‘Lessons Learned’ Ensures US REIT Liquidity Won’t Get Burned

By Steven Marks, Managing Director & Head of U.S. REITs, Fitch Ratings

Following a difficult few months, U.S. equity REIT liquidity profiles have improved meaningfully year-over-year, thanks to a “lessons learned approach” from previous down cycles.

This improvement comes after a slow start to 2016 for REIT capital issuance, and particularly common equity issuance. Equity REITs were hampered by depressed valuations in comparison to net asset value. Overall issuance during the first quarter of this year was down by more than 25 percent compared to the first quarter of 2015. Additionally, specialty REITs focusing on cell towers, data centers and student housing accounted for more than half of total issuance, highlighting the difficulties of the major property types as they sought to access capital early in 2016. Since the second quarter, however, equity valuations have recovered, and overall REIT capital issuance through September has surpassed the total through the same time last year.

Major equity REIT property types are benefiting from a resurgence in common equity valuations and the global demand for positive-yielding debt. Retail REITs have been especially active, leading all property types in total issuance for both the second and third quarters to date. In fact, retail alone is responsible for more than a quarter of aggregate issuance since April 2016.

Despite current favorable capital markets conditions, REITs are still preparing for market volatility and reduced capital markets access. REITs are adopting a lessons learned approach by paying off debt maturities early, reducing revolving line of credit balances and consciously spacing out debt maturity schedules to prevent any near-term shocks.

Equity investors are also realigning their portfolios, as REITs are now officially reclassified into a new real estate-only sector under the Global Industry Classification Standard (GICS), which went into effect at the end of last month. 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.

This approach taken by equity REITs should serve them well in maintaining strong liquidity over the next several quarters.