Fitch: REIT Liquidity Weakening

U.S. equity real estate investment trust liquidity remains strong, but shows initial signs of weakening, reported Fitch Ratings, New York.

Liquidity coverage slipped slightly: REITs’ median liquidity coverage ratio fell to 1.2x for the July 1, 2015 through Dec. 31, 2017 period, a slight decline from the last three prior comparable timeframes. Fitch said 10-year bond maturities from relatively heavy 2007 issuance absorb significant liquidity for several REITs, pushing liquidity coverage down.

“Lack of access to the public unsecured bond markets is forcing potential first-time REIT issuers to consider alternative sources of capital and rely more heavily on term loans and revolving lines of credit,” said Fitch Managing Director Steven Marks. 

REITs’ cost of debt capital remains attractive for larger and more seasoned companies, but average unsecured bond spreads rose more than 25 percent year-over-year in response to macroeconomic factors, Fitch reported.

Different sectors display different coverage ratios, the ratings firm said. The median liquidity coverage ratio equaled 2.0x for healthcare, 1.4x for industrial and multifamily, 1.1x for retail and 0.9x for office, illustrating significant variability across the major property types.

Effective yields for U.S. equity REIT bonds spiked late in the second quarter due to large movements in Treasury rates. Although Treasury rates stabilized, REIT bond spreads continue to rise, pushing effective yields above 3.3 percent from 3.0 percent for the first half of 2015, Fitch said.

The difference between REIT and corporate bond spreads fell to as low as three basis points in the past month after hovering in the 10 to 15 basis point range through early in the second quarter. Concerns surrounding monetary policy and global growth affected both REIT and corporate credit spreads, but corporate credit spreads rose at more than twice the rate of REIT spreads since early 2014 primarily due to oil and gas issuers.