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  • Alex Pettee, CFA

REIT Earnings • Dividend Hikes • Home Sales Slump

  • U.S. equity and bond markets finished lower again Thursday as sovereign bond yields swelled to fifteen-year highs as investors parsed a busy slate of corporate earnings and ongoing European political instability.

  • Declining for a second session but still hanging onto week-to-date gains of roughly 2%, the S&P 500 declined 0.6% today. Mid-Caps and Small-Caps were again laggards with 1.5% declines.

  • Real estate equities were among the better performers today amid a solid start to earnings season and a pair of dividend hikes. The Equity REIT Index declined 0.4% with 9-of-18 property sectors higher.

  • Industrial REITs have been upside standouts early-on in earnings season. First Industrial (FR) and Rexford (REXR) each reported strong "beat and raise" results with head-spinning leasing spreads topping nearly 90%, exhibiting no signs of slowing demand for logistics space.

  • Cell tower REIT Crown Castle (CCI) reported solid Q3 results and provided a decent outlook for 2023 while hiking its dividend by 6.5%. Elsewhere, hotel REIT Apple Hospitality (APLE) boosted its dividend by another 14%.

 

Income Builder Daily Recap

U.S. equity and bond markets finished lower again Thursday as sovereign bond yields swelled to fifteen-year highs as investors parsed a busy slate of corporate earnings and ongoing European political instability. Declining for a second session but still hanging onto week-to-date gains of roughly 2%, the S&P 500 declined 0.6% today but Mid-Caps and Small-Caps were once again laggards with a second-straight session of declines of over 1.5%. Real estate equities were among the better performers today amid a solid start to earnings season and a pair of dividend hikes. The Equity REIT Index declined 0.4% today with 9-of-18 property sectors in positive territory while the Mortgage REIT Index slipped 1.4%.

Another wave of hawkish rhetoric from the Federal Reserve pushed the 10-Year Treasury Yield higher by another 10 basis points to close at 4.23%. Homebuilders were little-changed on data showing a tenth-straight monthly decline in Existing Home Sales amid the historic surge in mortgage rate this year, but inventory levels remained near record lows despite the slowdown, which has provided a cushion to contain deepening price declines. The NAR reported this morning that sales of existing homes in September were at the slowest pace since 2012, with the exception of a brief dip at the start of the pandemic. Remarkably, despite the rate-driven sales slowdown, inventory declined to just 1.25 million homes for sales at the end of September - down 0.8% from last year, representing just 3.2 months of supply at the current sales rate - well below the historical average of around 5 months of supply.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Industrial: Three for three. Following a "beat and raise" report from Prologis (PLD) on Tuesday, First Industrial (FR) - which we hold in the REIT Dividend Growth Portfolio - was among the better performers today after reporting very strong earnings results and raising its full-year outlook. Driven by record-high cash leasing spreads of 30.9%, FR raised its same-store NOI growth outlook by 75 basis points to 9.5% and its FFO growth outlook by 200 basis points to 13.2%. Rexford(REXR) slumped 2% despite reporting similarly solid "beat and raise" results driven by incredible cash rental rate spreads of 88.6% GAAP / 62.9% cash in Q2. REXR raised its full-year NOI growth outlook by 110 basis points to 9.9% and its FFO outlook by 330 basis points to 18.3%.

Cell Tower: Crown Castle (CCI) slumped about 3% today despite reporting solid results powered by strong organic "same-tower" growth metrics and hiking its dividend by another 6.5% to $1.565/share. CCI maintained its full-year outlook calling for FFO growth in 2022 of roughly 6% while also providing 2023 guidance which calls for growth of 3.7% at the midpoint of its range, noting that it expects higher interest expense to be offset by an expected acceleration of same-tower billings to 6.8% in 2023 from 5.0% this year. Last week in Cell Tower REITs: 5G's Killer App, we analyzed why the sector has been slammed over the past three months, weighed down by tech-related weakness and disruptive threats to the long-term competitive positioning.

Office: The first office REIT to report results this earnings season, NYC-focused SL Green (SLG) finished higher by 1.5% after reporting results that were roughly in line with estimates as decent leasing volumes showed that corporate tenants haven't yet given up on the office in the hybrid work-from-home era. Positively, occupancy rates in its Manhattan same-store office portfolio increased 10 basis points to 92.1%, but rental rates remain under pressure with spreads that were 10.4% lower for the first nine months of 2022 than the previous fully escalated rents on the same spaces. Of note, SLG announced a new partnership with Caesars Entertainment (CZR) to pursue a gaming license for the planned Caesars Palace Times Square at 1515 Broadway. Recent MTA data has indicated that ridership has slowly but steadily improved to about 75% of pre-pandemic levels over the past month.

Also of note today, Apple Hospitality (APLE) - which we own in the REIT Dividend Growth Portfolio - hiked its monthly dividend by 14% to $0.08/share, representing a forward yield of 5.8%. Earlier this week, we published our REIT Earnings Preview: REITs Are Historically Cheap. Slammed by the historic surge in interest rates over the past six months, REITs enter third-quarter earnings season with the lowest valuations - and highest dividend yields - since the Financial Crisis with nearly 120 REITs raising their payouts this year compared to just 7 REIT dividend reductions. With a historically low dividend payout ratio, most equity REITs have a significant buffer to protect current payout levels if macroeconomic conditions take a turn for the worse. We'll hear results from Alpine Income (PINE) and Brandywine (BDN) this afternoon.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs were mixed today ahead of the start of earnings season next week with residential mREITs slipping 0.4% today while commercial mREITs declined 1.1%. As noted in our REIT Earnings Preview, over the past week, we've heard preliminary results from ten mREITs which showed BVPS declines ranging from 4-20% in Q3, but BVPS declines have been more muted for credit-focused mREITs compared to pure-play agency-focused mREITs.


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.

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.

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