05/17/2023 | by

WASHINGTON, D.C. (May 17, 2023) New data show that REITs continue to have well-structured debt; 76 percent of REITs’ total debt is unsecured, while 87 percent of listed REITs’ total debt is at a fixed rate, according to first quarter 2023 data from the Nareit Total REIT Industry Tracker Series (T-Tracker®) report released today.

Q1 2023 data also show that REIT balance sheets are solid and well-positioned for economic and capital market uncertainty. For example:

  • Leverage ratios remained modest with debt-to-market assets at 33.9%.
  • Weighted average term to maturity of REIT debt was nearly 7 years—or 82 months.
  • Weighted average interest rate on total debt was 3.9%.

“REITs appear well positioned to navigate a period of higher interest rates and economic uncertainty.” said Nareit Executive Vice President of Research and Investor Outreach John Worth. “Over the past decade, many REITs reduced their leverage and locked in debt at low, fixed rates. The result has been sound balance sheets that have helped REITs successfully weather the last year of economic and capital market uncertainty. Their balance sheets and solid operational performance will help REITs handle tighter credit conditions and the ongoing high interest rate environment,” added Worth.

Year-Over-Year Increases in FFO, NOI Underscore REITs’ Solid Fundamentals

T-Tracker data demonstrate that despite distress in the banking sector and other economic headwinds, REITs displayed operational strength during the first quarter of the year. Specifically, the data show that:

  • Funds from operations (FFO) was $18.7 billion—a 5.3% rise from one year ago.
  • Net operating income (NOI) and same store NOI experienced 2.2% and 7.2% year-over-year gains, respectively—underscoring that REITs are keeping up with inflation.
  • Dividends paid was $14.7 billion—a 7.7% increase from last year.

In addition, T-Tracker data show that the average occupancy rate stayed steady, decreasing slightly to 93.1% from 93.6% in the fourth quarter of last year.

Implied Cap Rates Show Gap in Public-Private Real Estate Market Divergence Is Closing

Nareit has written extensively about the gap between public and private real estate market valuations, using differences in capitalization (cap) rates to help illustrate this gap. The latest T-Tracker data show that the REIT implied cap rate was 5.9% in the first quarter of this year, which is more than 40 basis points higher than the private market transaction cap rate and 180 basis points greater than the private market appraisal cap rate. All else equal, this spread suggests that the public real estate market is priced at a material discount to the private market.

“The dislocation between public and private real estate market valuations has been shrinking, as changes in both REIT and private market valuations have helped close the gap,” said Nareit Senior Vice President of Research Ed Pierzak. “This gap will likely continue to close in the coming year, but the current divergence between the two markets—along with REITs’ solid balance sheets and operational performance—has increased the attractiveness of public equity REITs. In our meetings with investors, it’s clear they understand that REITs offer them access to institutional quality properties with best-in-class operators at substantially discounted prices relative to the private market.”

A review of historical market dynamics shows that REIT total returns have tended to bounce back—and even surge—after periods of significant REIT relative underperformance.

For more data, please read the complete Q1 2023 Nareit T-Tracker report.

Get Nareit Media blog posts delivered straight to your inbox.


Subscribe to the Developments Blog