Capital Access Underpins Disciplined Growth for Equity REITs

By Steven Marks, Head of U.S. REITs, Fitch Ratings: See where Fitch stands with its outlook on equity REITs for 2015.
Steven Marks, Fitch

Steven Marks, Fitch

Secular changes within the U.S. Equity REIT sector have enhanced credit profiles, which have led Fitch Ratings to revise its Outlook on the sector to Positive for this year.

Portfolio focus and tactical diversification, lower risk growth strategies, good liquidity management, minimal share repurchase risk, and enhancements to capital access via at-the-market equity programs are key drivers that Fitch expects will continue for the foreseeable future. All of these elements are currently reflected in Fitch’s issuer ratings and Outlooks and Fitch has maintained its Stable rating Outlook.

Liquidity remains solid and driven by good access to capital, improving property-level fundamentals across nearly all asset classes and lower-risk strategies. These positive elements are offset by expectations of relatively unchanged leverage, a continued, slow economic recovery, and concerns regarding an increase in interest rates.

Fitch expects equity REITs to continue to have access to low all-in-cost secured and unsecured debt and opportunistically access the equity markets via ATM programs or follow-on offerings to fund acquisitions and development. This access will lead to continued good liquidity coverage and improved fixed-charge coverage as issuers refinance higher cost capital.

It is not likely that REITs will increase leverage from their current levels nor meaningfully de-lever during the course of the year. Nearly all proceeds from follow-on common equity offerings will likely be used for development or paired with acquisitions or other growth opportunities on a leverage-neutral basis. Any de-levering will likely be organic as companies grow their recurring operating EBITDA and retain cash flow. Stock buybacks should remain modest and represent the largest threat to maintaining stable leverage metrics.

Development exposure across the REIT universe is substantially less than the peak years of 2007 and 2008. As such, Fitch does not expect development exposure to be a credit concern for REITs in 2015. Most multi-family REITs will continue to develop in select markets with strong demand drivers. Industrial REITs will develop both speculatively and build-to-suit properties for tenants under long-term leases. The increase in suburban office build-to-suit activity is indicative of REITs having strong relationships with prospective tenants. REITs in other property types will likely ramp up development spending at a measured pace.