10/22/2010 | By Allen Kenney
Despite a weak environment for fundamentals, the overall outlook for REITs remains generally stable, according to a report from ratings agency Fitch Ratings.
In its quarterly report on the industry, Fitch noted that REITs have had open access to the capital markets so far in 2010. According to Fitch, for the year, REITs have raised a total of:
- $10.9 billion through follow-on common equity offerings;
- $12.9 billion of unsecured debt;
- $2.1 billion in exchangeable senior notes; and
- $936 million of preferred equity.
In an interview with REIT.com, Steven Marks, managing director and head of the U.S. REIT group for Fitch Ratings, said the firm's assessment of the REIT market has improved throughout the year.
"Back in June, we revised our outlook to 'stable' from 'negative,'" Marks said. "That was driven in large part by strong liquidity and access to capital. Since June, it has only gotten stronger in terms of REITs' access to the equity markets and an improved macroeconomic outlook. I think the liquidity positions of most REITs are really strong."
When Fitch previously revised its ratings outlook in June from negative to stable, the agency had pointed to a "moderate delevering" of REITs' balance sheets. Marks said REITs had done a good job in 2009 of addressing their debt maturities.
Working against REITs going forward is persistent unemployment, Fitch said in the latest report. The result has been a dampening effect on consumer sentiment, which Fitch has measured to be at its lowest point in more than a year. Consequently, tenant demand for commercial real estate space has been stifled.
"We still think fundamentals are going to be soft for every property type, maybe with the exception of multifamily," Marks said. "I don't imagine there's going to be organic growth in cash flows."
In the report, Fitch cited a number of factors that could leave REITs vulnerable to ratings downgrades, including elevated leverage, a decrease in fixed-charge coverage, growing use of secured debt and more speculative development pipelines. "REITs remain up against weak property-level fundamentals, which are likely to decline further for the remainder of the year and into 2011 for most property types," Fitch said in its analysis.