February 27, 2014 / 2:01 PM / 4 years ago

RPT-Fitch: U.S. Equity REITs to Endure First Real Interest Rate Test

Feb 27 (Reuters) - (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 tenors.

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 REIT.’

‘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)

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