February 8 2023
The month of January certainly delivered in terms of market returns. The GPR 250 REIT World Index (USD) produced a net total return of 9.2%, breaking through its 1300 resistance level and ending the month at a high of 1377.35. In the REIT universe, the hotel/resort sector performed the best among peers—producing a return of 14.5%, while diversified was the worst performing sector, delivering 4%.
US economic data for the month of January brought great market optimism, bolstering hopes of a soft landing. Non-farm payrolls, although still elevated at 223k, posted its lowest reading since January 2022. Unemployment claims, however, continued to tick lower with its last reading coming in at 186k. Average hourly earnings (0.3% m/m) missed estimates by 0.1% while unemployment dropped from 3.7% to 3.5%. The divergence in unemployment and wage data (heightening the probability of a soft landing) cranked up the speaker and the market jamboree kicked off in full force.
Momentum was maintained by both core CPI and core PCE coming in at 0.3% m/m, the third successive time both readings landed in the 0.2%-0.3% range, down from the 0.5%-0.7% range. The month ended strong with another closely watched indicator—the employment cost index q/q, a measure of the change in total employee compensation—coming in 0.1% below expectations at 1%. The Willshire US REIT index, Nasdaq Composite, and S&P 500 rallied 2.2%, 1.67%, and 1.46% on the day of the release.
Layoffs accelerated in the month of January as corporate chiefs started cleaning house. Global tech layoffs were more than 77,916 by as many as 241 firms, with tech giants Alphabet, Microsoft, and Amazon leading the pack. Laid off tech employees were quickly absorbed back into the workforce as demand for the profession remains high. Financial sector layoff activity continued in January, with Goldman Sachs announcing it will lay off approximately 6% of its workforce—one of the company’s biggest round of layoffs since the global financial crisis.
Speculation was knocked out of the USD/JPY pair on January 18th when the Bank of Japan defied market pressure and left its yield curve control measures unchanged. The Yen dropped 2% against the dollar; quickly reversing the loss, hours later. The sustainability of the policy continues to be brought into question as Japanese inflation prints consistently reach multi-decade highs.
REIT earnings season kicked off with Prologis releasing results on January 18th. Full year core funds from operations (FFO)/share mildly beat estimates by $0.03 coming in at $5.16. Cash same property net operating income (NOI) growth guidance of 8.5% to 9.5% for 2023 was in line with expectations, and core FFO 2023 guidance of $5.45 implies mid-single digit growth. Prologis has a good track record of raising FFO guidance as the year progresses.
Other significant portfolio holdings that released results were Equity Lifestyle Properties (ELS) and Alexandria Real Estate Equities (ARE). Full year 2022 normalized FFO/share of $2.72 for ELS surprised 1.9% to the upside. NOI 2023 growth guidance of mid-5% was 50 bps above expectations and the company raised its annual dividend by 9%. ARE posted positive results; with full year same-store NOI growth (9.6%) beating the high end of management’s estimates while leasing volume remained strong and well above historical averages. Full year FFO/share was in line with expectations at $8.42 and fiscal year 2023 guidance metrics remain unchanged since their investor day in November 2022.
Despite the recent upbeat economic data and heightened probability of a soft landing, we maintain our mild recession base case as data remains mixed and of too low frequency to draw any meaningful conclusions. As a result, our preference for hybrid companies (companies with offensive and defensive characteristics) remains intact.