Fitch: Discounted Valuations Reinvigorating REIT Share Repurchase Appetites

NEW YORK--()--The level of REIT share repurchases will rise through the balance of 2015 and likely into 2016, according to Fitch Ratings. Buybacks were a hot topic of conversation during the second-quarter earnings season, with many companies completing repurchases under existing authorizations or announcing new programs.

Fitch's ratings for most REITs have some tolerance for modest, temporary leverage increases due to share repurchases funded with assets sales given strong credit profiles, the positive fundamental sector outlook and excellent CRE capital availability. However, less ratings tolerance exists for several companies vocal about buybacks during the second quarter, such as Mack-Cali Realty Corporation (rated 'BBB-'/Outlook Negative). In addition, Fitch's Positive Outlook for Brandywine Realty (rated 'BB+') reflects our expectation for reduced leverage, which could be delayed, or forestalled, depending on its level of share repurchases.

Share repurchases funded with asset sales proceeds are far more creditor friendly than debt funded repurchases. Asset sales are effectively equity raises but at private market valuations that exceed public market values today. Some companies plan to sell unconsolidated joint venture interests, which can have the added benefit of reducing complexity.

However, the lost income can cause leverage to tick up modestly, assuming property level debt is at or below the corporate average. Also, fewer assets mean less diversification, all things equal, and there is risk of adverse selection in portfolio quality. Fitch would view negatively revolver utilization to repurchase stock ahead of completing asset sales.

Twenty eight REITs (35%) discussed share repurchases during their second quarter earnings conference calls out of the 80 call transcripts that Fitch reviewed. Only three companies cited existing credit ratings as a balancing concern when discussing the attractiveness of share repurchases. Seven additional companies cited leverage as a decision input regarding buybacks. Maximizing shareholder value (by repurchasing shares below net asset value [NAV]) was the primary consideration around share repurchases.

Fitch views companies trading at the widest discounts to NAVs as the most likely to repurchase stock. The REIT sector is trading at a wide (20%) discount to consensus NAVs following the roughly 10% decline in REIT shares year-to-date, due to rising interest rate concerns.

The regional mall, office and shopping center property sectors have been hit hardest, trading at NAV discounts of 21.8%, 21.6% and 21.1%, respectively. Self-storage (7.7% NAV premium), healthcare (8% discount) and multifamily and ex-manufactured homes (12.5% discount) have fared best.

Companies in property sectors with development opportunities (primarily office, industrial, apartment and shopping center) are less likely to repurchase shares, in Fitch's view. Well-conceived development projects often still provide better returns than repurchasing shares. Developers are more likely to husband liquidity to fund commitments given the capital intensive nature of new construction.

Conversely, intense competition has driven acquisition valuations to levels that are frequently unattractive relative to repurchasing shares, depending on the company's NAV discount. Property sectors with less development exposure that trade at a discount to NAV include hotels and malls.

Additional information is available at 'www.fitchratings.com'.

REIT Share Price Weakness Reinvigorating Buybacks (What U.S. Equity REITs Are Saying)

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Contacts

Fitch Ratings
Stephen Boyd, CFA
Director
+1-212-908-9153
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Stephen Boyd, CFA
Director
+1-212-908-9153
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Steven Marks
Managing Director
+1-212-908-9161
or
Media Relations:
Sandro Scenga, +1 212-908-0278
sandro.scenga@fitchratings.com