‘Stable’ Outlook for REITs

Real estate investment trust property-level fundamentals should remain positive at least through 2018, reported Fitch Ratings, New York.

Fitch’s U.S. Equity REITs Handbook predicted lower-risk growth strategies, good liquidity management and tactical diversification will continue in the sector into the intermediate term.

“We believe a secular shift took place within the sector, whereby issuers take into account the credit implications of their actions to a far greater degree than in the past,” the report said. “For instance, many issuers established lower leveraged financial policies and operated inside of them.”

In addition, REIT managers are focused on maintaining liquidity and access to capital, such as prefunding debt maturities, upsizing lines of credit, establishing and accessing equity at-the-market programs, having more conservative development pipelines and selling lower quality assets, Fitch said.

Fitch cited industrial REITs as best-positioned for growth, “given strong underlying demand buoyed by ongoing growth in e-commerce.” The multifamily sector should see positive same-store net operating income growth, though some markets will slow due to oversupply. Retail REIT returns will likely vary by format, “with grocery-anchored strip centers performing the strongest and continuing to struggle,” the report said. 

The report noted development exposure across the REIT universe is more “manageable” today than it was during the peak development period in 2007 and 2008. “Fitch does not expect development exposure to be a credit concern for REITs in 2018…due to strong fundamentals for the industrial REIT sector and prudent development exposure for multifamily REITs.”

The sector’s liquidity profile is improving, Fitch said. Equity REITs across the sector have good liquidity given “modest ” debt maturities, reflecting the limited 10-year bond offerings issued in 2008 and 2009. In addition, “access to secured and unsecured debt remains strong, particularly in the private placement market,” the report said. SNL Financial said the average REIT trades at an approximate 10 percent discount to net asset value, which places pressure on REITs to fund external investments on a leverage-neutral basis, should they choose to do so.

“The sector’s stable outlook is driven by our view that nearly all of our ratings have stable outlooks and most rating actions will be affirmations,” the report said. “Upgrades or downgrades will be driven primarily by changes in financial policies and behavior consistent with adherence to such policies.”