The Nareit All Equity REIT Index generated total returns of 0.3% in April, with residential and healthcare REITs leading things on the positive side, while several segments posted slight declines for the month.

Residential REITs as a whole were up 4.15% in April, with apartment REITs (4.55%) and single-family rental REITs (6.48%) outpacing manufactured housing REITs (0.33%). Healthcare REITs also had a strong month, up 5.8%. Office REITs (-2.6%), lodging/resorts REITs (-2.1%), self-storage REITs (-2.8%), timber REITs (-2.3%) and infrastructure REITs (-2.2%) were all down for the month.

WMRE spoke with Edward F. Pierzak, Nareit senior vice president of research, and John Worth, Nareit executive vice president for research and investor outreach, to discuss the April results for the sector.

This interview has been edited for style, length and clarity.

WMRE: Let’s start with the overall April results. What are the main takeaways?

Ed Pierzak: As we look at the end of April and focus on the all-equity total returns, the good news is that they were up for the month. And as we look at the year-to-date number it’s positive as well at a little north of 2%. The index is also closing the gap a bit with the broader equity markets. For example, the Russell 1000 was up a little over 1% in April and is just shy of up 9% for the year.

As we look across the sectors, residential did particularly well for the month and year-to-date. Single-family home REITs have had some of the largest gains, followed by apartments. When we look at a little less than stellar performance, self storage was down for the month, but for the year, in terms of entire sectors, is one of the best performers (up 10.0%).

I did dig into that sector a little bit. At first I thought perhaps it was off of quarterly earnings expectations, but in fact all of the self-storage REITs had reported already and FFO is up, NOI is up and there were some minor declines in occupancy. So, the outcome there is likely over some concerns on demand going forward. But it’s one of those things that have been so strong for so long.

WMRE: Self-storage REITs have been at or near the top of returns for a long time coming out of the pandemic. So it seems like at some point it needs to just level off a bit. You mentioned earnings. We are into the first quarter earnings season now. Are there any things that stick out so far?

Ed Pierzak: With our T-Tracker, we compile earnings and put together an outlook and perspective on operational performance as well as balance sheets. As of yesterday afternoon, we had 68% of REITs reporting. We don’t have solid numbers to share at this point. But as we look at the analyst reports, we’re generally seeing good information flowing throughout. The expectation at this point is that operational performance will remain good. And one of the areas we’re unlikely to see big changes is on balance sheets. But they’re generally in great shape. And one area we’re likely to see an uptick in is the average cost of debt, but again it’s typically an uptick on the margins.

WMRE: That’s something you’ve talked about consistently in our conversations in terms of REITs not having a lot of floating rate debt and having long average weighted terms. So there might be some broader concerns about financing given the rancor in the capital markets, but generally REITs are in a good position, correct?

Ed Pierzak: On average, as of the end of fourth quarter, REITs were primarily using unsecured debt. It’s around 75% when we take a look at the metrics. And the use of fixed rate debt is over 85%. The weighted average term is seven years. REITs are really in a great shape to weather any economic uncertainty.

On capital raising, when we look at secondary debt and equity offerings, there was about $14.4 billion in the first quarter of 2023. Both measures are down quite a bit from previous quarters. But that’s actually good news. REITs are doing exactly what they are supposed to be doing. They are tapping debt markets strategically. Another thing it tells us is that there are deals being done. The kitchen is not closed. If there is an interest or desire to access debt, it is available.

Overall in the first quarter of 2023, REITs had just shy of $11 billion in secondary debt offerings with a yield to maturity at 5.7%. That’s a number that will measure favorably to any debt secured by a property. Even as I looked at some of the recent debt issuances—three deals in particular—each one was over $500 million with a cost at 5-ish%.

WMRE: What about on the M&A front? Has deal activity slowed?

Ed Pierzak: We had two mergers in the first quarter. And then two more mergers were announced in April. In terms of deal size, 97% of the volume is REITs acquiring REITs and getting bigger. Over the last several years—2019 to 2023—there’s been just shy of $200 billion in public REIT M&A activity and 74% of those were REIT to REIT in the same sector. It emphasizes the importance of the platform. As REITs get bigger, there’s increased value in the platform and in the management of the assets.

WMRE: There is increasingly a lot of doom and gloom when it comes to commercial real estate. That seems based on struggles in the office sector and on the problems with banks. But it seems to me some of that is overplayed and not taking into account the fundamentals of other property types. And for REITs in particular there’s already been a big downward adjustment in share prices from market peaks. So how do you make sense of all of that?

Ed Pierzak: When we take a look at the economic situation, the probability of a recession seems to be inching higher again and that’s a concern and there’s concern about the capital markets. While REITs are not immune from that, some of their transaction counterparties are impacted more than they are. REITs are well-positioned and from an operational performance perspective, they’re in solid shape and from a balance sheet perspective, they are really well-positioned.

WMRE: Another theme we’ve talked about in recent months is the idea that a wide gap opened between public and private real estate valuations. That gap might create an opportunity as those indexes converge. How is that playing out so far?

Ed Pierzak: There has been a degree of narrowing. We have a paper in the PREA quarterly that will come out mid-month. Through the end of April, there’s been a little uptick in the REIT market and some valuation adjustment in the private market. At the end of the Q4 of 2022, we saw a writedown in the mid-single digits for private real estate and at the end of Q1 there was a writedown of slightly less than that. That’s probably about a 10% aggregate drop. Our view is there is likely more to go, but as we look forward, this is not something public markets will do entirely. There will be valuation adjustments on the public side and some on the private side. There’s still a few quarters to go.

WMRE: Does that still leave a buying opportunity for any investors looking at that convergence in values?

Ed Pierzak: There’s still a tactical buying opportunity with REITs. As we’ve demonstrated previously, when there is a divergence and once REITs hit a trough—which we believe may have [happened] toward the latter half of last year in this cycle—REIT returns tend to bounce back and at times surge. So there is an ability to purchase a lot of REITs at a discount to private prices.

John Worth: Ed and I had a conversation with an institutional consultant earlier today and they are still viewing that marginal dollar valuations are far more attractive on the public side. There’s still a good entry point and a good tactical opportunity that’s still out there.

Related to that, Nareit and our partners in the index—FTSE, EPRA—had a chance to work with the national pension service of South Korea to build a custom index. It goes to this completion strategy we’ve talked about (of institutions using REITs to gain access to real estate that isn’t in their portfolio already). The custom index we built with them was like a custom fit suit. We looked at every place they had real estate exposure and didn’t by geography and property to build index to fill out their existing portfolio. We really think it’s state of the art in terms of a completion strategy. You can use REITs to custom build those gaps. You can build on an active or passive basis. The national pension system is starting with $1 billion against this strategy, but we think it will grow over time.

WMRE: And that includes not just North American REITs?

John Worth: It’s a global strategy. It’s built on where the sector opportunities are and some places where they wanted deeper regional exposure. Much of it is in the modern economy real estate sectors—self storage, healthcare, data centers, infrastructure, non-apartment residential.

WMRE: Last month when we talked you also previewed your annual ESG dashboard, which has since been published. Any additional thoughts on that?

Ed Pierzak: We’re tracking key performance indicators on environmental stewardship and social responsibilities. We had 100% publicly reporting on ESG, which is the same as last year. There are a lot of measures. Eighty-seven percent are disclosing carbon emissions. A number of REITs are using renewable energy. When we take a look at the actual properties, 81 of the top 100 REITs own green-certified buildings and that equates to just under 2,700 certified buildings overall in REIT portfolios. When you take all of it and bundle it up and you have an investment mandate and are worried about environmental stewardship, socially responsible REITs are great way for investors to meet those goals. They are living that life.

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