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  • Alex Pettee, CFA

Fed In Focus • Soft Landing • Resilient Housing Demand

  • U.S. equity markets finished roughly flat Wednesday as investors parsed testimony from Fed Chair Powell, who acknowledged that a recession is "certainly a possibility” as it seeks to tame inflation.

  • Holding onto most of yesterday's relief rally which followed the worst week since 2020, the S&P 500 slipped 0.1% while the Mid-Cap 400 and Small-Cap 600 posted similarly modest declines.

  • Real estate equities were among the leaders today with strength seen across the residential and technology REIT sectors as long-term interest rates moderated. The Equity REIT Index gained 1.2%.

  • Homebuilders led the rebound today on additional signs of resilient housing demand in the face of sharply higher rates. Mortgage demand rebounded last week while KB Homes reported surprisingly strong results this afternoon and reiterated its full-year guidance.

  • Apartment Income (AIRC) gained about 1% today after it announced that it will take full ownership of four newly-developed properties from Aimco (AIV) and put further separation in the strategic relationship between the two firms following their split in 2020.

Income Builder Daily Recap

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U.S. equity markets finished roughly flat Wednesday as investors parsed testimony from Fed Chair Powell, who acknowledged that a recession is "certainly a possibility” as it tightens monetary policy to tame inflation. Holding onto most of yesterday's relief rally which followed the worst week since 2020, the S&P 500 slipped 0.1% while the Mid-Cap 400 and Small-Cap 600 posted similarly modest declines. Real estate equities were among the leaders today with strength seen across the residential and technology REIT sectors as long-term interest rates moderated. The Equity REIT Index advanced 1.2% with 12-of-19 property sectors in positive territory while Mortgage REIT Index gained 0.5%.

In the first of two days of Congressional testimony, Fed Chair Powell reiterated the central bank's commitment to control persistent inflation while indicating that an economic cooldown - or outright recession - may be necessary to achieve its goal. The benchmark 10-Year Treasury Yield pulled back 15 basis points to 3.16% today - well below its high last week of 3.50% before the FOMC meeting. Defensive and yield-sensitive sectors were generally among the outperformer today with the Real Estate (XLRE) and Utilities (XLU) sectors catching a bid while Homebuilders and the broader Hoya Capital Housing Index continued to recover amid signs of resilient housing demand in the face of higher rates as mortgage applications increased last week while KB Home (KBH) reported better-than-expected results this afternoon.

Real Estate Daily Recap

Apartment: Apartment Income (AIRC) - which we own in the REIT Focused Income Portfolio - gained about 1% today after it announced that it will take full ownership of four newly-developed properties from Aimco (AIV). The two firms split in late 2020 to effectively separate the development unit - which was retained by AIV - from the long-term ownership unit which became AIRC. The four properties include 865 apartment homes in the Miami, Boston, Denver, and San Francisco metro markets. Aimco and AIR also modified the terms of their strategic relationship to gain more complete separation between the entities - a positive development for both considering the lingering market confusion about the relationship. Apartment Income now owns and manages 76 communities in 11 states and the District of Columbia.

Cannabis: Yesterday we published Cannabis REITs: Weeding Out The Weak. A perennial performance leader over the past half-decade, cannabis REITs have been slammed in 2022 amid concerns over tenant financial health given the sharp re-pricing of risk and tighter financial conditions. Owning the "Pharmland" - the physical real estate - had been one of the few cannabis plays that was working amid a decade-long stretch of dismal investment performance from broader cannabis ETFs. Marijuana legalization has progressed at the state level, but federal legalization efforts remain stalled, a "double-edged sword" for cannabis REITs that thrive in the murky legal environment, but also need healthy operators that will pay the rent. Cannabis REITs have faced remarkably few tenant non-payment issues thus far.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs continued their rebound today with residential mREITs advancing 1% while commercial mREITs gained 0.7%. After the close yesterday afternoon, Western Asset Mortgage (WMC) maintained its quarterly dividend at $0.04, representing a forward yield of 12.6%. WMC had previously reduced its payout from $0.06 in March - one of four mREITs to reduce their dividend this year compared to twelve mREITs that have raised their dividend. In Mortgage REITs: Everything In Moderation, we highlighted the potential risks related to rate volatility while noting that - even with the double-digit average dividend yield - most mREIT dividends are covered by EPS and not at immediate risk of reductions.

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, REIT Preferred stocks finished roughly flat today, on average. REIT Preferreds are lower by roughly 13% on a total return basis this year after ending 2021 with price returns of roughly 8.0% and total returns of roughly 14%. There are now roughly 180 REIT-issued exchange-listed preferred and debt securities with an average current yield of 7.06%.

Economic Data This Week

The state of the housing market will be in focus once again this week as we saw Existing Home Sales data on Tuesday which showed a cooldown in May to the slowest rate since June 2020 while New Home Sales data on Friday is expected to show a contraction to the lowest-level since late 2018. The weekly Initial Jobless Claims data on Thursday has once again become a closely-watched report following two straight weeks of notable increases in unemployment filings. The Michigan Consumer Sentiment report has also suddenly been thrust back into focus after Fed Chair Powell specifically cited the hotter-than-expected consumer inflation expectations survey as a primary rationale for the FOMC's decision to hike rates by 75 basis points rather than 50 basis points this month.

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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.

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.