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

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Specifically, those secular changes include “portfolio focus andtactical diversification, lower risk growth strategies, goodliquidity management, minimal share repurchase risk andenhancements to capital access via at-the-market equity programs,”according to the Fitch report, prepared by a team of analysts ledby managing director Steven Marks. “All of theseelements are currently reflected in Fitch's issuer ratings andRating Outlooks; in many cases, issuers with Positive RatingOutlooks have embraced many of these credit-enhancing ratingdrivers.”

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Fitch says it's maintaining its “stable” ratings outlook for USequity 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 assetclasses and lower-risk strategies.” Since 2010, Fitch says, 14% ofits rating actions on REITs have been upgrades, 6% were downgradesand the remaining 80% were affirmations. “Upgrades have generallybeen driven by issuer-specific circumstances, such as deleveragingefforts or improved access to capital, and do not reflect broadercyclical trends within the sector.”

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In terms of fundamentals, Fitch says multifamily fundamentalsshould be the strongest and remain on a positive trajectory,“although the pace of growth is slowing.” Most retail, industrialand CBD office REITs should have positive same-store NOI growth,although Fitch notes that suburban office REITs will continue toface challenges maintaining margins when considering recurringcapital expenditures. Conversely, Fitch says, “these positiveelements are offset by expectations of relatively unchangedleverage, a continued, slow economic recovery and concernsregarding an increase in interest rates.”

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The ratings agency believes the REITs will continue to have“access to low all-in-cost secured and unsecured debt andopportunistically access the equity markets via ATM programs orfollow-on offerings to fund acquisitions and development. Thisaccess will lead to continued good liquidity coverage and improvedfixed-charge coverage as issuers refinance higher costcapital.”

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Fitch says it doesn't expect US REITs to increaseleverage from current levels, nor does it see themmeaningfully de-levering during '15. “Nearly all proceeds fromfollow-on common equity offerings will likely be used fordevelopment or paired with acquisitions or other growthopportunities on a leverage-neutral basis,” according to Fitch.

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Any de-levering, says Fitch, “will likely be organic ascompanies grow their recurring operating EBITDA and retain cashflow. Stock buybacks should remain modest and represent the largestthreat to maintaining stable leverage metrics.”

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

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It could also turn negative, though, if accessto long-term unsecured debt capital were to revert to “the weaklevels observed in late 2008 and early 2009.” Additionally,“expectations of higher sustained leverage and lower coveragelevels, weakened property-level fundamentals and issuers embracingequity-friendly strategies (such as speculative development todrive growth, share buybacks or common stock dividend policies thatsignificantly reduce retained cash flows)” would contribute to amore negative outlook.

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Paul Bubny

Paul Bubny is managing editor of Real Estate Forum and GlobeSt.com. He has been reporting on business since 1988 and on commercial real estate since 2007. He is based at ALM Real Estate Media Group's offices in New York City.