Improving property operating results and sustained discipline by managements in keeping stable financial profiles continue to augur for a Positive Outlook for U.S. REITs in 2007, with potential for rating upgrades in the office and retail sector, according to a special report released yesterday by Fitch Ratings. “Fitch will consider more positively those management teams that do not excessively raise leverage and companies that possess varied access to capital and a large unencumbered asset pool, while remaining alert to any significant increases in leverage that may weaken fixed-charge coverage,” said Managing Director and REIT group head Steven Marks. “Intense investor interest in real estate is providing REITs a great deal of liquidity throughout all levels of the capital structure, leading to incremental and cheaper sources of financing.
“The flip side is that this level of interest in yield-oriented assets such as real estate makes real estate acquisitions more economically challenging, putting more pressure on REIT managements to find ways to grow net operating income.” Potential candidates for rating upgrades this year according to Fitch are office REITs as continued job growth will lead to occupancy and rental rate growth, particularly for office REITs situated in major metropolitan areas, while coastal cities with high barriers to entry are expected to have limited new supply, coupled with growing office demand. Similarly, retail REITs may also be upgraded by Fitch despite modestly weaker sales growth and demand compared to last year. “Retail occupancy rates should still remain at healthy levels and rental rate growth is expected to be positive,” said Marks. Multifamily REITs will also benefit via increased rental demand from tenants who cannot afford to buy homes at current escalated for-sale home prices in certain markets, while hotel REITs continues to benefit from steady growth in business travel even as leisure travel has eased, Fitch said. Health care facility operators are stronger and, with the new supply of assisted-living facilities in check, are expected to remain stable. Even industrial REITs, who are expected to see a slowdown in demand from consumer-driven industries, should remain stable in stronger coastal markets as strong business-to-business services and global trade should keep demand relatively in balance with supply. ‘2007 REIT Outlook Remains Positive’ is available on the Fitch Ratings web site at www.fitchratings.com.