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  • Alex Pettee, CFA

REIT Week • Yields Climb • Inflation Data Ahead

  • U.S. equity markets finished modestly higher Monday while benchmark interest rates and commodities prices continued to march higher ahead of a critical CPI inflation report on Friday.

  • Following declines of 1.1% last week- its eighth week of losses out of the past nine- the S&P 500 advanced 0.3% today while the Mid-Cap 400 and Small-Cap 600 each gained 0.6%.

  • Ahead of the start of REITweek on Tuesday- the industry's annual trade conference- real estate equities were mixed as the Equity REIT Index slipped 0.2% today while mREITs declined 0.6%.

  • Net lease REIT Essential Properties (EPRT) hiked its quarterly dividend by 4% to $0.27/share, representing a forward yield of roughly 4.7%. EPRT becomes the 67th equity REIT to raise its dividend this year.

  • Friday's CPI report may potentially reveal that the fastest pace of year-over-year increases is finally behind us. Both the headline and Core CPI is expected to show a cooldown in May to 8.3% and 5.9%, respectively.

Income Builder Daily Recap

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U.S. equity markets finished modestly higher Monday while benchmark interest rates and commodities prices continued to march higher ahead of a critical CPI inflation report on Friday. Following declines of 1.1% last week - its eighth week of losses out of the past nine weeks - the S&P 500 advanced 0.3% today while the Mid-Cap 400 and Small-Cap 600 each advanced 0.6%. Ahead of the start of REITweek on Tuesday morning - the industry's annual trade conference - real estate equities were mixed as the Equity REIT Index slipped 0.2% today with 10-of-19 property sectors in positive territory while the Mortgage REIT Index declined 0.6%.

As discussed in our Real Estate Weekly Outlook, global benchmark interest rates have resumed their march higher, fueled by persistently elevated energy prices as U.S. gasoline prices once again climbed to fresh record-highs today, closing in on $5 per gallon and threatening to prolong 'stagflationary' conditions. The 10-Year Treasury Yield gained another 8 basis points today to close at 3.04% - still below the 3.20% peak earlier this month - but well above the 2.71% low last week. Despite a 1% decline in Crude Oil prices, the Bloomberg Commodities Spot Index climbed to fresh record highs. Led to the upside by the Consumer Discretionary (XLY) and Materials (XLB) sectors, eight of the eleven GICS equity sectors were higher today.

Inflation data highlights the slower slate of economic data in the week ahead. On Friday, the BLS will report the Consumer Price Index which may potentially reveal that the fastest pace of year-over-year increases is finally behind us as both the headline and Core CPI is expected to show a cooldown in May to 8.3% and 5.9%, respectively. On Friday, we'll also get our first look at Michigan Consumer Sentiment for June. 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.

Real Estate Daily Recap

Net Lease: Ahead of the start of REITweek on Tuesday morning which we'll cover throughout the week, net lease REIT Essential Properties (EPRT) hiked its quarterly dividend by 4% to $0.27/share, representing a forward yield of roughly 4.7%. EPRT becomes the 67th equity REIT to raise its dividend this year along with another half-dozen mortgage REITs. In our State of the REIT Nation report published earlier this month, we noted that FFO growth has significantly outpaced dividend growth over the past several quarters, driving the dividend payout ratios to just 68.8% in Q1, so REITs are well-equipped to deliver another year of robust dividend growth that may meet or exceed the record year in 2021.

Mortgage: This evening, we'll publish an updated report on the mortgage REIT sector on Income Builder. Mortgage REITs – along with other fixed income-oriented securities across the credit and maturity curve - have stabilized in recent weeks as bond market volatility has calmed following a historically rough start to 2022. Earnings results confirmed that the challenging macro environment- marked by a "double-whammy" of rising rates and widening MBS spreads- wasn't the catastrophe to mREITs Book Values that some expected. Mortgage REITs are now outperforming Equity REITs for the year, and we continue to see value in a modest allocation towards higher-quality mREITs in a balanced income-focused real estate portfolio.

Single Family Rental: American Homes 4 Rent (AMH) announced a partnership with Värde Partners - a global alternative investment firm - to acquire and develop new land opportunities as part of American Homes 4 Rent's internal development platform. The facility will provide AMH with $500 million in initial capacity to acquire and develop new land opportunities. As discussed in Renting The American Dream, rapid home price appreciation and stiff competition in the "traditional" acquisition channel have forced SFR REITs to get creative with external growth plans. "If you can't buy it, build it" has been the recent mantra as SFR REITs have effectively become strategic homebuilders through internal development and partnerships with existing builders. AMH- which has quickly become one of the largest homebuilders in the country - built 2,054 homes in 2021 through its internal AMH Development Program and expects to deliver between 2,100 to 2,400 homes in 2022.


Malls & Healthcare: FTSE Russell released a preliminary list of companies set to join or leave two of its major indexes as part of its 2022 annual reconstitution. In the REIT space, notable additions to the Russell Microcap Index include mall REIT CBL Properties (CBL), healthcare REIT Diversified Healthcare (DHC), net lease REIT Modiv (MDV), and office REIT Orion Office (ONL). Notable deletions include mortgage REITs Ready Capital (RC) and Seven Hills Realty Trust (SEVN), mall REIT Pennsylvania REIT (PEI), and shopping center REIT Wheeler Real Estate (WHLR). A pair of REITs will join the Ruseel 3000 Index: NexPoint Residential Trust (NXRT) and InvenTrust (IVR). As REITs are the single most "passively-owned" equity sector, inclusion or exclusions from major benchmarks can materially affect valuations and can be a catalyst for smaller REITs on the cusp of "breaking through" into a major benchmark.


REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, the Hoya Capital REIT Preferred Index finished lower by 0.34% today. REIT Preferreds ended 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 6.72%. Office REIT JBG SMITH (JBGS) announced an increase its share buyback program from $500M to $1B alongside the announced the sale of two assets for $344M - the $198M sale of its PenPlace development site to Amazon for the second phase of its HQ2 and the sale of 1900 N Street, an 11 story office building in Washington DC.

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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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