• U.S. equity markets dipped for a second-session today while benchmark interest rates climbed to two-month highs, pressured by hotter-than-expected European inflation data and an ongoing debt ceiling impasse.

• Following declines of 1.1% yesterday, the S&P 500 declined another 0.8% today while the Small-Cap 600 posted steeper declines of over 1%. The Dow declined 256 points.

• Real estate equities were among the laggards today, pressured by higher rates and regional bank-related credit concerns. The Equity REIT Index dipped 2.2% today with all 18 property sectors lower.

• A pair of externally-managed REITs advised by AR Global - Global Net Lease (GNL) and Necessity Retail REIT (RTL) - announced plans to merge and internalize their management under the Global Net Lease.

• Embattled hospital owner Medical Properties Trust (MPW) - which has been in the cross-hairs of short sellers over the past year - was among the better-performers today after it announced that its second-largest tenant - Prospect Medical - completed $375M in new financings from third-party lenders.

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Income Builder Daily Recap

U.S. equity markets dipped for a second-session today while benchmark interest rates climbed to two-month highs, pressured by hotter-than-expected European inflation data and an ongoing debt ceiling impasse. Following declines of 1.1% yesterday, the S&P 500 declined another 0.8% today while the Mid-Cap 400 and Small-Cap 600 posted steeper declines of 0.9% and 1.2%, respectively. The Dow declined 256 points. The 2-Year Treasury Yield and 10-Year Yield each climbed to their highest levels since early March after U.K. inflation data showed lingering inflationary pressures in Europe. Real estate equities were among the laggards today, pressured by higher rates and regional bank-related credit concerns. The Equity REIT Index dipped 2.2% today, with all 18 property sectors in negative territory, while the Mortgage REIT Index declined 2.5%. Homebuilders were among the leaders today, however, after strong earnings results from Toll Brothers.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Net Lease: A pair of externally-managed REITs advised by AR Global - Global Net Lease (GNL) and Necessity Retail REIT (RTL) - announced plans to merge and internalize their management under the Global Net Lease banner. Management cited the benefits of improved scale, reduced leverage, and operating efficiencies, noting that the combined company would own roughly 1,350 properties with an aggregate enterprise value of $9.5B, making it one of the five largest net lease REITs. RTL surged more than 20% on the day while GNL dipped 11%. The deal comes amid a heated proxy battle led by activist firm Blackwells Capital, who announced their opposition to the merger and called the plan "another deceptive effort to skirt the ongoing proxy fight." Proxy advisory firms ISS and Glass Lewis each recommended last month that shareholders withhold support for several of AR Global's directors. As part of the proposed merger - which the firms expect to close in Q3 - GNL would reduce its quarterly dividend by 12% to $0.354 per share.

Healthcare: Embattled hospital owner Medical Properties Trust (MPW) - which has been in the cross-hairs of short sellers over the past year - was among the better-performers today after it announced that its second-largest tenant - Prospect Medical - completed $375M in new financings from third-party lenders. MPW has dipped more than 30% this year after reporting in February that Prospect had stopped paying rent - translating into an expected FFO decline of roughly 15% this year - but noted in its earnings report last month that it expects rent payments to resume in September. The announcement today noted that with the refinancing, Prospect is substantially free of material debt or lease obligations outside of those to Medical Properties and the new third-party financing. MPW also announced today that it closed on its previously-announced of seven Australian hospitals for AUD$730M and expects close the remaining AUD$470 million in property sales and debt repayment during the current quarter at a 5.7% implied cap rate. 

Hotels: Today, we published Hotel REITs: The Pandemic Is Over, Now What?  Despite lingering recession concerns, hotel REITs are pacing for a second-straight year of outperformance after punishing early-pandemic declines, buoyed by steady post-pandemic operating improvement and the long-awaited return of dividends. The final pandemic-era travel restrictions were lifted last week with the ending of the vaccine mandate for foreign arrivals. International travel demand should provide a healthy tailwind over the coming quarters. Domestic travel recovered to 100% of pre-pandemic levels in early 2023 but has plateaued since February. Business and group demand has marginally improved, offsetting some moderation in leisure demand. The latest data from STR showed that the national average occupancy rate improved to 64.4% in April - just 1% below 2019 levels - but Average Daily Rates ("ADR") and Revenue Per Available Room ("RevPAR") growth slowed rather considerably. ADR rose by 3.4% in April - down from 19.1% in March. RevPAR increased 1.9%, down from 14.4% in March.

Additional Headlines from The Daily REITBeat on Income Builder

• Digital Realty Trust (DLR) maintained its quarterly dividend at $1.22/share (Dividend Yield: 5.6%)

• Kilroy Realty (KRC) maintained its quarterly dividend at $0.54/share (Dividend Yield: 8.0%)

• Added to the Russell 3000 Index: Apline Income (PINE) and Seritage Growth (SRG) 

• Added to the Russell Microcap Index: Industrial Logistics (ILPT), Ashford Hospitality (AHT), and Office Properties Income (OPI) 

• Deleted from the Russell Microcap Index: CorEnergy Infrastructure (CORR) and Power REIT (PW) 

Mortgage REIT Daily Recap

Mortgage REITs also finished broadly lower today after a strong start to the week, with residential mREITs slipping 1.8% while commercial mREITs declined by 2.1%. Hannon Armstrong (HASI) dipped more than 9% today after announcing a $300M secondary common stock offering.  After the close today, Ellington Financial (EFC) announced that its estimated book value per share was $14.89 as of April 30, down about 1% from the $15.10/share at the end of Q1. As noted in our Earnings Recap, residential mREITs reported an average decline in BVPS of 1.9% in Q1, while commercial mREITs reported a 1.8% average decline. Within the residential mREIT sector, credit-focused mREITs fared better in Q1 - reporting a slight increase in their Book Value Per Share ("BVPS") while agency-focused REITs reported an average decline in their BVPS of about 5% in Q1. Dividend coverage was stronger for commercial mREITs with about 75% of commercial mREITs covering their dividend with Q1 adjusted EPS while just 50% of residential mREITs covered their dividend.

Economic Data This Week

The busy week of economic data continues tomorrow with Pending Home Sales data, which is expected to increase for the fourth month out of the past five, following a stretch of thirteen straight monthly declines. The most important report of the week comes on Friday with the PCE Price Index - the Fed's preferred gauge of inflation - which is expected to show a continued moderation in price pressures. In the same report, we'll also be looking at Personal Income and Personal Spending data for April, a key read on the state of the U.S. consumer.

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