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  • Alex Pettee, CFA

Correction Deepens • Solid GDP Data • REIT Earnings

Summary

  • U.S. equity markets finished lower Thursday in another choppy session as earnings season has so far done little to ease investor jitters over inflation, Fed policy, and geopolitical concerns.

  • Seeing a fourth-straight session of volatile intra-day swings, the S&P 500 finished lower by 0.4% while the tech-heavy Nasdaq 100 declined nearly 1% and is now over 15% below its recent highs.

  • Real estate equities were also under pressure despite a solid slate of earnings reports as the Equity REIT Index finished lower by 1.7% with all 19 property sectors in negative-territory.

  • Logistics REIT Duke Realty (DRE) declined 2% despite reporting strong results after the close yesterday, highlighted by record-high leasing spreads of 40.8%.

  • Cell tower REIT Crown Castle (CCI) declined 3% after reporting in-line results yesterday afternoon. CCI reported robust FFO growth of 13.9% in 2021 but expects growth to cool to mid-single-digits in 2022.

Income Builder Daily Recap

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U.S. equity markets finished lower Thursday in another choppy session as earnings season has so far done little to ease investor jitters over inflation, Fed policy, and geopolitical concerns. Seeing a fourth-straight session of volatile intra-day swings, the S&P 500 finished lower by 0.5% while the tech-heavy Nasdaq 100 declined nearly 1% and is now more than 15% below its recent highs. The small-cap Russell 2000 dipped another 2.3% today and is now in "bear market" territory defined as a pull-back of more than 20%. Real estate equities were also under pressure despite a solid slate of earnings reports as the Equity REIT Index finished lower by 1.7% with all 19 property sectors in negative territory while the Mortgage REIT Index finished lower by 0.4%.

Despite the selling pressure, six of the eleven GICS equity sectors managed to finish in positive territory, led to the upside by the Energy (XLE) sector which rallied as oil prices remained near seven-year highs. Consumer Discretionary (XLY) stocks dragged on the downside as Tesla (TSLA) slid more than 11% following mixed earnings results. The 10-Year Treasury Yield retreated 5 basis points to close at 1.81% but volatility levels of both stocks and bonds remain near the highest levels in nearly two years with the VIX Index closing above 30 for the third-straight session.

Equity REIT Daily Recap

Industrial: Duke Realty (DRE) declined 2% despite reporting strong results after the close yesterday, highlighted by record-high leasing spreads of 40.8% on a net effective basis and 20.6% on a cash basis. DRE delivered full-year FFO growth of nearly 14% in 2021 and sees another 10% growth in 2022 at the midpoint of its initial guidance range which “reflects our expectation that core rental operations in 2022 will be similar to 2021, and that we will maintain our current high occupancy levels and continue to produce rent growth metrics similar to recent history based on our significant embedded mark-to-market on our portfolio.” Prologis (PLD) reported similarly strong results last week, indicating that relentless demand for logistics space has continued and logistics REITs continue to command significant pricing power.

Cell Tower: Crown Castle (CCI) finished off by about 3% after it reported results that were roughly in line with estimates. Q4 metrics were slightly better-than-expected as CCI delivered full-year revenue growth of 7.5% - 40 bps ahead of its guidance – and FFO growth of 13.9% - 190 bps above its guidance. CCI raised its revenue and EBITDA outlook for 2022 but held its AFFO/share outlook steady, which calls for full-year growth of 5.9%. CCI commented that it “expects the deployment of 5G in the U.S. to extend our opportunity to create long-term value for our shareholders while delivering dividend per share growth of 7% to 8% per year.”

Office: SL Green (SLG) slumped after reporting mixed Q4 earnings results yesterday afternoon as occupancy rates in its Manhattan office portfolio slipped during the quarter. SLG reported same-store NOI growth of 4.8% in Q4 - a mild slowdown from its Q3 rate - as the occupancy rate declined 20 basis points sequentially to 93.0%. On the upside, SLG did post full-year FFO growth that was above its prior guidance and made no changes to its 2022 guidance provided last month which calls for 3.3% FFO growth this year. SLG also reported solid leasing volume with 574k sqft leased during the quarter, bringing the full-year total to 1.92M, well above its initial outlook of 1.3M sqft.

Student Housing: Yesterday, we published Student Housing REITs: Back to School as an exclusive report for Hoya Capital Income Builder members. American Campus Communities (ACC) - along with the broader student housing sector - have delivered a swifter-than-expected rebound as students at flagship universities returned to campus for the Fall semester. Despite the broader enrollment declines at the national level due to a myriad of short-term pandemic-related effects and structural headwinds related to demographics and the shift to online education, student housing fundamentals in top-tier university markets have returned to pre-pandemic levels.

Yesterday 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 reports discussed above, we'll hear results from timber REIT Weyerhaeuser (WY) on Friday morning.

Economic Data This Week

The frenetic week of economic data, earnings reports, and Fed-related newsflow continues on Friday when we'll see inflation data via the PCE Index as well as Personal Income & Spending data. 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 report published this weekend.


We're excited to announce the launch of our new investment research service here on Seeking Alpha - Hoya Capital Income Builder. We've put together a great team of contributors from across the REIT, dividend, and ETF industry, so whether your focus is High Yield or Dividend Growth, we’ve got you covered with high-quality, actionable investment research and a comprehensive suite of tools and models to help build sustainable portfolio income targeting premium dividend yields of up to 10%. And of course, subscribers receive complete access to our investment research - including reports that are never published elsewhere - from Hoya Capital and our team of contributors.

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.

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