Real Estate Weekly Outlook
U.S. equity markets slid on another volatile week as the Russia/Ukraine conflict dragged into a third week while gasoline prices in the U.S. surged to record-highs, sending consumer confidence to recessionary levels. Branded as the “Putin Price Hike” by the Biden Administration, inflation data from before the start of the Russia conflict was already showing the fastest-pace of consumer price increases since the early 1980s, weighing on sentiment and raising further questions over the failure to focus on domestic oil and natural gas production as a critical pillar of both economic and geopolitical security.
Sliding to its lowest weekly close since June 2021 amid a stretch of 7-of-10 weekly declines, the S&P 500 (SPY) finished lower by 2.8% for the week while the tech-heavy Nasdaq (QQQ) slid back into “bear market” territory. The five-week skid on the Dow Jones Industrial Average, meanwhile, marked the worst stretch of losses since May 2019. Despite the sharp rebound in long-term Treasury yields, real estate equities were among the outperformers for a third-straight week amid another wave of REIT dividend hikes as the Equity REIT Index declined 1.5% with 7-of-19 property sectors in positive-territory while Mortgage REITs advanced 0.6%.
All eyes were on commodities markets once again following last week’s historic surge, and after initially pushing through $130/barrel mid-week following the Biden Administration’s ban on Russian imports, WTI Crude Oil (CL1:COM) closed the week back below $110 amid mounting pessimism over the outlook for global economic growth – particularly in Europe and Asia. The U.S. Dollar Index rallied another 1% on the week, closing at the strongest level since September 2020. However, bonds across credit tiers and the maturity curve were under pressure all week, sending the 10-Year Treasury Yield back above 2.0% ahead of the Fed’s rate hike decision in the week ahead.
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.
The BLS reported this week that consumer prices surged at the fastest pace in nearly four decades in February – before the further surge in prices related to the Russia/Ukraine conflict – as inflation has so far proven to be less “transitory” than many economists and politicians projected. The Consumer Price Index rose 7.9% year-over-year – roughly in line with consensus estimates – and the highest annual increase since February 1982. Core Consumer Prices – which excludes food and energy – rose 6.4% from last year, which was significantly hotter than estimates of 5.9%. Prices for food, rent, and gasoline were once again the largest contributors to inflation as the energy index rose 25.6% and the food index increased 7.9%.
As we’ve discussed for the last year, we continue to see persistent pressure on the headline 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 increased 0.5% in February and accounted for over 40% of the monthly increase in the Core CPI Index. 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.
Ongoing concerns over inflation have weighed on consumer confidence in recent months, sending the University of Michigan’s consumer sentiment index tumbling to 10-year lows in March while expectations for one-year inflation rates increased to 5.4% – the highest level since the summer of 2008. Earlier in the week, the IBD/TIPP Economic Optimism Index showed a similar slump across all of their monthly metrics with its read on consumer confidence sliding 3 points to 41, the lowest since October 2013. Confidence in Federal Policy remains near all-time record lows at just 41.9 in March. Pollsters commented last month that “people view a lack of trust in our politicians and government structures as one of the biggest issues we face as a nation.”
Equity REIT Week In Review
Another week, another wave of REIT dividend hikes. Eight more REITs raised their dividends this past week, bringing the full-year total up to 46, a faster pace than the record year in 2021. Highlights of this week included a 13% hike from manufactured housing REIT Equity LifeStyle (ELS), a 13% increase from small-cap CIM Commercial (CMCT), and an 8% hike from mortgage REIT Great Ajax (AJX). Elsewhere, American Tower (AMT) raised its payout by 1%, Global Medical REIT (GMRE) hiked its dividend by 2%, and W.P. Carey (WPC) raised its payout by 0.2%. Additionally, a pair of hotel REITs – Park Hotels (PK) and Braemar Hotels (BHR) – reinstated their dividends which had been suspended since early 2020.
On that topic, this week we published our State of the REIT Nation. The “REIT Recovery” from the pandemic is essentially complete as FFO levels are back to pre-pandemic levels. Dividend payouts have lagged, however, setting the stage for significant growth in 2022. While REITs have pulled back into “cheap” territory in early 2022, REITs benefited from premium valuations over the past year which helped to jump-start external growth and awaken animal spirits. We highlighted how REIT balance sheets look far more like a typical operating company than the highly leveraged holding companies of yesteryear, which served them well during the pandemic-related volatility and should be a cushion to buffer the impact from the geopolitical issues in early 2022.
Shopping Center: Cedar Realty (CDR) traded flat on the week after reporting decent fourth-quarter earnings results and confirming that the company will sell a 33-property grocery-anchored portfolio for $840.0M and the remainder while Wheeler Real Estate (WHLR) will acquire the rest of the company for $291M. As discussed this week in Shopping Center REITs: Back on Sale, unlike their mall REIT peers, Shopping Center REITs entered 2022 with fundamentals that are as strong – or possibly even stronger – than before the pandemic with a full recovery completed. Occupancy rate trends and leasing spreads have been especially impressive with rents rising by double-digit rates in Q4, indicating clear signs of pricing power for the first time since the mid-2010s. After the close on Friday afternoon, Urstadt Biddle (UBA) reported solid results in its fiscal Q1 results, reporting a 6.1% increase in same-store NOI and a 70 basis point increase in occupancy rates to 92.6%.
Industrial: INDUS Realty (INDT) slid more than 7% on the week after reporting mixed results and announcing that it intends to sell its remaining office/flex buildings and fully exit its legacy investment in office properties. INDT – formerly branded as Griffin Industrial – converted to a public REIT in early 2021 and currently owns 36 industrial/logistics buildings aggregating 5.4M square feet, primarily in Connecticut and Pennsylvania. The Office/Flex Portfolio is comprised of seven buildings located in Connecticut totaling 175k sq. ft. This week, we published Supply Chains At Breaking Point, which discussed our updated outlook on the red-hot industrial REIT sector as vacancy rates declined to record-lows below 4% in 2021, driving rent growth of nearly 20% in North America with some markets seeing 50% increases.
Apartment: A pair of apartment REITs provided business updates alongside presentations at the Citi 2022 Global Property Conference this past week. AvalonBay (AVB) reported that it continued to see accelerating rent growth across nearly all of its markets in February as effective rent growth rose 12.7%, up from 12.4% in January and 11.0% in Q4. AVB noted that its currently running about 60 basis points above its full-year guidance provided last month. Camden (CPT) reported that its blended lease rates rose 14.3% year-over-year in February, its strongest ever for February, but a slight moderation from its record-high Q4 increase of 15.6%. As discussed in Shelter from Inflation, apartment REITs reported stellar earnings results in Q4 ending 2021 with record-high occupancy rates with the momentum accelerating in 2022 with 15% earnings growth this year.
Single-Family Rental: Invitation Homes (INVH) gained 1% on the week after it announced a new joint-venture with Rockpoint Group that will acquire and renovate higher-priced homes in premium markets relative to its current strategy which targets homes with rents typically in the $1,500-2,500 per month range. The JV will be capitalized with a total equity commitment of $300 million, with 17% from INVH and 83% from Rockpoint. The companies plan to focus on “top-quality submarkets within the Western US, Southeastern US, Florida, and Texas.” INVH will provide investment, asset management, and property management services to the JV, for which it will earn asset management and property management fees and have the opportunity to earn a promoted interest subject to certain performance thresholds.
Mortgage REIT Week in Review
Mortgage REITs delivered mixed performance on the week as the Treasury yield curve continued to flatten with the 2-10 spread reaching its narrowest level since March 2020. Investors were buying the dip in some of the more beaten-down small-cap residential mREITs with Orchid Island (ORC) rallying more than 8% while Lument Finance (LFT) and AG Mortgage (MITT) each gained over 5%. Great Ajax (AJX) gained 1.2% on the week after hiking its dividend by 8%, the second mREIT to raise its dividend this year. On the downside, AGNC Investment (AGNC) declined 0.6% after announcing that its tangible BVPS was $13.48 at the end of February, down from $14.91 at the end of January. Ellington Residential (EARN) slipped 0.5% after reporting that its Book Value Per Share (“BVPS”) declined 4.2% to $11.76 in Q4, citing the flattening yield curve and interest rate volatility.
Cannabis: AFC Gamma (AFCG) – a cannabis mortgage REIT that went public last February – was among the leaders on the week after reporting solid results and hiking its quarterly dividend by 10% to $0.55/share. AFCG reported total loan commitments of $419.2M ($363.7 million of which has been funded) across 16 portfolio companies with a weighted average yield to maturity was of 19%. In its earnings release, the company noted that operating as a public REIT “has allowed us to accomplish several goals, including valuable access to public debt and equity markets, which provides AFCG with an attractive cost of capital relative to its peers.” The largest cannabis REIT Innovative Industrial (IIPR) has been the best-performing REIT since the start of 2017.
REIT Preferreds & Capital Raising
REIT Preferred stocks slipped 0.4% this week and are now off by 9.6% on the year after ending 2021 with price returns of roughly 8.0% and total returns of roughly 14%. Ashford Hospitality (AHT) – which was one of the last REITs to resume their previously-suspended preferred distribution – filed to list a pair of new non-exchange traded preferred securities. The new Series K and Series J Redeemable Preferred Stock are expected to have an initial annual dividend yield of 8% and 8.2% respectively. Cedar Realty’s Series B (CDR.PB) and Series C (CDR.PC) Preferreds recovered a fraction of their declines after plunging 50% last week on expectations that its acquisition by Wheeler (WHLR) will result in a suspension of its distributions.
2022 Performance Check-Up & 2021 Review
Through ten weeks of 2022, Equity REITs are now lower by 10.6% this year on a price return basis while Mortgage REITs have slipped 7.5%. This compares with the 11.6% decline on the S&P 500 and the 7.6% decline on the S&P Mid-Cap 400. Dragged on the downside by the cell tower, mall, and data center sectors, 16-of-19 REIT sectors are now in negative territory for the year. At 2.00%, the 10-year Treasury yield has climbed 49 basis points since the start of the year and is 148 basis points above its all-time closing low of 0.52% in August 2020, but still 125 basis points below its 2018 peak of 3.25%.
Economic Calendar In The Week Ahead
The jam-packed week of economic data in the week ahead kicks off on Tuesday with the Producer Price Index for February, which is expected to show the first double-digit rate of producer cost inflation in history. On Wednesday, we’ll see Retail Sales data which is expected to show an uptick in February, buoyed by rising prices. The busy slate of housing data kicks off on Wednesday with the Homebuilder Sentiment. On Thursday, we’ll see Housing Starts and Building Permits and on Friday we’ll see Existing Home Sales data which are each expected to show steady strength behind the housing industry despite the jump in mortgage rates. The most closely-watched event of the week, however, comes on Wednesday with the Federal Reserve’s FOMC Meeting in which the committee is widely expected to announce a 25 basis point rate hike, but investors will be parsing the Fed’s comments to evaluate the updated pace of tightening.
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.