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  • Alex Pettee, CFA

Red-Hot PPI • REIT Dividend Hikes • Rents Keep Soaring

  • U.S. equity markets rebounded Tuesday despite another red-hot inflation report as the back-and-forth diplomacy efforts on the Russia/Ukraine border revealed hopes of a peaceful resolution.

  • Bouncing back from a decline of 0.4% yesterday, the S&P 500 rallied 1.6% today while the tech-heavy Nasdaq 100 gained 2.2% but remains 12% below its recent highs.

  • Real estate equities were also broadly higher today following strong earnings results and a pair of dividend hikes as the Equity REIT Index advanced 0.9% today.

  • Inflation Remains Relentless: The BLS reported this morning that Producer Prices soared at a 9.7% annual rate in February - significantly hotter than expected - and just a tick below setting fresh record highs.

  • NexPoint Residential rallied more than 3% today after reporting stellar earnings results, highlighted by an incredible 24.5% growth in new lease spreads in Q4. Results from Spirit Realty and Kite Realty were also quite strong.

Income Builder Daily Recap

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U.S. equity markets rebounded Tuesday despite another red-hot inflation report as the back-and-forth diplomacy efforts on the Russia/Ukraine border revealed hopes of a peaceful resolution. Bouncing back from a decline of 0.4% yesterday, the S&P 500 rallied 1.6% today while the tech-heavy Nasdaq 100 gained 2.2% but remains 12% below its recent highs. The Small-Cap 600 and Mid-Cap 400 were higher by 2.0% and 2.2%, respectively. Real estate equities were also broadly higher today following strong earnings results and a pair of dividend hikes as the Equity REIT Index advanced 0.9% today with 17-of-19 property sectors in positive territory while the Mortgage REIT Index gained 1.6%.

Nine of the eleven GICS equity sectors were higher today, led to the upside by the Technology (XLK) and Consumer Discretionary (XLY) sectors while the red-hot Energy (XLE) sector lagged for the second-straight day. Hotter-than-expected inflation data sent the 10-Year Treasury Yield to the highest level since late 2019 at 2.05% even as oil prices dipped 3% after hitting eight-year highs on Monday. Homebuilders and residential REITs led the Hoya Capital Housing Index to gains today after results from NexPoint Residential (NXRT) and LGI Homes (LGIH) showed continued strength behind the housing sector.

Inflation remains relentless: the BLS reported this morning that Producer Prices soared at a 9.7% annual rate in February - significantly hotter than expected - and just a tick below setting fresh record highs. Core PPI - which excludes food and energy - rose at an 8.28% annual rate - just below the upwardly revised record-high set in December. A double-edged sword, the continued upward pressure in producer inflation signals strong demand for goods and business-to-business services but also strengthened the Federal Reserve's case for more aggressive monetary tightening. Last week, the BLS reported that consumer prices surged at the fastest pace in nearly four decades in January, which translated into a slump in consumer confidence to the lowest level in over a decade.

Equity REIT Daily Recap

Apartment: NexPoint Residential (NXRT) - which we own in the Hoya Capital Housing Index - rallied more than 3% today after reporting stellar earnings results, highlighted by an incredible 24.5% growth in new lease spreads in Q4 as apartment REITs continue to report soaring rents across essentially all segments and all national markets. NXRT - which has been the best-performing apartment REIT over the last half-decade - reported FFO growth of 10.5% in 2021 and expects an acceleration to 22.2% growth in 2022 at the midpoint of its guidance range - the strongest in the sector.

Net Lease: Spirit Realty (SRC) - which we own in the REIT Focused Income Portfolio – rallied more than 2% today after reporting solid results, topping consensus estimates on its Q4 AFFO, and reaffirming its 2022 AFFO and acquisitions guidance. Spirit – which pays a dividend yield of 5.6% - recorded FFO growth of 12.2% in 2021 and sees growth of 7.3% in 2022. SRC continues to make significant progress upgrading its portfolio, balance sheet, and simplifying the complexity in its governance but continues to trade at relative discounts to its larger net lease peers with a P/FFO of under 13x compared to Realty Income at 17x and WP Carey at 16x.

Shopping Center: Kite Realty (KRG) – which we hold in the REIT Dividend Growth Portfolio – was also among the leaders today reported better-than-expected results highlighted by a sector-leading 2022 FFO guidance calling for another 14.7% growth this year following the impressive 16.3% growth recorded in 2021. Citing its merger with RPAI as a catalyst, this guidance would be a 4% increase over its pre-pandemic FFO from 2019 – the strongest 2022/2019 growth rate in the sector. As with the other seven shopping center REITs that have reported results thus far, strong leasing spreads and occupancy trends indicate that these REITs have a relatively solid degree of pricing power for the first time since the mid-2010s.

As discussed in our REIT Earnings Preview: Dividend Hikes And 2022 Outlook, highlights of this afternoon's earnings slate include Invitation Homes (INVH), Welltower (WELL), Community Healthcare (CHCT), Acadia Realty (AKR), and Industrial Logistics (ILPT), and tomorrow morning we'll see results from Urban Edge (UE). We'll continue to provide real-time coverage with our Earnings QuickTake posts for Hoya Capital Income Builder members and will publish follow-up articles summarizing our thoughts and analysis throughout REIT earnings season.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, commercial mREITs rallied 2.1% today while residential mREITs advanced 1.5%. Ares Commercial (ACRE) - which we own in the Hoya Capital High Dividend Yield Index - advanced more than 3.5% today after it reported better-than-expected results, noting that its book value per share ('BVPS') rose 0.5% in Q4 and also declared a supplemental dividend of $0.02 in addition to maintaining its current dividend rate. The average residential mREIT pays a dividend yield of 10.68% while the average commercial mREIT pays a dividend yield of 7.40%.

Economic Data This Week

The jam-packed week of earnings reports and economic data kicks off on Tuesday with the Producer Price Index for January, which failed to finally show any deceleration in inflation after reaching the highest rate on record in December. On Wednesday, we'll see Retail Sales data which is expected to show an uptick in January after a disappointing December. The busy slate of housing data kicks off on Wednesday with the Homebuilder Sentiment. On Thursday, we'll see Housing Starts and Building Permits and on Friday we'll see Existing Home Sales data which are expected to show continued momentum behind the housing industry.

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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.

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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