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- 5% 10-Year T-Bill Coming? Real Estate's Halloween Nightmare
5% 10-Year T-Bill Coming? Real Estate's Halloween Nightmare
September existing home sales fall to 14-year lows.
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Happy Thursday! Rising interest rates put a damper on stocks this week. Many REITs were posting quality earnings (see “5 Zingers” below) and showed a bit of bounce on Thursday morning, but overall only about a third of all REITs were profitable. The Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) was up 0.13% for the week on Thursday morning.
In this issue, A 30-year veteran of the bond market makes an “ugly” prediction about the 10-year T-bill and September existing home sales fall to 14-year lows.
—Ethan Roberts
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ONE BIG THING
5% 10-Year T-Bill Coming? Real Estate’s Halloween Nightmare
What: Less than two weeks before Halloween, Arif Husain, T-Rowe Price’s Chief Investment Officer of fixed-income assets, predicted in an interview with Bloomberg that the 10-year treasury yield could hit 5% within the next six months, as markets grapple with rising inflation expectations and worries over U.S. fiscal spending. Rowe also said that if the results of the election are not clear within a few days after Election Day, stocks could have an “ugly” correction.
The 10-year Treasury yield was at 4.19% on Thursday morning, a substantial spike from the low of 3.62% in mid-September, which occurred five days before the 50-basis Fed rate cut. According to Husain, who oversees part of T-Rowe’s $180 billion assets, the government’s deficit is the culprit, as the Treasury is “flooding the market” with new supply to offset the spending. In addition, quantitative tightening has depleted the demand for 10-year debt.
How: It’s the 10-year Treasury, not the Fed rate hikes or cuts that move 30-year mortgage rates up or down. That’s why mortgage rates have moved higher, not lower, after the Fed cut interest rates in September. The 30-year national average is now at 6.57% and trending upward.
Why: Single-family housing starts were up 2.7% in September, likely in anticipation of mortgage rates dropping. Who will buy those homes in six months if mortgage rates climb well over 7% again? Younger renters are already giving up hope of being able to afford homes that average over $400,000 in many states. Sure, there are more affordable homes in rural areas and there are always Tiny Homes, foreclosure auctions and fixer-upper homes, but the demand for these among the younger generations isn’t there.
A rising 10-year Treasury would also not be good for REITs, as we saw in 2022 and 2023. REITs have had a terrific rally since mid-April. The benchmark Vanguard Real Estate Index Fund ETF (NYSEARCA: VNQ) has returned 25% since then and about 50% of all REITs have even outgained the VNQ. Individual REITs, such as Iron Mountain Inc (NYSE: IRM) and SL Green Realty Corp have returned 70% and 58% respectively.
Takeaway: If you missed the boat on REITs or want to add to positions, an increase back to 5% or higher on the 10-year might allow you to catch better yields than at present. But for recent REIT purchasers at these levels, a 5% yield could get, to quote Husain...ugly.
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WHAT WALL ST. SAID ABOUT REITS THIS WEEK
Crown Castle Inc (NYSE: CCI) It was an interesting week for the data center REIT. After reporting third-quarter estimates for AFFO and revenue that beat the street, and maintaining its full-year 2024 AFFO forecast of $6.91-$7.02, CCI received four new price targets from analysts. On October 17, TD Cowen analyst Gregory Williams maintained CCI at Buy and lowered the price target from $127 to $123, but Jefferies analyst Jonathan Petersen raised his price target from $123 to $127 while maintaining his Buy position. Petersen said that overall the Q3 results were “generally ahead of expectations.”
UBS analyst Batya Levi maintained CCI at Neutral, but raised the price target from $103 to $118 and on October 18, Wells Fargo analyst Eric Luebchow maintained CCI at equal-weight and raised the price target from $100 to $105. Luebchow noted there has been no update on CCI possibly selling its fiber or small cell division, but they are prepared for CCI to retain those businesses.
Prologis Inc (NYSE: PLD) On October 21 Goldman Sachs analyst Caitlin Burrows downgraded Prologis from Buy to Neutral and slashed the price target from $142 to $132. Goldman Sachs sees smaller market rent growth going into 2025 and leasing delays affecting Prologis’ operating income. The same day, JP Morgan analyst Michael Mueller maintained Prologis at Overweight and lowered the price target from $138 to $131. Prologis dropped 3.86% to $117.77 following the downgrade and price cuts.
Essex Property Trust Inc (NYSE: ESS) On October 20, Raymond James analyst Buck Horne downgraded Essex Property Trust from Outperform to Market Perform. While Essex has gained roughly 40% over the past year, the analyst feels that Essex at 21.5 time 2025 AFFO is now at fair value. Furthermore, Proposition 33 in California is on the November ballot and if it passes, it would repeal previous limits on rent control that would be a negative for Essex.
Mid-America Apartment Communities Inc (NYSE: MAA) On October 21, Raymond James analyst Buck Horne upgraded Mid-America Apartment from Market Perform to Strong Buy and announced a $175 price target. The analyst noted recent rent growth in the Sun Belt region and sustained demand for apartments. Occupancy levels have increased and tenants are remaining in place for longer.
FIVE ZINGERS:
Proving Them Wrong: SL Green Realty Corp (NYSE: SLG) continues to defy the analysts, closing at $75.58 on Wednesday. In 2023, the NYC office REIT was downgraded to sell with price targets as low as $18. This week, three analysts raised price targets as high as $90 per share after SLG’s Q3 Adjusted EPS and revenue again beat the estimates.
Hurricane, Shmurricane: Prices continue to rise for South Florida’s luxury real estate market, even after Hurricanes Helene and Milton blasted the state with billions of dollars worth of damage. Cash remains king in Florida’s luxury market.
43% gain and still Beating Estimates: Agree Realty’s Q3 earnings this week beat the estimates on FFO and revenue. Up 43% since March, analysts love it, so is there more upside to go?
Dose of Cold Water: Despite the hoopla about the Fed cutting interest rates, the National Association of Realtors (NAR) said that September’s existing home sales dropped 1% from August to lowest level in 14 years. The annualized 3.84 million units was below the expected number of 3.88 million.
Trifecta: You can bet on this horse. Getty Realty beats the street on FFO and revenue, raises its FY24 FFO guidance from $2.30-2.32 to $2.32-$2.33 and hikes its quarterly dividend from $0.45 to $0.47 per share.
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