REIT Earnings • Fed Decides • Builders Rebound

• U.S. equity markets rebounded Tuesday- notching strong gains in the first month of 2023- as investors parsed a busy slate of corporate earnings results and economic data showing cooling inflationary pressures.
• Lifting its cumulative monthly gains to over 6%, the S&P 500 rallied 1.5% today while the tech-heavy Nasdaq 100 gained 1.6%. The Dow added 369 points.
• Real estate equities were among the leaders today after strong results from a handful of REITs and homebuilders. Equity REITs gained 2.1% while Homebuilders rallied nearly 5%.
• Equity Lifestyle (ELS) surged 6% after reporting strong results with full-year guidance calling for FFO growth of 6.0% - an acceleration from the 5.9% growth it achieved in 2022 - while boosting its dividend by 9.1% to $0.15/share.
• Lab space owner Alexandria (ARE) advanced nearly 3% after it reported very strong results on Monday afternoon, projecting 2023 full-year FFO growth of 6.4% while recording blended leasing spreads of 19.6% in Q4.

Income Builder Daily Recap

U.S. equity markets rebounded Tuesday - notching strong gains in the first month of 2023 - as investors parsed a busy slate of corporate earnings results and economic data showing additional evidence of cooling inflationary pressures. Lifting its cumulative monthly gains to over 6%, the S&P 500 rallied 1.5% today while the tech-heavy Nasdaq 100 gained 1.6%. The Dow added 369 points after snapping a six-session winning streak on Monday. Real estate equities were among the leaders today after strong results from a handful of REITs and homebuilders. The Equity REIT Index advanced 2.1% today with all 18 property sectors in positive territory while the Mortgage REIT Index gained 2.3%. Homebuilders and the broader Hoya Capital Housing Index led the gains today following solid results from a handful of builders and building suppliers including Pulte Group and NVR.

Ahead of the Fed rate decision tomorrow afternoon, benchmark interest rates ticked slightly lower today with the 10-Year Treasury Yield closing at 3.53% - down 2 basis points from its prior close. The closely-watched Employment Cost Index this morning showed that labor costs rose at a slower-than-expected pace in late 2022 added to recent evidence of moderating inflation. Crude Oil futures rebounded 1.8% today while Natural Gas prices rebounded slightly from their lowest levels in nearly two years yesterday. All eleven GICS equity sectors finished higher today with Consumer Discretionary (XLY) and Materials (XLB) stocks leading on the upside. Among the mega-cap names to report earnings results, General Motors (GM) and Exxon (XOM) each gained after reporting earnings while Caterpillar (CAT) and McDonald's (MCD) were under pressure.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Today we published our REIT Earnings Preview: The New Normal. Real estate earnings season kicks into gear this week, and over the next month, we'll hear results from 175 equity REITs, 40 mortgage REITs, and dozens of housing industry companies. REITs enter earnings season with some momentum amid the recent moderation in interest rates and hopes of a 'softish' economic landing following a punishing year of stock price performance. How REITs are responding to this higher rate environment – both on the acquisitions and the financing side - will be closely-watched. REITs hunkered-down in 2022, but opportunities are becoming more plentiful and we see the non-traded REIT segment as one area that may be "ripe for the picking" if investor redemptions continue. Full-year FFO guidance will be the most closely watched metric, especially in the residential, retail, and office sectors given the wide range of expectations.

Manufactured Housing: Equity Lifestyle (ELS) surged 6% after reporting strong results with full-year guidance calling for FFO growth of 6.0% - an acceleration from the 5.9% growth it achieved in 2022 - while boosting its dividend by 9.1% to $0.15/share. Notably, ELS upwardly revised its guidance for MH revenue growth which is now expected to rise 6.5% this year, up from the prior outlook of 6.4%. Per commentary from Income Builder contributor David Auerbach, positive highlights from the quarter included strong revenue line growth at just over 5%, a good operating expense line number which only grew 2.1% driven by a reduction in repairs/maintenance expense and this drove a 7% increase in operating profits. ELS' balance sheet remains one of the most conservative in the industry with an average 11 years to maturity on its debt and no meaningful amount of debt rolling over until 2026. Guidance was slightly above consensus with solid expectations coming from all three lines of business, manufactured housing, recreational vehicles and marinas.

Healthcare: Lab space owner Alexandria (ARE) advanced nearly 3% after it reported very strong results on Monday afternoon, projecting 2023 full-year FFO growth of 6.4% while recording blended leasing spreads of 19.6% in Q4 and 22.1% for full-year 2022 - its second-highest annual cash-basis rental rate growth in its history. Notably, after three-quarters of sequentially declining leasing volume following a record surge in late 2021, ARE reported an acceleration in leasing volume to 2.0M square feet - its fourth-best quarter on record - pushing back on concerns over softening demand from reduced biotech and pharmaceutical hiring. ARE projects that it will achieve cash rent spreads between 11-16% for full-year 2023 with an occupancy rate of 95.3% while achieving same-store NOI growth of 5.0% at the midpoint.

Additional Headlines from The Daily REITBeat on Income Builder

• S&P announced that Agree Realty (ADC) will move from the S&P SmallCap 600 to the S&P MidCap 400 prior to the open of trading on Monday, February 6th replacing STORE Capital (STOR).
• Invitation Homes (INVH) announced that Ernie Freedman will step down as Chief Financial Officer on June 1, 2023 at which time Jonathan Olsen, current Executive Vice President will become CFO. Freedman remains a consultant through March 31, 2024.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs resumed their strong start to the year with residential mREITs gaining 2.0% today while commercial mREITs rallied 2.3%. AGNC Investment (AGNC) - the second largest mREIT - advanced 3% today after it reported that its Book Value Per Share ("BVPS") jumped 8.4% in Q4 to $9.84/share and total economic return of 12.3% including the dividend. AGNC commented: "Agency MBS spreads tightened from historically wide levels, driving the meaningful improvement in our book value" and provided a favorable outlook for Agency MBS valuations, citing wider-than-average spreads, limited MBS supply, and reduced interest rate volatility.

Economic Data This Week

The main event of the jam-packed week of economic data comes on Wednesday with the FOMC Interest Rate Decision in which the Fed is widely expected to raise rates by 25 basis points to bring the Fed Funds rate to a 4.75% upper-bound. Notably, market pricing indicates expectations of just one additional 25 basis point hike in March - peaking at a 5.0% rate - with rate cuts beginning by the end of this year. Sandwiched around the Fed's decision is a critical slate of employment data headlined by JOLTS data and ADP Payrolls on Wednesday, Jobless Claims data on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists expect job growth of roughly 185k in January and for the unemployment rate to tick higher to 3.6%. Average hourly earnings - a closely-watched metric in recent months - is expected to slow to a 4.3% year-over-year rate from 4.6%.

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