• Alex Pettee, CFA

Hot Inflation • REITs Outperform • Dividend Boost

Summary

  • U.S. equity markets finished higher Thursday as long-term interest rates continued to retreat despite inflation data showing the highest annual rise in core consumer prices in over thirty years.

  • Closing at fresh record highs, the S&P 500 finished higher by 0.5% today while the Mid-Cap 400 finished flat and Small-Cap 600 retreated 1.3%.

  • Real estate equities continued their recent outperformance as the Equity REIT Index finished higher by 0.7% today with 12-of-19 property sectors in positive territory while Mortgage REIT declined 0.5%.

  • Core Consumer Prices - which excludes food and energy - rose 0.7% in May from last month and 3.8% from a year earlier, which was the largest annual increase since 1991.

  • Ellington Residential (EARN) finished higher by more than 4% after it declared a $0.30/share quarterly dividend, a 7.1% increase from its prior dividend of $0.28.

Real Estate Daily Recap

U.S. equity markets finished mostly higher Thursday as long-term interest rates continued to retreat despite inflation data showing the highest annual rise in core consumer prices in over thirty years. Closing at fresh record highs, the S&P 500 (SPY) finished higher by 0.5% today while the Mid-Cap 400 (MDY) finished flat while Small-Cap 600 (SLY) retreated 1.3%. Real estate equities continued their recent outperformance as the Equity REIT Index finished higher by 0.7% today with 12 of 19 property sectors in positive territory while the Mortgage REIT Index declined by 0.5%.

The bid for Treasury bonds continued today despite hotter-than-expected inflation data as the 10-Year Treasury Yield retreated another 4 basis points today to close at 1.46%, the lowest close since March 3rd. Seven of the eleven GICs equity sectors finished higher on the day, led to the upside by the Healthcare (XLV), Real Estate (XLRE), and Technology (XLK) sectors. Consistent with the trends throughout the week, residential REITs were the bright spot in the Hoya Capital Housing Index today as homebuilders have pulled back more than 6% on the week as the suddenly surging rental markets have absorbed some of the heat from the previously red-hot homeownership markets.

The BLS reported this morning that consumer prices rose at the faster annual rate in decades in May as WWII-levels of fiscal stimulus - much of it untargeted - have combined with surging demand from post-pandemic reopening, and have further clashed with supply constraints to drive a surge in prices. Core Consumer Prices - which excludes food and energy - rose 0.7% in May from last month and 3.8% from a year earlier, which was the largest annual increase since 1991. The headline CPI Index rose 0.6% from last month and 4.93% from last year, which was the highest since 2009. Nearly all major component indexes increased in May with shelter, airline fares, recreation, and home furnishings among the categories driving the increase.

Commercial Equity REITs

Office: Today, we published Office REITs: No Going Back. Vaccines are here, masks are off, and sports stadiums are full. Office desks around the country remain eerily empty, however, as office utilization rates remain a fraction of pre-COVID levels. For many corporations, there's no going back - at least not to pre-COVID norms. Survey data revealed that office workers would accept pay cuts before returning to the 5-day in-person workweek. While the office isn't going away entirely, hybrid work environments - which require less office space - are increasingly standard. Commute times and cost-of-living factors are playing a major role in determining which markets recover faster.

Single Family Rentals: Earlier this week, we published PropTech Revolution, which discussed how the positive reverberations from the post-pandemic "housing boom" are now being felt across U.S. rental markets as single-family housing rents have soared in early 2021. Quieting the critics that questioned their ability to operate efficiently, SFR REITs have been leaders in using Property Technology (PropTech) to reduce costs, increase renter satisfaction, and fuel accretive growth. While the fast-growing SFR REITs appear pricey compared to other REIT sectors, valuations remain compelling compared to other PropTech disruptors in the housing ecosystem.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 0.1% today but remain higher by 5.2% this week. Commercial mREITs were lower by 0.5% today but remain higher by 3.7% on the week. Ellington Residential (EARN) finished higher by more than 4% after it declared a $0.30/share quarterly dividend, a 7.1% increase from its prior dividend of $0.28. Annaly Capital (NLY) and Capstead Mortgage (CMO) each maintained their dividend at the prior rate.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.08% today, on average, and outperformed their respective common stock issues by an average of 0.71%. So far in 2021, REIT Preferred stocks are higher by 9.99% on a price return basis. The average REIT preferred currently pays a dividend yield of 6.01% and trades at a slight premium to par value. Over in the bond markets, RLJ Lodging (RLJ) announced today that it will offer $400M of senior secured notes due 2026. Ladder Capital (LADR) announced yesterday afternoon that it priced $650M in 4.750% Senior Notes due 2029.

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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