REIT Earnings • Dividend Hikes • Cap Rates Rise

• U.S. equity markets finished lower Thursday - reiterating from early-session gains and closing near session lows - as hawkish comments from Fed officials and mixed corporate earnings results weighed on sentiment.
• Extending its weekly decline to roughly 1.5%, the S&P 500 slipped 0.9% while the Mid-Cap 400 and Small-Cap 600 pushed their weekly declines to nearly 3% and 4%, respectively.
• Real estate equities were also under pressure today as investors analyzed a busy slate of REIT earning results. Equity REITs declined 1.1% while Mortgage REITs dipped 3.1%.
• Apartment REIT AvalonBay (AVB) traded roughly flat today after hiking its quarterly dividend by 4% to $1.65/share - its first dividend increase since 2019. AVB forecasts rental revenue growth of 5.0% in 2023, driven primarily by renewal rent growth with strength from Northeast markets offsetting relative weakness in its California markets.
• Net Lease REIT National Retail (NNN) declined about 2% today after kicking-off net lease earnings season with an in-line report. Notably, NNN's acquisition cap rate of 6.6% in Q4 was only 10 basis points above its 6.5% cap rate in Q4 of 2021 during which time the 10-Year Treasury Yield increased by 230 basis points.

Income Builder Daily Recap

U.S. equity markets finished lower Thursday - reiterating from early-session gains and closing near session lows - as hawkish comments from Fed officials and mixed corporate earnings results weighed on sentiment. Extending its weekly decline to roughly 1.5%, the S&P 500 slipped 0.9% today while the Mid-Cap 400 and Small-Cap 600 pushed their weekly declines to 3% and 4%, respectively. The Dow slipped 249 points. Treasury yields resumed their climb after yesterday's pause with the 10-Year Treasury Yield climbing back to its highest levels since January 5th at 3.68%. Real estate equities were also under pressure today as investors analyzed a busy slate of REIT earning results. The Equity REIT Index declined 1.1% today with 17-of-18 property sectors in negative territory while the Mortgage REIT Index declined 3.1%.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Apartment: Coastal-focused apartment REIT AvalonBay (AVB) traded roughly flat today after hiking its quarterly dividend by 4% to $1.65/share - its first dividend increase since 2019 - and reporting decent results, noting that its full-year FFO rose 18.5% in 2022 - in-line with its prior guidance - and forecasts FFO growth of 5.3% for full-year 2023. AVB forecasts that its total rental revenue growth will rise 5.0% in 2023 at the midpoint of its range, driven primarily by renewal rent growth with strength from Northeast markets offsetting relative weakness in its California markets. Of note, AVB highlighted several value-creation programs including its "Avalon Connect" bulk internet offering - which generated $2.5M in annualized incremental NOI in Q4 - and its furnished housing program which generated $1M in incremental NOI. AVB also noted that it decreased its office headcount by 5% and its maintenance headcount by 4% driven by "digitalization and automation" efforts. We'll hear results from Apartment Income (AIRC) and Equity Residential (EQR) this afternoon.

Net Lease: National Retail (NNN) declined about 2% today after kicking-off net lease earnings season with an in-line report, noting that its full-year FFO rose 9.8% in 2022 - 40 basis points above its prior guidance - and forecasts FFO growth of 1.0% for full-year 2023. National Retail reported that it acquired $260M of properties in Q4 at an initial cash cap rate of 6.6%, which was only 10 basis points above its 6.5% cap rate in Q4 of 2021 during which time the 10-Year Treasury Yield increased by 230 basis points - a topic we discussed in Net Lease REITs: Calling The Fed's Bluff, which noted that net lease executives, investors, and asset owners have seemingly never bought into the idea of a "new normal" of sustained higher interest rates. During the quarter, NNN sold $16M in properties at a 5.9% cap rate. We'll hear results from Alpine Income (PINE) this afternoon and see results from WP Carey (WPC) on Friday morning.

Strip Centers: The relatively solid earnings season for shopping center REITs continued with a pair of decent reports from FRT and KIM showing a continued increase in occupancy rates and upward pressure on market rents. Federal Realty (FRT) was little changed after reporting decent results, noting that its full-year FFO rose 13.5% in 2022 - 50 basis points above the midpoint of its prior guidance - and forecasts FFO growth of 2.5% for full-year 2023. Leasing trends were strong in Q4 with cash rent spreads rising 10.0% - its strongest in nearly three years - while occupancy rates climbed another 20 basis points from last quarter to 94.5%. Kimco (KIM) declined after reporting mixed results, noting that its full-year FFO rose 14.5% in 2022 - in-line with its prior guidance - but forecasts an FFO decline of 1.9% for full-year 2023. Notably, Kimco achieved its highest year-over-year occupancy rate increase in 15 years alongside solid rent growth trends with blended cash leasing spreads of 8.7% - its strongest in nearly three years.

Industrial: A pair of industrial REITs traded lower today after delivering very strong fourth-quarter results but providing a relatively cautious outlook for 2023. First Industrial (FR) finished lower by 1% after reporting that its full-year FFO rose 18.5% in 2022 - 250 basis points above its prior guidance - but forecasted FFO growth of just 2.6% for full-year 2023. FR achieved stellar cash rental rate increases of 41.1% in Q4 and 26.7% for full-year 2022, which is the highest annual increase in company history. Rexford (REXR) declined 2.5% despite reporting similarly strong results, noting that its full-year FFO rose 19.5% in 2022 - 120 basis points above its prior guidance - and forecasts FFO growth of 7.1% for full-year 2023. Unlike FR, REXR saw a slight sequential deceleration in its leasing spreads with blended rent increases of 52.4% in Q4 following two straight quarters of record-high spreads above 60%.

Office: Hudson Pacific (HPP) declined about 2% despite reporting better-than-expected results, noting that its full-year FFO rose 1.5% in 2022 - in-line with its prior guidance - and forecasts that its FFO will decline by 6.4% for full-year 2023, which is a less-steep decline than the office sector-average of 7.5%. Leasing demand was surprisingly solid with total volume of 517k SF - its third-highest-volume quarter since 2019 - with cash rent spreads and occupancy rates each essentially flat for the quarter - a decent report considering HPP's deeply discounted valuations. Piedmont (PDM) traded lower by about 3% today after reporting mixed results, noting that its full-year FFO rose 1.8% in 2022 - in-line with its prior guidance - but forecasts that its FFO will decline by 7.5% for full-year 2023, in-line with the office sector average. Equity Commonwealth (EQC) traded roughly flat after reporting in-line results. We'll hear results from Cousins Properties (CUZ) and Corporate Office (OFC) after the close today.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs continued their roughly week today with residential mREITs and commercial mREITs each slipping 2.3%. Annaly Capital (NLY) - the largest mortgage REIT - dipped more than 5% today despite reporting better-than-expected results, noting that its Book Value Per Share ("BVPS") increased 4.3% to $20.79 and EPS was slightly above estimates but warned that it expects to reduce its quarterly dividend by about 25% in Q1 in anticipation of "some further pressure on Earnings Available For Distribution going forward." Two Harbors (TWO) declined about 2.5% after it reported that its BVPS increased 7.9% to $17.72. Apollo Commerical (ARI) dipped nearly 7% after it reported that its BVPS declined 2.4% to $15.54. We'll hear results from Ladder Capital (LADR) and Redwood Trust (RWT) after the close today and from Ellington Financial (EFC) on Friday morning.

Economic Data This Week

On Friday, we'll get our first look at Michigan Consumer Sentiment data for February which includes a closely-watched consumer inflation expectations survey. Consumer Sentiment - which has tracked closely with consumer gasoline prices over the past two years - has rebounded in recent months since hitting its lowest-level on record in mid-2022. We'll publish a full analysis and commentary of this week's developments in the real estate industry, as well as an analysis of the busy week of economic data in our Real Estate Weekly Outlook this weekend.

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