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  • Alex Pettee, CFA

Inflation Stays Hot • Wild Stock Swings • REIT Dividend Hike

  • U.S. equity markets rebounded Thursday in another wild session despite disappointingly hot inflation data as a seemingly unexplained wave of programmatic-driven buying pressure erased steep early-session declines.

  • Rebounding from the lowest levels since 2020 and snapping a six-session losing streak, the S&P 500 rallied 2.6% today while the tech-heavy Nasdaq 100 advanced 2.4%.

  • The Equity REIT Index advanced 2.0% today with all 18 property sectors in positive territory while the Mortgage REIT Index gained 1.9%. Homebuilders lagged as mortgage rates climbed to multi-decade-highs.

  • 'Bad news' on the inflation front continued today with the most closely-watched measure of US consumer prices - Core CPI - rising by more than expected to a 40-year high in September. The CPI Excluding-Shelter Index, however, posted a third straight monthly decline.

  • Hotel REIT Service Properties Trust (SVC) surged more than 25% after it resumed its previously-suspended dividend at $0.20/share quarterly dividend, representing a dividend yield of 14.47%.

 

Income Builder Daily Recap

U.S. equity markets rebounded Thursday from two-year lows in another wild session despite disappointingly hot inflation data as a seemingly unexplained wave of buying pressure erased steep early-session declines. Recovering from early-session declines of over 2% en route to snap a six-session losing streak, the S&P 500 rallied 2.6% today while the tech-heavy Nasdaq 100 advanced 2.4%. Real estate equities were also broadly-higher today despite the uptick in long-term interest rates with the 10-Year Treasury Yield climbing 5 basis points to 3.95%. The Equity REIT Index advanced 2.0% today with all 18 property sectors in positive territory while the Mortgage REIT Index gained 1.9%. Homebuilders lagged as mortgage rates climbed to multi-decade highs.

'Bad news' on the inflation front continued today with the most closely-watched measure of US consumer prices - Core CPI - rising by more than expected to a 40-year high in September, lifting treasury yields back towards their highest-levels since the Great Financial Crisis. The core consumer price index, which excludes food and energy, increased 6.6% from a year ago, the highest level since 1982. From a month earlier, the core CPI climbed 0.6% for a second month - also hotter than anticipated. Despite the decline in gasoline prices last month, the overall headline CPI increased 0.4% last month, and was up 8.2% from a year earlier. The hot CPI print follows similarly disappointing PPI data on Wednesday, which together has likely solidified the additional 75-basis point interest rate hike at the Fed’s November meeting.

What goes around comes around. 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 Dallas Fed published a report highlighting the data issues at the BLS, finding a 16-month lag between the BLS inflation series and real-time market pricing of home prices and rents - and for several years we've highlighted the "smoothing" effects seen in the Shelter CPI which effectively renders the index as a rolling two-year average of actual shelter inflation. The delayed effects of this Shelter inflation is beginning to show up - and it's hitting quite hard.

The shelter index rose 6.6% over the last year - the highest annual increase since 1982 - accounting for over half of the total increase in all items less food and energy. But while the month-over-month headline CPI increased by 0.4% in September, the CPI Excluding-Shelter Index posted a third straight monthly decline - suggesting that "real-time" inflation is indeed decelerating even as headline metrics suggest otherwise. Market-based indexes of rents and home values recorded 10-20% year-over-year rental rate increases beginning in June 2021, but these double-digit increases have since moderated to levels that are more in-line with post-GFC averages.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Hotel: Service Properties Trust (SVC) surged more than 25% after it resumed its previously-suspended dividend at $0.20/share quarterly dividend, representing a dividend yield of 14.47%. SVC announced last week that it had amended its credit facility to remove the restrictions on paying common dividends. The dividend represents a 37% payout ratio based on Q2 2022 normalized funds from operations. In our report last week - Hotel REITs: Winter Is Coming - we noted that recent TSA Checkpoint data has indicated that domestic travel throughput briefly exceeded 100% of pre-pandemic levels in late August before moderating back towards the 90% level that it's hovered around since March. We remain skeptical over the sustainability of the recovery in the upscale urban markets given the complexion of the RevPAR recovery, driven by pent-up domestic leisure travel and surging room rates while business and international travel remain slow to recover.

Cell Tower: Today we published Cell Tower REITs: 5G's Killer App. Cell Tower REITs have been slammed harder than any property sector over the past three months, weighed down by tech-related weakness and disruptive threats to the long-term competitive positioning. Concerns over emerging - and potentially competing - satellite technologies came to a head when Apple announced that its new iPhone lineup would be capable of sending text messages over satellite networks. Awed by impressive rocket launches, the market has overlooked more meaningful industry dynamics - the accelerated rollout of fixed wireless access ("FWA") - which have further solidified the competitive positioning of land-based wireless networks - a market that is effectively "cornered" by the three cell tower REITs.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were also broadly higher today as more mREITs reported preliminary Q3 results which have so far shown that conditions aren't quite as dire as some feared amid the worst year of returns for credit markets in history. Orchid Island Capital (ORC) rallied after it reported that its estimated Book Value Per Share ("BVPS") was $11.42 at the end of Q3 - down 21% from the $14.35 last quarter - but less steep than the nearly 40% declines during that period. Two Harbors Investment (TWO) finished roughly flat after it pegged its BVPS at $4.11 at the end of Q3 - down 19% from the $5.10 at the end of Q2. Seven Hills Realty (SEVN) finished slightly higher after holding its dividend steady at its current rate.

Economic Data This Week

The busy week of economic data concludes on Friday with Retail Sales data and Michigan Consumer Sentiment. The Fed is particularly interested in the 5-Year Inflation Expectations survey, looking for signs of a potential "wage-price inflation spiral" through elevated consumer wage expectations. 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.


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