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William_Potter/iStock via Getty Images
This is an abridged version of the full report published on Hoya Capital Income Builder Marketplace on April 22nd.
U.S. equity markets declined for a fifth-straight week - the worst losing streak since 2012 - after the Federal Reserve delivered a "double" 50 basis point interest rate hike which flared intense volatility but did little to ease stagflation concerns. The whipsaw trading action following the FOMC meeting marked an unwelcome return of the extreme intraday swings - and thousand-point Dow moves - that hasn't been seen since early in the pandemic as strong earnings results and solid employment data failed to be the upside catalyst to quell the downbeat sentiment.
Off to its worst start to a year since 1939, the S&P 500 declined another 0.2% on the week while the tech-heavy Nasdaq 100 dipped deeper into "bear market" territory with another 1.3% and is now more than 23% below its highs. Currency markets continue to reflect expectations of U.S. economic outperformance with the U.S. Dollar strengthening to fresh-two-decade highs. Real estate equities declined sharply for the second-straight week as a strong slate of REIT earnings results and dividend hikes were overwhelmed by macro events. Dragged down by steep declines across many growth-oriented property sectors, the Equity REIT Index dipped 3.9% on the week with 17-of-19 property sectors in negative territory but Mortgage REITs were a source of notable strength with gains of 3.5%.
After a brief reprieve from the historic selling pressure in late April, fixed income securities across the credit and maturity spectrum were under pressure yet again as both the 10-Year Treasury Yield and the 2-Year Treasury Yield climbed to their highest levels since 2018. Consistent with the "inflation trade" seen throughout 2022, Energy (XLE) sector was one of the few sources of strength as Crude Oil prices climbed back above $110/barrel after OPEC showed little urgency to increase production. Homebuilders - which have been slammed in 2022 and are now trading at low-single-digit P/E multiples - also finally caught a bid this week as earnings results across the rental and ownership sector showed steady and unrelenting housing demand in the face of surging mortgage rates. Also of note, Bitcoin slumped another 5% on the week and is now nearly 50% below its highs set last November.
Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.
The Bureau of Labor Statistics reported this week that the U.S. economy added 428k jobs in April - slightly above expectations of roughly 400k - and marking the 12th straight month of job growth above 400k. A solid report that indicated that the U.S. labor market remains a notable source of strength amid a myriad of concerns over inflation and geopolitics, the balance of the employment data this week was lukewarm as the ADP Payrolls report earlier in the week showed job gains of 247k in April - well below expectations - while Initial Jobless Claims climbed back above 200k for the first time since early February. Average hourly earnings rose just $0.10/hour in April or 0.3% - which was slower than expected - and well below the 1.2% rise in consumer prices seen in the CPI report last month. Notable job gains continued in leisure and hospitality while hiring in the transportation and warehousing and manufacturing sectors saw a notable pickup in hiring.
For the second-straight week, a strong slate of REIT earnings results and positive dividend news was overwhelmed by macro events in a week that saw unexplained carnage across several property sectors and individual names. The newsflow was frenzied with more than 100 REITs reporting results on the week. While results this past week didn't quite match the stellar results of the prior two weeks, with 80% of the earnings season complete, the overall body of work remains undoubtedly positive with 55 REITs raising their full-year outlook for Funds From Operations ("FFO") - a 70% "boost rate" that is well above the historical average. Just one REIT - technology REIT Uniti Group (UNIT) - fractionally lowered their FFO/share outlook in Q1. We'll publish our full Earnings Recap early next week, but below we note some upside and downside highlights of the frenetic week.
Healthcare: Healthcare REITs were one of the few places to hide this past week after earnings results showed stabilizing fundamentals in the troubled skilled nursing and senior housing sectors. Sabra Health Care (SBRA) and Omega Healthcare (OHI) each surged more than 10% on the week after reporting resolutions in rent collection issues from several troubled SNF operators and an uptick in occupancy rates throughout the quarter. Senior housing REIT Ventas (VTR) gained nearly 3% after reporting an impressive rebound in its Senior Housing Operating ("SHOP") resulting from a 420 basis point increase in occupancy to 83.0% and strong in-place resident rate increases of 8% during Q1, which outpaced inflationary expense pressures. Medical office REITs were also upside standouts on the week following solid earnings reports and some potential M&A drama. Healthcare Realty (HR) surged more than 14% after a report that Welltower (WELL) made an all-cash offer to buy HR at $31.75/share earlier this year after the company had agreed to merge with Healthcare Trust of America (HTA).
Mall: The growth-to-value rotation was evident in the mall REIT sector even as we await results in the week ahead from Simon (SPG) and Macerich (MAC). We did hear results from Tanger Factory Outlet (SKT), which rallied 6% after reporting solid first-quarter results - highlighted by positive leasing spreads - and lifting its full-year guidance. Notably, Tanger recorded a 1.3% increase in blended rental rate on renewed leases, snapping a twelve-quarter streak of negative rent spreads dating back to Q1 of 2019. Tanger also boosted its full-year FFO growth outlook by 290 basis points to -0.6%, but this would still be 24% below its full-year 2019 FFO. Pennsylvania REIT (PEI) dipped nearly 15%, however, despite reporting similar trends of stabilizing vacancy and rental spreads, but the clock is ticking for the troubled landlord to raise capital through asset sales to pay down its substantial debt load.
Shopping Center: Sticking in the retail sector, results from shopping center REITs continued their positive trend and of the twelve shopping center REITs to report results thus far, ten have raised their full-year FFO guidance. Regency Centers (REG) was the upside standout this past week after reporting very strong results and raising its full-year outlook, boosting its full-year FFO outlook by 280 basis points and its SSNOI outlook by 130 bps. Federal Realty (FRT) was also an outperformer after it raised its full-year FFO growth outlook to 6.8% - up 180 basis points - and raised its NOI growth outlook to 4.3% - up 30 basis points while Whitestone REIT (WSR) also delivered strong performance after maintaining its outlook but reported its third-straight quarter of double-digit leasing spreads with blended rent growth of 10% in Q1. Unlike their mall REIT peers, shopping center REIT FFO is expected to fully recover to pre-pandemic levels in 2022 led by Kite Realty (KRG).
Hotel: More than two years after slashing their dividends to zero early in the pandemic, we're now seeing a growing number of hotel REITs resume their shareholder distributions as hotel occupancy returns to pre-pandemic levels. DiamondRock (DRH) was among the better performers this week after reporting that its Revenue Per Available Room ("RevPAR") was just 3.5% below 2019-levels in Q1 and noted that it expects 2022 hotel revenues to meet or exceed 2019-levels. DRH also announced that it expects its common stock dividend to resume in Q3 of 2022. Host Hotels (HST) was also a leader after doubling its dividend rate while reporting a continued recovery in leisure demand and " meaningful improvements" in transient and group business segments. Apple Hospitality (APLE) - which was the first hotel REIT to meaningfully restore its dividend - also reported strong results, highlighted by preliminary data showing RevPAR for the month of April 2022 exceeded April 2019. Recent TSA Checkpoint data has shown that domestic travel recovered to 90% of pre-pandemic levels by late March, but trended sideways in April.
Net Lease: On a jam-packed week with results from three-fourths of the sector, EPR Properties (EPR) was the lone net lease REIT in positive territory for the week after raising its FFO growth target by 210 basis points to 37.1%. National Retail (NNN) and Agree Realty (ADC) were also upside standouts on the week after each raised their full-year outlook. NNN booted its FFO growth outlook to 6.5% - up 280 basis points while ADC increased its full-year acquisition target to $1.5B at the midpoint - up from $1.2B - consistent with the theme across the sector that rising rates haven't yet hindered the external growth activity across the net lease sector. Anything less than perfection was punished this week, however, underscored by a 5% dip from Realty Income (O) after it reaffirmed its 2022 earnings guidance which calls for FFO growth of 8.8%. STORE Capital (STOR) also lagged despite raising its full-year FFO and acquisition target and setting a company record with $513M in Q1 acquisitions. STOR now sees FFO growth of 8.0% - up 70 basis points from its prior outlook.
Storage: For the storage and industrial REITs, stellar earnings results were met by unexplained carnage. Extra Space (EXR) dipped more than 4% on the week despite substantially raising its full-year outlook, commenting that it's "off to an exceptional start in 2022, driven by high occupancy and strong pricing power." EXR now sees FFO growth of 18.3% this year - up 510 basis points from its prior outlook - and raised its same-store NOI growth by 350 bps to 16.5%. Life Storage (LSI) and National Storage (NSA) also plunged despite raising their full-year FFO growth outlook to over 20%. Public Storage (PSA) dipped more than 9% on the week despite reporting a similarly strong start to 2022, but reiterated its full-year FFO and NOI growth outlook, likely related to uncertainty over the timing and logistics of the PS Business Parks (PSB) acquisition by Blackstone, which will trigger a special dividend later this year for PSA shareholders for its 41% ownership stake in PSB.
Industrial: The unexplained carnage was even more intense across the industrial space despite a fairly quiet week of earning results underscored by the double-digit decline from Prologis (PLD) and EastGroup (EGP), which both reported very strong results two weeks ago. Confoundingly, the sector leader on the week was cold storage operator Americold (COLD) despite reporting lukewarm first-quarter results and presenting a fairly downbeat outlook. COLD - which has been among the worst-performing industrial REITs amid operational challenges in its services-heavy business model - reiterated its full-year earnings outlook which calls for an 8.7% decline in FFO per share and noted that "supply chain and labor disruptions continue to impact the global food supply chain. The labor market remains very challenged and continues to strain our customers' ability to produce at pre-COVID levels."
Casino: VICI Properties (VICI) finished lower by 3% on the week despite raising its full-year outlook and officially closing on its previously announced acquisition of MGM Growth Properties (MGP), making it the largest owner of hotel and conference real estate in America with an estimated enterprise value of $44B. Simultaneous with the deal closing, VICI entered into an amended and restated triple-net master lease with MGM Resorts (MGM) which has an initial total annual rent of $860.0M and annual escalators of 2.0% per year for the first 10 years and thereafter at 2.0% per year or the annual increase in the consumer price index, subject to a 3.0% cap, whichever is greater. In addition, VICI retains MGP's 50.1% ownership in the joint venture between MGP and Blackstone (BX) Real Estate Income Trust, which owns the real estate assets of MGM Grand Las Vegas and Mandalay Bay.
Student Housing: Speaking of Blackstone, this week we published our final Student Housing REIT sector report. American Campus (ACC) - the first of three student housing REITs and the last one still publicly traded - was scooped-up last month by Blackstone - one of its five major REIT acquisitions since June to feed its fledgling non-traded REIT business, BREIT. We discussed how BREIT has grown into a $100B behemoth in less than five years despite its high fee structure. Non-traded REITs - which are typically promoted to investors by broker-dealers that receive hearty up-front commissions of 3-7% and "trailers" of up to 1% annually - have rightfully been subject to heavy scrutiny from regulators due to their high fee structure, lack of liquidity, and prevalent conflicts of interests. The $100 in gross asset value - the vast majority of which has been acquired over the past five years alone - places BREIT among the five largest REITs alongside Prologis (PLD), American Tower (AMT), Crown Castle (CCI), and Equinix (EQIX).
Mortgage REITs have been a bright spot amid the carnage over the past two weeks as earnings results confirmed that the brutal macro environment - and historic weakness in MBS valuations - hasn't been the catastrophe for mREITs that some expected. New Residential (NRZ) rallied 7% after reporting strong results this morning with its Book Value Per Share ("BVPS") gaining 10% in Q1 as its portfolio of servicing & MSR assets benefited from the rising rate environment. Two Harbors (TWO) gained 10% after reporting that its BVPSS declined just 2.9% as strength in its MSR portfolio helped to offset declines in its Agency portfolio. AGNC Investment (AGNC) - which owns a more traditional agency MSB portfolio - rallied 13% despite reporting a 17% decline in its BVPS but posted impressive earnings growth and provided a "significantly improved" investment outlook. Arbor Realty (ABR) gained 2% after raising its dividend for the second time this year, which also marked the eighth consecutive quarterly increase for the residential lender.
On the downside this past week, Ellington Residential (EARN) dipped 3% after reporting a 13.8% BVPS decline in Q1 and becoming just the fourth REIT to reduce its dividend this year with a 20% reduction. Invesco Mortgage (IVR) declined 1% on the week after it reported that its BVPS dipped 28.5% in Q1 - the steepest decline in the mREIT sector. Western Asset (WMC) slid 3% after reporting that its BVPS dipped 14.6% to $2.73 in Q1. New York Mortgage (NYMT) was also among the laggards on the week after reporting a BVPS decline of 7.2% We'll hear results from the final half-dozen mREITs in the week ahead including Broadmark Realty (BRMK), Lument Finance (LFT), Cherry Hill (CHMI), Granite Point (GPMT), and Angel Oak (AOMR).
Through eighteen weeks of 2022, Equity REITs are now lower by 13.9% on a price return basis while Mortgage REITs have slipped 12.1%. This compares with the 13.4% decline on the S&P 500 and the 12.6% decline on the S&P Mid-Cap 400. Led on the upside by the farmland, hotel, and timber REIT sectors, just 3-of-19 REIT sectors are now in positive territory for the year while eight sectors are off by 15% or more. At 3.12%, the 10-Year Treasury Yield has climbed 161 basis points since the start of the year and is now within striking distance of its post-GFC high of 3.25% reached in October 2018 while the 2-Year Treasury Yield has climbed from 0.73% to nearly 2.75%.
Inflation data and commentary from Fed members highlight the busy slate of economic data in the week ahead. On Wednesday, the BLS will report the Consumer Price Index which may potentially reveal that the fastest pace of year-over-year increases is finally behind us as both the headline and Core CPI is expected to show a cooldown in April to 8.1% and 6.0%, respectively. Similar themes are expected in the Producer Price Index report on Thursday is expected to show a 10.7% increase for the headline PPI, down from 11.2% in the prior month. On Friday, we'll also get our first look at Michigan Consumer Sentiment for May to see if the unexpected rebound in confidence seen last month can be sustained or if it resumes the downward trend that began last August amid persistent anxiety about inflation. Throughout the week, there are also more than a half-dozen scheduled Fed member speeches that may offer insights into the Fed's opinion of the post-meeting market response.
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.
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