Retail Sales Slump • Stocks Dip • Homebuilders Rebound
U.S. equity markets dipped to the lowest levels in a month Thursday after the ECB and BOE echoed the Fed's hawkish policy stance while disappointing retail sales renewed recession worries.
losing at the lowest level since early November, the S&P 500 dipped 2.5% today - erasing much of the rally sparked by the cooler-than-expected CPI report last month.
Real estate equities were among the outperformers today as the 10-Year Treasury Yield pulled back to three-month lows. Equity REITs declined 1.4% today, while Mortgage REITs declined 2.1%.
Homebuilders were a bright spot today after positive earnings commentary from Lennar (LEN) alongside data from Freddie Mac showing that mortgage rates fell for a fifth-straight week.
The Census Bureau reported that the critical holiday spending season started slowly in November with retail sales falling by the most in nearly a year on a seasonally-adjusted basis.
Income Builder Daily Recap
U.S. equity markets dipped to the lowest levels in a month Thursday after the ECB and BOE echoed the Fed's hawkish policy stance while disappointing retail sales and manufacturing data sparked renewed recession worries. Closing at the lowest level since early November, the S&P 500 dipped 2.5% today - erasing much of the rally sparked by the cooler-than-expected CPI report last month - while the tech-heavy Nasdaq 100 fell 3.4%. Real estate equities were among the outperformers Equity REIT Index declined 1.4% today with 17-of-18 property sectors in negative territory while the Mortgage REIT Index finished lower by 2.1%. Homebuilders were a bright spot today after positive earnings commentary from Lennar alongside data from Freddie Mac showing that mortgage rates fell for a fifth-straight week.
While equity markets were under pressure, bonds caught a bid with the 10-Year Treasury Yield dipping back to three-month lows as investors parsed weak economic data and monetary tightening actions from the European Central Bank and Bank of England. The U.S. Dollar Index rebounded with gains of over 1% today while Crude Oil dipped nearly 2%. The Census Bureau reported that the critical holiday spending season started slowly in November with retail sales falling by the most in nearly a year on a seasonally-adjusted basis. Total retail sales dipped 0.6% for the month in a relatively broad-based decline that saw weak spending trends across both online and brick-and-mortar categories. Food-related categories saw increased spending in November, but much of the gains were likely explained by higher food prices.
Real Estate Daily Recap
Best & Worst Performance Today Across the REIT Sector
Shopping Center: Kimco (KIM) announced that it will restructure as an Umbrella Partnership Real Estate Investment Trust, or UPREIT - a structure now utilized by most REITs to streamline acquisitions in a tax-deferred manner. The UPREIT structure allows property owners to exchange their property for ownership shares in the REIT in a "like-kind" transfer known as a 721 Exchange - which has similar benefits as the more commonly known 1031 Exchange. Under the 721 structure, property sellers receive OP Units in the REIT - typically exchangeable on a 1-for-1 basis to REIT common shares - and in doing so, the property seller can defer capital gains until they sell the REIT stock. The reorganization - which is a bit legally complex and hence the delay from many older REITs in "upgrading" to a UPREIT - is not expected to have any material impact on Kimco's operations or financial position.
Net Lease: Today we published Net Lease REITs: Business As Usual - And Could Be An Issue on the Income Builder Marketplace which discussed recent developments and our updated outlook on the net lease sector. One of the more "bond-like" and rate-sensitive REIT sectors, net lease REITs have surprisingly been among the best-performing property sectors this year despite their muted property-level growth and narrowing investment spreads. Curiously, net lease executives, investors, and asset owners have seemingly never bought into the idea of a "new normal" of sustained higher interest rates and have plowed ahead with acquisitions. Acquisition cap rates have expanded only modestly - roughly 50-100 basis points on a YTD basis per recent commentary- during which time we’ve seen benchmark rates climb by 250-300 basis points. While we do believe that the worst of the inflationary pressures are behind us, there does appear to be complacency reflected in valuations and strategies in REITs with higher interest-rate risk - notably those focused on "corporate" properties with bond-like lease structures.
Another day, another REIT dividend hike. Host Hotels (HST) became the third REIT to declare a supplemental dividend over the past week, declaring a $0.20/share special dividend while holding its regular quarterly dividend steady a $0.12/share. Elsewhere, Innovative Industrial (IIPR) was among the leaders today after it held its quarterly dividend steady at $1.80/share, representing a forward yield of 6.31%. Despite the broader economic slowdown, REIT dividend increases continue to significantly outpace REIT dividend decreases consistent with our discussion in our State of the REIT Nation report last month which noted that REIT payout ratio ratios remain below the long-term historical averages, implying that REITs have significant 'embedded' dividend growth that should be unlocked over the coming quarters. In total, more than a dozen REITs hiked their dividend this week while three REITs reduced their payouts, bringing the full-year total to 120 REIT dividend hikes compared to 12 dividend decreases.
Casino: Earlier this week, we published Casino REITs: Hold 'Em As Others Fold 'Em. The lone property sector in positive territory this year, Casino REITs have benefited from their attractive “inflation-hedging” lease structure, the rebound in Las Vegas travel demand, and broader institutional investor acceptance. VICI boasts inflation-linked escalators on 96% of leases while GLPI benefits from indirect inflation hedges linked to tenant performance. Casino REITs have been thrust into the spotlight as apparent beneficiaries of outflows at Blackstone’s (BX) non-traded REIT platform BREIT, spawning a $5.5B acquisition of two Vegas casinos by VICI Properties (VICI). Balance sheet “firepower” and access to longer-term capital have become a significant competitive advantage for public REITs and VICI and GLPI appear particularly well-positioned to play offense while private peers seek an exit.
Additional Headlines from The Daily REITBeat on Income Builder
UBS initiated CPT with a Buy rating; ESS ($226) and UDR ($43) with Neutral ratings; and MAA with a Sell rating
Piper Sandler downgraded FRT to Neutral from Overweight
TD Securities downgraded EQIX to Hold from Buy
BNP Paribas initiated COLD, EQIX, and IRM with Outperform ratings and initiated DLR with a Neutral rating
Moody’s downgraded SVC's ratings including its corporate family rating to “B2” from “B1” with a negative outlook
S&P affirmed IRM's ratings including its “BB-“ issuer credit rating with a stable outlook
PDM announced the appointment of Mary Hager to its Board of Directors and with Hager’s appointment, the Company’s board of directors now consists of nine total members
ESRT announced that its Chief Financial Officer, Christina Chiu, has also been named the company's Chief Operating Officer
O announced the appointment of Gregory Whyte as Executive Vice President, Chief Operating Officer which will take effect January 3, 2023
GOOD closed on the sale of its two-story office building located in Allen, Texas on December 8, 2022 and “will allow us to continue to re-deploy capital into the industrial sector, consistent with our recycling initiatives”
Income Builder Members receive access to The Daily REITBeat, an institutional-quality daily note that keeps subscribers apprised of pertinent news, data, and trends specifically within the REIT industry.
Mortgage REIT Daily Recap
Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs finished lower today with residential mREITs slipping 0.7% while commercial mREITs declined 2.3%. MFA Financial (MFA) slipped 3% after trimming its quarterly dividend to $0.35/share - down from a $0.44/share rate previously - representing a forward yield of roughly 12.5%. AFC Gamma (AFCG) and BrightSpire Capital (BRSP) each held their dividends steady at current rates. Last month, we published Mortgage REITs: High Yields Are Fine, For Now which discussed why mREITs have rebounded in recent weeks as earnings results were not as catastrophic as feared. Despite paying average dividend yields in the mid-teens, the majority of mREITs have been able to cover their dividends as improved earnings power from wider investment spreads have helped to offset book value declines.
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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