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  • Alex Pettee, CFA

Earnings Heat-Up • REIT Results • Builders See Strong 2022

Summary

  • U.S. equity markets posted their third-straight day of gains Tuesday as strong corporate earnings reports and strong guidance have calmed investor jitters about the impacts of inflation and rising rates.

  • Back within 5% of record-highs after briefly dipping into correction territory last week, the S&P 500 advanced another 0.7% today while the Mid-Cap 400 rallied 1.1% and the Small-Cap 600 gained 0.8%.

  • Real estate equities were mixed today as earnings season begins to heat-up. The Equity REIT Index finished roughly flat with 9-of-19 property sectors in positive territory. Mortgage REITs slipped 0.5%.

  • Homebuilder PulteGroup (PHM) gained after reporting strong Q4 results and provided guidance calling for accelerating growth across all key metrics in 2022 including gross margins, which comes despite the ongoing supply chain and cost headwinds.

  • Alexandria Real Estate (ARE) finished slightly higher today after reporting another strong quarter as lab space continues to be one of the hottest segments of the U.S. real estate market.

Income Builder Daily Recap

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U.S. equity markets posted their third-straight day of gains Tuesday as strong corporate earnings reports and strong guidance - notably from UPS today - have calmed investor jitters about the impacts of inflation and rising rates. Back within 5% of record-highs after briefly dipping into correction territory last week, the S&P 500 advanced another 0.7% today while the Mid-Cap 400 rallied 1.1% and the Small-Cap 600 gained 0.8%. Real estate equities were mixed today as earnings season begins to heat up with the Equity REIT Index finishing roughly flat with 9-of-19 property sectors in positive territory while the Mortgage REIT Index declined 0.5%.

The solid start to February follows a turbulent January in which the S&P 500 posted monthly declines of 5.3%, its largest since March 2020, while the tech-heavy Nasdaq dipped 9%. The 10-Year Treasury Yield climbed back above 1.80% as better-than-expected corporate earnings - in which three-fourths of S&P 500 companies have beat expectations thus far - have offset recent signs of softening economic data. Homebuilders and the broader Hoya Capital Housing Index were mixed today despite strong guidance provided by PulteGroup, which sees continued robust demand and margin expansion.

Equity REIT Daily Recap

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.

Timber: PotlatchDeltic (PCH) traded lower today after reporting mixed results yesterday afternoon as the slump in lumber prices and supply chain constraints resulted in a softer Q4 amid an otherwise record-year across all metrics. PCH delivered full-year revenue growth of nearly 30%, powering a 71% rise in Adjusted EBITDA and a 153% surge in Earnings Per Share. The company provided solid Q1 guidance and commented that "2022 is off to a great start with the recent surge in lumber prices benefitting both our Timberlands and Wood Products businesses. We expect housing-related fundamentals that drive demand in our business to remain favorable."

Homebuilders: Sticking in the housing sector, we heard a pair of solid reports from homebuilders over the last 24 hours. PulteGroup (PHM) gained 1% after reporting strong Q4 results and provided guidance calling for accelerating growth across all key metrics in 2022 including gross margins, which comes despite the ongoing supply chain and cost headwinds. PHM sees nearly 20% revenue growth in 2022 after delivering 26% revenue growth in 2022 and expects its gross margin to be above 28.5% in 2022, up from roughly 27% in 2021. NVR (NVR) traded higher by 0.6% as well after reporting decent results, recording full-year revenue growth of nearly 20% and a nearly 500 basis point improvement in gross margins.

Healthcare: Alexandria Real Estate (ARE) finished slightly higher today after reporting another strong quarter as lab space continues to be one of the hottest segments of the U.S. real estate market. The company noted that "historic demand for high-quality office/laboratory space has translated into record leasing volume and rental rate growth in 2021" which resulted in a nearly 25% surge in rents and powered a 7.1% same-store NOI growth and 6.3% rise in FFO growth. ARE expects the positive momentum to continue, providing guidance calling for 7.5% NOI growth and 7.7% FFO growth in 2022.

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 0.7% today while commercial mREITs ended lower by 0.1%. AGNC Mortgage (AGNC) finished lower by 1.5% today after kicking off mREIT earnings season with a mixed report, noting that its tangible Book Value Per Share ("BVPS") slipped 4% in Q4 "as spreads to benchmark rates widened moderately and valuations declined relative to interest rate hedges." However, AGNC noted that while spread widening hurts BVPS in the short term, it improves the expected return on new investments. 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.

We're excited to announce the launch of our new investment research service 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.