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  • Alex Pettee, CFA

Hawkish Fed • Yields Jump • Week Ahead

  • U.S. equity markets were modestly lower Monday- retreating from their best weekly gains since November 2020- after hawkish commentary from Fed Chair Powell sent bond yields soaring to three-year highs.

  • Following gains of nearly 6% last week, the S&P 500 finished fractionally lower today while the tech-heavy Nasdaq 100 slipped 0.3% following a surge of over 8% last week.

  • Real estate equities were under-pressure today amid a surge in yields with the Equity REIT Index slipping 0.6% with 16-of-19 property sectors in negative territory while Mortgage REITs declined 1.2%.

  • Fed Chair Powell today reiterated the central bank's aggressive stance to combat inflation, commenting that the committee is prepared to raise interest rates in "double-hike" 50-basis-point steps, if needed.

  • Amid a busy week of scheduled Fed commentary, the economic calendar slows down a bit in the week ahead. The major reports of the week are New Home Sales on Wednesday and Pending Home Sales on Friday.

Income Builder Daily Recap

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U.S. equity markets were modestly lower Monday - retreating from their best weekly gains since November 2020 - as Treasury bond yields surged to the highest level since May 2019 following comments from Fed Chair Powell. Following gains of nearly 6% last week, the S&P 500 finished fractionally lower today while the tech-heavy Nasdaq 100 slipped 0.3% following a surge of over 8% last week. Real estate equities were under pressure today amid a surge in long-term yields with the Equity REIT Index slipping 0.6% with 16-of-19 property sectors in negative territory while Mortgage REITs declined 1.2%.

As discussed in Fed vs. Inflation, Fed Chair Powell today reiterated the central bank's aggressive stance to combat inflation, commenting that the committee is prepared to raise interest rates in "double-hike" 50-basis-point steps, if needed. Meanwhile, the inverse correlation between equity valuations and energy prices continued today as WTI Crude Oil (CL1:COM) prices soared 7% to close back above $112/barrel today after dipping below $95 last week. The Energy (XLE) sector surged nearly 4% to push its year-to-date gains back above 35%. The Industrials (XLI) sector finished higher despite a drag from Boeing (BA) following the crash of a 737-800 in China.

The economic calendar slows down a bit in the week ahead with the major reports coming on Wednesday with New Home Sales and on Friday with Pending Home Sales, which are expected to show continued strength in home buying activity amid robust demand from institutional build-to-rent owners and individual homeowners despite the "all but broken" supply chains with builders facing the most difficulty sourcing garage doors, major appliances, cabinets, and countertops. On Friday, we'll also see revised Consumer Sentiment data for March which dipped to recessionary levels in the initial reading last week amid mounting anxiety over soaring inflation. We'll also be watching PMI data on Thursday and the Baker Hughes Rig Count on Friday for indications on whether U.S. oil and gas production is accelerating to address the surge in global energy prices.

Real Estate Daily Recap

Cannabis: This evening, we'll publish our updated report on the budding cannabis REIT sector - the best-performing real estate sector since the start of 2018 - which has stumbled in early 2022, pressured by the broader growth-to-value rotation and uncertainty over progress on federal legalization. Owning the "Pharmland" - the physical real estate - has been one of the few themes in the space that has worked as cannabis ETFs have delivered dismal investment performance since 2019. Thriving in the murky and often contradictory regulatory framework of legalized marijuana, recent movement in Washington on cannabis-related bills has raised questions about the future prospects in a federally-legalized environment. Importantly, federal legalization simply shifts the regulation onto the states, many of which have adopted frameworks that are quite favorable to property owners with licenses that are "attached" to real estate. In the report, we'll discuss our updated price targets and ratings.

Apartments: Camden Property (CPT) was among the leaders today after it announced plans to acquire all outstanding partnership interests in its 2 discretionary investment funds from Teacher Retirement System of Texas. CPT currently owns 31% of the funds' interests and will acquire the remaining 69% interests through this deal for roughly $1.1B. The assets include 22 multifamily communities with 7.2K apartment homes, primarily in Sunbelt markets across CPT's portfolio. CPT expects this acquisition will provide an initial FFO yield of ~4.25% and, assuming an Apr. 1 close, would result in $0.08/share of accretion to CPT's prior 2022 FFO guidance. As a result of this transaction, the expected NOI contribution from markets including Houston, Austin, Dallas, and Tampa would increase slightly, while the remainder of CPT's markets would reflect slightly lower concentrations.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, commercial mREITs declined 0.2% today while residential mREITs slipped 0.8%. Granite Point (GPMT) gained about 1% today after providing a business update this morning, noting that it resolved a $54 Washington DC office loan and cited "continued progress executing on our strategic priorities and repositioning of our business." AG Mortgage (MITT) was the leader today after holding its dividend steady at $0.21/share, representing a forward yield of 9.42%. The average residential mREIT pays a dividend yield of 11.06% while the average commercial mREIT pays a dividend yield of 7.46%.

We recently launched Hoya Capital Income Builder - the new premier investment research service focused on real income-producing assets classes. Whether your focus is High Yield or Dividend Growth, we’ve got you covered with high-quality, actionable investment research and a comprehensive suite of tools and models to help build sustainable portfolio income targeting premium dividend yields of up to 10%. And of course, subscribers receive complete access to our investment research - including reports that are never published elsewhere - from Hoya Capital and our team of contributors.

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.

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