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U.S. REITs Look Ready To Handle Rising Rates

Sep. 24 2018 — As the Federal Reserve continues to normalize monetary policy, and yields on benchmark Treasuries look set to rise accordingly, S&P Global Ratings believes that the healthy balance sheets enjoyed by most U.S. REITs we rate will allow these borrowers to withstand a gradual pace of rate increases with little effect on their credit quality.

S&P Global Ratings economists forecast two more quarter-point Fed rate hikes this year (for a total of four) and three in 2019, which would bring the benchmark federal funds rate to 3%-3.125%, up from effectively zero in the aftermath of the Great Recession. We expect the 10-year yield to reach 3.2% by year-end, 3.4% at the end of next year, and 3.5% in 2020.

We believe most U.S. REITs we rate can absorb this gradual increase in rates, given that their balance sheets hold a limited amount of floating-rate debt and have limited near-term refinancing needs.

While rising interest rates have the potential to weaken credit protection measures, particularly EBITDA interest coverage and fixed-charge coverage ratios, this risk is mitigated because our rated REIT universe consists largely of fixed-rate debt. Less than 20% of REITs we rate have debt structures with more than 25% exposure to variable-rate debt.

Meanwhile, aggregate debt maturities are manageable, in our view. Just 3% of outstanding debt comes due during the remainder of this year, followed by 7% and 11% in 2019 and 2020, respectively (see chart 1).

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