Key Takeaways
- First-quarter North America REIT earnings have largely met our expectations. We expect the economic recovery to gain traction in the second half of 2021 given improved indicators and progress on COVID-19 vaccination rollout.
- We expect the negative ratings bias to ease from 19% and the upgrades-to-downgrades ratio to improve with credit metrics.
- Mergers and acquisitions have gained momentum while access to capital markets remains favorable.
- While we expect sequential improvement through the remainder of 2021, the recovery for seniors housing, discretionary retail, and gateway office sectors could take longer than other property types given the lingering negative impact from secular changes.
First-Quarter Earnings Largely Meet Or Exceed Expectations, And We Believe Operating Performance Will Continue To Improve In 2021
While same-property net operating income (NOI) was negative 4% in the first quarter for REITs that we rate, we expect NOI growth to return for most property types in the second quarter of 2021. REIT management teams are generally optimistic about their recovery prospects, many providing positive same-property NOI guidance following a significant decline in fiscal 2020. Rent collections have mostly reached the mid- to high-90% range across most property types, and occupancy rates have largely stabilized. We expect the improving economic outlook and progress in COVID-19 vaccinations to support a robust economic recovery in 2021, although labor market shortages and supply chain constraints could stall the recovery.
Chart 1
Chart 2
Sector Outlooks
Rental housing. Same-property NOI for rated multifamily REITs declined an average of 9.6% in the first quarter (following a 4% decline in full-year 2020). REITs with significant exposure to urban coastal markets underperformed (Equity Residential reported a decline of 17%, AvalonBay Communities Inc. a 14% decline) because of heavy concessions in the third and fourth quarters of 2020. Multifamily REITs in U.S. Sun Belt performed better than their urban peers, relatively flat. Demand for single-family rentals remains strong, driving above-average NOI growth. We recently assigned a 'BBB-' issuer credit rating and stable outlook to Invitation Homes Inc.
Retail. Rent collections continued to recover as tenants reopened, reaching about 95% in the first quarter. While same-store NOI remained negative, we expect a significant recovery starting in the second quarter and overall positive NOI growth for the year. Still, we think the recovery to 2019 NOI could be slow due to secular difficulties, particularly for malls and outlets. We recently lowered the rating on Simon Property Group Inc. to 'A-' from 'A' with a stable outlook. We also revised the outlooks on First Capital Real Estate Investment Trust and RioCan Real Estate Investment Trust to negative from stable and affirmed all our ratings.
Office. Rent collections remained high in the high-90% area despite low utilization as the return to the office has been slow. NOI declined 2% in the first quarter for rated office REITs as ancillary revenues (such as parking and retail) remain depressed. Leasing volume is low, although it has accelerated materially since the onset of the COVID-19 pandemic. And rents in certain markets remain under pressure (with heightened concessions granted by landlords). We expect the recovery for gateway markets such as New York and San Francisco to be slow given high supply and a spike in subleased space, while REITs with assets in suburban markets with higher job growth perform better. We recently lowered our rating on Vornado Realty Trust to 'BBB-' from 'BBB' with a stable outlook. We revised the outlook on SL Green Realty Corp. to negative from stable and affirmed the 'BBB-' rating.
Health care. Heavy exposure to senior housing continues to hamper the performance of Welltower Inc. (BBB+/Negative/A-2) and Ventas Inc. (BBB+/Negative/A-2), significantly reducing NOI over the past several quarters. While we expect occupancy trends in senior housing operating property assets to improve from a March trough, the timing of the recovery is still uncertain. We expect NOI to remain negative in 2021. Medical office properties remain resilient and demand for life science assets robust. We recently upgraded Physicians Realty Trust to 'BBB' from 'BBB-'.
Negative Rating Bias In The North American REIT Sector To Ease In 2021
Some 19% of our ratings had negative outlooks as of June 1. The retail, office, and health care sectors had a greater proportion of negative outlooks given the impact that the COVID-19 pandemic had on occupancy and rent collections. However, the upgrade-to-downgrade ratio improved--four upgrades to five downgrades, compared to one upgrade to 13 downgrades in 2020. We recently upgraded Physicians Realty and QTS Realty Trust Inc. to 'BB' from 'BB-' because of improving credit metrics and resilient performance. We downgraded Simon Property Group L.P. to 'A-' from 'A' and Vornado Realty Trust to 'BBB-' from 'BBB'. We expect the negative trend to ease as operating performance gains traction and credit metrics strengthen.
Amid the improved economic outlook and recovery of equity prices, we've seen a sudden increase in mergers and acquisitions (M&A) across the REITs sector. Net-lease REIT Realty Income Corp. (A-/Stable/--) announced the acquisition of VEREIT Inc. (BBB/Watch Pos) in an all-stock transaction, and strip center REIT Kimco Realty Corp. (BBB+/Stable/--) announced the acquisition of Weingarten Realty Investors (BBB/Watch Pos) for 90% stock and 10% cash. We placed the ratings on both VEREIT and Weingarten on CreditWatch with positive implications since they were acquired by higher-rated entities. QTS just announced it would be acquired by Blackstone in a transaction valued at $10 billion, a 21% premium to the QTS stock price on June 4.
Chart 3
Chart 4
REITs Maintain Good Access To Capital Markets As Transaction Markets Recover
Debt issuance remains strong in 2021 given favorable credit market conditions, with tightening credit spreads and low interest rates. REITs issued about $25 billion of debt as of May 1, compared to $23 billion at the same point a year ago. Equity prices have also recovered given improving fundamentals and economic outlook. REITs issued about $7 billion of equity as of May 1 versus $5.7 billion a year ago. The discount to net asset value (NAV) has recovered for most property types, with the exception of office and lodging. However, the discount for these sectors has narrowed significantly compared to the wider discount in 2020.
The recovery in equity values could drive more M&A activity, in our opinion. We also expect disposition and acquisition volume to recover from the dearth of transactions in 2020. Asset values remain resilient, and we expect cap rates to remain relatively steady, particularly for well-leased and high-quality assets. While REITs reinstated dividend payments gradually as operating performance improved, we expect dividends will likely remain below pre-pandemic levels as REITs reset to more sustainable dividend payout ratios.
Chart 5
This report does not constitute a rating action.
| Primary Credit Analyst: | Ana Lai, CFA, New York + 1 (212) 438 6895; ana.lai@spglobal.com |
| Secondary Contacts: | Michael H Souers, New York + 1 (212) 438 2508; michael.souers@spglobal.com |
| Kristina Koltunicki, New York + 1 (212) 438 7242; kristina.koltunicki@spglobal.com |
No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.
Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.
To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.
S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.
S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.
Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.