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  • Alex Pettee, CFA

Fed Ahead • REIT Dividend Hikes • Cannabis Compromise

  • U.S. equity markets rebounded Monday following their worst week since June while benchmark interest rates climbed to the highest levels since 2007 with all eyes on the Federal rate decision.

  • Following a dip of more than 5% last week, the S&P 500 advanced 0.7% today powered by a late-day rally while the tech-heavy Nasdaq 100 gained 1.0%.

  • Real estate equities were mixed today with the Equity REIT Index lower by 0.1% with 9-of-18 property sectors in positive territory. Homebuilders gained 2.5% ahead of a busy week of housing data.

  • Innovative Industrial (IIPR) - which has been slammed this year on concerns over credit and rent payment issues among its cannabis cultivator tenants - surged 12% today after disclosing in an 8-K last Friday that it reached a confidential settlement with Kings Garden which had defaulted on its rent and property management fees in July.

  • Another day, another pair of REIT dividend hikes. Hotel REIT Hersha Hospitality (HT) resumed its dividend that had been suspended since March 2020. STORE Capital (STOR) - which announced last week that it will be taken private - hiked its dividend by 6.5%, becoming the 108th REIT to raise its dividend this year.

 

Real Estate Daily Recap

U.S. equity markets rebounded Monday following their worst week since June while benchmark interest rates climbed to the highest levels since 2007 with all eyes on the Federal Reserve rate decision on Wednesday afternoon. Following a dip of more than 5% last week, the S&P 500 advanced 0.7% today powered by a late-day rally while the tech-heavy Nasdaq 100 gained 1.0% following losses of nearly 6% last week. Real estate equities were mixed today with the Equity REIT Index finishing lower by 0.1% with 9 of 18 property sectors in positive territory led by a rebound from cannabis, timber, and hotel REITs. The Mortgage REIT Index gained 0.9% while homebuilders advanced 2.5% ahead of a busy week of housing market data.

As discussed in our Real Estate Weekly Outlook, concern has mounted in recent weeks that the central bank risks compounding a pandemic-era policy error by rapidly tightening monetary conditions based on a subset of "stale" data, which has seemingly overshadowed real-time inflation metrics and economic reports suggesting that the global economy has downshifted considerably in recent months. The upward pressure on benchmark rates continued today with the 10-Year Treasury Yield climbing to its highest closing level in fifteen years at 3.49% as traders currently price in an 80% probability of a 75 basis point rate. Nine of the eleven GICS equity sectors finished higher today while Crude Oil finished flat and the US Dollar Index retreated slightly from 20-year highs.

While all eyes will be on the Federal Reserve in the week ahead, we'll also see a jam-packed slate of housing data - the industry that is bearing the brunt of the aggressive tightening path through the historic surge in mortgage rates. Today we saw NAHB Homebuilder Sentiment data for September which declined to the lowest level since 2014 - excluding the brief pandemic dip in April and May 2020. On Tuesday, we'll see Housing Starts and Building Permits data which is expected to show a further pull-back in home construction activity to post-pandemic lows. On Wednesday, Existing Home Sales data is also expected to dip to the lowest levels since 2014 excluding the pandemic shutdown months. The main event will be on Wednesday with the FOMC Interest Rate Decision in which Fed is expected to hike rates by 75 basis points for a third-straight meeting to a 3.25% upper-bound - levels last seen in July 2005.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Cannabis: Innovative Industrial (IIPR) - which has been slammed this year on concerns over credit and rent payment issues among its cannabis cultivator tenants - surged 12% today after disclosing in an 8-K last Friday that it reached a confidential settlement with Kings Garden which had defaulted on its rent and property management fees in July. Kings Garden leases six properties from IIPR which comprise roughly 8% of IIPR's revenue in 2021. Research firm Compass Point upgraded IIPR to Buy from Neutral, citing the positive indication from the combination of the settlement and the dividend hike which "sent a signal that management is confident of its ability to collect lease payments from its tenants." The ten largest publicly-traded cannabis REIT tenant operators have plunged between 50% and 80% over the past year, hurt in part by a slowdown in stimulus-fueled sales growth and by a far more-difficult capital raising environment amid tightening credit conditions.

Another day, another pair of REIT dividend hikes. Hotel REIT Hersha Hospitality (HT) resumed its dividend that had been suspended since March 2020, declaring a $0.05/share quarterly dividend, representing a forward yield of roughly 2.1%. STORE Capital (STOR) - which announced last week that it will be acquired by GIC and Blue Owl's Oak Street for $32.25 in cash - hiked its dividend by 6.5%, becoming the 108th REIT to raise its dividend this year. STOR also reiterated that under the terms of its merger agreement, following the payment of this dividend, the company may not pay further dividends, except as necessary to preserve its tax status as a REIT. As discussed this week in 100 REIT Dividend Hikes - our State of the REIT Nation Report - property-level fundamentals have been quite strong - and strengthening - for most property sectors in recent quarters despite the broader economic slowdown this year - and despite the wave of dividend hikes over the past 18 months, dividend payout ratios remain far below historic averages.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were mixed today with residential mREITs finishing fractionally higher while commercial mREITs advanced 0.7%. On a quiet day of newsflow, Franklin BSP Realty (FBRT) and Lument Finance (LFT) led the gains on the upside while AG Mortgage (MITT) and Seven Hills Realty (SEVN) lagged on the downside. After the close today, Ellington Financial (EFC) announced that its estimated book value per share of common stock was $15.99 as of August 31st - lower by about 2% from its $16.32 estimate at the end of July.

Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

Hoya Capital Research & Index Innovations (“Hoya Capital”) is an affiliate of Hoya Capital Real Estate, a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations provides non-advisory services including market commentary, research, and index administration focused on publicly traded securities in the real estate industry.


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