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  • Alex Pettee, CFA

Risk-On Sentiment • Earnings Ahead • Cell Tower M&A?

  • U.S. equity markets finished broadly higher Monday as investors probed the likelihood of a "soft landing" and took positions ahead of a busy slate of earnings reports and economic data.

  • Pushing its two-day rally to nearly 3%, the S&P 500 advanced 1.2% today while the tech-heavy Nasdaq 100 rallied 2.2%, lifting its two-day gains to over 4%.

  • Real estate equities were broadly-higher today as well with the Equity REIT Index posting gains of 0.5% with 14-of-18 property sectors in positive territory while Mortgage REITs advanced 0.4%.

  • WP Carey (WPC) received a credit rating upgrade from S&P Global, which boosted its rating to BBB+ from BBB on expectations that its contractual rent increases and acquisitions will support further operating outperformance over the next two years despite recession risks.

  • American Tower (AMT) was among the laggards today after reports last Friday that it's exploring a potential bid for Cellnex - a Spanish telecom operator which operates roughly 100k communications sites across Europe with a market capitalization of roughly $25B.

 

Income Builder Daily Recap

U.S. equity markets finished broadly higher Monday as investors probed the likelihood of a "soft landing" and took positions ahead of a busy slate of corporate earnings reports and economic data. Pushing its two-day rally to nearly 3%, the S&P 500 advanced 1.2% today while the tech-heavy Nasdaq 100 rallied 2.2%, lifting its two-day gains to over 4%. Real estate equities were broadly-higher today as well with the Equity REIT Index posting gains of 0.5% with 14-of-18 property sectors in positive territory while the Mortgage REIT Index advanced 0.4%. Homebuilders and the broader Hoya Capital Housing Index continued their strong start to 2023 ahead of results from DR Horton - the nation's largest homebuilder - tomorrow morning.

As discussed in our Real Estate Weekly Outlook, with the Federal Reserve now in its "quiet period" until the February FOMC meeting, investor attention has turned to corporate earnings season with key reports this week from a handful of mega-cap technology firms with particular attention on corporate hiring trends and pricing power given their significance to the Fed's monetary policy path. The 10-Year Treasury Yield edged higher to close at 3.53% - continuing a bounce after dipping to three-month lows last week - while the US Dollar Index finished flat. Crude Oil and Gasoline futures remained at one-month highs as traders monitor the China demand recovery and European geopolitics. All eleven GICS equity sectors finished higher on the day with Technology (XLK) and Communications (XLK) stocks leading to the upside.

It'll be another jam-packed week of housing data, inflation reports, and corporate earnings results in the week ahead. The main event of the week comes on Thursday with fourth-quarter Gross Domestic Product data which is expected to show that the U.S. economy expanded at a modest 2.6% annualized rate. The Atlanta Fed's GDPNow model forecasts growth of 3.5% from the prior quarter as the significant drag from residential fixed investment is expected to be offset by a boost from improved personal consumption and higher net exports. On Thursday and Friday, we'll see New Home Sales and Pending Home Sales data for December which are expected to echo the continued slowdown seen in Existing Sales and Housing Starts data this past week. Also on Friday, we'll see another critical inflation report with the Core PCE Index - the Fed's preferred gauge of inflation - which has been one of the early indicators showing signs of peaking price pressures in recent months.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector


Net Lease: WP Carey (WPC) - which we own in the REIT Focused Income Portfolio - finished slightly higher after it received a credit rating upgrade from S&P Global, which boosted its rating to BBB+ from BBB on expectations that its contractual rent increases and acquisitions will support further operating outperformance over the next two years despite recession risks. As analyzed in Net Lease REITs: Calling The Fed's Bluff, WPC is poised to deliver outsized FFO growth over the coming year due to its inflation-linked rent escalators across over 50% of its portfolio. S&P Global noted that it expects demand to "remain healthy over the next several years," reflecting solid net lease industry fundamentals.

Cell Tower: American Tower (AMT) was among the laggards today after reports last Friday that it's exploring a potential bid for Cellnex - a Spanish telecom operator which operates roughly 100k communications sites across Europe with a market capitalization of roughly $25B. Analysts expressed doubt over the likelihood of a deal - which the initial report speculated would involve both AMT and Brookfield - given AMT's recent focus on deleveraging and lack of interest in large-scale M&A. Notably, following six straight years of outperformance over the Equity REIT Index, cell tower REITs lagged the benchmark for a second-straight year in 2022, weighed down by tech-related weakness, an expected moderation in FFO growth, and concern over potentially disruptive threats to the long-term competitive positioning.

Hotels: This afternoon, we'll publish an updated report on the Hotel REIT sector to the Income Builder Marketplace which will discuss recent hotel industry trends and our updated outlook for 2023. Despite lingering recession concerns and recent travel disruptions, Hotel REITs have been among the better-performing over the past year, buoyed by steady post-pandemic operating improvement and a much-anticipated return of dividends. The final months of 2022 saw a mild softening in demand- worsened by holiday travel nightmares- but recent high-frequency data and REIT updates show surprisingly solid momentum in early 2023. We favor the higher-margin limited-service segment and select full-service names with a Sunbelt focus but see strong value in hotel REIT preferred securities across segments.

While the REIT earnings calendar doesn't get busy until early February, we'll see a trickle of reports starting next week with office REIT SL Green (SLG) and cell tower REIT Crown Castle (CCI) on Wednesday along with timber REIT Weyerhaeuser (WY) on Thursday. Homebuilder D.R. Horton (DHI) will also report results on Tuesday. We'll publish our Earnings Preview report later this week which will discuss the major themes we're watching over the next six weeks of REIT earnings reports.

Additional Headlines from The Daily REITBeat on Income Builder

  • KeyBanc downgraded AMT, CCI to Sector Weight from Overweight

  • Equinix (EQIX) announced that it has appointed Thomas Olinger to its Board of Directors, replacing Irving "Bud" Lyons, III, who has served as a member of the Board since 2007.

Mortgage REIT Daily Recap

Per the REIT Rankings Tracker available to Income Builder subscribers, mortgage REITs continued their strong start to 2023 with residential mREITs advancing 0.5% today while commercial mREITs gained 0.7%. On a quiet day of newsflow, Hannon Armstrong (HASI) and Ready Capital (RC) led the gains on the upside while Franklin BSP (FBRT) was among the laggards. AGNC Investment (AGNC) and Dynex Capital (DX) kick off mREIT earnings season at the end of the month on January 30th. Last month, we published Mortgage REITs: High Yields Are Fine, For Now, which noted that despite paying average dividend yields in the mid-teens, the majority of mREITs have been able to cover their dividends, but we flagged a handful of mREITs with payout ratios above 100% of EPS.

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.

Hoya Capital Research & Index Innovations (“Hoya Capital”) is an affiliate of Hoya Capital Real Estate, a registered investment advisory firm based in Rowayton, Connecticut that provides investment advisory services to ETFs, individuals, and institutions. Hoya Capital Research & Index Innovations provides non-advisory services including market commentary, research, and index administration focused on publicly traded securities in the real estate industry.


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