NEW YORK CITY—REITs made a strong fundraising comeback in the second quarter after a shaky start to 2016, leading to meaningful improvements in their liquidity profiles, Fitch Ratings said Friday. The median liquidity coverage ratio for select US equity REITs is 1.7x for the 18 months that began July 1, as coverage for each major property type increased 20% or more from the prior year, according to Fitch.
It's a case of making hay while the sun shines, though, as Fitch sees real estate trusts preparing for the eventual market contraction. “REITs are adopting a lessons-learned approach by bolstering cash reserves, reducing revolving line of credit balances and consciously spacing out debt maturity schedules to prevent any near-term shocks,” says managing director Steven Marks.
Specifically, says Fitch, REITs are now “better prepared for less favorable conditions as median cash balances more than tripled” year-over-year to June 30, while average line of credit balances were reduced by 31.9%. REITs have also been attentive to debt laddering by refinancing, extending and prepaying obligations, Fitch says; their actions have cut near-term maturities through 2018 by nearly $900 million.
Following a Q1 in which capital issuance was down more than 25% from a year ago, year-to-date issuance has been outpacing the prior year on the back of strong unsecured bond ($17.1 billion) and common equity ($8.4 billion) issuance since Q2 began, according to Fitch. Early in the year, REITs depended heavily on unsecured term loans to weather what he ratings agency calls “a choppy bond market and lagging equity valuations,” and they appeared set to break the record for term loan issuance set just the year before.
“Debt costs declined significantly and valuations recovered in recent months, however, and REITs returned to their primary sources of capital,” says Fitch in a quarterly report. “Unsecured bonds and common equity issuance accounted for $25.5 billion, or 84.7% of total issuance, since April 1.”
Increased stock and bond activity isn't the only notable capital markets development for REITs. Fitch reports, “Equity investors have begun realigning their portfolios as REITs have officially been reclassified into a new real estate-only sector under the Global Industry Classification Standard,” a change that went into effect on August 31. It represents the first sector added to GICS since it was implemented in 1999.
“The change removes REITs from the Financial Institutions sector, thereby increasing visibility and likely generalist investment in the sector as commercial real estate becomes a growing part of a diversified investment portfolio,” says Fitch. “The change will also benefit real estate by distancing it from recent volatility in the banking sector and showcasing its stable cash flows during a period of uncertainty in the US and global economies.”
Furthermore, Trepp's Susan Persin reported on Friday that MedEquities Realty Trust has announced terms for its initial public offering, currently scheduled for this Thursday. The Nashville-based company, which invests in a range of health care facilities and health care-related debt, will raise up to $259 million by offering 19.9 million shares in the $12 to $14 range. “The offering is making headlines as it will only be the third REIT IPO so far this year,” Persin writes.
Although a fourth REIT IPO, via a spin-off from Hilton Worldwide Holdings, is in the offing, Persin doesn't see a new wave of IPOs in the sector. “REITs' high dividend yields are attractive, but the real estate cycle is maturing and investors do not know when the Fed will raise interest rates,” she writes.
“Adding to market uncertainty, Federal Reserve Chair Janet Yellen singled out commercial real estate as potentially in a bubble” during the press conference in which she announced that interest rates would remain where they are. “Many of the conditions that have been holding back the IPO market have not changed, which does not inspire confidence in the success of future REIT IPOs,” writes Persin.
More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in New York City. Learn more.
It's a case of making hay while the sun shines, though, as Fitch sees real estate trusts preparing for the eventual market contraction. “REITs are adopting a lessons-learned approach by bolstering cash reserves, reducing revolving line of credit balances and consciously spacing out debt maturity schedules to prevent any near-term shocks,” says managing director Steven Marks.
Specifically, says Fitch, REITs are now “better prepared for less favorable conditions as median cash balances more than tripled” year-over-year to June 30, while average line of credit balances were reduced by 31.9%. REITs have also been attentive to debt laddering by refinancing, extending and prepaying obligations, Fitch says; their actions have cut near-term maturities through 2018 by nearly $900 million.
Following a Q1 in which capital issuance was down more than 25% from a year ago, year-to-date issuance has been outpacing the prior year on the back of strong unsecured bond ($17.1 billion) and common equity ($8.4 billion) issuance since Q2 began, according to Fitch. Early in the year, REITs depended heavily on unsecured term loans to weather what he ratings agency calls “a choppy bond market and lagging equity valuations,” and they appeared set to break the record for term loan issuance set just the year before.
“Debt costs declined significantly and valuations recovered in recent months, however, and REITs returned to their primary sources of capital,” says Fitch in a quarterly report. “Unsecured bonds and common equity issuance accounted for $25.5 billion, or 84.7% of total issuance, since April 1.”
Increased stock and bond activity isn't the only notable capital markets development for REITs. Fitch reports, “Equity investors have begun realigning their portfolios as REITs have officially been reclassified into a new real estate-only sector under the Global Industry Classification Standard,” a change that went into effect on August 31. It represents the first sector added to GICS since it was implemented in 1999.
“The change removes REITs from the Financial Institutions sector, thereby increasing visibility and likely generalist investment in the sector as commercial real estate becomes a growing part of a diversified investment portfolio,” says Fitch. “The change will also benefit real estate by distancing it from recent volatility in the banking sector and showcasing its stable cash flows during a period of uncertainty in the US and global economies.”
Furthermore, Trepp's Susan Persin reported on Friday that MedEquities Realty Trust has announced terms for its initial public offering, currently scheduled for this Thursday. The Nashville-based company, which invests in a range of health care facilities and health care-related debt, will raise up to $259 million by offering 19.9 million shares in the $12 to $14 range. “The offering is making headlines as it will only be the third REIT IPO so far this year,” Persin writes.
Although a fourth REIT IPO, via a spin-off from Hilton Worldwide Holdings, is in the offing, Persin doesn't see a new wave of IPOs in the sector. “REITs' high dividend yields are attractive, but the real estate cycle is maturing and investors do not know when the Fed will raise interest rates,” she writes.
“Adding to market uncertainty, Federal Reserve Chair Janet Yellen singled out commercial real estate as potentially in a bubble” during the press conference in which she announced that interest rates would remain where they are. “Many of the conditions that have been holding back the IPO market have not changed, which does not inspire confidence in the success of future REIT IPOs,” writes Persin.
More than 300 of the industry's leading national investors, REITs, banks, private equity firms, asset management firms and other institutions will join us as we explore the market conditions behind the trends at this year's RealShare National Investment & Finance, scheduled for Oct. 5 and 6 at the Roosevelt Hotel in
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