U.S. Equity REITs at the Half: Cruising but Not Galloping Yet
- Jun 20, 2012
The outlook for U.S. equity REITs remains on solid footing as we begin the second half of this year. That said, positive rating momentum is unlikely for the foreseeable future.
The primary reason is leverage, which remains high for equity REITs by and large. It is also unlikely that REITs will meaningfully trim debt off of their balance sheets during the latter half of 2012. Instead, REITs are likely to use virtually all proceeds from follow-on common equity offerings for development and/or acquisitions.
However, many other elements are headed in a positive direction.
For example, equity REITs are likely to see improved fixed charge coverage and property fundamentals, all while maintaining strong capital market access. Multi-family REITs, in particular, will have the most positive trajectory for the remainder of the year.
REIT liquidity, already strong, has also been boosted by ample unsecured credit lines from U.S. commercial banks (as opposed to their European counterparts). Thus, any lending pullback by European financial institutions should not directly affect the availability of bank capital to U.S. REITs.
The largest uncertainty remains the macroeconomic environment. Fitch is projecting modest GDP growth for the remainder of 2012. That coupled with the volatile movement in both oil and gasoline prices will erode real household incomes. This in turn will result in tepid growth that should keep space demands for commercial real estate at modest levels.
Longer term, Fitch may revise the outlook for equity REITs to positive if, among other developments, sector-wide leverage levels begin to drop and capital markets access and liquidity remain strong. Alternatively, an outlook revision to negative may be in the cards for REITs if access to long-term unsecured debt capital reverts to the weak levels seen in late 2008-early 2009 and issuers begin to embrace riskier strategies.