Brad Case's  Instablog

REITs are back on offense and all eyes are on growth: growth prospects for core portfolios, growth from acquisitions and growth in dividends.

• Alexandria Real Estate Equities (ARE)
• AvalonBay Communities (AVB)
• DCT Industrial Trust (DCT)
• Glimcher Realty Trust (GRT)
• Hersha Hospitality Trust (HT)
• Lexington Realty Trust (LXP)
• Ramco-Gershenson Properties Trust (RPT)
• Rayonier (RYN)

In contrast to other commercial real estate sectors, nearly all Fitch-rated health care REITs have reported positive same store NOI growth during 2010 relative to 2009.

Fitch-rated health care REITs have made the bulk of their health care facility investments in recent years in facilities funded by non-government sources, and thus their exposure to government reimbursement risk continues to decline.

Operating conditions in senior housing will likely improve in 2011, as the pipeline of new construction is expected to drop below 2% of existing stock.

Each medical office property typically has a granular tenant base, with lower tenant turnover than a comparable office building.  These dynamics create fairly stable operating performance for medical office properties.

Capital access for life science tenants remains strong.  While some operators coudl continue to consolidate facilities, the industry continues to grow and long-term demand for well-constructed space in key locations is expected to remain solid.

While many sectors within health care real estate are affected to some degree by challenging macroeconomic conditions, the property sector is affected less so because of the sheer volume of population growth in the over-70 age cohort.  When combined with limited new development activity, operating conditions have been far healthier than in most other major property types.

Most health care REITs rated by Fitch have good liquidity and strong balance sheets, with significant availability under revolving lines of credit, well-laddered debt maturities, and large unencumbered asset pools.  Additionally, health care REITs have demonstrated access to a variety of capital sources including secured and unsecured debt financing and the follow-on common equity market.  The unsecured bond market remains open for health care companies and banks continue to be interested in lending to health care REITs.

Strong long-term demographic trends are helping support demand, with fewer challenges at the property level than other sectors have experienced.  Many health care REITs have been active investors in 2010 and they are in a strong position to take advantage of opportunities to further grow and diversify their portfolios.

Weak consumer demand due to high unemployment levels will fuel a muted economic recovery, pressuring retail REITs' ability to maintain occupancy and cash flow.  Offsetting weak fundamentals, most Fitch-rated retail REITs have improved and stabilized their balance sheets, capitalization, liquidity, and financial flexibility.  Investment-grade retail REITs continue to maintain a strong portfolio of unencumbered assets, which provided a source of contingent liquidity while bond and equity markets were inhospitable.

Rents will continue to fall as market vacancies are expected to remain protractedly high aggravated by a weak recovery in consumer spending.  The outlook is not even across the retail space, however: Fitch expects strip center owners to be more negatively impacted by weak consumer demand, losing out to large format retail centers, which are expected to have more stable performance due to the strong in-fill locations of their properties and premier tenancy.  Fitch expects that properties located in infill locations with high barriers to entry will outperform properties located in less supply-constrained locations.  Offsetting the significant rent declines over the last four years is the long-term nature of many retail leases, allowing landlords to benefit from slight rent increases upon renewal or new lease signing.

However, Fitch's rated universe has historically outperformed market averages and should continue to outperform in 2011.  While Property & Portfolio Research (PPR) expects the occupancy rate to be 83% by the end of 2011 for the 54 major markets, Fitch expects its rated universe to maintain occupancy in the low to mid 90% range.  Fitch expects the retail REITs in its rated universe will continue to outperform broad market averages.  Large REITs with stable balance sheets and superior assets in desirable locations are able to attract tenants due to strong relationships with national retail chains.