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  • Alex Pettee, CFA

REIT Dividend Hikes • Yields Retreat • Inflation Cools

  • U.S. equity markets advanced Thursday after the closely-watched CPI inflation report showed continued signs of easing inflationary pressures, strengthening the case for the Fed to ease the pace of monetary tightening.

  • Pushing its week-to-date gains to nearly 2.5%, the S&P 500 climbed 0.3% today while the Mid-Cap 400 and Small-Cap 600 each posted roughly 1% gains on the session.

  • Real estate equities continued their strong start to the year as benchmark interest rates retreated to the lowest-levels in four months. Equity REITs gained 1.2% while Mortgage REITs advanced 1.5%.

  • Peak Inflation? Sure looks that way. Headline inflation declined in December on a month-over-month basis while the closely-watched CPI-ex-Shelter Index was negative for the fifth month in the past six.

  • A trio of REITs hiked their dividends over the past 24 hours - UMH Properties (UMH), STAG Industrial (STAG), and Seven Hills Realty (SEVN). Corporate Office Properties (OFC) announced a deal to acquire five data centers from Blackstone.

 

Income Builder Daily Recap

U.S. equity markets advanced Thursday after the closely-watched CPI inflation report showed continued signs of easing inflationary pressures, strengthening the case for the Fed to ease the pace of monetary tightening. Pushing its week-to-date gains to nearly 2.5%, the S&P 500 climbed 0.3% today while the Mid-Cap 400 and Small-Cap 600 each gained closer to 1%. Real estate equities continued their strong start to the year as benchmark interest rates retreated to the lowest-levels in four months. The Equity REIT Index gained 1.2% with all 18 property sectors in positive territory while the Mortgage REIT Index advanced 1.5%. Homebuilders and the broader Hoya Capital Housing Index were also among the leaders today, buoyed by data showing that mortgage rates resumed their decline with the 30-year fixed-rate mortgage averaging 6.33%, down from a recent peak above 7.0%.

Peak Inflation? Sure looks that way. The Consumer Price Index showed a cooler-than-expected increase in prices in December with the Headline and Core CPI coming in below expectations, indicating that inflationary pressures may finally be rolling over amid a broader global economic slowdown. The Headline CPI Index posted a 0.1% decline for the month, slowing the annual increase to 6.4% - the lowest since October 2021 - while the Core CPI Index slowed to below 6%. Notably, the CPI-ex-Shelter Index - the metric that we believe officials should most closely watch given the lagged effects of shelter inflation - was negative for the fifth month in the past six. Bonds rallied across the credit and maturity curve as the benchmark 10-Year Treasury Yield dipped 5 basis points to close at 3.45% - back on the cusp of the lowest levels since September and well below its peak closing high of 4.25% in October.

As we've cautioned for the last year, the CPI Index was substantially understating the real-time increase in the single-largest component of the index - Shelter - since mid-2021 due to the sampling methodology which only collects "same-unit" data twice per year. The cooler-than-expected headline print was even more encouraging given the acceleration in CPI Shelter to 7.5% - the highest annual increase since 1982. Remarkably, since July, the CPI ex-Shelter Index has declined by 1.6% - an annualized rate of -3.2% - which is among the most deflationary six-month periods on record for that index. In fact, just two periods in the past 75 years of BLS data have seen a lower six-month average inflation rate on the CPI ex-Shelter Index: 2009 and 2015.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector


Manufactured Housing: UMH Properties (UMH) - which we own in the REIT Focused Income Portfolio - rallied nearly 5% after it raised its quarterly dividend by 2.5% to $0.205/share. Earlier this week, we published Manufactured Housing: Recession Resistant REITs which noted that MH REITs snapped an incredible streak of nine straight years of outperformance over the REIT Index in 2022, impacted by headwinds from higher interest rates and hurricane-related disruptions. While rent growth has moderated from record-high levels across other residential property types, MH revenue growth is poised to accelerate in 2023, driven by their under-appreciated inflation-linkage and Cost-of-Living-Adjustment effects. Nearly half of MH residents receive monthly Social Security benefits, which are poised to rise 8.7% beginning this month - the highest COLA increase in four decades - which will give MH REITs and senior housing REITs room to push rent growth.

Office: Corporate Office Properties (OFC) - which owns a portfolio of government properties leased to defense and information technology (“IT”) agencies in addition to a traditional DC-heavy office portfolio - rallied nearly 3% today after it announced that it acquired a 90% interest from Blackstone (BX) in five data center shell properties valued at $278M. The acquisition was executed through two separate transactions that closed in mid-December and early January. As a result, Corporate Office - also known as COPT - received ~$250M of proceeds, which it will use to fund the equity required for its development pipeline. With the closings, COPT doesn't anticipate that it will need to raise any additional equity capital in 2023.

Industrial: STAG Industrial (STAG) - which we also own in REIT Focused Income Portfolio - rallied 2% today after it hiked its monthly dividend by 1% to $0.1225/share, representing a forward dividend yield of 4.23%. We've seen a handful of business updates from industrial REITs throughout the week which have indicated that demand remained resilient into year-end. Terreno (TRNO) reported average rental rate increases on new and renewed leases of 45.2% in Q4 while Redford Industrial (REXR) reported rent spreads were higher by 76.8% on a GAAP basis and 52.5% on a cash basis in the fourth quarter.

Strip Centers: Today we published Strip Center REITs: Bargain Hunting on the Income Builder Marketplace which discussed our updated outlook on the sector and recent portfolio trades. Flying under-the-radar amid recession concerns and the looming shadow cast by their persistently-troubled mall peers, the outlook for Strip Center REITs has improved considerably over the past year. The combination of near-zero new development and positive net absorption since early 2021 has driven occupancy rates to record-highs and allowed Strip Center REITs to enjoy some long-awaited pricing power. Favorable supply/demand fundamentals have translated into impressive double-digit rent growth spreads throughout 2022 and the best earnings “beat rate” of any property sector during the year. Read the full report here.

Additional Headlines from The Daily REITBeat on Income Builder

  • Deutsche Bank upgrades AMT to Buy from Hold

  • Barclays downgrades CCI to Equalweight from Overweight

  • Baird downgrades INN to Neutral from Outperform

  • Baptista Research initiates HLT with a Hold rating

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs continued their strong start to the year with residential mREITs gaining another 1.6% today while commercial mREITs gained 2.2%. Seven Hills Realty (SEVN) surged more than 15% after boosting its quarterly dividend by 40% to $0.35/share, representing a forward dividend yield of 15.3%. Apollo Commercial (ARI) advanced 2% after providing a business update in which it reported that it completed $3.7B of new loan originations for the year, up from $3.2B in 2021. AGNC Investment (AGNC) and Orchid Island (ORC) each gained about 1% after keeping their dividends steady at current rates. Last month, we published Mortgage REITs: High Yields Are Fine, For Now, which noted that despite paying average dividend yields in the mid-teens, the majority of mREITs have been able to cover their dividends, but we flagged a handful of mREITs with payout ratios above 100% of EPS.

Economic Data This Week

The busy week of economic data concludes on Friday with our first look at Michigan Consumer Sentiment data for January which includes a closely-watched consumer inflation expectations survey. 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 this weekend.

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.


This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital Real Estate. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.


The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.


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