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  • Alex Pettee, CFA

Yields Surge • Global Tightening • 6% Mortgage Rates

  • U.S. equity markets remained under pressure Thursday while benchmark interest rates surged as central banks around the world responded to another "jumbo" Fed hike with their own monetary tightening actions.

  • Pushing its week-to-date declines to 3%, the S&P 500 dipped another 0.8% today to its lowest level since July while the Mid-Cap 400 and Small-Cap 600 slid more than 2%.

  • Real estate equities were broadly lower as well with the Equity REIT Index declining by 1.3% today with 17-of-18 property sectors in negative territory while the Mortgage REIT Index slid 3.6%.

  • American Tower (AMT) - the largest equity REIT in the U.S. - hiked its dividend for the second time this year, one of 108 REITs that have raised their dividend this year compared to 7 dividend cuts.

  • Lennar (LEN) rallied 2% after reporting surprisingly solid results amid pressure from surging mortgage rates, recording a 13% year-over-year increase in home deliveries - in line with its prior guidance - while gross margins remained near record-highs.

 

Real Estate Daily Recap

U.S. equity markets remained under pressure Thursday while benchmark interest rates surged as central banks around the world responded to another "jumbo" Fed hike with their own monetary tightening actions. Pushing its week-to-date declines to 3%, the S&P 500 dipped another 0.8% today to its lowest level since July while the Mid-Cap 400 and Small-Cap 600 each slid more than 2%. Real estate equities were broadly-lower as well with the Equity REIT Index declining by 1.3% today with 17-of-18 property sectors in negative territory while the Mortgage REIT Index slid 3.6%. Homebuilders were mixed as a relatively solid report from Lennar offset a continued surge in mortgage rates to above 6% - the highest levels since the Financial Crisis.

In the wake of the Fed's interest rate hike on Wednesday, more than half-dozen central banks adjusted monetary policy today including hikes from the U.K., Switzerland, and Norway while Japan was forced to intervene in the FX market to support the yen for the first time in 24 years. The 10-Year Treasury Yield jumped 20 basis points to 3.71% despite another economic indicator flashing a clear "recession warning" with the Leading Economic Index falling for a sixth straight month, prompting a recession prediction from the Conference Board "in the coming quarters." Employment data has remained surprisingly resilient amid the cooldown with data today showing that weekly initial and continuing jobless claims were each lower than expected. Ten of the eleven GICS equity sectors finished lower today while the US Dollar Index remained at two-decade highs.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Homebuilders: Lennar (LEN) rallied 2% after reporting surprisingly solid results amid pressure from surging mortgage rates, recording a 13% year-over-year increase in home deliveries - in line with its prior guidance - while gross margins remained near record-highs. LEN noted that while "sales have clearly been impacted by rising interest rates, there remains a significant national shortage of housing, especially workforce housing, and demand remains strong." Results from KB Home (KBH) were a bit shakier, however, with its cancellation rate jumping to 35% in the quarter - significantly above Lennar's 21% cancelation rate. KBH noted that while "the long-term outlook for the housing market remains favorable, the combination of rising mortgage interest rates, ongoing inflation, and other macro concerns has caused many prospective buyers to pause on their homebuying decision."

Cell Tower: American Tower (AMT) - which we hold in the REIT Dividend Growth Portfolio - hiked its dividend for the second time this year, declaring a $1.47/share quarterly dividend, a 2.8% increase from prior its dividend of $1.43. As discussed in 100 REIT Dividend Hikes - our quarterly State of the REIT Nation Report - property-level fundamentals have been quite strong - and strengthening - for most property sectors in recent quarters despite the broader economic slowdown this year. Dividends per share rose by 15.1% in Q2 from last year, but total dividend payouts remain roughly 13% below pre-pandemic levels as many REITs have been exceedingly conservative in their dividend distribution policy. REIT dividend payout ratios declined to just 65.3% in Q2 - well below the 20-year average of 80% - leaving ample cushion to maintain distributions in the event of a deepening recession.

Industrial: Today we published Industrial REITs: Headlines Worse Than Reality on the Income Builder Marketplace. A perennial performance leader in recent years, Industrial REITs have been slammed this year despite delivering stellar operating performance. Demand for well-located logistics and warehouse space continues to significantly outstrip supply through the end of Q2, even as early effects of the global economic cooldown become apparent. Just as valuations were recovering from the Amazon (AMZN) dip on news that the e-commerce giant pumped the breaks on its aggressive pandemic-fueled footprint expansion, the sector has taken a fresh leg lower after FedEx (FDX) announced a similar "cost management" move last week, citing weakening global demand. While we've been vocal in recent months that the global economic outlook has weakened more substantially than policymakers and Fed officials have been willing to acknowledge, the magnitude of the selloff in industrial REITs appears quite a bit overdone as industrial real estate demand is fundamentally less 'economically sensitive' than many presume. We discuss recent allocations and our updated outlook in the new report.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were sharply lower today as surging yields put further pressure on mortgage-backed bond (MBB) valuations. Chimera Investment (CIM) dipped more than 9% after reducing its quarterly dividend by 30% to $0.23/share - the 5th mortgage REIT to reduce its dividend this year compared to 13 dividend hikes. Two Harbors (TWO) was also among the laggards after announcing yesterday afternoon a 1-for-4 reverse stock split which is expected to take place on November 1st. TWO also held its quarterly dividend steady at $0.17/share, payable October 28th. Over the last 24 hours, PennyMac Mortgage (PMT), Rithm Capital (RITM), and Western Asset (WMC) each maintained their dividends at prior levels.

Economic Data This Week

We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook this weekend.

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.

Hoya Capital Research & Index Innovations (“Hoya Capital”) is an affiliate of Hoya Capital Real Estate, a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations provides non-advisory services including market commentary, research, and index administration focused on publicly traded securities in the real estate industry.


This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital Real Estate. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing.


The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized.


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