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  • Alex Pettee, CFA

REITweek Updates • Target Warning • Senior Housing Deal

  • U.S. equity markets advanced while benchmark interest rates eased as investors parsed mixed signals on the state of consumer demand following another profit warning from Target on bloated inventory levels.

  • Adding to Monday's gains of 0.3% and erasing its declines from last week, the S&P 500 advanced 1.9% today while the Mid-Cap 400 rose 1.3% and the Small-Cap 600 climbed 0.9%.

  • Real estate equities were among the stronger performers today following an upbeat slate of REITweek business updates. Led by gains from residential REITs, the Equity REIT Index gained 1.4% today.

  • REITweek updates from residential REITs showed a continued acceleration in rent growth across most markets. Single-family rental REITs reported new lease growth of over 15% thus far in Q2.

  • Welltower boosted its guidance, citing improving senior housing occupancy and "robust" pricing power. Welltower also announced a major $502M acquisition of a 25-property senior apartment portfolio.

Income Builder Daily Recap

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U.S. equity markets advanced while benchmark interest rates eased as investors parsed mixed signals on the state of consumer demand following another profit warning from Target. Adding to Monday's gains of 0.3% and erasing its declines from last week, the S&P 500 advanced 1.9% today while the Mid-Cap 400 rose 1.3% and the Small-Cap 600 climbed 0.9%. Real estate equities were among the stronger performers today following an upbeat slate of REITweek business updates. Led by gains from residential REITs, the Equity REIT Index gained 1.4% today with 16-of-19 property sectors in positive territory while the Mortgage REIT Index advanced 0.9%.

After climbing back above the 3.0%-level on Monday, the 10-Year Treasury Yield retreated 7 basis points to close at 2.97% - still below the 3.20% peak earlier this month - but above the 2.71% low last week. Ten of the eleven GICS equity sectors finished higher today, led to the upside by the Energy (XLE) sector while the Consumer Discretionary (XLY) sector lagged after Target (TGT) lowered its guidance for the second time in the past three weeks, citing margin pressures from "unusually high transportation and fuel costs." Bitcoin was particularly volatile today, briefly dipping below 30k amid ongoing pressure on highly-speculative asset classes.

Real Estate Daily Recap

Single-Family Rental: REITweek updates from residential REITs showed a continued acceleration in rent growth across most markets. American Homes (AMH) advanced 2% after it reported blended lease growth of 9.3% so far in Q2, an acceleration from the 8.8% rate in Q1. Invitation Homes (INVH) gained 1.6% after it reported that blended rents accelerated to 11.7% in Q2, up from 10.9% in Q1. The combination of historically low housing supply and strong demographic-driven demand - with added pandemic-driven tailwinds - has sent single-family rents soaring at the fastest rate on record. Mirroring the surge in suburban home values amid this historic and lingering housing shortage, SFR REITs have reported double-digit rent growth in recent months while occupancy rates continue to set record-highs.

Healthcare: Welltower (WELL) advanced more than 2% after providing a REITweek business update which included a guidance increase and acquisition announcement. WELL boosted the midpoint of its Q2 adjusted FFO to $0.855 - up from $0.845 - citing improving senior housing occupancy and "robust" pricing power. Welltower - which has been among the most active acquirers of any REIT in recent quarters - also announced a major $502M acquisition of a 25-property senior apartment portfolio from Calamar. Upon completion of the deal, Welltower will own nearly 10,000 age-restricted rental housing units under its Wellness Housing platform and will fund the deal, in part, with OP UPREIT units. Wellness Housing properties operate with low-to-no staffing and an average length of stay of approximately 5 years, resulting in operating margins and capex budgets closer to the multifamily sector.

Net Lease: W. P. Carey (WPC) advanced more than 2% after providing a REITweek business update in which it has acquired $400M in assets since the end of Q1. The investments advance the company's external growth strategy and in line with its diversified approach, include investments in industrial, grocery and lab properties located in the US and Europe. Net lease REITs - which account for just 7% of the Equity REIT Index - accounted for over a third of total REIT acquisitions over the past twelve months with more than $11B in net acquisitions in 2021, the highest full-year total since 2013. Despite the rising rate environment, net lease REITs - which are typically among the most rate-sensitive property sectors - have been one of the best-performing sectors this year as the robust pace of external growth has accelerated.

Mortgage REIT Daily Recap

Mortgage: Yesterday, we published an updated report on the mortgage REIT sector on the Income Builder marketplace. 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.

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%. Over in the capital markets today, Redwood Trust (RWT) priced $200M in 7.75% convertible senior notes due 2027 in a private offering. Holders can convert beginning on March 15, 2027 at a rate of 95.6823 shares of common stock per $1,000 principal amount of notes, equivalent to a conversion price of ~$10.45 per share. Elsewhere, SITE Centers (SITC) refinanced its $950M unsecured revolving credit facility that now has its maturity extended to June 6, 2026 with two six-month extension options.

Economic Data This Week

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.

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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.