Retail REIT M&A • Stocks Rebound • Housing Shortage
U.S. equity markets climbed to a nine-month high Thursday as investors weighed signs of progress on debt-ceiling negotiations and solid economic data against a continued drumbeat of hawkish Fed commentary.
Closing at its highest-level since last August, the S&P 500 advanced 0.9% while the tech-heavy Nasdaq 100 rallied nearly 2% to close at fresh 52-week highs.
Real estate equities were laggards today, however, pressured by a fourth-straight day of rising benchmark interest rates. The Equity REIT Index declined 0.5% today, with 13-of-18 property sectors in negative-territory.
Retail REIT M&A: Regency Centers (REG) - the second largest strip center REIT - announced a $1.4B all-stock deal to acquire Urstadt Biddle Properties (UBP) at $20.40/share, a roughly 33% premium to UBP's last closing price.
You can't buy what's not for sale. Existing Home Sales data this morning showed that sales of previously-owned homes declined slightly in April from the prior month, but historically low inventory levels were the primary culprit behind the weakness.
Income Builder Daily Recap
U.S. equity markets climbed to a nine-month high Thursday as investors weighed signs of progress on debt-ceiling negotiations and solid economic data against a continued drumbeat of hawkish central bank commentary. Closing at its highest-level since last August, the S&P 500 advanced 0.9% while the tech-heavy Nasdaq 100 rallied nearly 2% to close at fresh 52-week highs. The Dow gained 115 points. Real estate equities were laggards today, however, pressured by a fourth-straight day of rising benchmark interest rates. The Equity REIT Index declined 0.5% today, with 13-of-18 property sectors in negative territory, but the Mortgage REIT Index advanced 1.1%. Homebuilders and the broader Housing Index continued their strong week on data showing that housing inventory levels remain near historic lows.
Benchmark interest rates ticked higher for a fourth-straight session, lifted today by comments from Dallas Fed President Logan, who commented that "we aren't there yet" referring to data that would "show that it is appropriate to skip a meeting." Swaps markets now imply a 40% chance of a June hike, up from less than 1% a week ago. The policy-sensitive 2-Year Treasury Yield jumped another 11 basis points to 4.28% today - up from 4.00% at the end of last week - while the 10-Year Yield rose another 7 basis points to 3.65% - up from 3.47% at the end of last week. Technology (XLK) stocks led the way today among the eleven GICS sectors, while defensive and yield-sensitive segments were laggards including Utilities (XLU) and Real Estate (XLP).
You can't buy what's not for sale. Existing Home Sales data this morning showed that sales of previously-owned homes declined slightly in April from the prior month, but historically low inventory levels were the primary culprit behind the weakness. Despite headwinds on demand resulting from elevated mortgage rates, potential homebuyers are facing an increasingly competitive market, with properties selling in an average of 22 days in April - down from 29 days in March. Nearly three-quarters of homes were on the market for less than a month. There was good news for homebuyers, however, as home prices declined 1.7% in April - the steepest price decline in more than a decade - following double-digit annual gains in home prices in 2021 and 2022.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Strip Center: Regency Centers (REG) - the second largest strip center REIT - announced a $1.4B all-stock deal to acquire Urstadt Biddle Properties (UBP) at $20.40/share, a roughly 33% premium to UBP's last closing price. Urstadt Biddle is a small-cap grocery-focused REIT that owns 77 retail properties concentrated around suburban New York City - of which roughly 85% are grocery-anchored - with the highest average base rent among the pure-play strip center REITs. The combined company - which will have a pro forma equity market capitalization of roughly $11 billion and a total enterprise value of $16 billion - will be comprised of 481 total properties encompassing 56 million square feet of gross leasable area. The transaction is expected to close late in the third quarter or early in the fourth quarter of 2023. The deal is expected to be immediately accretive to Core Operating Earnings. Regency has arguably the strongest balance sheet of any retail REIT with a Debt Ratio below 30 - (only UBP has a lower debt ratio at 25%) and trades with the highest P/FFO valuations in the sector - two attributes that put the company in the "drivers-seat" for opportunistic acquisitions.
Office: Yesterday, we published Office REITs: Just How Bad Is It? The new pariah of the commercial real estate sector, Office REITs have remained in free-fall in recent months, plunging another 30% this year following a plunge of nearly 40% last year. Just how bad is it? The surge in interest rates has turned a weak-but-manageable situation into a bleak one, but there is more nuance to the prevailing narrative would suggest. Debt service expenses have been the primary culprit behind the wave of recent loan defaults from private equity firms Brookfield, Blackstone, and Pimco, and the eight dividend cuts from office REITs. Nationally, property-level cash flows remain within 5% of pre-pandemic levels, but leasing activity has dipped by over 30%. Coastal tech-heavy markets remain at sub-50% daily utilization rates, but Sunbelt and secondary markets have recovered to over 75%. Much like the e-commerce impact on malls, supply/demand conditions will eventually normalize as properties get repurposed or outright abandoned. We remain bearish on coastal REITs with transit-heavy commutes - the new "Class C/D malls" - but we're calling a bottom for the handful of Sunbelt-focused REITs.
Additional Headlines from The Daily REITBeat on Income Builder
FCPT announced the acquisition of two newly constructed Fast Pace Health properties in Indiana and Louisiana for $4.9 million, priced at a cap rate "in range with previous transactions"
INDT announced that stockholders voted to approve the previously announced proposed acquisition by Centerbridge Partners, L.P. and GIC which is expected to close in the early summer of 2023
Exane BNP Paribas upgrades PLYM to Outperform from Neutral
Moody’s affirmed LXP's ratings including its “Baa2” senior unsecured debt and issuer ratings but revised its outlook to negative from stable
Mortgage REIT Daily Recap
Mortgage REITs continued their strong week today, buoyed by a rebound in hard-hit regional bank stocks - with residential mREITs advancing another 1.2% while commercial mREITs gained 0.9%. Office-focused lenders remained the upside standouts this week with particularly strong performance today from Brightpsire Capital (BRSP) and Ladder Capital (LADR). As noted in our Earnings Recap, residential mREITs reported an average decline in BVPS of 1.9% in Q1, while commercial mREITs reported a 1.8% average decline. Within the residential mREIT sector, credit-focused mREITs fared better in Q1 - reporting a slight increase in their Book Value Per Share ("BVPS") while agency-focused REITs reported an average decline in their BVPS of about 5% in Q1. Dividend coverage was stronger for commercial mREITs with about 75% of commercial mREITs covering their dividend with Q1 adjusted EPS while just 50% of residential mREITs covered their dividend.
Economic Data This Week
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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