Real estate was the second-worst-performing sector after technology in 2022, primarily because of multiple rate hikes. The Federal Reserve raised the benchmark federal funds rate seven times last year to the highest level in 15 years to mitigate inflationary pressures. The S&P United States REIT index plunged 27% in 2022. The benchmark S&P 500 index, in comparison, is down 19.4% over the past year.
The recessionary concerns have also battered real estate investment trusts (REITs), as demand for specific real estate properties such as housing and commercial office properties plummeted. After a stellar run in 2021, housing demand plunged by 30% in November last year. The permanent shift toward a remote working culture along with mass layoffs also harmed commercial office properties.
As the inflation levels are still well above the Fed’s target of 2%, the central bank is expected to stick to its hawkish monetary policies.
“There’s an expectation really that the services inflation will not move down so quickly, so we’ll have to stay at it,” Fed Chairman Jerome Powell said. “We may have to raise rates higher to get where we want to go.”
Some of the hardest-hit REITs are:
AvalonBay Communities Inc. (NYSE: AVB) is a residential REIT that owns 88,405 apartments across 12 states. It won the Nareit 2022 Leader in the Light Award, reflecting its superior environmental, social and governance (ESG) efforts.
But shares of AvalonBay Communities declined 36.1% in 2022. Several analysts downgraded the stock anticipating underperformance amid the Fed’s continued hawkish stance and normalizing rental rates.
Last month, Aperture Investors analyst Adam Kramer downgraded AVB stock from Overweight to Equal-Weight, while Goldman Sach analyst Chandi Luthra downgraded the stock from Buy to Neutral. Also, JP Morgan analysts downgraded AvalonBay Communities from Neutral to Underweight on Dec. 16. This comes after the REIT revised its fiscal 2022 core funds from operations (FFO) per share guidance from $9.76$9.96 to $9.74-$9.84.
AvalonBay Communities pays $6.36 per share as dividends annually, yielding 3.94%. Its four-year average dividend yield stands at 3.23%. Over the past five years, the REIT’s dividend payouts grew at a meager 2.3% compound annual growth rate (CAGR).
Shares of Chigaco-based Equity Residential (NYSE: EQR) declined 34.8% over the past year, given the tremendous macroeconomic turbulence. Equity Residential’s financials have taken a hit in recent quarters. In the third quarter that ended on Sept. 30, the REIT’s earnings per share (EPS) fell 25.2% year-over-year to $0.86.
Equity Residential’s normalized FFO per share increased 19.5% year-over-year from $0.77 in the third quarter of 2021 to $0.92 in the third quarter of last year. The REIT pays $2.50 in dividends annually, translating to a 4.24% yield. Equity Residential raised its annual dividend payout by 9 cents, or 3.73%, from $2.41 in 2021 to $2.50 last year.
Despite the softening rental rates, the REIT’s management has remained bullish regarding its 2023 growth prospects.
“The substantial embedded growth in our rent roll and our financially resilient and highly employable resident base leaves us well-positioned to deliver above-average results in 2023 — despite likely macroeconomic turbulence. Longer term, we will continue to benefit from trends such as high single-family housing costs, favorable demographics and an overall deficit in housing across the country,” Equity Residential President and CEO Mark Parrell said.
SL Green Realty
Manhattan, New York’s largest commercial landlord, SL Green Realty Corp. (NYSE: SLG), has had a dismal year. SL Green stock plummeted 54.4% last year, making it one of the worst-performing office REITs in 2022. Analysts have also maintained a bearish sentiment regarding SL Green Realty. In December, SL Green stock was downgraded by BMO Capital Markets analyst John Kim, Scotiabank analyst Nicholas Yulico and Citigroup analyst Nicholas Joseph.
The commercial REIT has been battered by the declining demand for office space over the past two years. For the nine months ended Sept. 30, SL Green Realty reported a net loss of $28.7 million, or 47 cents per share. This compares with the $486.1 million net income generated over the same period of 2021. The REIT slashed its dividend per share by 12.9% to $0.3108 last month. It pays $3.25 in dividends annually, translating to a 9.64% yield.
As recession concerns loom, the possibility of speedy revival is slim for New York City’s largest landlord. The consensus FFO estimate of $5.72 for fiscal 2023 indicates a 14.1% decline year-over-year. Analysts expect the REIT’s revenue to improve by 2.4% in this year.
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