RESEARCH

US REITs earnings take a hit

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THE COVID-19 pandemic dampened earnings of all US equity REITs in the first quarter of 2020, according to the Nareit.

The Total REIT Industry Tracker Series (T-Tracker) report found earnings declined 9.0% to $15.0 billion in the first quarter of 2020 compared to the prior quarter. At the same time, funds from operations (FFO) were 6.2% lower than the first quarter of 2019.

Results varied widely across sectors reflecting the markets vulnerable to loss of business from the pandemic. Not surprisingly, lodging/resorts sector FFO dived 67.2%, accounting for half the overall decline in REIT FFO. Regional malls also experienced an 11.6% decline in FFO. The office, infrastructure and specialty REITs also felt the impact.

However industrial REITs defied the slump, reporting a 21.7% increase in FFO from the prior quarter, and FFO of single-family homes rose 7.0%.

REITs maintained strong balance sheets and other financial resources to help weather the crisis. Leverage ratios inched lower in the beginning of 2020, with debt-to-book assets for all equity REITs declining slightly to 50.5% from 50.8% in the fourth quarter of 2019. The weighted average maturity of REIT debt declined marginally to 82.3 months. This compares to an average maturity of less than 60 months in 2008, however, measures to lengthen and ladder debt maturities have reduced the need to refinance debt during the current market turmoil. The average interest rate paid on long term debt declined to 3.8%, and interest expense relative to NOI reached a new record low of 21.7%.

Despite the lower earnings Nareit president and CEO Steven A. Wechsler said the low leverage, longer debt maturities, and high interest coverage ratios all indicate that REITs entered this crisis with solid financial fundamentals and have substantial resources to meet this challenge.

“Many measures of operating performance remained on track during the first quarter, despite the impact of COVID-19. Occupancy rates for the REIT industry ticked down 31 basis points from the prior quarter to 93.6% but are just 50 bps below the record high reached in 2018. Occupancy of Apartment REITs rose to a record 96.3%,” he observed.

Senior economist Calvin Schnure said operating performance has been maintained through the early phases of this crisis, in part because REITs generally hold higher quality properties with investment grade tenants.

“Occupancy rates remain high and the vast majority of tenants continue to make timely rent payments,” Schnure said.

Nareit found that on average, the share of typical rent collected in May was largely unchanged from April, which suggests that while REIT tenants in some hard-hit sectors continue to struggle, their ability to pay rent did not appreciably worsen in May despite the widespread shutdowns in April.

The industrial sector remained the strongest performer with collections equal to nearly 96% of typical rents in May. This reflects a drop of just under 3 percentage points from the nearly 99% of rents collected as reported in April. Industrial REITs own nearly 4,900 industrial properties in the US.

Apartment collections remained strong for May and were substantially the same as April with 95% of typical rents collected. Survey respondents reported granting rent deferrals for 3% of rent owed. The continued ability of apartment renters to meet their rent obligations reflects both the federal government stimulus, including enhanced unemployment benefits, and the fact that REIT apartments generally serve a population less likely to be affected by layoffs.

The office sector’s May rent collections experienced a slight decline to 92% in May from 93% in April. There are nearly 1,800 REIT-owned office properties in the US.

The healthcare sector with over 4,500 senior residential properties and over 2,800 medical facilities saw an uptick in rents collected for May, raising the share of typical rents collected from 87% in April to 90% in May. Survey respondents reported granting rent deferrals for 5% of rent owed.

In the retail sector, there are over 16,000 free standing properties and rents paid were steady at 70%, down from 71% in April. Survey respondents reported granting rent deferrals for nearly 18% of their May rent. Meanwhile of the 2,700 REIT-owned shopping centers, 48% of typical rents were collected in May, a two percentage point improvement over April.

Same-store net operating income (SS NOI), which measures NOI generated by properties held for one year or more, rose 2.5% over the past four quarters. This was a marked increase from the 1.9% gain through the fourth quarter of 2019. The Manufactured Homes sector reported a 6.3% increase in SS NOI, while Office, Industrial and Single-family Homes showed gains of 6.0%, 4.6% and 4.0%, respectively. Regional Malls, however, reported a 0.2% decrease in SS NOI over the past four quarters.

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