Fitch: Economic Factors May Prolong Positive REIT Credit Cycle

NEW YORK--(BUSINESS WIRE)-- While recent large transactions involving equity REITs appear similar to those that signaled the twilight of previous credit upturns for the group, other economic factors may indicate that the current commercial real estate (CRE) upturn could last longer than past cycles, Fitch Ratings says.

Subpar employment growth early in this recovery, combined with limited bank appetites for construction lending, have delayed the supply response to improved demand. Together, these trends suggest that this CRE upturn could extend beyond the common five-to-seven year historical average.

The positive fundamental outlook for most CRE property types and favorable net asset value (NAV) share premiums have generally provided equity REITs with "cloud cover" to make acquisitions despite historic low acquisition cap rates in the direct real estate markets. Most property types are experiencing a favorable supply/demand imbalance that Fitch expects will persist into 2016, and possibly longer.

Acquisitions can benefit credit profiles, depending on the circumstances. Acquisition-led portfolio growth can improve market, asset and tenant diversification, as well as asset quality - outcomes that Fitch would view favorably, all other things being equal. However, acquisitions entail risks.

Fitch's primary concern is the associated transaction financing. Fitch considers acquisition financing strategies from several perspectives, including the impact to leverage, funding execution risk and length of time anticipated until longer-term financing is in place.

Acquisition funding strategies that maintain or reduce leverage are generally credit positive. The use of short-term borrowings to close acquisitions can reduce liquidity and introduce uncertainty by making companies reliant upon accommodative equity and/or investment markets for financing. Fitch has also observed marginally higher near-term leverage metrics when companies sell higher yielding non-core assets to help fund acquisitions of core properties. Unencumbered coverage of unsecured debt can also weaken when dispositions are unencumbered and purchases are not.

Notable transactions this year include Prologis' $5.9 billion purchase of the real estate assets and operating platform of privately held KTR Capital Partners in joint venture (JV) with Norges Bank Investment Management announced earlier this week. KTR was founded in 2004 by the management team that sold Keystone Realty Trust to a JV between ProLogis and Eaton Vance for $1.5 billion in the same year. In addition, Blackstone Property Partners' announced purchase of Excel Trust and Brookfield Asset Management's announced purchase of Associated Estates Realty Corp. may foreshadow a return in public-to-private acquisitions.

For more information on Fitch's REIT property sector outlooks, see our reports on www.fitchratings.com:

U.S. Industrial REIT Dashboard: 1Q15

U.S. Healthcare REITs Dashboard: 1Q15

U.S. Multifamily REIT Dashboard: 1Q15

U.S. Retail REIT Dashboard: 1Q15

U.S. Office REITs Dashboard: 1Q15

Additional information is available on www.fitchratings.com.

The above article originally appeared as a post on the Fitch Wire credit market commentary page. The original article, which may include hyperlinks to companies and current ratings, can be accessed at www.fitchratings.com. All opinions expressed are those of Fitch Ratings.

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Fitch Ratings
Stephen Boyd, CFA
Director
US REITs
+1 212-908-9153
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Steven Marks
Managing Director
US REITs
+1 212-908-9161
or
Kellie Geressy-Nilsen
Senior Director
Fitch Wire
+1 212-908-9123
or
Media Relations:
Sandro Scenga, +1 212-908-0278
[email protected]

Source: Fitch Ratings

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