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  • Alex Pettee, CFA

Red Hot Inflation • Yield Curve Inversion • Earnings Ahead

  • U.S. equity markets declined for a third straight session Wednesday on data showing that inflation reached another four-decade high in June as surging energy costs and rents drove an unexpected acceleration.

  • Extending its week-to-date declines to 2.5%, the S&P 500 declined 0.3% today to push its drawdown to 21% from its recent highs while the Mid-Cap 400 and Small-Cap 600 posted similar declines.

  • Real estate equities were mixed today as gains from residential REITs was offset by declines from retail REITs. The Equity REIT Index finished lower by 0.5% today.

  • Peak Inflation? Not Yet. Consumer prices rose at the fastest pace in more than 40 years in June - and significantly above analysts' estimates - as cost pressures continue to be far less "transitory" than economics and public officials projected.

  • Hannon Armstrong (HASI) bounced back 3% today following a nearly 20% dip on Tuesday following the publication of a short report from Muddy Waters. Analysts at Cowen and Oppenheimer defended the firm and its management team and recommended buying the shares on the weakness.

Income Builder Daily Recap

U.S. equity markets declined for a third straight session Wednesday on data showing that inflation reached another four-decade high in June as surging energy costs and rents drove an unexpected acceleration. Extending its week-to-date declines to 2.5%, the S&P 500 declined 0.3% today to push its drawdown to 21% from its recent highs while the Mid-Cap 400 and Small-Cap 600 posted similar declines today. Real estate equities were mixed today as gains from residential REITs were offset by declines from retail REITs. The Equity REIT Index finished lower by 0.5% today with 8 of 18 REIT sectors in positive territory while the Mortgage REIT Index rallied 1.3%.

Despite the hotter-than-expected inflation data and expectations of an even-more-aggressive path of Fed rate hikes over the next several months, benchmark interest rates on the long-end of the curve continued to retreat today with the 10-Year Treasury Yield declining another 5 basis points to 2.90% - well below its recent high of 3.50% reached in early June. Crude Oil prices stabilized following sharp declines on Tuesday amid concern over sharply slowing economic growth in Europe and Asia. Ahead of the unofficial start of earnings season tomorrow, nine of the eleven GICS equity sectors finished lower on the day, dragged on the downside by the Industrials (XLI) and Healthcare (XLV) sectors while Homebuilders and the broader Hoya Capital Housing Index were among the upside leader for the second day.

Peak Inflation? Not Yet. Consumer prices rose at the fastest pace in more than 40 years in June - and significantly above analysts' estimates - as cost pressures continue to be far less "transitory" than economics and public officials projected. The annual increase in the headline Consumer Price Index accelerated to 9.1% in June - above the 8.8% rate expected - the highest since January 1981. The Core CPI - the metric on which the Fed focuses its attention - rose 5.9% - above expectations for a 5.7% gain. Remarkably, the energy index rose 41.6% over the last year, the largest 12-month increase since the period ending April 1980. The food index increased 10.4% for the 12-months ending June, the largest 12-month increase since February 1981.

As we've discussed for the last year, we continue to project persistent pressure on the headline inflation metrics due to the delayed recognition of soaring shelter costs - the single largest weight in the CPI Index - which are just beginning to filter into the data. The cost of shelter increased 0.6% in June - matching the largest monthly increase since March 2004 - pushing its year-over-year rise to 5.6 - the largest 12-month increase since the period ending February 1991. We believe this still significantly understates the actual rise in shelter costs as private market rent data has shown that national rent inflation has been in the 10-15% range over the past twelve months while home values have risen by 15-20%. 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 which will add an estimated 0.6-1.2% to the Core CPI index in 2022 and 2023.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Storage: Today, we published Storage REITs: Recession Resistant, But Not Acting Like It. Self-Storage REITs - usually known for their recession-resistant characteristics - have sold off in recent months despite a stellar slate of earnings results and upbeat interim updates. Storage REITs appear to be caught up in the bearish sentiment surrounding industrial REITs– a rather distant “cousin” to the storage sector– and the unusually-high recent correlations are fundamentally unwarranted. Few REIT sectors have defied expectations as comprehensively as storage REITs since the start of the pandemic, and while several pandemic-fueled tailwinds are waning, the long-term outlook remains quite compelling. We discussed our updated outlook and recent allocations in the report linked here.

Industrial: STAG Industrial (STAG) advanced 0.5% today after announcing that it completed the sale of two fully occupied industrial real estate properties for gross proceeds of approximately $82 million, representing a cash capitalization rate of 5.2%. The buildings consist of approximately 1 million sf and are located in Dayton, OH and Greenwood, IN which STAG acquired the buildings in 2017 and 2018, respectively, for a purchase price of approximately $63.3 million representing a cash capitalization rate of 6.2%.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were broadly higher today with residential mREITs advancing 1.2% while commercial mREITs advanced 1.0%. Hannon Armstrong (HASI) bounced back 3% today following a nearly 20% dip on Tuesday following the publication of a short report from Muddy Waters. Analysts at B. Riley, Cowen and Oppenheimer defended the firm and its management team and recommended buying the shares on the weakness. Muddy Waters alleged in the short report on Tuesday that HASI's accounting is complex and that the company appears to inflate its GAAP earnings in the report titled: "HASI: “ESG” is for Exaggerating, Scamming, and Grifting."

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, REIT Preferred stocks finished lower by 0.40% today, on average. REIT Preferreds are lower by roughly 10% 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 6.97%. Over in the capital markets, Realty Income (O) increased its unsecured credit facility by $500M to $1.5B. Yesterday, Fitch Ratings affirmed Getty Realty's (GTY) credit rating of “BBB-“ with a stable outlook.

Inflation data highlight another busy week of economic data in the week ahead. On Wednesday, the BLS reported the Consumer Price Index and tomorrow we'll see the Producer Price Index for June. On Friday, we'll also see Retail Sales for June and get our first look at Michigan Consumer Sentiment for July. 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.

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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