FFO rose 5.6% as the economy reopened
REITs display resilience with strong balance sheets, low leverage ratios
WASHINGTON, D.C., ( Nov. 16, 2020) – Funds from operations (FFO) of all U.S. equity REITs rose 5.6% to $11.9 billion in the third quarter of 2020, after a 23.5% decline in the second quarter, according to the Nareit Total REIT Industry Tracker Series (T-Tracker®) report. FFO in the third quarter of 2020 was 22.3% lower than one year ago.
Three sectors that had been most directly impacted by the economic shutdown in the spring accounted for most of the improvement in the third quarter. Diversified REITs saw FFO swing from negative $102 million in the second quarter to positive $962 million; Lodging/resorts had a modest improvement due to rising travel volumes and the reopening of hotels, as FFO went from negative $1.17 billion in the second quarter to negative $848 million in the third quarter; and retail REITs saw FFO rebound from $2.36 billion in the second quarter to $2.49 billion in the third quarter.
“REIT earnings stabilized in the third quarter, especially those sectors that had been most directly affected by the economic shutdown in the spring,” said Nareit President and CEO Steven A. Wechsler. “Most REITs have been resilient despite the economic headwinds, due to their financial strength, including lower leverage, longer debt maturities and ample sources of liquidity.”
REITs entered the pandemic with strong balance sheets and have maintained financial strength during the pandemic. The book debt-to-total assets ratio was 50.8% in the third quarter of 2020, compared to 52.0% in the second quarter and significantly lower than 58.3% during the 2008 financial crisis. REITs have lengthened the maturity of their debts, reducing the need to refinance during the pandemic. The weighted average maturity of REIT debt in the third quarter was 84.9 months, or just over seven years, compared to 59.2 months in 2008. The weighted average interest coverage ratio–an indication of the sector’s ability to service its debt out of current income–increased from 3.2x in the second quarter of 2020 to 3.8x in the third quarter, and considerably higher than the 2.7x in 2007.
The T-Tracker does show, however, other signs of a difficult operating environment amidst the pandemic. Same-store net operating income (SS NOI), which measures NOI generated by properties held for one year or more, fell 7.5% from a year ago, in line with the 7.3% decline through the second quarter. The largest declines were in the retail sector, where SS NOI was 19.0% lower than a year ago. Most other sectors reported smaller decreases, while increases were reported by the manufactured homes sector (4.2%), single-family homes sector (3.7%) and industrial sector (2.6%).
The weighted average occupancy rates for all properties owned by REITs rose 110 bps, from 89.8% to 90.9%. Occupancy in the third quarter was 290 bps lower than one year earlier. Much of the increase from the second quarter was due to the reopening of the lodging/resort sector after the economic shutdown in the first half of 2020. Industrial sector occupancy rates rose 60 bps, from 95.3% to 95.9% (30 bps higher than one year earlier). Occupancy rates declined, however, in the apartment (down 40 bps from last quarter, to 93.9%, which is 160 bps lower than one year earlier) and office (down 70 bps, to 92.3%, which is 120 bps lower than one year earlier) sectors.
“Economic conditions remain challenging with large parts of the economy operating below capacity during the pandemic. Many REITs reported rising rental receipts as the reopening of shops and stores contributed to tenants’ cash flows,” said Calvin Schnure, Nareit senior economist. “Conditions vary widely across property types according to their exposures to the pandemic, and those REIT sectors that support the digital economy—data centers, infrastructure, and industrial REITs—have experienced strong demand.”
Total dividends paid in the REIT industry were little changed in the third quarter, edging 0.8% lower, following a 22.0% decline in the previous quarter. Dividends paid by retail REITs rose 24.1% as some REITs that had suspended dividends earlier in the year resumed payments. Dividends paid by equity REITs totaled $10.7 billion. Dividends paid by mREITs declined 1.0%, to $1.55 billion.
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.