Feb 27 (The following statement was released by the rating agency)
With its first real test of rising interest rates
on the horizon, high levels of floating-rate debt could cause the sharpest
decline in fixed-charge coverage for U.S. industrial REITs, with hotel and
multifamily REITs close behind, according to Fitch Ratings in a new report.
By contrast, manufactured home REITs should see the smallest impact on
fixed-charge coverage from higher rates, followed by self-storage, diversified
and office REITs.
It should be noted that REITs are on the whole well-positioned to withstand an
increase in interest rates. This is primarily due to their balanced debt
maturity profiles and only moderate exposure to short-term and variable-rate
debt. That said, the impact will vary by property type. 'Since the so-called
modern REIT era began over 20 years ago, REITs have been essentially untested in
a sustained period of rising rates,' said Director Stephen Boyd.
From the standpoint of leases, hotel, self-storage and multifamily REITs should
be able to absorb a spike in interest rates given the ability to quickly mark
leases to market. Industrial REITs are reasonably well-protected given three- to
five-year lease tenors. In contrast, suburban office, strip centers, central
business district offices, malls, healthcare facilities and triple-net lease
REITs have less near-term flexibility. As such, they may have more difficulty
offsetting higher borrowing costs with rental rate increases given longer lease
Why interest rates increase will ultimately dictate the impact on real estate
values, REIT share prices and bond spreads, according to Boyd. 'Interest rate
increases as a result of stronger economic growth could have positive
implications for REIT credits,' said Boyd. 'Conversely, a stagflation scenario
of higher rates and weak economic growth would almost certainly be negative for
'Scenario Analysis: Equity REITs and Rising Rates' is available at
'www.fitchratings.com' or by clicking on the above link.
Link to Fitch Ratings' Report: Scenario Analysis: Equity REITs and Rising Rates
(Manageable Credit Risk that Varies by Property Type)