Fitch Ratings has published an updated sector-specific criteria report that addresses Fitch's methodology on analysing the credit risk of US equity real estate investment trusts (REITs) and real estate operating companies (REOCs).
The report, titled “Criteria for Rating US Equity REITs and REOCs”, updates and replaces a report of the same title dated 27 February 2012.
Fitch's approach for analysing US equity REIT and REOC credit risk continues to have three primary components: a review of management, a financial analysis, and a review of the issuer's property portfolio.
Factors having an impact on management review include the quality of the team, adaptation, financial discipline, strategy, experience and track record, and corporate governance.
Financial factors include a review of recurring cash flow and fixed charge coverage, financial flexibility, access to capital, liquidity, contingent liquidity from unencumbered assets, as well as balance sheet, capitalisation, and leverage. Fitch primarily uses base case projections, and also uses stress case projections and a risk-adjusted earnings stress scenario in the rating process.
Factors pertinent to the property portfolio include investment granularity, market focus, and asset quality, particularly location, tenant profiles, lease expirations, lease renewals rates, lease duration, and lease rollover rates.
The criteria report addresses other factors such as development, joint ventures, covenants, and peer analysis.