Fitch: Improved Liquidity May Have U.S. Equity Reits Shifting to Offense

April 9, 2010
By Allison Landa, News Editor

Courtesy Flickr Creative Commons user cookipediachef

According to a special report by Fitch Ratings, the liquidity picture is brightening for U.S. equity REITs. In its “U.S. Equity REIT Liquidity Update: Repositioning for the Future”, the firm found that many REITs now have adequate liquidity well beyond the typical two-year Rating Outlook timeframe – a noticeable difference from last year.

“Most REITs now have more ample liquidity coverage through 2012 and beyond,” said Fitch managing director Steven Marks when announcing the results. “REITs with liquidity break-even ratios in 2014 or beyond will be the strongest in the sector.”

The Fitch report posits that improved capital markets conditions have resulted in an equilibrium shift in terms of liquidity for most REITs. While last year REITs were harnessing liquidity for defensive measures such as addressing upcoming debt maturities and funding routine capital expenditures, this year REITs are looking well into the future.

It finds that liquidity coverage ratios have improved and are continuing to increase, and that a longer term liquidity break-even is preferable. REITs’ liquidity coverage ratios improved to a median of 1.6 times as of Dec. 31, 2009 from 1.3 times at Sept. 30, 2009 and 1.1 times at June 30, 2009.

“Assuming a steady run rate of retained cash flows from operating activities and recurring capital expenditures, Fitch views companies that have a liquidity break-even of 1.0 times in 2014 or beyond as the strongest in the sector,” the report reads.

In addition, revolving credit facility availability was found to have expanded, with the average percentage drawn from REITs’ unsecured credit revolving facilities declining to 19.8 percent as of year-end 2009. They reached a peak of 37.5 percent less than a year earlier in March 2009.

“As REITs reposition for the future in light of these trends, certain REITs may choose to increase credit risk through offensive measures such as development expansion or higher risk acquisitions, while other may choose to further reduce credit risk through additional defensive measures,” the report reads. “Within this broader framework, Fitch’s company-specific rating actions will reflect whether Fitch views a company as using its newfound liquidity offensively or defensively.”