As the COVID-19 crisis deepened, REITs retained strong balance sheets, low leverage ratios.
WASHINGTON, D.C. August 20, 2020 – Earnings of all U.S. equity REITs fell 21.7% to $11.6 billion in the second quarter of 2020 compared to the prior quarter, according to the Nareit Total REIT Industry Tracker Series (T-Tracker) report. Earnings, represented as funds from operations (FFO), were 29.3% lower than the second quarter of 2019.
REIT sectors were disparately impacted by the pandemic and subsequent shutdowns, with sectors facing the most exposure to COVID-19 and related social distancing measures experiencing the greatest effect. The Lodging/Resorts sector, Retail sector, and Healthcare sector all reported declines. FFO decreased 25.0% and 16.7% in the Retail and Healthcare sectors, respectively, while FFO of Lodging/Resort REITs swung from slightly positive in the first quarter to negative $1.1 billion in the second quarter. Several sectors, however, saw FFO increases this quarter, including those sectors supporting e-commerce. Data Center REITs reported a 32.6% increase and Infrastructure REITs were up 3.8%. Specialty REITs, while not related to e-commerce, had an increase of 19.6% from the first quarter.
REITs maintained strong balances sheets despite sharp declines in earnings in many sectors, helping them withstand the shocks of the pandemic. REITs entered the pandemic with historically low leverage ratios. The debt-to-book-asset ratio stood at 50.8%, little changed from the prior quarter and significantly lower than 58.3% in the financial crisis year of 2008. The weighted average maturity of REIT debt was 83.4 months, or nearly seven years, up from 82.3 months in the previous quarter and up from less than 60 months, or five years, in 2008. Interest coverage ratios - an indication of the sector’s ability to service its debt out of current income - declined from 4.1x in the first quarter of 2020 to 3.4x in the second quarter but remained above levels from a decade ago.
“COVID-19 continues to impact every aspect of our economy, and while REITs are no exception, they are well-capitalized and overall the industry has a strong financial foundation," said Nareit President and CEO Steven A. Wechsler. "REITs have been strengthening their balance sheets for the past decade, putting them in a solid position to weather the ongoing challenges of this pandemic.”
Total dividends in the REIT industry declined 16.8% to $13.1 billion, which is 9.6% lower than in the second quarter of 2019. Dividends paid by equity REITs were down 6.6% from the second quarter of last year, to $11.5 billion, and dividends paid by mREITs declined 26.0% to $1.7 billion. The largest declines in dividend payments were among the same sectors that had the largest declines in FFO, reflecting not only these lower earnings but also a desire to preserve liquidity. Dividends paid by Retail REITs decreased 40.5% from the first quarter, while Lodging/Resorts were down 39.8%, and Diversified declined 29.3%. Healthcare REITs, which had a significant decline in FFO, reported a 2.5% drop in dividend payments compared to the first quarter, but dividend payments were 4.1% higher than one year earlier. Dividends paid by Data Center REITs reversed part of a large increase that took place in the first quarter, which was due largely to the timing of the payout; dividends remained 20.9% above one year ago.
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. The largest declines were in the Retail sector, where SS NOI was 20.7% lower than one year ago. Most other sectors reported smaller declines, while SS NOI of Industrial REITs rose 2.6%.
Occupancy rates for the REIT industry fell 290 bps to 89. 9% in the second quarter. Most sectors saw a decline in occupancy rates, except the Industrial sector, however, which rose 35 bps to 95.9%.
“The sharp decline in REIT earnings reflects the record contraction in GDP in the second quarter. Economic activity hit bottom in April, however, and began rebounding over the past four months,” said Calvin Schnure, Nareit senior economist. “In fact, retail sales in July had already risen above pre-pandemic levels, which should bolster the revenues of Retail REITs during the third quarter.”