Softish Landing • Amazon Cellular • REITs Lead Rally
U.S. equity markets rallied Friday- lifting the benchmarks to 2% weekly gains- after the critical nonfarm payrolls report showed stronger-than-expected job growth in May combined with a cooldown in wage-growth.
Lifting its weekly gains to nearly 2%, the S&P 500 finished higher by 1.5% today, while the Mid-Cap 400 and the Small-Cap 600 each posted gains of over 3%. The Dow rallied 701 points.
The Dow rallied 701 points. Real estate equities were among the leaders today, led by many of the most beaten-down segments including office and retail. The Equity REIT Index advanced 2.4%.
The trio of cell tower REITs all advanced about 2% today on reports that e-commerce giant Amazon (AMZN) has been in talks with wireless carriers about offering low-cost or free nationwide mobile phone service to its Prime subscribers.
The critical BLS nonfarm payrolls report this morning showed that the U.S. economy added 339k jobs in May - well above expectations of 180k - marking the 29th straight month of positive job growth.
Income Builder Daily Recap
U.S. equity markets rallied Friday - lifting the benchmarks to strong weekly gains - after the critical nonfarm payrolls report showed stronger-than-expected job growth in May combined with a cooldown in wage growth. Lifting its weekly gain to nearly 2%, the S&P 500 finished higher by 1.5% today while the Mid-Cap 400 and the Small-Cap 600 each posted gains of over 3%. The Dow rallied 701 points. Real estate equities were among the leaders today, led by many of the most beaten-down segments including office and retail. The Equity REIT Index advanced 2.4% today with all 18 property sectors in positive territory while the Mortgage REIT Index rallied over 3%. Homebuilders and the broader Hoya Capital Housing Index were also upside standouts today as payrolls data provided encouraging evidence of a 'soft' economic landing.
The critical BLS nonfarm payrolls report this morning showed that the U.S. economy added 339k jobs in May - well above expectations of 180k - marking the 29th straight month of positive job growth. Beneath the impressive headline print, however, there was clear evidence of 'loosening' in labor market conditions as wages rose at a slower-than-expected pace during the month while the unemployment rate rose to its highest level since 2022. Average hourly earnings ("AHE"), a key inflation indicator, rose 0.3% in May - below the 0.4% increase expected - which pulled the annual increase down to 4.3%. Earlier in the week, ADP Research reported that private payrolls rose 278k, which was also well above the median estimate of 170k. The 'Goldilocks' report did little to affect the swaps-implied likelihood of roughly 75% that the Fed will pause in its June meeting, but did reduce the likelihood of rate cuts later this year. The 2-Year Treasury Yield gained 18 basis points to 4.51%, while the 10-Year Yield added 8 basis points to 3.69%.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Cell Tower: The trio of cell tower REITs - American Tower (AMT), Crown Castle (CCI), and SBA Communications (SBAC) - all traded higher by about 2% today on reports that e-commerce giant Amazon (AMZN) has been in talks with wireless carriers about offering low-cost or free nationwide mobile phone service to its Prime subscribers. The company is reportedly negotiating with Verizon (VZ), T-Mobile (TMUS), and Dish Network (DISH) to get the lowest possible wholesale prices. The deal would reportedly allow AMZN to offer Prime members wireless plans for $10 a month or less. DISH surged on the report while the three major carriers posted sizable declines today. In our Cell Tower REIT report, we've discussed the possibility that DISH could become a legitimate competitor - and fourth major viable tenant - if it partners with one of the major technology firms, which have expressed on-and-off interest in entering the internet provider business over the past half-decade.
Healthcare: Healthcare Realty (HR) - which we own in the REIT Focused Income Portfolio - rallied more than 3% today after it announced a new $500M stock buyback program of its common stock. The Company does not intend to use debt to fund the share repurchase program. Elsewhere in the healthcare space, CareTrust REIT (CTRE) advanced 2% after it announced that it has acquired a 105-unit, two-facility memory care portfolio with facilities located in Ohio and Michigan. The facilities will be managed by Ridgeline Management, which signed a new 15-year master lease with CareTrust that includes two, 5-year renewal options and annual CPI-based rent increases. CareTrust’s initial investment in the facilities was $21.1 million. The deal was funded using proceeds from the company’s $600 million unsecured revolving credit facility and provides for initial annual base rent of $1.79M.
Hotel: Service Properties Trust (SVC) rallied more than 5% today after it announced that it purchased the 250-room Nautilus Hotel located in Miami Beach, Florida, for $165.4M, or around $661.6K per key. The hotel will initially be branded as the Nautilus Sonesta Miami Beach, and undergo a $25M repositioning starting in the Summer of 2024 with plans to reopen in early 2025 under Sonesta’s lifestyle brand, The James. SVC commented that the acquisition "provides SVC with an important entry into the South Beach market and adds another high-end destination resort hotel to our portfolio," said Todd Hargreaves, SVC's president and chief investment officer. Last week, we published Hotel REITs: The Pandemic Is Over, Now What? Despite lingering recession concerns, hotel REITs are pacing for a second-straight year of outperformance after punishing early-pandemic declines, buoyed by steady post-pandemic operating improvement and the long-awaited return of dividends. The final pandemic-era travel restrictions were lifted last week with the ending of the vaccine mandate for foreign arrivals. International travel demand should provide a healthy tailwind over the coming quarters. Domestic travel recovered to 100% of pre-pandemic levels in early 2023 but has plateaued since February. Business and group demand has marginally improved, offsetting some moderation in leisure demand.
Yesterday we published State of REITs: Distress & Opportunity. Whether fundamentally justified or not, commercial and residential real estate markets continue to bear the brunt of the Federal Reserve's historically swift monetary tightening cycle. Commercial real estate, in particular, has been the boogeyman that bank executives have blamed for unrelated distress. While there are pockets of distress, actual default rates remain historically low. The pockets of distress are almost entirely debt-driven, with the notable exception of coastal urban office properties. Nearly every property sector reported "same-store" property-level income above pre-pandemic levels. Property-level fundamentals are fine, but some balance sheets are not. Many real estate portfolios - particularly private equity funds and non-traded REITs - were not prepared for anything besides a near-zero-rate environment. With commercial property values now 15-20% below 2022 highs, and with interest rates doubling from last year, the tide is just beginning to recede for many highly-levered portfolios or those lacking access to capital.
Mortgage REIT Daily Recap
Mortgage REITs continued their very strong week, with residential mREITs advancing 2.6% - and more than 7% on the week - while commercial mREITs gained 3.5% today to lift their weekly gains to nearly 5%. On an otherwise slow day of newsflow, several office-heavy lenders were among the leaders today - and for the week - including TPG Real Estate (TRTX), Granite Point (GPMT), and Ladder Capital (LADR). Residential lender Arbor Realty (ABR) - which we own in the Focused Income Portfolio - rallied nearly 5% after Wedbush analyst Jay McCanless initiated coverage with a buy rating, citing its stable earnings stream and attractive dividend yield which is "well-supported by both GAAP EPS and earnings available for distribution."
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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