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  • Alex Pettee, CFA

Snap Sinks • REIT Dividend Hike • New Home Sales

  • U.S. equity markets resumed their sell-off Tuesday, dragged down by technology stocks after disappointing earnings from Snap indicated that businesses are targeting marketing spending in an effort to control costs.

  • Erasing almost all of Monday's rebound, the S&P 500 declined 1.2% today while the tech-heavy Nasdaq 100 dipped by 2.6% to push its drawdown to just shy of 30%.

  • Led by gains from technology and residential REITs, real estate equities were among the outperformers today as the Equity REIT Index gained 0.3% today with 9-of-19 property sectors in positive territory.

  • Another day, another REIT dividend hike. CTO Realty (CTO) - a recent C-corp-to-REIT conversion that was officially added to the NAREIT Index earlier this month - became the 62nd equity REIT to raise its dividend this year.

  • New Home Sales data today indicated that the aggressive hiking path has cooled the previously red-hot housing market, but better-than-expected results this afternoon from Toll Brothers (TOL) suggest that concerns may be overstated.

Income Builder Daily Recap

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U.S. equity markets resumed their sell-off Tuesday, dragged down by technology stocks after disappointing earnings from Snap indicated that businesses are targeting marketing spending in an effort to control costs. Erasing almost all of Monday's rebound, the S&P 500 declined 1.2% today while the tech-heavy Nasdaq 100 dipped by 2.6% to push its drawdown to just shy of 30%. The Dow Jones Industrial Average managed to end the day modestly higher amid a bid for defensive stocks. Led by gains from technology and residential REITs, real estate equities were among the outperformers today as the Equity REIT Index gained 0.3% today with 9-of-19 property sectors in positive territory while Mortgage REITs declined 0.3%.

Technology and advertising stocks were slammed today, underscored by a 40% plunge from Snap (SNAP) after the social media company issued a profit warning, saying that it planned to slow hiring and spending. Bonds and defensive equity sectors caught a bid today, however, as the 10-Year Treasury Yield dipped 10 basis points to close at 2.76% - well below the 3.20% peak seen in early May - amid questions over the Fed's willingness to continue to hike rates aggressively if we are indeed in a recession. New Home Sales data today indicated that the aggressive hiking path has cooled the previously red-hot housing market, but better-than-expected results this afternoon from Toll Brothers (TOL) suggest that concerns may be overstated.

Real Estate Daily Recap

Another day, another REIT dividend hike. CTO Realty (CTO) - a recent C-corp-to-REIT conversion that was officially added to the NAREIT Index earlier this month - became the 62nd equity REIT to raise its dividend this year, declaring a $1.12/share quarterly dividend, a 3.7% increase from its prior dividend of $1.08, representing a forward yield of 7.13%. In our State of the REIT Nation report published last week, 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 - well below the 20-year average of 80%. With a historically low dividend payout ratio, we believe that REITs are well-equipped to deliver another year of robust dividend growth that may meet or exceed the record year in 2021.

Mall: Today we published Mall REITs: Retail Rout. One step forward, one back. After nearly doubling in value last year, mall REITs have been the worst-performing major property sector in 2022 as the stimulus-fueled retail strength has stalled. The tech wreck has spilled over to become the retail wreck in recent weeks. Retail stocks are now off by nearly as much as the depth of the lockdown lows. Mall REITs earnings results were actually decently encouraging with Simon (SPG) and Tanger (SKT) boosting their full-year FFO outlook, noting a recovery in tenant sales and rent collection back to pre-pandemic levels. Soaring fuel prices and persistent inflation have triggered a "rapid slowdown" in several retail categories in recent months at some major retailers, however, and we reiterate that a recession could be a final death blow to many lower-tier malls. We've remained underweight mall REITs over the past half-decade given the evident secular headwinds on the enclosed regional mall format, but we continue to see "sum-of-the-part" value in Simon which owns an impressive retail brand portfolio alongside Authentic Brands.

Industrial: We also published Industrial REITs: Amazon's Wake of Carnage on the Income Builder marketplace. A perennial performance leader in recent years, Industrial REITs have been slammed over the past month after Amazon (AMZN) announced plans to cut costs in its logistics network, pumping the breaks on its aggressive pandemic-fueled footprint expansion amid rising costs and slowing consumer spending, seeking to reduce overcapacity through sublets and renegotiated leases. The downbeat Amazon report followed an otherwise stellar slate of industrial REIT earnings reports - highlighted by incredible 30% rent growth - and overshadowed several major M&A developments including a potential takeout of Duke - one of our largest holdings. We had trimmed our industrial REIT exposure prior to this sell-off given the previously lofty valuations, but the recent carnage is an opportunity to double down on several dividend champions discussed here.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were among the outperformers today as residential mREITs advanced 0.3% while commercial mREITs gained 0.5%. On another slow day of newsflow, Orchid Island (ORC) and Granite Point (GPMT) led to the upside while Lument Finance (LFT) was the laggard. In our Earnings Recap published last week, we noted that mREITs have been an upside standout over the past several weeks after earnings season showed that Book Value declines were generally not as steep as analysts projected. Residential mREIT Book Value Per Share ("BVPS") metrics declined by 8.4%, on average while commercial mREIT reported an average BVPS increase of 0.1%.

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, the Hoya Capital REIT Preferred Index finished higher by 0.21% 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 6.96%. A pair of REITs received credit rating upgrades today. S&P Ratings affirmed RLJ Lodging (RLJ) “BB-“ credit rating but revised its outlook to stable from negative. S&P also raised Xenia Hotels' (XHR) credit rating to “B” from “B-“ with a stable outlook.

Economic Data This Week

We have another busy week of economic and housing data in the week ahead, highlighted by New Home Sales on Tuesday and Pending Home Sales on Thursday which are each expected to show a similar moderation in housing market activity as that seen this week in Housing Starts and Existing Home Sales. Before the three-day Memorial Day weekend, we'll get another look at inflation with the PCE Price Index on Friday which investors - and the Fed - are hoping will finally show some signs of moderating price pressures. Last month, the PCE increased by 6.6%, which was the highest rate since 1982. Also on Friday, we'll also see Personal Income and Spending data and the revised look at Michigan Consumer Sentiment - which dipped to decade-lows in the initial reading for May.

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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.