A recurring topic was the fate of the GSEs and the role they play in the ratings of multifamily REITs. 'The consistent and, more importantly, countercyclical contingent liquidity role of the GSEs is a key factor that allows multifamily REITs to operate with weaker metrics than similarly rated peers,' said Associate Director
Fitch expects the GSEs will continue to reduce their originations but debt capital should remain sufficient for multifamily REITs to refinance near-term maturities. Further, it is premature to anticipate a complete dissolution of the GSEs, which could result in sector-wide rating changes all else being equal. 'The long-term solution may lie somewhere between the current state and a completely private mortgage market,' said Costa.
Of equal importance to investors was where Fitch forecasts the sector's leverage going and how said forecast compares to the historical average. Fitch notes that whether REITs are over-, under-, or appropriately levered in comparison to averages depends in large part on the period and should be considered in the context of the secular decline in interest rates and cap rates. 'With the sector's leverage in line with the 20 year average at 3Q'13, the conclusion that REITs are appropriately levered assumes that either a) interest rates remain at or below current levels; b) the spread between cap rates and Treasuries has a sufficient cushion to withstand rising rates and/or c) there has been an institutional acceptance of real estate as an asset class such that the cap rates seen during periods of higher interest rates are no longer plausible,' said Costa.
Other material topics addressed in the report include: how Fitch assesses liquidity for inaugural unsecured issuers; what type of corporate actions Fitch views as short-sighted; the implications of troubled retail tenants on retail REITs and others.
Fitch's 'U.S. Equity REITs: FAQs from Recent Investor Roundtables' report is available at 'www.fitchratings.com' or by clicking on the above link.
Additional information is available at 'www.fitchratings.com'.
Source: Fitch Ratings
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