NEW YORK CITY—REITs have had wind in their sails thus far in 2014, and that’s likely to remain the status quo for the balance of the year. Citing expectations of solid liquidity driven by good access to capital, improving property-level fundamentals and lower-risk strategies, Fitch Ratings has given the entire REIT sector a “stable” outlook for the year.
The ratings agency says that “stable” outlook could be revised upward to “positive” if leverage levels decrease sector-wide and if macroeconomic fundamentals spur stronger job growth. Conversely, the outlook could be downgraded to “negative” if the sector’s access to long-term secured debt reverts to the weak levels seen in late 2008 and early 2009 and if Fitch expects higher leverage and lower coverage levels.
“Multifamily REIT fundamentals should remain the strongest and continue on a positive trajectory for ‘14, though the pace of growth is slowing,” says managing director Steven Marks. On a sector-by-sector basis, apartment REITs offer the best outlook in terms of property fundamentals, balance sheet and capitalization, and liquidity and financial flexibility, with office faring worst, especially suburban office REITs.
Marks notes that most retail, industrial and CBD office REITs should see modestly positive same-store NOI growth. At the same time, Marks says, “The suburban office sector will face challenges in maintaining margins when considering recurring capital expenditures.”
US equity REITs aren’t likely to increase leverage from current levels or meaningfully de-lever this year, Fitch says. Nearly all proceeds from their follow-on common equity offerings will likely be used for development or paired with acquisitions or other growth opportunities on a leverage-neutral basis.
Fitch’s mid-year report says that any de-levering will likely be organic, with companies growing their recurring operating EBITDA and retain cash flow. Although stock buybacks are expected to remain modest, they also represent the largest threat to maintaining stable leverage metrics.
Outside the multifamily sector, most REITs have a modest cost-to-complete for their development pipelines. Fitch says this bespeaks lower-risk growth strategies, good liquidity management and fundamentals that generally don’t justify speculative development.