According to Narei's T-Tracker. While positive, it was well below the numbers posted in 2022 and 2021 when FFO grew 17.2% and 22.3%, respectively.
The story was similar for net operating income (NOI), up 2.7%, from 11.6% and 14.3% the previous two years.
Meanwhile, the FTSE Nareit All Equity index posted a total return increase of 1.78% in March, bringing the index closer to positive territory for the year. Year-to-date, the index is down 1.3% as total returns rose 11.36% in 2023.
Nareit too posted an update how the 27 largest actively managed real estate investment trusts focused on REITs are adapting their allocation strategies.
WealthManagement.com spoke with Edward F. Pierzak, senior vice president of research at Nareit, and Nicole Furnari, Nareit's vice president of research, about T-Tracker, the funding search and the March results.
This interview has been edited for style, length and clarity.
WealthManagement.com: Let's start with T-Tracker. What did we learn from the REIT's full-year results?
Ed Pierzak: We still have good numbers in terms of operational performance, including FFO growth and NOI growth in the last quarter of 2023. All of that remained positive. One of the things that we're starting to see when we look quarter-by-quarter rather than year-over-year is that we're seeing more negative numbers. It could be seasonality in the data, but it could also be a smoothing in operations.
If you look at the growth strength that we've had over the last five or six months, we see this decline in strength. It shouldn't be much of a surprise. By measures of supply and demand, there is some softness. We are starting to see demand decrease in some sectors. That said, when we look at occupancy rates, we find that they continue to be very strong for all property types, excluding office.
If you look at those rates for apartments, retail and industrial, they average between 95% and 97%. These are solid numbers. For the office, we have seen a decline, but also that leveling off. The office occupancy rate is 88%, the same as last quarter. I would also consider that to be good news. Overall, if we take T-Tracker and compare it to CoStar's numbers, which would be a broader market indicator, we find that T-Tracker's occupancy rates are similar but higher than CoStar's numbers. CoStar. So operationally I think we're in pretty good shape.
WM: So when you talk about a softening, what does that mean?
EP: Same-store NOI increased 3.6%. But in the previous quarter it was 4.6%, while in the previous quarter it was 5%. It is a reduction in growth. Likewise, if you look at FFO, growth rates are also lower. We are talking about this year-over-year decrease.
If you look at some of the sectors, year-over-year the industry is negative, but if you think about it, the industry had been so strong for so long that some moderation was inevitable.
WM: Another part of T-Tracker assesses the health of REIT balance sheets. What are you seeing there?
EP: They look really good. Regarding the leverage ratio, we are at 33.2%. This is a level that I would say is similar to a core investment strategy in the private world. In this higher interest rate environment, REITs have done the right things. Their weighted maturity is 6.9 years and average rates are 4.2%. Composition, over 90% of REIT debt is fixed rate debt, and nearly 80% of it is unsecured debt. Unsecured debt proves to be a competitive advantage, not only in accessing debt, but in accessing it at an attractive rate.
WM: And that's something we've talked about periodically in our conversations. It looks like the balances are largely holding up over time.
EP: We've seen the numbers vary at the margins, but REITs have been well disciplined and put this strategy in place of long-term, fixed-rate, unsecured debt and executed it over the long term. They have a longer horizon focus than a short term one.
WM: Referring to monthly and year-over-year returns, what stands out there for you?
EP: We just finished the first quarter and REITs were down modestly. The index of all capitals fell by a little more than 1%. As you look at all sectors, in the broadest sense, most have done well. They were specialty REITs, data centers and housing. On a monthly basis, we finished March just shy of 2%. One of the things to watch there is the power of the office, up to 4.6%. As much as we hear about the problems of the office, there is a recognition that there are still positives in that sector.
WM: What stands out about the research you're doing to evaluate the performance of the biggest active managers? First of all, can you remind me of the methodology of who you are looking at?
Nicole Furnari: It is based on Morningstar data and is the 27th largest. Mostly they are mutual funds and ETFs.
The big observation for the fourth quarter was a shift towards parity close to what their index would be. In comparing funds to the FTSE index, for example, telecoms was heavily underweight when we started looking. With year-on-year and quarter-on-quarter growth, this underweight level has shrunk to near zero. It's also true for gaming and specialty REITs. Specialty REITs posted the biggest year-over-year and quarter-over-quarter gains. Active managers are pushing into some of these new property sectors.
WM: Looking at some of the charts in your article, housing stands out in terms of the overweight of managed funds compared to the all-cap index.
NF: Funds really want housing. And historically, they've been overweight. What's interesting is that if you look at the trend over time, they are easing off the accelerator and changing allocations. It is worth noting that there has also been growth on the retail side. We are seeing gains in retail and some funds are moving into that sector. It seems like they have a positive outlook on people who shop in stores.
EP: With retail, demand is really outstripping supply. For years, we'd heard in the press that the US was oversold, but retail supply was limited and developers withheld that supply for several years. So it's not so much that demand has gone through the roof; is that it has exceeded the increase in supply.
WM: We've also seen a lot of lower-quality retail properties get taken down, haven't we? Some of them have been converted or closed, so now things are more in balance. Correct?
NF: There has been a flight to quality, yes. You've also seen direct-to-consumer brands like Warby Parker move to build physical stores.
WM: Yes, more retailers are taking the omnichannel approach.
NF: Yes.
WM: Are there lessons for other investors based on what actively managed funds are doing?
NF: Everyone can take from this what speaks to them. We are providing the information as a way of telling 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 each quarter has emerged from a narrative. It has been something interesting to watch.