US REITs Face Challenges Despite Recent Improvements
Maintaining sufficient liquidity remains the primary credit risk to U.S. equity real estate investment trusts (REITs) in spite of recent opportunistic actions to reduce financial pressures, according to Fitch Ratings.
‘Many REITs have taken advantage of opportunities to bolster liquidity,’ said Steven Marks, Managing Director and REITs Group Head. ‘However, Fitch maintains a circumspect view towards REIT liquidity because these opportunities are company-specific and have not translated to a sector-wide trend.’
However, recent improvements in financial markets indicate some positive momentum. Four Fitch-rated REITs accessed the unsecured debt market since March at yields between 7% and 10.75%. In addition, several REITs have executed bond tender offers in recent months, while common equity issuances of over $12 billion have enabled REITs to reduce leverage and bolster liquidity since the beginning of 2009.
Nonetheless, challenges remain for equity REITs, including tenuous financing available across the capital markets, deteriorating performance in commercial real estate and the sizeable overhang of debt maturities for equity REITs looming in 2011.
Fitch also notes that limited visibility regarding net operating income capitalization rates continues to stress commercial property values, constraining transaction activity and the magnitude of institutional investor secured debt lending volume.
Major challenges ahead noted by Fitch include likely reduced revolving credit facility commitments, limited unsecured bond issuances, a near-dormant U.S. CMBS market, reduced bond tender activity, and uncertainties regarding the recent re-equitization wave in the REIT sector.
For details see U.S. Equity REIT Liquidity Update: Hold the Applause.
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