FFO increased 19.8% in Q2, with a broad-based earnings recovery exceeding the pre-pandemic peak
WASHINGTON, D.C. ( Aug. 12, 2021) – The REIT earnings recovery accelerated in the second quarter of 2021 as funds from operations (FFO) for all equity REITs rose 19.8% compared to the prior quarter, to $16.5 billion, according to the Nareit Total REIT Industry Tracker Series (T-Tracker®) report released today. With this increase, FFO has fully recovered from the declines early in the pandemic, and total FFO in the second quarter rose slightly above the peak level prior to the pandemic.
“REITs and commercial real estate are experiencing a more complete recovery as the economic reopening continues,” said Calvin Schnure, Nareit senior economist. “While the Delta variant raises risks of slower improvement ahead, robust economic growth is spurring demand for commercial space."
Second quarter REIT earnings recovery was broad-based, with approximately two-thirds of all REITs reporting higher FFO than the previous year.
The retail sector reported its fourth consecutive quarter of FFO increases, rising 21.4% compared to the prior quarter, carried mainly by increases in regional malls.
- Regional malls saw the largest FFO increase in the second quarter of 2021, rising 32.5% over the prior quarter to $1.4 billion
- Free-standing retail FFO increased 22.4% to $806 million
- Shopping centers FFO increased 7.9% to $1.03 billion
Recovery accelerated in other sectors that had been impacted most by the pandemic.
- Lodging/resort REITs had positive FFO of $67 million, following four consecutive quarters of negative FFO
- FFO of office REITs increased 37.7% to $2.0 billion, exceeding pre-pandemic highs
- Diversified REITs reported a 20.8% increase in FFO over the prior quarter, to $575 million
Real estate sectors supporting the digital economy maintained their strong performance as demand for technology-based commerce and communications continued to grow even as COVID-19 restrictions lift.
- FFO for the data center sector was unchanged from the first quarter, maintaining a record high of $1.1 billion in the second quarter of 2021
- FFO for the infrastructure sector rose 20.8% to $2.2 billion in the second quarter
- FFO for the industrial sector rose 11.3% to $1.6 billion
Occupancy rates increased 180 bps to 92.5%, and have recovered more than two-thirds of the decline from pre-pandemic levels.
- Industrial sector increased 210 bps to a record high of 97.3%
- Retail occupancy rates moved slightly higher, to 93.0%
- Office sector occupancy saw little change in the second quarter at 90.3%
- Residential occupancy rates remained high at 95.0%
- Other sectors (not reported separately) had an increase in occupancy rates of 360 bps, driven largely by lodging/resorts
REITs made net acquisitions of $16.3 billion, the highest quarterly total since the second quarter of 2015.
- Infrastructure REITs acquired $9.1 billion of properties, on net, compared to $1.1 billion in the first quarter. Infrastructure REITs accounted for over half of all acquisitions in the quarter
- The self storage sector acquired $3.2 billion in properties in the second quarter of 2021, compared to $0.6 billion in the first quarter
- The retail sector acquired $2.1 billion in properties in the second quarter, compared to $0.5 billion in the first quarter
- Residential REITs acquired $1.1 billion in properties in the second quarter, compared to $0.3 billion in the first quarter
- Health care was the only sector to report significant net dispositions with net sales of $0.8 billion in the second quarter, compared to net purchases of $1.2 billion in the first quarter.
Several factors monitored by the T-Tracker demonstrate the resilience of the REIT industry, including:
- Leverage ratios declined, with the weighted average debt-to-total book assets ratio dropping to 48.7% from 51.4% in the first quarter. The debt-to-market assets ratio declined to 28.0% from 32.3%
- Interest expense as a percentage of NOI declined to 19.2%, a record low for the industry
- Weighted average term to maturity of REIT debt lengthened further to 88.2 months in the second quarter of 2021, or more than 7¼ years, from 86.3 months in the first quarter of 2021. Debt maturities are significantly longer than the average of less than 60 months (five years) in the Great Financial Crisis of 2008. Longer maturities reduced the need to refinance debt during the pandemic, and REITs have locked in historically low interest rates far into the future.
Dividends are recovering at a slower rate, however, and are still well below the pre-pandemic level of $16.9 billion. Total dividends paid out in the second quarter of 2021 declined slightly from the first quarter, decreasing 1.7% to $12.8 billion. Dividends paid by equity REITs declined $181 million, to $11.2 billion, and dividends paid by mREITs were little changed at $1.6 billion.