NEW YORK CITY—With plentiful capital and access to debt behind them, US equity REITs' liquidity coverage ratio remains solid heading into midyear 2015, Fitch Ratings says. The cost of debt capital for real estate trusts remains attractive by historic standards; however,  Fitch notes that unsecured bond spreads have widened over the past several months.

After demonstrating stability for much of the second quarter of 2014, REIT and corporate credit spreads increased during the latter half of Q3 last year through the present. The spreads for unsecured bonds has been in the range of 130 to 140 basis points since the beginning of this year, up from the 100- to 110-bps range last seen this past August. These developments reflect “concerns that monetary policy tightening could adversely impact corporate credit,” according to Fitch.

REIT bond premiums to corporates have remained at about 15 bps over the past year with some variability this past Janaury. However, Fitch says in a special report credited to analysts Sean Patap, Zachary Klein and Steven Marks, “Despite modest spread widening, the lending environment remains attractive by historical standards, and, thus, the market has not placed an outsized premium on REITs' need for consistent access to capital.” It's a different story, though, for fixed-income markets in terms of putting a premium on that requirement by REITs.

The median liquidity coverage ratio for select US equity REITs is 1.7x for the April 1, 2015 to Dec. 31, 2016 period, down slightly from 1.9x for the comparable timeframe noted in Fitch's Q1 '14 liquidity report. The median liquidity coverage ratio is currently 1.7x for healthcare, 1.8x for industrial, 1.5x for multifamily, 1.5x for office and 1.7x for retail, thereby illustrating what Fitch sees as a relatively even distribution across the major property types.

Availability from revolving credit facilities remain the largest component of REITs' sources of liquidity. Cash and cash equivalents represented 11.2% of total liquidity sources as of March 31, compared to 10.4%, 13.2% and 13.6%, respectively, at Dec. 31 over the past three years. Since REITs' adjusted funds from operations payout ratios have remained steady at about 75% to 80% over the past several years, cash retention levels have remained low.

Fitch says preferred stock continues to be a less attractive capital source for REITs, given high dividend yields and select issuers' preference for 30-year bonds as opposed to the preferred stock market when considering long-term funding options. Conversely, REITs have issued $10.1 billion of common equity and $14.2 billion of unsecured bond markets thus far in '15, with both sources on pace to eclipse full-year '14 levels.

Effective yields for US equity REIT bonds have been volatile due to recent movements in Treasury rates, according to the report. Although spreads have been basically flat this year, REIT effective yields have been around 3.0% in recent weeks following the increase in Treasury rates in late April and early May. The low point of REIT effective yields in Q1 came in late January, at around 2.6%.

Looking ahead, Fitch expects the Federal Reserve to begin raising interest rates in midyear and follow a gradual tightening path, leading to an average policy rate of 1.6% next year. Fitch expects the 10-year Treasury rate to reach 3.0% by year-end '16. Accordingly, look for REITs to “continue to opportunistically access the bond market to extend duration and repay revolver borrowings over the next several months,” says Fitch.