REITs Record Solid Occupancy Levels Amid Soft Q1 Performance

With the Q1 earnings season almost winding up, this is the right time to gauge the performance of the real estate investment trust (REIT) industry. Though the rate hike acted as a dominant factor in the first quarter, underlying asset category dynamics and location of properties equally played major roles in the performance of REITs.

While markets like industrial real estate, data center and office displayed strength, retail and residential categories remained under pressure, in the reported quarter. In fact, shrinking mall traffic and store closures amid aggressive growth in online sales kept retail REITs on tenterhooks. Additionally, an increasing number of deliveries of new units in a number of key markets, along with elevated concession activity, raised concerns over some residential REIT stocks.

Amid this environment, occupancy rates touched record level in the first quarter, while funds from operations (“FFO”), a widely used metric to gauge the performance of REITs, reported a decline from the prior quarter, per a NAREIT media release.

In fact, the Q1 scorecard reveals that total FFO of the listed U.S Equity REIT industry of $14.3 billion in the reported quarter declined 3.9% sequentially. However, the figure came 8.1% higher than the prior-year quarter tally.

Nevertheless, same-store net operating income (NOI) reported 3.7% year-over-year growth. Results were driven by segments like Data Centers, Single Family Homes, and Industrial, which witnessed robust same-store NOI growth of 8.0%, 7.3% and 5.9%, respectively.

Furthermore, properties owned by the listed Equity REITs enjoyed solid occupancy levels. In fact, the occupancy rate touched a record high of 93.9% in Q1, indicating an expansion of 30 basis points (bps) from the previous quarter and 84 bps from the year-ago period.

Among the S&P 500 REIT constituents, data center REIT, Equinix, Inc. (NASDAQ:EQIX) , and industrial REIT, Prologis, Inc. (NYSE:PLD) , delivered better-than-expected results in the quarter, with positive surprises of nearly 17.0% and 1.6%, respectively, in terms of FFO per share. However, retail REIT, Simon Property Group, Inc. (NYSE:SPG) , and residential REIT, AvalonBay Communities, Inc., (NYSE:AVB) fell short of estimates, registering negative surprise of 0.7% and around 1.0%, respectively.

Admittedly, growth in cloud computing, Internet of Things and big data is not only helping tech companies, but also driving demand for data center REITs. In addition, amid economic expansion, e-commerce boom and heightened urbanization, companies are shifting their strategy toward services like same-day delivery and other such options, propelling demand for warehouse distribution facilities. Further, with a wider customer base, these companies are opting for supply-chain consolidation, resulting in higher demand for logistics infrastructure and efficient distribution networks. This is opening up opportunities for industrial REITs.

Currently, Prologis has a Zacks Rank #2 (Buy), while Equinix, Simon Property Group and AvalonBay Communities carry a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Note: All EPS numbers presented in this write up represent funds from operations (“FFO”) per share. FFO, a widely used metric to gauge the performance of REITs, is obtained after adding depreciation and amortization and other non-cash expenses to net income.


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