Grand Canyon deadline hit yesterday (From Behind the Markets)

For everything that AI is doing to help the economy grow, investors are getting reminded of one core area of weakness this earnings season. The latest read on the housing sector remains mixed but still shows a frozen market.

Existing home sales in September came in at an annualized 3.99 million units. That was up 1.5% from a two-year low. However, sales were still down 2.2% year over year. Adding to the pressure is the 30-year mortgage rate, which is hovering near 7.5%, its highest level since November 2023.

High mortgage rates can discourage homeowners from selling and giving up their cheaper loans, potentially steering buyers toward new construction. Large builders can also offer financing incentives to make purchases more affordable. Those advantages seem like they would make homebuilder stocks such as D.R. Horton (NYSE: DHI) or Toll Brothers (NYSE: TOL) a strong option. But both stocks have made only modest gains year to date.

Investors have other options in housing-adjacent areas, with two of the top names reporting earnings this week. Both are real estate investment trusts (REITs), which come with their own share of considerations. But investors looking for a dividend yield that currently beats inflation and provides the opportunity for capital gains have two names to consider.

Public Storage: Scale Is Becoming the Story

Public Storage (NYSE: PSA) is an indirect housing play. People rent storage when they move, downsize, or are waiting to buy. A frozen housing market means fewer of those moves. That has kept same-store growth close to flat this year.

However, third-quarter results suggest the bottom may be in. Core funds from operations (FFO) came in at $4.34 per share, up 0.7% year over year.

Same-store revenue and net operating income (NOI) each rose 0.5%. Average occupancy ticked up to 92.2% from 91.9%. Management pointed to lower customer churn and stronger move-in rates.

Those gains are modest. The bigger story is scale. Public Storage closed its acquisitions of National Storage Affiliates (NSA) and Public Storage Canada during the quarter. The deals added more than 1,100 stores.

The company now operates 4,764 facilities with roughly 339 million net rentable square feet.

Management expects $110 million to $130 million in run-rate synergies from NSA within three to four years. Those gains come from moving NSA properties onto the PS Next operating platform. Non-same-store revenue nearly doubled in the quarter, rising 90.8%.

Investors should look past GAAP net income of $1.69 per share, down 35.5%. That decline reflects $114.6 million in transaction and integration expenses. Those costs are tied to the acquisitions and are not expected to recur.

The more important signal was guidance. Public Storage raised its full-year core FFO outlook to $16.90 to $17.10 per share. That lifts the midpoint by 10 cents. It also raised same-store NOI guidance by 90 basis points. The range now runs from a 0.8% decline to 0.2% growth.

Investors liked what they heard. PSA closed at $312.46 on Oct. 27, up 1.8%. Shares have rallied from a low near $280 in early October. The stock is back above its 50-day simple moving average (SMA), near $299. The MACD sits above its signal line with a rising histogram. The next test is resistance near $330, where shares topped out this summer.

At current prices, the $3 quarterly dividend yields about 3.8%.

Sun Communities: The Market Punishes a Beat

Sun Communities (NYSE: SUI) is a more direct way to play the housing squeeze. The REIT owns manufactured housing (MH) and RV communities.

Manufactured homes remain one of the most affordable options for buyers priced out by mortgage rates and can be particularly attractive for first-time home buyers and empty nesters.

That demand showed up in the Q3 numbers. Core FFO came in at $2.35 per share, up 3.1% from a year ago. That topped the high end of management’s $2.23 to $2.33 guidance range. Same-property NOI grew 3.6%. The MH segment led the way with 6.9% growth.

Investors sold the stock anyway. SUI fell 4% to $115.03 on Oct. 27.

The drop pushed shares below its 50-day SMA near $116.71. Volume rose to 2.27 million shares. The MACD line is turning lower, and the histogram is shrinking. A bearish crossover is possible in the coming sessions.

The RV business is the likely concern. Same-property RV NOI fell 1.3% in the quarter. Management also trimmed full-year RV NOI guidance to 0% to 0.8% growth, down from 0.2% to 1.8%. Home sales volume dropped 13.6%.

Full-year core FFO guidance now sits at $6.97 to $7.05, a $7.01 midpoint. That’s a penny below the prior midpoint. But context matters. The prior range excluded the sale of the company’s UK business, Park Holidays. That deal closed Sept. 22, removing fourth-quarter UK income. Holding guidance nearly steady without it suggests the core business is improving.

Management is putting the roughly $1.03 billion in sale proceeds to work. Sun bought back 2.4 million shares in the quarter at an average of $119.24. It repurchased another 700,000 shares through Oct. 23 at $113.24. Leverage also improved. Net debt to recurring EBITDAre fell to 3.2 times from 3.9 times last quarter.

Looking ahead, Sun expects 2027 rent increases of 5.4% for MH and 4.4% for annual RV sites. Its $1.12 quarterly dividend yields roughly 4% at current prices.

Different Paths Around a Frozen Market

Both stocks tell a similar story. Housing remains stuck, but these REITs are finding growth around it. Public Storage is leaning on scale. Sun Communities is leaning on a simpler, more focused portfolio.

The market rewarded one and punished the other this week. Investors willing to look past the first reaction may find opportunity in both.

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