• Alex Pettee, CFA

Inflation Heats-Up • Retail Sales Cool • REIT Dividend Boosts

Summary

  • U.S. equity markets retreated from record-highs Tuesday following a mixed slate of economic data as producer prices rose faster-than-expected while retail sales moderated slightly in May.

  • Retreating from yesterday's record-highs, the S&P 500 finished lower by 0.2% today while the Mid-Cap 400 finished lower by 0.1% and the Small-Cap 600 gained 0.2%.

  • Real estate equities were among the laggards today as the Equity REIT Index finished lower by 1.1% with 17 of 19 property sectors in negative territory while Mortgage REITs declined 1.1%.

  • The Producer Price Index surged 6.6% for the 12 months ending in May, the fastest increase since the agency began tracking the data in 2010. Retail Sales declined slightly in May while Homebuilder Confidence remained strong.

  • Another day, another flurry of REIT dividend increases. Casino REIT MGM Growth (MGP) boosted its dividend by 4% while Cannabis REIT Innovative Industrial (IIPR) boosted its payout by 6.1%.

Real Estate Daily Recap

U.S. equity markets retreated from record-highs Tuesday following a mixed slate of economic data as producer prices rose faster-than-expected while retail sales moderated slightly in May. Retreating from yesterday's record-highs, the S&P 500 (SPY) finished lower by 0.2% today while the Mid-Cap 400 (MDY) finished lower by 0.1% and the Small-Cap 600 (SLY) gained 0.2%. Real estate equities were among the laggards today as the Equity REIT Index finished lower by 1.1% with 17 of 19 property sectors in negative territory while the Mortgage REIT Index declined by 1.1%.

Ahead of the closely-watched Federal Reserve meeting tomorrow afternoon, the 10-Year Treasury Yield closed flat today at 1.50% despite the hotter-than-expected PPI inflation report this morning. Six of the eleven GICS equity sectors finished lower on the day, dragged on the downside by the Real Estate (XLRE), Technology (XLK), and Communications (XLC) sectors. Homebuilders and the broader Hoya Capital Housing Index were mixed today ahead of Housing Starts and Building Permits data tomorrow morning.

As discussed today in Homebuilders: Opportunity in Cool Down, the scorching-hot single-family housing market has finally cooled in recent months as record-low housing supply and soaring home prices have forced potential buyers to pause their home buying search. Today, the Homebuilder Sentiment Index showed that homebuilders remain confident, but no longer at the euphoric levels of earlier this year as the index declined slightly to 81 in June from 83 in the prior month. Discounts are few-and-far-between across the housing markets, but homebuilders are now on sale following a 15-20% correction. Builders are quintessential "Growth At Reasonable Price" stocks, trading at single-digit forward P/E multiples despite double-digit growth rates.

Inflation & Retail Sales

The BLS reported this morning that the Producer Price Index surged 6.6% for the 12 months ending in May, the fastest increase since the agency began tracking the data in 2010. Core PPI - which excludes foods, energy and trade services - rose 0.6% in May from the previous month, bringing the annual increase to 4.8%. Unprecedented levels of fiscal stimulus - much of it untargeted - have combined with surging demand, and have further clashed with supply constraints to drive a surge in both consumer and producer prices and emerging shortages of goods and labor across many industries.

Elsewhere, the Commerce Department reported this morning that Retail Sales declined slightly in May from the record-high levels of spending earlier this year, fueled by stimulus checks and economic reopenings. Sales declined 1.3% in May from the prior month - roughly in line with expectations adjusting for the upward revisions to April's data - and were still higher by 28.1% from last May. Many of the COVID-winners including e-commerce and home improvement stores have moderated in recent months while the hardest-hit categories including clothing and food services have recovered.

Commercial Equity REITs

Another day, another flurry of REIT dividend increases. Casino REIT MGM Growth Properties (MGP) boosted its dividend by 4% to $0.515/share, up from its prior dividend of $0.495. Cannabis REIT Innovative Industrial (IIPR) boosted its payout by 6.1% to $1.40/share, up from its prior dividend of $1.32. This was the second dividend boost of the year for both of these REITs. 63 equity REITs have now raised their payouts this year, the majority of which have come from REITs that also boosted their payouts in 2020.

Healthcare: Medical Properties Trust (MPW) announced that it will buy a portfolio of 18 in-patient behavioral health hospital facilities for $950M through a sale-leaseback agreement with Springstone. The hospitals will be master leased pursuant to terms that are anticipated to provide a GAAP-basis yield exceeding 9.0% and lease payment coverage of approximately 1.75x in the near term. The lease is expected to include an initial 20-year term with CPI-based annual rent escalators subject to a 2% floor. MPW expects to initially fund the total cash consideration using cash on hand and borrowings under its revolving credit facility and additional financing arrangements, which may include issuances of debt and equity securities, placement of new secured loans on the acquired real estate, or a combination thereof.

Office: Washington REIT (WRE) dipped more than 6% today after it announced that it has agreed to sell substantially all of its office portfolio to Brookfield Asset Management (NYSE:BAM) private real estate fund for $766M to focus on multifamily properties. The office portfolio sale consists of 12 office assets, comprising 2.37M square feet, located in the Washington, DC region. WRE expects to complete the transaction in Q3. WRE plans to use net proceeds from the office portfolio sale and future retail sales to fund the expansion of its multifamily platform through acquisitions in Southeastern markets and to reduce its leverage by repaying outstanding debt. WRE's multifamily strategies target the Class A- and Class B segments of the market in the Southeastern markets of Atlanta, Raleigh, and Charlotte.

Mortgage REITs

Per our Mortgage REIT Tracker available to The REIT Forum subscribers, residential mREITs finished lower by 1.5% and are now off by 1.8% on the week. Commercial mREITs were lower by 0.8% and are now lower by 0.2% this week. Ready Capital (RC) gained nearly 3% today after it boosted its dividend to $0.42/share, up from its prior dividend rate of $0.35 per share. Two mREITs traded lower after pricing secondary equity offerings: Arbor Realty (ABR) declined by 5% today after priced an offering of 6M common shares while Ellington Residential (EARN) finished lower by nearly 7% after pricing an offering of 3.25M common shares. EARN also announced that its estimated book value per common share as of May 31 was $12.96, down slightly from its reported $13.22 BVPS as of March 31.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished lower by 0.18% today, on average, but outperformed their respective common stock issues by an average of 1.05%. So far in 2021, REIT Preferred stocks are higher by 9.55% on a price return basis. The average REIT preferred currently pays a dividend yield of 6.00% and trades at a slight premium to par value.

Economic Data This Week

We have a jam-packed week of economic and housing data in the week ahead. Today we saw Producer Price Index data for May which showed the highest rate of producer inflation in several decades. We also saw Retail Sales data for May and the NAHB Homebuilder Sentiment Index for June. On Wednesday, we'll see Building Permits and Housing Starts data for May which is expected to show that new home construction activity remains near 15-year highs. Also on Wednesday, we'll hear commentary from the Federal Reserve, along with their interest rate decision at the conclusion of their two-day FOMC meeting.

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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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