Take Charge With These 5 ‘Fortress’ REITs
- Maintaining a healthy balance sheet is a tremendous driver for REIT performance, as it suggests discipline and the commitment by the management team to drive earnings growth.
- Liquidity and access to capital within the REIT sector are strong, and most REITs have enjoyed healthy access to capital up and down the capital stack.
- Many publicly-traded REITs have managed to survive and thrive for decades using risk-aligned practices distinguished by sound balance sheet fundamentals and rhino-focused dividend performance.
- These 5 REITs own assets in a variety of property sectors, so it’s important to recognize that each REIT has its own risk characteristics.
Since the end of the financial crisis, many REITs have seen a renewed appreciation for managing risk. Specifically, they have realized that an investment-grade credit profile provides them with the opportunity to tap an unsecured debt market and to continue to unencumber their portfolios.
Maintaining a healthy balance sheet is a tremendous driver for REIT performance, as it suggests discipline and the commitment by the management team to drive earnings growth. By focusing on dispositions, many REITs are continuing to delever in a time when cap rates remain attractive.
Just like when I pay off my credit card debt and get rewarded with a higher credit score, REITs are also rewarded for their strict discipline and improved cost of capital. So far in 2018, there have been 38 rating agency actions, of which 26 were positive.
Liquidity and access to capital within the REIT sector is strong, and most REITs have enjoyed healthy access to capital up and down the capital stack.
Eva Steiner, a professor at Cornell University, was co-author of the “Outstanding Paper” submitted at the 2017 NAREIT-AREUEA Real Estate Research Conference. In an interview with NAREIT last year, she said:
“We know that capital structure risks, especially high leverage and a high share of short-term debt, significantly reduced the cumulative total return of U.S. REITs in the 2007-2009 financial crisis. In this study, we found that reducing those risks ahead of the crisis, specifically by reducing leverage and extending debt maturity in 2006, was associated with a significantly higher cumulative total return 2007-2009, even after controlling for the levels of those variables at the start of the financial crisis.”
She concluded by saying, “adjustments to capital structure ahead of the crisis were an important component of managerial skill and discipline that supported firm value during the crisis.”