S&P Gives REITs Stable Rating, But Health Care Could Face Headwinds

Despite continued concern about the performance of real estate investment trusts in light of a rising interest rate environment, REIT performance overall is not expected to slow down, according to a report from global ratings agency Standard & Poor’s.

North American REITs, collectively, maintain a stable outlook through 2013 and 2014, says S&P Real Estate Finance Director George Skoufis in a report published this week.

“While recent trends indicate slower economic expansion than we had initially forecast for 2013, Standard & Poor’s Ratings Services maintains a stable ratings outlook for the North American real estate investment trusts and real estate operating companies (collectively REITs) sector for 2013 and 2014,” Skoufis says. “Our expectation for a continued gradual recovery in the economy, combined with our belief that modest growth in GDP, employment, and consumer spending will drive continued occupancy and rent improvements, support this outlook.”


S&P cites steady occupancy and rising rental rates as underlying expectations for the stable rating of REITs with the potential for a more positive outlook depending on individual company performance in the sector, which is overall positive with 13% of REIT ratings currently positive on CreditWatch.

Recent analysis by Stifel also points to the plus side of an improving economy as strengthening the investment opportunities among senior housing specifically.

“Higher interest rates mean seniors have more disposable income,” Stifel real estate analysts wrote in an August 28 report. “This could lead in our view to some firming of or higher seniors housing monthly rents, further enhancing an expected improvement in pricing power in 2014 as the industry
approaches 90% occupancy.”


Investors have maintained interest in REITs despite the rising rate environment, which also bodes well for their performance, Skoufis writes.

But across the healthcare sector, a pullback in cap rates may not be linear with interest rates, says recent analysis from Stifel real estate analysts, for large cap REITs. Big cap REIT cost of capital remains around 5.5%, roughly in line with where health care REITs were purchasing assets in 2011 and 2012, Stifel’s analysis finds, while for small cap healthcare REITs, transactions are mainly relationship driven and not likely to be impacted by the rate environment.

“We continue to believe that large cap healthcare REITs are positioned to outperform their small cap peers,” Stifel’s analysis states. “That being said, we believe it will be difficult for healthcare REITs to gain traction if rates continue to rise and until investors are comfortable that healthcare REITs will find accretive acquisitions.”

Further, there could be a short term lull for big cap REITs in the space due to the rise in rates.

“We do expect some pause (1-2 quarters perhaps) in large healthcare real estate transactions as buyers and sellers adjust to higher costs of capital,” Stifel’s analysts write.

View the full commentary from S&P.

Written by Elizabeth Ecker

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