Peak Inflation And US Equity Markets Last Week

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Real Estate Weekly Outlook

U.S. equity markets delivered broad-based this week – snapping a dismal skid of seven-straight weekly declines – following solid earnings results and inflation data showing emerging signs of peaking price pressures. A deceleration in the PCE Price Index – the Fed’s favored gauge of inflation – appears to grant the central bank some much-needed “breathing room” on its monetary tightening actions, while earnings result from retailers, airlines, banks, and homebuilders indicated that the slowdown in consumer spending and the critical housing market may not be as sharp as previously suspected.

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Climbing out of “bear-market” territory with its best week of gains since November 2020, the S&P 500 soared 6.6% on the week while the tech-heavy Nasdaq 100 rallied more than 7% to trim its drawdown back to under 25%. The Dow Jones Industrial Average, meanwhile, recovered nearly 2,000 points on the week, snapping its skid of eight straight weekly declines which was its worst stretch since the Great Depression. Led by a sharp rebound in the hotel and retail property sectors and lifted by another wave of REIT dividend hikes, real estate equities were broadly higher as well. The Equity REIT Index advanced 5.8% – its best week since May 2020 – while the Mortgage REIT Index rallied by 5.4% – its best week in over a year.

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Signs of peaking inflation helped to power a broad-based relief rally as all eleven GICS equity sectors were higher by at least 3% on the week. The Consumer Discretionary (XLY) sector, which was slammed last week following downbeat results from Walmart (WMT) and Target (TGT) – rallied nearly 10% on surprisingly upbeat results from Nordstrom (JWN), Macy’s (M), and Dollar General (DG). Despite the equity market rally, Treasury yields retreated on the week as the 10-Year Treasury Yield declined 4 basis points to close the week at 2.74% – well below the recent 3.20% peak earlier this month. Notably, Preferred Stocks (PFF) and High Yield Credit (JNK) delivered their best week since early in the pandemic. Homebuilders and the broader Hoya Capital Housing Index also delivered a strong rebound following strong results from Toll Brothers (TOL) and data showing that mortgage rates declined for a second week.

Equity Sector Performance

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Real Estate Economic Data

Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.

economic calendar week ahead 2022

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Peak Inflation? The Core Personal Consumption Expenditures (“PCE”) Price index – the Fed’s favored inflation gauge – rose 4.9% from a year ago in April – in line with estimates – a deceleration from March. The headline PCE – which includes food and energy – increased 6.3% in April from a year ago, which was also a cool down from the 6.6% pace last month. Notably, the month-over-month increase of 0.2% in April was the smallest increase in a year and a half. Alongside the inflation data, the BEA reported that personal income rose 0.4% during the month – slightly below the 0.5% estimate – while consumer spending rose 0.9% – higher than the 0.7% rise expected. Personal income growth has cooled quite substantially this year as the fiscal stimulus measures have expired, rising just 1.7% so far in 2022 – far below the mid-single-digit inflation rate – after having risen by 7.5% in 2021 and 6.5% in 2020.

PCE inflation

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Real disposable personal incomes (“Real DPI”) however, were flat in April and are now lower by 6.2% from last year. Remarkably, Real DPI is now more than 20% below its peak in March 2021, which occurred at the height of the stimulus check distribution. Naturally, negative real income growth has weighed heavily on consumer sentiment. The University of Michigan’s Consumer Sentiment Index fell to a final May reading of 58.4 – its lowest level in more than 10 years – and below the initial reading of 59.1. Consumers were downbeat on both the current and future economic outlook as the Current Conditions Index fell to a 13-year low in May while the Consumer Expectations fell sharply to 55.2 from 62.5. Researchers commented that “this recent drop was largely driven by continued negative views on current buying conditions for houses and durables, as well as consumers’ future outlook for the economy, primarily due to concerns over inflation.”

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As the Federal Reserve intended, rising mortgage rates have indeed cooled the red-hot housing market in recent months as data this week showed that New Home Sales in April slid to the lowest rate in two years while Pending Home Sales declined for the sixth-straight month. The recent cool down has renewed the perennial “Bubble” calls from pundits, but fundamentals suggest that national housing markets are instead more likely to see a somewhat “boring” return to normalcy ahead similar to 2018-2019 when rising mortgage rates resulted in a notable near-term slowdown in buying activity before the historic acceleration seen over the subsequent two years. Importantly, subprime loans and adjustable-rate mortgages – the dynamite that led to a cascading financial market collapse in 2008 – have been essentially non-existent throughout this cycle. Adjustable-rate mortgages – which would be most “at-risk” from the surge in rates have accounted for less than 5% of mortgages originated since 2009, down from nearly 30% at the peak in 2005.

rising rates home sales

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Signs of a near-term peak in mortgage rates and positive industry commentary indicated that the gloomy forecasts – which have fueled a 30-40% decline in homebuilders this year – may be significantly overstated. Toll Brothers rebounded more than 7% on the week after reporting better-than-expected results and maintaining its full-year outlook which calls for revenue growth of 20% this year. Rather remarkably, TOL reported an impressive increase in gross margins to 26.1% compared to 24.4% in the second quarter of 2021. TOL commented that the “many fundamental drivers that have supported the housing market in recent years remain firmly in place” and cited the “supply and demand imbalance resulting from over a decade of underproduction… will continue to support housing demand in the long-term.”

housing supply shortage

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Equity REIT Week In Review

Another week, another wave of REIT dividend hikes. National Storage Affiliates (NSA) rallied more than 10% after it hiked its dividend by 10% – its second increase this year. CTO Realty (CTO) – a recent C-corp-to-REIT conversion that was officially added to the NAREIT Index earlier this month – gained nearly 8% after hiking its dividend by 4%. Presidio Property (SQFT) – a microcap diversified REIT that owns office, industrial, retail, and single-family residential properties – rallied more than 16% on the week after it raised its quarterly dividend by 1%. 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, so REITs are well-equipped to deliver another year of robust dividend growth that may meet or exceed the record year in 2021.

Equity REIT dividend increases in 2022

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Hotel: Leading on the upside this week with nearly double-digit gains, hotel REITs benefited from upbeat demand outlooks from Southwest Airlines (LUV) and JetBlue (JBLU) as airlines have so far been able to pass rising fuel costs onto consumers. Pebblebrook Hotel (PEB) – which owns an “urban-heavy” hotel portfolio that was among the hardest-hit during the pandemic – gained nearly 9% on the week after providing a business update in which it reported that its same-store occupancy rate for April rose to 68% from 62% in March, reaching its highest level since the beginning of the pandemic. Notably, the company reported that its Revenue Per Available Room (“RevPAR”) was back to within 6% of 2019-levels in April as a nearly 20% comparable increase in room rate helped to offset a roughly 10% comparable decline in occupancy rates. Recent TSA Checkpoint data has shown that domestic travel recovered to 90% of pre-pandemic levels by late March, but has trended sideways since then as headwinds from rising fuel and airline prices appear to be causing some households and businesses to re-think or scale-back summer travel plans.

travel recovery

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Mall: Small-cap CBL & Associates Properties (CBL) – which has actually been the best-performing mall REIT since emerging from Chapter 11 bankruptcy late last year – rallied nearly 10% on the week after announcing that it was able to refinance $65M in debt, using the proceeds of a new 10-year fixed-rate mortgage loan to complete a partial redemption of outstanding 10% Senior Secured Notes. Elsewhere, Simon Property (SPG) rebounded by 5% following reports that it’s not planning to a make bid for the department store chain Kohl’s (KSS) contrary to reports in the prior week. In Mall REITs: Retail Rout, we discussed Simon’s strategy and history of buying distressed retail brands. Through its 50/50 joint venture with Authentic Brands on the SPARC Group – and a separate partnership with Brookfield – SPG has accumulated a portfolio of brands with value that extends beyond the immediate benefit of keeping these tenants in business. This vertical retail integration strategy is consistent with our long-held view that mall REITs would actually benefit if they performed more like retailers – which have substantially outperformed their REIT landlords across most measurement periods.

Simon SPARC retail brands

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Industrial: While still advancing more than 5% on the week, industrial REITs lagged the broader benchmarks following further reporting on Amazon’s (AMZN) plans to cut costs in its logistics network after a massive expansion in its footprint over the past several years. As we analyzed in Industrial REITs: Amazon Cuts Deep, Bloomberg noted that Amazon is seeking to sublet at least 10 million square feet of space and “could try to negotiate lease terminations with existing landlords. 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 Realty (DRE) – one of our largest holdings. We had trimmed our industrial REIT exposure prior to this sell-off given the previously lofty valuations, but we noted that the recent correction is an opportunity to double down on several dividend champions.

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Casinos: Gaming and Leisure Properties (GLPI) – a recent addition to our REIT Focused Income Portfolio – was also among the leaders this week with gains of more than 7%. In Casino REITs: Game On, we discussed why casino REITs have been one of our favorite under-the-radar property sectors in recent years. Casino REITs have benefited from an upward “re-rating” from investors as the sector has matured and as the business model – and the solid level of inflation protection – has become better understood. The M&A environment remains as active as ever. Earlier this month, VICI Properties (VICI) closed on its $17.2 billion strategic acquisition of MGM Properties while Realty Income (O) entered the sector with a nearly $2B acquisition of Encore Boston Harbor from Wynn Resorts and indicated that plans to be an active player in the casino business, commenting that it is “very hopeful that we can continue to grow this area.”

casino REIT acquisitions 2022

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Mortgage REIT Week in Review

Mortgage REITs delivered their best week of 2022 – continuing their solid run of outperformance over the past two months – as fixed income valuations have firmed. The iShares MBS ETF (MBB) – the benchmark tracking the un-levered performance of residential mortgage-backed bonds – has rebounded nearly 3% over the past three weeks – but remains lower by roughly 6.5% for the year. On a quiet week of industry newsflow, all 41 mortgage REITs were in positive territory for the week led to the upside by double-digit gains from Angel Oak (AOMR), Great Ajax (AJX), and Granite Point (GPMT). Also among the leaders, Arbor Realty (ABR) – one of the best-performing mortgage REITs over the past five years – gained more than 6% after announcing that it closed on a $1.05 billion loan securitization – of which $873M of investment grade-rated notes were issued while Arbor retained interests in $177M.

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REIT Capital Raising & REIT Preferreds

REIT Preferred delivered their best week of 2022, gaining nearly 3%, on average, but are still lower by roughly 8% on the year after ending 2021 with price returns of roughly 8.0% and total returns of roughly 14%. A few REITs were busy on the capital-raising front this week. This week, Preferred Apartment (APTS) announced that its acquisition by Blackstone (BX) is expected to close on June 9th and upon closing, the company will suspend redemptions of shares of its unlisted Series A, Series A1, Series M, and Series M1 Redeemable Preferred Stock. Several REITs were also active in the primary capital-raising markets this week. Net lease REIT Agree Realty (ADC) lagged on the week after it launched a secondary common stock offering through a forward sale agreement of up to 5M shares. Office REIT Highwoods Properties (HIW) extended the maturity on its $200M bank term loan by 3.5 years to May 2026 and obtained an additional $150M term loan.

REIT preferreds

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2022 Performance Check-Up

Through twenty-one weeks of 2022, Equity REITs are now lower by 13.5% on a price return basis while Mortgage REITs have slipped 12.4%. This compares with the 12.6% decline on the S&P 500 and the 10.4% decline on the S&P Mid-Cap 400. Five of the nineteen REIT sectors are now in positive territory – up from just one last week – while three sectors are off by 20% or more, down from seven last week. At 2.74%, the 10-Year Treasury Yield has climbed 124 basis points since the start of the year, moderating a bit after briefly coming within 5 basis points of its post-GFC high of 3.25% reached in October 2018. The 2-Year Treasury Yield has climbed from 0.73% to 2.48%.

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Economic Calendar In The Week Ahead

Employment data highlights another busy week of economic data in the week ahead, headlined by ADP Employment and JOLTS data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of 310k in May which would be the lowest month-over-month increase since April 2021 as the U.S. has now recovered 95% of the 22 million jobs lost from the COVID-related economic shutdowns. The unemployment rate, meanwhile, is expected to stay steady at 3.6%. We’ll also see home price data on Tuesday with reports from Case Shiller and the FHFA but due to the nearly two-month lag in these indexes, the effect of the recent cool down in home sales activity may not yet be seen. We’ll also be watching Construction Spending on Wednesday and a flurry of Purchasing Managers’ Index (“PMI”) data throughout the week.

real estate economic data week ahead May 31, 2022

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For an in-depth analysis of all real estate sectors, be sure to check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Farmland, Storage, Timber, Mortgage, and Cannabis.

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.

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