Fitch: Positive Outlook for REITs in 2016

Good portfolio management, lower-risk growth strategies and more conservative financial policies lead to a continuing positive outlook for real estate investment trusts from Fitch Ratings, New York.

Fitch said its current issuer ratings and rating outlooks already reflect many of these positive elements, so the rating agency’s REIT outlook for 2016 remains stable.

“The stable ratings outlook for the sector for 2016 reflects expectations of good property-level fundamentals across nearly all asset classes and relatively unchanged leverage profiles,” said Fitch Managing Director Steven Marks.

Fitch said it expects that positive property-level fundamentals will continue across most asset classes that REITs invest in during 2016. “Multifamily fundamentals should again be the strongest, although the pace of growth is slowing,” the firm’s U.S. Equity REIT 2016 Outlook said. “Most retail, industrial and office REITs should have positive same-store net operating income growth, although REITs that own office assets in select suburban markets will face challenges maintaining margins when considering recurring capital expenditures.”

The report made it clear that Fitch believes REITs will continue to have access to low-cost secured and unsecured debt despite expectations of short-term interest rate increases. It predicted limited REIT stock issuance to fund acquisitions and development next year.

Fitch sait it does not expect that REITs will change their leverage significantly during 2016. Instead, they will likely redeploy proceeds from dispositions into acquisitions, development or share repurchases, the rating firm said. “Any deleveraging will likely be organic, as companies grow their recurring operating earnings [before interest, taxes, depreciation and amortization] and retain cash flow,” Fitch said. “Stock buybacks represent the largest threat to maintaining stable leverage metrics.”

Fitch noted a trend toward REITs developing new assets rather than acquiring existing ones. “Companies are increasingly focusing on new development to drive earnings in the context of competitive acquisition market pricing,” the report said. “Strong property fundamentals and successful recent projects have also caused some companies to moderately increase their appetite for speculative development projects.” Though most REIT managers believe that building offers better risk-adjusted returns than buying, Fitch generally views later-cycle development as riskier.