Fitch Ratings: Liquidity Slowly Getting Better for REITs

NEW YORK-Fitch Ratings here released two reports on the current state of the real estate investment trust market.

In the first report released in September, entitled "U.S. Equity REIT Liquidity Update: Slowly on the Mend," Fitch asserts that access to unsecured debt is improving for equity REITs. Though concentrated among selected issuers, the upswing has been taking place since the second quarter of this year.

"Though liquidity may be more of a concern for certain REITs with more sizeable shortfalls, liquidity across the U.S. equity REIT sector is improving modestly," said Steven Marks, managing director and U.S. REIT Group Head. "Maintaining a liquidity surplus remains a key factor for Fitch's equity REIT ratings."

The CMBS market faces continued challenges while pension funds, insurance companies and other lenders are reducing secured lending activity. Despite this, REITs continue to demonstrate access to the mortgage financing market.

While most REITs are refinancing mortgages on more onerous terms, secured lenders' asset and sponsor selectivity has favored publicly traded REITs' portfolios. So, Fitch has enhanced its approach towards analyzing REIT liquidity by including sensitivities addressing various scenarios of refinancing prospects for REITs' upcoming secured debt maturities.

In the second report released in October, entitled "Don't Mind the GAAP for REIT Leverage," Fitch reveals that a more reliable method of measuring REIT leverage is showing that more highly levered companies may be under increased ratings pressure.

This method, known as utilizing net debt to recurring operating EBITDA, is a better indicator of leverage given the uncertainty surrounding valuation, particularly on a historical cost basis, according to Fitch.

"Indications of currently high or increasing debt to recurring operating EBITDA multiples may trigger a ratings review," Mr. Marks said.

In addition to leverage, among Fitch's continued points of emphasis in this instance will be liquidity, financial flexibility and risk-adjusted earnings to determine any change in ratings.Fitch finds that the net debt to recurring operating EBITDA ratio provides the most accurate perspective on a REIT's capacity for debt, as it most accurately captures indebtedness relative to the earnings power of a REIT's portfolio.