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  • Alex Pettee, CFA

Inflation Cools • REIT Dividend Hike • Russia Tensions

  • U.S. equity markets rebounded Tuesday in a choppy session as cooler-than-expected inflation data and strong earnings results from Walmart and Home Depot offset renewed geopolitical concerns in the Russia-Ukraine war.

  • Following declines of 0.9% on Monday, the S&P 500 rebounded 1.6% today while the tech-heavy Nasdaq 100 advanced 1.3%.

  • Real estate equities were among the stronger performers today as improving inflation data sparked a bid for bonds and yield-sensitive asset classes. Equity and Mortgage REITs both advanced 1.1% today.

  • Good news on the inflation front continued today. Notably, over the past four months, the Headline PPI has averaged 0.0% compared to a 12% annualized rate in the four previous months.

  • Another day, another REIT dividend hike. Net lease REIT Four Corners Property Trust (FCPT) hiked its quarterly dividend by 2.3% to $0.34/share, becoming the 120th REIT to boost its dividend this year.

 

Income Builder Daily Recap

U.S. equity markets rebounded Tuesday in a choppy session as cooler-than-expected inflation data and strong earnings results from Walmart and Home Depot offset renewed geopolitical concerns in the Russia-Ukraine war. Following declines of 0.9% on Monday, the S&P 500 rebounded 1.6% today while the tech-heavy Nasdaq 100 advanced 1.3%. Real estate equities were among the stronger performers today as improving inflation data sparked a bid for bonds and yield-sensitive asset classes. The Equity REIT Index finished higher by 1.1% today with 16-of-18 property sectors in positive territory while the Mortgage REIT Index advanced 1.1%. Homebuilders and the broader Hoya Capital Housing Index also delivered strong gains following upbeat housing market commentary from Home Depot.

Cooler-than-expected PPI inflation data sparked a bid across bond markets with the 10-Year Treasury Yield dipping 7 basis points to close at 3.80% today while the U.S. Dollar resumed its recent slide as well. Crude Oil prices, meanwhile, jumped 2% as geopolitical tensions heightened following unconfirmed reports of an explosion in Poland which a US intelligence source linked to Russia, coming several hours before a request from the White House for an additional $38B in additional war funding. Eight of the eleven GICS equity sectors finished higher on the day with Consumer Discretionary (XLY) stocks leading to the upside following strong earnings results from retail giants Walmart (WMT) and Home Depot (HD) with each reporting impressive comparable sales results and decent margins in the third quarter.

Following the cooler-than-expected Consumer Price Index report last week, Producer Price Index data this morning showed similar trends of waning inflationary pressures in wholesale prices. The Producer Price Index for final demand increased just 0.2% in October - pulling the year-over-year back under 8% for the first time in 15 months. Notably, over the past four months, the Headline PPI has averaged 0.0% compared to a 12% annualized rate in the four previous months. The Core Producer Price Index, meanwhile, was flat in October on a month-over-month basis - below expectations of a 0.3% increase. Also of note, services prices fell 0.1% in October, which marked the first decline since November 2020. Goods prices rose 0.6%, but 60% of the increase was due to higher gasoline prices, which have declined in November.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Another day, another REIT dividend hike. Net lease REIT Four Corners Property Trust (FCPT) hiked its quarterly dividend by 2.3% to $0.34/share, becoming the 120th REIT to boost its dividend this year. Later this week, we'll publish our updated State of the REIT Nation report analyzing the quarterly NAREIT T-Tracker data released today. Of note, REIT dividends increased 15.5% in Q3 compared to the prior quarter and 18% from the prior year fueled by a wave of mid-year dividend hikes. REIT FFO/share, meanwhile, was higher by 13.7% from the prior year. REIT dividend payout ratios averaged 73% in Q3 - up from the near-record-low rate in Q2 - but still well below the longer-run averages of around 80%. Also of note, Same Store NOI rose 7.1% from last year while average leverage ratios remained near historic lows.

Last Friday we published our REIT Earnings Recap: Rents Paid, Dividends Raised. Nearly 200 REITs and a dozen homebuilders have reported third-quarter earnings results over the past three weeks, providing critical information on the state of the U.S. real estate industry. REIT earnings season was surprisingly strong across nearly all property sectors. Of the REITs that provide guidance, nearly two-thirds raised their full-year FFO outlook alongside another two dozen dividend hikes. During third-quarter earnings season, the Equity REIT Index outperformed the broader S&P 500 by nearly 10 percentage points while Mortgage REITs outperformed by over 15 percentage points. Earnings results from Shopping Center, Industrial, and Net Lease REITs were most impressive - accounting for exactly half of the 58 guidance hikes. Residential and technology REIT results were more hit-and-miss - accounting for half of the 14 downward guidance revisions. Read the full report here.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs continued their recent upswing today with residential mREITs advancing 1.3% while commercial mREITs gained 0.5%. Arlington Asset (AAIC) lagged, however, after wrapping-up mREIT earnings season with a mixed report, noting that its Book Value Per Share increased about 1% in Q3, but indicated that does not yet plan to restore its dividend. Today we published Mortgage REITs: High Yields Are Safe, For Now on the Income Builder Marketplace which analyzed mREIT earnings season, noting that Mortgage REITs are now outperforming Equity REITs for the year after earnings results showed that the damage to balance sheets from the brutal quarter for fixed income markets was not nearly as catastrophic as many feared.

Economic Data This Week

The busy week of housing data continues on Wednesday with the NAHB Homebuilder Sentiment data for September which is expected to decline to the lowest level since 2014 - excluding the brief pandemic dip in April and May 2020. On Thursday, we'll see Housing Starts and Building Permits data which is expected to show a further pull-back in home construction activity to levels below that of late 2019 before the pandemic boom. On Friday, Existing Home Sales data is also expected to dip to the lowest levels since 2014 excluding the pandemic shutdown months. We'll also be watching Retail Sales data on Wednesday along with Jobless Claims data on Thursday.

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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