Bed Bath Be-Gone • REIT Earnings • Week Ahead
U.S. equity markets were little-changed Monday while benchmark interest rates drifted lower as traders took positions ahead of a jam-packed week of corporate earnings reports and economic data.
Following a tranquil week in which volatility benchmarks calmed to the lowest-levels since November 2021, the S&P 500 advanced 0.1% today, while the tech-heavy Nasdaq 100 declined 0.2%.
Real estate equities finished mostly-lower today ahead of earnings reports from nearly a third of the sector this week. The Equity REIT Index declined 0.4% today, while Mortgage REITs slipped 0.6%.
Strip Center REITs were under pressure today after the troubled retailer Bed Bath & Beyond - which comprises about 1% of the sector's rents - filed for Chapter 11 bankruptcy protection with plans to vacate its 500 stores.
Mortgage REIT Dynex Capital (DX) - which focuses on agency-backed residential MBS - finished lower by about 0.5% after reporting mixed results this morning but reiterating its commitment to its dividend.
Income Builder Daily Recap
U.S. equity markets were little-changed Monday while benchmark interest rates drifted lower as traders took positions ahead of a jam-packed week of corporate earnings reports and economic data. Following a tranquil week in which the equity market volatility benchmark calmed to the lowest levels since November 2021, the S&P 500 advanced 0.1% today, while the tech-heavy Nasdaq 100 declined 0.2%. Real estate equities finished mostly-lower today ahead of earnings results from nearly a third of the sector in the week ahead. The Equity REIT Index declined 0.4% today, with 13-of-18 property sectors in negative territory, while the Mortgage REIT Index declined 0.6%. Homebuilders were again a notable bright spot today, however, ahead of results this week from a half-dozen builders.
As noted in our Real Estate Weekly Outlook, nearly 80% of S&P 500 components have topped EPS estimates thus far as we approach the quarter-way point of earnings season - highlighted last week by solid results from several multinationals and regional banks along with the nation's largest homebuilder - with a prevailing theme of normalizing cost headwinds and stabilizing supply chains amid a broader cooling of inflationary pressures. The 2-Year Treasury Yield slipped 4 basis points to 4.12% today, while the 10-Year Treasury Yield declined 5 basis points to 3.52%. Six of the eleven GICS equity sectors finished higher on the session, with Energy (XLE) and Materials (XLB) stocks leading on the upside while Technology (XLK) stocks lagged.
The state of the U.S. housing market remains in focus early in the week across the busy slate of economic data. On Tuesday, we'll see home price data via the Case Shiller Home Price Index, which is expected to show an eighth consecutive month of declining home prices in February, with the 20-City composite expected to show that prices are now flat on a year-over-year basis and about 5% below recent peaks. We'll see some more-forward-looking data on Thursday with Pending Home Sales data, which is expected to show a third straight monthly increase in March following a stretch of thirteen straight monthly declines. The most important report of the week comes on Friday with the PCE Price Index - the Fed's preferred gauge of inflation - which is expected to show a continued moderation in price pressures. In the same report, we'll also be looking at Personal Income and Personal Spending data for March, a key read on the state of the U.S. consumer.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Today we published our REIT Earnings Preview on the Income Builder Marketplace. 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. The flat performance on the REIT Index this year hides some notably sharp bifurcations within the sector, with residential and industrial sectors posting notable outperformance, offset by weakness in office. Many well-capitalized REITs are equipped to "play offense" and take advantage of acquisition opportunities from weaker private players - but whether or not these typically-defensive REITs are ready to take a more aggressive tact remains a key focus. Most equity REITs still have a healthy buffer to protect current payout levels if macroeconomic conditions take a turn for the worse, but we'll be closely-monitoring dividend commentary in the office, mortgage, and healthcare REIT sectors. We'll hear results this afternoon from Alexandria Real Estate (ARE) and PotlatchDeltic (PCH).
Strip Center: Strip Center REITs were under pressure today after the troubled retailer Bed Bath & Beyond (BBBY) - which comprises about 1-2% of the sector's rents - filed for Chapter 11 bankruptcy protection with plans to vacate its 500 stores. Commentary last quarter indicated that most of these locations have a "waiting list" of retailers eyeing the space, but we'll be listening closely during earnings season to hear if any of these discussions have fizzled after the SVB collapse and subsequent credit crunch. The combination of near-zero new development and positive net absorption since early 2021 has driven strip center occupancy rates to record-highs in recent quarters and allowed these REITs to enjoy some long-awaited pricing power. We'll hear results from Site Centers (SITC) and Retail Opportunity (ROIC) on Tuesday.
Mortgage REIT Daily Recap
Mortgage REITs were mixed today as earnings season kicked-off, as residential mREITs slipped 0.2% while commercial mREITs declined 0.8%. Dynex Capital (DX) - which focuses on agency-backed residential MBS - finished lower by about 0.5% after reporting mixed results this morning. DX reported that its Book Value Per Share ("BVPS") declined by about 6% in Q1 to $13.80, noting that its portfolio was "positioned for spread tightening" and cited the combination of spread widening and interest rate volatility in the wake of the SVB collapse for the dip in BVPS. DX reiterated confidence in its dividend, commenting, "we pay an attractive and consistent monthly dividend that we believe is sustainable... we expect the hedge gains will be supportive of the dividends in 2023 and beyond even if net interest income and EAD decline due to higher financing costs." We'll hear results this afternoon from KKR Real Estate (KREF), AGNC Investment (AGNC), and Seven Hills (SEVN).
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