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Real Estate Weekly Outlook

U.S. equity markets finished higher on a turbulent week after Russia launched a full-scale military incursion into neighboring Ukraine as investors weighed the potential geopolitical fallout and the monetary policy response. Seizing on the existing energy crisis in Europe and geopolitical instability resulting from the pandemic, Putin escalated a decades-long conflict into a ground war with the former Soviet nation as Western nations attempted to thread a geopolitical needle in punishing the aggression while attempting to limit the impact on global energy supplies and avoid a further escalation between nuclear powers.

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Riding a two-day rebound to climb out of “correction” territory and snap a two-week skid, the S&P 500 (SPY) finished higher by 0.8% for the week while the tech-heavy Nasdaq 100 (QQQ) advanced 1.2% after briefly slipping into “bear market” territory – defined as a 20% decline from recent highs. All eyes were on energy markets as crude oil prices surged above $100 per barrel for the first time since 2014 before retreating after several rounds of sanctions tactically attempted to limit disruptions to Russian oil production. Real estate equities were among the leaders on the busiest week of REIT earnings season as the Equity REIT Index finished higher by 2.0% with 16-of-19 property sectors in positive-territory while Mortgage REITs slipped 1.8%.

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Equities were buoyed by expectations of a less aggressive path of monetary tightening by the Federal Reserve in light of the geopolitical instability and by hopes of a relatively peaceful resolution to the conflict that would avoid a direct conflict between Russia and NATO. Domestic-focused equity sectors – notably Real Estate (XLRE) and Utilities (XLU) – were among the leaders on the week as investors expressed an expectation that the U.S. – as the largest oil producer in the world – should prove to be more insulated from the looming energy crisis that will afflict Western European nations that are still heavily reliant on Russian energy imports to fuel their economies.

Equity Sector Performance

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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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The U.S. housing industry – which served as a critical source of stability throughout the pandemic – has exhibited some signs of moderation over the last several months as rising mortgage rates have ushered in some long-awaited “normalization” to some of the hottest markets in the country. New and Pending Home Sales this week were each softer than expected, reflecting a mild “pause” in homebuying activity amid an unusually swift surge in the 30-Year Fixed Mortgage rate, which has shot higher by nearly a full percentage point over the last two months. We believe that much of the “tightening” in the mortgage market has already occurred even before the Fed begins its rate hiking cycle as the 3.89% rate on the 30-Year benchmark is now closer to its November 2018 high of 4.94% than to its January 2021 low of 2.65%.

home sales 2022

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While changes in mortgage rates do indeed have significant effects on the short-term trends in the ownership markets and the marginal distribution between renting and owning, the longer-term outlook for the housing industry remains highly promising. Demographic-driven growth in household formations, combined with the lingering housing shortage resulting from a decade of underbuilding, remain long-term tailwinds for the housing industry and a return to sustainable “trend-level” growth is a welcome sign to prolong the secular growth trends into the latter half of the decade. Notably, New Home Sales data this week showed that the supply of newly-completed homes declined to the lowest level since the records began in 1975 at just 2.5 months while Existing Home inventory also declined to historic lows last week.

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Over the next year, we should see home price appreciation moderate to “trend level” growth as well, which has historically been a rate consistent with personal incomes and nominal GDP growth in the 4-7% range. Importantly, national home prices have tracked these economic metrics quite closely over most measurement periods, indicating that national home prices are now currently at “fair value,” but given the moderation in economic growth seen over the last several quarters, home prices will need to moderate back towards single-digit rates of appreciation to prevent issues related to overvaluation and housing affordability. During this “cool down” period, we expect rents – which have lagged home price appreciation – to “catch up” with home values.

home prices 2022

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Equity REIT Week In Review

Dividend hikes continue to be the prevailing theme of REIT earnings season and we saw another dozen REITs hike their payouts this past week. Highlights included a 25% dividend hike from industrial REIT Prologis (PLD), a sizable dividend hike from both of the billboard REITs – Lamar Advertising (LAMR) and Outfront (OUT), and the resumption of monthly dividends from Apple Hospitality (APLE), which became the first hotel REIT to meaningfully restore its dividend. We’ve now seen 38 equity REITs hike their dividend through the first two months of 2022, outpacing the record-year of dividend hikes in 2021.

REIT Dividend increases

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Storage: All five self-storage REITs reported results this past week which were impressive across the board. All five storage REITs delivered NOI and FFO growth above their prior guidance for full-year 2021 as self-storage demand has been insatiable over the last 18 months. Across the storage sector, FFO growth is expected to average more than 16% in 2022 following incredible growth of 27% in 2021. Public Storage (PSA) rallied nearly 6% on the week while CubeSmart (CUBE) and National Storage (NSA) each rallied more than 3% on the week. Extra Space (EXR), which gained nearly 4% on the week, commented that it continues to see rent growth in the magnitude of 20% in early 2022 but does expect to see some moderation throughout the year following the historic surge in rents in 2021.

storage REITs

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Single-Family Rental: American Homes 4 Rent (AMH) advanced 2.5% on the week after reporting another strong quarter as single-family rents continue to soar across the country. AMH delivered FFO growth of 17.2% in 2021 and expects impressive growth of another 12.5% this year from the combination of nearly 10% same-store NOI growth and a low-single-digit contribution from external growth through the addition of between 3,300 to 3,900 new homes to its wholly-owned portfolio. Notably, despite the highly competitive home sales market, AMH added nearly 1,000 new homes to its portfolio in Q4 with about half coming through its internal AMH Development Program as the SFR REIT has quickly become one of the nation’s largest homebuilders as well.

SF Rents

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Student Housing: American Campus (ACC) rallied 6% on the week after reporting strong results and providing guidance that projects a full recovery in FFO in 2022. ACC is targeting pre-pandemic occupancy levels for the coming academic year with revenue growth of nearly 4% at the midpoint of its guidance range. The student housing sector has delivered a swifter-than-expected rebound as students at flagship universities returned to campus for the 2021-2022 academic year and despite the broader enrollment declines at the national level due to a myriad of short-term and structural headwinds, student housing fundamentals in these top-tier university markets have improved above the pre-pandemic baseline.

student housing REITs 2022 30450

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Manufactured Housing: Sun Communities (SUI) was flat on the week after it reported FFO growth of 27.9% – by far the best in the company’s history – and sees FFO growth of 9.8% in 2022 at the midpoint of its initial guidance range. SUI also announced a 6.0% dividend increase to $3.52/share. As with its peer Equity LifeStyle (ELS), while the core manufactured housing business remains solid, the RV and marina businesses are driving the incremental growth both at the organic same-store level and the external-growth level. SUI recorded same-store NOI growth of 11.2% in 2021 and sees 6.4% NOI growth in 2022 driven by a 4.9% increase in core manufactured housing NOI and an incredible 28.9% increase in RV NOI. UMH Properties (UMH) – which focuses exclusively on traditional MH parks – advanced nearly 2% on the week after delivering FFO growth of 24.3% in 2022, citing the success of its rental home program which drove a nearly 200 basis point occupancy improvement.

cell tower REITs

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Cell Tower: American Tower (AMT) – the largest REIT by market cap – gained 2% on the week after reporting solid results including AFFO growth of 13.7% in 2021 – well above its prior guidance – and projecting growth of 4.1% in 2022. As expected, the Sprint/T-Mobile merger has dragged down U.S. organic “same tower” growth to 2.9% in 2021 and AMT sees just 1% U.S. organic growth in 2022, but it projects organic international growth of 6% with total billings (including site expansions) at an impressive 16%. Uniti Group (UNIT) soared more than 12% after delivering better-than-expected results and projecting a return to FFO growth in 2022 for the first time since 2016.

cell tower REITs 2022 30

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Data Center: Iron Mountain (IRM) surged more than 13% on the week after reporting very strong results in its growing data center business, noting that it booked 27 megawatts of new and expansion leases in the fourth quarter, bringing its full-year total to 49 MW, far above its guidance of 30 MW. IRM also provided guidance calling for AFFO growth of 8.0% in 2022 following impressive growth of 13.4% in 2021. DigitalBridge (DBRG) also rallied more than 6% after reporting progress in implying its business structure after completing its transition from a diversified REIT into a pure-play technology REIT last year. Driven by record leasing volume from Digital Realty (NYSE:DLR), data center leasing metrics substantially exceeded their previous record high even without accounting for two of the three REITs that were acquired in 2021.

data center leasing

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Industrial: Americold (COLD) declined nearly 4% on the week after delivering a notably weak report, recording an FFO decline of nearly 11% in 2021 and it sees another 9% decline in 2022. Unlike other industrial REITs that are net beneficiaries of the ongoing supply chain issues and resulting investment in additional logistics space, COLD is more “services-oriented” than other pure-play property-owning industrial REITs and has been negatively impacted by “the impact of food supply chain disruption resulting in lower economic occupancy and throughput in our same-store portfolio.” Plymouth (PLYM) also declined after reporting disappointing results, noting that its Core FFO/share declined by 8.1% in full-year 2021 due to the impact of the 60% increase in its share count during the year as it worked to reduce its leverage.

industrial REITs

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Net Lease: EPR Properties (EPR) which focuses on “experience-oriented” properties including movie theaters – rallied more than 6% after reporting an impressive recovery in 2021 with the upward momentum continuing into this year. After plunging more than 65% in 2020, EPR recorded full-year FFO growth of over 70% in 2021 and sees another 35% growth this year to bring it back within 20% of pre-pandemic levels by year-end. STORE Capital (STOR) advanced 1.5% after it reported FFO growth of 12% in 2021 and raised its 2022 growth outlook which now calls for growth of another 7.3%. Getty Realty (GTY) was flat despite delivering strong results with FFO growth of 7.1% in 2021 and projecting growth of 6.1% in 2022 which, if achieved, would be 22% above its pre-pandemic 2019 level – the best in the net lease sector.

net lease REITs

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Cannabis: Innovative Industrial (IIPR) rallied 4% on the week after reporting another impressive quarter, recording full-year AFFO growth of 78% driven by investment volume of $714M. IIPR acquired 31 additional cannabis-related properties in Q4 and early 2022, bringing its portfolio up to 105 properties. In our recent report – When They Go Low, We Get High – we discussed the cannabis REIT sectors’ parallels with the casino industry where REITs have carved out a profitable and attractive niche with a sustainable competitive advantage. Critically, as additional states adopt tax and regulatory frameworks, marijuana cultivation licenses are increasingly “attached” to the real estate asset – and limited in quantity – an ideal structure for these REITs.

best cannabis reits 2021

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We’re now 95% complete with REIT earnings season with a handful of REITs left to report results next week, which will include Centerspace (CSR), SBA Communications (SBAC), Easterly Government (DEA), Global Medical REIT (GMRE), Tricon Residential (TCN), and Postal Realty (PSTL). We’ll continue to provide real-time coverage with our Earnings QuickTake posts for Hoya Capital Income Builder members and will publish follow-up articles summarizing our thoughts and analysis throughout REIT earnings season.

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Mortgage REIT Week in Review

Mortgage REITs were under pressure this past week as the Treasury yield curve reached its flattest level since April 2022, pressuring residential mREITs in particular. On the upside this week, Ready Capital (RC) gained nearly 2% after reporting that its adjusted net book value rose 2% in Q4 to $15.35. Commercial mREIT Starwood Property (STWD) was also among the outperformers after reporting record-levels of investment activity of $7.1B in Q4 and reported that its book value per share increased by nearly 20% in Q4 to $20.74. Elsewhere, TPG Real Estate (TRTX) declined 3% on the week despite reporting that its Book Value Per Share (“BVPS”) increased 1% in Q4.

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The laggards on the week included Orchid Island (ORC), which dipped more than 10% after reporting that its BVPS declined 9.0% in Q4 to $4.34. Elsewhere, MFA Financial (MFA) slipped 7.5% on the week after reporting that its BVPS declined 1% to $4.78 in Q4 while Granite Point (GPMT) finished lower by 4% on the week after reporting that its BVPS declined 3.6% in Q4 to $16.70. AG Mortgage (MITT) declined 4% on the week that its BVPS decreased 13% to $14.64 resulting from a large equity raise in November. Highlights of next week’s earnings calendar include Broadmark Realty (BRMK) on Monday, Arlington Asset (AAIC) on Wednesday, and Western Asset (WMC), ACRES Commercial (ACR), and Great Ajax (AJX) on Thursday.

mREIT earnings

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2022 Performance Check-Up & 2021 Review

Through eight weeks of 2022, Equity REITs are now lower by 10.3% this year on a price return basis while Mortgage REITs have slipped 8.0%. This compares with the 7.8% decline on the S&P 500 and the 6.4% decline on the S&P Mid-Cap 400. Dragged on the downside by the cell tower and data center sectors, 17-of-19 REIT sectors are now in negative territory for the year. At 1.99%, the 10-year Treasury yield has climbed 47 basis points since the start of the year and is 147 basis points above its all-time closing low of 0.52% in August 2020, but still 126 basis points below its 2018 peak of 3.25%.

real estate investing 2022

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Economic Calendar In The Week Ahead

Employment data highlights the busy economic calendar 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 438k in February following stronger-than-expected job growth of 467K in January which included significant revisions to prior months while the unemployment rate is expected to decline to 3.9% after ticking up to 4.0% last month. We’ll also see Construction Spending data on Tuesday and a flurry of Purchasing Managers’ Index (“PMI”) data throughout the week.

economic calendar week ahead 2022

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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, Storage, Timber, Prisons, 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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