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  • Alex Pettee, CFA

Russia Oil Ban • REIT Dividend Hikes • Gas Price Records

  • U.S. equity markets finished lower Tuesday on another volatile session as investors considered the ramifications of soaring oil and gasoline prices on economic growth and fallout from the ongoing Russia/Ukraine conflict.

  • Adding to declines of 2.9% yesterday and finishing at the lowest level since June 2021, the S&P 500 dipped another 0.7% today, but the Mid-Cap 400 and Small-Cap 600 each held on to modest gains.

  • Real estate equities were mixed today as investors rotated back into pro-cyclical sectors. The Equity REIT Index slipped 0.5% today with 11-of-19 property sectors in positive-territory while mortgage REITs rallied 1.9%.

  • The wave of REIT dividend hikes continued today with another four REITs raising their payouts, bringing the full-year total up to 43: Equity Lifestyle, Great Ajax, Braemar Hotels, and CIM Commercial.

  • Consumer gas prices in the U.S. climbed to fresh record-highs today at $4.17/gallon, eclipsing the previous record-high of $4.11 in 2008 as criticism has mounted on the administration over the lack of focus on increasing domestic production.

Income Builder Daily Recap

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U.S. equity markets finished lower Tuesday on another volatile session as investors considered the ramifications of soaring oil and gasoline prices on economic growth and geopolitical fallout from the ongoing Russia/Ukraine conflict. Adding to declines of 2.9% yesterday and finishing at the lowest level since June 2021, the S&P 500 dipped another 0.7% today, but the Mid-Cap 400 and Small-Cap 600 each held on to modest gains. Real estate equities were mixed today with investors rotating back into pro-cyclical sectors as the Equity REIT Index finished lower by 0.5% today with 11 of 19 property sectors in positive territory while Mortgage REITs rallied 1.9%.

The Biden Administration today announced a ban on Russian oil and energy imports in response to the invasion of Ukraine, but criticism has intensified over the apparently limited efforts to increase domestic production. Consumer gas prices in the U.S. climbed to fresh record-highs today at $4.17/gallon, eclipsing the previous record-high of $4.11 in 2008 while Gasoline (XB1:COM) futures rose another 3% today while WTI Crude Oil (CL1:COM) prices jumped another 4%. The 10-Year Treasury Yield jumped 12 basis points but remains well below its mid-February highs above 2.05%. Nine of the eleven GICS equity sectors finished lower today led on the upside today once again by the Energy (XLE) sector, which pushed its 2022 gains to nearly 40%.

Real Estate Daily Recap

The wave of REIT dividend hikes continued today with another four REITs raising their payouts, bringing the full-year total up to 43. Manufactured housing REIT Equity Lifestyle (ELS)- which we own in the Hoya Capital Housing Index - raised its quarterly dividend by 13.1% to $0.31/share. Mortgage REIT Great Ajax (AJX) - which we own in the Hoya Capital High Dividend Yield Index - hiked its quarterly payout by 8.3% to $0.26/share. Braemar Hotels (BHR) reinstated its quarterly dividend - which had been suspended since the pandemic - at $0.01/share. Finally, small-cap REIT CIM Commercial (CMCT) declared a $0.085/share quarterly dividend, a 13.3% increase from its prior dividend of $0.075.

Yesterday, we published our State of the REIT Nation. The "REIT Recovery" from the pandemic is essentially complete as FFO levels are back to pre-pandemic levels. Dividend payouts have lagged, however, setting the stage for significant growth in 2022. While REITs have pulled back into "cheap" territory in early 2022, REITs benefited from premium valuations over the past year which helped to jump-start external growth and awaken animal spirits. We highlighted how REIT balance sheets look far more like a typical operating company than the highly leveraged holding companies of yesteryear, which served them well during the pandemic-related volatility and should be a cushion to buffer the impact from the geopolitical issues in early 2022.

Industrial: Yesterday, we also published Industrial REITs: Shortages Everywhere as an exclusive report for Income Builder Members which discussed our updated outlook and recommendations within the red-hot industrial sector. On the front-lines of the historic supply-chain shortages, Industrial REITs outperformed the broad-based REIT Index for the sixth consecutive year in 2021, but have uncharacteristically lagged in early 2022. Industrial occupancy rates declined to record-lows below 4% despite robust levels of new development, driving rent growth of nearly 20% in North America with some markets seeing 50% year-over-year increases. Development can't keep up robust demand as businesses scramble to build out supply resiliency and next-day delivery speeds.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, residential mREITs declined 0.7% today while commercial mREITs finished lower by 2.5%. Ellington Residential (EARN) finished slightly lower today after reporting Q4 results yesterday afternoon, noting that its Book Value Per Share ("BVPS") declined 4.2% to $11.76 during the quarter. Consistent with the commentary from other mREITs during earnings season, EARN noted that the flattening yield curve and interest rate volatility caused yield spreads on many Agency RMBS to widen substantially over the course of the quarter, but it was able to limit its BVPS declines with its interest rate hedges. We'll hear results from cannabis REIT AFC Gamma (AFCG) reporting on Thursday.

Economic Data This Week

The economic calendar slows down a bit in the week ahead with the major report of the week coming on Thursday when the BLS will report the Consumer Price Index for February which is expected to show the highest rate of inflation since 1982 at 7.9%. While most economists expected the inflation rate to peak in early 2022, soaring commodities prices in recent weeks amid the Russian invasion of Ukraine - which together are major global suppliers of oil, gas, wheat, iron, and fertilizer - will keep significant upward pressure on inflation metrics over the next several months. We'll also be watching JOLTS Jobs Openings data on Wednesday and Michigan Consumer Sentiment data on Friday which sunk to the lowest level in ten years in February amid intensifying concerns over inflation.

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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