Despite higher interest rates on the way, equity real estate investment trusts (REITs) are likely to be on solid footing in 2017, according to a recent report. This means the market outlook is good for several REITs with senior housing portfolios, including the industry’s “Big Three” health care REITS— HCP Inc. (NYSE: HCP), Ventas Inc. (NYSE: VTR), and Welltower Inc. (NYSE: HCN).
U.S. equity REITs, which were recently given their own category on the Global Industry Classification Standard (GICS), are likely to see stability in 2017, credit rating company Fitch Ratings predicts.
The report cited “good property-level fundamentals” in nearly all asset classes, as REITs will likely continue to focus their portfolios through diversification, good liquidity and low-risk growth.
Development exposure is also predicted to be more manageable and less than during a peak from 2007-2008. The report also stated that REITs have “good liquidity” across sectors, with continued access to secured and unsecured debt.
However, these positives are balanced by high exposures to bank credit and term loan facilities, according to Fitch. Bank borrowing exposure accounted for 26% of REITs’ total debt as of Sept. 30, 2016—a hike of 19% since the end of 2010. Yet Fitch also predicts lower leverage levels next year with improvement in property-level cash flows and enhanced cash retention after dividend payments.
At the same time, REITs are currently trading at a 7% net asset value discount on average, according to the report, which means companies may feel the pressure to boost their values in 2017.
Positive macroeconomic factors weighed into the outlook, including a positive jobs report. National unemployment is down to 4.6%, according to the most recent data from the Department of Labor Statistics. Since 2010, nearly 15 million jobs have been created. The health care sector has been a leader in recent jobs reports, adding 407,000 jobs in the last 12 months and 28,000 in November alone, according to the National Investment Center for Seniors Housing & Care (NIC).
The strong jobs report is likely to influence leadership at the Federal Reserve to act on its intentions to further increase its federal funds rate. Higher interest rates could also drive up capitalization rates in 2017, according to Fitch.
Written by Amy Baxter