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Fitch Affirms Camden Property Trust's IDR at 'BBB'; Outlook to Stable

^{Published on 2010-07-16 05:55:47 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the credit ratings of Camden Property Trust (NYSE:CPT) and one of its operating subsidiaries, Camden Summit Partnership, L.P. (collectively, Camden, or the company) as follows:

"Equity Credit for Hybrids & Other Capital Securities"

Camden Property Trust

--Issuer Default Rating (IDR) at 'BBB';

--$600 million unsecured revolving line of credit at 'BBB';

--$500 million unsecured term loan at 'BBB';

--$1 billion senior unsecured notes at 'BBB';

--$14.5 million senior unsecured medium term notes at 'BBB';

--Preferred stock (indicative) at 'BB+'.

Camden Summit Partnership, L.P.

--IDR at 'BBB';

--$46.2 million senior unsecured medium term notes at 'BBB'.

In addition, the Rating Outlook has been revised to Stable from Negative.

The Rating Outlook revision to Stable reflects that the net operating income (NOI) contraction experienced across Camden's multifamily portfolio is not resulting in fixed charge coverage deterioration to the extent contemplated by Fitch in early 2009. While rental rates declined in 2009 into early 2010, rental rate growth may materialize with same-property NOI growth on the horizon in 2011.

The affirmation of Camden's IDR and senior unsecured debt ratings at 'BBB' reflects Camden's proven access to multiple sources of capital, adequate risk-adjusted capitalization for the 'BBB' rating, and good unencumbered asset coverage. The rating further reflects management's track record of adjusting risk through real estate and capital markets cycles. The affirmation takes into account certain offsetting factors, including sizeable debt maturities in 2012, although the company has adequate liquidity through 2011. In addition, the company's government-sponsored enterprise financing activities have led to modest structural subordination for bondholders.

From first quarter 2009 (1Q'09) to 1Q'10, the weighted average rental rate after concessions in Camden's same-property portfolio declined from $973 per unit to $919 per unit, with declines of 7.5% or greater in Las Vegas, Los Angeles, Charlotte, Orlando and Phoenix. Same-property rental rates declined from $984 per unit in 2008 to $936 per unit in 2009. In addition, year-over-year same-property net operating income declined by 9.1% in 1Q'10 and 6.0% in 2009. However, the company's $272.1 million follow-on equity offering in May 2009 utilized to pay down borrowings under the company's unsecured revolving line of credit provided sufficient fixed charge coverage cushion to absorb downward pressure on stabilized property cash flows. The company's fixed charge coverage ratio (defined as recurring operating EBITDA less recurring capital expenditures divided by interest incurred and preferred unit distributions) was 2.2x for the trailing 12 months ended March 31, 2010, compared with 2.1x and 1.9x in 2009 and 2008, respectively.

Fitch projects that the U.S. unemployment rate will improve incrementally over time and, combined with declining home ownership, will ultimately translate into demand for multifamily space. Further, limited new supply should allow Camden to maintain or grow occupancies. Fitch projects that after a mid-single-digit same-property NOI decline for Camden in 2010, an inflection point in same-store NOI will occur over the next 12 months and subsequent growth will occur late 2011 into 2012. Fixed charge coverage is projected to be between 1.9 times (x) and 2.3x through 2012, which remains appropriate for a 'BBB' IDR.

The 'BBB' rating further reflects Camden's proven access to multiple sources of capital, willingness to access the equity market through a follow-on equity offering in May 2009, and the recent utilization of an at-the-market equity offering program. The company's risk-adjusted capital has strengthened at a 'BBB' stress level to 1.3x as of March 31, 2010 from 1.1x as of Dec. 31, 2008, due to equity capital raises and a reduction in development activities. The company's leverage ratio, defined as net debt divided by recurring operating EBITDA, was 7.3x as of March 31, 2010, down from 7.7x and 8.3x as of Dec. 31, 2009 and Dec. 31, 2008, respectively.

Camden has a large, high-quality unencumbered property portfolio, and 73.2% of total apartments were unencumbered as of March 31, 2010. Unencumbered asset coverage of unsecured debt based on the covenants in Camden's bond indenture was 2.6x as of March 31, 2010, which is strong for the 'BBB' rating. When applying a range of capitalization rates against the company's NOI from unencumbered properties, unencumbered asset coverage was at a range around 2.1x, which is solid for a 'BBB' rating.

Qualitatively, management has a good track record of adjusting risk through real estate and capital markets cycles, opportunistically pursuing acquisitions of stabilized portfolios as market conditions permit and appropriately paring back on development during periods of scarce demand. The company's current consolidated development pipeline consists of two completed projects in lease-up, while the total development pipeline and land decreased to 3.4% of gross assets as of March 31, 2010 from 7.8% as of Dec. 31, 2007.

Fitch's main credit concern is Camden's sizeable debt maturities in 2012, when 29.6% of the company's consolidated debt, including secured debt, an unsecured term loan and unsecured notes, matures. However, for April 1, 2010 through Dec. 31, 2011, the company's sources of liquidity (unrestricted cash, availability under its unsecured revolving line of credit and expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (debt amortization and maturities and recurring capital expenditures) result in a liquidity coverage ratio of 1.7x. Pro forma for a potential 16.7% reduction in the company's line of credit that matures in January 2011, liquidity coverage would be 1.5x.

When including 2012 debt maturities, liquidity coverage through Dec. 31, 2012 would be below 1.0x. However, Fitch believes that Camden's access to capital should enable the company to address those maturities. Moreover, a break-even sensitivity analysis reveals that Camden has enough liquidity to meet debt maturities through 2012 even if only approximately 44% of upcoming debt maturities are refinanced.

While government-sponsored enterprise financing has provided a debt backstop to the multifamily sector, Camden's access to those funding sources has led to additional structural subordination for bondholders. Secured debt as a percentage of undepreciated book capital was 17.9% as of March 31, 2010, up from 13.5% and 10.3% at Dec. 31, 2008 and 2007, respectively. However, the company has proven access to the unsecured credit markets, enabling financial flexibility over the next 12-24 months in advance of 2012 maturities. In addition, the company's covenants under its unsecured revolving line of credit agreement and unsecured bond indenture do not restrict its financial flexibility.

The two-notch differential between Camden's IDR and its indicative preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'. While Camden Property Trust does not have any preferred stock outstanding, its subsidiary Camden Operating, L.P. has $100 million of 7.0% series B cumulative redeemable perpetual preferred units outstanding. Based on Fitch's criteria report, "Equity Credit for Hybrids & Other Capital Securities," these preferred units are 75% equity-like and 25% debt-like, since they are perpetual and have no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred units to recurring operating EBITDA was 7.4x as of March 31, 2010, compared with 7.8x as of Dec. 31, 2009.

The following factors may result in positive action on the ratings and/or Rating Outlook:

--If the company's fixed-charge coverage ratio sustains above 2.5x (for the 12 months ended March 31, 2010, fixed-charge coverage was 2.2x);

--If the company's leverage ratio sustains below 7.0x (as of March 31, 2010, the company's leverage, defined as net debt to recurring operating EBITDA, was 7.3x);

--More geographical diversification across the multifamily portfolio.

The following factors may result in negative action on the ratings and/or Rating Outlook:

--If the company's fixed-charge coverage ratio sustains below 1.8x;

--If the company's leverage ratio sustains above 8.0x;

--An aggressive resumption of development activities that could place pressure on risk-adjusted capitalization;

--A liquidity shortfall.

Relevant Fitch criteria available on the Fitch web site at '[ www.fitchratings.com ]' include:

--'Criteria for Rating U.S. Equity REITs and REOCs', April 16, 2010;

--'Equity Credit for Hybrids & Other Capital Securities - Amended', Dec. 29, 2009;

--'Rating Hybrid Securities', Dec. 29, 2009;

--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009;

--'Corporate Rating Methodology', Nov. 24, 2009;

--'Evaluating Corporate Governance', Dec. 12, 2007;

--'Parent and Subsidiary Rating Linkage', June 19, 2007.

Camden began in 1982 as the residential arm of Century Development, was renamed Centeq Companies in 1986, and was incorporated as a real estate investment trust (REIT) in May 1993. As of March 31, 2010, Camden owned interests in or operated 185 multifamily properties comprising 63,658 apartment homes across the United States. As of March 31, 2010, Camden had $5.7 billion in gross book assets, an equity market capitalization of $3 billion, and a total market capitalization of $5.7 billion.

Additional information is available at '[ www.fitchratings.com ]'.

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