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The Strength of REIT Balance Sheets
Ongoing uncertainty in the banking industry, combined with worry over upcoming debt maturities is leading to an uneasy commercial real estate sector. But first-quarter data from Nareit’s Total REIT Industry Tracker Series might ease some concerns. The T-Tracker data shows that REITs, by and large, continue to have well-structured debt.
The data indicated that:
- 76% of REITs’ total debt is unsecured, while 87% of the listed REITs’ total debt is at a fixed rate
- Leverage ratios remained modest; debt-to-market assets stood at 33.9%
- The weight average term to maturity of REIT debt was 82 months
- The weight average interest rate on total debt stood at 3.9%
“REITs appear well positioned to navigate a period of higher interest rates and economic uncertainty.” said Nareit Executive Vice President of Research and Investor Outreach John Worth in a statement. He added that many REITs reduced their leverage and locked in debt at low, fixed rates during the past decade. This has led to “sound balance sheets that have helped REITs successfully weather the last year of economic and capital market uncertainty,” Worth said. “Their balance sheets and solid operational performance will help REITs handle tighter credit conditions and the ongoing high interest rate environment.”
The T-Tracker data also reported that the REIT implied cap rate was 5.9% in Q1 2023. This was more than 50 basis points (bps) higher than the private market transaction cap rate, and 180 bps higher than the private market appraisal cap rate. This spread suggests that all else being equal, the public real estate market is priced at a material discount to the private market, Nareit pointed out.
“The dislocation between public and private real estate market valuations has been shrinking, as changes in both REIT and private market valuations have helped close the gap,” observed Nareit Senior Vice President of Research Ed Pierzak in a statement. He went on to say that the gap will continue to close in the coming year.
Nareit also reported continued operational strength, with Funds from Operations (FFO) at 18.7 billion, a 5.3% year-over-year increase. Additionally:
- Net operating income increased by 2.2% from the year before
- Same-store NOI was also up, at a 7.2% year-over-year gain
- Dividends paid totaled $14.7 billion, a 7.7% increase from a year ago
- ◦Financing
- ◦Economy
