Fitch Upgrades Camden Property Trust's IDR to 'BBB+'; Outlook Stable.
--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--$500 million unsecured revolving credit facility to 'BBB+' from 'BBB';
--$1.4 billion senior unsecured notes to 'BBB+' from 'BBB'.
The Rating Outlook is Stable.
The upgrade of Camden's IDR reflects:
--Fixed-charge coverage that Fitch expects will continue to increase predominantly due to favorable multifamily property fundamentals across the portfolio;
--Ongoing reductions in leverage via the funding of acquisitions and development with equity;
--Management's solid stewardship of the portfolio, which entails selling older communities;
--A mostly unencumbered portfolio that provides financial flexibility as well as value to bondholders as evidenced by robust unencumbered asset coverage.
The upgrade takes into account offsetting factors including:
--A large development pipeline that adversely impacts liquidity;
--CPT's presence in markets that are performing well but have shown higher volatility and lower sustained same-property performance than peers' average through the cycle.
Fixed-charge coverage is appropriate for the 'BBB+' rating and was 2.9x in first quarter 2012 (1Q'12), compared with 2.4x in 2011 and 2.1x in 2010. Improvements stem primarily from occupancy gains and positive leasing spreads in almost all of Camden's markets, which are primarily in the Sunbelt, and lower fixed charges. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures divided by total interest incurred and preferred unit distributions.
Positive demand drivers include an increase in Camden's average renter income to $69,200 in 1Q'12 from $62,400 in 1Q'11, and job growth, coupled with low move-outs related to home purchases. Same-property net operating income (NOI) increased by 9.6% in 1Q'12, compared with 7.1% in 2011 and negative 3.5% in 2010. During 1Q'12, the top three performing markets as measured by SSNOI growth were Phoenix at 19.0%, Charlotte at 16.7% and Southeast Florida at 16.0%. Even less robust markets remained positive in 1Q'12, including Las Vegas at 2.6%, San Diego/Inland Empire at 3.0% and Atlanta at 3.7%.
Fitch anticipates that high single-digit same-property NOI growth in 2012 followed by moderating same-property NOI growth over the next 12-to-24 months along with incremental earnings from development will result in fixed-charge coverage sustaining in the 3.0x to 3.5x range, which would be appropriate for a 'BBB+' rating. In a stress case not anticipated by Fitch in which Camden repeats its same-property NOI declining performance of 2009-2010 over the next 12-to-24 months, coverage would remain between 2.5x and 3.0x, which would remain appropriate for a 'BBB+' rating.
Growth in portfolio-level cash flow, the company's $392 million follow-on common stock offering in January 2012, and at-the-market common stock offering programs used to fund acquisitions and development have reduced leverage. Net debt to 1Q'12 annualized recurring operating EBITDA was 6.1x, compared with 6.7x and 7.2x for the years ended Dec. 31, 2011 and Dec. 31, 2010, respectively. Fitch anticipates that leverage will approach 5.0x over the next 12-to-24 months due to improving fundamentals and continued access to common stock market to meet funding obligations. In a stress case not anticipated by Fitch in which Camden repeats its same-property NOI declining performance of 2009-2010 over the next 12-to-24 months, leverage would sustain above 6.0x, which would be more consistent with a 'BBB' rating.
The rating action takes into account Camden's strong management team, which continues to improve the quality of the portfolio. With one-off buyers actively obtaining government-sponsored enterprise 10-year debt with coupon rates below 4%, Camden is looking to sell $300 million of older properties to push down the average age of the portfolio to approximately 10 years from approximately 12 years. Fitch views this portfolio repositioning positively, as the company is taking advantage of low multifamily capitalization rates to improve overall portfolio quality.
A large unencumbered asset base further supports the 'BBB+' rating. Unencumbered assets (calculated as 1Q'12 annualized unencumbered NOI divided by a stressed capitalization rate of 7.5%) covered unsecured debt by 2.9x. The rating contemplates that Camden will continue to be a predominantly unsecured borrower but have the flexibility to encumber the portfolio if market conditions warrant. In addition, the covenants under the company's bond indenture and revolving credit facility agreement do not restrict financial flexibility.
The company's development pipeline is a growth vehicle that negatively impacts liquidity. As of March 31, 2012, development including projected total costs represented 6.8% of gross asset value, up from 4.4% as of Dec. 31, 2010 and 3.7% as of Dec. 31, 2009. However, current development remains well below peak levels of the last upcycle (11.4% as of Dec. 31, 2005 and 11.0% as of Dec. 31, 2006). For the period April 1, 2012 through Dec. 31, 2013, base case liquidity coverage assuming no additional capital raises is 1.1x, but 0.9x when including development costs as a liquidity use. However, longer term, Camden has a manageable debt maturity schedule with no more than 13.5% of debt due in any given year over the next five years. The company has demonstrated good capital markets access, mitigating refinance risk.
Camden's portfolio is performing well but has shown higher volatility and lower sustained same-property performance than selected multifamily REIT peers through the cycle. From 2002 to 2011, Camden's average same-store NOI growth was approximately 60 basis points below peers, and from 2007 to 2011, Camden's average same-store NOI growth was approximately 150 basis points below peers. Furthermore, Camden's results were achieved with more same-store NOI volatility.
The Stable Outlook reflects Fitch's view that fixed-charge coverage will sustain in the 3.0x to 3.5x range, leverage will approach 5.0x over the next 12-to-24 months, and the portfolio will remain predominantly unencumbered.
Fitch has withdrawn the 'BB+' rating on Camden's $100 million 7% preferred units as these securities have been redeemed and are no longer deemed to be relevant to Fitch's coverage.
The following factors may result in positive momentum in the ratings and/or Rating Outlook:
--If the company's fixed-charge coverage ratio sustains above 3.5x (1Q'12 fixed-charge coverage was 2.9x);
--If the company's leverage ratio sustains below 5.0x (as of March 31, 2012, leverage was 6.1x);
--Geographical diversification across the multifamily portfolio into markets with more same-store NOI growth stability.
The following factors may result in negative momentum on the ratings and/or Rating Outlook:
-- Development including projected total costs sustaining above 10% of gross asset value (this metric was 6.8% as of March 31, 2012);
--The funding of development primarily via debt incurrence, which is not Fitch's current expectation;
--If the company's fixed-charge coverage ratio sustains below 2.5x;
--If the company's leverage ratio sustains above 6.0x;
--A liquidity coverage ratio sustaining below 1.0x.
Additional information is available on www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Recovery Ratings and Notching Criteria for Equity REITs' (May 3, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Corporate Rating Methodology' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
Criteria for Rating U.S. Equity REITs and REOCs
Recovery Ratings and Notching Criteria for Equity REITs
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|Date:||Jul 18, 2012|
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