Record-high occupancy rates and well-capitalized balanced sheets highlighted the U.S.-listed equity REIT industry’s strong fundamentals in the fourth quarter, Nareit reported this week.
According to the latest Nareit Total REIT Industry Tracker, funds from operations — an important measure of REIT performance — of equity REITs listed on U.S. exchanges totaled $15.1 billion in the fourth quarter, up 3.2% from the previous quarter and a 1.4% gain from the year-earlier quarter.
Nareit’s T-Tracker is a quarterly composite performance measure of the entire U.S.-listed REIT industry.
Occupancy rates for all equity REITs reached 93.8%, a 20-basis-point increase over the third quarter and the highest level in the 17-year history of the T-Tracker database.
Nareit reported that REITs had been proactively strengthening their balance sheets for the higher interest rate environment ahead. T-Tracker data showed that leverage dropped to a record low, with the debt-to-book assets ratio declining 95 basis points year-over-year to 47.6%.
Debt-to-market assets, which substitutes market cap for the book value of shareholders’ equity, were slightly higher than in the third quarter, at 34.7%, but remained near its lowest level of 32.7% recorded in mid-2016.
According to Nareit, REITs have locked in low interest rates far into the next decade, with the weighted average maturity of their debt at 75.1 months. Interest expense as a share of net operating income was 22.3%, close to its record low of 21.7%.
“The REIT market shows strong industry fundamentals and continuing earnings growth,” Nareit’s president and chief executive, Steven Wechsler, said in a statement. “The steps REITs have taken to strengthen their balance sheets, favoring equity as a source of capital and extending debt maturities to lock in low rates, have prepared the industry to weather a climate of rising interest rates.”
T-Tracker results also showed that equity and mortgage REITs paid dividends totaling $13.7 billion, up 4.5% from the third quarter and a 3% gain from the 2016 fourth quarter.
Net operating income in the October-to-December period reached $23.9 billion for the industry as a whole, an increase of 3.1% from the third quarter and a 9.8% year-over-year increase.
Same store net operating income for the industry decelerated from its pace in 2016 and early 2017, gaining 2.6% over the 2016 fourth quarter. Nareit noted that SS NOI measures NOI generated by properties held for one year or more in order to factor out the effects of property acquisitions and dispositions
These were the top-performing equity REIT property segments on a SS NOI increase basis versus the fourth quarter of 2016:
- Single-family homes: 6%
- Manufactured homes: 5.7%
- Diversified: 5.4%
- Industrial: 4.2%
“Slower rent growth in commercial real estate markets overall contributed to more moderate gains in the REIT sector last quarter,” Calvin Schnure, Nareit’s senior vice president of research and economic analysis.
“Supply and demand are roughly balanced in most property sectors, however, and this real estate cycle still has plenty of room to run, setting the stage for further rent growth ahead.”
— Check out 3 Things to Know About Real Estate and Premium Financing on ThinkAdvisor.