More Than 90% of Debt is Fixed Rate; Weighted Average Term to Maturity Almost Seven Years
WASHINGTON, D.C. (August 17, 2023) – New data from the second quarter show that REITs continue to have well-structured debt—79% of REITs’ total debt was unsecured, while 91% of listed REITs’ total debt was at a fixed rate, according to the Nareit Total REIT Industry Tracker Series (T-Tracker®) report released today.
Second quarter 2023 data also show that REIT balance sheets are solid and well-positioned for economic and capital market uncertainty. On average:
- Leverage ratios remained modest with debt-to-market assets at 34.6%.
- Weighted average term to maturity of REIT debt was nearly 7 years—or 79 months.
- Weighted average interest rate on total debt was 3.7%.
“REITs are ably handling tighter credit conditions and the ongoing high interest rate environment, in large part because of their solid balance sheets and sound operational performance,” said Nareit Executive Vice President of Research & Investor Outreach John Worth.
Year-Over-Year Increases in FFO, Same Store NOI Illustrate REITs’ Sound Fundamentals
T-Tracker data demonstrate that despite mortgage market turmoil and other economic headwinds, REITs displayed operational strength during the second quarter. More than half of REITs reported year-over-year increases in funds from operations (FFO). Specifically:
- Funds from operations (FFO) was $20.6 billion—a 4.2% rise from one year ago.
- Same Store Net Operating Income (NOI) experienced 5.0% year-over-year gains, underscoring that REITs are keeping pace with inflation.
- Dividends paid was $3 billion—a 4.5% increase from last year.
In addition, T-Tracker data show that the average occupancy rate stayed steady, increasing slightly to 93.4% from 93.2% in the first quarter.
Industrial and Lodging/Resorts Lead Quarterly Sector Performance
Two-thirds of REITs reported quarterly increases in FFO, including gaming, the new sector that the FTSE Nareit U.S. Real Estate Index Series added in the second quarter. A number of sectors experienced double-digit growth on a quarterly basis, including:
- Industrial, which rose 38.3%.
- Lodging/Resorts, which increased 28.3%.
- Health Care, which rose 24.7%.
- Gaming, which rose 18.4%.
- Infrastructure, which increased 8%.
Other sectors, such as diversified and self-storage, also experienced strong growth in FFO with 7.7% and 6.6% increases, respectively.
Implied Cap Rates Show Gap in Public-Private Real Estate Market Divergence Continues
Nareit has written extensively about the divergence between public and private real estate market valuations, using differences in capitalization (cap) rates to help demonstrate this gap. The latest T-Tracker data show that the REIT implied cap rate was 6.1% in the second quarter of this year, which was more than 100 basis points higher than the private market transaction cap rate and nearly 180 bps greater than the private market appraisal cap rate. All else equal, this spread suggests that the public real estate market is priced at a material discount to the private market.
“With progress remaining slow, the valuation readjustment process will likely stretch into 2024,” said Nareit Senior Vice President of Research Edward Pierzak. “Given the continuing divergence—and REITs’ solid balance sheets and sound operational performance—public equity REITs are increasingly attractive. In our meetings with investors, it’s clear they understand that REITs offer them access to institutional quality properties with best-in-class operators at substantially discounted prices compared to the private market.”
A review of historical market dynamics shows that REIT total returns have tended to bounce back—and even surge—after periods of significant REIT relative underperformance.
For more data, please read the complete Q2 2023 Nareit T-Tracker report.