REITs Resurgence: Are High Yields Sustainable?

Current Yield Trends in REITs

Current yield trends in REITs show a mix of cautious optimism and regulatory compliance. Realty Income projects a 6% dividend yield with 4.3% AFFO growth, while acknowledging potential variability in future dividends. Ventas highlights the necessity of distributing 90% of taxable income to maintain REIT status, underscoring yield sustainability.

"Although we expect to continue our policy of paying monthly dividends, we cannot guarantee that we will maintain our current level of dividends, that we will continue our pattern of increasing dividends per share, or what our actual dividend yield will be in any future period." --- (O, sec filing, 2024/Q1)

"In order to continue to qualify as a REIT, we must make annual distributions to our stockholders of at least 90% of our REIT taxable income (excluding net capital gain)." --- (VTR, sec filing, 2024/Q1)

"Our projected 2024 operational return profile of approximately 10%, which comprises an anticipated dividend yield close to 6% and AFFO per share growth of approximately 4.3%, assuming the midpoint of guidance is a validation of our value proposition." --- (O, earning call, 2024/Q1)

Impact of Interest Rates on Yields

Higher interest rates and their volatility are impacting REIT yields by affecting customer decision-making, cap rates, and NOI improvements. While some companies find stability in a stable rate environment, others rely on portfolio diversification to mitigate potential disruptions from interest rate changes.

"The interest rate environment and its associated volatility have weighed on customer decision making, especially as the 10 year has increased 70 basis points from its level just 90 days ago and expectations for Fed rate cuts have moved from potentially six to now possibly zero." --- (PLD, earning call, 2024/Q1)

"And I think there's some fear now that if the Fed was to raise rates or stay higher for longer, that would affect cap rates in a way adverse to their interest." --- (EQR, conference, 2024/06/04)

"The increase in our midpoint can be explained by a $0.03 per share improvement in organic SHOP NOI, partially offset by higher interest rates." --- (VTR, earning call, 2024/Q1)

"We're not anticipating a reduction in rates, but at least we feel like we're in a more or less a stable rate environment, that makes it easier to make investment decisions." --- (SPG, earning call, 2024/Q1)

"Consequently, we would highlight the diversification of our portfolio, which today consists of over 1,500 clients in all 50 states, the UK and six other countries in Western Europe, all of which helps insulate us from potential disruptive interest rate and credit events that could impact the durability of our cash flow." --- (O, earning call, 2024/Q1)

Property Market Conditions

Real estate values fluctuate with market conditions, impacting REIT yields. Strong demand and high housing costs in key markets support high yields, while FFO may not fully capture these market-driven changes. Strategic acquisitions in favorable conditions further bolster yield sustainability.

"However, since real estate values historically have risen or fallen with market conditions, many industry investors deem presentations of operating results for real estate companies that use historical cost accounting to be insufficient by themselves." --- (VTR, sec filing, 2024/Q1)

"Since real estate values historically rise and fall with market conditions, presentations of operating results for a REIT using historical accounting for depreciation could be less informative." --- (O, press release, 2024/05/06)

"Strong demand and high single-family housing costs are consistent conditions across both our coastal established markets that represent 95% of our company's NOI and our new expansion markets of Dallas-Fort Worth, Atlanta, Denver, and Austin, that collectively represent 5% of our NOI." --- (EQR, earning call, 2024/Q1)

"By excluding these gains and losses, FFO does not capture realized changes in the value of disposed properties arising from changes in market conditions." --- (PLD, sec filing, 2024/Q1)

"And we're committed to taking advantage of this multiyear opportunity and the kind of returns that we're seeing in the market for good assets at high yields with high growth potential, we are going to find a way to make those acquisitions and make senior housing a larger part of our overall portfolio." --- (VTR, earning call, 2024/Q1)

Operational Performance of Major REITs

Major REITs utilize metrics like FFO, Core FFO, and AFFO to compare operational performance, adjusting for non-recurring items and differing depreciation assumptions. Strong balance sheets and experienced management teams, as seen in Equity Residential, further enhance operational performance. Same-store metrics also provide meaningful insights into segment performance.

"We believe that FFO and Core FFO allow for a comparison of the performance of our operations with other publicly-traded REITs, as FFO and Core FFO, or a substantially similar measure, are routinely reported by publicly-traded REITs, each adjust for items that we believe do not reflect the ongoing operating performance of our business and we believe are often used by analysts and investors for comparison purposes." --- (O, press release, 2024/05/08)

"FFO is a performance measure that is standard in the REIT business. We believe FFO provides investors with additional information concerning our operating performance and a basis to compare our performance with those of other REITs." --- (SPG, press release, 2024/05/06)

"Just a quick word, Equity Residential is one of the largest, highest quality multifamily REITs with an exceptionally strong balance sheet, and a really experienced management team that I'm fortunate to be with today." --- (EQR, conference, 2024/06/04)

"We define same-store as properties owned, consolidated and operational for the full period in both comparison periods and that are not otherwise excluded; provided, however, that we may include selected properties that otherwise meet the same-store criteria if they are included in substantially all of, but not a full, period for one or both of the comparison periods, and in our judgment such inclusion provides a more meaningful presentation of our segment performance." --- (VTR, sec filing, 2024/Q1)

"In particular, AFFO provides an additional measure to compare the operating performance of different REITs without having to account for differing depreciation assumptions and other unique revenue and expense items which are not pertinent to measuring a particular company’s on-going operating performance." --- (O, sec filing, 2024/Q1)

Sector-Specific Trends

Industrial REITs like Prologis are seeing long-term margin stability and market normalization, while healthcare REITs such as Ventas are experiencing intermediate-term occupancy increases. Residential REITs, exemplified by Equity Residential, are closely monitoring state-specific policies. Retail REITs, like Realty Income, are strategically issuing stock to finance property acquisitions.

"Don't look at it necessarily on a quarter-by-quarter basis. So if you look at that, the whole $6 billion development portfolio, all $35 million feet we're trending to our long-term margin of 24% to." --- (PLD, earning call, 2024/Q2)

"And again, the trends in those markets also support a lot of intermediate-term occupancy increases." --- (VTR, earning call, 2024/Q1)

"Are there any specific states or markets where you're keeping a closer eye, either because there's something already on the ballot there or because there's maybe a policy proposal or certain rhetoric from a certain candidate, you know, something basically, what are you guys kind of keeping an eye on more closely this year?" --- (EQR, conference, 2024/06/04)

"We may issue common stock when we believe our share price is at a level that allows for the proceeds of an offering to be accretively invested into additional properties or to permanently finance properties that were initially financed by our revolving credit facility, commercial paper programs, or shorter-term debt securities." --- (O, sec filing, 2024/Q1)

"But as markets get more normalized, softer in some cases, business goes towards the higher quality businesses. So it's hard to predict the absolute level of occupancy, certainly quarter-by-quarter, because one or two leases, even as large as our portfolio is, can really move around the numbers." --- (PLD, earning call, 2024/Q2)

Future Outlook and Sustainability

REITs like SPG, VTR, and PLD are focusing on sustainability and operational efficiencies to support long-term value creation and yield sustainability. SPG is addressing store closures, VTR is recognized for its energy management, and PLD leverages strategic locations and sustainable designs to maintain competitive advantages.

"And then possibly related to that, kind of what is your near-term outlook in terms of J.C. Penney store closures just given foot traffic trends in recent years have not been great, so just curious how long you think the current store count and fleet is sustainable." --- (SPG, earning call, 2024/Q1)

"Sustainability Leadership Ventas received the 2024 ENERGY STAR Partner of the Year Sustained Excellence in Energy Management Award from the U.S. Environmental Protection Agency (EPA), continuing the Company's strong track record of recognition for its industry-leading corporate sustainability practices that support long-term value creation." --- (VTR, press release, 2024/05/01)

"We believe we have a competitive advantage due to (i) the strategic locations of our global land bank and redevelopment sites; (ii) the development expertise of our local teams; (iii) the depth of our customer relationships; (iv) our ability to integrate sustainable design features that provide operational efficiencies for our customers; and (v) our procurement capabilities that allow us to secure high-demand construction materials at a lower cost." --- (PLD, sec filing, 2024/Q1)

"These resources allow us to provide our customers with unique and actionable insights and tools to help them make progress on sustainability goals and drive greater efficiency in their operations." --- (PLD, sec filing, 2024/Q1)