NEW YORK--(BUSINESS WIRE)--Secular changes within the US Equity REIT sector have enhanced credit profiles and led to a Positive Sector Outlook for 2015, according to Fitch Ratings.
We believe portfolio focus and tactical diversification, lower risk growth strategies, good liquidity management, minimal share repurchase risk, and enhancements to capital access via at-the-market (ATM) equity programs are key drivers and will continue for the foreseeable future. All of these elements are currently reflected in Fitch's issuer ratings and rating Outlooks. In many cases, issuers with Positive Rating Outlooks have embraced many of these credit-enhancing rating drivers.
We are maintaining our stable Ratings outlook for the U.S. equity REIT sector for 2015, given expectations of continued solid liquidity driven by good access to capital, improving property-level fundamentals across nearly all asset classes and lower-risk strategies. These positive elements are offset by expectations of relatively unchanged leverage, a continued, slow economic recovery, and concerns regarding an increase in interest rates.
We believe issuers will continue to have access to low all-in-cost secured and unsecured debt and opportunistically access the equity markets via ATM programs or follow-on offerings to fund acquisitions and development. This access will lead to continued good liquidity coverage and improved fixed-charge coverage as issuers refinance higher cost capital.
Fitch does not expect U.S. REITs to increase leverage from current levels nor meaningfully de-lever during 2014. Nearly all proceeds from follow-on common equity offerings will likely be used for development or paired with acquisitions or other growth opportunities on a leverage-neutral basis. Any de-levering will likely be organic as companies grow their recurring operating EBITDA and retain cash flow. Stock buybacks should remain modest and represent the largest threat to maintaining stable leverage metrics.
The Rating Outlook for Fitch-rated credits could be revised to positive if Fitch expects sectorwide leverage levels to decrease. Secondarily, an Outlook revision to Positive would be driven by the macroeconomic backdrop resulting in sustained job growth (driving demand for space), Fitch's expectation of improving fixed-charge coverage levels, continued strong capital markets access, and liquidity levels and expectations of positive same-store net operating income for several consecutive quarters across most property types.
Additional information is available on www.fitchratings.com.
The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.
Applicable Criteria and Related Research: 2015 Outlook: U.S. Equity REITs (Capital Access Underpins Disciplined Growth)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=828828
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