Real estate stocks outperform major market averages as rate hikes ruled out, earnings continue to grow

Real estate stocks outperformed major market averages as the Federal Reserve ruled out a near-term rate hike despite the inflation data, and the sector continued to demonstrate solid balance sheets and earnings.

The Real Estate Select Sector SPDR Fund ETF (NYSEARCA:XLRE) closed Wednesday, the day of the Federal Open Market Committee meet, 0.06% higher at $36.21 and rose 1.54% from last week to finish at $37.02 on Friday.

Dow Jones Equity All REIT Total Return Index increased by 1.73%, while FTSE Nareit All Equity REITs gained 1.33% on a weekly basis.

Comparatively, the broader S&P 500 index climbed merely 0.55%.

Health Care REIT Ventas (VTR), Self Storage REIT Extra Space Storage (EXR), Telecom Tower REIT American Tower (AMT), and Residential REIT Camden Property Trust (CPT) were the biggest S&P 500 real estate gainers of the week, inching up on the back of strong quarterly earnings.

Meanwhile, Data Center REIT Equinix (EQIX), Specialized REIT Iron Mountain (IRM) and Tower REIT SBA Communications (SBAC) emerged as laggards.

Office Properties Income Trust (OPI), Industrial Logistics Properties Trust (ILPT), Douglas Elliman (DOUG) and KE Holdings (BEKE) were the other major real estate gainers.

Macro catalysts

The Fed held rates steady for a sixth straight meeting on Wednesday, keeping the federal funds rate target range at 5.25%-5.50%, as widely expected. However, Chair Jerome Powell cleared at his post-decision press conference on Wednesday that he doesn't expect the Fed to have to increase rates anytime soon.

Core PCE inflation accelerated from 2% to 3.7% and real GDP slowed to 1.6%, contradicting earlier Fed expectations of a "soft landing." Citi Research pushed its base case for the first rate cut from June to July and expects about 100 basis points instead of 125 basis points of total cuts this year.

Mortgage applications dropped as rates rose. Long-term mortgage rates rose for the fifth consecutive week.

Meanwhile, well-heeled home shoppers are increasingly paying cash, helping turbo-charge price gains for the most expensive U.S. homes. The median sale price of luxury homes, or those valued in the top 5% of the market nationally, hit an all-time high $1.23 million in the first quarter, an increase of 8.7% from the same period last year, according to an analysis by Redfin.

Earnings Surprise

A total of 20 out of 31 S&P 500 real estate companies reported quarterly results this week. Among the 20 companies, 16 posted an earnings beat, while four reported a miss. A total of 14 of the reporting companies exceeded revenue consensus, while six trailed expectations.

QTD, 27 out of the 31 real estate companies have reported earnings. Roughly 85.2% of the companies delivered an earnings beat, while ~14.8% missed consensus. In terms of revenue, about 70.4% beat expectations, and nearly 29.6% trailed the consensus.

For the upcoming week, five notable real estate companies scheduled to report results are Realty Income (O), Medical Properties Trust (MPW), Simon Properties (SPG), Innovative Industrial Properties (IIPR) and Healthcare Realty (HR).

Fund Flows

Funds flowed into XLRE this week, boosted by optimism surrounding the Fed's dovish tone. Optimism about the short-term outlook for the broader stock market rebounded after four consecutive weeks of decline.

XLRE saw net inflows worth $23.55M, compared to outflows worth $58.27M last week, data solutions provider VettaFi said.

Meanwhile, Seeking Alpha's Quant Rating system changed its recommendation on the ETF to Strong Sell from Sell on Tuesday, ahead of the Fed meeting.

Subsector Performance

Health Care REITs saw the biggest jump in stock prices among subsectors, fueled by Ventas' Q1 results and the upgrade of Healthpeak Properties (DOC) by Wedbush.

Office REITs were surprise winners of the week, boosted by Boston Properties (BXP) beat.

Here is a look at the subsector performance for the week: