Real estate investment trusts will continue to ride a wave of steady momentum for the remainder of 2013, analysts suggest.
Equity REITs will succeed given the expectations of good liquidity driven by strong access to capital, moderately stronger property-level fundamentals across the majority of asset classes and lower-risk development exposure and strategies, Fitch Ratings said.
“Fitch expects issuers will continue to have access to historically low all-in-cost secured debt, unsecured debt and preferred stock, and opportunistically access the equity markets to fund acquisitions and development,” explained analysts for Fitch Ratings.
As a result, this access will lead to good liquidity coverage and improved fixed-charge coverage as issuers refinance higher-cost capital.
Furthermore, multifamily property-level assets are expected to be the strongest sector and will continue on a positive trajectory for the latter half of the year.
Most retail, industrial and office REITs should have modestly positive same-store net operating income (SSNOI) growth, the credit rating agency noted.
Fitch stated that it does not expect REITs to increase leverage from currently high levels nor meaningfully de-lever for the rest of the year.
Thus, nearly all proceeds from common equity offerings will be used for development, acquisitions or other growth opportunities.
“Any de-levering will likely be organic as companies grow their recurring operating EBITDA and retain cash flow,” the Fitch analysts stated.
With a fragile improvement in the economy slated for the remainder of the year, tepid economic growth should keep space and new supply at modest levels.
Although, the potential for severe economic shocks will alter the abundance of pricing of capital for REITs.
Currently, Fitch is maintaining its ‘stable’ outlook for the equity REIT sector, but the outlook could be revised to positive if leverage levels fall.
Additionally, an outlook revision to ‘positive’ would be driven by the macroeconomic backdrop resulting in sustained job or continued strong capital markets access and liquidity levels improving for several quarters across most property types.
On the other hand, the outlook could be revised to ‘negative’ if access to long-term unsecured debt capital reverts to weak levels, which occurred in 2008 and 2009, the ratings giant noted.
“Fitch has expectations of higher leverage and lower coverage levels, property-level fundamentals weaken (primarily driven by an economic slowdown) and issuers embrace equity-friendly strategies (such as speculative development to drive growth, share buybacks or common stock dividend policies that significantly reduce retained cash flows),” the analysts concluded.
