Productivity Plunge • REIT Dividend Hike • CPI Ahead
U.S. equity markets slumped Tuesday after employment data showed a hotter-than-expected rise in unit labor costs and a historic annual decline in productivity ahead of a critical CPI inflation report.
Following modest declines on Monday, the S&P 500 retreated 0.5% today while Mid-Cap 400 and Small-Cap 600 posted steeper declines of 1.0% and 1.6%, respectively.
Real estate equities were among the better-performers sectors today as a strong earnings season wrapped up with several solid reports from small-cap REITs. The Equity REIT Index finished higher by 0.4%.
Spirit Realty (SRC) gained 1% after the net lease REIT hiked its dividend by 4%, becoming the 86th REIT to raise its dividend this year. Tanger Outlets (SKT) advanced after reporting decent results and raising its full-year NOI and FFO growth outlook.
Small-cap mall owner Pennsylvania REIT (PEI) surged more than 15% today after reporting better-than-expected results including its first quarter of positive FFO since it emerged from Chapter 11 bankruptcy in November 2020.
Real Estate Daily Recap
U.S. equity markets slumped Tuesday after employment data showed a hotter-than-expected rise in unit labor costs and a historic annual decline in productivity ahead of a critical CPI inflation report tomorrow morning. Following modest declines on Monday, the S&P 500 retreated 0.5% today while Mid-Cap 400 and Small-Cap 600 posted steeper declines of 1.0% and 1.6%, respectively. Real estate equities were among the better-performers sectors today as a strong earnings season wrapped-up with another dividend hike and several solid reports from small-cap REITs. The Equity REIT Index finished higher by 0.4% today with 10-of-18 property sectors in positive territory while the Mortgage REIT Index declined 0.8%.
Following a bit of positive inflation-related news on Monday with Fed survey data showing a steep decline in consumer inflation expectations, the news was less upbeat today as the BLS reported that U.S. worker productivity in the second quarter fell at its steepest pace on an annual basis since 1948 while growth in unit labor costs accelerated. Ahead of the critical CPI report on Wednesday morning, the 10-Year Treasury Yield climbed 3 basis points to 2.80% but remains lower on the week while the 2-Year Treasury Yield closed at 3.26%, resulting in a deeper yield inversion on the 10-2 curve. Internationally, the economic outlook in Europe looks increasingly grim after Ukraine halted Russian oil exports through a key pipeline serving central Europe citing non-payment issues. Stateside, Technology (XLK) stocks were again a laggard today after Micron (MU) warned of weakening chip demand.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Today we published our REIT Earnings Recap: Rents Paid, Dividends Raised. The U.S. REIT industry - which remains relatively "early" in its post-pandemic recovery - exhibited few signs of softness in the second quarter even as the U.S. entered a technical recession. Earnings results from residential, self-storage, and shopping center REITs were most impressive, followed closely behind by industrial and net lease REITs. Office REITs were the lone weak spot among major sectors. Nearly two-thirds of REITs raised their full-year guidance. Strong results from REITs come amid an otherwise disappointing earnings season for the broader equity market in which less than 50% of S&P 500 companies raised their 2022 earnings outlook. Another dozen REITs hiked their dividends this earnings season including a 4% hike today from net lease REIT Spirit Realty (SRC), bringing the full-year total to 86.
Malls: Tanger Outlets (SKT) was among the better-performers today after reporting decent results - raising its full-year NOI and FFO growth outlook by 60 basis points, but to levels that are still 24% below 2019-levels. Encouragingly, SKT did record its strongest 12-month average rent spread in nearly five years of 4.1% while reporting an increase in occupancy to 94.9% - up 190-basis-point from last year. Small-cap Pennsylvania REIT (PEI) surged more than 15% today after reporting better-than-expected results including its first quarter of positive FFO since it emerged from Chapter 11 bankruptcy in November 2020. Importantly, PEI reported progress in its plan to sell assets to pay down its extreme debt loads, noting that it paid down $82M in debt so far in 2022 and has roughly $250M in asset sales in the pipeline. Property-level fundamentals remain soft, however, with total renewal spreads of -1.5% in Q2 - down from the -1.4% spread in Q1.
Healthcare: Medical office REIT Healthcare Realty (HR) was among the leaders today after reporting better-than-expected results in its first report since its completed merger with Healthcare Trust of America. HR recorded same-store NOI growth of 3.3% in Q2 - slightly better than most of its MOB peers - while recording FFO growth of 4.7% over Q2 of 2021. Elsewhere, skilled nursing REIT National Health Investors (NHI) also outperformed today after reporting decent results and boosting its full-year normalized FFO guidance. NHI now expects its FFO to decline 2.1% in 2022 - a 160 basis point improvement from its prior outlook - while reporting progress in its "portfolio optimization" which involves the conversion of several lease structures from triple-net agreements into "SHOP" operating structures. The company commented that it's "not out of the woods yet... as the [SNF operator] industry continues to deal with elevated operating costs."
Mortgage REIT Daily Recap
Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were mostly lower today with residential mREITs declining 0.3% while commercial mREITs dipped 1.5%. Cannabis lender AFC Gamma (AFCG) outperformed today after reporting solid Q2 results including a 2.5% increase in its book value per share ("BVPS") to $17.03. Granite Point (GPMT) traded modestly lower after reporting mixed results with a better-than-expected EPS offset by a 2% decline in its BVPS. Small-cap Lument Finance (LFT) lagged after missing consensus EPS estimates while reporting a 2% decline in its BVPS in Q2. Elsewhere, Broadmark (BRMK) lagged after reporting disappointing results amid an uptick in default rates in its book of residential construction loans. As discussed in our REIT Earnings Recap, mortgage REITs have rebounded sharply since mid-June as mortgage-backed bonds (MBB) have caught a bid following a brutal first-half of 2022. Over the next 24 hours, we'll hear results from Angel Oak Mortgage (AOMR) and Arlington Asset (AAIC).
REIT Preferreds & Capital Raising
Per the Income Builder Preferred Tracker available to Income Builder subscribers, REIT Preferred stocks finished lower by 0.74% today, on average. REIT Preferreds are lower by roughly 5% on a total return basis this year after ending 2021 with price returns of roughly 8.0% and total returns of roughly 14%. There are now roughly 180 REIT-issued exchange-listed preferred and debt securities with an average current yield of roughly 6.75%
Economic Data This Week
The major inflation reports on the week include the Consumer Price Index on Wednesday which investors - and the Fed - are hoping to show that the fastest pace of year-over-year increases is finally behind us. The headline CPI is expected to moderate to an 8.7% annual rate from the four-decade-high set in June as the effects of declining gasoline prices begin to filter into the data. Gas prices have declined about 20% since their peak on June 13th at $5.01 per gallon. The following day we'll see the Producer Price Index for July which is expected to exhibit similar trends of peaking price pressures. On Friday, we'll get our first look at Michigan Consumer Sentiment for August which includes a similar inflation expectations survey. Last month, sentiment fell to the lowest level in more than 10 years as persistent inflation and worries over economic growth have weighed on confidence. 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.
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