Funds from operations (FFO) of publicly traded real estate investment trusts (FFO) grew 2.1% in 2023, according to data T Tracker by Nareit. While positive, it is well below the 17.2% and 22.3% FFO growth figures for 2022 and 2021, respectively.
It was a similar story for net operating income (NOI), which grew 2.7%, down from 11.6% and 14.3% in the previous two years.
At the same time, the FTSE Narrat All-Share Index’s total return increased by 1.78% in March, bringing the index closer to positive territory for the year. The index is down 1.3% year-to-date since total returns grew 11.36% in 2023.
Naret also Posted an update Pay attention to how the 27 largest actively managed real estate investment funds in REITs adjust their allocation strategies.
Wealth Management Network Discuss T-Tracker, fund research and March results with Edward F. Pierzak, Nareit’s senior vice president of research, and Nicole Furnari, Nareit’s vice president of research.
This interview has been edited for style, length and clarity.
WealthManagement.com: Let’s start with T-Tracker. What did we learn from REITs’ full-year performance?
Ed Pilzak: We still have good numbers on operating performance, including FFO growth and NOI growth in the last quarter of 2023. All of this is still positive. One of the things we start to see when you look at it quarter-over-quarter rather than year-over-year is we’re seeing more negative numbers. This could be seasonality in the data, but it could also be weakness in operations.
If you look at the intensity of our growth over the last five, six months, we’ve seen that intensity diminish. This should come as no surprise. Looking at supply and demand indicators, there is some weakness. We are starting to see demand taper off in certain industries. That said, when we look at occupancy rates, we see that occupancy rates remain very strong across all property types, excluding offices.
If you look at the ratios for apartments, retail and industrial, their average ratios are between 95% and 97%. These are solid numbers. For offices, we’ve seen a decline, but we’ve also seen it stabilize. Office occupancy rate was 88%, unchanged from the previous quarter. I also think this is good news. Generally speaking, if we compare T-Tracker’s data to CoStar’s data (which would be a broader market indicator), we would find that T-Tracker’s occupancy is similar to CoStar’s data, but higher than CoStar’s data. So from an operational perspective, I think we’re in very good shape.
WM: So when you talk about softening, what does that mean?
EP: Same-store NOI grew 3.6%. But last quarter it was 4.6%, compared with 5% in the previous quarter. This is the gradual waning of growth. Likewise, if you look at FFO, you’ll see that growth levels are also lower. We’re talking about this tapering off year by year.
If you look at certain industries, you’ll see that industrials are negative year over year, but if you think about it, industrials have been going so strong for so long that some slowdown is inevitable.
WM: The other part of the T-Tracker measures the health of a REIT’s balance sheet. What do you see there?
EP: They look really good. In terms of leverage, we’re at 33.2%. I would say that this level is similar to the core investment strategy of the private world. In this high interest rate environment, REITs are doing the right thing. They have a weighted term of 6.9 years and an average interest rate of 4.2%. In terms of composition, more than 90% of REIT debt is fixed-rate debt and nearly 80% is unsecured debt. Unsecured debt proves to be a competitive advantage, not only in terms of access to debt, but also in terms of access to debt at attractive interest rates.
WM: This is something we discuss regularly in our conversations. The balance sheet appears to have remained largely unchanged over time.
EP: We’ve seen marginal changes in the numbers, but REITs have been very disciplined and have taken this strategy out of long-term debt, fixed rate and unsecured debt and executed over the long term. They focus on longer-term goals rather than short-term goals.
WM: Turning to monthly and year-to-date returns, what stands out to you?
EP: We just finished the first quarter and REITs were down slightly. All stock indexes fell just over 1%. When you look across industries, most are doing well in the broadest sense. These include specialty REITs, data centers and accommodation. Looking at the monthly data, we ended March with a gain of just under 2%. One of the things to watch is the strength of office towers, which grew by 4.6%. While we hear a lot of reports about office issues, there is a realization that there is still upside to the industry.
WM: What stands out about the research you did on measuring the activities of the largest active fund managers? First, could you remind me of the method of the object you are following?
Nicole Fornari: It ranks No. 27, based on Morningstar data. Mainly mutual funds and ETFs.
The biggest highlight of the fourth quarter was the change in its index that was close to parity. For example, when comparing the fund to the FTSE, the telecoms sector was very underweighted when we started looking. With year-on-year and month-on-month growth, the level of underweighting has shrunk and is approaching zero. The same goes for gaming and specialty REITs. Specialty REITs posted the largest year-over-year and quarter-to-quarter gains. Active managers are making inroads into some newer areas of real estate.
WM: Judging from some of the charts in your article, residential funds stand out in terms of managed fund overweight relative to the all-stock index.
Nuclear factor: Funds really like residential. Historically, they have been overweight. What’s interesting is that if you look at the trends over time, you’ll see that they are relaxing the accelerator and changing allocations. It’s worth pointing out that there’s also growth on the retail side. We’re seeing growth in retail and some money moving into that sector. They seem to have a positive attitude towards people shopping in the store.
EP: For retail, demand is indeed outpacing supply. We’ve been hearing in the media for years that retail in the U.S. is excessive, but retail supply is constrained and developers have been holding back supply for years. So it’s not so much that demand has peaked; Rather it has outpaced supply growth.
WM: We’re also seeing a lot of low-quality retail properties being torn down as well, right? Some of them have been converted or closed, so things are more balanced now. correct?
Nuclear factor: Yes, people are starting to pursue quality. You’re also seeing direct-to-consumer brands like Warby Parker start building physical stores.
WM: Yes, more and more retailers are taking an omnichannel approach.
Nuclear factor: Yes.
WM: Are there any lessons that the practice of actively managing funds can teach other investors?
Nuclear factor: Everyone can take something from it that is useful to them. We provide this information to illustrate where active managers are putting their money. When I started this project, I was worried that there wouldn’t be much to say each quarter. But every season there’s a story that comes out of it. This is a very interesting thing.
