Price-to-FFO Ratio Dropped to 15.8x; Lowest Multiple Since 2011
WASHINGTON, DC, May 17, 2018 – U.S. REITs achieved moderate earnings growth in the first quarter of 2018. Sustained earnings growth contributed to a decline in the industry’s aggregate price-to-FFO ratio to 15.8x, underscoring attractive valuations amid solid industry fundamentals.
Nareit’s T-Tracker®, a quarterly composite performance measure of the entire U.S. listed REIT industry, showed that first quarter 2018 FFO totaled $15.3 billion, a 3.6 percent increase compared to the fourth quarter of 2017 and a 6 percent gain from the first quarter of 2017.
Occupancy rates for all Equity REITs declined slightly to 93.6 compared to last quarter’s record high of 93.8 percent. First quarter 2018 occupancy rates represented an increase of 18 basis points compared to the first quarter of 2017.
Same Store Net Operating Income (SS NOI) for the industry was up 2.5 percent compared to the first quarter of 2017. SS NOI measures NOI generated by properties held for one year or more to factor out the effects of property acquisitions and dispositions.
“The REIT industry achieved modest earnings growth in the first quarter of 2018, led by Manufactured Home REITs, followed by Health Care, Industrial, Free-Standing Retail and Data Center REITs,” said Nareit President and CEO Steven A. Wechsler. “High occupancy rates and year-over-year growth of same-store NOI reflect a continued strong operating environment for REITs.”
Other highlights from the first quarter 2018 Nareit T-Tracker results were:
- Overall industry performance was negatively impacted by Regional Mall REITs, which posted an 18 percent decline in FFO from the prior quarter. An unusually large number of store closures and resulting temporary rise in vacancies contributed to the decline. Despite the weak first quarter, most Regional Mall REITs reported strong releasing spreads (a measure of the change in rent per square foot between new and expiring leases), indicating they are refilling the space at higher rents. REITs also cited strong tenant sales growth, further supporting rental growth. Excluding Regional Mall REITs, total REIT FFO would have risen 7.1 percent from the prior quarter, a difference of 3.5 percentage points.
- Net Operating Income totaled $23.9 billion, 6.5 percent higher than one year earlier and little changed from the fourth quarter of 2017.
- Dividends paid by Equity and mREITs totaled $14.3 billion, an increase of 3.8 percent from the fourth quarter of 2017 and a 7.4 percent gain from the first quarter of 2017.
- The top-performing Equity REIT property segments on a Same-Store NOI increase basis versus the first quarter of 2017 were Industrial (5.6 percent), Manufactured Homes (4.8 percent), Diversified (4.1 percent), and Office (3.5 percent).
“Solid operating fundamentals drove earnings growth in the first quarter,” said Calvin Schnure, Nareit senior vice president of research & economic analysis. “The forward momentum in earnings growth contrasted with REITs’ mixed stock market performance, resulting in the lowest aggregate price to FFO ratio since 2011. At a time when price-earnings multiples for broad stock market indices have risen to post-crisis highs, REIT valuations remain attractive.”
About the Nareit T-Tracker
The Nareit Total REIT Industry Tracker Series provides investors with the total quarterly operating performance of the U.S. listed Equity REIT industry, as well as the total dividend performance of Equity and Mortgage REITs. The series includes the Nareit FFO Tracker, the Nareit NOI Tracker and the Nareit Dividend Tracker.
The Nareit FFO Tracker measures reported funds from operations (FFO) for REITs in the FTSE Nareit All Equity REITs Index. FFO is a non-GAAP measure that is roughly equal to a REIT's GAAP net income excluding real estate depreciation and gains or losses from sales of property. REITs generally adhere to the Nareit definition of FFO in their SEC filings.
The Nareit NOI Tracker measures reported net operating income (NOI) for REITs in the FTSE Nareit All Equity REITs Index. NOI is a non-GAAP measure that equals gross operating income provided by the property (rental income as well as fees and other revenues) less property operating expenses, including utilities, management fees, insurance, and property taxes, but excluding interest and principal payments on debt, income or franchise taxes, capital expenditures and depreciation.
The Nareit Dividend Tracker monitors reported common dividends paid by REITs in the FTSE Nareit All Equity REITs Index and the FTSE Nareit Mortgage REITs Index – the total amount of all dividends paid to investors in common stock of these stock exchange-listed REITs.