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  • Alex Pettee, CFA

REIT M&A • Rents Rising • Jobs Day Ahead

  • U.S. equity markets finished lower Thursday on another volatile day after talks between Russia and Ukraine failed to reach a cease-fire while oil prices remained near the highest level since 2008.

  • Retreating following strong gains of 1.8% yesterday, the S&P 500 slipped 0.6% today while the tech-heavy Nasdaq 100 declined 1.4% while WTI Crude Oil prices settled lower by 2% to $108/barrel.

  • Real estate equities were among the outperformers for the third-straight day as the Equity REIT Index advanced 0.5% with 13-of-19 property sectors in positive territory while the Mortgage REITs declined 0.7%.

  • Cedar Realty (CDR) soared 15% today after announcing it will sell the majority of its portfolio to private equity firm DRA Advisors while the remainder of its assets will be acquired by small-cap REIT Wheeler Real Estate (WHLR).

  • Tricon (TCN) rallied 3% today after reporting very strong results as single family rents continue to increase by double-digit rates across most of its Sunbelt markets. TCN recorded incredible rent growth on new leases of 19.1% in Q4 and in January.

Income Builder Daily Recap

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U.S. equity markets finished lower Thursday on another volatile day after talks between Russia and Ukraine failed to reach a cease-fire while oil prices remained near the highest level since 2008. Retreating following strong gains of 1.8% yesterday, the S&P 500 slipped 0.6% today while the tech-heavy Nasdaq 100 declined by 1.4% while WTI Crude Oil prices settled lower by 2% to $108/barrel. Real estate equities were among the outperformers for the third-straight day as the Equity REIT Index advanced 0.5% with 13-of-19 property sectors in positive territory while Mortgage REITs declined 0.7%.

Domestic-focused and yield-sensitive sectors were again among the leaders today as the 10-Year Treasury Yield declined 2 basis points to 1.84% today and remains sharply lower from its recent mid-February highs above 2.05%. Six of the eleven GICS equity sectors were higher on the day, led to the upside by the Utilities (XLU) and Real Estate (XLRE) sectors while the Consumer Discretionary (XLY) sector lagged. Ahead of the closely-watched nonfarm payrolls report tomorrow morning, employment data today was quite strong as weekly Initial Jobless Claims declined to the lowest level of 2022 at 215k, which follows strong ADP Employment data on Wednesday.

Real Estate Daily Recap

Shopping Center: Cedar Realty (CDR) - which announced last September that it considering a sale of the company - soared 15% today after announcing it will sell the majority of its portfolio - 33 shopping centers valued at roughly $900m - to private equity firm DRA Advisors while the remainder of its assets - 18 properties valued at roughly $290m - will be acquired by Wheeler Real Estate (WHLR). The all-cash transactions are expected to generate total net proceeds of roughly $29.00 per share, a 16.6% premium to Cedar's closing price on Wednesday. CDR will become wholly owned by WHLR and CDR stock will no longer be publicly traded, but CDR's preferred issues will remain publicly traded - a controversial issue that we discuss in more detail below.

Single-Family Rental: Tricon (TCN) rallied 3% today after reporting very strong results as single family rents continue to increase by double-digit rates across most of its Sunbelt markets. TCN recorded incredible rent growth on new leases of 19.1% in Q4 and in January, driving blended rent growth of nearly 9%. For full-year 2021, TCN recorded FFO growth of 16.3% and projects growth of another 8.8% at the midpoint of its initial 2022 full-year outlook. The Company continued to grow its single-family rental portfolio through the acquisition of an additional 2,016 homes during the quarter, bringing its total managed portfolio to 29,149 rental homes. By comparison, its SFR REIT peers Invitation Home (INVH) owns roughly 82k homes while American Homes (AMH) owns roughly 56k homes.

Data Center: Yesterday, we published Data Center REITs: Opportunity in Tech Turbulence as an exclusive report for Income Builder subscribers. Data Center REITs- a perennial performance leader in the REIT sector- are in "bear market" territory for the third time this decade as technology stocks have lost their luster in early 2022. Data center demand and fundamentals remain resilient and were remarkably unaffected by the pandemic and subsequent reopenings, but that's precisely the issue as investors have rotated into more pro-cyclical sectors. The complexion of the sector changed dramatically after two REITs were taken private while COR was acquired by AMT, but Digital Bridge and Iron Mountain have matured into serious players. In the report, we discussed our updated outlook and recommendations for the sector.

Earlier this week, we published our REIT Earnings Recap: REITs Are Now Cheap. More than 200 REITs have reported earnings results over the past five weeks, providing critical information on the state of the real estate industry amid the extreme volatility in early 2022. Dividend hikes have been among the prevailing themes of earnings season with 40 REITs already raising their payouts so far in 2022, outpacing the record-setting pace seen last year. The thesis for maintaining an overweight allocation to U.S. real estate equities in a balanced portfolio remains especially compelling given their minimal international exposure and inflation-hedging attributes.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, residential mREITs rallied 1.2% today while commercial mREITs finished higher by 1.5%. Arlington Asset (AAIC) rallied nearly 3% today after reporting solid results yesterday afternoon, noting that its Book Value Per Share ("BVPS") increased 3% in Q4 and announced that it will "aggressively repurchase shares" to close its discount to BVPS. Western Asset (WMC) declined 2.5% after reporting mixed results, noting that its economic return on book value was -5.5% for the quarter. We'll hear results from Great Ajax (AJX) this afternoon. The average residential mREIT pays a dividend yield of 11.29% while the average commercial mREIT pays a dividend yield of 7.50%.

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, the Hoya Capital REIT Preferred Index finished lower by 0.85% today. REIT Preferreds ended 2021 with price returns of roughly 8.0% and total returns of roughly 14%. There are now 190 REIT-issued exchange-listed preferred and debt securities with an average current yield of 6.51%. Cedar Realty's Series B Preferred (CDR.PB) and Series C Preferred (CDR.PC) each plunged roughly 50% today on expectations that its acquisition by Wheeler will result in a suspension of its distributions, as Wheeler has not paid dividends on its preferreds since 2018. Several law firms issued press releases stating that they were investigating the deal for possible breaches of fiduciary duty.

Economic Data This Week

The busy week of employment data concludes tomorrow with the BLS Nonfarm Payrolls. Economists are looking for job growth of 438k in February following stronger-than-expected job growth of 467K in January which included significant revisions to prior months while the unemployment rate is expected to decline to 3.9% after ticking up to 4.0% last month.

We recently launched Hoya Capital Income Builder - the new premier investment research service focused on real income-producing assets classes. Whether your focus is High Yield or Dividend Growth, we’ve got you covered with high-quality, actionable investment research and a comprehensive suite of tools and models to help build sustainable portfolio income targeting premium dividend yields of up to 10%. And of course, subscribers receive complete access to our investment research - including reports that are never published elsewhere - from Hoya Capital and our team of contributors.

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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