Inflation Soars • Rents Rise • REIT Dividend Hikes

Summary

• U.S. equity markets finished mostly-higher Wednesday despite inflation data showing the fastest rate of consumer price increases in four decades as investors looked for signs of a potential inflation peak.
• Adding to gains of 0.3% yesterday which snapped a five-day skid, the S&P 500 advanced 0.3% while the tech-heavy Nasdaq 100 gained 0.4%. Mid-Caps slipped 0.3% while Small-Caps declined 0.4%.
• Residential REITs led the real estate sector higher today as the Equity REIT Index gained 0.2% with 10-of-19 property sectors in positive territory while Mortgage REITs slipped 0.2%.
• The headline CPI Index showed a 7.0% year-over-year rise in December, the highest since 1982. The cost of shelter gained 0.4% in December, while the annual gain rose to 4.0% - the highest in more than 14 years.
• A pair of REITs hiked their dividends this morning as Gladstone Land (LAND) bumped its monthly dividend higher by 0.2% while Gladstone Commercial (GOOD) raised its dividend by 0.1%. After the close today, UMH Properties (UMH) also hiked its dividend by 5.3%.

Income Builder Daily Recap

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U.S. equity markets finished mostly higher Wednesday despite inflation data showing the fastest rate of consumer price increases in four decades as investors looked for signs of a potential peak in price pressures. Adding to gains of 0.3% yesterday which snapped a five-day skid, the S&P 500 advanced 0.3% today while the tech-heavy Nasdaq 100 gained 0.4%. Mid-Caps slipped 0.3% while Small-Caps declined 0.4%. Residential REITs led the real estate sector higher today as the Equity REIT Index gained 0.2% with 10-of-19 property sectors in positive territory while Mortgage REITs slipped 0.2%.

The BLS reported this morning that consumer prices surged at the fastest pace in nearly four decades in December as inflation has so far proven to be less "transitory" than many economists projected. The Consumer Price Index rose 7.0% year-over-year – roughly in line with consensus estimates - and the highest annual increase since June 1982. Core Consumer Prices - which excludes food and energy - rose 5.5% from last year - higher than expected. Prices for food, rent, and gasoline were once again the largest contributors to inflation as the energy index rose 29.3% and the food index increased 6.3%.

We continue to see persistent near-term pressure on inflation metrics due to the delayed impact of soaring rents and home values, which are just beginning to filter in the data. The cost of shelter gained 0.4% in December, while the annual gain rose to 4.0%, the highest in more than 14 years. Private market rent data has shown that national rent inflation has been in the 10-15% range over the past quarter while home values have risen by 15-20%. The Dallas Fed published a report highlighting the data issues at the BLS, finding a 16-month lag between the BLS inflation series and real-time market pricing of home prices and rents which will add an estimated 0.6-1.2% to the Core CPI index in 2022 and 2023.

Equity REIT & Homebuilder Daily Recap

A pair of REITs hiked their dividends this morning as Gladstone Land (LAND) bumped its monthly dividend higher by 0.2% while Gladstone Commercial (GOOD) raised its dividend by 0.1%. After the close today, manufactured housing REIT UMH Properties (UMH) also hiked its dividend by 5.3%. Following a wave of more than 130 REIT dividend hikes in 2021, we've now seen four REIT dividend hikes so far in early 2022. As discussed in our State of the REIT Nation report, FFO growth significantly outpaced dividend growth in 2021, pushing REIT dividend payout ratios to just 67% in Q3 - well below the 20-year average of 75% - indicating that REITs are well equipped to continue to raise their payouts in the quarters ahead.

Malls: Pennsylvania REIT (PEI) slumped more than 3% today after announcing a plan to raise $350M+ in multiple phases which is targeted to reduce debt and interest burden. The company also announced that it saw a "meaningful" increase in shopper traffic over the holiday season, building on strong sales during the early shopping season in October and November. Traffic during the holiday season (November and December) grew by 25% over 2020 at core malls. Mall REITs snaped their five-year streak of underperformance in 2021 with total returns of more than 93%.

Healthcare: Yesterday, we published Healthcare REITs: Vaccine Hesitancy. After a vaccine-driven revival, Healthcare REITs were the weakest-performing property sector in 2021 as the promising recovery in skilled nursing and senior housing has suffered Omicron-driven setbacks. Staffing shortages have become critical issues at skilled nursing and senior housing facilities, which operators attribute to a combination of COVID-related sick days, vaccine mandates, unemployment benefits, and uncompetitive wages. While near-term headwinds will persist until the pandemic abates, we remain optimistic on the longer-term outlook for healthcare REITs. Baby Boomers are substantially larger and wealthier than any prior generation.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, residential mREITs slipped 0.6% today while commercial mREITs gained 0.3% today. For full-year 2021, the NAREIT Mortgage REIT Index delivered price returns of 7.0% and total returns of 16.0%. Ready Capital (RC) slumped nearly 6% launching a secondary common stock offering of 6M shares which it intends to use to fund additional asset purchases and loan originations. The average residential mREIT pays a dividend yield of 9.43% while the average commercial mREIT pays a dividend yield of 6.76%.

Economic Data This Week

Inflation and retail sales data highlight the busy week of economic data in the week ahead, kicking off on Wednesday with the Consumer Price Index report for December which showed the highest rate of consumer price inflation in 40 years. On Thursday, we'll see the Producer Price Index report which is expected to show the highest rate of producer price inflation on record nearly 10%. On Friday, we'll see Retail Sales data for the critical holiday month of December which is expected to show a modest decline from the prior month and we'll also get our first look at Consumer Sentiment data for January.

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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.