Staring Down Stagflation

Summary

• U.S. equity markets declined for a fourth-straight week as lukewarm earnings results from mega-cap technology companies and downbeat economic data- including a GDP contraction- raised further concerns about emerging stagflation.
• Logging its worst month since the depths of the pandemic in March 2020, a deepening tech-rout dragged the S&P 500 lower by 3.3% this week- 14% below its recent highs.
• Real estate equities snapped a stretch of outperformance with broad-based declines on the week despite very strong earnings and M&A. The Equity REIT dipped 5.3% while Mortgage REITs declined 2.1%.
• Amid the equity market rout, however, bond markets were relatively steady while currency markets reflected growing expectations of U.S. economic outperformance with the U.S. Dollar strengthening to near-two-decade highs.
• Homebuilders - and the broader housing sector - were a source of strength on an otherwise dim week. Home sales data and earnings reports from builders confirmed that demand remains surprisingly resilient despite the surge in mortgage rates.
• I do much more than just articles at Hoya Capital Income Builder: Members get access to model portfolios, regular updates, a chat room, and more. Learn More »

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Real Estate Weekly Outlook

U.S. equity markets declined for a fourth-straight week as lukewarm earnings results from mega-cap technology companies and downbeat economic data - including a surprising contraction in first-quarter GDP - raised further concerns about emerging stagflation as the Federal Reserve prepares to accelerate the pace of monetary tightening in its policy meeting this coming week. Amid the equity market rout, however, bond markets were relatively steady while currency markets reflected growing expectations of U.S. economic outperformance with the U.S. Dollar strengthening to near-two-decade highs.

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Logging its worst month since the depths of the pandemic in March 2020, the S&P 500 dipped 3.3% on the week - and is now 14% below its recent highs - while the tech-heavy Nasdaq 100 declined nearly 4% and is now more than 22% below its highs. While tech stocks took the direct hit, there were few places to hide across equity markets as the Mid-Cap 400 declined 3.2% and the Small-Cap 600 finished lower by 3.6%. Real estate equities snapped a stretch of outperformance with broad-based declines on the week despite very strong earnings and M&A. Dragged down by declines across growth-oriented property sectors, the Equity REIT Index dipped 5.3% on the week with all 19 property sectors in negative territory while Mortgage REITs slipped 2.1%

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All eleven GICS equity sectors were lower on the week, dragged to the downside by Consumer Discretionary (XLC) stocks driven by sharp declines from Amazon (AMZN) after missing earnings estimates amid ongoing issues with upward cost pressures. While lukewarm results from mega-cap technology names dominated the headlines this week, earnings season continued to trend quite positively overall with 80% of S&P 500 companies reporting an upside EPS surprise. Stability across bond markets was also a silver-lining this week as the 10-Year Treasury Yield retreated 2 basis points to 2.89% amid an intensifying "tug-of-war" on long-term rates from the upward pressure from a hawkish Federal Reserve and the downward pressure from a dimming outlook for global economic growth.

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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.

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Homebuilders - and the broader housing sector - were a source of strength on an otherwise dim week. Housing data - including better-than-expected Pending Home Sales and in-line New Home Sales - was consistent with reports from eight homebuilders which indicated that housing demand remains surprisingly resilient despite the surge in mortgage rates. D.R. Horton (DHI) - the largest homebuilder in the U.S. - reported strong Q1 results and raised its full-year sales outlook, which now calls for 28% revenue growth this year. DHI commented, “Housing market conditions remain strong despite the rise in mortgage rates, as we continue to experience homebuyer demand that exceeds our pace of supply." M.D.C. Holdings (MDC) was also among the leaders after reporting similar trends and maintaining its full-year outlook.

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Apart from resilient housing data, the balance of the economic data slate was lukewarm at best, underscored by the surprising negative print on real Gross Domestic Product amid soaring inflation rate as 6.5% nominal GDP growth was deflated to a 1.4% decline in inflation-adjusted activity. Separately, the BEA reported this week that consumer prices in the US continued surging in March with the PCE Price Index - the Fed's "preferred" measure of inflation - rising 6.6% from last year - the highest rate of inflation in more than four decades. The headline PCE Index rose 0.9% in March - above consensus expectations - but the Core PCE Index rose 0.3% from the prior month - slightly cooler than consensus estimates. Driving the gains was a 33.9% year-over-year surge in energy prices and a 9.2% increase in food prices.

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Equity REIT Week In Review

You wouldn't know it by the performance this week, but REITs delivered very strong earnings throughout the week. As we analyzed in our REIT Earnings Halftime Report, among the 41 REITs that have provided full-year FFO guidance, 30 REITs (73%) raised their outlook - well above the historical guidance increase rate of 60%. On a fundamental level, residential and industrial REITs have been the early upside standouts thus far as rents continue to soar by double-digit rates across these sectors amid a substantial and lingering demand-versus-supply imbalance, but a sharp growth-to-value rotation across the equity market this week overwhelmed much of the company and sector-specific fundamental trends.

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As noted in our Halftime Report, M&A has been the major theme through the first two weeks of REIT earnings season. A week after the acquisition of student housing REIT American Campus (ACC), Blackstone was at it again. PS Business Parks (PSB) surged 12% after it agreed on Monday to be acquired by the asset manager Blackstone (BX) at $187.50 - a 12% premium to its prior closing price. For Blackstone - which oversees a massive conglomerate of real estate investment vehicles including the largest non-traded REIT - the deal is the fifth since last June following acquisitions of residential REITs American Campus, Preferred Apartment (APTS), Bluerock Residential Growth REIT (BRG), and data center REIT QTS Realty Trust (QTS).

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Timber: Beginning with the performance leaders on the week, PotlatchDeltic (PCH) was one of just nine equity REITs to finish in positive territory for the week after reporting strong Q1 results, highlighted by a substantial boost in adjusted EBITDA, driven by large increases in timberlands and wood products revenues amid higher commodity prices. Weyerhaeuser (WY) finished barely negative on the week after reporting similarly strong results. This week, we published Buy Land, They're Not Making It Anymore - which discussed our newly-launched Landowner Portfolio. The strategy targets exposure to publicly-traded companies that own or control significant acreage of land across North America, diversified across regions and across distinct productive uses. This portfolio is comprised of 18 companies that collectively own or control over 50 million acres of land across the United States- larger than the entire landmass of New England.

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Shopping Center: Another source of strength this week came from shopping center REITs, in which all four REITs that reported results raised their full-year FFO and NOI growth outlooks. Results from Kite Realty (KRG) were most impressive with a 330 basis point increase in its full-year FFO growth outlook to 18.0% - the strongest in the sector. Kimco (KIM) was also among the leaders on the week after reporting very strong results and significantly raised its full-year FFO growth outlook to 8.8% - up 280 basis points from its prior guidance. KIM noted that it increased its pro-rata portfolio occupancy by 30 basis points sequentially to 94.7%, representing the highest sequential occupancy increase in a first quarter in over 10 years.

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Hotels: Also defying the broader sell-off, hotel REITs were upside standouts following a pair of solid earnings reports. Hersha Hospitality (HT) rallied 3% on the week after it reported that its RevPAR was just 14% below comparable 2019-levels in the first quarter as strong ADR growth helped to offset occupancy levels which were 20.8 percentage points below 2019-levels. HT also announced an agreement to sell seven properties for gross proceeds of $505M or ~$360K/key and use the proceeds to "significantly" reduce its debt. After the completion of the transaction, Hersha will own 26 hotels in New York, Miami, DC, Philadelphia, and Los Angeles. Pebblebrook (PEB) - which owns a portfolio of upscale hotels in CA, NY, and FL - was also lower by just 1% on the week after it reported moderately improving fundamentals in its hard-hit coastal markets, noting that its RevPAR was 23% below 2019 levels, a decent improvement from Q4 in which RevPar was 32% below pre-pandemic levels, and expects RevPAR to be 8-10% lower from 2019 levels in Q2.

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Data Center: Digital Realty (DLR) managed to skirt the broader tech-wreck after it recorded its highest quarter ever for new and expansion leasing activity, signing leases representing 167M of annualized GAAP rental revenue. Equinix (EQIX) was dragged lower by 3.5% on the week, however, despite reporting strong results and raising its full-year outlook. EQIX now sees full-year AFFO/share growth of 7.2%, up 20 basis points from its prior outlook driven by "the best net booking performance in our history, fueled by strong demand across all three regions, robust net pricing actions, and near-record low churn." Iron Mountain (IRM) also slumped 5% despite reporting strong results in its growing data center division, noting that it executed 35MW of new and expansion leases - roughly $40M in annualized revenue - and now expected additions of 130MW this year, up from 50MW in its prior outlook.

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Cell Tower: American Tower (AMT) - the largest REIT by market cap -dipped 8% on the week despite raising its full-year AFFO and revenue growth outlook, citing "consistent leasing trends across remaining regions as 5G coverage and 4G densification drives demand across our global footprint." Earlier in the week, SBA Communications (SBAC) was also lower by more than 5% despite reporting very strong results and boosting its full-year outlook across the board and now sees AFFO/share growth of 10.8% this year - up 120 basis points from its prior outlook - driven by site leasing revenue growth of 8.5% - up 180 basis points. SBAC noted, "Based on our backlogs and conversations with our customers, we expect elevated leasing activities to continue through 2022 and into 2023. All of our US wireless carrier customers are actively engaged in building out their 5G networks and we are committed and have the resources to help them achieve their goals."

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Industrial: Industrial REITs were also slammed especially hard this past week following the disappointing results from Amazon in which its capital investments came under analyst scrutiny - about 30% of which goes towards fulfillment capacity including warehouse rental. First Industrial (FR) and Duke Realty (DRE) were each sharply lower on the week despite reporting a remarkable surge in rent growth and raising their full-year outlook. Elsewhere, EastGroup (EGP) dipped more than 10% despite reporting leasing spreads of 33.5% and raising its FFO growth of 10.8% in 2022 - up 190 basis points from its prior outlook - and sees NOI growth of 6.4% - up 80 basis points. Industrial Logistics (ILPT), meanwhile, slumped more than 15% after reporting slow progress in its plan to reduce its debt by selling assets from its recently-acquired Monmouth portfolio.

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Apartment: The weakness from apartment REITs this past week was especially head-scratching after a wave of stellar earnings results. Small-cap NexPoint Residential (NXRT) managed to avoid the selling pressure after reporting incredible 24.3% rent growth on new leases and 18.2% on renewals as market rents across its Sunbelt markets continue to soar. Camden Property (CPT) dipped 5% despite reporting stellar results and raising its full-year FFO growth outlook by 500 basis points to 20.8% while Mid-America (MAA) saw a similar dive despite raising its full-year FFO growth outlook by 270 basis points to 15.5% and recording its sixth straight quarter of accelerating rent growth. Equity Residential (EQR) dipped more than 10% as strong rental trends were offset by an uptick in delinquency rates in its Southern California market related to the delayed implementation of the California rental assistance program.

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Healthcare: Lab space owner Alexandria Real Estate (ARE) dipped 7% despite reporting its second-highest leasing volume in company history for both total space and development and redevelopment space, achieving GAAP rent growth spreads of 32.2% while reporting cash same-store NOI growth of 7.3%. ARE boosted its full-year outlook and now sees adjusted FFO growth of 8.0% - up 30 basis points - and NOI growth of 6.9% - up 40 basis points. Medical Properties Trust (MPW) was among the better performers, however, after reporting solid performance trends and revising the format of its guidance to a calendar year outlook from the previous "run-rate" estimate. The updated outlook calls for 14.6% FFO growth this year, which is slightly above the midpoint of its prior estimates on a comparable basis.

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Last week, we published our Real Estate Earnings Preview which discussed the major themes and metrics we'll be watching across each of the real estate property sectors this earnings season. Despite the historic surge in interest rates over the past quarter driven by expectations of Fed monetary tightening, REITs entered the first-quarter earnings season with some momentum at their backs, delivering solid outperformance over the last month relative to the broad-based equity indexes. The week ahead is the busiest of REIT earnings season with nearly 100 REITs reporting results including Boston Properties (BXP) on Monday, Regency Centers (REG) on Tuesday, Realty Income (O) on Wednesday, and Tanger Factory Outlet (SKT) and Ventas (VTR) on Thursday.

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Mortgage REIT Week in Review

Mortgage REITs notably outperformed this week as earnings season kicked off with results that weren't as weak as feared and as valuations firmed in mortgage-backed bond markets. Annaly Capital (NLY) - the largest mREIT - was among the better performers after reporting results that were not as bad as feared amid "one of the most challenging macro environments for fixed-income in decades." Annaly's earnings were flat in Q1 at $0.28 - above the $0.25 consensus - but noted that its book value per share ("BVPS") was "not immune to the effects of Agency MBS underperformance," recording a 15% decline to $6.77. A pair of smaller agency-focused mREITs managed to avoid a BVPS decline altogether as Dynex Capital (DX) rallied nearly 9% after reporting that its BVPS rose $0.25 during the quarter while Redwood Trust (RWT) rallied 7% after reporting that its BVPS was essentially flat in Q1.

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Elsewhere on the residential mREIT-side, ARMOUR Residential (ARR) and Orchid Island (ORC) - which have been among the hardest-hit mREITs this year - recorded BVPS declines of 18% and 23% in Q1 - a rough report but not as catastrophic as some feared. On the commercial mREIT-side, Blackstone Mortgage (BXMT) and KKR Real Estate (KREF) were each lower by about 5% after reporting that their BVPS was flat in Q1. Ladder Capital (LADR), meanwhile, dipped 6% after reporting that its BVPS declined by roughly 2% in Q1 while Apollo Commercial (ARI) slumped nearly 10% after reporting that its BVPS slipped 1.6%. We'll hear results from nearly two dozen mREITs in the week ahead including AGNC Investment (AGNC) on Monday, New Residential (NRZ) on Tuesday, Starwood Property (STWD) on Wednesday, PennyMac Mortgage (PMT) on Thursday, and Great Ajax (AJX) on Friday.

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2022 Performance Check-Up

Through four months of 2022, Equity REITs are now lower by 10.4% this year on a price return basis while Mortgage REITs have slipped 15.1%. This compares with the 13.3% decline on the S&P 500 and the 11.9% decline on the S&P Mid-Cap 400. Despite the rough week, REITs delivered a relatively strong month of April, climbing from the worst-performing to the fifth-best-performing major asset class this year on a total return basis. Led on the upside by the farmland, hotel, and timber REIT sectors, 4-of-19 REIT sectors are now in positive territory for the year. At 2.89%, the 10-Year Treasury Yield has climbed 138 basis points since the start of the year and is now closer to its post-Great Financial Crisis peak of 3.25% reached in October 2018 than its August 2020 low of 0.52%.

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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 data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of 380k in April following three-straight months of stronger-than-expected job growth while the unemployment rate is expected to decline to 3.5% from 3.6% in the prior month. The focus will be on the Fed in the week ahead with the FOMC Interest Rate Decision on Wednesday in which the committee is expected to initiate a "double rate hike" of 50 basis points this meeting and market pricing implies a total of 250 basis points by year-end. We'll also be watching Construction Spending on Monday and a flurry of Purchasing Managers' Index ("PMI") data throughout the week.

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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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Analyst’s Disclosure: I/we have a beneficial long position in the shares of RIET, HOMZ, STOR, NLY, AGNC, SRC, BXMT, UBA, GTY, MGP, ACC, NNN, STWD, HIW, CCI, SPG, SBRA, DOC, ILPT, SUI, INVH, AMT, REG, DRE, CUBE, IIPR, ARE, FR, CPT, EQIX, APLE, MAA, PCH, PLD, DLR, LAMR, MDC, KRG either through stock ownership, options, or other derivatives. 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.

Hoya Capital Real Estate ("Hoya Capital") is a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns. A complete discussion of important disclosures is available on our website (www.HoyaCapital.com) and on Hoya Capital's Seeking Alpha Profile Page. Nothing on this site nor any published commentary by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and should not be considered a complete discussion of all factors and risks. Data quoted represents past performance, which is no guarantee of future results. 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. Investing involves risk. Loss of principal is possible. Investments in companies involved in the real estate and housing industries involve unique risks, as do investments in ETFs, mutual funds, and other securities. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing. Hoya Capital, its affiliate, and/or its clients and/or its employees may hold positions in securities or funds discussed on this website and our published commentary. A complete list of holdings is available and updated at www.HoyaCapital.com.

Comments

[Morgan Myrmo]

These weekly reviews are very helpful!
-Morgan

[Marc Ewinger]

The Equity REIT carnage continues :-(

[EliasMouawad]

@Marc Ewinger Not for long. I am bullish on SPG and STOR.

[User 51437870]

Exited the last of my income stocks this morning (stwd) for tremendous gains. time to ring the register. would happily re-enter at lower prices.

[Finding Your Retirement]

is it stagflation now? no more hard Rs

[CrimsonPhoenix]

Further thoughts on AGNC? I just recently dipped a toe in, to better keep track of the SP ... I'm curious whether the expectation is for it go down much further (just under $11 now) or if it's close to the 'load the boat' stage before going back up again. Thoughts appreciated!

[kyle191]

Terrific and fact based article. I had to read it twice to grasp the full content....but I am glad I did.

Thanks

[Goldale]

Appreciate your reports. Too many SA articles have little substance. Thanks

[clrodrick]

That Friday plunge in REITs was just ridiculous especially the industrial REITs! I woke up to the bloodbath and was like WTF?!?!?! REITs been the only sector I have not cut back on in 2022 to raise cash so Friday was painful. I'm thinking of initiating a position in FR as that is the only blue chip industrial REIT I do not own.

[gabrielwachs]

what else is new?? the rich have always cash aside, and now they will buy cheep what we bough expensive results?? a bigger yacht the next summer.......

[oppmand]

Thanks. Kindly recommend better ETF’s or CEF’s that hold REIT’s.

[marc184]

@oppmand like that myself

[clrodrick]

@oppmand RQI / RFI are popular REIT closed end funds you can go to cefconnect.com to check them out for yourself. Hoya Capital also launched their own REIT fund (ticker RIET) that you can check out it has gotten some positive press

[kdds]

Love your reports. Thanks!