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  • Alex Pettee, CFA

Hot Inflation • Yields Jump • REIT Dividend Boost

Summary

  • U.S. equity markets finished broadly lower Tuesday following data showing that consumer prices continued to soar in July, sending yields higher and turning investor attention back to the Federal Reserve.

  • Following gains of 0.4% yesterday, the S&P 500 finished lower by 0.3% today while the Mid-Cap 400 retreated 1.5% and the Small-Cap 600 dipped 1.9%.

  • Pressured by rising yields, real estate equities were among the laggards today as the Equity REIT Index declined by 1.4% with 18-of-19 property sectors in negative territory while Mortgage REITs dipped 3.1%.

  • The BLS reported this morning that consumer prices rose at the fastest annual rate in decades in June. The hotter-than-expected reading comes as the effects of soaring rents and home values begin to filter into the data.

  • Movie theater owner EPR Properties (EPR) was among the leaders today after resuming its dividend which has been suspended since May 2020 and noting that it collected 82% of Q2 rents.

Real Estate Daily Recap

U.S. equity markets finished broadly lower Tuesday following data showing that consumer prices continued to soar in July, sending yields higher and turning investor attention back to the Federal Reserve. Following gains of 0.4% yesterday, the S&P 500 finished lower by 0.3% today while the Mid-Cap 400 retreated 1.5% and the Small-Cap 600 dipped 1.9%. Pressured by rising yields, real estate equities were among the laggards today as the Equity REIT Index declined by 1.4% with 18-of-19 property sectors in negative territory while the Mortgage REIT Index dipped 3.1%.

After retreating to five-month lows last week, the 10 Year Treasury Yield jumped back above 1.42% today following hotter-than-expected inflation data. Ten of the eleven GICS equity sectors were lower on the day with Technology (XLK) the lone sector in positive territory. Despite rising yields, Financials (XLK) were under pressure as bank earnings kicked off with mixed results from JP Morgan (JPM) and Goldman Sachs (GS). Elsewhere, Crude Oil (CL1:COM) prices rose to the highest level in more than two years ahead of Producer Price Index data tomorrow morning.

Consumer Prices Jump in June

The BLS reported this morning that consumer prices rose at the fastest annual rate in decades in June as WWII-levels of fiscal stimulus 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 0.9% in June from last month and 4.5% from a year earlier, which was the largest annual increase since 1991. The headline CPI Index also rose 0.9% from last month and 5.3% from last year, which was the second-highest annual increase since 1991.

The hotter-than-expected reading comes as the effects of soaring rents and home values begin to filter into the data. The CPI: Shelter index rose 0.5% from the prior month - the highest monthly rise since 2005 - but the annual rise remains significantly understated at just 2.6%. The BLS' methodology only collects shelter data every six months while most other components are sampled monthly, so the Shelter Index has only begun to reflect the historic surge in home values and rents seen in early 2021. We estimate that actual CPI: Shelter inflation is running at 4-5%, which would push the headline inflation rate to nearly 7%.

Commercial Equity REITs

Industrial: Today 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.

Sticking in the industrial sector, Monmouth Real Estate Investment (MNR) was among the leaders today after receiving a second acquisition proposal from a "large private investment" believed to be private equity firm Starwood Capital for net cash consideration of $19.51/share in cash - reduced to $18.70 by the $0.63/share termination fee payable by MNR to EQC. This proposal comes two months after announcing a merger agreement with office REIT Equity Commonwealth (NYSE:EQC) - led by Sam Zell - in which EQC would acquire the company in an all-stock transaction that would award MNR shareholders' with 0.67 shares of EQC per share of MNR, reflecting a value of $18.10/share at yesterday's closing prices.

Net Lease: EPR Properties (EPR) was among the leaders today after resuming its dividend which has been suspended since May 2020. EPR will pay a monthly dividend of $0.25 per share, representing a forward yield of roughly 5.7%. EPR also provided preliminary Q2 metrics, noting that 99% of its movie theater properties and 98% of its non-theater properties were open by the end of July. It noted that it collected 82% of contractual cash revenue, above the high end of its previously announced guidance for Q2 of 75%-80%. EPR - owns has a portfolio of experience-based properties (movie theaters, amusement parks, and ski resorts) - reported the weakest rent collection rates of any non-mall REIT in 2020.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 3.7% today and are now off by 3.9% this week. Commercial mREITs slipped 1.9% today and are now lower by 0.9% this week. Two Harbors Investment (TWO) lagged after pricing a secondary common stock offering that raised $260M, intending to use the proceeds to acquire additional assets. AFC Gamma (AFCG) was among the outperformers after the cannabis REIT provided a business update in which it noted that it closed on $71.3M of new commitments in Q2 and reiterating that it has been added to the small-cap Russell 2000 Index (IWM), effective June 28.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks higher lower by 0.26% today, on average, but outperformed their respective common stock issues by an average of 2.15%. So far in 2021, REIT Preferred stocks are higher by 9.32% 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. Rexford Industrial Realty (REXR) announced that it will redeem all of its 5.875% Series A Cumulative Redeemable Preferred Stock (REXR.PA) on Aug. 16, 2021.

Economic Data This Week

We'll see a jam-packed slate of economic data and the start of the second-quarter earnings season in the week ahead, headlined by inflation and retail sales data. On Tuesday and Wednesday, respectively, we'll see Consumer Price Index ("CPI") and Producer Price Index ("PPI") data for June. The BLS reported last month that consumer and producer prices each recorded the largest annual increases in more than a decade. On Friday, we'll see Retail Sales data for June which is expected to show a continued cool down from the stimulus-fueled record-highs set in April. We'll also be watching Jobless Claims data on Thursday and Consumer Sentiment data on Friday.

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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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