US REIT same-store net operating income growth slows in Q2

The same-store net operating income of publicly traded US equity real estate investment trusts grew slower in the second quarter.

Same-store net operating income (NOI) across public US equity REITs grew at a median rate of 2.6% year over year, which is weaker than the 3.8% median year-over-year hike in the previous quarter. This recent growth is even slower compared to the 4.3% median annual gain for full year 2023, according to an S&P Global Market Intelligence analysis.

S&P Global Market Intelligence prefers to use 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, the data reported by public REITs can provide valuable insight into potential earnings trends for commercial real estate as a whole.

Healthcare bags largest gain

The healthcare segment had the largest year-over-year gain in same-store NOI during the second quarter, with a median increase of 7.8%.

Of the seven existing healthcare REITs included in the analysis, two made it to the list of US equity REITs with the highest year-over-year increase in same-store NOI during the second quarter. American Healthcare REIT Inc. saw the largest hike within the healthcare sector, posting growth of 15.7%, the third-highest gain among the REITs included in the analysis.

On the REIT's Aug. 6 earnings call, American Healthcare President and CEO Danny Prosky said that the rise in demand for healthcare real estate remains strong as seen in the performance of the REIT's diversified healthcare portfolio during the first half. The REIT's performance in the first half, combined with the continued demand, has propelled anticipated same-store NOI growth for 2024 to 12%-14%, up from the previous guidance of 5%-7%.

"Within our [four] property segments, we continue to observe increased demand from an aging population, which we expect will extend at least into the latter part of the decade. This demand and resulting internal growth within our portfolio is surpassing our original conservative estimates, prompting us to increase our guidance for both total portfolio same-store NOI and earnings for fiscal year 2024," Prosky said.

The other healthcare REIT in the overall top gainers' list was Welltower Inc., which took fourth place with same-store NOI growing 11.3% year over year during the second quarter. Welltower Executive Vice President and COO John Burkart attributed the double-digit total same-store NOI growth in the second quarter to the growth of the REIT's senior housing operating portfolio.

"Turning to senior housing. We continue to be pleased with the level of same-store NOI growth being generated by this business, which once again exceeded our expectations at 21.7%. Attaining 20-plus-percent NOI growth for any sector is an incredible achievement, but [seven] consecutive quarters is truly exceptional. I'd also note that the strength of our business remains broad-based, with all regions and property types posting outsized levels of growth," Burkart said during the REIT's July 30 earnings call.

Industrial REITs posted the second-largest year-over-year increase in same-store NOI during the second quarter, with a median increase of 6.7%.

Four of the 10 industrial REITs in Market Intelligence's analysis were included in the top gainers list during the quarter, led by Americold Realty Trust Inc. with a same-store NOI of $206.6 million, up 17.3% from the same period in 2023. The other three industrial REITs in the top gainers' list were Plymouth Industrial REIT Inc. with 9.8% year-over-year growth, Rexford Industrial Realty Inc. with 9.1% year-over-year growth and Terreno Realty Corp. with 9.0% year-over-year growth.

– Visit the CRE Zone for a curated compilation of S&P Global Market Intelligence's commercial real estate news and insights. – Download a template on real estate investment trust same-store comparison. – Listen to the latest Street Talk podcast: How threatened are US banks by the wave of commercial real estate maturities.

Self-storage REITs incur losses

Only the self-storage segment reported a decrease in same-store NOI during the second quarter, with a median year-over-year drop of 1.6%.

Among the five self-storage REITs included in the analysis, National Storage Affiliates Trust saw the steepest decline of 5.6%, placing it among the US REITs that saw the largest reductions in same-store NOI.

Based on National Storage's recent earnings release, the same-store NOI loss during the second quarter was mainly due to a 2.8% drop in same-store total revenues and a 4.8% hike in same-store property operating expenses.

"For the quarter, revenue growth declined 2.8% on a same-store basis, driven by growth in rent revenue per square foot of 60 basis points, offset by a 320-basis-point year-over-year decline in average occupancy," National Storage CFO Brandon Togashi said during the REIT's Aug. 6 earnings call.

"Expense growth was 4.8% in the second quarter with the main drivers of growth being [repairs and maintenance], marketing and insurance, partially offset by a decline in property taxes due to successful appeals. Marketing expenses remain higher due to increased competition for customers while insurance expense growth will moderate going forward to the single digits," Togashi added.

Global Self Storage booked a year-over-year drop of 2.7% in same-store NOI during the second quarter. Similar to National Storage, Global Self Storage attributed the same-store NOI decline to "more muted revenue growth" and "increased cost of operations" in its second-quarter earnings release.

The same-store NOI of the three remaining self-storage REITs declined year over year: Public Storage's was down 1.6%, CubeSmart's fell 1.2% and Extra Space Storage Inc.'s dropped 1.1%.

Office posts weakest gain among major property types

Out of the four major property types, the office sector saw the weakest growth, with median same-store NOI inching up 0.2% from the second quarter of 2023. The sector recorded year-over-year growth of 0.3% in the first quarter and posted 1.4% growth for the entirety of 2023.

Eight out of the 19 office REITs in the analysis logged a year-over-year decrease in same-store NOI during the second quarter, while the remaining 11 posted annual gains.

Office-focused Hudson Pacific Properties Inc. had the largest year-over-year drop in same-store NOI among all the REITs in the analysis, with its same-store NOI declining 11.8% year over year to $105.2 million. Creative Media & Community Trust Corp., meanwhile, was the largest gainer, with same-store NOI increasing 18.4% year over year.

The three remaining major property types also posted slower growth in same-store NOI during the second quarter.

Retail-focused REITs booked a 3.0% median year-over-year growth, following a 3.6% median hike in the first quarter. The residential segment logged a median year-over-year increase of 2.9%, compared to 4.7% in the prior quarter. Meanwhile, the industrial segment's median year-over-year growth slowed to 6.7% in the second quarter, from 7.4% in the first quarter.

Same-store occupancy across all US REITs was at a median of 93.7% in the second quarter, an improvement from the prior quarter's 93.3%.

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 94.2% in 2021 and then slipped to 94.0% in 2022. In 2023, the same-store occupancy rate fell to 93.8%.