FFO in Q3 and Q4 rose, recovering 50% of the decline experienced in the first half of the year
WASHINGTON, D.C., (March 10, 2021) – A recovery in REIT earnings is well underway after the sharp decline that occurred during the shutdowns at the beginning of the pandemic. According to the Nareit Total REIT Industry Tracker Series (T-Tracker®) report released today, funds from operations (FFO) rose 11.3% to $13.9 billion in the fourth quarter of 2020, recovering half of the decline that took place last spring. FFO rose among eight of the 12 REIT property sectors, including those sectors that support the digital economy. While FFO remains well below pre-pandemic levels – it was 16.0% lower in the fourth quarter than one year ago – there are distinct trends that show the paths forward for various sectors.
“Even before the vaccine rollout was fully underway, the REIT industry’s collective FFO had already recovered half its decline in the first half of last year. With broad distribution of COVID-19 vaccines on the horizon, REITs are poised for further gains in 2021,” said Calvin Schnure, Nareit senior economist.
Fourth quarter REIT earnings performance reflects three distinct subsets of property types:
Most REIT property sectors - office, residential, diversified, health care, self-storage, timber, and specialty - have begun a significant recovery of FFO collectively recovering half of the decline that occurred during the first two quarters of 2020.
- As a group their FFO was 9.6% lower in the fourth quarter than just prior to the start of the pandemic, a substantial recovery from the second quarter, when their FFO was 19.6% below pre-pandemic levels.
Digital economy sectors continued a year of strong performance.
- Data center REITs saw a 16.9% rise in FFO compared to the fourth quarter of 2019.
- FFO of infrastructure REITs increased 15.8%.
- FFO of industrial REITs was up 8.8% over this same period.
Retail and lodging/resorts - the sectors most directly impacted by the pandemic - while still depressed compared to 2019, trimmed their losses in the fourth quarter to less than half of what they recorded in the second quarter when shutdowns of businesses and travel initially took effect.
- Retail REITs reported a 23.6% decline in FFO compared to the fourth quarter of 2019.
- Lodging/resorts went from positive FFO before the pandemic to negative FFO for the final three quarters of 2020.
“We believe we will see a strong recovery in those sectors that have felt the brunt of the pandemic when the vaccine distribution is widespread and shopping and travel patterns recover more fully,” said Nareit President and CEO Steven A. Wechsler. “These companies, along with the rest of the industry, also have the financial strength — including lower leverage, long debt maturities, and significant resources of cash, securities and access to credit — to sustain operations until their respective segments of the economy reopen further and more customers return.”
The occupancy rate for all equity REITs rose 80 bps, from 90.4% to 91.2%. This includes a 135 bp increase in occupancy for retail REITs and a 65 bp increase for apartment REITs. Occupancy rates of office REITs, however, declined 90 bps, to 91.4%. Despite some increases in the fourth quarter, occupancy rates of all property types were lower than they were one year earlier.
This edition of the T-Tracker contains three new data series on the financial position of REITs:
- Liquidity resources (cash and securities plus undrawn lines of credit, as a multiple of annual interest expense);
- The distribution on interest coverage ratios across the REIT industry; and,
- Debt outstanding, with detail on secured (mortgage) and unsecured (bond) debt.
Past editions of the T-Tracker reported the weighted average interest coverage ratio; the new series on the distribution of interest coverage ratios reveals that not only have average coverage ratios risen over the past decade, but also the number of REITs with coverage ratios below 3x have declined from 60% of REITs in Q4 2007, just prior to the Great Financial Crisis, to 18.5% in Q4 2020.