U.S. Equity REITs Primed for Strong Second Half of 2013

By Steven Marks, Head of U.S. REITs, Fitch Ratings: Accessing senior debt and preferred stock will continue to come very cheap for equity REITs, despite the recent increase in Treasury rates.

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U.S. equity REITs figure to ride a continued wave of steady momentum for the remainder of this year.

Fitch Ratings is maintaining its stable outlook for U.S. equity REITs thanks largely to continued good liquidity. Accessing senior debt and preferred stock will continue to come very cheap for equity REITs, despite the recent increase in Treasury rates.

Fundamentals will also be solid across most asset classes, with multi-family REITs driving the trend. The lone outlier remains office REITs, namely those with significant presence in suburban markets where job growth remains muted.

Leverage for the REIT sector remains high (albeit manageable) and not likely to come down for the foreseeable future. Equity REITs will continue to use proceeds from equity offerings for acquisitions and other growth opportunities, though not at the expense of adding dramatically higher amounts of debt. This makes an Outlook revision unlikely for equity REITs heading into next year.

Drilling down into specific property-types, Fitch maintains its stable rating outlook for multi-family REITs despite the likelihood that operating fundamentals will remain positive and capital will remain abundant. The outlook is similarly stable for office REITs for the balance of 2013. That said, weak office-using employment growth and high levels of “shadow” space are tempering demand and, therefore, the pace of recovery in property fundamentals.

Moving over to industrial REITs, three themes to watch for in the coming months are; strategic clarity in the face of improving property fundamentals; observing if the “heavy lifting” of sector-wide de-leveraging will come to a close, and; issuers’ ability to continue showing agility across different capital markets. All of these factors augur for a stable outlook for industrial REITs. Property fundamentals also continue to continue for retail REITs. High-quality assets in prime locations should continue to see the lion’s share of fundamental growth.

Lastly, the rating outlook for healthcare REITs for the remainder of 2013 is stable. Recent favorable proposals by the Centers for Medicare & Medicaid Services, combined with the implementation of the Affordable Care Act, should be net positives for the sector.