NEW YORK--(BUSINESS WIRE)--Better portfolio strategies and management, lower risk external growth strategies and generally more conservative financial policies have enhanced credit profiles and lead to a continuing Positive Sector Outlook for US Equity REITS in 2016, according to Fitch Ratings.
These positive elements are already reflected in Fitch's issuer ratings and Rating Outlooks, so the Rating Outlook for the group remains Stable. In many cases, issuers with Positive Rating Outlooks have embraced many of these credit-enhancing rating drivers.
The Stable Ratings outlook for the sector for 2016 reflects expectations of good property-level fundamentals across nearly all asset classes and relatively unchanged leverage profiles. Weaker access to attractively priced equity and public unsecured bond capital balance these positives for REITs with elevated levels of unfunded development costs and/or high balances on revolving lines of credit facilities.
We believe issuers will continue to have access to low all-in cost secured and unsecured debt, despite expectations that short-term interest rates increases will be slow. Equity issuance to fund acquisitions and development will be limited, given the NAV discount at which most REITs trade. Further, the public unsecured bond market is increasingly distinguishing between issuers with respect to borrowing cost and access.
Fitch does not expect US REIT leverage to change meaningfully during 2016. Proceeds from dispositions will likely be redeployed towards acquisitions, development or share repurchases, and equity issuance will be sporadic. Any deleveraging will likely be organic, as companies grow their recurring operating EBITDA and retain cash flow. Stock buybacks represent the largest threat to maintaining stable leverage metrics.
The Rating Outlook for Fitch-rated credits could be revised to Positive if Fitch comes to expect sustained sectorwide leverage levels below their current 6.5x. 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, and continued strong capital markets access and liquidity.
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.
2016 Outlook: U.S. Equity REITs (Capital Allocation and Access Critical)