• Alex Pettee, CFA

REIT Dividend Boost • Inflation Stays Hot • Stocks Rebound

Summary

  • U.S. equity markets rebounded Friday on the reported successful trials of a new COVID pill, but still finished the week sharply lower amid concern over potential stagflation and political dysfunction.

  • Ending the week with cumulative declines of 2.0%, the S&P 500 rebounded with 1.3% gains today while the Mid-Cap 400 finished higher by 1.7% and the Small-Cap 600 rallied 2.1%.

  • Real estate equities were broadly higher today as the Equity REIT Index gained 1.7% today with 18-of-19 property sectors in positive territory while Mortgage REITs climbed 1.6%.

  • The BEA reported this morning that its PCE Index - the Fed's "preferred" gauge of inflation - rose another 0.4% in August, pushing the annual rise to 4.3%, the largest year-over-year rise in prices since 1991.

  • Storage REIT Life Storage (LSI) boosted its dividend for the second time this year, one of 110 REITs that have raised their dividend in 2021. Elsewhere, RMR and Tremont completed their merger into Seven Hills Realty Trust.

Real Estate Daily Recap

U.S. equity markets rebounded Friday on the reported successful trials of a new COVID pill, but still finished the week sharply lower amid ongoing concern over potential stagflation and political dysfunction. Ending the week with cumulative declines of 2.0%, the S&P 500 rebounded with 1.3% gains today while the Mid-Cap 400 finished higher by 1.7% and the Small-Cap 600 rallied 2.1%. Real estate equities were broadly higher today as the Equity REIT Index gained 1.7% today with 18-of-19 property sectors in positive territory while Mortgage REITs climbed 1.6%.

Stocks and bonds rallied in sympathy today as the 10-Year Treasury Yield pulled back 6 basis points to 1.47% today despite inflation data showing the fastest annual increase in consumer prices in 30 years. All eleven GICS equity sectors finished higher today, led to the upside by the Energy (XLE) and Communications (XLC) sectors. 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 report on Saturday morning.

The BEA reported this morning that its PCE Index - the Fed's "preferred" gauge of inflation - rose another 0.4% in August, pushing the annual rise to 4.3%, the largest year-over-year rise in prices since 1991. The 3.6% annual rise in the Core PCE Index - which excludes food and energy - matched the highest in nearly 30 years. Fresh data Consumer Confidence data showed that inflationary remains a significant concern for most Americans as consumers expect inflation to top 4.6% inflation over the next year while a separate survey from the Conference Board showed expectations of 6.5% inflation.

Equity REITs

Storage: Life Storage (LSI) boosted its dividend for the second time this year, declaring a $0.86/share quarterly dividend, a 16.2% increase from its prior dividend of $0.74. LSI is one of four storage REITs and one of 110 REITs across all sectors that have raised their dividend in 2021. Self-Storage REITs have delivered as impressive of a turnaround as any property sector in recent memory, catalyzed by the ongoing housing boom and the acceleration in housing market turnover. An ensemble of impressive earnings in Q2 results indicated that the pandemic-driven rebound was no fluke. Storage REITs now project to have one of the strongest growth rates of any sector this year.

Hotels: Today we published Hotel REITs: Winters Coming. With vaccines in arms and the economy rebounding, it was poised to be a memorable summer for hotel REITs and the broader tourism industry before the resurgence of COVID variants. The "fourth wave" came at an inopportune time for the industry, which was relying on robust demand in the critical late-summer season and the return of business travel this Fall. In a twist of fate, after posting dramatic gains during the vaccine development stages, Hotel REITs have been the weakest-performing property sector since vaccines became widely available in late April. We reiterate our outlook that the risks remain skewed to the downside for hotel REITs. Valuations aren't attractive enough to accept near-zero dividend yield and assume the risk of subsequent pandemic setbacks.

Third Quarter Recap: As noted yesterday, REITs were essentially flat, on average, in the third quarter, declining by 0.7% on a price-return basis. Among the major REIT sectors, housing-related categories led the way in Q3 including apartments, manufactured housing, and timber REITs. Laggards in the third quarter included office, cell tower, and net lease REITs. Through three quarters of 2021, Equity REITs are now higher by 19.8% this year while Mortgage REITs have gained 14.1%. This compares with the 14.8% advance on the S&P 500 and the 19.6% gain on the S&P Mid-Cap 400. Led by the residential and retail property sectors, all nineteen REIT sectors remain in positive territory for the year with regional malls and cannabis RIETs leading to the upside.

Mortgage REITs

Per our Mortgage REIT Tracker, mREITs were broadly higher today as commercial mREITs gained 1.8% to end the week with 0.3% declines. Residential mREITs gained 0.9% today to end the week lower by 0.8%. RMR Mortgage (RMRM) completed its merger with Tremont Mortgage (TRMT) yesterday and began trading as the renamed entity - Seven Hills Realty Trust (SEVN). SEVN will still be externally managed by RMR Group (RMR) and will be focused on investing in first mortgage loans secured by middle market and transitional commercial real estate. Boosted by 24 dividend hikes across the sector this year, the average residential mortgage REIT now pays a dividend yield of 9.1% while the average commercial mortgage REIT pays a dividend yield of 7.0%.

REIT Preferreds & Capital Raising

Per the REIT Preferreds & Bond Tracker available to The REIT Forum subscribers, REIT Preferred stocks finished higher by 0.02% today, on average, and have produced total returns this year of roughly 15%. Over in the bond markets today, net lease REIT American Finance (AFIN) priced $500M of new 4.50% Senior Notes due 2028. Elsewhere, apartment REIT Centerspace (CSR) announced an amended and extended $400M credit facility that matures in September 2025, up from its prior $250M facility.

Economic Data This Week

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 report on Saturday morning.

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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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