Slight growth on US REIT same-store net operating income in Q1

While investors remain concerned over cash flows associated with commercial real estate, publicly-traded US equity real estate investment trusts opened the year with a slight improvement on same-store net operating income (NOI) during the first quarter.

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.

While earnings trends within the portfolio of publicly traded REITs might not match all privately owned properties, during a time when commercial real estate is being scrutinized more closely, the data reported by public REITs can provide valuable insight into potential earnings trends for commercial real estate as a whole.

The same-store net operating income across publicly-traded US equity REITs had a year-over-year median growth rate of 3.8% in the first quarter, up from the 3.6% median increase in the prior quarter. However, this recent growth is still comparably weaker relative to the 4.3% median annual growth rate for the entire year of 2023.

Healthcare, industrial sectors got largest gains

The healthcare segment had the highest year-over-year growth in same-store NOI during the first quarter, posting a median growth of 8.1%.

Half of the REITs in the healthcare sector analyzed were among the overall list of US REITs with the most same-store NOI gains during the first quarter. Among the three healthcare REITs, American Healthcare REIT Inc. had the largest increase with a same-store NOI annual growth of 13.0%, which was also the fourth-highest increase across the entire industry during the same quarter.

On its May 14 earnings call, American Healthcare REIT CFO Brian Peay said that the company was able to earn 30 cents per fully diluted share of normalized funds from operations during the first quarter, attributed mostly to the recent same-store NOI growth in the combined portfolio, which consisted of the senior housing operating portfolio (SHOP) and integrated senior health campuses. They had annual same-store NOI growth of 33.5% and 19.9%, respectively.

"[W]e are maintaining our full-year guidance for same-store NOI growth in the combined portfolio of 5% to 7% in 2024. [O]ur expectations for full-year 2024 NOI growth in each of our segments are 8% to 10% for integrated senior health campuses, 25% to 30% for SHOP, potentially down slightly to flat for outpatient medical, and 1% to 3% for our triple net lease segment." Peay noted.

Welltower Inc. followed with a 12.9% year-over-year hike in same-store NOI during the first quarter, while Diversified Healthcare Trust posted an annual growth of 9.5%. On Diversified Healthcare Trust's recent earnings call, CFO Matthew Brown said that the increase was driven by improvement in occupancy and average monthly rate, although it was partially offset by higher operating expenses.

The industrial sector came in second, with an annual median increase of 7.4%. Three out of 10 industrial REITs were also included in the top gainers list during the period, led by Terreno Realty Corp., which ended the first quarter with a same-store NOI of $54.8 million, a 13.1% increase from the same period in 2023. The two other industrial REITs among the top gainers' list were First Industrial Realty Trust Inc. and Americold Realty Trust Inc., which posted year-over-year hikes of 10.0% and 8.6%, respectively.

During the same quarter, the self-storage segment was the sole property sector that incurred losses in its same-store NOI, posting a median year-over-year decline of 1.9%.

Within the sector, Global Self Storage had the largest drop in same-store NOI during the first quarter, at 5.7%.

It was followed by National Storage Affiliates Trust, which saw a year-over-year decline of 3.7%. In National Storage Affiliates' first quarter earnings release, it was noted that the decrease in same-store NOI was attributed to the 1.5% drop in same-store total revenues along with a 4.5% increase in same-store property operating expenses.

The three remaining self-storage REITs also posted losses during the first quarter: CubeSmart at 1.9%, Public Storage at 1.5% and Extra Space Storage Inc. at 0.5%.

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UMH Properties tops the list of gainers

Manufactured home REIT UMH Properties Inc. was the biggest gainer among all US REITs in the first quarter, with a robust annual growth in same-store NOI, at 15.6%. This was well beyond the residential sector's 4.7% median growth, as well as the overall REIT industry median.

"The markets continue to do well. We continue to achieve our 5% rent increases. And as a result of the increased revenue and occupancy, our expense ratios are decreasing, which is allowing us to hit these same property double-digit NOI increases," UMH Properties' Executive Vice President and COO Brett Taft said on a recent earnings call.

"So we're optimistic this will continue, but we closely monitor every community in our portfolio. I'd also add to that, that our collections are as strong as they normally are historically. In the first quarter, it was 98.7%, almost 99%. So the company is doing well operationally from just about every standpoint," Taft added.

Office REITs barely up

The office sector was somewhat divided, with ten of the 19 office REITs in the analysis logging positive same-store NOI Growth during the quarter, but the other nine reporting a decline in their same-store NOI. Of the ten REITs with the largest decline in same-store NOI for the quarter, six were from the office sector.

Hudson Pacific Properties Inc. reported the largest same-store NOI decline within the office sector for the first quarter at 12.9%, followed by Office Properties Income Trust with a 12.0% decline. Kilroy Realty Corp. and Equity Commonwealth also reported same-store NOI drops of 7.2% and 6.9%, respectively, for the quarter.

Same-store NOI growth for the office sector overall was up a very slight 0.3% year over year on a median basis. It was an improvement from the 0.7% decline the previous quarter, but still a deceleration from the 1.4% median hike for the whole year of 2023.

Same-store occupancy across all US REITs stood at a median of 93.3% in the first quarter, down from the prior quarter's 93.8%.

The median same-store occupancy rate across all REITs has been above 94% for most years since 2015, but the rate fell to 93.3% in 2020 amid the COVID-19 pandemic. The same-store occupancy rate bounced back to about 94.2% in 2021 and to 94% in 2022. In 2023, the same-store occupancy rate slipped again to 93.8%.