‘Behind The Curve’ Correction – Seeking Alpha

Real Estate Weekly Outlook

U.S. equity markets delivered their worst week since the beginning of the pandemic as investors rapidly reset interest rate expectations amid concerns that the Fed is “behind the curve” in combating inflation. The hope for moderating inflation has been interrupted by an intensification of supply chain disruptions resulting from Omicron and a continued surge in energy prices while investors see dwindling potential for further fiscal support following another rough week for the Biden legislative agenda.

Declining for the third-straight week and now sitting on the cusp of “correction” territory, the S&P 500 (SPY) declined 5.8% on the week while the tech-heavy Nasdaq 100 (QQQ) pushed deeper into correction with 7.5% declines and is now 14% below all-time highs – its third-steepest drawdown of the past decade. Real estate equities were among the better performers on the week – but still posted broad-based declines – as the Equity REIT Index declined 3.9% with all nineteen property sectors in negative territory while Mortgage REITs declined by 3.5%.

The choppiness across financial markets has intensified as investors price-in expectations of additional rate hikes ahead of the Fed’s January meeting in the coming week. Meanwhile, concerns over stagflation were deepened by employment data showing that jobless claims rose to the highest level since last October. The 10-Year Treasury Yield retreated slightly this week after reaching its highest level since late 2019. Investors have dumped speculative assets in early 2022 as Bitcoin (BTC-USD) continued its slide and is now 50% below its recent highs. Longer-duration asset classes have also slumped while all eleven GICS equity sectors were lower on the week.

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.

Beneath the volatility and concern over rising rate, data showed that the U.S. housing industry gathered momentum into the winter months and – as it did early in the pandemic recovery – looks poised to again serve as a source of resilience for the U.S. economy. Housing Starts and Permits data this week showed that U.S. homebuilding activity accelerated to nine-month highs in December despite ongoing supply chain constraints. Driven by strength in the multi-family category, Housing Starts climbed 1.4% to a seasonally adjusted annual rate of 1.702 million units last month, the highest level since March, which offset a modest decline in single family starts.

Homebuilder confidence also remained historically strong in January but snapped a four-month streak of gains as lingering supply-chain disruptions offset solid housing demand. The NAHB reported this week that its Housing Market Index slipped slightly from 10-month highs in early January to 83 from last month’s upwardly revised reading of 84. The Current Sales sub-index held steady at 90, the Future Sales sub-index declined two points to 83, and the Homebuyer Traffic sub-index declined two points to 69. The NAHB commented that construction costs have increased almost 19% year-over-year while shortages are adding weeks to typical single-family construction times.

Additional supply is much-needed as Existing Home Sales data showed that the inventory of unsold existing homes at the end of December was just 910,000, or 1.8 months of supply, the lowest levels since the association began tracking total inventories in 1999. For full-year 2021, Existing Home Sales rose 8.5% to 15-year highs of 6.12 million, but the strong sales pace moderated slightly in December as housing supply levels dipped to historic lows and as mortgage rates began to tick higher. NAR Economist Lawrence Yun commented that “consumers should prepare to endure some increases in mortgage rates… and [we] expect home prices to grow more moderately by 3% to 5% in 2022 and 2023 as more supply reaches the market.”

Also this past week, RE/Max (RMAX) reported that December 2021 home sales were the second-highest for the month in report history, trailing only December 2020. Zillow (Z) reported that housing inventory levels dropped below 1 million to record-low levels in December – down 40.5% from the pre-pandemic level in December 2019. Historically tight housing supply rents are up 15.7% from last year while home values rose by 19.6%. Redfin (RDFN) noted that 32% of homes that went under contract within one week of hitting the market, and reported that listed rents rose 14.1% year-over-year – the largest annual jump in rents on record.

On that point, this week we published Homebuilders: Growth At Very Reasonable Prices which discussed how homebuilders continue to sell homes as fast as they can be built, but that’s not fast enough as supply chain constraints have curtailed immediate upside, but may have also prolonged the favorable cycle which has been defined by lingering undersupply. Profit margins have climbed to record highs as builders have more-than-offset cost pressures through higher sales prices. Scale remains a critical competitive advantage as the larger public builders continue to gain market share.

Equity REIT Week In Review

Industrial: Prologis (PLD) was one of just six REITs in positive-territory this past week after kicking off fourth-quarter REIT earnings season with another strong beat-and-raise report. PLD delivered Core FFO growth of 9.2% in full-year 2021 and its initial guidance calls for 8.4% growth in 2022. Same-store NOI growth is expected to rise 6.5% this year, an acceleration from its full-year NOI growth of 6.1%. Leasing spreads were particularly impressive with cash rents rising 19.6%, its highest on record and continuing a reacceleration that began in late 2020. Consistent with our forecast in Industrial REITs: Empty Shelves, Ample Opportunity, CEO Hamid Moghadam commented, “Demand for our 1 billion square foot global portfolio shows no signs of slowing.”

Healthcare: Senior housing REIT Ventas (VTR) was among the best performers this past week after providing a business update in which it projected that its FFO in Q4 will be at the high end of its guidance range. Ventas also noted that leading indicators in December remained robust, with leads at 113% of 2019 levels and move-ins at 106% of 2019 levels and that it recorded five straight months of positive year-over-year occupancy growth through December 2021. As noted in our recent Healthcare REIT report, consistent with the update last week from Welltower (WELL), it appears that while the path back to “normal” was slowed by Omicron, the recovery still had positive momentum deep into Q4.

Data Center: DigitalBridge (DBRG) was lower by 5% on the week after announcing that its portfolio company DataBank agreed to acquire four existing data centers in Houston, TX from former REIT – CyrusOne – for $670M. CyrusOne was acquired by KKR (KKR) in 2021, part of a wave of M&A activity that included Blackstone’s (BX) acquisition of QTS Realty and American Tower (AMT) acquisition of CoreSite. The transaction – which is expected to close late in 1Q22 – will be funded by an investor group led by DigitalBridge, which will contribute $80M from its balance sheet to maintain its 20% ownership position in DataBank.

Hotel: Ashford Hospitality (AHT) dipped more than 20% on the week despite announcing that the company – along with Braemar Hotels (BHR) – received letters from the SEC stating that the agency’s investigation on their external manager – Ashford (AINC) – has concluded and SEC enforcement won’t pursue further action related to an SEC inquiry was over related-party deals and the usage of bailout funds. Hersha Hospitality (HT) finished lower by 5% on the week – roughly in line with the hotel REIT average – after announcing preliminary operating results for December 2021. HT noted that it achieved Average Daily Rates that were 7.2% above December 2019 levels, but that October and November RevPAR trailed 2019 comparable month results by 30% and 21%, respectively, while its December results trailed by 14%. Recent TSA Checkpoint data has shown that the impact of the COVID reacceleration has been relatively mild with travel still at 80% of 2019-levels.

Mortgage REIT Week in Review

Mortgage REITs were also broadly lower on the week – but continue to hold onto solid outperformance relative to equity REITs for the year which we analyzed this past week in Mortgage REITs: High Yield Opportunities & Risks. Ellington Financial (EFC) was among the outperformers this past week after providing a business update in which it noted that its estimated book value per share was $18.39 as of December 31, up 0.2% from its BVPS at the end of Q3 of $18.35. BrightSpire Capital (BRSP) slumped more than 9% on the week after revising its estimated book value per share lower by $0.33 compared to its estimate on December 22nd. In 2021, the Mortgage REIT Index delivered price returns of 7.0% and total returns of 16.0%.

2022 Performance Check-Up & 2021 Review

Through three weeks of 2022, Equity REITs are now lower by 9.3% this year on a price return basis while Mortgage REITs have slipped 4.7%. This compares with the 7.8% decline on the S&P 500 and the 8.8% decline on the S&P Mid-Cap 400. Dragged on the downside by the cell tower and data center sectors, all nineteen REIT sectors are now in negative territory for the year. At 1.75%, the 10-year Treasury yield has climbed 24 basis points since the start of the year and is 123 basis points above its all-time closing low of 0.52% in August 2020, but still 150 basis points below its 2018 peak of 3.25%.

Economic Calendar In The Week Ahead

We have another frenetic week of economic data, earnings reports, and Fed-related newsflow in the week ahead, kicking off on Tuesday with the Case Shiller Home Price Index. On Wednesday, we’ll see New Home Sales which is expected to show an acceleration in December consistent with recent reports from homebuilders. Later on Wednesday, we’ll hear from the Federal Reserve at the conclusion of their two-day FOMC Meeting. On Thursday, we’ll get our first look at fourth-quarter GDP data as well as Pending Home Sales for December. On Friday, we’ll see inflation data via the PCE Index as well as Personal Income & Spending data.

For an in-depth analysis of all real estate sectors, be sure to 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, Storage, Timber, Prisons, 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.

Additional disclosure: This is an abridged version of the full report published on Hoya Capital Income Builder on January 19th.

Hoya Capital Real Estate (“Hoya Capital”) is a research-focused Registered Investment Advisor headquartered in Rowayton, Connecticut. Founded with a mission to make real estate more accessible to all investors, Hoya Capital specializes in managing institutional and individual portfolios of publicly traded real estate securities, focused on delivering sustainable income, diversification, and attractive total returns. A complete discussion of important disclosures is available on our website (www.HoyaCapital.com) and on Hoya Capital’s Seeking Alpha Profile Page.

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