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  • Alex Pettee, CFA

Rail Strike Looms • PPI Cools • REIT Dividend Hike

  • U.S. equity markets rebounded Wednesday following their post-CPI plunge on Tuesday as PPI data painted a brighter inflation picture, showing a decline in producer prices for a second-straight month.

  • Following its steepest single-day decline since June 2020, the S&P 500 rebounded by 0.3% today while the tech-heavy Nasdaq 100 advanced 0.8% following its 5.5% dip on Tuesday.

  • After outperforming during yesterday's carnage, real estate equities lagged today as the Equity REIT Index declined by 1.1% with 16-of-19 property sectors in negative territory while Mortgage REIT Index advanced 0.6%.

  • The 10-Year Treasury Yield remained near its highest levels in fifteen years as concerns over a looming freight railroad strike - and its potentially devastating effects on still-fragile U.S. supply chains - negated a cooler-than-expected PPI report.

  • Realty Income (O) - the largest net lease REIT - was among the better-performing REITs after raising raised its monthly dividend by 0.2% - one of 105 REITs that has raised its dividend this year.

 

Real Estate Daily Recap

U.S. equity markets rebounded Wednesday following their post-CPI plunge on Tuesday as PPI data painted a brighter inflation picture, showing a decline in producer prices for a second-straight month. Following its steepest single-day decline since June 2020, the S&P 500 rebounded by 0.3% today while the tech-heavy Nasdaq 100 advanced 0.8% following its 5.5% dip on Tuesday. After outperforming during yesterday's carnage, real estate equities lagged today as the Equity REIT Index declined by 1.1% with 16-of-19 property sectors in negative-territory while Mortgage REIT Index advanced 0.6%.

Following a bond market rout in the wake of the hotter-than-expected CPI report, the 2-Year Treasury Yield and the 10-Year Treasury Yield each remained near their highest levels in fifteen years as concerns over a looming freight railroad strike - and its potentially devastating effects on still-fragile U.S. supply chains - negated a cooler-than-expected PPI report. The US Dollar Index pulled back slightly from its two-decade high set yesterday while Crude Oil prices advanced 1%. Six of the eleven GICS equity sectors finished higher on the day, led to the upside by the Energy (XLE) and Consumer Discretionary (XLY) sectors.


Following the hotter-than-expected CPI report on Tuesday, investors received some better news on the inflation front as the wholesale prices fell in August for a second-straight month as plunging commodities prices resulting from slowing global economic growth cooled the pace of inflation. The headline Producer Price Index fell 0.1% in August - roughly matching consensus estimates - which followed a 0.4% decline in July. On a year-over-year basis, the headline PPI index is higher by 8.7% - the lowest rate since August 2021. Core PPI, meanwhile, moderated to a 7.3% year-over-year increase, matching the lowest rate since June 2021. Yesterday, data showed that consumer prices unexpectedly accelerated in August across both the headline CPI and Core CPI metrics driven by increases in shelter costs.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector


Net Lease: Realty Income (O) - the largest net lease REIT - was among the better-performing REITs after raising raised its monthly dividend by 0.2% to $0.248/share monthly. Today we published Net Lease REITs: Inflation Risk Persists which noted that net lease REITs have surprisingly been among the best-performing property sectors this year despite the challenging rising-rate environment. Even with rent growth significantly lagging inflation, net lease REITs are still on-pace for double-digit earnings growth as robust accretive external growth has more than offset the drag from muted property-level growth. Net lease REIT investors aren't buying the "new normal" of permanently elevated inflation and while our base case is that inflation will return to the 2-3% level by the end of next year as pandemic-era fiscal policy normalizes, there appears to be some complacency reflected in valuations of REITs more exposed to upside inflation risks.

Hotel: Sunstone Hotels (SHO) rallied 1.5% today after it provided a business update which noted that it achieved an Average Daily Rate in Q3 that was 16.9% higher than the same period in 2019, which offset a 14.5-percentage-point drop in occupancy compared to the 2019-level, resulting in total Revenue Per Available Room that was 2.7% below 2019-levels. Leisure and hospitality-focused REITs have been among the better-performing sectors over the past month amid encouraging high-frequency data with TSA Checkpoint data showing a strong end-of-summer swell in travel demand that saw throughput exceed 100% of pre-pandemic levels for the first time since March 2020. Meanwhile, STR reported that U.S. hotel Revenue Per Available Room ("RevPAR") was 24.6% above 2019-levels in the Labor Day week as Occupancy Rates improved to 103% of 2019-levels while Average Daily Rates were 20.9% above the pre-pandemic average.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were mostly-higher today as residential mREITs climbed 0.8% while commercial mREITs advanced by 0.5%. After the close yesterday, six mREITs declared dividends that were in line with their current rate - Dynex Capital (DX), KKR Real Estate (KREF), TPG Real Estate (TRTX), Redwood Trust (RWT), MFA Financial (MFA), and Apollo Commercial (ARI). We've seen 13 mREITs increase their dividend this year and 4 dividend cuts.

Economic Data This Week

We'll get a break from inflation data on Thursday but will get a look at Retail Sales data for August as well as Jobless Claims data. The busy week of inflation data concludes on Friday with Michigan Consumer Sentiment for September. 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.

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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