11/15/2023 | by

WASHINGTON, D.C. (Nov. 15, 2023) New data from the third quarter show that REITs continue to have well-structured debt—79% of REITs’ total debt was unsecured, while 91% of listed REITs’ total debt was at a fixed rate, according to the Nareit Total REIT Industry Tracker Series (T-Tracker®) report released today.

Third quarter 2023 data also show that REIT balance sheets are solid and well-positioned for economic and capital market uncertainty. On average:

  • Leverage ratios remained modest with debt-to-market assets at 36.2%.
  • Weighted average term to maturity of REIT debt was 6.5 years.
  • Weighted average interest rate on total debt was 4.0%.

“REITs’ balance sheets are in good shape, largely because REITs continue to exercise great discipline in managing them,” said Nareit Executive Vice President of Research & Investor Outreach John Worth. “That discipline, combined with REITs’ ongoing solid operational performance, is enabling REITs to navigate tighter credit conditions and the ongoing high interest rate environment.”

Year-Over-Year Increases in NOI Illustrate REITs’ Sound Fundamentals

T-Tracker data demonstrate that despite ongoing macroeconomic headwinds, REITs displayed operational strength during the third quarter. Nearly 75% of REITs reported year-over-year increases in net operating income (NOI). Specifically:

  • NOI was $29.2 billion—a 6.3% rise from one year ago.
  • Same Store NOI experienced 4.6% year-over-year gains, underscoring that REITs are keeping pace with inflation.

In addition, T-Tracker data show that the average occupancy rate stayed steady at 93.3%. 

Gaming and Health Care Lead Sector Performance

Nearly two-thirds of REITs reported year-over-year increases in funds from operations, including:

  • Gaming, which rose 41.4%.
  • Health Care, which rose 10.7%.
  • Data Centers, which rose 9.8%
  • Residential, which increased 4.1%.
  • Retail, which also increased 1%.

Implied Cap Rates Show Public-Private Real Estate Divergence Will Continue Into 2024

Nareit has written extensively about the divergence between public and private real estate market valuations, using differences in capitalization (cap) rates to help demonstrate this gap. The latest T-Tracker data show that the REIT implied cap rate was 6.5% in the third quarter of this year, which was 170 basis points (bps) higher than the private market transaction cap rate and nearly 220 bps 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 valuation readjustment process will stretch into 2024, because progress remains slow,” said Nareit Senior Vice President of Research Edward Pierzak. “In the face of this ongoing divergence, public equity REITs are increasingly attractive, particularly when you consider their solid balance sheets and sound operational performance. 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 compared 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 Q3 2023 Nareit T-Tracker report.

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