REITs Resurgence: Will the Momentum Last?

Current performance trends in REITs

REITs are showing strong performance trends, with key metrics like FFO and Core FFO providing valuable comparisons across the sector. Healthcare REITs, particularly those focused on senior housing, are benefiting from demographic tailwinds. Additionally, occupancy gains and renewal rate increases are driving growth, while debt to EBITDA remains a crucial measure of balance sheet health.

"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, 2024/08/08)

"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)

"Unlike nearly all of its healthcare REIT peers, most of its income is derived from senior housing assets, a sector with tremendous fundamental tailwinds as the 80+ demographic is expected to be the fastest-growing age cohort for many years to come and there is little new supply." --- (VTR, press release, 2024/04/18)

"But really, what we're seeing to date is an out performance with occupancy gains that we've been able to achieve, as well as the achieved renewal rate increases that we've been posting year to date for basically the entire year has been greater than what we would have anticipated, which is putting up blended rate growth for the Q1 and even year to date through the Q2 stronger than what we anticipated initially." --- (EQR, conference, 2024/06/04)

"So we've been in a great spot. And I'll say I'd see that as continuing because, again, debt to EBITDA probably being the main metric folks look at to understand balance sheet health and REITs." --- (PLD, conference, 2024/06/05)

Macroeconomic and interest rate impacts on REITs

REITs are navigating the current macroeconomic landscape by securing high-yield investments and reducing rate sensitivity (O). However, rising interest rates and volatility are impacting customer decisions (PLD) and raising concerns about adverse effects on cap rates (EQR). Potential economic downturns and lower interest rates could influence consumer spending and earnings (SPG, O).

"That end, the six year £300 million sterling senior secure loan we invested in during the quarter provides us with an attractive 8.1% yield secured by the solid credit of a U.K. grocery store operator, while reducing the rate sensitivity on the value of sterling debt we have on the balance sheet maturing in 2030, which currently totals £540 million. From a 2024 earnings guidance perspective, we are reiterating our full year investments at $3 billion in our AFFO per share guidance of $4.15 to $4.21, which represents 4.5% annual per share growth, assuming the midpoint." --- (O, earning call, 2024/Q2)

"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)

"So I think even if these levels were in pretty good shape, if you have a -- if you have kind of a longer downturn, then it's realistic to think that consumer spending is going to be reined in. But offsetting that obviously will be, low inflation, lower interest rates and you can -- you could potentially see a scenario that we dealt with pre-COVID, right?" --- (SPG, earning call, 2024/Q2)

"So there's a little bit of dilution from that. But I think when you look into 2025, we've got $1.8 billion, $1.9 billion, a 4.2% I just talked about how maybe there's 100 basis points of dilution if we were to do something like sterling and dollars based off of today's indicative rates that would have no more than about a 50 basis point impact to earnings. So it's obviously come in quite a bit." --- (O, earning call, 2024/Q2)

Sector-specific dynamics in REITs

REITs face unique sector-specific dynamics, including stringent regulatory requirements, diversified growth through new verticals like gaming and data centers, and strong leasing activities. Financial stability and operational cash flow are crucial for maintaining REIT status, while sector-specific performance, such as in healthcare, shows significant leasing momentum and occupancy gains.

"In order to maintain our qualification as a REIT, we must satisfy a number of highly technical requirements, which impact how we invest in, operate or manage our assets." --- (VTR, sec filing, 2024/Q1)

"The portfolio's stabilized internal growth rate has risen in recent years, and now stands at approximately 1.5% on an annualized basis, in part because of the expansion of our European platform, where many leases are subject to uncapped CPI increases, as well as our expansion into the gaming and data center verticals, which where leases often include healthy annual rent escalators. With the benefit of excess free cash flow, second quarter capital deployment activity resulted in investment spread of approximately 293 basis points, which like the first quarter is well above our..." --- (O, earning call, 2024/Q2)

"But coming into the first few weeks of the third quarter, I think we are maintaining the momentum that I guess you're inferring was picked up between NAREIT and the end of the quarter, which is that proposal activity is strong, leasing activity is strong. We see it more in renewals, a little less so in new leasing." --- (PLD, earning call, 2024/Q2)

"In general, we anticipate that cash generated from operations will be sufficient to meet operating expenses, monthly debt service, recurring capital expenditures, and dividends to stockholders and/or distributions to partners necessary to maintain Simon’s REIT qualification on a long-term basis." --- (SPG, sec filing, 2024/Q1)

"In our outpatient medical portfolio, Pete and team continued to build leasing momentum, executing over 800,000 square feet of new and renewal deals in the quarter, which translated to 30 basis points of sequential occupancy gains. Further, the equalized loan portfolio outpatient medical assets have made significant progress, increasing occupancy 450 basis points year-over-year to 81.5% in the second quarter, leveraging the Lillibridge operating platform and playbook to drive growth." --- (VTR, earning call, 2024/Q2)

Investor sentiment towards REITs

Investor sentiment towards REITs is cautiously optimistic, with strategic capital investors seeking value uplift before committing new capital. The addition of well-respected REIT investors to Ventas Inc.'s board further signals positive investor confidence.

"Hopefully, the 2 new guys don't mess it up. No, in all seriousness, and then we added 2 well respected REIT investors to our Board this year." --- (VTR, conference, 2024/06/04)

"Even though modest, the value uplift in the US and Europe are important as strategic capital investors have been looking for values to not only bottom, but actually turn upwards before committing new capital. With Europe a bit ahead of the US in this regard, it" --- (PLD, earning call, 2024/Q1)

Future outlook for REITs

Future distributions for REITs will depend on various factors including operational results, cash flow, and financial conditions. Orion Office REIT's recent leasing activities and dividend declarations, along with a reaffirmed 2024 outlook, indicate a positive future for REITs.

"Future distributions will be at the discretion of our Board of Directors and will depend on, among other things, our results of operations, Funds from Operations Available to Common Stockholders ("FFO"), Normalized Funds from Operations Available to Common Stockholders ("Normalized FFO"), AFFO, cash flow from operations, financial condition, capital requirements, the annual distribution requirements under the REIT provisions of the Internal Revenue Code of 1986, as amended, our debt service requirements, and any other factors the Board of Directors may deem relevant." --- (O, sec filing, 2024/Q2)

"- Completed 108,000 Square Feet of Leasing and an Additional 414,000 Square Feet Subsequent to Quarter End - - Declares Dividend of $0.10 Per Share for First Quarter 2024 - - Company Reaffirms 2024 Outlook - Orion Office REIT Inc. (NYSE:ONL) ("Orion" or the "Company"), a fully-integrated real estate investment trust ("REIT") focused on the ownership, acquisition and management of a diversified portfolio of single-tenant net lease office properties located across the U.S., announced today its operating results for the first quarter ended March 31, 2024." --- (O, press release, 2024/05/08)