Steady As She Goes for U.S. Equity REITs in 2011

By Steven Marks, Fitch Ratings

The rating outlook for U.S. equity REITs remains stable, thanks largely to expectations of strong capital markets access, continued de-risking of issuers' balance sheets and strategies, expectations of relatively unchanged coverage metrics and a strengthening asset sales environment.

The rating outlook for U.S. equity REITs remains stable for 2011, thanks largely to expectations of strong capital markets access, continued de-risking of issuers’ balance sheets and strategies, expectations of relatively unchanged coverage metrics and a strengthening asset sales environment.

Equity REITs are also maintaining strong liquidity positions as many issuers have accessed the capital markets to repay or refinance near-term indebtedness. This positive development comes as projected development expenditures have fallen sector-wide.

Improved liquidity has given many companies added flexibility to pursue acquisitions without affecting rating levels. However, it should be noted that Fitch still views acquisitions that are not financed on a leverage-neutral basis more negatively. With asset prices still well below peak valuation and significant secured debt maturities over the next few years, REIT acquisition volume should increase this year as sellers seek solutions.

Going forward, Fitch may revise the sector outlook to positive if in addition to strong capital markets access and liquidity, same-store net operating income growth turns positive for several consecutive quarters. Other factors that may drive an outlook revision to positive include a systemic decline in leverage and if the macroeconomic backdrop resulted in sustained job growth, which would drive demand for space.

Conversely, Fitch may lower the sector outlook to negative if capital markets access reverts back to the weak levels observed in late 2008-early 2009 and if issuers increase their use of secured debt to the detriment of unsecured bondholders. Additional detriments to the outlook for equity REITs would include an embracing of riskier strategies by issuers such as speculative development, and if issuers increased common stock dividends to a level that significantly reduced cash flows.