💍 Tying the Knot

Plus, Real Estate pundits beat the drums for a real estate rally in 2024. Here's what they're saying.

Ethan Roberts
January 26, 2024

Happy Friday! It was all systems go for the market this week, with no negative news to weigh down the indices. On Thursday, higher-than-expected GDP, yet lower-than-expected inflation numbers put Wall Street in a very good mood. Some REITs were still consolidating off their recent run-ups, but about 70% of them finished in positive territory.

In this issue: Realty Income and Spirit Realty tie the knot, Real Estate pundits beat the drums for a real estate rally in 2024 and SL Green turns lemons into lemonade.

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REIT ROUNDUP:

Park Hotels & Resorts Inc (NYSE: PK), which was featured here a few weeks ago for paying two special dividends on top of its regular Q4 dividend, reported preliminary Q4 AFFO of $0.53 and full year 2023 AFFO of $2.05, versus estimates of $0.49 and $2.01. In addition, preliminary revenue per available room (RevPAR) was up 4.9% in Q4 year over year and 10.2% for the full year 2023.

VICI Properties Inc (NYSE: VICI) January 23, announced it’s entered into a loan construction agreement for up to $150 million in financing to affiliates of Homefield Kansas City to fund the development of a Margaritaville resort in Kansas City, KS.

Terreno Realty Corp (NYSE: TRNO) January 23, announced it has begun redevelopment of a 231,000 square foot two-building property on 11.1 acres in Gardena, CA. After the demolition of the existing buildings, construction of three new industrial buildings will begin, for a total investment of $64.0 million. The buildings are expected to be finished in 2027.

Equinix Inc (Nasdaq: EQIX) January 24, announced it now has a fully managed private cloud service, enabling businesses to easily acquire and manage their own NVIDIA DGX AI supercomputing infrastructure for building and running custom generative AI models.

AGNC Investment Corp (Nasdaq: AGNC) January 22, reported fourth-quarter earnings of $0.57 per share, below the estimate of $0.58 and 22.97% below EPS of $0.74 from Q4 2022.

WINNERS & LOSERS

📈 Biggest Winners This Week: Office REITs continue their dominance

DigitalBridge Group Inc (NYSE: DBRG) Up 11.22%
SL Green Realty Corp (NYSE: SLG) Up 10.11%
Paramount Group Inc (NYSE: PGRE) Up 9.85%
Vornado Realty Trust (NYSE: VNO) Up 9.55%
Macerich Co (NYSE: MAC) Up 9.04%
Braemar Hotels & Resorts (NYSE: BHR) Up 7.37%
Boston Properties, Inc (NYSE: BXP) Up 7.26%
Bridge Investment Group Holdings (NYSE: BRDG) Up 7.24%
Douglas Emmett Inc (NYSE: DEI) Up 6.99%

📉 Biggest Losers This Week: Hotel and retail REITs.

Arbor Realty Trust (NYSE: ABR) Down 5.59%
Service Properties Trust (Nasdaq: SVC) Down 3.73%
Sun Communities Inc (NYSE: SUI) Down 3.63%
Park Hotels & Resorts Inc (NYSE: PK) Down 3.00%
Seritage Growth Properties (NYSE: SRG) Down 2.94%
Ryman Hospitality Properties Inc (NYSE: RHP) Down 2.70%

Prices as of January 25, 12:00 PM

UPGRADES: Another very busy week for upgrades, but only one downgrade.

Crown Castle Inc (NYSE: CCI) January 19, BMO Capital analyst Ari Klein upgraded Crown Castle from Underperform to Market Perform and raised the price target from $107 to $110.

Agree Realty Corporation (NYSE: ADC) January 22, JMP Securities analyst Mitch Germain upgraded Agree Realty from Market Perform to Outperform and announced a $71 price target.

Plymouth Industrial REIT Inc (NYSE: PLYM) January 22, JMP Securities analyst Mitch Germain upgraded Plymouth Industrial REIT from Market Perform to Outperform and announced a $27 price target.

Digital Realty Trust Inc (NYSE: DLR) January 22, Scotiabank analyst Maher Yaghi upgraded Digital Realty Trust from In-Line to Outperform and raised the price target from $69 to $71.

Regency Centers Corp (NYSE: REG) January 22, Evercore ISI Group analyst Steve Sakwa upgraded Regency Centers from Sector Perform to Sector Outperform and raised the price target from $69 to $71.

… And Downgrades:

EPR Properties (NYSE: EPR) January 22, JMP Securities analyst Mitch Germain downgraded EPR Properties from Market Outperform to Market Perform.

ONE BIG THING

Tying The Knot: Spirit Realty Capital Shareholders Approve Merger with Realty Income

What: On January 19, Spirit Realty shareholders approved all of the proposals to close the merger with Realty income that was proposed in October.

Who: Realty Income Corp (NYSE: O) is a San Diego-based, triple-net lease REIT, with over 13,250 properties around the world. The “Monthly Dividend Company”, as it’s widely known, is a member of the S&P 500 and an S&P 500 Dividend Aristocrat. Its occupancy rate for its entire portfolio, pre-merger, was 98.8%.

Spirit Realty Capital REIT Ord Shs (NYSE: SRC) is a Dallas, TX based retail REIT with free-standing, single tenants on triple-net long-term leases. Spirit Realty Capital owns 2,064 properties that are leased across 37 different industries. Its 345 tenants include Home Depot, Dollar Tree, BJ’s Wholesale Club and Dave & Busters. Its most recent occupancy level was 99.8%.

How: Well over 99% of the votes cast at the special meeting of Spirit shareholders were in favor of the merger. The merger closed on January 23. Under the terms of the merger, Spirit common shareholders received 0.762 newly-issued Realty Income common shares for each Spirit common share they own immediately prior to the effective time of the merger. The NYSE symbol for the merged REITs will continue to be O going forward.

Takeaway: Realty Income has stated that the merger will add another 2.5% to its Adjusted Funds From Operations (AFFO) and will be immediately accretive to 2024 earnings. Its 13,250 properties will now increase to over 15,300. Since this was an all-stock deal, there was no depletion of cash involved in the transaction.

Spirit Realty shareholders are happy, as evidenced by the overwhelming vote for the merger. Realty Income shareholders should also be happy, as this merger will increase diversification and substantially add to its contractual rents. Realty Income now becomes the fourth largest REIT in the S&P 500 in enterprise value.

Those who’ve said that Realty Income was too big to grow have been proven wrong within the past year, as Realty Income has diversified its massive holdings with the purchase of The Bellagio Las Vegas and now Spirit Realty.

HOUSING NEWS BRIEF

False Hope For Housing Optimism In 2024?

What: Optimism for increased home sales is running rampant in the real estate market for 2024 over expected declines in mortgage interest rates. But not so fast….

Who: Fannie Mae’s economic and Strategic Research (ESR) Group is predicting in its January report that mortgage rates will fall below 6% by the end of 2024, sparking a much greater demand for housing than was seen in 2023. The ESR group says existing home sales will rise from 3.8 million in the fourth quarter of 2023 to 4.5 million by the fourth quarter of 2024.

Additionally, the ESR group is no longer expecting a mild recession, but instead is forecasting a slightly positive GDP for the year. Doug Duncan, Fannie Mae Senior VP and chief economist noted:

“Inflation’s decline and the resultant FED pivot to signaling future rate cuts lead us to believe that home sales and mortgage originations likely bottomed out in the second half of 2023 and that a gradual improvement is now underway.”

He’s not the only one feeling optimistic. Lawrence Yun, the chief economist for the National Association of Realtors (NAR) and eternal optimist (with an axe to grind), says that despite sales slipping 1% between November and December and suffering a decline of 6.20% year-over-year, “the latest month’s sales look to be the bottom before inevitably turning higher in the new year.”

Yun cites the 30-year fixed rate mortgage which averaged 6.60% as of January 18, down from 6.66% in the previous week, but up from 6.15% a year ago.

But are higher sales really inevitable? Prices have not declined as expected, so even a 1% interest rate drop from last summer does not make housing that much more affordable for younger buyers. In fact, the median existing home price in December was $382,600, up 4.4% from $366,500 13 months ago. A one percent interest rate decline drops the payment on the median price, with 20% down, about $200.

Homes are still not selling quickly. December days on the market rose from 25 days in November to 29 days in December.

Economists and Realtors are optimistically counting on declines in mortgage rates, but if that occurs it’s likely because the economy is weakening. The total number of layoffs for all of 2023 was 720,000, the highest level since the COVID pandemic of 2020. Any increase in layoffs for 2024 could be trouble for home sales. And as mentioned here in last week’s REIT report, debt levels are rising and savings rates are falling among potential young homebuyers.

But wait, there’s more: Finally, there’s this gut punch: On January 9, the U.S. Department of Labor announced a final rule that forces companies to treat some workers as employees rather than independent contractors. This rule would vastly increase labor costs for businesses that rely on contract labor, freelancers and “gig” services. Businesses would have to pay half of the social security taxes that independent contractors now pay, and possibly provide health insurance and other benefits they’ve been able to avoid.

Takeaway: Although this final rule will likely be fought in the courts, should it prevail, businesses are likely to begin laying off more staff to defray higher costs. Couple that with 22 states increasing the minimum wage this month and a much higher rate of layoffs is very possible in 2024. Already this month there have been layoffs announced by Microsoft, the L.A. Times, Sports Illustrated, Google, Meta, Amazon, Wayfair, YouTube, Comerica and others.

And that cannot be good for the housing market, despite what Mr. Yun says.

ONE FOR THE ROAD

SL Green Turns Its Lemons Into Lemonade

What: SL Green reported fourth quarter earnings on January 24 in which FFO and revenue both missed estimates and the numbers were weaker than a year ago. But it also raised its Full Year 2024 FFO guidance midpoint by a dollar.

Who: SL Green Realty Corp (NYSE: SLG) is a New York City based office REIT and the largest office building landlord in New York, with 59 buildings totaling 32.5 million square feet. It pays a monthly dividend of $0.25 per share and presently yields 6.58%.

Sour Fruit: Q4 FFO of $0.72 per share missed the analyst consensus estimate of $0.91 and was far below its FFO of $1.47 in Q4 2022. Revenue of $131.93 million was 18.24% below consensus estimates of $161.36 million and 41.3% below revenue of $224.87 million in Q4 2022. Net loss to common stockholders of $2.45 per share was far worse than the net loss of $1.01 per share in Q4 2022.

However, SL Green said that $0.15 of the FFO decline was due to non-cash fair value adjustments on mark-to-market derivatives and $0.27 per share was non-recurring general and admin charges related to the non-renewal of the company’s former President. But even taking away that combined $0.42, FFO was still $0.14 below last year’s number.

Sweet Fruit: However, SL Green was able to turn its lemons into lemonade with the announcement that it now sees 2024 FFO in a range between $5.90-$6.20 per share, with the midpoint $1.00 higher than its previous guidance range of $4.90-$5.20. As a result of this “sweetening”, shares opened over 1% higher the following morning.

Takeaway:: Lesson to investors- on Wall Street, it’s all about what’s up ahead on the road, not what happened last quarter. Despite all the gloom and doom about office REITs, SL Green is up about 60% since November and shows no sign of stopping now. Today’s results may come as a surprise to analysts at Goldman Sachs, who recently maintained a Sell rating on SL Green with a $36 price target. As of Thursday morning, shares were trading up near $46.