Rents Soaring • REIT Earnings • Job Losses

Summary

• U.S. equity markets gained for the fourth-straight day as strong corporate earnings reports lifted investor optimism while a weak ADP employment report eased upward pressure on interest rates.
• Back within about 4% of record-highs after dipping into correction territory last week, the S&P 500 advanced 1.0% today while the Mid-Cap 400 finished flat and the Small-Cap slipped 0.5%.
• Real estate equities were among the leaders today ahead of a busy afternoon of earnings results. The Equity REIT Index gained 1.3% today with 16-of-19 property sectors in positive territory.
• Equity Residential (EQR) rallied more than 4% after reporting solid Q4 results and providing very strong guidance for 2022 which calls for 12% same-store NOI growth and 15% FFO growth as rental rates continue to soar by double-digit rates.
• DR Horton (DHI) gained 1.5% after reporting strong results and boosting its 2022 full-year outlook. DHI reported year-over-year revenue growth of more than 20% - driven by a 17% increase in deliveries - and now sees 26% revenue growth for 2022.

Income Builder Daily Recap

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U.S. equity markets gained for the fourth-straight day as strong corporate earnings reports - today from Google and DR Horton - lifted investor optimism while a weak ADP employment report eased pressure on interest rates. Back within about 4% of record-highs after briefly dipping into correction territory last week, the S&P 500 advanced another 1.0% today while the Mid-Cap 400 finished flat and the Small-Cap 600 slipped 0.5%. Real estate equities were among the leaders today ahead of a busy afternoon of earnings results. The Equity REIT Index gained 1.3% today with 16-of-19 property sectors in positive territory while the Mortgage REIT Index declined 1.2%.

Ten of the eleven GICS equity sectors were higher on the day, led to the upside by the Real Estate (XLRE) and Communications (XLC) sectors following as Google parent Alphabet (GOOG) soared more than 7% on strong earnings. The 10-Year Treasury Yield retreated back below the 1.80% level after ADP Employment data showed a job loss of 301k in January as investors speculate that softening jobs data could slow the outlook for Fed rate hikes. Homebuilders and the broader Hoya Capital Housing Index were among the leaders today following strong reports from DR Horton (DHI) and Equity Residential (EQR) yesterday afternoon, indicating that the housing industry remains a source of economic strength early in 2022.

Equity REIT Daily Recap

Apartments: Equity Residential (EQR) rallied more than 4% today after reporting solid Q4 results yesterday afternoon and provided very strong guidance for 2022 which calls for 12% same-store NOI growth and 15% FFO growth as rental rates continue to soar by double-digit rates across essentially all rental segments and all major markets. EQR – which owns a coastal-heavy portfolio and as a result lagged its peers in rent growth and NOI metrics in 2020 and 2021 - reported accelerating rent growth with blended rent spreads of 10.7% in Q4 and 12.7% in January. We'll hear results this afternoon from Mid-America Apartments (MAA), Essex Properties (ESS), and AvalonBay (AVB).

Homebuilders: Sticking in the housing sector, DR Horton (DHI) gained 1.5% after reporting solid results and boosting its 2022 full-year outlook. DHI reported year-over-year revenue growth of more than 20%, driven by a 17% increase in deliveries. The pace of new orders has accelerated in early 2022 as DHI recorded net sales growth of 5% on a unit basis and 29% on a value basis as the company continues to see price appreciation in the 20% range. Consistent with results across the homebuilder sector, margins have been particularly impressive as builders have more-than-offset increased costs through higher sales values. M/I Homes (MHO) was flat today after reporting in-line results this morning and we'll hear results this afternoon from Century Communities (CCS).

Last week, we published REIT Earnings Preview: Dividend Hikes And 2022 Outlook. Real estate earnings season kicks off this week, and REITs enter fourth-quarter earnings season at an interesting crossroads, having been the best-performing asset class of 2021, but also one of the weakest through the first three weeks of 2022. REIT property-level fundamentals remain on an upward trajectory and we expect another strong quarter from residential REITs, in particular, as recent data indicates that rents continue to soar by double-digit rates. In addition to the aforementioned earnings reports, we'll also hear results this afternoon from Brandywine (BDN) and Omega Healthcare (OHI).

Billboard: Today, we published Billboard REITs: Under-The-Radar Inflation Hedge. Billboard REITs own a commanding share of the nation's 500,000 outdoor advertising displays - a surprisingly resilient business with strong inflation-hedging attributes. Unlike other increasingly-cluttered digital formats, there's "only one channel" on the highway. These REITs are well-positioned to capture the steadily rising share of marketing spending towards Out-of-Home ("OOH") advertising displays. We discuss our updated outlook and how we're allocating to the sector in our exclusive report linked here.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, residential slipped 0.9% today while commercial mREITs ended higher by 0.2%. iStar (STAR) surged more than 12% after it agreed to sell a portfolio of net lease assets for $3.07B to Carlyle Group. iStar estimates the transaction will net $1.1B of cash proceeds, after repaying all associated mortgage debt and full repayment of its secured term loan. We'll hear results tomorrow morning from Dynex Capital (DX) and tomorrow afternoon from PennyMac Mortgage (PMT). Last Friday, we published Mortgage REITs: High Yield Opportunities & Risks which discussed our updated sector outlook.

Economic Data This Week

Employment data highlights the busy economic calendar in the week ahead, headlined by ADP Employment data on Wednesday, Jobless Claims on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of 200k in January following the second-straight month of weaker-than-expected employment growth of 199k in December and for the unemployment rate to remain at 3.9%. We also saw Construction Spending and JOLTs Job Openings data on Tuesday, and we'll see a flurry of Purchasing Managers' Index ("PMI") data throughout the week.

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Disclosure: Hoya Capital Real Estate advises two Exchange-Traded Funds listed on the NYSE. In addition to any long positions listed below, Hoya Capital is long all components in the Hoya Capital Housing 100 Index and in the Hoya Capital High Dividend Yield Index. Index definitions and a complete list of holdings are available on our website.

Additional Disclosure: It is not possible to invest directly in an index. Index performance cited in this commentary does not reflect the performance of any fund or other account managed or serviced by Hoya Capital Real Estate. Data quoted represents past performance, which is no guarantee of future results. Information presented is believed to be factual and up-to-date, but we do not guarantee its accuracy.