Fitch bases its negative outlook for the balance of the year on ratings actions its REIT group took between January 1 and April 14. "The outlook may be revised to stable if among several items, property-level fundamentals, liquidity, and access to capital strengthen in 2010," states the report from Fitch managing director Steven Marks and other analysts.
To date this year, the 38 US equity REITs rated by Fitch have enjoyed strong access to the capital markets, the agency says. Via the equity market, REITs have raised $2.1 billion so far in '10, and they've garnered $9.1 billion on the unsecured bond and unsecured convertible bond markets to extend debt maturities and/or repay borrowings. "Thus, liquidity coverage ratios have improved."
Nonetheless, the credit outlook for REITs depends more broadly on real estate fundamentals, which tend to lag economic indicators, and there are promising signs in the overall picture. In its "Global Economic Outlook" published earlier this month, Fitch noted that the global economic recovery appears to be gathering momentum.
The US economy, in particular, grew by 1.4% in the fourth quarter of 2009, and all indications point to the economy growing 3% this year. However, the current jobless-recovery scenario is expected to be around for some time. "Real estate performance tends to be a lagging indicator of the economy, but if these positive signs translate to a sustained economic recovery, Fitch would expect the US equity REITs it covers to experience stabilizing property performance toward the latter half of 2010," the agency says in last week's REIT report.
In that report, Fitch refers to a February commentary noting the likely negative effects of property asset transfers by REITs to joint-venture strtcutures. The REITs' credit profiles would be affected because unsecured creditors will no longer have direct access to the assets' rental income, while JVs' cash dividends could also be restricted. Additionally, in a liquidation scenario, "the claims of unsecured creditors of the parent company against a JV's assets may be subordinated."
On the plus side, Fitch notes that most REITs now have more ample liquidity coverage "through 2012 and beyond." Those with liquidity break-even ratios in 2014 or beyond will be the strongest in the sector, the agency says.
Another sign that liquidity has improved is that REITs are drawing less from their unsecured revolving credit facilities. Fitch says draw rates declined to 19.8% as of Dec. 31, '09, from a peak of 37.5% at the end of March '09. And REITs' liquidity coverage ratios have improved to a median of 1.6x at the end of '09, compared to 1.1x at the midpoint of last year.
"As they reposition for the future, certain REITs may choose to increase credit risk through offensive measures, which may include development expansion or higher risk acquisitions," according to the most recent report. "This does not mean every REIT will be more aggressive, as reducing credit risk through additional defensive measures, such as reductions in outstanding debt, remains a viable option."
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Paul Bubny
Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.
