Year to Date, REITs Have Raised $6.7 Billion in Unsecured Bond Issuances and $14.4 Billion in Follow-On Common Stock Offerings
Increasing access to, and raising of, new capital is improving the outlook for U.S. equity REITs, according to Fitch Ratings.
Given the demonstrated ability by many REITs to raise common equity through follow-on offerings coupled with unsecured bond issuance activity, Fitch's said it may up its outlook for the equity REIT sector from negative to stable in the future.
REITs have raised $6.7 billion in unsecured bond issuances year-to-date, with most of that taking place since June 30. In addition, REITs have raised $14.4 billion year-to-date in follow on common stock offerings.
"The market's acceptance of these transactions has enabled REITs to reduce leverage, as well as strengthen liquidity," said Steven Marks, managing director and U.S. REIT Group head. "However, REITs may be reluctant to continue such issuance due to the impact of further dilution to the extent such offerings are more defensive or liquidity-enhancing, as opposed to acquisition-driven, which is a concern."
REITs also continue to demonstrate success in accessing the mortgage financing market. While most REITs are refinancing mortgages on more onerous terms, secured lenders' asset and sponsor selectivity has favored publicly traded REITs' portfolios.
"REITs are not immune from recent headline risk regarding ongoing commercial real estate fundamental challenges," Marks cautioned. "However, REITs are set apart from other commercial property owners from a contingent liquidity standpoint."
Fitch said it remains concerned about the limited activity in the CMBS market, which affects market psychology toward all commercial real estate, but REITs' access to capital and liquidity coverage metrics, although still weak relative to pre-recession levels, is encouraging.
For the rest of year right now, though, Fitch continues to maintain a negative outlook on REITs because of the following.
- The challenged U.S. economy,
- Still constrained real estate debt capital markets
- Expectations of continued deteriorating property operating fundamentals across the four major property sectors, and
- Ongoing uncertainty surrounding commercial real estate property values.
The outlook for multifamily REITs continues to be stable, primarily due to expectations of apartment REITs' continued access to mortgage capital, the proceeds of which would be used to repay maturing debt and improve debt maturity profiles and liquidity. The multifamily sector continues to have the added advantage of access to affordable mortgage capital from Fannie Mae and Freddie Mac, as GSEs continue to be a viable option. Despite the stable outlook, Fitch views this sector with increased caution, as multifamily REITs continue to be challenged by increased utilization of secured debt and declining property fundamentals caused by increasing unemployment and the weak economy.
The outlook for office REITs continues to be negative. There have been some signs of stabilization in the U.S. economy during the past few months, but the unemployment picture continues to be bleak. Fitch expects unemployment to reach double digits this year and continue rising well into 2010.
The outlook for industrial REITs also continues to be negative. Decreased demand and a recessionary economy will continue to place downward pressure on operating fundamentals within the sector. The pullback in global trade and a slow asset sales market are negatively affecting fundamentals and deleveraging strategies.
The outlook for retail REITs in 2009 also continues to be negative. Fitch expects that U.S. retail sales growth (excluding the automotive sector) will continue to be negative in 2009. With consumer confidence at a historical low, the U.S. consumer is responding to the weak environment by deleveraging and increasing personal savings. The U.S. consumer's cash flow, wealth, and capacity to borrow continue to be challenged, causing consumers to become more price sensitive and approach purchases with a sharp focus on value, which strains all retailers, particularly those in the discretionary category. Occupancy levels and property cash flows will remain under pressure as retail REITs struggle with store closures, tenant credit issues, and weak leasing activity.
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