Fitch: REIT Liquidity Improves ‘Meaningfully’

Real estate investment trust liquidity profiles have improved “meaningfully” year-over-year–thanks to lessons learned from previous down cycles, reported Fitch Ratings, New York. 

Equity REITs are preparing for an eventual contraction despite currently favorable capital market conditions, Fitch Managing Director Steven Marks noted. “REITs are adopting a ‘lessons learned’ approach by bolstering cash reserves, reducing revolving line of credit balances and consciously spacing out debt maturity schedules to prevent any near-term shocks,” he said. 

REIT capital issuance fell 25 percent year-over-year in the first quarter, Fitch’s U.S. Equity REIT Liquidity: Clear Route Ahead report said. But that changed starting in the second quarter. April through September issuance outpaced the prior year with strong unsecured bond ($17.1 billion) and common equity ($8.4 billion) issuance. These two capital sources accounted for nearly 85 percent of total issuance since April 1.

After a “choppy” bond market and lagging equity valuations caused REITs to rely heavily on unsecured term loans early in the year, debt costs declined significantly and REITs returned to their primary sources of capital, unsecured bonds and common equity issuance, Fitch said. The median liquidity coverage ratio for U.S. equity REITs equaled 1.7x for the July 1, 2016 through December 31, 2018 period as coverage for each major property type increased 20 percent or more from the prior year, he said.

REITs are preparing for less favorable conditions, the report said. Median cash balances more than tripled between June 2015 and June 2016 while average line-of-credit balances shrank 31.9 percent. REITs have also refinanced assets and extended or prepaid obligations, which cut near-term maturities (through 2018) by nearly $900 million, Fitch said. 

“Equity investors are also realigning their portfolios with REITs now officially reclassified into a new real estate-only sector…which went into effect at the end of last month,” Fitch said. “The change removes REITs from the Financial Institutions sector, thereby increasing visibility and likely generalist investment in the sector as commercial real estate becomes a growing part of a diversified investment portfolio.”