NEW YORK--(BUSINESS WIRE)--Link to Fitch Ratings' Report: 2011 Outlook: U.S. Equity REITs
Strong capital markets access and continued issuer de-risking pave the way for a Stable Outlook for U.S. equity REITs next year, according to Fitch Ratings in its 2011 Outlook report. Also bolstering the sector's prospects are relatively unchanged coverage metrics and a strengthening asset sales environment.
Many REITs have seen their liquidity positions strengthened in recent months, with many issuers accessing the capital markets to repay or refinance near-term maturing debt. Many companies now have the flexibility to pursue acquisitions without affecting rating levels. However, Fitch would view acquisitions more negatively if they were not financed on a leverage-neutral basis.
"REIT acquisition volume should increase in 2011 with significant secured debt maturities coming due and asset prices still well below peak valuation," said Managing Director and U.S. REIT group head Steven Marks.
Offsetting these positive elements are expectations of continued negative property-level fundamentals across most asset classes. Also potentially weighing on the sector is a fragile improvement in the economy and continued elevated leverage across the sector.
Fundamentals in the multifamily sector should have a positive trajectory in 2011. Central business district (CBD) office cash flows are also stabilizing, although net operating income declines may still occur. The suburban office, industrial and retail sectors will continue to have challenges to maintain same store net operating income.
"Fitch may revise the sector outlook to positive if macro and property operating fundamentals improve and capital markets access and liquidity remain strong," said Marks. Conversely, "a double dip recession, increased risk appetite, rising leverage or shrinking liquidity may result in Fitch revising its sector outlook to negative."
The Outlook for multifamily fundamentals has improved over last year, offering a solid foundation to Fitch's Stable sector Outlook in 2011. Companies in the sector continue to benefit from limited supply and access to low-cost financing from Fannie Mae and Freddie Mac.
While fundamentals are moderating in Fitch's rated office REIT universe, unemployment remains an ongoing concern for demand growth for these companies' rentable space. The evidence of economic recovery has been much more prominent in CBD markets. In contrast, suburban office fundamentals are likely to sustain continued negative pressure. Fitch's overall Outlook for office REITs is Stable, owing to improved balance sheets, liquidity, and access to capital.
Fitch's Stable Outlook for industrial REITs is driven by the de-leveraging of balance sheets as well as solid liquidity. Companies will, however, continue to feel stress from weakening fundamentals, as leases roll down to significantly lower market rents.
While negative macroeconomic conditions such as weak consumer spending and high unemployment continue to weigh on the fundamentals for retail properties, the Outlook for retail-owning REITs is Stable. In the face of these challenges, most Fitch-rated retail REITs have improved and stabilized their balance sheets, capitalization, liquidity and financial flexibility.
Health care REITs' Positive Outlook is largely driven by demographic trends that continue to benefit the health care sector, portfolio diversity and limited supply. These companies also generally have good liquidity and strong balance sheets.
Fitch will be discussing its 2011 Outlook for U.S. REITs during a teleconference to take place tomorrow morning at 11 a.m. ET (details to follow in a separate press release).
'2011 Outlook: U.S. Equity REITs' is available by clicking on the link or at 'www.fitchratings.com' under 'Latest Research'.
Additional information is available at 'www.fitchratings.com'.