The excellent news, REITs as a class have been doing nicely of late. In keeping with BTIG Analysis, as of final Friday, they have been up 4.2%. That compares with 3.6% for the S&P 500 and 4.0% for the Russell 2000 inventory indexes.
However then there was this assertion: “With vital inflation measures on faucet for this week’s financial calendar (CPI prints on Tuesday, and PPI prints on Wednesday), charges are more likely to be in focus once more for REIT.”
And the CPI prints—extra generally known as inflation numbers—that got here out on Tuesday have been brutal to expectations. Even with oil down, most all the pieces else was up. Core inflation, with out meals or power, hit 6.3%, rising double the speed economists had anticipated. Fundamentals hammered shoppers. Meals was up 0.8% month over month. Shelter grew at 0.7% month-over-month. Transportation was up 0.5% from July to August.
That is just about a assured 75-basis level enhance within the benchmark rate of interest when the Fed meets subsequent week, with a 1 proportion level bounce doable.
Usually, inflation might be good for REITs, in accordance with a Nareit put up early in 2022. “REITs have traditionally supplied safety in opposition to inflation and outperformed the broader inventory market during times of reasonable and excessive inflation,” the agency stated, the place it defines reasonable inflation as between 2.5% and seven.0% and excessive inflation being greater than 7.0%.
However then there are rates of interest and the Fed has been aggressive in pushing them as much as sluggish financial progress and push inflation again to round 2%.
“REITs as a sector have considerably cleaned up their stability sheets for the reason that GFC,” BTIG says in its report. “Nonetheless, the weighted common fee on REIT debt is at an all-time low in 2022, as is the ratio of curiosity expense to NOI. This units up a threat to estimates and outcomes if charges proceed to climb.” Which they may.
“Certainly, charges have been so low for therefore lengthy, and have had so many false begins, we predict there’s a threat that curiosity expense has turn into anchored in consensus estimates,” the agency continued. “For context, the present ahead curve for SOFR reveals a mean fee in 2023 of three.84%, earlier than accounting for any credit score spreads. Thus, the typical 1-month fee in 2023 is larger than the present weighted common fee for complete REIT debt throughout the sector. It will current a headwind for unhedged variable-rate balances and potential volatility for exterior progress as patrons are compelled to recalibrate their financing expectations.”