Ghosts Of Inflation Past | Seeking Alpha

Real Estate Weekly Outlook

U.S. equity markets notched another set of record highs this week while benchmark interest retreated from three-month highs as investors parsed decent PCE inflation data and upbeat corporate earnings reports. Investors breathed a “sigh of relief” after PCE Price Index data wasn’t the Fed-spooking setback that some feared following lukewarm CPI and PPI reports earlier this month. Excluding the lagging housing inflation component which continues to capture “ghosts of inflation past,” Core PCE posted an annual increase of just 1.5% in January – below the Fed’s 2% inflation objective.

Posting gains for the 16th time in the past 18 weeks, the S&P 500 advanced another 1.0% this week. The gains were relatively broad-based across market-cap tiers this week, with the Mid-Cap 400 rallying 1.9% and the Small-Cap 600 gaining 1.2%. The tech-heavy Nasdaq 100 continued its unrelenting run with gains of another 2%. Real estate equities were among the leaders this week as an encouraging REIT earnings season concluded with another generally strong slate of reports. Led by tech-focused and cannabis REITs, the Equity REIT Index finished higher by 2.1% on the week, with 15-of-18 property sectors in positive territory, while the Mortgage REIT Index gained 1.9%. Homebuilders rallied more than 3% on housing market data showing that inventory levels remain near historic lows despite still-sluggish sales activity.

After climbing to three-month highs in mid-February following the warmer-than-expected CPI and PPI reports, benchmark interest rates declined for a second-straight week on the heels of a relatively soft slate of economic data offset, which offset another leg higher for commodities prices. The 10-Year Treasury Yield retreated by 8 basis points this week to 4.18% – down from recent closing highs of 4.33%. The policy-sensitive 2-Year Treasury Yield declined to 4.53% – down from recent highs of 4.74%. The retreat in rates came despite a jump in WTI Crude Oil prices to the highest levels in four months. WTI futures breached $80/barrel for the first time since November ahead of a closely-watched OPEC+ decision on production cuts. Swaps markets are now pricing in 3.3 rate cuts this year – which now roughly matches the midpoint of the Feds “dot plot” – with the first cut not expected until June. Markets had priced in as many as 7 rate cuts earlier this year and, at the time, pegged nearly 80% odds that cuts would begin by March.

Real Estate Economic Data

Below, we recap the most important macroeconomic data points over this past week affecting the residential and commercial real estate marketplace.

Following warmer-than-expected Consumer and Producer Price Index data earlier this month, PCE Price Index data was generally a “sigh of relief” for investors fearing a Fed-spooking setback in the January report. Headline PCE rose 0.3% for the month – in line with expectations – which dragged the year-over-year rate to 2.4%, which was the lowest annual increase since April 2021. Core PCE – the Fed’s preferred gauge of inflation – rose 0.4% in January, which was the largest monthly jump in a year, but the annual increase cooled to 2.8%. Goods prices declined 1.1% for the month while services prices rose 0.4%, an increase that is still being driven largely by the delayed recognition of housing inflation seen 9-18 months ago. We’ve noted that real-time shelter inflation – as measured by a half-dozen private market data providers – is closer to the 0-2% range, far below the 6.1% increase reported in government data. Substituting the Apartment List National Rent Index (ALNRI) for the PCE Housing component shows that Headline PCE would have posted a 1.6% year-over-year increase, while Core PCE would show a 1.5% annual increase – each well below the Fed’s 2% inflation objective.

Housing market data this week showed sluggish but steady trends across the homeownership market, as the rebound in interest rates sapped some of the Spring optimism for a rebound in sales velocity. New Home Sales data showed a modest uptick in home sales in January as mortgage rates pulled back slightly from three-decade highs, while supply growth of newly-completed homes remained near historically low levels. New single-family home sales increased to a 661k annual pace in January – up 1.5% from January but slightly below the consensus forecast and well below the pandemic-era peak of 1.1M in August 2020. Despite the relatively sluggish sales trends, the report showed that newly-completed homes were sold within 2.8 months, on average, which remained well below the 10-year average of around 3.5 months. New Homes For Sale – a wider measure of supply that includes homes still under construction (including pre-construction permitting) – rose for an eighth straight month, however, which kept the monthly supply at levels that are at the higher-end of the 10-year range. The median sales price of a home decreased to $420k in January – down about 2% from a year ago and well below the pandemic-era peak of nearly $500k.

Equity REIT And Homebuilder Week In Review

Best & Worst Performance This Week Across the REIT Sector

REIT earnings season entered the final stretch this week with reports from the three dozen equity and mortgage REITs, with 95% of the sector now complete. As discussed in our REIT Earnings Recap, beneath the reignited interest rate headwinds that have pressured the sector, REITs delivered one of their strongest earnings seasons since early in the pandemic recovery, and the back-half of earnings season was actually a bit stronger than the first-half. Of the 88 equity REITs that provide full-year Funds From Operations (FFO) guidance, 59 REITs (67%) beat the midpoint of their forecast, 19 REITs (22%) matched, while just 11 REITs (10%) missed estimates. This 67% FFO “beat rate” was well ahead of the 55% “beat rate” in Q4 of 2022. Consistent with the “Tale of Two Economies” trends that we’ve discussed, upside surprises this earnings season came largely from the service-oriented pro-cyclical property sectors – retail, hotel, and specialty REITs – and from the still-supply-constrained single-family housing and logistics markets.

Manufactured Housing: Beginning with the upside standouts this week, UMH Properties (UMH) – the third-largest MH REIT with a portfolio of 25,800 developed sites across 135 communities – rallied 11% this week after reporting very strong results showing steady demand and mid-single-digit rent growth across its portfolio. UMH reported full-year normalized FFO growth of 1.2% in 2023, which was 36% above the pre-pandemic 2019 level. Unlike its two larger MH peers which typically only own the land under the owner-occupied homes and RVs, UMH owns and rents over 10,000 physical homes. UMH credited strong leasing activity in this rental portfolio – which is now 94% occupied – and had success in selling these homes as well. These newly occupied rental and sales units resulted in a 9% same-property income growth and 13% same-property NOI growth. While UMH does not provide formal guidance, it projected that its rental revenue will grow 5% in 2024 due to in-place rent increases. Earlier in earnings season, its larger peers Equity LifeStyle (ELS) and Sun Communities (SUI) reported solid results with expectations of mid-single-digit rent growth in 2024 in their core MH portfolio, offsetting lingering headwinds on their transient RV segment.

Hotels: Consistent with the trends earlier this earnings season, results from eight hotel REITs this week showed continued strength in leisure demand in late 2023 and into early 2024. Xenia Hotels (XHR) – which focuses on luxury branded hotels in West Coast and South East markets – rallied 16% this week after it reported better-than-expected FFO and Revenue Per Available Room (RevPAR) metrics in Q4 and provided an upbeat outlook for 2024, with expectations for sector-leading FFO growth of 9.4%. Park Hotels (PK) rallied 9% this week after reporting strong results and hiking its quarterly dividend by 67% to $0.25/share (6.3% dividend yield), becoming the 27th REIT to raise its dividend this earnings season. Park – which focuses on luxury-branded hotels and resorts in coastal urban markets – recorded a sector-best FFO growth rate of 32.5% in 2023 and sees another positive year in 2024 with expectations of 3.9% FFO growth. Park highlighted a recovery in group demand, noting that Q4 marked the first quarter in which group revenues exceeded the pre-pandemic 2019 baseline. RLJ Lodging (RLJ) – which focuses on the mid-tier hotel segment largely under the Courtyard by Marriott and Residence Inn by Marriott brands – gained 3% after reporting decent results showing full-year FFO growth of 22.1% and RevPAR growth of 9% in 2023 driven by a recovery in its pandemic-impacted urban segment.

Cannabis: One of the weaker-performing sectors through the Fed’s tightening cycle, cannabis REIT Innovative Industrial (IIPR) rebounded 8% this week after it reported solid results showing an improvement in rent collection in late 2023 and into early 2024. IIPR – which was the best-performing REIT from 2017-2021 before stumbling hard over the past two years amid industry-wide headwinds – reported that it collected 100% of owed rents in Q4 and year-to-date through February, up from the lows of around 90% in mid-2023. While certainly an improvement, the 100% collection rate in Q4 did include roughly 3.5% in previously delinquent rents and/or security deposits, including a $800k security deposit from 4Front related to a development property that faced delays in completion, and roughly $2M in legal settlements related to lease defaults from Kings Garden and Parallel. For Cannabis REITs – which have concentrated leasing and lending efforts on larger multi-state operators (“MSOs”) and publicly traded firms in recent years – tenant default issues have remained limited to a handful of smaller single-state operators. Despite the industry-wide headwinds throughout the year, IIPR reported that its full-year adjusted FFO rose 7.4% in 2023 to $9.08, which easily covered its $7.22/share dividend representing a dividend yield of above 8%.

Farmland: From “pharmland” to the more traditional farmland, small-cap Farmland Partners (FPI) gained 4% after reporting mixed results including a nearly 50% dip in its FFO in 2023 from the record-setting level in 2022, but provided an upbeat outlook on farmland fundamentals heading into 2024 with expectations calling for FFO growth of nearly 20% in 2024. FPI entered the Fed tightening cycle with significant variable rate debt exposure – roughly a third of its debt – which accounted for the vast majority of the dip in 2023. FPI reiterated its high-level investment “pitch” on its earnings call, highlighting several reasons to be bullish on the firm’s prospects. First, FPI believes that its portfolio is “significantly undervalued” on a Net Asset Value basis, citing rising land prices over the past several years which has created a “huge disconnect between the market value of our land in the private markets and the public company.” Second, FPI noted that the climate situation has improved in the past 18 months, noting that we’re in the “second year of reasonably strong rainfall on the West Coast, particularly in California. That will help the water situation and that will help the yield situation.” Third, FPI reiterated a plan to drive AFFO growth which includes an “aggressive cost-cutting effort and we’re going to continue that effort into 2024.”

Cell Tower: A busy slate of cell tower reports this week showed relatively solid trends in the final quarter of 2023, but also revealed a muted growth outlook for 2024 amid a broader moderation in 5G network investment. American Tower (AMT) – the largest cell tower REIT – rallied 6% after reporting full-year FFO growth of 1.1% in 2023 – above its prior forecast – and forecast FFO growth of 4.3% in 2024 at the midpoint of its initial guidance range. AMT’s more upbeat outlook than its peers was fueled, in part, by its growing data center segment, which AMT forecasts will grow another 10% in 2024 – above its broader revenue outlook calling for growth of 1-3% on an FX neutral basis. Small-cap fiber owner Uniti Group (UNIT) surged 12%after reporting mixed results, but commented that it plans to maintain its dividend and implicitly hinted that it was engaged in merger talks. UNIT reported that its full-year FFO dipped 19% in 2023 as sharply higher interest expense offset 2% revenue and EBITDA growth. UNIT didn’t directly confirm the reports last month that it was engaged in merger talks with its former parent and largest tenant – telecom operator Windstream Holdings – but did comment that it “expects to be active this year evaluating transformative transactions.” Elsewhere, SBA Communications (SBAC) declined 2% despite hiking its quarterly dividend by 15%, and reporting full-year FFO growth of 6.8% in 2023 – above its prior guidance. SBAC’s outlook, however, called for relatively disappointing FFO growth of just 1.5% in 2024, which “reflects a continuation of the reduced level of carrier CapEx” and ongoing Sprint-related churn.

Office: Moving to the laggards this week, Orion Office (ONL) – which has struggled mightily since its initial spin-off from net lease giant Realty Income in 2021 – dipped another 19% this week after reporting decent fourth-quarter results but providing a dim outlook for 2024. Orion – which faces lease expirations on nearly a quarter of its portfolio in 2024 – expects its FFO to plunge more than 40% in 2024, noting that “several of our largest tenants with leases rolling in 2024 will not renew, causing revenues and earnings to decline materially and carrying costs to rise until we can get these properties released.” ONL was able to sign just 250k SF in leases throughout 2023 – a fraction of the nearly 2 million SF set to expire – but did report that its leasing activity in 2024 has picked up, signing 227k SF in the first two months of 2024. ONL commented, “this is not just an Orion issue… the hybrid workplace model has become the mainstay and office tenants continue to need less square footage, creating leasing activity for the industry that has not returned to pre-pandemic levels.” Overall, office REITs reported average FFO declines of -13.6% in 2023 and expect a decline of roughly -7% in 2024, which would be about 20% below pre-pandemic levels.

Storage: Results from a trio of storage REITs this week showed continued headwinds on self-storage fundamentals from the combination of elevated supply growth and sluggish demand, but also some hints at improving trends in early 2024 amid a thawing of the icy-cold housing market. Extra Space (EXR) – the largest storage REIT by the number of units managed – gained 2% after reporting that its full-year FFO declined -4.0% in 2023 and expects another decline of -1.2% in 2024. Property-level fundamentals are expected to remain sluggish across the sector in 2024 as relatively steady low-single-digit rent growth on renewed leases will be offset by sharply lower rents on new leases. EXR did note that it sees “some positive signs that we are getting closer” to regaining pricing power with new customers. New lease rates – referred to as “Street Rates” – remained lower by -10% in Q4 – marking a notable improvement from the -24% dip in Q3. EXR also reiterated its outlook that supply growth will moderate by late 2024, noting that it’s seen a 30-40% decline in its measure of new competitive development. National Storage (NSA) – which focuses Sunbelt and secondary markets – gained 2% after reporting similar trends, noting that Street Rates remained lower by -10% in Q4 – marking a slight improvement from the -15% dip in Q4. NSA reported that its full-year FFO declined -4.3% in 2023 – not as weak as the -5.3% previously forecast – but does see headwinds continuing into 2024 with guidance calling for a -7.8% decline. CubeSmart (CUBE) was the laggard of the trio, finishing flat this week after reporting in-line results and noting that Street Rates were -14% in Q4, and have remained lower by -15%.

Casino: Gaming and Leisure Properties (GLPI) – which owns 62 regional casinos – was little-changed this week after it reported solid fourth-quarter results and hiked its dividend by 4% to $0.76/share (6.6% dividend yield). GLPI reported full-year FFO growth of 3.9% in 2023 – slightly above its prior guidance of 3.8% – and expects modest growth of about 1% in 2024. The relatively quiet M&A environment was the focus of the earnings call, with GLPI commenting, “Our core message to potential counterparties is that despite the macro backdrop in volatility, we are very much open for business.” GLPI highlighted its recent deal to acquire Tioga Downs in February – which GLPI financed through an OP unit exchange – as helping its “reputation of being a unique problem solver.” Earlier this earnings season, VICI Properties (VICI) reported similarly solid results, recording FFO growth of 11.4% in 2023 – also above its prior outlook – and providing guidance forecasting 4.0% FFO growth in 2024. The M&A environment has been similarly slow for VICI given the challenging financing environment and ultra-wide bid-ask spread between private market values and the price at which public investors would be willing to accept. With few casinos on the selling block, VICI has pushed into adjacent entertainment-oriented sub-sectors in recent quarters.

Mortgage REIT Week In Review

Led by a rebound from commercial property lenders, Mortgage REITs rebounded this week with the iShares Mortgage REIT ETF (REM) advancing 1.9%. Multifamily-focused lender NexPoint Real Estate (NREF) rallied 8% this week after it reported steady loan performance in its $1.6B portfolio, pushing back on recent concern over a much-discussed jump in CLO delinquency rates in recent months. NREF noted that its Book Value Per Share (BVPS) rose 0.3% in Q4 to $17.93 – the fourth strongest among commercial mREITs this earnings season – while its distributable EPS increased to $0.51, which continues to cover its $0.50/share dividend. NREF provided color on the state of the multifamily lending market, noting it’s in the “eye of the storm” through mid-2024 given peak supply and interest rates headwinds, but sees a “light at the end of the tunnel” as both the supply dynamic and the interest rate environment “flips in the landlord’s favor.” NREF notes that it’s seeing more deals for cash-in refinancing dollars as borrowers seek money to fund replacement caps, remarking that sponsors are “okay with being diluted, seemingly okay with the terms we’re providing in terms of risk mitigation and the ability to take over the asset, and “being realistic on cap rates.”

Elsewhere on the commercial side, Ready Capital (RC) – which focuses on “middle-market” multi-family – declined 1.5% this week after it reported shakier loan performance across its portfolio compared to NREF. RC noted that its 60-day plus delinquencies in its originated portfolio climbed to 7.2% in Q4 – up from 2.9% in Q3 – but this eased somewhat in early 2024 to 5.5% as of the end of February. The majority of this uptick was driven by a four-loan portfolio of multifamily buildings from a single sponsor “as certain properties experienced NOI reductions driven by flat rent growth and increases in operating and interest costs.” On the residential mREIT side, Ellington Financial (EFC) dipped 7% after reporting that its BVPS declined 3.5% in Q4 – the second-worst among residential mREITs this earnings season – and announced that it would reduce its monthly dividend by 13% to $0.13/share (12.9% dividend yield). EFC noted that strong performance from its residential loan portfolio its Agency and non-Agency MBS “didn’t quite offset” merger-related dilution and expenses from its acquisition of Arlington Asset, resulting in a decline in its EPS to $0.27 in Q4 from $0.33 in the prior quarter.

On the downside this week, Great Ajax (AJX) – which had been targeted by Ellington Financial before the deal was terminated in late 2023 – dipped 19% after reporting that its BVPS dipped nearly 10% in Q4 to $9.99/share, prompting a cut in its quarterly dividend to $10/share – down 9% from its prior dividend and marking its fourth dividend cut in the past year. AJX also announced a “strategic transaction” with Rithm Capital (RITM) in which AJX will terminate the relationship with its existing external manager, Thetis Asset Management, and will enter into a management agreement with an affiliate of Rithm to serve as its external manager. The companies noted that the deal “will enable Great Ajax to shift its strategic direction and capitalize on commercial real estate investment opportunities.” As part of the strategic transaction, Great Ajax has entered into a one-year term loan agreement with a subsidiary of Rithm for up to $70 million and plans to use borrowings to repay high-cost debt. Rithm Capital – which has been one of the best-performing mortgage REITs over the past several years – gained 3% this week.

2024 Performance Recap & 2023 Review

Through nine weeks of 2024, real estate equities have lagged the broader equity benchmarks following a powerful year-end rebound in 2023. The Equity REIT Index is lower by -2.0%, while the Mortgage REIT Index is lower by -4.2%. This compares with the 7.9% gain on the S&P 500, the 4.8% gain for the S&P Mid-Cap 400, and the -0.4% decline for the S&P Small-Cap 600. Within the REIT sector, 6 of the 18 property sectors are higher for the year, led on the upside by Data Center, Hotel, Billboard, and Regional Mall REITs, while Net Lease and Self-Storage REITs have lagged on the downside. At 4.18%, the 10-Year Treasury Yield is higher by 30 basis points on the year, while the 2-Year Treasury Yield has risen 10 basis points to 4.53%. Following a late-year rally in the final months of 2023, the Bloomberg US Bond Index is lower by -1.3% this year. WTI Crude Oil is higher by 12.5% this year, but the broader Commodities complex remains lower by -0.8% on the year.

Economic Calendar In The Week Ahead

Employment data highlights the critical week of economic data, headlined by the JOLTS report and ADP Payrolls on Wednesday, Jobless Claims data on Thursday, and the BLS Nonfarm Payrolls report on Friday. Economists are looking for job growth of roughly 190k in February, which follows the blowout report in January in which 353K jobs were added to the payrolls. The January report – which was the driving force behind the recently diminished rate cut expectations – showed impressive “headline” metrics, but these numbers clashed with other employment reports over the past two months showing a more definitive cooling across labor markets and a notable uptick in corporate layoff announcements. The Average Hourly Earnings series within the BLS payrolls report – which is the first major inflation print for February – will also be closely watched, and is expected to show wage growth moderating to a 4.3% annual increase from the 4.5% increase reported last month.

For an in-depth analysis of all real estate sectors, check out all of our quarterly reports: Apartments, Homebuilders, Manufactured Housing, Student Housing, Single-Family Rentals, Cell Towers, Casinos, Industrial, Data Center, Malls, Healthcare, Net Lease, Shopping Centers, Hotels, Billboards, Office, Farmland, Storage, Timber, Mortgage, and Cannabis.

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.

Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.