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  • Alex Pettee, CFA

Santa Claus Rally? • Home Sales Slide • REIT Updates

  • U.S. equity markets rebounded Wednesday while interest rates pulled back as investors parsed solid corporate earnings results from Nike and FedEx and data showing a deepening housing market cooldown.

  • Advancing for a second-session and erasing its weekly declines, the S&P 500 rallied 1.5% today while the tech-heavy Nasdaq 100 snapped a five-day decline with gains of 1.5%.

  • Real estate equities were also broadly-higher today with the Equity REIT Index advancing 1.1% with 15-of-18 property sectors in positive territory, while the Mortgage REIT Index gained 2.1%.

  • Existing Home Sales dipped for a 10th-straight month to an annual rate of 4.09 million. Notably, the -35.4% plunge in sales was the sharpest year-over-year decline on record, exceeding that of the 2008 housing crisis which saw a peak decline of -30.3% in January 2008.

  • Pebblebrook Hotels (PEB) dipped more than 8% today after it provided a business update yesterday afternoon in which it downwardly revised most of its earnings metrics for Q4. A pair of office REITs also provided updates on their respective strategic repositioning.

 

Income Builder Daily Recap

U.S. equity markets rebounded Wednesday while interest rates pulled back as investors parsed solid corporate earnings results from Nike and FedEx and data showing a continued sharp cooldown in the U.S. housing market. Advancing for a second session and erasing its weekly declines, the S&P 500 rallied 1.5% today while the tech-heavy Nasdaq 100 snapped a five-day decline with gains of 1.5%. The 10-Year Treasury Yield (US10Y) remained steady at 3.68% while the 2-Year Treasury Yield (US2Y) pulled back 4 basis points to 4.22%. Real estate equities were also broadly-higher today with the Equity REIT Index advancing 1.1% with 15-of-18 property sectors in positive territory, while the Mortgage REIT Index gained 2.1%.

The beaten-down single-family homebuilding sector rebounded today despite data from the National Association of Realtors showing that existing home sales declined for a 10th straight month to an annual rate of 4.09 million - the lowest levels in over twelve years excluding the brief dip during the 'shutdown months' in early 2020. Notably, the -35.4% plunge in sales was the sharpest year-over-year decline on record, exceeding that of the 2008 housing crisis which saw a peak year-over-year decline of -30.3% in January 2008. The median existing-home sales price dipped to $370,700 in November - down 10.4% from the peak in June 2022. Home price declines have been steepest in the Northeast and Midwest with median prices now 13% below their peaks while prices compared to 8.3% in the South and 9.8% in the West regions.

Real Estate Daily Recap

Best & Worst Performance Today Across the REIT Sector

Hotels: Pebblebrook Hotels (PEB) dipped more than 8% today after it provided a business update yesterday afternoon in which it downwardly revised most of its earnings metrics for Q4 citing "a negative impact from Hurricane Nicole and weaker business and leisure demand during the second half of November, which may relate to new seasonal patterns around holidays due to hybrid work." Pebblebrook now expects its Q4 adj. FFO to be $0.13-$0.16 vs. prior to its outlook of $0.18-$0.24. Recent TSA checkpoint data shows that domestic throughput has remained steady at around 95% of pre-pandemic levels since September as a slight uptick in business travel has offset a moderation in leisure travel demand in recent weeks.

Net Lease & Casino: Activist firm Land & Buildings posted a presentation outlining a proposed strategy for Six Flags Entertainment (SIX) to "unlock substantial value by executing a strategy to monetize real estate while also driving an operational turnaround." The report speculated that VICI Properties (VICI), Gaming and Leisure (GLPI), Realty Income (O), and EPR Properties (EPR) could be potentially interested buyers under a sale-leaseback strategy. Six Flags owns and operates 17 parks across North America and L&B believes that Six Flags is a "prime candidate for an Opco/Propco separation and that its real estate is likely valued at more than the Company’s entire current equity market capitalization of approximately $1.8 billion." Under prior leadership in the mid-2010s, SIX explored monetizing its real estate through a REIT structure but did not move forward with the plan but noted that it "could revisit the idea in the future."

Office: A pair of office REITs announced progress on "portfolio repositioning" initiatives over the past 24 hours. Piedmont Office (PDM) gained 1.8% today after it announced that it sold two Cambridge, Massachusetts assets - One Brattle Square and 1414 Massachusetts Avenue - for total proceeds of roughly $160M. Proceeds were used to pay off the outstanding balance on its $600M line of credit, leaving the full capacity of the line currently available. The firm noted that the sales were a "crucial step in our asset recycling strategy" in which it has sold assets its coastal markets and invested in Sunbelt markets. Empire State Realty (ESRT) gained about 1% after the NYC-focused REIT provided a business update in which it announced that it acquired a multifamily asset in Manhattan for $115M while reaching deals to sell an office building in White Plains, NY for $42M and in Harrison, NY for $53M. The firm commented that the deal is "consistent with our plan to recycle our balance sheet and add well-located NYC multifamily assets."

Cannabis: Cannabis REITs stabilized today after an early-week sell-off sparked by the exclusion of the SAFE Banking Act from the omnibus spending package - dimming hopes that any major federal marijuana legislation will be passed during the Biden Presidency. The Secure and Fair Enforcement ("SAFE") Banking Act was designed to protect banks and other financial institutions from penalties for providing services to legitimate cannabis businesses. Stalled progress on federal legalization has made a challenging fundraising environment enough tougher for struggling cannabis cultivators and retailers. Despite the trifecta of Democrat control in Washington, the once-ambitious legalization efforts have been defined by "broken promises" according to industry executives. These challenging conditions have led to emerging pockets of stress across the industry including a handful of bankruptcies among smaller operators - including several REIT tenants.

Additional Headlines from The Daily REITBeat on Income Builder

  • SITE Centers (SITC) authorized a new $100M stock buyback program after its previous repurchase program was exhausted following Q4 repurchases of $22.2M funded with proceeds from property sales.

  • Brandywine Realty Trust (BDN) announced plans to redeem all of the outstanding 3.95% Guaranteed Notes due February 15, 2023 on January 20, 2023.

  • 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 were broadly-higher today with residential mREITs gaining 1.8% while commercial mREITs advanced 1.6%. Granite Point (GPMT) gained 0.9% today despite trimming its quarterly dividend by 20% to $0.20/share, representing a dividend yield of 13.8%. Angel Oak (AOMR) gained nearly 8% - adding to yesterday's gains of roughly 3% after it reported that its book value per share ("BVPS") was $9.40 - down about 12% from the end of September - but not as weak as expectations.

Economic Data This Week

The busy week of economic data continues tomorrow with Jobless Claims data along with a second revision to third-quarter Gross Domestic Product data. On Friday, we'll see New Home Sales data which is expected to stay around the 600k level - a more modest decline compared to existing home sales seen this week - as homebuilders have generally been more proactively adjusted prices than existing owners. On Friday, we'll also see some important inflation data with the PCE Price Index for November - the Fed's preferred gauge of inflation - which is expected to show a moderation in price pressures to the lowest since late 2021.

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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