Fitch Ratings has assigned a 'BBB+' credit rating to Essex Portfolio,
L.P.'s $400 million senior unsecured notes that priced on April 8, 2014.
Fitch currently rates Essex Property Trust, Inc. (NYSE: ESS) and its
operating partnership, Essex Portfolio, L.P. (collectively, Essex or the
company) as follows:
Essex Property Trust, Inc.
--Issuer Default Rating 'BBB+';
--Preferred
Stock 'BBB-'.
Essex Portfolio L.P.
--Issuer Default Rating 'BBB+';
--Unsecured
Line of Credit 'BBB+';
--Senior Unsecured Notes 'BBB+'.
The Rating Outlook is Stable.
On April 8, 2014, Essex Portfolio, L.P. priced a private placement of
$400 million aggregate principal amount of 10-year senior unsecured
notes at a stated interest rate of 3.875%. The notes mature on May 1,
2024 and were priced at 99.234% of par value, resulting in a yield to
maturity of 3.968%. The operating partnership expects to use net
proceeds to refinance existing senior unsecured indebtedness and for
general corporate purposes.
KEY RATING DRIVERS
Fitch's ratings for Essex consider the company's dominant ownership
position of multifamily properties within key densely populated and
supply constrained markets in Northern and Southern California and
Seattle. These markets generally have favorable demographics that
include vibrant and growing labor markets and above average household
income levels, as well as high homeownership costs that drive demand for
multifamily apartments. Moreover, Fitch views the company's management
team as being among the strongest in the multifamily REIT sector based
on its track record of superior asset management and capital allocation.
Elevated leverage for the rating due to its merger with BRE Properties,
which closed on April 1, 2014, geographic portfolio concentration risk
and development risk are factors that balance these credit positives.
The Stable Outlook incorporates Fitch's view that Essex will drive
leverage lower over the near-to intermediate term through a combination
of internal and external property net operating income (NOI) growth, the
formation of a joint venture and opportunistic equity issuances. The
ratings and Stable Outlook also reflect Fitch's expectation for
meaningful operating synergies and improved access to lower cost capital
stemming from the company's merger with BRE Properties.
Rating concerns include an initial increase in ESS' leverage, as well as
a reduction in its unencumbered asset coverage of unsecured debt (UA/UD)
as a result of the merger.
Merger Enhances Competitive Position
Fitch generally has a favorable view toward the merger of Essex and BRE,
notwithstanding the near-term deterioration in select credit metrics.
The combination bolstered Essex's existing presence in attractive,
supply-constrained, West Coast markets, in which low single-family
housing affordability has historically supported strong multifamily
fundamentals.
Moreover, the agency expects the combined company will benefit from
improved access to lower cost capital due to its larger size.
Elevated Leverage to Moderate
Fitch believes that Essex management remains committed to reducing
leverage below 7.0x. However, Fitch estimates ESS' leverage will
increase towards the mid-7.0x range as a result of the merger, up from
6.8x standalone as of Sept. 30, 2013 - the last full quarter prior to
the merger announcement.
Fitch expects ESS will reduce its leverage to under 7.0x within
approximately one year after closing the merger through a combination of
same store net operating income (SSNOI) growth, incremental NOI from
development deliveries and opportunistic share issuance under the
company's at-the market (ATM) equity program. Sustaining leverage above
7.0x remains a key rating sensitivity that could warrant a downgrade
and/or negative revision to ESS' Outlook.
Lower Unencumbered Asset Coverage
Fitch estimates that ESS' unencumbered asset coverage of unsecured debt
(UA/UD) will decrease slightly below 2.0x as a result of the merger from
the low 2.0x range as of Sept. 30, 2013 which is a credit concern.
Higher property taxes and the assumed contribution of $900 million of
unencumbered assets into a newly formed JV are the principal reasons for
the decline in UA/UD coverage. Fitch calculates the company's UA value
using a direct capitalization approach of unencumbered NOI, assuming a
stressed 7.5% capitalization rate.
Similar to leverage, Fitch expects internal growth and incremental NOI
from development deliveries to lift the company's UA/UD above 2.0x
within a year after closing the merger.
Strong Fixed Charge Coverage
Fitch expects ESS' fixed-charge coverage to be 2.6x on a trailing 12
month (TTM) basis for the combined company. Fitch estimates that
coverage should improve to 2.8x pro forma for the company's announced
$900 million institutional joint venture, which is adequate for the
ratings.
Fitch defines fixed-charge coverage as recurring operating EBITDA less
recurring capital improvements divided by interest incurred and
preferred distributions.
Limited Execution Risk
The overlap in asset profiles and markets suggests only a moderate
amount of merger integration risk.
RATING SENSITIVITIES
The following factors may result in a negative revision to ESS' ratings
and/or its Outlook:
--Fitch's expectation of leverage sustaining above 7.0x (Fitch estimates
TTM leverage would be 7.5x for the combined company on a pro forma basis
assuming $200 million of new equity);
--Fitch's expectation of fixed-charge coverage sustaining below 2.5x
(TTM coverage was 2.8x on a pro forma basis);
--Fitch's expectation of UA/UD sustaining below 2.0x (UA/UD was 1.9x on
a pro forma basis as of Sept. 30, 2013).
Although Fitch does not anticipate any upwards rating momentum, the
following factors could result in a positive revision to ESS' ratings
and/or its Outlook:
--Fitch's expectation of leverage sustaining below 6.0x;
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x;
--UA/UD sustaining above 3.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26,
2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis' (Dec. 13, 2013);
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 19,
2013);
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage' (Aug. 5, 2013).
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
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT
Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Recovery Rating and Notching Criteria for Equity REITs ￢ﾀﾓ Effective May
12, 2011 to May 3, 2012
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490
Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=826610
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