Publicly traded REITs have been swept away in the financial fallout stemming from Russia’s invasion of Ukraine, which has sent global equity prices down. In February, the total return for the FTSE NAREIT All Equity REIT Index was down 3.89 per cent as of month-end and down 11.52 per cent year-on-year. This compares with a decline of 8.01 percent for the S&P 500 and 6.43 percent for the Dow Jones Industrial Average during the same time frame.
However, share prices do not tell the full story within the sector. February wrapped up a very strong annual earnings season for publicly traded REITs.
Funds from operations (FFO) for all equity REITs grew 24.6 percent to $64.8 billion from 2020 to 2021. Net acquisitions totaled $26.7 billion in the fourth quarter, the second largest amount on record. Net acquisitions for the year was also a record $67.8 billion.
WMRE sat down with Nareit’s executive vice president and economist John Worth to discuss 2021 results and February returns.
This interview has been edited for length, style, and clarity.
WMRE: Let’s start with the February issue. Total returns were lower for the second consecutive month to start the year.
John Worth: So far, the all-equity REIT index has declined 11.5 per cent year-on-year till the end of February. In February, we saw a decline of 3.9 per cent in the overall returns of the index. This is a continuation of some of the pre-January trends. Infrastructure was one of the worst performers. Data centers lag behind. Those two areas are down 21.5 percent and 17.5 percent, respectively, year-over-year.
Office REITs, on the other hand, are down just 2.8 percent, which is better than all-equity figures, and retail REITs are even slightly better, even though they’re down 9.3 percent for the year. and residential REITs were down 9.35 percent.
A strong performer of note is lodging/resort, up 1.5 per cent for the year after gaining 3.6 per cent for the month.
Overall, it signals a bit of a transition from tech-oriented real estate stocks to more traditional sectors. Perhaps investors are looking for value and also acting in a constant reopening game.
Moreover, many of those topline results started in the first week of March with positive returns. REITs rose 3.4 percent by the end of the week and month-over-month. Also, a lot of it reflects the volatility related to Russia/Ukraine which is going to take some time to get out of the system.
Cumulatively, as of last Friday, REITs were down 8.55 percent and the S&P was down 8.9 percent on a year-over-year basis. I believe what we are seeing is mostly about geopolitical instability. We will not get a good idea about the broader stock market views of real estate until we are clear about it.
WMRE: February marked the end of the fourth-quarter earnings session for REITs. What were some of the big takeaways?
John Worth: The headline is that REIT earnings have grown nearly 25 percent since 2020 and have even surpassed pre-pandemic levels since 2019. This indicates that we have seen a meaningful improvement from the COVID performance and almost every sector has improved on an annual basis since 2020.
We saw net acquisitions equivalent to $26.7 billion in the fourth quarter, with strong earnings growth for 2021. This is the second biggest quarter on record. The full year reached $67.8 billion. This REIT holds the record for annual acquisitions.
As we have seen share prices recovering, they are raising capital and 2021 was also a banner year on that front. REITs raised over $126 billion in debt and equity offerings, which is also a record. A lot of that capital raising went into acquisitions. This is what you need as a recipe for future growth. The acquisition will drive earnings growth and we will see that flow in the coming quarters and years.
Another thing to note at T-Tracker is that we see the REIT’s balance sheet as very strong. The leverage ratio declined in the fourth quarter. The debt-to-total-book-asset ratio was 48.1 percent. At the same time, the debt-to-market-asset ratio has come down to 25.7 per cent. The weighted-average terms to maturity also lengthened to 89.4 months, or about 7.5 years. For context, the average maturity in 2008 was less than five years.
WMRE: The level of capital raising looks remarkable as investors have other options, including private markets, to invest in real estate. Therefore, the fact that REITs have been able to tap the markets appears to be a good indicator of the strength of the industry.
John Worth: It is a competitive market for raising capital and is competitive in terms of acquisitions. The fact that REITs are able to go out and effectively bring in high quality assets speaks volumes on their operating platforms. They are permanent entities, they are in markets where they know the players and they know the geographies. They are able to go out and make deals. Some of them are able to develop their own and do site selection, planning, processing and construction to place new properties in the market.
WMRE: Can you get a little bit more about the FFO numbers for the year and quarter?
John Worth: FFO was up dramatically from the previous year at 24.6 per cent, and also up 1.4 per cent from the pre-pandemic year of 2019. This indicates a complete recovery. We have the FFO ticking down a bit on a quarterly basis. There was a very strong recovery during the second and third quarters of 2021 and then a slight decline from $17.3 billion in the third quarter to $16.8 billion in the fourth quarter. But when you look at the fourth quarter of 2021 compared to the same quarter of 2020, the FFO was up quite dramatically at 22 percent. So with all that said, I don’t read too much into quarter-over-quarter declines. The bigger picture is actually an upward trend.
WMRE: Any other findings from the full year’s report?
John Worth: We had a very active 2021 in terms of M&A and we are going to see what 2022 brings. So far, we have already done some deals. Blackstone REIT has been active and has announced some major acquisitions. And there were two other big announced listed-to-listed acquisitions. Most importantly, Healthcare Trust of America announced a merger with Healthcare Realty Trust.
WMRE:NEREIT recently published a report on the status of REITs globally. What are some of the findings of that report?
John Worth: This report takes a longer view and how we have seen REITs grow over the past 60+ years. REITs were created in the US in the 1960s, but not much happened in the first 30 years. It’s been a lot more dramatic over the past 30 years.
There are now 865 REITs listed around the world. What I find interesting is not the total or $2.5 trillion market cap, but rather the population of the countries that have REITs. About five billion people live in countries with REITs. Those countries account for 85 percent of global GDP. So about 65 percent of the world’s population lives in a country that has a REIT.
WMREAre there any new countries adding REIT structures?
John Worth: The latest country to add REITs was China in 2021. There are always countries considering this, but right now I don’t know of any country launching in 2022.
Long-term, demographic forecasts suggest that most of the world’s largest cities are going to be in Africa, with only two countries having REIT structures right now. It is the only continent where population is growing at a meaningful pace and we are going to see more urbanization. As I think about the public policy challenges it will present, REITs can be a significant contributor to solutions and bring capital to those problems to bear.
