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  • Alex Pettee, CFA

Dovish Fed • Yields Retreat • REIT Dividend Boost

Summary

  • U.S. equity markets were mostly-lower Thursday following a downbeat slate of bank earnings while investors again piled into long-term government bonds following dovish comments from Fed Chair Powell.

  • Falling back into negative territory for the week, the S&P 500 finished lower by 0.3% today while the Mid-Cap 400 retreated 0.3% and the Small-Cap 600 declined by 1.2%.

  • Real estate equities continued their relative outperformance today with the Equity REIT Index gaining 0.1% with 12-of-19 property sectors in positive territory while the Mortgage REIT Index gained 0.3%.

  • Fed Chair Powell again reiterated the Fed's accommodative stance and defended concerns about overheating after CPI and PPI inflation data showed that prices rose at the fastest pace in decades earlier this week.

  • Net lease REIT National Retail Properties (NNN) boosted its dividend by 2%, become the seventh net lease REIT to raise its dividend this year and is now one of 69 equity REITs to boost their payouts so far in 2021.

Real Estate Daily Recap

U.S. equity markets were mostly-lower Thursday following a downbeat slate of bank earnings while investors again piled into long-term government bonds following dovish comments from Fed Chair Powell. Falling back into negative territory for the week, the S&P 500 finished lower by 0.3% today while the Mid-Cap 400 retreated 0.3% and the Small-Cap 600 declined by 1.2%, pushing their respective week-to-date declines to roughly 2% and 3%. Real estate equities continued their relative outperformance today with the Equity REIT Index gaining 0.1% with 12-of-19 property sectors in positive territory while the Mortgage REIT Index gained 0.3%.

In his second day of Congressional testimony, Fed Chair Powell again reiterated the Fed's accommodative stance and defended concerns about overheating after CPI and PPI inflation data showed that prices rose at the fastest pace in decades earlier this week. Despite the inflation concerns, "Crypto Mania" appears to be fading as Bitcoin (BTC:USD) remains under pressure as trading volumes and investor interest wane. Six of the eleven GICS equity sectors finished higher on the day, led to the upside by the Utilities (XLU) sector while Residential REITs led the broader Hoya Capital Housing Index to modest gains after data from Redfin (RDFN) showed that the number of homes for sale fell to a record low, down 28% from last year.

Commercial Equity REITs

Storage: Today, we published Storage Wars. Self-Storage REITs have delivered as impressive of a turnaround as any property sector in recent memory, catalyzed by the ongoing housing boom and the acceleration in housing market turnover. An ensemble of impressive earnings results indicated that the pandemic-driven rebound was no fluke. Storage REITs now project to have one of the strongest growth rates of any sector this year. Storage demand is driven by "change", and there has been no shortage of that recently as post-pandemic mobility rates normalize. The demographic-driven housing boom bodes well for a sustained recovery into the mid-2020s.

Net Lease: National Retail Properties (NNN) boosted its dividend by 2%, declaring a $0.53/share quarterly dividend, up from its prior dividend of $0.52. NNN is the seventh net lease REIT to raise its dividend this year and is now one of 69 equity REITs to boost their payouts so far in 2021. NNN was one of 52 equity REITs that boosted their dividend last year as well. Over the past 24 hours, four other REITs maintained their payouts at current levels: Diversified Healthcare (DHC), Office Properties Income (OPI), Services Properties (SVC), and Innovative Industrial (IIPR).

Single-Family Rentals: This morning, Invitation Homes (INVH) notified holders of its 3.50% convertible senior notes due 2022 that it will settle conversions with common stock. Assuming the June 30th conversion ratio of 43.9448 shares per $1,000 of notes, settlement of the $345 million of notes would result in the issuance of approximately 15 million common shares and a reduction in cash interest expense of approximately $12 million on an annualized basis, which would effectively reduce the Debt/EBITDA ratio from 7.1x to 6.8x. Mirroring the surge in suburban home values amid a historic and lingering housing shortage resulting from a decade of under-building, SFR REITs have reported double-digit rent growth in recent months.

Industrial: Earlier this week, we published Industrial REITs: Who Doesn't Love Logistics? The red-hot industrial property market - the physical "hub" of e-commerce - has shown few signs of cooling down through mid-2021 as businesses scramble to build out supply chain resiliency. Industrial REITs - which recorded the strongest earnings and dividend growth of any real estate sector in 2020 - continue to thrive amid this insatiable demand for logistics space. Brokerage firm CBRE (CBRE) reported that industrial vacancy rates dipped to record-lows last quarter - the 44th consecutive quarter of positive net absorption - driving a nearly double-digit surge in rents. Sharing similar compelling tailwinds as the U.S. housing industry - structurally constrained supply and robust secular demand - we expect that investors willing to "pay up for quality" won't be disappointed.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished higher by 0.6% today but remain lower by 4.5% this week. Commercial mREITs gained 1.2% today and are now lower by 0.9% this week. Orchid Island (ORC) gained after announcing preliminary Q2 earnings results, noting that its Book Value Per Share ("BVPS") was $4.71 as of June 30th, down 4.6% from the end of Q1. ORC also maintained its monthly dividend at $0.065. This morning, Tremont Capital (TRMT) and Sachem Capital (SACH) also each declared dividends in-line with their previous rate.

Yesterday, we noted that SPAC Mania continued as Sachem Capital (SACH) announced that it will launch a SPAC (Special Purpose Acquisition Vehicle), seeking to acquire "businesses within the real estate sector, including real estate finance and real property ownership and management." SAC will offer up to 5,750,000 units (including 750,000 units covered by the underwriter’s overallotment option) at a price of $10.00 per unit, or $50 million in the aggregate ($57.5 million if the underwriter’s overallotment option is exercised in full.) Each unit will include one share of SAC Class A common stock and one-half of a redeemable warrant. SAC is expected to apply to list the units on The Nasdaq Stock Market under the symbol “SCEMU”.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.03% today, on average, and underperformed their respective common stock issues by an average of 0.02%. So far in 2021, REIT Preferred stocks are higher by 9.29% on a price return basis. The average REIT preferred pays a current yield of 5.95% and trades at a slight premium to par value. Over in the bond markets, Tanger Outlets (SKT) announced that it amended and extended its unsecured lines of credit by four years and increased its borrowing capacity to $1.22 billion.

Economic Data This Week

We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook report on Saturday morning.

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Disclosure: A complete list of holdings and Real Estate and Housing Index definitions and holdings are available at HoyaCapital.com. Hoya Capital Real Estate advises an Exchange Traded Fund listed on the NYSE. Hoya Capital is long all components in the Hoya Capital Housing 100 Index.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.

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