Relief Rally • Builders Bounce • REIT Internalization

U.S. equity markets rebounded Tuesday as investors waded back into risk assets following last week's rout following better-than-expected housing data showing signs of demand resilience in the face of sharply-higher rates.

• Following its worst weekly decline since late 2020, the S&P 500 rallied 2.5% today but remains 21% below its recent highs. The tech-heavy Nasdaq 100 also gained 2.5% to trim its drawdown.
• Real estate equities were broadly higher today as well today with the Equity REIT Index advancing 1.4% with 16-of-19 property sectors in positive territory while Mortgage REIT Index rallied over 4%.
• Mortgage REIT New Residential surged nearly 9% today after announcing last Friday afternoon that it will internalize its management structure which the company estimates will result in $60M-$65M of cost savings, or $0.12-$0.13 per diluted share per year.
• Homebuilder Lennar reported stronger-than-expected earnings results, noting resilient demand in the face of surging mortgage rates while managing to expand its margins despite the challenging inflationary environment.

Income Builder Daily Recap

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U.S. equity markets rebounded Tuesday as investors waded back into risk assets following last week's rout following better-than-expected housing data showing signs of demand resilience in the face of sharply higher rates. Following its worst weekly decline since late 2020, the S&P 500 rallied 2.5% today but remains 21% below its recent highs. The tech-heavy Nasdaq 100 also gained 2.5% to trim its drawdown back to 30%. Real estate equities were broadly higher today as well today with the Equity REIT Index advancing 1.4% with 16-of-19 property sectors in positive territory while Mortgage REIT Index rallied more than 4% following a rough week.

As discussed in our Real Estate Weekly Outlook, selling pressure was amplified last week after the Fed announced aggressive measures to combat persistent inflation while economic data suggested that the U.S. economy is likely headed for a second-straight quarterly contraction. The bid for risk assets today was fueled, in part, by strong results from homebuilder Lennar (LEN), which reported stronger-than-expected demand while managing to expand its margins despite the challenging environment of higher mortgage rates and construction costs. All eleven GICS equity sectors were higher today, led to the upside by a rebound in the Energy (XLE) sector following a sharp sell-off last week. The benchmark 10-Year Treasury Yield climbed 7 basis points to 3.31%, still below its high last week of 3.50% before the FOMC meeting. Bitcoin bounced back above the $20,000 level following a brutal plunge over the past several weeks.

The state of the housing market will be in focus once again this week as we saw Existing Home Sales data today which showed a cooldown in May to the slowest rate since June 2020 while New Home Sales data on Friday is expected to show a contraction to the lowest-level since late 2018. The weekly Initial Jobless Claims data on Thursday has once again become a closely-watched report following two straight weeks of notable increases in unemployment filings. The Michigan Consumer Sentiment report has also suddenly been thrust back into focus after Fed Chair Powell specifically cited the hotter-than-expected consumer inflation expectations survey as a primary rationale for the FOMC's decision to hike rates by 75 basis points rather than 50 basis points this month.

Real Estate Daily Recap

Cannabis: Today we published Cannabis REITs: Weeding Out The Weak. A perennial performance leader over the past half-decade, cannabis REITs have been slammed in 2022 amid concerns over tenant financial health given the sharp re-pricing of risk and tighter financial conditions. Owning the "Pharmland" - the physical real estate - had been one of the few cannabis plays that was working amid a decade-long stretch of dismal investment performance from broader cannabis ETFs. Marijuana legalization has progressed at the state level, but federal legalization efforts remain stalled, a "double-edged sword" for cannabis REITs that thrive in the murky legal environment, but also need healthy operators that will pay the rent. Cannabis REITs have faced remarkably few tenant non-payment issues thus far.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, following a rough week, mortgage REITs posted broad-based gains today with residential mREITs advancing nearly 4% while commercial mREITs gained more than 2%. New Residential Investment (NRZ) - which we recently added to our REIT Focused Income Portfolio - surged nearly 9% today after announcing last Friday afternoon that it will internalize its management structure which the company estimates will result in $60M-$65M of cost savings, or $0.12-$0.13 per diluted share per year. Additionally, in August NRZ will change its name to Rithm Capital and will trade under the ticker symbol RITM, but will retain its executive suite and key employees of the former external manager.

After the close today, Western Asset Mortgage (WMC) maintained its quarterly dividend at $0.04, representing a forward yield of 12.6%. In Mortgage REITs: Everything In Moderation, we highlighted the potential risks related to rate volatility while noting that - even the double-digit average dividend yield - most mREIT dividends are covered by EPS and not at immediate risk of reductions. We've now seen 12 mortgage REITs raise their dividend this year compared to four dividend reductions.

REIT Preferreds & Capital Raising

Per the Income Builder Preferred Tracker available to Income Builder subscribers, REIT Preferred stocks finished higher by 0.56% today, on average. REIT Preferreds are lower by roughly 13% on a total return basis this year after ending 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 7.06%.

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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.