Fitch Ratings has affirmed the credit ratings of Camden Property Trust
(NYSE: CPT) as follows:
-- Issuer Default Rating (IDR) at 'BBB+';
-- $500 million unsecured revolving credit facility at 'BBB+';
-- $1.5 billion senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation of Camden's IDR at 'BBB+' takes into account credit
strengths including favorable property fundamentals across the
multifamily portfolio, which are expected to contribute to strong
fixed-charge coverage for the rating. The company also has appropriate
leverage for the rating, an experienced management team, and good
financial flexibility as evidenced by solid unencumbered asset coverage,
minimal near-term debt maturities and moderate retained operating cash
flow.
These credit strengths are balanced by a sizeable development pipeline
that is a growth driver for the company but tempers liquidity coverage.
In addition, Camden's ownership concentration in high population growth
Sunbelt markets has led to operational volatility when compared with
multifamily peers due to fewer supply constraints; however, Camden has
outperformed its peers on average through recent cycles.
FAVORABLE FUNDAMENTALS
Job growth in Camden's markets has supported strong occupancy rates and
pricing flexibility, resulting in same-store net operating income
(SSNOI) of 8.5% for the trailing 12 months (TTM) ended March 31, 2013.
Total SSNOI grew by 6.7% in the first quarter of 2013 (1Q'13) following
9.2% increase in 2012 and 7.1% growth in 2011.
Fixed-charge coverage is strong for the 'BBB+' rating at 3.2x for the
TTM ended March 31, 2013, up from 3.0x in 2012 and 2.4x in 2011. Strong
fundamentals, lower borrowing costs and equity issuance drove the
improvement. Fitch defines fixed-charge coverage as recurring operating
EBITDA less recurring capital expenditures divided by total interest
incurred.
Job growth in Camden's top markets from industries such as energy is
leading to sustained increases in demand. Decreasing rent-to-income
ratios (17.7% in 1Q'13 compared with 18% in 1Q'12), partly due to rising
household income ($75,752 in 1Q'13 compared with $70,435 in 1Q'12), and
moderate new supply support Fitch's outlook for further rent and SSNOI
increases.
Fitch's base case projections contemplate 4% to 6% SSNOI over the next
several years resulting in fixed-charge coverage in the 3.7x-3.8x range.
Under a stress case not anticipated by Fitch in which SSNOI declines by
levels experienced in 2009-2010, fixed-charge coverage would remain in
the low 3x range, which is appropriate for a multifamily REIT rated
'BBB+'.
APPROPRIATE LEVERAGE FOR RATING
Net debt as of March 31, 2013 to TTM recurring operating EBITDA was
5.6x, compared with 5.9x in 2012 and 6.7x in 2011. The company's $391.6
million common stock offering in January 2012 and at-the-market common
stock offering programs helped fund acquisitions and development while
reducing leverage.
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 and unsecured bond markets to meet funding obligations. In
a stress case not anticipated by Fitch in which Camden repeats its
performance of 2009-2010 over the next 12-to-24 months, leverage would
approach 6.0x, which would be weak for a multifamily REIT rated 'BBB+'.
EXPERIENCED MANAGEMENT TEAM
Camden's management team continues to improve the quality of the
portfolio via the sale of older assets and through ground-up
development. Fitch views management's focus on asset quality as a key
differentiator between Camden and other Sunbelt and mid-Atlantic-centric
apartment owners. Senior management's tenure with the company is also a
key differentiator between Camden and its peers.
STRONG FINANCIAL FLEXIBILITY
The company's unencumbered assets (1Q'13 annualized unencumbered NOI
divided by a stressed capitalization rate of 7.5%) covered net unsecured
debt by 3.3x, which is strong for the 'BBB+' rating. Unencumbered NOI
comprised 74.7% of total 1Q'13 NOI. The rating contemplates that Camden
will continue to be a predominantly unsecured borrower but has the
flexibility to encumber the portfolio if market conditions warrant.
Debt maturities are laddered over the next several years, with 8.1% of
debt maturing in 2013 followed by 1.4% in 2014 and 10.1% in 2015. Full
availability under its $500 million unsecured credit facility net of
letters of credit outstanding provides ample capacity for Camden to
address near-term maturities.
Camden's adjusted funds from operations (AFFO) payout ratio was 65.9% in
1Q'13, down from 75.5% in 2012 and 99% in 2011. The current AFFO payout
ratio indicates good internally-generated liquidity. In addition, the
covenants under the company's bond indenture and revolving credit
facility agreement do not restrict financial flexibility.
LARGE DEVELOPMENT PIPELINE
The company's development pipeline is a growth vehicle that negatively
impacts liquidity. As of March 31, 2013, cost-to-complete development
represented 4.8% of gross asset value, down slightly from 5.2% as of
Dec. 31, 2012. Current cost-to-complete as a percentage of gross asset
value is slightly above levels of the last upcycle (4.3% as of Dec. 31,
2005 and 4% as of Dec. 31, 2006).
For April 1, 2013 through Dec. 31, 2014, base case liquidity coverage
assuming no additional capital raises is 1.1x when including development
costs as a liquidity use. Fitch defines liquidity coverage as liquidity
sources divided by uses. Liquidity sources include cash, availability
under the company's unsecured revolving credit facility, projected
retained cash flows from operating activities after dividends. Liquidity
uses include pro rata debt maturities and projected recurring capital
expenditures.
MARKET VOLATILITY
In 1Q'13, the company's top five markets were D.C. Metro (16.7% of pro
rata NOI), Houston (10.7%), Tampa (7.4%), Dallas (7%), and Las Vegas
(6.8%). SSNOI was positive in all of Camden's markets in 1Q'13, with the
top three markets being Atlanta (+15.9%) Charlotte (+15.5%), and Houston
(+14.1%). The bottom three markets were Las Vegas (+0.3%), San
Diego/Inland Empire (+1.4%), and Phoenix (+2.8%).
Camden's portfolio is performing well (6.7% SSNOI in 1Q2013 compared
with the peer average of 5.9%) and has outperformed peers since 2011.
For 2003-2012, Camden averaged SSNOI growth of 2.5% compared with the
peer average SSNOI of 2.2%.
Camden has shown more SSNOI volatility than peers during the trailing
10-year period. Fitch attributes this to strong performance subsequent
to the Summit acquisition in 2005 as well as weaker performance than
peers in 2009, stemming from fewer supply constraints resulting in
above-average development activity in the previous up-cycle. However,
rents have recovered relative to recessionary lows in each of Camden's
markets except for Las Vegas and Fitch has a favorable outlook for most
of Camden's markets. Nevertheless, the company's portfolio overweight in
the D.C. metro is a credit concern given weakening demand and elevated
levels of new supply.
STABLE OUTLOOK
The Stable Outlook reflects Fitch's view that fixed-charge coverage will
be strong for the rating in the mid-3x range, leverage will approach 5x
over the next 12-to-24 months and company will continue its active
development pipeline, starting between $250 million and $400 million
annually.
RATING SENSITIVITIES
The following factors may result in positive momentum on the ratings
and/or Rating Outlook:
-- Fitch's expectation of fixed-charge coverage sustaining above 3.5x
(TTM fixed-charge coverage was 3.2x);
-- Fitch's expectation of leverage sustaining below 5.0x (as of March
31, 2013, leverage was 5.6x);
-- More geographical diversification across the multifamily portfolio
into markets with growth stability.
The following factors may result in negative momentum on the ratings
and/or Rating Outlook:
-- Fitch's expectation of cost-to-complete development sustaining above
10% of gross asset value (this metric was 4.8% as of March 31, 2013);
-- The funding of development primarily via debt incurrence, which is
not Fitch's current expectation;
-- Fitch's expectation of fixed-charge coverage ratio sustaining below
2.5x;
-- Fitch's expectation of leverage sustaining above 6.0x;
-- Fitch's expectation of liquidity coverage sustaining below 1.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- Criteria for Rating U.S. Equity REITs and REOCs (Feb. 26, 2013);
-- Recovery Ratings and Notching Criteria for Equity REITs (Nov. 12,
2012);
-- Corporate Rating Methodology (Aug. 8, 2012).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=796656
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