Fitch Ratings: Liquidity Concerns Remain for REITs

By Allen Kenney
Even though a number of REITs have taken steps this year to address potential liquidity issues, concerns about the industry's access to capital remain as debt maturities begin to approach, according to Fitch Ratings.
In a report released June 30, the credit analysis firm outlined a number of ongoing challenges for REITs. While some REITs have had success tapping the equity markets for fresh capital, Fitch's analysts pointed out that the debt markets don't appear to be so promising. Revolving lines of credit are likely to shrink going forward, they said, with "weaker issuers" forced to enter more secured credit agreements.
Unsecured bond issuances are "unattractive" for REITs in the current environment, according to the report, and activity in the commercial mortgage-backed securities (CMBS) market has yet to pick up. The analysts also called the prospect of further equity issuances "uncertain," as some companies' share prices remain depressed and others may appear less attractive to bargain-hunting investors as valuations rise.
"Given that opportunities are company-specific rather than broad for the sector, Fitch's view is to 'hold the applause' on REIT liquidity," the report said.
Brad Case, NAREIT vice president of research and industry information, called Fitch's outlook "appropriately conservative" for a ratings agency. However, he characterized the report as an "incomplete picture" of conditions in the REIT market, noting that stock market investors have responded favorably to the initial wave of equity issuances.
"Investors have seen equity issuances as confirmation that publicly traded REITs have the capacity to meet their debt obligations, and have rewarded them for using equity to address leverage concerns," he said.
"As their stock prices continue to climb, REITs will use further equity issuances to reduce their cost of capital, strengthen their capital structure, and take advantage of growth and acquisition opportunities going forward." The FTSE NAREIT Equity REIT Index gained 28.85 percent in the second quarter of 2009, the strongest quarterly gain since the index began in 1972.