Fitch: US Equity REITs Outlook Positive amid Solid Fundamentals

NEW YORK--()--Link to Fitch Ratings' Report: 2017 Outlook: U.S. Equity REITs (Solid Fundamentals and Liquidity Support Positive Sector Outlook)
https://www.fitchratings.com/site/re/890560

The consistency with which the US equity REIT sector has adopted and maintained credit-friendly financial policies supports a continued positive sector outlook in 2017, according to Fitch Ratings.

Fitch forecasts continued strength in property-level fundamentals across most asset classes, relatively unchanged leverage profiles, and sufficient access to attractively priced equity and unsecured debt capital, underpinning our stable rating outlook for US equity REITs. High exposures to bank credit and term loan facilities continue to balance these positives.

Companies are increasingly focusing on (re)development to drive earnings in the context of a competitive acquisition market, lower leverage and modest organic growth. Good property fundamentals may cause some companies to moderately increase their appetites for speculative development, particularly industrial REITs. Fitch generally views later-cycle development as having execution and funding risks.

Fitch anticipates issuers will retain access to low all-in-cost secured and unsecured debt, despite expectations of increasing short-term interest rates. The property transaction market remains robust, enabling companies to fund leverage-neutral growth initiatives and improve portfolio quality via asset sales.

Fitch does not forecast US REIT leverage to change meaningfully during 2017. Proceeds from dispositions will be redeployed toward acquisitions, development or modest share repurchases, and equity issuance will be episodic. Any deleveraging will be organic as companies grow recurring operating EBITDA and retain cash flow.

The sector has more borrowing exposure from commercial banks than before due to banks providing issuers with surrogate to unsecured bond offerings in the form of long-tenor, low-cost term loans, with the added benefit of no prepayment penalties, save for swap breakage costs. Issuers have not termed out bank funding via the bond market, which is surprising given the strength of unsecured bond markets over the last five years; this exposure could limit liquidity via commercial banking relationships should they need incremental bank funding.

The rating outlook for REITs could be revised to positive if sector wide leverage is sustained below 6.5x, currently at 6.4x. An outlook revision to positive would be driven by macroeconomic factors resulting in sustained job growth, improving fixed-charge coverage 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.

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Contacts

Fitch Ratings
Steven Marks
Managing Director, Corporates
US REITs Sector Head
+1 212 908-9161
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Kellie Geressy-Nilsen
Fitch Wire
+1 212 908-9123
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com

Contacts

Fitch Ratings
Steven Marks
Managing Director, Corporates
US REITs Sector Head
+1 212 908-9161
Fitch Ratings
33 Whitehall Street
New York, NY 10004
or
Kellie Geressy-Nilsen
Fitch Wire
+1 212 908-9123
or
Media Relations:
Sandro Scenga, New York, +1 212-908-0278
Email: sandro.scenga@fitchratings.com