• U.S. equity markets advanced while benchmark interest rates retreated after the critical CPI report showed a continued cool-down of inflationary pressures in April, easing pressure on the Fed to hold its restrictive stance.

• Pushing back into positive territory for the week, the S&P 500 gained 0.2% today, while the Mid-Cap 400 and the Small-Cap 600 posted similar gains.

• Real estate equities- the industry group with perhaps the most to gain from moderating inflation and interest rate pressures- were among the leaders today. The Equity REIT Index gained 1.0%.

• The inflation metric that we watch most closely - CPI-ex-Shelter Index - showed a tenth straight month of cooling in the year-over-year rate. Since July, this CPI ex-Shelter Index has posted an annual inflation rate of just over 1%.

• Tricon Residential (TCN) - the third largest single-family rental REIT - gained 2% after reporting solid results highlighted by buoyant leasing spreads, consistent with the theme we've observed across residential REIT earnings reports over the past month.

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Income Builder Daily Recap

U.S. equity markets advanced while benchmark interest rates retreated after the critical CPI report showed a continued cooldown of inflationary pressures in April, easing pressure on the Fed to hold its restrictive stance. Pushing back into positive territory for the week, the S&P 500 gained 0.2% today, while the Mid-Cap 400 and the Small-Cap 600 posted similar gains. The Dow declined 30 points. Bond investors cheered the encouraging inflation news, sending benchmark interest rates lower on the session with the 2-Year Treasury Yield dipping 12 basis points to 3.91% while the 10-Year Yield retreated 5 basis points to 3.47%. Real estate equities - the industry group with perhaps the most to gain from moderating inflation and interest rate pressures - were among the leaders today. Also buoyed by solid earnings results, the Equity REIT Index gained 1.0% today with 16-of-18 property sectors in positive territory, while the Mortgage REIT Index gained 0.4%.

All eyes were on the Consumer Price Index report this morning, which showed a continued moderation in inflationary pressures from the four-decade-high levels seen last summer. The headline CPI inflation rate moderated to 4.9% in April - below consensus estimates of a 5.0% print -  as lower heating and food prices offset increases in gas prices, used vehicle prices, and rent costs. The delayed recognition of shelter inflation continues to heavily distort the headline and core metrics, however, resulting in a significant understatement of inflation from mid-2021-2022 and an overstatement of inflation since mid-2022. The metric that we watch most closely - CPI-ex-Shelter Index - showed a tenth straight month of cooling in the year-over-year rate. Since July, this CPI ex-Shelter Index showed an annual inflation rate of just over 1% 

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Single-Family Rental: Tricon Residential (TCN) - the third largest SFR REIT - gained 2% after reporting solid results highlighted by buoyant leasing spreads, consistent with the theme we've observed across residential REIT earnings reports over the past month. TCN noted that it achieved blended rent growth of 7.2% in Q1 comprised of new lease rent growth of 10.3% and renewal rent growth of 6.5%. Rent growth actually accelerated in early Q2 as TCN reported blended spreads of 7.6% in April, comprised of 11.9% growth on new leases and 6.5% growth on renewals, while same home occupancy was stable at 97.2%. TCN commented, "Housing in America has a math problem - demographics are driving demand for single-family homes from both buyers and renters; meanwhile the supply of new homes is not keeping pace,."

Manufactured Housing: UMH Properties (UMH) - the smallest of three MH REITs - advanced 3% after reporting solid results, noting that its AFFO per share rose about 5% from last year. UMH - which does not provide full-year guidance - reported same-store NOI growth of 5.6% in Q1 as a 6.1% increase in revenues was partially offset by a 6.8% increase in expenses. UMH commented, “One year ago, our results were impacted by a lack of inventory for sale and rent which resulted in limited revenue growth. We now have new home inventory in place that will allow us to drive significant earnings growth this year." Earlier this year, UMH raised its dividend by 2.5%, marking a third-straight year of dividend growth after going 13 years without a dividend raise.

Healthcare: Small-cap healthcare REIT National Health Investors (NHI) rallied 8% today after reporting strong results and raising its full-year guidance. Driven by improved rent collection, lower executive compensation, and an expected recovery in its Senior Housing Operating Portfolio ("SHOP"), NHI now expected to report full-year FFO growth of 2.2%, up from its prior outlook calling for a 0.7% decline.  NHI reported that total occupancy improved year-over-year by 400 basis points to 81.3% on a 440 basis point increase in senior housing and a 350 basis point increase in skilled nursing. We'll hear results from CareTrust (CTRE) this afternoon.

Net Lease: Peakstone Realty Trust (PKST) - formerly known as Griffin Realty Trust - declined about 2% today after reporting its first earnings results as a public-listed company following its direct listing last month, a process that was marred by uncertainty over its share count resulting from a reverse stock split and preferred share redemption concurrent with its listing. PKST traded below $20 in its first week after the listing, but climbed to as high as $43/share in mid-April before retreating back below $20 this week. Peakstone is a net lease office and industrial REIT that owns 78 properties across 24 states. Roughly 70% of PKST's Net Operating Income ("NOI") is derived from its portfolio of 55 office properties, while 30% of NOI comes from its portfolio of 23 industrial properties. PKST reported that its FFO was $0.37/share - $1.48 annualized - which implies a Price-to-FFO of roughly 13x based on its $20 current share price. The closest comparable REITs are likely Gladstone Commercial (GOOD), which trades at a P/FFO of roughly 7x, and Orion Office (ONL) which trades at a P/FFO around 5x, implying significant further downside for PKST's share price.

Yesterday, we published Winners of REIT Earnings Season, which is Part 1 of our Earnings Recap report. There's more to commercial real estate than office. Obscured by continued office sector pain, REITs delivered surprisingly strong first-quarter results. Of the 83 equity REITs that provide full-year Funds from Operations ("FFO") guidance, 37 (44%) raised their full-year earnings outlook, while 5 (6%) lowered guidance. Surprisingly buoyant rent growth - particularly across the residential, industrial, hospitality, technology, and retail sectors - was the prevailing theme of these upward revisions. Tenant rent collection improved for healthcare and cannabis REITs. Expense pressures abated a bit for some sub-sectors - notably in the labor-heavy cold storage and full-service hospitality - but were otherwise "status quo" for most other sectors. We've seen 5 REITs announce dividend cuts while 5 REITs raised their dividends.

Additional Headlines from The Daily REITBeat on Income Builder

• Fitch Ratings affirmed FR's Issuer Default Rating on the company and its subsidiary, First Industrial, L.P., at “BBB” with a stable outlook

• AMT announced the pricing of its registered public offering of €600.0 million (approximately $660.2 million) of 4.125% senior unsecured notes due 2027 and €500.0 million (approximately $550.2 million) of 4.625% senior unsecured notes due 2031

• PEB announced that on May 9, 2023, it closed on the sale of the 189-room Hotel Monaco Seattle in Seattle, WA for $63.3 million

Mortgage REIT Daily Recap

Mortgage REITs rebounded today with residential mREITs climbing by 0.5%, on average, while commercial mREITs finished fractionally higher. Invesco (IVR) surged 9% after it reported adjusted EPS of $1.50/share - covering its $0.40/share dividend (which was reduced from $0.65 in March) - while noting that its Book Value Per Share ("BVPS") declined about 1% in A1 to $12.61. Granite Point (GPMT) rallied 3% after reporting adjusted EPS of $0.20/share - covering its $0.20/share dividend - and noted that its BVPS declined about 5% in Q1 to $14.08. GMPT also announced an upsided stock buyback program of up to an addition 5 million shares. Broadmark (BRMK) gained 1.5% after reporting adjusted EPS of $0.10/share - and noted that its May dividend of $0.035/share will be the final cash dividend paid by the Company assuming the completion of the merger with Ready Capital Corporation by June 1, 2023, as currently anticipated.

Economic Data This Week

Inflation remains in the spotlight on Thursday when we'll see the Producer Price Index, which is expected to show an even more significant cooling of price pressures, with the headline PPI expected to slow to a 2.5% year-over-year rate - down from the recent peak last March at 11.8%. On Friday, we'll get the first look at Michigan Consumer Sentiment for May, a report which includes the closely-watched inflation expectations survey.

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