Equity REIT Liquidity: A Glass Half Full and Slowly Getting Fuller

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

Liquidity for U.S. REITs has strengthened substantially following the severe market dislocations of 2008 and 2009. While liquidity remains weaker than in the period prior to the financial crisis, Fitch’s outlook is stable for U.S. equity REIT liquidity over the near term.

The Big Picture

Over the next 18 months, nearly 80 percent of U.S. equity REITs have liquidity levels sufficient enough to meet ongoing capital needs from committed and organic sources and have a solid cushion should the capital markets become less accommodative.

Despite recent spread widening, the debt capital markets remain open and accessible for nearly all REITs regardless of their credit rating. U.S. real estate companies have issued $10.9 billion in unsecured bonds so far this year, compared to nearly $21 billion during all of last year. Additionally, U.S. real estate companies have issued $14.9 billion in common stock in 2011 compared to $20.9 billion during all of 2010.

The Double-Edged Sword of Recent Bond Issuances

Investor demand has led to some very large 2011 bond issuances, with notable examples including HCP’s $2.4 billion bond offering early in 2011, along with healthcare REITs’ $1.4 billion offering. These transactions present a double-edged sword. While extending duration, certain tranches of these issuances may create lumpy maturities down the road. For example, HCP’s offering had a $1.2 billion tranche with a maturity in 2021.

Improving Revolver Capacity

Due to REITs’ cash distribution requirements, the main source of liquidity for most U.S. equity REITs remains availability from committed unsecured revolving credit facilities. Percentages drawn under revolving credit facilities peaked at 39.2 percent on average across the sector at the end of 2008. Since then, the percentage of liquidity REITs has declined gradually, falling to 17.7 percent through June of this year.

Fitch anticipates the percentage drawn from revolving credit facilities to hover between 15 percent-25 percent as the bond market continues to be relatively attractive and management teams seek to term out short-term debt.

There remains wide disparity of liquidity coverage across REIT property types. Liquidity coverage for healthcare REITs remains the most ample at 4.0x. Retail comes in second at 1.5x, while levels for industrial and office REITs are at 1.3x. Multifamily has the lowest levels of liquidity coverage at 1.0x, due primarily to having the highest leverage in the sector.