S&P Credit Analyst: REITs Ready to Absorb Interest Rate Hikes

Lisa Sarajian, managing director with Standard & Poor’s Rating Services, joined REIT.com for a video interview at REITWorld 2014: NAREIT’s Annual Convention for All Things REIT at the Atlanta Marriott Marquis.

S&P’s annual report on the REIT industry offered a positive outlook for the coming year. Sarajian attributed the optimism to a strengthening economy, which is building up business and consumer confidence. As a result, companies are enjoying “solid” operating fundamentals, according to Sarajian. She noted that occupancy rates have improved for all sectors.

Sarajian also weighed in on the impact of possible interest rate increases on the REIT industry.

“We pretty much assume interest rates are going to rise,” she said. “It’s just a function of when they rise and how they rise.”

If rising rates result from a healthy economy, Sarajian predicted that REITs wouldn’t have many problems adjusting. A “shock to the system” would pose greater concerns, she said.

“But we think REITs have done a pretty good job of managing their capital stack and their debt maturity schedule so that they would have the cushion or the opportunity to handle an interest rate shock,” Sarajian said. “Having said that, we’ll always see some company-specific situations where a company might be struggling to manage that kind of a shock.”

S&P’s annual report also pointed out that REITs have easy access to the capital markets in the current environment. “We have seen pretty robust issuance this year, and the bulk of that capital seems to be refinancing maturing debt, opportunistically pre-funding debt maturities,” she said.

In other cases, companies are tapping the capital markets to fund development and mergers and acquisitions, Sarajian noted.

“We would anticipate that capital is going to be there and that we could see it used for a variety of reasons,” she said.