• U.S. equity markets declined Tuesday as traders tracked efforts to end a standoff over an extension of the debt ceiling and took positions ahead of a critical CPI inflation report.

• Following fractional gains on Monday, the S&P 500 slipped 0.4% today, while the Mid-Cap 400 and the Small-Cap 600 posted similar declines. The Dow declined 57 points.

• Real estate equities finished mostly-lower today amid the final stretch of REIT earnings season. The Equity REIT Index declined 0.4% today, with 7-of-18 property sectors in positive territory.

• Innovative Industrial (IIPR) - the largest of five cannabis REITs - rallied 3% after reporting solid results, noting that its rent collection rate improved to 98% in Q1 - up from 94% in Q4 - with no additional tenants named as non-payers.

• West Coast-focused office REIT Hudson Pacific (HPP) dipped another 7% after it reported weak results and reduced its dividend by 50%, becoming the seventh office REIT and 15th overall to reduce its dividend this year. San Francisco remains the hardest-hit major market by the post-pandemic WFH era.

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Income Builder Daily Recap

U.S. equity markets declined Tuesday as traders tracked efforts to end a standoff over an extension of the U.S. debt ceiling and took positions ahead of a critical CPI inflation report on Wednesday morning. Erasing Monday's fractional gains, the S&P 500 slipped 0.4% today, while the Mid-Cap 400 and the Small-Cap 600 posted similar declines. The Dow declined 57 points. Benchmark interest rates were little changed today, with the 2-Year Treasury Yield climbing a couple of basis points to 4.03% while the 10-Year Treasury Yield was unchanged at 3.52%. Real estate equities finished mostly-lower today amid the final stretch of REIT earnings season. The Equity REIT Index declined 0.4% today with 7-of-18 property sectors in positive territory, while the Mortgage REIT Index slipped 1.4%. Homebuilders advanced following solid earnings results from building supplier Trex (TREX).

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Cannabis: Innovative Industrial (IIPR) - the largest of five cannabis REITs - rallied 3% after reporting solid results, noting that its rent collection rate improved to 98% in Q1 - up from 94% in Q4 - with no additional tenants named as non-payers. Cannabis REITs have been under pressure over the past year as their cultivator operators have been smoked by plunging wholesale cannabis prices, tightening credit availability, and setbacks on federal legalization. The improved collection rate in Q1 was driven primarily by applying security deposits on leases of Green Peak, Parallel, and Holistic and through the sale of its properties leased to Vertical. The remaining 2% of uncollected rents was comprised of approximately $1.1M from Parallel and Green Peak and $470k for rent prior to the sale of its Vertical properties. Chicago Atlantic (REFI) finished roughly flat after reporting in-line results this morning and affirming its full-year outlook. REFI reported distributable EPS off $0.60/share - covering its $0.47 dividend - and noting that its Book Value Per Share rose about 1% in Q1 to $15.04. We'll hear results tomorrow from New Lake Capital (OTCQX:NLCP) and AFC Gamma (AFCG).

Farmland: Sticking in the agriculture space, Gladstone Land (LAND) dipped 2% today after reporting mixed results, noting that its tenant rent collection issues have persisted amid headwinds from lower crop prices and the impacts of flooding in California. LAND reported rent collection issues from 3 of its 90 tenants - one of which was evicted - while the other two are late in their rent payments. One of the hottest inflation-hedges, farmland REITs have been slammed over the past six months amid a substantial pull-back in commodities prices from their peaks last May. The Bloomberg Grains Index is now lower by about 40% from last year and is now slightly below the average from 2015-2020. Earlier this earnings season, Farmland Partners (FPI) reported mixed results, noting that it still expects its FFO to decline 30% this year driven by a "triple-whammy" of headwinds: lower crop yield due to drought conditions, low crop price due to normalization effects after a sharp spike early in the Ukraine-Russia war (with particularly sharp price declines on specialty crops), and significantly higher interest rate expense due to FPI's elevated level of variable rate debt exposure.

Healthcare: Senior housing REIT Ventas (VTR) finished lower by 1% after reporting in-line results and maintaining its full-year outlook calling for FFO growth of 7.8%. Despite occupancy rates that remain about 10 percentage points below pre-pandemic norms, senior housing operators have wielded significant pricing power in recent quarters as rental rates "catch up" with rents of comparable non-age-restricted multifamily units. VTR reported that its Revenue Per Occupied Room ("RevPOR") increased by nearly 7% in Q1 - its strongest in a decade. Importantly, labor expenses moderated as well following a period of crisis-level staffing issues in 2022. VTR noted that the more-costly third-party contract labor component has been reduced by 59% year-over-year.  VTR affirmed its same-store NOI outlook for its Senior Housing Operating portfolio ("SHOP") of 15% to 21% NOI growth, driven by "a significant occupancy ramp throughout the year and muted new supply." We'll hear results this afternoon from National Health Investors (NHI).

Office: West Coast-focused office REIT Hudson Pacific (HPP) dipped another 7% after it reported weak results and reduced its dividend by 50%, becoming the seventh office REIT and 15th overall to reduce its dividend this year. HPP noted that it signed 344k SF of space in Q1 - down about 30% from a year earlier - at rental rates that were 4.9% below prior rates. HPP - which owns a portfolio consisting primarily of traditional office properties in San Francisco and Los Angeles, markets that were among the strongest before the pandemic driven by robust tech hiring - withdrew its full-year outlook, citing the impact of the Hollywood writer's strike, which impacts its studio segment, which represents about 10% of its portfolio. Data from Kastle Systems - which tracks office utilization rates - shows that San Francisco remains the hardest-hit market by the pandemic-driven WFH era. At the same time, many Sunbelt and secondary markets are seeing mid-week utilization rates at around 75% of pre-pandemic levels, San Francisco has yet to crack 50%. This afternoon, we'll hear results from a pair of office REITs: JBG Smith (JBGS) and Orion Office (ONL).

Today we published Winners of REIT Earnings Season, which is Part 1 of our Earnings Recap report. There's more to commercial real estate than office. Obscured by continued office sector pain, REITs delivered surprisingly strong first-quarter results. Of the 83 equity REITs that provide full-year Funds from Operations ("FFO") guidance, 37 (44%) raised their full-year earnings outlook, while 5 (6%) lowered guidance. Surprisingly buoyant rent growth - particularly across the residential, industrial, hospitality, technology, and retail sectors - was the prevailing theme of these upward revisions. Tenant rent collection improved for healthcare and cannabis REITs. Expense pressures abated a bit for some sub-sectors - notably in the labor-heavy cold storage and full-service hospitality - but were otherwise "status quo" for most other sectors. We've seen 5 REITs announce dividend cuts while 5 REITs raised their dividends. The final handful of REITs reports over the next 24 hours, including results this afternoon from manufactured housing REIT UMH Properties (UMH) and tomorrow morning from single-family rental REIT Tricon (TCN), and net lease REITs Necessity Retail (GNL) and Global Net Lease (GNL).

Additional Headlines from The Daily REITBeat on Income Builder

• Moodyʼs upgraded all the ratings for AMH, including the senior unsecured rating to “Baa2” from “Baa3” for its operating subsidiary American Homes 4 Rent, L.P. and revised its outlook to stable from positive

• BA/ML reinstated EXR and PSA with Buy rating

• BA/ML downgraded NSA to Underperform from Neutral

Mortgage REIT Daily Recap

Mortgage REITs also finished lower today, with both the residential and commercial mREIT benchmarks declining by roughly 1%. Ellington Financial (EFC) gained 0.1% after it noted that its Book Value Per Share ("BVPS") increased 0.3% in Q1 and reported distributable EPS of $0.45/share - covering its $0.45/share dividend. Cherry Hill (CHMI) dipped 6% after it reported that its BVPS dipped nearly 9% in Q1 to $5.52 - the worst decline in the mREIT sector - and commented that it expects to reduce its dividend to "a yield of 13% to 15% of our current book value." Using its end-of-quarter book value, this guidance would imply only a slight reduction to $0.25/share from its current rate of $0.27/share. Ready Capital (RC) declined 3% after reporting distributable EPS of $0.31/share - shy of its $0.40/share dividend - but noted that its BVPS was roughy flat in Q1 at $15.07. We'll see results this afternoon from Broadmark (BRMK), Granite Point (GPMT), and Invesco (IVR). 

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