Apartment Fundamentals Weaken, But Multifamily REIT Ratings Show Stability

New York–While the fundamentals of the apartment industry have continued to erode over the past several months, multifamily REITs have taken steps to shore up liquidity and most continue to have stable outlooks, according to Moody’s Investors Service. “Multifamily REITs have increasingly adopted defensive postures with their balance sheets and operating activities, seeking to maximize liquidity via a number of initiatives, including the use of Fannie and Freddie debt, ratcheting down development activities, and asset sales,” says Chris Wimmer, vice president at Moody’s. “As management teams appropriately focus on the challenging conditions, most balance sheets are well-prepared for the next 12 to 18 months.” Moody’s rates nine multifamily REITs. Eight of the nine have stable outlooks, while one outlook is negative. As a sign of their adequate liquidity, Moody’s notes that the average bank line capacity available to rated REITs at the end of 2008 was close to 80 percent, with only one REIT having capacity of less than 50 percent. To improve liquidity, REITs have the option of lowering the cash portion of their regular common dividends, and some have done so. During these tough times, Moody’s says it will closely monitor the liquidity of the REITs, especially their management of any near-term debt maturities, and also the effect of deteriorating property fundamentals on REIT cash flows. Recessionary stress and the related employment weakness have increased pressure on apartment fundamentals, with occupancy averages at their lowest in years for most rated multifamily REITs, according to Moody’s. Property cash flow growth, however, remained in positive territory for the full year 2008, albeit at the lowest rates in at least four years.