Less Toeing the Line May Bring Acquisitions for U.S. Equity REITs

By Steven Marks, Fitch Ratings

After harnessing liquidity for defensive measures most of the last year, liquidity positions of U.S. equity REITs have strengthened considerably and will likely do so into 2011. As a result, most Fitch-rated REITs can now take a much more proactive stance toward growing their businesses. With ample liquidity, these REITs are now positioned to consider property acquisitions and other growth-oriented activities.

After harnessing liquidity for defensive measures most of the last year, liquidity positions of U.S. equity REITs have strengthened considerably and will likely do so into 2011. As a result, most Fitch-rated REITs can now take a much more proactive stance toward growing their businesses. With ample liquidity, these REITs are now positioned to consider property acquisitions and other growth-oriented activities.

A major reason for the improved liquidity positions is that most REITs raised follow on common equity during 2009 and 2010. In addition, the renaissance in REIT unsecured bond issuance since mid-2009 has provided an incremental source of capital. Combined, the proceeds of these stock and bond offerings were used primarily to repay amounts outstanding on lines of credit, increasing the availability of this key source of capital for REITs.

Most REITs also curtailed their development pipelines, which resulted in less need to use revolving credit lines. In fact, the average percentage drawn from REITs’ revolving credit facilities declined by more than half through June 2010 after hitting a highwater mark of 37.5 percent in March 2009.

Many REITs have renewed their lines of credit over the past twelve months. The most notable trend has been an increase in pricing of these lines, pricing floors and more stringent covenants. While these changes negatively impact liquidity, most REITs have offset this impact through lower line usage. Despite these trends, Fitch does not anticipate broad rating changes as a result of the more onerous terms seen in unsecured line of credit renewals. Fitch will, however, continue to monitor the impact of these changes on companies’ financial flexibility, liquidity and profitability.

Fitch believes that most REITs have demonstrated prudence in maintaining liquidity during and following the financial crisis. As the capital markets continue to recover and REITs reposition themselves for growth, Fitch will continue to view more positively from a credit perspective companies that maintain ample liquidity levels. Conversely, Fitch will view with more caution those REITS that pursue growth in a manner that sacrifices liquidity and balance sheet strength.