S&P Credit Analyst Says REIT Debt Financing Growth
04/14/2014 | by Allen Kenney

Lisa Sarajian, managing director at Standard & Poor’s Ratings Agency, joined REIT.com for a video interview during REITWise 2014: NAREIT’s Law, Accounting and Finance Conference held in Boca Raton, Fla.

Sarajian was asked about the state of the market for the bonds and preferred stocks of REITs.

“Our outlook for the sector is stable with a positive bias,” she said. “That means we think more ratings will go up than down this year. That’s consistent with what we experienced last year. The support for that is strengthening fundamentals across most asset classes—maybe office being a laggard and pockets of multifamily and retail a little bit vulnerable. But fundamentals strengthened. Access to capital continues to be robust.”

Sarajian noted that the issuance of debt and preferred stock shares by REITs has climbed roughly 10 percent so far this year. REITs are using that fresh capital to finance growth, rather than refinancing existing credit lines.

“The result of that: healthy balance sheets, good debt maturity schedules,” she said.

Sarajian cited mergers and acquisitions and spinoffs among the “wildcards” that could impact the outlook for REITs in 2014.

Sarajian also gave her assessment of the market for commercial mortgage-backed securities (CMBS). The CMBS market is “back,” according to Sarajian.

“While it’s a less important funding source for the REITs that we rate, it’s definitely an important lubricant to the broader commercial real estate market,” she said. “The fact that it’s back is healthy because REITs continue to want to sell into the market.”

Sarajian discussed some of the potential obstacles facing CMBS in the near future.

“Our colleagues on the CMBS side are a little bit concerned about eroding underwriting standards, but the lending environment is extremely competitive,” she said.

Sarajian offered her opinion on the evolution and growth of REITs into other property sectors.

“There has definitely been a gradual expansion of how the industry defines real estate,” she said. “This can be a challenge for us from a ratings perspective because we’re tasked with trying to determine to what extent the business being conducted within a REIT is a real estate business or an operating business. To the extent we conclude that the activity is really more of an operating platform and an operating business, we’re not going to evaluate is as a REIT.”