US real estate investment trusts’ (REITs) revenue from operations rose nearly 15% to $19.9B in Q3 2022 from a year ago, according to the National Association of Real Estate Investment Trusts’ (NAREIT) Q3 T-Tracker. 14.9% Y/Y growth decreased from 16.4% in Q2 to 29.3% growth in Q1 2022.
The majority of REITs, 81%, reported a Y/Y increase in FFO during the quarter. For all US-listed REITs, operating income rose 8.1% Y/Y, down from 10.5% in Q2 and 15.2% in Q1.
The results for the quarter reflect “a growing trend,” said John D. Worth, NAREIT’s senior vice president, Research & Investor Outreach. “We’re seeing some upside from the big drop in profits [when COVID restrictions took hold] followed by a big, big increase as we entered the recovery process.”
Only three equity REIT sectors have not achieved FFO expansion — lodging and hospitality, data centers, and health care, the latter of which is almost back to pre-COVID levels, Worth said.
Lodging & REITs are moving forward, with the sector posting the strongest FFO rates in Q3, up 126% Y/Y. The next strongest sector was real estate, up 49.9%, followed by industrial REITs, up 30.9%. Industrial REITs have been one of the sectors that have benefited the most from the growth of e-commerce during the pandemic, as people have been severely restricted from traveling for a long time in 2020.
Overall, dividends paid by US REITs remain healthy, rising 20.6% Y/Y in Q3, from 14.6% Y/Y growth in Q2. Mortgage REITs, though saw Y/Y growth slow to 12.2% in Q3 from 19.0% in Q2 and 16.7% in Q1.
With an uncertain economic outlook, and rising interest rates, REITs appear to be well-prepared. Interest rates were near historic lows, with commercial loans at 34.5%. in another encouraging sign, fixed debt reached 82.6% of total debt. Interest rates increased to 6x, and interest rates, as a percentage of NOI, were near a record low of 18.9%.
In addition, the weighted period to maturity of the REIT’s debt was 84 months, or more than seven years, which means that their debt repayments are spread over several years.
At REITWorld’s recent NAREIT conference, managers remained optimistic about their performance, Worth said, but seemed more cautious about the next 12 months. “We still don’t see many of our REIT members saying they see slow growth today in terms of performance metrics, but it’s clear in their outlook for 2023.”
One big question going forward is when the buying process will resume. “A lot of what we’re hearing is that sales aren’t happening because buyers and sellers can’t get on the same page about what’s required to get that refund,” Worth said.
The restart will “undoubtedly come at some point,” he said, but whether it will be Q4 2022 or next year remains to be seen.
Despite the high risk of a recession, publicly traded real estate businesses may be better equipped to weather the downturn than the real estate sector, said Edward Pierzak, vice president of research at NAREIT.
Over the past six years, REITs have, on average, underperformed real estate in the four quarters before the recession, but outperformed real estate during and in the four quarters after the recession.
“We all know that economic growth is what drives real estate activity, but that said, even if we look at what might be a really low GDP, that doesn’t mean it’s going well,” Pierzak said. .
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