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This is an abridged version of the full report published on Hoya Capital Income Builder Marketplace on June 3rd.

Real Estate Weekly Outlook

Following their best week since November 2020, U.S. equity markets slipped this past week as China’s apparent emergence from COVID lockdown lifted global benchmark interest rates and commodities prices. A “Goldilocks” employment report in the U.S. – which showed that hiring remains robust while wage pressures have eased a bit – was offset by another jump in energy prices as U.S. gasoline prices climbed to fresh record-highs, closing in on $5 per gallon and threatening to prolong ‘stagflationary’ conditions.

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Declining for the eighth week out of the past nine, the S&P 500 retreated 1.1% on the week and is now roughly 14% below its recent highs. The tech-heavy Nasdaq 100 declined 0.9% and remains nearly 25% below its highs. After pulling back in recent weeks on hopes of peaking inflation, the 10-Year Treasury Yield jumped more than 20 basis points back to the cusp of 3.0%, pressuring bonds and yield-sensitive equity sectors. Real estate equities were among the groups under pressure following their best week since the depths of the pandemic. Ahead of the annual REITweek industry conference, the Equity REIT Index declined 2.0% with 15-of-19 property sectors in negative territory while the Mortgage REIT Index declined by 0.6%.

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The ‘fuel’ of stagflation – both literally and figuratively – persistently elevated energy prices remain the most significant economic and geopolitical threat. Crude oil prices rallied another 5% on the week, buoyed by China’s stimulus announcement and a new EU oil embargo on Russia, offsetting the effects of an OPEC agreement to increase oil production. Public policy measures have, so far, failed to spur a significant increase in U.S. energy production as the U.S. rig count finished unchanged on the week at levels that are still 25% below the comparable week in 2019 despite a 114% increase in U.S. oil prices. The rebound in sovereign yields reignited the downward pressure on fixed income securities across the credit and maturity spectrum, sending the benchmark Aggregate Bond ETF (AGG) lower by 1% – erasing about half of its gains since bottoming early last month.

Equity Sector Performance

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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.

economic calendar for the week starting May 30, 2022

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The Bureau of Labor Statistics reported this week that the U.S. economy added 390k jobs in May – slightly above expectations of roughly 325k – but snapping the streak of 12th straight months of job growth above 400k. A solid “Goldilocks” report indicating that the U.S. labor market still remains a notable source of strength amid a myriad of concerns over inflation and geopolitics, an uptick in the labor force participation rate and size of the labor force were particularly encouraging, but future gains will be increasingly harder to come by with nonfarm employment now within 0.5% of its pre-pandemic level. The balance of the employment data this week was also quite solid as Continuing Jobless Claims declined to the lowest level since 1969 while Initial Claims haven’t yet shown signs of cracks despite an increased frequency of reported layoffs and hiring freezes.

job growth may 2022

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In April, the unemployment rate was unchanged at 3.6%, and the number of unemployed persons was essentially unchanged at 6.0 million. Prior to the coronavirus pandemic, the unemployment rate was 3.5%, and the number of unemployed persons was 5.7 million. Notable job gains occurred in leisure and hospitality, in professional and business services, in construction, and in transportation, but employment in retail trade declined over the month by the most since the depths of the pandemic. While retail is showing clear signs of slowing, the long-awaited “return to the office” appears to be picking up steam as the number of “telework” employees declined to 7.4% of employed persons in May – down from 7.7% in the prior month and COVID peak of nearly 25%.

Employment by industry 2022

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Equity REIT Week In Review

Timber: A pair of companies in our newly-launched Landowner Portfolio announced a merger today as PotlatchDeltic (PCH) announced that it will acquire CatchMark Timber (CTT) – the smallest of four timber REITs – in a roughly $600 million all-stock deal. CatchMark surged more than 40% on the week while PotlatchDeltic slumped 8%. The combined company will own 2.2 million acres of timberlands, including 626,000 acres in Idaho and over 1.5 million acres in the U.S. South, and have a market valuation of roughly $4 billion. PCH reflects a price of $12.88 for each share of CTT – a 55% premium to its most recent close – which is roughly at the levels that CTT traded in late 2021 before running into a myriad of issues with its now-exited Triple T joint venture. PotlatchDeltic shareholders will own 86% of the combined company, which will be one of the ten largest publicly-traded landowners in the U.S.

timber REITs

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Apartments: Ahead of the REITweek presentations next week, AvalonBay (AVB) provided reporting on recent rent trends, noting that its same-store revenue growth for April and May increased 13.0% over the prior year, which is 190 basis points above its prior guidance. AVB cited “favorable underlying resident uncollectible lease revenue, the recognition of higher-than-expected delinquent rent payments from COVID rental assistance programs, and better-than-expected occupancy and effective lease rates.” Data provider Apartment List published its June National Rent Report this week which showed a continued acceleration in rent growth in May with its national index rising by 1.2% in May – bringing its year-over-year rent growth total to a “staggering” 15.3%. So far this year, rents are growing more slowly than they did in 2021, but faster than the growth observed in the years immediately preceding the pandemic. Consistent with Zillow (Z) data last week, Apartment List reported that rents increased this month in 96 of the nation’s 100 largest cities.

rent growth by market - April 2022

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Shopping Center: Retail REITs lagged after employment data showed that the retail trade category shed 61k jobs in May – the worst month since April 2020. This week, we published Shopping Center REITs: Winning The Last Mile. Significantly outpacing their mall REIT peers, shopping center REITs are the second-best performing major property sector this year. Results across the shopping center REIT sector have been as impressive as any property sector over the past three quarters with fundamentals that are as strong – if not stronger – than before the pandemic with a full recovery in both FFO and NOI now complete. Results in the first quarter pushed the average occupancy rate to the highest level since early 2015 while rental rate spreads have exhibited a notable acceleration since bottoming early last year. We believe that the slowed pace of store closings – particularly in the strip center format – goes beyond the near-term COVID-related trends and is indicative of a sustained retailer focus on efficient and well-located large-format space which can serve as hybrid showroom/distribution centers.

store closings 2022

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Industrial: A handful of REITs announced additions to their property portfolio this week. Rexford Industrial (REXR) acquired four industrial properties for $163.8M within its primary Southern California region, bringing the company’s YTD total to $774M. Terreno Realty (TRNO) acquired an industrial property located in San Leandro, California for $34.6M. EastGroup (EGP) acquired a portfolio of industrial real estate in the San Francisco and Sacramento markets with the acquisition of Tulloch Corp. The acquired portfolio consists of 14 properties totaling 1.7M square feet and two land parcels totaling 10.5 acres. The properties are currently 100% leased to 37 tenants with an average remaining lease term of roughly three years. Last week in Industrial REITs: Amazon Cuts Deep, we noted how industrial REITs have uncharacteristically lagged this year after Amazon (AMZN) – the largest industrial tenant – announced plans to cut costs in its logistics network.

REIT net acquisitions 2022

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Casinos: VICI Properties (VICI) advanced nearly 2% on the week after being added to the S&P 500 – effective on Wednesday, June 8 – which follows its successful acquisition of MGM Growth Properties. This week, we published Casino REITs: Game On which discussed why casino REITs have been among the best-performing property sectors this year as the positive tailwinds from the leisure demand recovery have offset inflation headwinds and economic growth concerns. Despite their ultra-long-term triple net lease structures, casino REITs are better protected from inflation than many would presume, making heavy use of CPI-linked escalators and tenant revenue share agreements. While no longer under the radar, Casino REITs remain one of our favorite yield-oriented property sectors, providing strong value with 5-6% dividend yields and growth potential through continued consolidation.

casino REITs

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Student Housing: Privately-owned asset manager Greystar Real Estate announced a $4.2 billion deal to acquire Student Roast – a 23,000-bed student housing portfolio in the U.K. – from Brookfield Asset Management (BAM). Student Roost – the largest student housing operator in England – operates in more than 20 cities across the UK and reportedly drew interest from Blackstone (BX), among others. With the deal, Greystar will become the second-largest student housing owner with more than 100,000 beds, second only to American Campus (ACC), which was acquired by Blackstone earlier this year in a $12.8 billion in an all-cash transaction. ACC was the last remaining public REIT following Greystar’s 2018 acquisition of EDR and Harrison Street’s 2015 acquisition of Campus Crest.

Institutional Student Housing Portfolios

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Hotel: Sunstone Hotel (SHO) advanced 1.5% on the week after it announced that it will acquire a 25% joint venture interest in the 1,190-room Hilton San Diego Bayfront from Park Hotels (PK). Following the acquisition, Sunstone will own 100% of the venture’s interests in the Hotel. Sunstone will pay Park $102M in cash and will effectively assume Park’s $55M share of the existing mortgage loan. The purchase price implies a $628M value – $528k per key – and represents a 6.6% cap rate on its 2022 NOI. Sunstone also provided a business update in which it reported “accelerating hotel demand” and expects its second-quarter Revenue Per Available Room to be down 6-8% compared to the 2019 period, noting that “the greatest demand growth is occurring at the Company’s urban and group-oriented hotels which are experiencing an increase in near-term booking activity, higher than expected attendance at group events, and increased business transient volume.”

hotel REITs

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Healthcare: Another week, another REIT dividend hike. Lab space operator Alexandria Real Estate (ARE) – which we own in the REIT Dividend Growth Portfolio – hiked its quarterly dividend by 2.6% to $1.18/share, representing a forward yield of roughly 2.8%. ARE – which has raised its dividend every year for more than a decade – becomes the 66th equity REIT to raise its dividend this year. In our State of the REIT Nation report published earlier this month, we noted that FFO growth has significantly outpaced dividend growth over the past several quarters, driving the dividend payout ratios to just 68.8% in Q1, so REITs are well-equipped to deliver another year of robust dividend growth that may meet or exceed the record year in 2021.

REIT dividend hikes 2022

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Mall: PREIT (PEI) dipped more than 20% on the week despite reporting progress in its asset-raising plans with the execution of sale agreements for 12 parcels that will generate gross proceeds of roughly $35M. PREIT – which has a Debt Ratio of around 80% – has been seeking to sell-off land around its mall assets to pay down its debt and had previously announced $275M in asset sales in progress. Last week in Mall REITs: Retail Rout, we noted that mall REITs earnings results were actually decently encouraging with Simon and Tanger boosting their full-year FFO outlook, noting a recovery in tenant sales and rent collection back to pre-pandemic levels. Soaring fuel prices and persistent inflation have triggered a “rapid slowdown” in several retail categories in recent months at some major retailers, however, and we reiterate that a recession could be a final death blow to many lower-tier malls.

occupancy rates 2022

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Mortgage REIT Week in Review

Mortgage REITs were mixed following their best week of 2022 as the mREIT sector is now outperforming their equity REIT peers on a year-to-date basis. Despite the slip this week, iShares MBS ETF (MBB) – the benchmark tracking the unlevered performance of residential mortgage-backed bonds – has rebounded nearly 2% over the past month – but remains lower by roughly 7.5% for the year. On an otherwise quiet week of mREIT newsflow, PennyMac Mortgage (PMT) was among the outperformers after holding its quarterly dividend steady at $0.47/share, representing a forward yield of roughly 11.6%. On the downside this week, KKR Real Estate (KREF) slumped 6.5% after launching a $54M secondary common stock offering of 7M shares which it will use to expand its lending portfolio.

mortgage REIT investing

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2022 Performance Check-Up

Through twenty-two weeks of 2022, Equity REITs are now lower by 15.3% on a price return basis while Mortgage REITs have slipped 12.9%. This compares with the 13.6% decline on the S&P 500 and the 11.1% decline on the S&P Mid-Cap 400. Led by the hotel and casino property sectors, four of the nineteen REIT sectors are now in positive territory – while five property sectors are lower by 20% or more. At 2.96%, the 10-Year Treasury Yield has climbed 113 basis points since the start of the year, moderating a bit after briefly coming within 5 basis points of its post-GFC high of 3.25%. The 2-Year Treasury Yield has climbed from 0.73% to 2.66%.

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Economic Calendar In The Week Ahead

Inflation data highlight the slower slate of economic data in the week ahead. On Friday, the BLS will report the Consumer Price Index which may potentially reveal that the fastest pace of year-over-year increases is finally behind us as both the headline and Core CPI is expected to show a cooldown in May to 8.3% and 5.9%, respectively. On Friday, we’ll also get our first look at Michigan Consumer Sentiment for June. Last month, sentiment fell to the lowest level in more than 10 years as persistent inflation and worries over economic growth have weighed on confidence.

real estate economic data

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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, 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.

high dividend yield index

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