Inflation Remains A Problem

Summary

• U.S. equity markets posted their worst week of the year as benchmark interest rates jumped to three-month highs on data showing a surprising reacceleration in inflation and economic activity in January.
• Declining for a third straight week - a skid that follows a stretch of four-of-five weekly gains to start the year - the S&P 500 dipped 2.7% while the Nasdaq declined over 3%.
• Real estate equities and other yield-sensitive market segments were among the laggards this week as continued upward rate pressure offset a generally solid slate of earnings results and positive dividend news.
• The path to an economic "soft landing" got more turbulent after the PCE Price Index - the Fed's preferred gauge of inflation - showed similar trends of perky price pressures on display in last week's slate of inflation reports.
• Dividend hikes were in focus on the busiest week of real estate earnings season, with eight more REITs raising their payouts. Storage and Hotel REITs were upside standouts this week, while farmland and technology REITs were under pressure on mixed outlooks.
• This idea was discussed in more depth with members of my private investing community, Hoya Capital Income Builder. Learn More »

Maria Vonotna

Real Estate Weekly Outlook

This is an abridged version of the full report and rankings published on Hoya Capital Income Builder Marketplace on February 24th.

U.S. equity markets posted their worst week of the year as benchmark interest rates jumped to three-month highs on data showing a surprising acceleration in inflation and economic activity in January. The path to an economic "soft landing" got more turbulent this week after the PCE Price Index - the Fed's preferred gauge of inflation - showed similar trends of perky price pressures on display in last week's slate of inflation reports, raising concerns that the central bank may be forced to keep interest rates higher for longer.

Hoya Capital

Declining for a third-straight week - a skid that follows a stretch of four-of-five weekly gains to start the year - the S&P 500 dipped 2.7% in a broad-based sell-off this week, while the tech-heavy Nasdaq 100 declined more than 3%. Real estate equities and other yield-sensitive market segments were among the laggards this week as continued upward rate pressure offset a generally solid slate of earnings results and positive dividend news. The Equity REIT Index dipped 3.9% with 17-of-18 property sectors in negative territory, while the Mortgage REIT Index declined 3.9%. Homebuilders were a bright spot after earnings reports and home sales data showed signs of life in the sluggish housing market, but rate pressures tempered optimism.

Hoya Capital

Bonds remained under pressure across the credit and maturity curve as the 10-Year Treasury Yield jumped another 12 basis points this week to 3.95% - its highest weekly close since November 11th - while the US Dollar Index posted its highest weekly advance since late September. Renewed rate concerns come alongside a ratcheting-up of geopolitical tensions with mounting concern that the Ukraine conflict is descending into a "proxy war" between major Western and Eastern powers. Despite the hotter-than-expected economic data, Crude Oil prices flirted with their lowest levels of the year while Natural Gas prices briefly dipped to the lowest-levels since early 2020 before rebounding later in the week. Ten of the eleven GICS equity sectors were lower on the week with Consumer Discretionary (XLY) stocks dragging on the downside, pressured by downbeat results from several major retailers.

Hoya Capital

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.

Hoya Capital

While "peak" inflation now remains firmly in the rearview as the effects of pandemic-era fiscal expansion fade, there remains an unanswered question about whether "trend inflation" ultimately settles back in the 2-3% pre-pandemic range or at an elevated 3-5% sustained level - the answer to which has significant implications for central bank policy and financial asset values. Personal Consumption Expenditures data this week pointed more to the latter with both the Core and Headline PCE reaccelerating slightly in January to a 4.7% and 5.3% year-over-year rate, respectively. Of note, personal spending data was also stronger-than-expected in January with an annual increase of nearly 8%, buoyed in part by a similarly-sized boost to Social Security benefits following the 8.7% Cost of Living Adjustment ("COLA") for 2023.

Hoya Capital

Equity REIT Week In Review

Best & Worst Performance This Week Across the REIT Sector

Hoya Capital

Dividend hikes were in focus on the busiest week of real estate earnings season with eight more REITs raising their payouts, highlighted by a 20% increase from cell tower REIT SBA Communications (SBAC), a 10% hike from industrial REIT Prologis (PLD), a 6% boost from manufactured housing REIT Sun Communities (SUI), a 5% hike from apartment REIT Essex (ESS), a 4% increase from billboard REIT Lamar (LAMR), and a 2% boost from casino REIT Gaming and Leisure Properties (GLPI). We've now seen 36 REIT dividend hikes this year - tracking slightly behind the 40 that we saw through this date last year - while 4 REITs have reduced their payouts. This weekend, we'll publish our REIT Earnings Recap on the Income Builder Marketplace which will discuss the winners and losers of a consequential earnings season.

Hoya Capital

Industrial: The busy slate of earnings news was preempted for a second-straight week by M&A news over the weekend. Small-cap INDUS Realty (INDT) rallied 5% this week after announcing that it reached an agreement with Centerbridge Partners and GIC Real Estate to be acquired in an all-cash $868M transaction at $67/share - up from the initial $65/share offer that the private equity pair initially proposed in late November. Previously known as Griffin Industrial Realty before its REIT conversion back in 2021, INDUS is a small-cap REIT that owns 42 industrial/logistics buildings aggregating 6.1 million square feet in Connecticut, Pennsylvania, North Carolina, South Carolina, and Florida. Per the merger terms, INDUS will be allowed to declare and pay its regular Q1 and Q2 2023 cash dividends but will suspend subsequent dividends until the closing of its merger, which is expected to occur by mid-2023. For GIC, the deal is its second major acquisition of the past year following its $14B takeover of net lease REIT STORE Capital last September.

Hoya Capital

Hotels: The lone property sector in positive-territory this week, hotel REITs were buoyed by solid earnings reports and hotter-than-expected economic data. Sunstone (SHO) - one of hardest-hit REITs early in the pandemic due to its urban-heavy and business-focused portfolio mix - was the leader on the week after reporting a notable rebound in business and group travel in recent months, bringing its total Revenue Per Available Room ("RevPAR") to within 3% of 2019-levels. DiamondRock (DRH) - which owns a similar urban-heavy portfolio - was also led after reporting a full RevPAR recovery in 2022 and provided strong preliminary January results, noting that its RevPar was 10.5% above 2019-levels - its best month since July 2022. Ryman (RHP) was an upside standout after reporting very strong leisure demand in late 2022 - driving comparable RevPAR growth of 20% above 2019-levels. RHP - one of three hotel REITs to provide full-year guidance - foresees FFO growth of 5% in 2023 which would be 14.5% above 2019-levels. Park (PK) also gained this week after providing full-year guidance calling for 17% FFO growth this year.

Hoya Capital

Storage: The second-best performing sector this week, four of the five storage REITs reported results this week. CubeSmart (CUBE) advanced 1% after reporting that its full-year FFO increased by 19.9% in 2022 and sees FFO growth of another 5.7% in 2023, the highest in the storage sector. CUBE expects same-store NOI growth of 5% for 2023 as sticky pricing trends on renewals are expected to offset a decline in rental rates for new customers. CUBE noted that "street rates" for new customers were down about 10% in Q4 and about 9% in early 2023. Extra Space (EXR) gained 1% on the week after reporting that its full-year FFO rose 22.1% in 2022 - 130 basis points above its prior outlook - and noted a reacceleration in rent growth since bottoming in November. Life Storage (LSI) finished lower by 3% despite reporting sector-leading FFO growth of 28.4% in 2022 and sees another 5.2% growth at the midpoint of its 2023 outlook and provided a preliminary outlook for 2024 as well, noting that it expects "low double-digit FFO per share growth in 2024, with a midpoint of 11%." In its earnings call, LSI outlined its reasons for rejecting the takeover bid from Public Storage (PSA), noting that it believes the proposal "significantly undervalues" the company.

Hoya Capital

Mall: Tanger Factory Outlet (SKT) was a leader this week as well, gaining about 1% after reporting better-than-expected results highlighted by strong leasing volume and a positive inflection in rental rate trends. Tanger recorded rent spreads of 10.1% on new and renewed leases on a trailing twelve-month basis - its strongest rent growth since 2016 and marking the fourth-straight quarter of positive spreads following a dismal stretch of rent declines from mid-2019 to late 2021. The outlet-focused retail operator commented that "traffic remained steady and total gross sales were in line with last year's levels in spite of a far more promotional retail environment this holiday selling season. Tanger recorded 4.0% FFO growth in 2022 - above its prior guidance - and expects growth of 0.5% in 2023 at the midpoint of its range, which would bring its FFO to within 20% of pre-pandemic levels from full-year 2019.

Hoya Capital

Casino: The top-performing sector from 2022, both casino REITs reported solid results this past week. Gaming & Leisure Properties gained 0.2% after reporting slightly better-than-expected results and hiking its dividend by 2% to $0.72 alongside a $0.25/share special dividend. GLPI recorded full-year FFO growth of 3.2% in 2022 - 60 basis points above its prior guidance - and sees FFO growth of 2.5% in 2023. VICI Properties (VICI) declined 2% despite reporting strong results and providing an upbeat outlook for 2023, noting that its full-year FFO rose 6.0% in 2022 - 80 basis points above its prior growth outlook - and sees FFO growth of 9.6% in 2023 driven by CPI-linked rent escalations and by several recent large acquisitions, including the remaining 50% stake in the MGM Grand/Mandalay Bay that it acquired from Blackstone (BX) in late 2022 and the acquisitions of the PURE Canadian Gaming Casinos in early 2023.

Hoya Capital

Apartments: The strong earnings season for apartment REITs wrapped up with a solid report from sunbelt-focused NexPoint Residential (NXRT), which gained this week after reporting that its full-year FFO increased 28.8% in 2022 - the strongest in the apartment REIT sector - while seeing strong property-level trends continuing this year, calling for same-store NOI growth of 11.0%. A common theme this earnings season, however, higher interest expenses are expected to negate much of the property-level growth but NXRT did report progress in de-levering its balance sheet and fixing its interest rate expense through asset sales, refinancings, and swap agreements. Elsewhere, NYC-focused Veris (VRE) reported very strong leasing trends in Q4 and into early Q1, with blended spreads of over 11% across both periods. Midwest-focused Centerspace (CSR) also provided a fairly upbeat forecast calling for blended rent growth of 4.5% for full-year 2023. Notably, apartment REIT earnings results and guidance have pushed back on the "hard landing" narrative. Apartment REITs forecast NOI growth of 7% and FFO growth of 4% in 2023 - among the strongest in the real estate sector.

Hoya Capital

Net Lease: The majority of the net lease sector reported results this past week in which most REITs continued to exhibit a surprising "business as usual" attitude despite the headwinds from sharply higher interest rates on their acquisition-focused growth strategies. Across the 14 net lease REITs to report results thus far, the average increase in acquisition cap rates was just 30 basis points between Q4 2021 and Q4 2022, during which time the benchmark 10-Year Treasury Yield increased roughly 230 basis points. Realty Income (O) - the largest net lease REIT - declined 2% after reporting that its FFO rose 13% in 2022 but expects its FFO to be flat in 2023. The company reported a 70 bps increase in acquisition cap rates and commented that spreads have gapped wider in recent months to levels that are "about 100 basis points" since June. Necessity Retail (RTL) was the upside standout after noting that its full-year FFO rose 3.9% in 2022 while announcing continued progress in shoring up its balance sheet through asset sales and refinancings. On the downside, Gladstone Commercial (GOOD) dipped 12% after reporting downbeat results - one of two net lease REITs that reported negative FFO for the year - as weakness in its office portfolio offset strength in its industrial segment.

Hoya Capital

Healthcare: Moving on to the laggards this week, hospital owner Medical Properties Trust (MPW) dipped nearly 20% after reporting mixed results, noting that its full-year FFO rose 4.0% in 2022 - slightly above its prior guidance - but provided a downbeat outlook for 2023 with expectations of a 13.5% dip in its FFO at the midpoint of its range. Tenant concerns were the focus of the report with MPW reporting that Prospect Medical - its third-largest tenant at roughly 12% of revenues - has stopped paying rent. MPW notes that its 2023 outlook assumes a "worst-case scenario" of zero further rent collection from Prospect. The firm noted that outside of Prospect, that did not have any rent collection issues from other tenants, but did confirm that its new tenant in its Utah portfolio - CommonSpirit Health - will pay rental rates that are about 10% lower than the former tenant - Steward - was paying before it sold the portfolio operations to CommonSpirit.

Hoya Capital

Farmland: Farmland Partners (FPI) dipped over 15% on the week after providing a downbeat outlook for the year ahead with the midpoint of its 2023 guidance calling for a 32% decline in FFO amid a "triple-whammy" of headwinds. Following two years of double-digit FFO growth in 2021 and 2022, FPI sees headwinds from lower crop yield due to drought conditions, low crop price due to normalization effects after a sharp spike early in the Ukraine-Russia war (with particularly sharp price declines on specialty crops), and significantly higher interest rate expense due to FPI's elevated level of variable rate debt exposure. Gladstone Land (LAND) declined about 7% on the week despite providing a relatively more upbeat outlook, commenting that "overall demand for prime farmland remains stable to strong in almost all of the areas where our farms are located, particularly along the West Coast."

Hoya Capital

Cell Tower: Tech-focused weeks were also laggards this week after providing a generally muted outlook for 2023. SBA Communications dipped more than 8% on the week after reporting mixed results and announcing that its president and CEO, Jeff Stoops, will retire at the end of 2023. SBAC recorded FFO growth of 14.1% in 2022 and hiked its quarterly dividend by 20% to $0.85/share, but forecasts a moderation in 2023 with expectations of 3.2%. American Tower (AMT) declined 7% after providing initial guidance calling for a 1.6% decline in FFO at the midpoint of its range. A common theme across the REIT sector, higher interest expense is expected to offset an otherwise strong year of property-level growth with AMT expecting 5% organic "same-store" tenant billings growth in the U.S. - an acceleration from the 1% growth in 2022 as the headwinds from the Sprint merger subside.

Hoya Capital

Mortgage REIT Week In Review

Mortgage REITs were lower by a similar magnitude as their equity REIT peers this week, with the iShares Mortgage Real Estate Capped ETF (REM) declining 3.8% - trimming its year-to-date gains to roughly 8%. We heard reports from a dozen mREITs this past week. TPG RE Finance (TRTX) was the upside standout after reporting that its distributable earnings per share rose to $0.30 in Q4 - up 53% from last quarter - and easily covering its $0.24/share dividend. BrightSpire (BRSP) gained 1% after reporting that its distributable EPS increased to $0.27/share from $0.25/share in Q3 - and covering its $0.20/share dividend - while its BVPS was unchanged during the quarter at $12.06. Orchid Island (ORC), AG Mortgage (MITT), and MFA Financial (MFA) were among the outperformers as well this week after reporting BVPS increases of 4.5%, 3.3%, and 1.6%, respectively.

Hoya Capital

Also among the better-performers this week, NexPoint Real Estate (NREF) declared a special dividend of $0.185/share in addition to its regular dividend of $0.50/share, citing "strong 2022 results, generating $12.5 million of undistributed income during the year to be distributed to our shareholders throughout 2023." Franklin BSP (FBRT) advanced 2% after noting that its BVPS was roughly flat in Q4 at $15.78 while commenting that it's "very happy with where we are today at dividend coverage. On the downside this week, New York Mortgage (NYMT) dipped 12% after reporting that its BVPS declined 9% to $3.32 in Q4, but commented that "nearly all book value loss in the quarter were unrealized and expected to be reversed over time." Residential mREITs have reported an average 0.9% increase in their BVPS in Q4, while commercial mREITs have reported an average 1.9% decline from the prior quarter.

Hoya Capital

2022 Performance Recap & 2023 Check-Up

Through the first eight weeks of 2023, the Equity REIT Index is higher by 3.9% on a price return basis for the year, while the Mortgage REIT Index is higher by 7.7%. This compares with the 3.6% gain on the S&P 500 and the 7.2% advance on the S&P Mid-Cap 400. Within the real estate sector, 15-of-18 property sectors are in positive territory on the year led by Hotel, Self-Storage, Industrial, and Residential REITs. At 3.95%, the 10-Year Treasury Yield has increased 7 basis points since the start of the year - well above its closing low of 3.39% in early February - but still below its 2022 highs of 4.30%. The US bond market has stabilized following its worst year in history as the Bloomberg US Aggregate Bond Index has gained 0.2% this year.

Hoya Capital

Economic Calendar In The Week Ahead

We'll see another fairly busy week of economic data in the week ahead. The state of the U.S. housing market will be a focus early in the week. On Monday, we'll see Pending Home Sales data for January which is expected to rebound slightly from the prior month, reflecting the moderation in mortgage rates from the recent peak above 7% in November through the early February lows of around 6%. On Tuesday, we'll see home price data via the Case Shiller Home Price Index, which is expected to show a sixth consecutive month of declining home prices with the 20-City composite expected to show that prices are now more than 5% below recent peaks. On Thursday, we'll be watching the final Jobless Claims report for February ahead of nonfarm employment data in the following week. We'll also be watching Unit Labor Costs data from the revised GDP report on Thursday - an inflation metric that is closely watched by the Federal Reserve - as well as a busy slate of Purchasing Managers' Index ("PMI") data throughout the week.

Hoya Capital

For an in-depth analysis of all real estate sectors, 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.

Hoya Capital

Analyst’s Disclosure: I/we have a beneficial long position in the shares of RIET, HOMZ, ALL HOLDINGS IN THE INCOME BUILDER REIT FOCUSED INCOME & DIVIDEND GROWTH PORTFOLIOS 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 Research & Index Innovations (“Hoya Capital”) is an affiliate of Hoya Capital Real Estate, a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations provides non-advisory services including market commentary, research, and index administration focused on publicly traded securities in the real estate industry. This published commentary is for informational and educational purposes only. Nothing on this site nor any commentary published by Hoya Capital is intended to be investment, tax, or legal advice or an offer to buy or sell securities. This commentary is impersonal and should not be considered a recommendation that any particular security, portfolio of securities, or investment strategy is suitable for any specific individual, nor should it be viewed as a solicitation or offer for any advisory service offered by Hoya Capital Real Estate. Please consult with your investment, tax, or legal adviser regarding your individual circumstances before investing. The views and opinions in all published commentary are as of the date of publication and are subject to change without notice. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. Any market data quoted represents past performance, which is no guarantee of future results. There is no guarantee that any historical trend illustrated herein will be repeated in the future, and there is no way to predict precisely when such a trend will begin. There is no guarantee that any outlook made in this commentary will be realized. Readers should understand that investing involves risk and loss of principal is possible. Investments in real estate companies and/or housing industry companies involve unique risks, as do investments in ETFs. The information presented does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. An investor cannot invest directly in an index and index performance does not reflect the deduction of any fees, expenses or taxes. Hoya Capital Real Estate and Hoya Capital Research & Index Innovations have no business relationship with any company discussed or mentioned and never receive compensation from any company discussed or mentioned. Hoya Capital Real Estate, its affiliates, 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 and additional important disclosures is available at www.HoyaCapital.com.