US Equity REITs Firing on All Cylinders

By Steven Marks, Managing Director and Head of U.S. REITs for Fitch Ratings: U.S. Equity rates are holding up well to meet liquidity needs over the next few years.

With robust capital markets access throughout the capital structure, U.S. equity REITs are well-positioned to meet liquidity needs over the next few years.

REITs have raised more than $40 billion of common and preferred stock, unsecured bonds and unsecured term loans in this year alone. A closer look reveals that preferred stock and unsecured term loan issuance has already reached record annual levels. This occurrence is a clear sign that REITs are taking advantage of tighter spreads and low yields to lock in long-term financing and pay down revolving credit facility borrowings.

The prolific funding comes as liquidity coverage and is gradually improving. Liquidity coverage ratios through the end of June are just under 1.5 times over the next ten quarters. This compares favorably to 1.7 times as of March 31, 2012 over seven quarters.

Common stock offerings have been used by and large to fund acquisitions and development since the de-levering wave completed in the middle of 2010. Fitch views these transactions as credit positives, particularly if priced at or above net asset value, while offerings priced at a discount to NAV may reduce future equity investor appetite.

Another sign that equity REITs are firing on all cylinders is evident in tightening spreads.  Spreads, as measured by the Merrill Lynch REIT index, tightened to roughly 211 basis points over benchmark yields in early August. This action compared with approximately 300 bps at the beginning of 2012 and is indicative of fixed-income investors’ search for yield.

Despite good liquidity coverage, REITs may still face potential headwinds. An unforeseen slide of the broader economy, the still-volatile nature of the European debt markets, and uncertainties surrounding the outcome of the upcoming U.S. presidential election all carry inherent risks for REIT bondholders.