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Real estate investments trusts turned in a better-than-expected Q2 as occupancy rates achieved and exceeded prepandemic levels, helping to push up funds from operations, according to the National Association of Retail Investment Trust’s T-Tracker data.
For all listed U.S. REITs, Q2 FFO increased 9.8% from Q1 to a record $19.6B and 15.4% from the year-ago level. Almost 84% of REITs reported increased FFO from a year earlier.
“Our first takeaway is that across the board REITs are really performing well irrespective of inflation risk, higher interest rates and concerns about a slowing economy,” said John D. Worth, NAREIT executive vice president, Research & Investor Outreach. “What we see is we’ve really got the majority of the industry outperforming where they were pre-COVID.”
The most dramatic improvement was in the lodging and resort REITs. Q2 FFO more than doubled from Q1 and, compared with a year earlier, lodging/resort REIT FFO soared more than 1,000%. Listed U.S. lodging/resort REITs’ Q2 FFO of $1.27B grew from $552M in Q1 and from $91M in Q2 2021.
In terms of same-store net operating income (“SS NOI”), self-storage, apartments, and single-family homes saw the strongest Q/Q growth. Self-storage REITs’ Q2 SS NOI jumped 20.8% after rising 22.4% in Q1.
Apartment REITs’ SS NOI climbed 16.0% from the previous quarter after a healthy 12.1% boost in Q1. Single-family home rental REITs registered an 11.6% increase, its third straight quarter of more than 11% Q/Q improvement.
Only three sectors are underperforming where they were prior to COVID, NAREIT’s Worth said. Those are Diversified, Health Care and Specialty. And even those are “not incredibly far below” their pre-pandemic levels, Worth said.
The office sector FFO has held up pretty well with Q2 2022 FFO up 6 percentage points from Q4 2019, he noted. “Early in the COVID period, what we saw was that rents were getting paid despite the fact that people weren’t going into the office Now that we’ve got people flowing back into the office, rents are still being paid, we’re starting to see more leasing activity in 2022 than we certainly saw in 2021 and we’re seeing occupancy rates have really bottomed out and have started to creep back up again.”
Like many other sectors, higher interest rates have impacted REITs’ M&A activity. Net acquisitions slowed in Q2 2022 to $11.0B from $16.7B in the previous quarter, the NAREIT tracker shows. In a higher interest rate environment, buyers are going to be looking for higher capitllzation rates, Worth said. (Capitalization rate, or cap rate, is the rate of return based on the income that property is expected to produce.) “We’re really in a period where the market is finding it’s way to new equilibrium prices and new equilibrium cap rates that reflect the prospect of higher interest rates,” he said. “It’s going to take some time for those expectations to land.”
He also sees REITs as well positioned to handle the currently elevated level of inflation. Looking at the Q2 results, REITs’ net operating earnings rose faster than inflation on a year-over-year basis. “That’s one of the key components of why real estate and REITs, in particular, can be good inflation protectors and are helpful to have in a portfolio during a period of high and moderate inflation,” Worth said. “Historically, REITs outperform the broader stock market in periods of high or moderate inflation,” he added.
See performance of several REIT sectors over the past year in chart below. Best performance was from Hotels & Resorts (magenta line), Nasdaq Multi-Asset REIT index (blue) came in next, followed by Residential REITs (green), Healthcare (dark blue), and Office (red). The orange line is the S&P 500 Index.
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Image and article originally from seekingalpha.com. Read the original article here.