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PulteGroup and Vornado Realty have been highlighted as Zacks Bull and Bear of the Day

For Immediate Release

Chicago, IL – May 17, 2023 – Zacks Equity Research shares PulteGroup PHM as the Bull of the Day and Vornado Realty Trust VNO as the Bear of the Day. In addition, Zacks Equity Research provides analysis on Microsoft MSFT, Activision Blizzard ATVI and Sony's SONY.

Here is a synopsis of all five stocks:

Bull of the Day:

Just when investors thought the housing market would implode under the "squared weight" of (1) a steeply inverted yield curve and (2) the regional banking crisis, we are witness to homebuilders like PulteGroup putting up solid Q1 numbers and guidance that lift their prospects considerably.


The reason that PHM is a Zacks #1 Rank now is that analysts launched their consensus estimates since that report from full-year EPS of $7.44 to $9.05.

And next year's profit haul also moved higher from $7.24 to $9.00 per share.

This rebound may mark the earnings trough not only for many homebuilders, but for real estate in general.

Inflation and Interest Rates: Have They Peaked?

This past weekend I published an article about the "possible peak" in my real estate-focused newsletter Multifamily Investing.

You can read the full version at the link but here is a synopsis...

The US economy is doing a pretty good job of absorbing the regional banking crisis.

Despite the persistence of digital banks runs -- with short-sellers preying on blood in the water to drive out deposits by pummeling stock prices -- the stock market has held up well and the Federal Reserve signaled a pause in their efforts to battle inflation.

Meanwhile, job creation, consumer spending, and housing markets remain strong according to a collection of robust data sets.

This scenario sets up "the pause" for the Fed with interest rate hikes.

That diverse body of economists, with tons of data and analysis at their disposal, has done a good amount to tamp down wildfire inflation.

And while the yield curve will remain inverted for some time, the message is clear that they have taken a big bite out of the cost surges.

So now we are seeing inflation stabilize across many sectors. Sure, 5-7% inflation in some sectors like Food & Energy are alarming.

But what matters now to investors is the trend direction and speed.

And that trend is showing a new downward trajectory in inflation and a slowing in the rate of acceleration in either direction.

History shows that this pattern leads to the fire being put out.

Especially in the age of exponential technologies that tend to foster hyper productivity and disinflation. Honestly, when was the last time you had to worry about sending a check, a document, a photo, or yourself for a signature when they can all be done now instantaneously?

What's the Impact for Real Estate?

While I thought the regional banking crisis would have a bigger negative impact on mortgage lending than the positives of the Fed pause, I'm starting to reconsider that idea.

In their article for Forbes Advisor, Mortgage Rate Forecast For 2023, Robin Rothstein and Chris Jennings (Editor) suggest that the inflation battle is being won and the market is recognizing this...

Recent data indicates the Fed's tightening policy seems to be working, though some analysts say too well, given the ongoing turmoil in the banking sector. Nevertheless, headline inflation cooled to 5% in March for the first time in nearly two years and is well below its June 2022 peak of 9.1%. Even so, the current rate is still far above the Fed's 2% goal.

The good thing about this article is that they quote a variety of real estate-focused economists and analysts sharing their views of the unfolding interest rate landscape.

On the alarmed end of the spectrum comes this...

"The latest interest rate hike by the Federal Reserve is unnecessary and harmful," said Lawrence Yun, chief economist at the National Association of Realtors, in an emailed statement. "(Small regional banks) are becoming zombie-like banks, unable to lend even to good businesses as they are more concerned with balance sheet shuffling for survival. This situation will worsen with each additional rate hike by the Federal Reserve."

Among the optimists were these forecasts...

National Association of Realtors (NAR). "[F]orecasts that ... mortgage rates will drop—with the 30-year fixed mortgage rate progressively falling to 6.0% this year and to 5.6% in 2024."

Compass U.S. region president, Neda Navab. "There have been signals that mortgage interest rates may be at or near their peak, given recent encouraging news around inflation and a corresponding drop in the U.S. Treasury yields that help set mortgage rates. A sustained drop could push mortgage rates into the 5% range late in the second quarter or in the second half of 2023, but that's definitely not guaranteed."

Mortgage Bankers Association (MBA). "Long-term rates have already peaked. We expect that 30-year mortgage rates will end 2023 at 5.2%."

What About the Debt Ceiling Battle?

We've seen this movie before and it usually gets resolved after some customary political brinkmanship.

But the Forbes Advisor piece does share some additional views, including the idea that the uncertainty and potential for default will keep rates elevated into the summer.

This remains the wild card for the spring home-buying season.

The good news is that digital-centric financial markets are extremely quick at absorbing new information (good or bad) and discounting new trends.

This means that barring a tumultuous US default event, inflation and rates are trending down, the regional bank crisis volatility is being absorbed by much bigger banks, and national lenders, builders, and investors will be modeling for rates in the 5% handle.

And if the economy avoids recession, then all the bargains I was expecting in the Multifamily space may not unfold either. To learn more, check out this on-demand educational webinar from Mike Morawski where he goes over the return dynamics, underwriting traps, and tax advantages of Multifamily Investing...

Creating Generational Wealth

Mike has some great slides in there that illustrate what I call the "power laws" of Cash Flow and Equity Build.

Bottom line: We could still get more Regional Bank scares, but the intelligence of the market discounting machine has weighed and measured what these failures mean and found them lacking in systemic or economic impact. I am surprised by this, but then again, this is a feature and not a bug of US economic resilience as I talked about in my recent vlog...

Dollar Destruction Hysteria: Why the Panic is Wrong, Again

Bear of the Day:

Vornado Realty Trust made headlines earlier this year when they defaulted on a $450 million commercial property loan in NYC.

Vornado first-quarter 2023 funds from operations (FFO) plus assumed conversions as adjusted per share of 60 cents missed the Zacks Consensus Estimate of 62 cents. Moreover, the figure declined 24.1% year over year.

Quarterly results display better-than-anticipated revenues aided by healthy leasing activity. However, higher operating expenses acted as a dampener.

Total revenues came in at $445.9 million in the reported quarter, surpassing the Zacks Consensus Estimate of $443.7 million. On a year-over-year basis, revenues improved nearly 1%.

Quarter in Detail

In the reported quarter, total same-store net operating income (NOI) (at share) came in at $264.6 million compared with the prior-year quarter's $264.7 million. The metric for the New York and 555 California Street portfolios improved 1.6% and 4.3%, respectively. However, the same-store NOI (at share) for THE MART portfolio declined 22.6% from the prior-year period.

Operating expenses flared up 5.7% to $228.8 million year over year.

During the quarter, in the New York office portfolio, 777,000 square feet of office space (771,000 square feet at share) was leased for an initial rent of $101.02 per square foot and a weighted average lease term of 9.5 years. The tenant improvements and leasing commissions were $2.48 per square foot per annum or 2.5% of the initial rent.

In the New York retail portfolio, 25,000 square feet were leased (20,000 square feet at share) at an initial rent of $373.07 per square foot and a weighted average lease term of 6.8 years. The tenant improvements and leasing commissions were $26.54 per square foot per annum or 7.1% of the initial rent.

Additionally, at THE MART, 79,000 square feet of space (all at share) was leased for an initial rent of $56.44 per square foot and a weighted average lease term of 6.8 years. The tenant improvements and leasing commissions were $8.04 per square foot per annum or 14.2% of the initial rent.

For VNO's 555 California Street portfolio, 4,000 square feet of space (3,000 square feet at share) was leased for an initial rent of $156.96 per square foot and a weighted average lease term of seven years. The tenant improvements and leasing commissions were $39.07 per square foot per annum, or 24.9% of the initial rent.

Vornado ended the quarter with occupancy in the New York portfolio at 89.9%, down 130 basis points (bps) year over year. Occupancy in THE MART declined to 80.3% from 88.9%. However, occupancy in 555 California Street improved 70 bps to 94.9%.

Portfolio Activity

In the reported quarter, Vornado and Rudin closed the earlier announced transactions related to their 350 Park Avenue and 40 East 52nd Street properties with Citadel Enterprise Americas LLC ("Citadel") and with an affiliate of Kenneth C. Griffin, Citadel's Founder and CEO ("KG").

Additionally, Vornado entered into a joint venture (JV) with Rudin ("Vornado/Rudin") to purchase 39 East 51st Street for $40 million. Upon the formation of the KG JV, VNO intends to combine this property with 350 Park Avenue and 40 East 52nd Street to create a premier development site, to be known as "Site" collectively. The transaction is expected to be completed in second-quarter 2023.

Balance Sheet

Vornado exited first-quarter 2023 with cash and cash equivalents of $890.9 million, slightly up from $889.7 million as of Dec 31, 2022.

Additional content:

Microsoft's (MSFT) $69B Activision Deal Gets EU Clearance

Microsoft has received approval from The European Union for its $69-billion acquisition of Call of Duty-maker Activision Blizzard. This decision goes against the U.K. and U.S. authorities, who have concerns about the deal.

The European Commission, after conducting its analysis, concluded that the acquisition would not harm competition. Microsoft made a promise to allow other companies in the cloud gaming market to offer popular games like Call of Duty on their platforms for the next ten years. However, the deal still faces legal challenges in the United States and the U.K., which could be difficult for Microsoft to overcome.

The EU's decision is seen as positive for competition and is expected to give a boost to the cloud streaming market, which currently makes up a small percentage of the overall gaming industry.

The EU's viewpoint contrasts with that of the U.K.'s Competition and Markets Authority and the US Federal Trade Commission, both of which had reservations about the deal. The main difference in opinions seems to revolve around how quickly the cloud gaming market will grow in the future.

Overall, Microsoft's acquisition of Activision Blizzard has received EU approval but the deal's ultimate success depends on overcoming legal hurdles in the United States and the U.K. The decision by the EU shows confidence in the potential benefits of competition and growth of the cloud gaming market.

What's the Problem with the Acquisition?

The main problem with the acquisition is regarding the competition. Microsoft's gaming division would have too much of the industry, which could unfairly limit its competitors and ultimately harm consumers.

In the United States, the Federal Trade Commission (FTC) wants to stop Microsoft from buying Activision, as they believe it could have negative effects. The U.K.'s Competition and Markets Authority (CMA) is also concerned that the deal could lead to higher prices and fewer options for gamers in the U.K.

The CMA has issues with the solutions Microsoft proposed to address these concerns. The problem revolves around exclusivity – if Microsoft wants to benefit the most from the deal, they might make future games from Activision exclusive to Xbox and PC, leaving out Sony's PlayStation.

Since Microsoft acquired Minecraft in 2014, the game has been available on platforms owned by Sony and others without any restrictions. As part of the ongoing discussions surrounding the Activision deal, Microsoft has made a commitment to keep Call of Duty, which has been a major point of contention, accessible on Sony and Nintendo platforms for ten years following the completion of the acquisition.

Although the deal is approved by the EU, it may not go through. The U.K.'s Competition and Markets Authority (CMA) had a dissenting opinion last month. CMA had cited cloud gaming market as a concern, which is now agreed by Microsoft. This could make the difference in CMA's decision.

Microsoft's Gaming Prospects to Get a Boost

This Zacks Rank #3 (Hold) company is building an Xbox mobile store, which will offer games directly to mobile devices. Microsoft wants to add Activision Blizzard content to this store to build on its already existing communities of gamers.

You can see the complete list of today's Zacks #1 Rank (Strong Buy) stocks.

For fiscal fourth-quarter Microsoft expects Xbox content and services revenue growth in the low to mid-teens due to third-party and first-party content, as well as Xbox Game Pass.

Microsoft's shares have gained 30.6% year to date, whereas the Zacks Computer and Technology sector have grown 22.7%.

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Microsoft Corporation (MSFT) : Free Stock Analysis Report

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