US REITs show improved same-store net operating income in 2022

Editor's note: In the below analysis, S&P Global Market Intelligence prefers to take cash-based same-store net operating income, if available. However, a noncash-based net operating income will be used if not.

US equity real estate investment trusts posted stronger gains on same-store net operating income in 2022, with median growth of 6.1% for the entire year, as opposed to the 5.3% median increase in 2021.

Same-store net operating income (NOI) across the entire REIT industry improved in the fourth quarter of 2022, posting a year-over-year median growth rate of 5.7%, following slower median gains of 5.0% in the third quarter and 5.1% in the second quarter. However, the strongest same-store NOI gain was seen during the first quarter, when the industry median grew 8.5% year over year.

Diversified Healthcare Trust leads the list of highest gainers in Q4'22

Healthcare REIT Diversified Healthcare Trust was the biggest gainer among all US REITs in the fourth quarter, reporting robust same-store NOI year-over-year growth of 34.8%. In comparison, the REIT's performance for the entire year was more muted, with only 3.3% same-store NOI growth.

The gains that the healthcare REIT incurred during the fourth quarter were mainly attributed to the better performance of its senior housing operating portfolio segment. In Diversified Healthcare Trust's earnings release March 1, the REIT mentioned that the hike in the senior housing operating portfolio segment's same property cash basis NOI was due to higher revenues derived from "higher rates and increased occupancy."

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On the other side of the spectrum, diversified REIT CTO Realty Growth Inc. had the biggest loss in same-store NOI during the same quarter, reporting a year-over-year decline of 6.9%. For full year 2022, however, the REIT actually saw a 13.0% gain in comparison to the previous year.

Following a subpar fourth-quarter performance, the REIT predicts a much weaker same-store NOI growth of 1% to 4% in 2023, citing in its recent earnings release "elevated bad debt expense, occupancy loss and costs associated with tenants in bankruptcy and/or tenant lease defaults" as contributing factors.

Self-storage, residential REITs trump other property types

The self-storage segment had the biggest year-over-year growth in same-store NOI not only during the fourth quarter but for the entire year. The REIT sector reported a median gain of 13.3% during the fourth quarter and a median boost of 17.9% for full year 2022.

Three out of five self-storage facility operators landed on the overall list of US REITs with the highest same-store NOI gains for the fourth quarter. Public Storage reported the highest annual gain on same-store NOI among the three self-storage REITs, at 15.8%, the third-highest increase across all property types during the fourth quarter. For the entire year, the self-storage REIT posted a 17.9% gain in same-store NOI.

In its most recent earnings release Feb. 21, Public Storage attributed the revenues of its same-store facilities to the "higher realized annual rent per occupied square foot," although this was partially offset by a drop in occupancy. The same-store facilities' cost of operations also increased during the fourth quarter, mainly due to higher expenses on property tax, marketing and other direct property costs, but these were also partially offset by a decline in on-site property manager payroll expense.

In addition to Public Storage, the two other self-storage REITs on the list were Extra Space Storage Inc. and Life Storage Inc., which took the sixth and eighth positions, at 13.4% and 13.3%, respectively. The remaining two self-storage REITs that did not reach the top 10 gains list, CubeSmart and National Storage Affiliates Trust, posted year-over-year hikes of 12.1% and 9.4%, respectively.

Following the self-storage sector, residential REITs had the second-highest increase in median same-store NOI during the fourth quarter at 10.9% and for the whole year of 2022 at 13.2%.

Within the residential segment, multifamily-focused Mid-America Apartment Communities Inc. saw the biggest gain in same-store NOI at 16.8%. Three other multifamily-focused residential landlords were among the top 10 US REITs with the highest same-store NOI gains in the fourth quarter, including NexPoint Residential Trust Inc., Essex Property Trust Inc. and Independence Realty Trust Inc.

Strong showing for residential, industrial REITs in 2022

Across four major property types, the residential and industrial segments had the most gains during the fourth quarter and for the entirety of 2022.

Median same-store NOI growth on residential REITs jumped from 5.4% in 2021 to 13.2% in 2022. Although slowing from a peak of 14.4% year-over-year median growth in the second quarter, the residential sector still maintained double-digit growth for the second half of 2022, ending the fourth quarter with a 10.9% median gain.

The industrial sector picked up the pace during the second half of the year, posting median hikes of 8.5% and 8.9% during the last two quarters, following a 7.1% median gain during the second quarter. For the entire 2022, the sector posted median same-store NOI growth of 8.9%, up from 4.6% in 2021.

Same-store occupancy across all US REITs was at a median of 93.6% in the fourth quarter, down from the prior quarter's 94.2%.

The median same-store occupancy rate across all REITs has been above 94% since 2015, but the rate dropped to 93.4% in 2020 amid the COVID-19 pandemic. In 2021, the same-store occupancy rate bounced back to about 94.1% and remained unchanged in 2022.