NEW YORK CITY—The outlook for the US REIT sector as a whole has been upgraded to "positive" for 2015, Fitch Ratings says. What the ratings agency terms “secular changes” are responsible for enhancing credit profiles within the sector, and Fitch says it believes they'll be maintained for the foreseeable future.

Specifically, those secular changes include “portfolio focus and tactical diversification, lower risk growth strategies, good liquidity management, minimal share repurchase risk and enhancements to capital access via at-the-market equity programs,” according to the Fitch report, prepared by a team of analysts led by managing director Steven Marks. “All of these elements are currently reflected in Fitch's issuer ratings and Rating Outlooks; in many cases, issuers with Positive Rating Outlooks have embraced many of these credit-enhancing rating drivers.”

Fitch says it's maintaining its “stable” ratings outlook for US equity REITs in the coming year, in view of its expectations for “continued solid liquidity driven by good access to capital, improving property-level fundamentals across nearly all asset classes and lower-risk strategies.” Since 2010, Fitch says, 14% of its rating actions on REITs have been upgrades, 6% were downgrades and the remaining 80% were affirmations. “Upgrades have generally been driven by issuer-specific circumstances, such as deleveraging efforts or improved access to capital, and do not reflect broader cyclical trends within the sector.”

In terms of fundamentals, Fitch says multifamily fundamentals should be the strongest and remain on a positive trajectory, “although the pace of growth is slowing.” Most retail, industrial and CBD office REITs should have positive same-store NOI growth, although Fitch notes that suburban office REITs will continue to face challenges maintaining margins when considering recurring capital expenditures. Conversely, Fitch says, “these positive elements are offset by expectations of relatively unchanged leverage, a continued, slow economic recovery and concerns regarding an increase in interest rates.”

The ratings agency believes the REITs will continue to have “access to low all-in-cost secured and unsecured debt and opportunistically access the equity markets via ATM programs or follow-on offerings to fund acquisitions and development. This access will lead to continued good liquidity coverage and improved fixed-charge coverage as issuers refinance higher cost capital.”

Fitch says it doesn't expect US REITs to increase leverage from current levels, nor does it see them meaningfully de-levering during '15. “Nearly all proceeds from follow-on common equity offerings will likely be used for development or paired with acquisitions or other growth opportunities on a leverage-neutral basis,” according to Fitch.

Any de-levering, says Fitch, “will likely be organic as companies grow their recurring operating EBITDA and retain cash flow. Stock buybacks should remain modest and represent the largest threat to maintaining stable leverage metrics.”

Fitch says its ratings outlook for US equity REITs could be revised from “stable” to “positive” if there's an expectation of leverage levels to decrease across the sector. “Secondarily, an outlook revision to positive would be driven by the macroeconomic backdrop resulting in sustained job growth (driving demand for space), Fitch's expectation of improving fixed-charge coverage levels, continued strong capital markets access, and liquidity levels and expectations of positive same-store net operating income for several consecutive quarters across most property types.”

It could also turn negative, though, if access to long-term unsecured debt capital were to revert to “the weak levels observed in late 2008 and early 2009.” Additionally, “expectations of higher sustained leverage and lower coverage levels, weakened property-level fundamentals and issuers embracing equity-friendly strategies (such as speculative development to drive growth, share buybacks or common stock dividend policies that significantly reduce retained cash flows)” would contribute to a more negative outlook.