REITs Show Healthy Debt and Affinity for Health Care, Telecommunications Assets

The real estate investment trust (REIT) marketplace is finishing 2024 on a strong and encouraging note as investment capital flocks into data centers and telecommunications, while industry-wide leverage ratios and balance sheets remain healthy, according to two new reports from NAREIT.

Nareit’s “Actively Managed Real Estate Fund Tracker for Q3 `24” report found that the telecommunications and health care sectors increased their industry-wide share of assets under management to 13.9 percent and 15.5 percent, respectively. Health care’s share increased by 1.5 percent from the third quarter of 2023, while telecommunication increased 3.3 percent from that same period one year ago.

By comparison, the share of assets under management that REITs held in health care dropped from 21.9 percent in the third quarter of 2023 to 16.4 percent in the third quarter of 2024. 

Nicole Funari, Nareit vice president of research and author of the report, said that the investment weight geared toward residential was gobbled up by capital movements into the telecommunication space, especially data centers. 

“Obviously, they’ve been very overweight in residential for a while now, and you can’t be overweight in every sector, you have to be underweight somewhere,” Funari said. “So the slight cutback in the residential sector means that weight needs to go to telecom based on the market, but [residential’s] still one of the highest shares of [assets under management] in the third quarter of 2024.” 

Notably, the share of assets under management in the industrial space fell from 14.6 percent in the third quarter of 2023 to 11.1 percent in the third quarter of 2024 — the largest decline, besides residential, of the 13 asset classes monitored by Nareit.   

“They were very overweight in industrial, and in the past year we’re seeing a revision to the mean in the industrial market,” said Funari. “You’re seeing active managers realigning and rebalancing into where the market is now.”

As for the balance sheets of publicly traded REITs, Nareit data found that REIT balance sheets are both well structured and safe from radical interest rate movements. Approximately 79.5 percent of REITs’ total debt is unsecured — in other words, corporate debt offerings — while 91.3 percent of listed REITs’ total debt is at a fixed rate. 

Ed Pierzak, Nareit senior vice president of research, said that the broad menu of capital available for REITs to access — they can hit the equity market, they can go to the unsecured debt market, they can get individual mortgages on assets, they can even go direct to institutional investors for joint venture equity programs — allows the industry a chance to be flexible, even when interest rates fluctuate like they have over the last two years. 

“As we saw interest rates go up during 2022, there were challenges for a lot of private real estate investors to either refinance existing mortgages or get new debt. But the good news is, throughout the cycle, all the ups and downs, we found the kitchen is always open for REITs,” said Pierzak. 

He noted that 85 percent of REIT debt is investment grade and that the average REIT portfolio is levered at only 30 percent on its typical loan-to-value CRE transaction, which is akin to an industry-wide core or core-plus strategy that is influenced by the hits REITs took during the Global Financial Crisis nearly 15 years ago. 

“That leverage ratio was quite a bit higher during the GFC, so in many ways REITs learned a valuable lesson then, and I think it’s reflected in their balance sheets today,” he said. “They exhibit a lot of discipline not only in the level of debt but in the composition of that debt. Focusing on fixed-rate, unsecured debt has really provided them with an ability to be well positioned in the current market.” 

Brian Pascus can be reached at bpascus@commercialobserver.com