Fitch: US Equity REITs Adequate but Weakening

While Fitch does not see any immediate concerns with regard to the liquidity profiles of many REITs within Fitch's rated universe, the company views the sector more cautiously as the real estate debt capital markets, specifically unsecured debt and CMBS remains gripped by uncertainty and inactivity. "Liquidity is still adequate for many equity REITs as sources of liquidity less primary uses of liquidity are still generating a surplus even as the capital markets have remained inhospitable to virtually all issuers," says Steven Marks, managing director and US REIT Group head.

Marks explains that "however, sustained contraction in liquidity in these markets, combined with unattractive costs to issuers, will likely continue to have consequences for REITs' ability to access capital." In the report, Fitch defines sources of liquidity as cash, available credit facility borrowings and retained cash flows from operating activities, and defines uses of liquidity as near-term debt maturities and future capital expenditure spending.

The report noted that many equity REITs are well positioned to address short-term cash requirements, as "many REITs have availability of committed amounts under their credit lines before violating a financial covenant contained either in the companies' unsecured bond indentures or credit line agreements."

Although the report said that several REITs will have notable liquidity shortfalls, the report did say that large REITs such as Boston Properties Inc. and Vornado Realty Trust remain well positioned to weather continued stress in the financial markets, nothing that "these companies benefit from strong and stable operating liquidity and, in some cases, meaningful amounts of capacity in the form of unsecured revolver availability."

A recent report from FBR Capital Markets, which highlighted the Manhattan office market in particular and attempted to drill down which REITs are most susceptible to softening fundamentals, placed both Boston Properties and Vornado Realty Trust as a "moderate risk." The reported also noted that many investors are shying away from New York-exposed office REITs altogether due to fears rising over possible default among some financial tenants in Manhattan.