Walking An Inflation Tightrope

Summary

• U.S. equity markets rebounded following the worst week since February on promises of bipartisan progress on a significantly slimmed-down infrastructure package, reflecting concern that additional stimulus could further inflame inflation.
• Delivering its best week since February and closing at fresh record-highs, the S&P 500 gained 2.8% this week while Mid-Caps jumped 4.5% and Small-Caps rallied 4.1%. Bitcoin dipped another 10%.
• Further evidence of accelerating rent growth across the country powered another strong week for residential REITs, lifting the Equity REIT Index higher by 1.8% with 17-of-19 property sectors in positive territory.
• The political tightrope on advancing additional fiscal stimulus got ever-thinner after the Core PCE Index - the Federal Reserve's "preferred" gauge of inflation - recorded its highest annual increase since 1991.
• The wave of REIT dividend boosts continued this week with mall REIT Simon Property and shopping center REIT Saul Centers joining 65 other REITs that have raised payouts this year.
• This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »

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Real Estate Weekly Outlook

U.S. equity markets rebounded following the worst week since February on promises of bipartisan progress on a significantly slimmed-down infrastructure package, reflecting concern that additional stimulus could further inflame inflation. With another key measure of inflation soaring to 30-year highs this week, opinion polls showed that an "overwhelming majority" of American are concerned about inflation and increasingly doubt the Biden Administration and Federal Reserve's ability to control it.

(Hoya Capital Real Estate, Co-Produced with Colorado Wealth Management)

Delivering its best week since February and closing at fresh record-highs, the S&P 500 (SPY) gained 2.8% on the week while the Mid-Cap 400 (MDY) jumped 4.5% and the Small-Cap 600 (SLY) rallied 4.1%. Further evidence of accelerating residential rent growth across the United States powered another strong week for residential REITs, lifting the Equity REIT Index (REIT) higher by 1.8% with 17 of 19 property sectors in positive-territory while the Mortgage REIT Index (REM) rallied 3.5%.

The potential bipartisan infrastructure deal comes just as investors had seemingly written-off the prospects for additional fiscal stimulus as the 10-Year Treasury Yield and long-term inflation expectations jumped this week after hitting three-month lows last week. Ten of the eleven GICS equity sectors finished higher on the week, led to the upside by economically-sensitive sectors including Energy (XLE) and Industrials (XLI) while Financials (XLF) rallied after the passing the Federal Reserve's annual stress test, effectively restoring these banks' ability to return capital to shareholders.

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.

The political tightrope on the proposed infrastructure package got ever-thinner this week after the BEA reported that its PCE Index - the Fed's "preferred" gauge of inflation rose 0.4% in May, pushing the annual rise to 3.9%, the largest year-over-year rise in prices since 2008. The 3.8% annual rise in the Core PCE Index - which excludes food and energy - was the highest in nearly 30 years. Fresh data from the University of Michigan's Survey of Consumers showed that Consumer Confidence has waned in recent months due largely to concerns over inflation. Consumers surveyed expect inflation to average 4.2% over the next year, the highest reading since 2008.

These soaring inflation metrics come despite the fact that these indexes have not yet fully reflecting the rapid jump in housing inflation over the last twelve months, a topic we discussed in a report earlier this month. Existing Home Sales data this week showed that home prices saw a record year-over-year increase of 23.6% in May, underscoring the intensifying housing shortage across essentially all major U.S. residential markets. Existing Home Sales still managed to top consensus estimates, but still continued a trend of moderation as inventory remained near historic lows, down 20.6% from one year ago.

Despite the worsening housing shortage, New Home Sales data this week confirmed that new home construction in the United States moderated in May from historically-strong levels, as many builders have been forced to delay incremental projects due to supply chain shortages and as marginal buyers have been more hesitant to enter the market amid soaring prices. New Home Sales fell in May by nearly 6%, but this was still nearly 10% higher from last year. We discussed in our Homebuilder report last week that the modest cool-down doesn't change the positive outlook for builders, who reported a record backlog of homes ordered but not yet started in Q1.

Equity REIT Week In Review

The wave of REIT dividend boosts continued this week with another two increases following eight last week. Mall REIT Simon Property (SPG) rallied nearly 5% on the week after it declared a $1.40/share quarterly dividend, a 7.7% increase from its prior dividend of $1.30, but still below its pre-pandemic dividend rate of $2.10/share. Shopping center REIT Saul Centers (BFS) boosted its quarterly dividend by 3.8% to $0.55/share. BFS was one of just three shopping center REITs that were able to avoid a dividend cut in 2020. 65 equity REITs have now raised their dividend this year.

Single-Family Rental: Two major asset management firms are reportedly making moves into the red-hot single-family rental sector as rents continue to soar. KKR & Co (KKR) is reportedly forming a new SFR company, My Community Homes, that plans to buy and manage rental houses across the U.S. Earlier in the week, Blackstone Group (BX) announced that it will acquire SFR operator Home Partners of America — which owns more than 17,000 houses nationwide — for $6 billion. Last week, we discussed why SFR REITs have been the best-performing REIT sector since 2015 and the growing presence of institutional operators in the single-family sector.

Manufactured Housing: On a related topic, this week we published Ground Zero of the Housing Shortage where we analyzed the Harvard's updated Housing Studies (JCHS) report which took a deep-dive into the factors contributing to the historic housing shortage. We noted that manufactured housing ("MH") REITs have been riding the positive tailwinds of the housing shortage over the past decade, producing sector-leading growth rates. Consistent with the trends across the residential REIT industry over the past quarter, MH REITs significantly boosted their growth outlook, citing strong rental housing demand and substantial upward rent pressure.

Hotels: Small-cap REIT Condor Hospitality Trust (CDOR) surged more than 30% this week after announcing that it is "evaluating strategic alternatives to enhance shareholder value" and has engaged a broker to market its 15 hotels. Pebblebrook Hotels (PEB) gained nearly 3% after providing a business update in which it noted that it expects to reach positive adjusted FFO in Q3 2021 and noted that "operating trends are improving every week, with leisure demand continuing to show robust growth and business travel recovering." The latest TSA Checkpoint data showed that domestic travel - which bottomed last April at less than 5% of pre-pandemic levels - has recovered to around 75% of pre-pandemic levels over the past month.

Malls: Pennsylvania REIT (PEI) finished lower by 4% on the week despite providing a business update in which it noted that traffic throughout PREIT's portfolio is back within 10% of pre-pandemic levels. Despite the recovery, however, half of PREIT's managed properties still recorded sales below 2019 levels even as overall retail sales have set a series of record-highs this year. Rent collection has seemingly recovered back to "normal" levels, however, as the company reported that it collected 149% and 119% of billed rents in April and May, respectively, reflecting some deferred rent collection from prior months. During Q1, PREIT reported that it collected roughly 80% of rents.

Cell Tower: This week, we published Cell Tower REITs: All In On 5G. We discussed how American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC) are again pulling their weight after uncharacteristically lagging earlier this year, catalyzed by strong first quarter earnings and major M&A developments. AT&T (T) and Verizon (VZ) ended their tumultuous foray into the media business this year, divesting their capital-draining ancillary businesses as competition has heated-up with T-Mobile (TMUS) and Dish Network (DISH). While no longer cheap, Cell Tower REITs should remain a growth engine of the real estate sector, particularly as the newly recapitalized carriers go "all-in" on 5G network build-outs.

Sticking within the technology REIT sector, as part of its strategic shift towards becoming a pure-play technology REIT, Colony Capital (CLNY) completed its re-branding as DigitalBridge (DBRG) and hosted an Investor Day event in which it provided full-year guidance and outlined its long-term growth targets. DigitalBridge now manages 22 portfolio and affiliated companies across the "digital infrastructure" ecosystem, comprising roughly 100 data centers and 440k cell sites. DBRG now expects 2021 digital investment management revenue of $145M-$155M, up from its previous guidance of $140M-$150M.

Healthcare: Finally, Medical Properties Trust (MPW) gained 3.4% this week after it announced its second large acquisition this month, purchasing five general acute care hospitals from Tenet Healthcare (THC) for about $900M. The hospitals will be leased pursuant to Medical Properties' master lease agreement with Steward, which is expected to exercise its options to extend the lease term to expire in 2041. MPW has now acquired more than $3.4 Billion in assets since the start of 2021. The company expects to initially fund the total cash consideration using cash on hand, but indicated that it is likely to sell some properties as well, noting that its funding strategy "includes substantial proceeds from anticipate capital recycling activity"

Mortgage REIT Week In Review

Mortgage REITs were back to their winning-ways this week following last week's dip as residential mREITs gained 1.5% while commercial mREITs jumped 3.4%. On a slow week of newsflow in the mREIT space, iStar (STAR) jumped more than 14% following a credit ratings upgrade from Fitch. Elsewhere, Colony Credit (CLNC) completed its name and ticker change to BrightSpire Capital (BRSP) and moved its corporate headquarters from Los Angeles to New York City. The Company switched its NYSE ticker symbol to BRSP for its common stock along with its four outstanding preferred issues.

REIT Preferreds & Capital Raising

The InfraCap REIT Preferred ETF (PFFR) was lower by 0.3% this week but remains higher by 4.3% thus far in 2021 We'll soon have three new REIT preferred issues hitting the market as Sachem Capital (SACH) priced a 7.75% Series A Cumulative Preferred which is expected to begin trading on July 6 while Chatham Lodging (CLDT) priced a 6.625% Series A Cumulative Preferred and Gladstone Commercial (GOOD) priced a 6.00% Series G Preferred, but will use the proceeds to optionally redeem all of its 7.00% Series D Cumulative Preferred (GOOD.PG).

Over in the bond markets, net lease REIT Essential Properties (EPRT) priced $400M of 2.95% senior notes due 2031.while National Retail (NNN) expanded its credit facility from $900M to $1.1B and reduced its interest rate by 10 basis points. Elsewhere, four REITs announced secondary equity raises: Global Self Storage (SELF), apartment REIT UDR, Inc. (UDR), Broadstone Net Lease (BNL), and small-cap cannabis REIT AFC Gamma (AFCG). In the most recent quarter, debt as a percent of enterprise value for the average REIT retreated back down below 33% by the end of Q1 after briefly climbing above 40% during the March sell-off.

2021 Performance Check-Up

Nearly at the half-way point of 2021, Equity REITs are higher by 21.2% while Mortgage REITs have gained 18.4%. This compares with the 14.1% advance on the S&P 500 and the 18.2% gain on the S&P Mid-Cap 400. All nineteen REIT sectors are now in positive territory for the year, while on the residential side, seven of the eight sectors in the Hoya Capital Housing Index are higher. At 1.54%, the 10-year Treasury yield has climbed 62 basis points since the start of the year and is 102 basis points above its all-time closing low of 0.52% last August, but 171 basis points below its 2018-peak of 3.25%.

Among the ten major asset classes, REITs are now the third-best performing this year after briefly claiming the top-spot last week, outpaced only by Small-Caps (SLY) and Commodities (DJP). Despite the rough 2020 in which REITs were the worst-performing asset class, REITs are still the fourth best-performing asset classes since the start of 2010, producing average annual total returns during this time of 11.9%. REITs lag only Small-Cap, Mid-Cap, and Large-Cap equities over this time period, producing far superior total returns to Bonds (AGG), TIPS (TIP), Commodities (DJP), Emerging Markets (EEM), and International (EFA) stocks.

Economic Calendar In The Week Ahead

We have another busy slate of economic data in the week ahead, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of 675k in June, an acceleration from the 559k rate of job growth in May while the unemployment rate is expected to tick down to 5.6%. We'll also see Case Shiller HPI Home Price Index data on Tuesday, Pending Home Sales data on Wednesday, and Construction Spending data on Thursday.

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, Storage, Timber, Prisons, Cannabis, High-Yield ETFs & CEFs, REIT Preferreds.

Disclosure: Hoya Capital Real Estate advises an Exchange-Traded Fund 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. Index definitions and a complete list of holdings are available on our website.

Editor's Note: This article covers one or more microcap stocks. Please be aware of the risks associated with these stocks.

Disclosure: I am/we are long HOMZ, AMT, ARE, AVB, BXMT, DRE, DLR, EFG, EQIX, FB, FR, MAR, MGP, NLY, NHI, NNN, PLD, REG, ROIC, SBRA, SPG, SRC, STOR, STWD, PSA, EXR, AMH, CUBE, ELS, MAA, UDR, SUI, CPT, NVR, EQR, INVH, ESS, PEAK, LEN, DHI, HST, AIV, MDC, ACC, PHM, TPH, MTH, WELL. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.