08/24/2012 | By Carisa Chappell
Robust funding activity in 2012 has put U.S. equity REITs in a good position to meet their liquidity needs in the coming years, according to a report from ratings agency Fitch Ratings.
Equity REITs in the United States enjoyed strong access to capital during the first half of 2012.
Approximately $43 billion in funding has been raised across the capital structure, including $13 billion in common stock, $7 billion in preferred stock, $13 billion in unsecured bonds and $9.2 billion in unsecured term loans.
"Declining interest rates and declining spreads have all made the cost of financing attractive for issuers. It's driven by investors' thirst for yield," said Steven Marks, managing director with Fitch ratings, in an interview with REIT.com.
He added that REITs are taking advantage of tighter spreads and historically low yields to lock in long-term financing and pay down borrowing on revolving credit facilities.
"Typically, they are using the capital to fund development pipelines, pay down lines of credit, fund acquisitions and, to a lesser extent, fund expiring debt maturities," Marks said.
Brad Case, senior vice president for research and industry information with NAREIT, said he expects REITs' acquisition activity will accelerate thanks to their efforts in the capital markets.
"Acquisitions will be strong now through 2017, because non-REITs borrowed too much during 2006 and 2007," he said.
While the retail sector has been the most active in fundraising so far this year, having raised $8.5 billion in fresh capital, the least active has been the industrial sector, which raised $1.7 billion. The health care sector has raised $8.2 billion, the office sector has raised $7.1 billion and multifamily REITs have raised $4.6 billion.
Case said REITs' improved operating performance has made it easier for them to make payments on debt. He said he expects the robust fundraising activity to continue in the second half of the year for REITs.
"They've managed their balance sheets and brought down their leverage, so that gives them access to debt," he said.
Marks said he also expects fundraising activity to continue in the second half, but at a slower pace.
"We expect it to be a little more muted, but to the extent that companies have active development pipelines, they will need to fund those activities through long-term bond issuance," he said.
Fitch pointed out that bond spreads as measured by the Merrill Lynch REIT index continued to tighten for U.S. equity REITs from the beginning of 2012 to early August. However, Marks noted that potential headwinds could cause spreads to widen.
"There are challenges that are really out of REITs' control, such as the broader economic slowdown in the U.S., the financial situation in Europe and the upcoming presidential election, that could result in volatility in the capital markets," he said.