Fed Hikes • Stocks Drop • REIT Earnings
U.S. equity markets reversed early-session gains Wednesday after the Federal Reserve hiked interest rates by another 25 basis points and signaled a surprising indifference to recent banking industry turmoil.
Following declines of more than 1% on Tuesday, the S&P 500 declined by another 0.7% today - finishing near session-lows. The Dow declined 270 points.
Real estate equities were mixed amid the busiest 48 hour-stretch of REIT earnings season. The Equity REIT Index declined 0.4% today, with 12-of-18 property sectors in negative territory.
Mall REIT Simon Properties (SPG) dipped about 4% today despite reporting decent first-quarter results and hiking its dividend while also raising its full-year outlook. Questions over SPG's plan to spend $1.5B on redevelopment and expense headwinds offset strong leasing results.
Hotel REITs Apple Hospitality (APLE) and Xenia Hotels (XHR) each rallied about 3% after reporting strong first-quarter results. Skilled nursing REIT Omega Healthcare (OHI) rallied 10% after reporting improving health of tenant operators.
Income Builder Daily Recap
U.S. equity markets reversed early-session gains Wednesday after the Federal Reserve hiked interest rates by another 25 basis points and - through a unanimous decision that received "very strong across the board” - signaled a surprising indifference to recent banking industry turmoil and real-time inflation metrics showing muted inflationary pressures since mid-2022. Following declines of more than 1% on Tuesday, the S&P 500 finished lower by another 0.7% today - finishing near session lows - while the tech-heavy Nasdaq 100 declined 0.6%. The Dow declined 270 points. Real estate equities were mixed amid the busiest 48 hour-stretch of REIT earnings season. The Equity REIT Index declined 0.4% today, with 12-of-18 property sectors in negative territory, while the Mortgage REIT Index advanced 0.2%.
As expected, the Federal Reserve raised short-term interest rates for a 10th consecutive meeting, containing the most aggressive rate hike course since 1980. Despite the 25 basis point rate hike by the Federal Reserve to a 5.25% upper bound, the 2-Year Treasury Yield dipped 8 basis points to 3.90%, while the 10-Year Treasury Yield declined 4 basis points to 3.40%. All eleven GICS equity sectors finished lower on the session, with Energy (XLE) stocks extending their sharp weekly declines. Declining another 4% today to roughly $68 per barrel, the WTI Crude Oil benchmark is now lower by nearly 10% on the week and nearly 50% below its 52-week highs. Financial (XLF) stocks remained under pressure amid concern that a handful of at-risk regional lenders - notably PacWest (PACW) and Western Alliance (WAL) may be the casualty following the collapse of three major banks over the past month.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Mall: Simon Properties (SPG) dipped about 4% today despite reporting decent first-quarter results and hiking its dividend while also raising its full-year outlook. Questions over SPG's plan to spend $1.5B on redevelopment and expense headwinds offset strong leasing results. Becoming the 47th REIT to raise its dividend this year, SPG declared a $1.85/share dividend - an 8.8% year-over-year - and bringing its dividend closer to its $2.10/share level before the pandemic. SPG now expects its FFO to be flat with last year - an upward revision of about 40 basis points from last quarter - which would bring its FFO to within 2% full-year 2019. Total portfolio occupancy stood at 94.6% in Q1 - down 30 basis points sequentially but up 130 bps from a year earlier. While SPG no longer discloses leasing spreads, it noted that average base rents rose 3.1% from a year earlier, its strongest growth since Q1 2020. We'll hear results tomorrow morning from Macerich (MAC).
Hotels: Apple Hospitality (APLE) - which we own in the Focused Income Portfolio - rallied about 3% after reporting strong results and affirmed its full-year outlook calling for 5% growth in Revenue Per Available Room ("RevPAR"). APLE noted that its RevPAR was 6% above its comparable pre-pandemic level from Q1 2019 driven by a 9% relative increase in Average Daily Rates ("ADR"), offsetting a 2% drag in comparable occupancy rates. Xenia Hotels (XHR) - which we own in the Dividend Growth Portfolio - also rallied 3% today after reporting that its RevPAR was 5% above 2019-levels, driven by an 18% comparable increase in ADR, which offset a roughly 10% drag in comparable occupancy rates. XHR noted that "while leisure demand remains at historically high levels, we are continuing to see a shift to a more traditional mix of demand with business transient and group demand continuing to improve." We'll hear results this afternoon from Host (HST) and Summit Hotels (INN).
Healthcare: Skilled nursing REIT Omega Healthcare (OHI) rallied nearly 10% after reporting better-than-expected results highlighted by positive progress in operator lease restructurings. OHI noted that "the operating backdrop continues to improve, with occupancy increasing, the tight labor market moderating slightly, and federal and state reimbursement increases providing much needed support." OHI reiterated confidence in its current dividend as well, noting that "Barring additional unforeseen restructurings, this should result in both our dividend payout ratio and our leverage rapidly improving as the year progresses." Senior housing REIT Welltower (WELL) gained 1% after raising its full-year FFO outlook, the only healthcare REIT to raise its FFO guidance thus far this earnings season. Driven by a continued recovery in its senior housing operating ("SHOP") portfolio, WELL now expects FFO growth of 3.4% for full-year 2023, up from its prior outlook of 2.7%. We'll hear results this afternoon from Sabra Healthcare (SBRA) and Global Medical (GMRE), while Physicians Realty (DOC) reports tomorrow morning.
Storage: 'Status-quo' has been the theme of storage REIT earnings season with each of the four REITs reporting results thus far maintaining their full-year outlook. Extra Space (EXR) declined about 2% after it reiterated its expectations of 4.3% NOI growth and 0.1% FFO this year, while Life Storage (LSI) - which will be acquired by EXR in an all-stock deal expected to close in Q3 - declined by a similar amount after it maintained its guidance calling for NOI growth of 4.5% and FFO growth of 5.5%. LSI noted that it continues to lean heavily on sticky rental rate trends and no renewals to offset relatively weak pricing on new leases, reporting that these "street rates" on new leases are lower by 14% year-over-year - a bit softer than the -10% level in Q4 - but strengthened in April and into May. We'll hear results this afternoon from Public Storage (PSA).
Industrial: The impressive first-quarter earnings season for industrial REITs continued today with strong results from small-cap LXP Industrial (LXP), which rallied about 3% after noting that it achieved cash rent spreads of 40% and noted further progress stabilizing its relatively large development pipeline. LXP maintained its full-year outlook which calls for 1.5% FFO growth. The four major industrial REITs all raised their full-year outlook. After a rent growth moderating in late 2022 - which many expected to continue throughout this year - rent spreads have actually reaccelerated in early 2023, perhaps credited to a moderation in cost pressures for tenants in other areas of the supply chain, specifically freight costs, which are now as much as 90% lower than their peak in September 2021. Rent growth on new and renewed leases rose 40% from last year - climbing to a fresh record-high for the sector - while occupancy rates also increased from last quarter to new highs, showing that demand continues to substantially outpace available supply. We'll hear results this afternoon from Terreno (TRNO) and from Plymouth (PLYM) tomorrow morning.
Yesterday we published our Earnings Halftime Report. We noted that REIT earings results thus far have been better than the prevailing narrative would suggest. Of the 49 REITs that provide guidance, 23 (47%) raised their full-year earnings outlook while 5 (10%) lowered. Office and commercial mortgage REITs have been in focus given the stiff work-from-home headwinds and shaky dividend outlook. Vornado suspended its dividend, but results have otherwise been decent thus far. Apartment and Industrial REITs have accounted for nearly half of the guidance boosts thus far. Residential rent growth appears to have firmed in recent months after a rather sharp cooldown in late 2022 amid a broader Spring revival across the housing sector. Retail REITs have reported impressive leasing momentum thus far, while healthcare REITs' operator issues have remained status-quo. In addition to the aforementioned reports, we'll hear results this afternoon from four net lease REITs: Realty Income (O), Spirit Realty (SRC), Broadstone (BNL) and Gladstone Commercial (GOOD); data center REIT Equinix (EQIX), and office REIT Paramount Group (PGRE). Tomorrow morning we'll hear from specialty REITs Iron Mountain (IRM) and Lamar Advertising (LAMR).
Additional Headlines from The Daily REITBeat on Income Builder
TRNO announced that it sold an industrial property located in North Bergen, NJ on May 1, 2023 for a sale price of approximately $25.5 million
Mortgage REIT Daily Recap
Mortgage REITs rebounded slightly today after two days of stiff declines. Brightspire (BRSP) was among the better-performers after reporting adjusted EPS of $0.27/share - covering its $0.20/share dividend - and noted that its Book Value Per Share ("BVPS") declined 2.7% in Q1 to $11.74. TPG Real Estate (TRTX) dipped 16% after it reported adjusted EPS of $0.05 - short of its $0.24 dividend - and noted that six loans with a total balance of $550M are now in nonaccrual status, up from two loans totaling $190M last quarter. Claros Mortgage (CMTG) fell 4% after it reported adjusted EPS of $0.29 - falling shy of its $0.37/share dividend - and noted that its BVPS declined about 1% in Q1 to $17.96. We'll hear results this afternoon from New York Mortgage (NYMT), Franklin BSP (FBRT), and ACRES Realty (ACR).
Economic Data This Week
Employment data and the Federal Reserve's interest rate decision highlight a critical week of economic data in the week ahead. The busy slate of employment data is headlined by JOLTS report on Tuesday, ADP Payrolls data on Wednesday, Jobless Claims data on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of roughly 180k in April, which follows a solid month of March in which the economy added 236k jobs. The closely-watched Average Hourly Earnings series within the payrolls report - which is the first major inflation print for April - is expected to show a cooldown in wage growth in April to 4.2%. 'Good news is bad news' will likely be the theme of these reports as several Fed officials have pinned their decisions to pivot away from aggressive monetary tightening on a long-awaited cooldown in labor markets.
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