Rated A-REITs to show strong credit quality in 2017: Moody's
Rating agency Moody's Investors Service says earnings reported by 13 Australian real estate investment trusts (A-REITs) rated by it suggest their credit quality will remain strong throughout FY2017.
It also expects the rated A-REITs' liquidity to remain strong because of their moderate level of debt maturities over the next 12 months.
Eleven trusts reported results for the first halves of their 2017 fiscal years, while the other two reported for all of calendar 2016.
"We expect the A-REITs' financial leverage -- as measured by adjusted net debt/EBITDA -- to increase slightly during their respective fiscal years as the trusts take on modest amounts of debt to fund developments and acquisitions," said Kirsten Lee, analyst at Moody's Investor Service.
"Nonetheless, modest net operating income (NOI) and funds from operations (FFO) growth of around 2.0%-3.0% will partially offset the increase in debt, while the NOI and FFO growth will be driven by a continued high level of contracted rental income from relatively long-weighted lease expiries," adds Lee.
Moody's conclusions were contained in its latest report, "Financial Results Indicate Credit Quality Will Remain Strong Through Fiscal 2017".
The report said that because of a lack of immediate suitable investment opportunities, with assets seen as being priced at the peak of the cycle, the majority of the A-REITs are likely to continue operating at the lower end of their internal target gearing ranges to retain balance-sheet flexibility.
They will also operate with sufficient cushions within their rating tolerance levels to manage a potential turn in the property cycle.
In contrast to the larger A-REITS, Moody's expects the smaller A-REITs to remain acquisitive, as they seek to expand their asset bases.
The rating agency expects that retail trusts will continue to see solid comparable NOI growth, owing to broadly steady vacancy rates and fixed rent increases, and despite slowing sales growth.
The underlying operating environment for super regional and regional malls is likely to remain supportive, with a strong pipeline of demand from international retailers keeping occupancies at high levels.
However, Moody's expects re-leasing spreads and comparable NOI growth will be negatively affected if significant retailer bankruptcies continue because rental rates on new leases are typically lower than those on renewed leases.
The comparable NOI growth of sub-regional malls will be the most negatively affected, should this occur, due to weaker International retailer demand.
Moody's said it expects the rated office and industrial A-REITs with high exposure to Sydney will continue to see moderate NOI growth, driven by fixed rent increases, higher occupancies and lower incentives.
It also expects the rated A-REITs' liquidity to remain strong because they have a moderate level of debt maturities over the next 12 months.
Of the 13 A-REITs that have reported, six demonstrated credit neutral results, while four were credit positive and three negative, it said.
The results reflect a modest reduction in average financial leverage as most A-REITs have paid down debt from the proceeds of their non-core asset sales. This, coupled with a modest development pipeline -- will see the rated A-REITs maintaining strong balance sheets and good headroom within their ratings over the next 12 to 18 months, concludes the report.