I’ve been following Blackstone REIT closely over the past few years for business/client reasons. I first reached out to them in mid February questioning their valuation techniques after seeing the initial rise in interest rates and drop in publicly traded REIT’s but rise in their valuation. I followed up in June and recently met with them again asking the same questions as the public/private valuation spreads continue to widen to a very large extent. My point here is not to talk about BREIT specifically, who are still very seasoned real estate buyers/operators, but to figure out what broader implications we can glean from this. From what I’ve learned in the private REIT space is that about all mimic each other in terms of valuation calculations and thus BREIT and Starwood’s version are not alone in how they mark their portfolio’s, aka, now quite different than public markets. Imagine the thousands of other private real estate funds that all mark the same. Also now imagine all the retail customers that are requesting or inquiring about redemptions.
I believe the same can be said for the retail products that have been rolled out in private equity and private credit so these funds can tap that large pool of retail money. Now the redemption and gating rules should have been clear from the start but not all retail pays attention or at least doesn’t think it matters until it does. The pension fund, the insurance company, the endowments that have historically been the investors in the long time lock up type private funds, they are fully clear on what they sign up for. The retail investor I’m not so sure and that theory is now getting tested and will be a major liquidity factor and now questioned source of funds for many things private in 2023.
While rent growth is clearly decelerating, the high rental rates are beginning to impact the younger households that do most of the renting, particularly the millennial demographic. I saw a story yesterday from PropertyManagement.com who surveyed renters and here are some of the results:
1)”1 in 4 millennials are currently living with their parents.
2)1 in 8 millennials moved back in with their parents this year.
3)Many cited high rent, money concerns, and job losses as reasons why.
4)Of those who couldn’t afford rent, 91% would move out if they made more money.
5)Despite wanting to own a home, 44% can only afford a 3.5% mortgage rate or less.
6)15% spend more than the recommended 50% net income on rent.”
We’ve talked here a lot about the key question now on where home prices go from here. Rick Palacios of John Burns Real Estate Consulting on Twitter late yesterday said “Our November home price index shows several markets where prices are down double-digits from March/April peaks. In order of magnitude: #San Francisco (-13%), #Austin & #San Jose (-11%), #LasVegas (-10%). Expecting more markets will join this club next month.”
Toll Brothers in their earnings release last night said the number of contracted homes in the quarter were lower by 60% y/o/y and homes in backlog were down 21% y/o/y. The CEO said “the dramatic increase in mortgage rates since March presents a challenging market as we enter FY 2023. Many homebuyers are on the sidelines, waiting for clarity on the direction of mortgage rates and the overall economy.”
Mortgage rates continued to fall according to the MBA to 6.41% vs 7.14% one month ago and that helped to lift refi’s by 4.7% w/o/w but they are still down 86% y/o/y. Purchases fell 3% w/o/w after gains seen in the prior 4 weeks. They are still lower though by 40% y/o/y.
Here’s an anecdote from the Ally Financial CEO presentation at the Goldman conference yesterday where I read the transcript. For lower quality borrowers they are offering 10% loans but “I think we’re probably close to hitting a sort of saturation point where maybe consumers sort of say okay, I’m at a 10% yield for – paying 10% on a car loan. I think I’m kind of getting close to hitting the wall.”
Brian Moynihan of BAC said yesterday, “Consumers are still spending more money right now, but the rate of growth is slowing.”
The CEO of Discover said “The prime households have enough liquidity to manage inflation. It doesn’t mean it’s not painful…That’s why you’re seeing stress in the subprime and near-prime issuers where those households are already tapped out. They’re already shopping at Dollar General or the lower end retailers.”
The CFO of Synchrony Financial said “What we hear today is, ‘I can’t make my rent payment, it’s up. Inflation is killing me on gas and groceries.’ You see that.”
The CEO of Capital One Financial said “The good news is the credit metrics are still better than they were in the past but the bad news is the trajectory.”
I also wanted to include some quotes from the Signet Jewelers conference call because the stock rallied 20% yesterday after earnings and when we’re all questioning the direction of consumer spend, they did pretty well. They have multiple store brands that cater to all levels of the income spectrum. The CEO said “Jewelry is different from the rest of retail. For example, cyclical industries like apparel are more sensitive to economic volatility, carry inventory with a relatively low residual value, and sell products that consumers see as more discretionary. Conversely, customers placed a higher value on jewelry. They see jewelry purchases as less discretionary because they are tied to special occasions and people in their lives and jewelry retains its value or appreciates over time. In addition, jewelry doesn’t go out of style from season to season. This makes jewelry more resilient, and as a result, more attractive than many other retail industries.”
The November Logistics Managers’ Index fell to 53.6 from 57.5 in October. The breakeven level is 50 but it is the 2nd lowest reading in this index, only just above the 51.3 seen in April 2020. While a few months ago we were alerted by many large retailers of the excess inventory situation, “inventory metrics are now settling into more sustainable rates of growth. Inventory levels have decreased significantly, particularly for upstream respondents.” Warehouse capacity remains tight they said and warehouse prices continue higher.
In terms of global trade, China last night said its November exports fell 8.7% y/o/y, more than double the expected decline of 3.9%. Also of note, Taiwan said its November exports dropped by 13.1% y/o/y vs the forecast of down 6.8%. Because of the massive manufacturing presence of each, treat both as bellwethers on global economic activity. That said, a China reopening would certainly help imports into China. But exports to the US, Europe and other parts of Asia faltered too.
After the better than expected German factory order number seen yesterday, today’s German IP was also not as weak as feared. The euro is higher as are bond yields.