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Fitch Affirms Colonial Properties Trust's IDR at 'BB+'; Outlook Stable

^{Published on 2010-08-23 07:25:22 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the credit ratings of Colonial Properties Trust (NYSE: CLP) and its operating partnership, Colonial Realty Limited Partnership (collectively Colonial or the company) as follows:

Colonial Properties Trust

--Issuer Default Rating (IDR) at 'BB+'.

Colonial Realty Limited Partnership

--IDR at 'BB+';

--$675 million unsecured revolving credit facility at 'BB+';

--$707.4 million senior unsecured notes at 'BB+';

--$100 million preferred operating partnership units at 'BB-'.

The Rating Outlook is Stable.

The affirmation of Colonial's IDR at 'BB+' reflects the company's credit strengths, including its manageable debt maturity schedule and more focused business model that mostly involves multifamily property ownership and features limited development risk. These strengths are offset by Colonial's leverage measured on a net debt to recurring operating EBITDA basis, which is more consistent with a 'BB+' rating. In addition, operating conditions in the multifamily sector remain challenging across the Sunbelt region in which Colonial is focused, though fundamentals are improving. The Stable Outlook reflects Colonial's strong liquidity, access to capital, and unencumbered asset coverage of unsecured debt.

Colonial's liquidity position is strong. Sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities, expected recurring capital expenditures) for July 1, 2010 to Dec. 31, 2011 result in a liquidity coverage ratio of 3.2 times (x). Furthermore, the company's debt maturity schedule is well laddered with no more than 20% of debt maturing annually for the next five years.

Colonial's business platform continues to become more simplified, thereby lessening certain risks for bondholders such as development risk and joint venture capital contribution risk. Undeveloped land and construction-in-progress represented 8.7% of total assets as of June 30, 2010, compared with 7.5% and 9.8% as of Dec. 31, 2009 and Dec. 31, 2008, respectively, and down from a peak of 16.5% as of Dec. 31, 2007. Joint venture exposure has also declined, with Colonial's equity investment in joint ventures plus pro rata share of debt equal to $242.3 million as of June 30, 2010, down from $256.5 million and $522.5 million as of Dec. 31, 2009 and Dec. 31, 2008, respectively. The joint venture platform currently consists of interests in 42 properties, and modest joint venture funding risk remains. For example, in June 2010, Colonial Realty Limited Partnership and its joint venture partner in the Parkway Place Limited Partnership retail joint venture each contributed $5.4 million of cash to fund their pro rata share of a debt shortfall that was created via the refinancing.

Colonial's leverage is consistent with a 'BB+' rating, as the company's net debt to recurring operating EBITDA (including Fitch's estimate of recurring cash distributions from partially-owned entities) was 9.3x as of June 30, 2010, down from 9.5x and 9.7x as of Dec. 31, 2009 and Dec. 31, 2008, respectively. Modest improvements in leverage stem partially from the company's at-the-market equity offering programs that have been used in part to repurchase unsecured debt. Fitch projects that leverage will remain in a range between 9.0x and 9.5x over the next 12-24 months absent de-leveraging transactions, but that leverage will improve modestly within that range as operating fundamentals improve and thereby bolster EBITDA. Colonial's risk-adjusted capitalization is also appropriate for the 'BB+' rating.

The economic recovery remains fragile, with the high unemployment rate continuing to adversely impact pricing on multifamily community leases. Colonial's portfolio is focused in the Sunbelt region, with the top five markets being Charlotte, NC (13.7% of same-property NOI as of June 30, 2010), Dallas-Fort Worth (13%), Atlanta (12.3%), Orlando (7.7%), and Raleigh, NC (6.7%). As a result of this geographical focus, there has been a strong correlation between the magnitude of changes in same-property net operating income across the portfolio. Weighted average year-over-year same-store net operating income declined by 5.7% and 5.3% from the second quarter of 2009 (2Q'09) to 2Q'10 in Colonial's top five markets, and across the entire multifamily portfolio, respectively.

However, there are signs of improvement, with total multifamily portfolio occupancy increasing to 96.4% as of June 30, 2010, from 94.7% and 94.1% as of Dec. 31, 2009 and Dec. 31, 2008, respectively. Fitch anticipates that even though the unemployment rate will likely remain at elevated levels over the near term, same-store net operating income in the multifamily portfolio will likely recover modestly in 2011 due to increases in occupancy.

The portfolio benefits from property type diversification, as 77.7% of total real estate assets are multifamily properties and the remaining 22.3% of properties are retail and office properties. While rental rates in the multifamily portfolio declined 6.7% from 2Q'09 to 2Q'10, year-over-year changes in rental rates in the office and retail portfolios were -0.8% and 1.7%, respectively, in 2Q'10.

The company's fixed charge coverage ratio (defined as recurring operating EBITDA including Fitch's estimate of recurring cash distributions from partially-owned entities less recurring capital expenditures less straight line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) was 1.4x for the trailing 12 months ended June 30, 2010, unchanged from full-year 2009 and full-year 2008. Pro forma for the redemption of $100.1 million of series D preferred stock, fixed charge coverage would be 1.6x. Fitch projects that full-year same-store net operating income declines will be followed by modest growth in 2011 and 2012, resulting in fixed charge coverage of 1.5x to 1.6x absent de-leveraging transactions. In a more adverse case than anticipated by Fitch, fixed charge coverage would be below 1.3x.

The Stable Outlook reflects Colonial's large unencumbered property pool, which gives the company financial flexibility. The company has accessed financing through the government-sponsored enterprises because of its unencumbered portfolio. In addition, unencumbered asset coverage of unsecured debt (calculated as 2Q'10 annualized unencumbered property net operating income divided by a range of capitalization rates reflective of the portfolio) centered around 1.9x as of June 30, 2010, which is strong for a 'BB+' rating. Moreover, covenants within the company's unsecured revolving line of credit agreement and bond indenture do not currently restrict Colonial's financial flexibility.

The two-notch differential between Colonial's IDR and the rating of Colonial Realty Limited Partnership's preferred units is consistent with Fitch's criteria for corporate entities with a 'BB+' IDR. Based on Fitch's report, 'Equity Credit for Hybrids and Other Capital Securities' (dated Dec. 29, 2009 and available on at '[ www.fitchratings.com ]'), Colonial Realty Limited Partnership's 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 stock to recurring operating EBITDA (including cash distributions from partially-owned entities) was 9.6x as of June 30, 2010, compared with 9.8x and 10.0x as of Dec. 31, 2009 and Dec. 31, 2008, respectively. Pro forma for the Aug. 9, 2010 redemption of all of the company's $100.1 million series D preferred stock, net debt plus 25% of preferred stock to recurring operating EBITDA would be 9.5x as of June 30, 2010.

The following factors may have a positive impact on the ratings:

--If the company's fixed-charge coverage ratio sustains above 2.0x (for the 12 months ended June 30, 2010, fixed-charge coverage was 1.4x);

--If the company's leverage ratio sustains below 8.5x (as of June 30, 2010, the company's leverage, defined as net debt to recurring operating EBITDA, was 9.3x);

--If the company maintains a sizeable unencumbered portfolio.

The following factors may have a positive impact on the Rating Outlook:

--If the company's fixed-charge coverage ratio sustains above 1.5x;

--If the company's leverage ratio sustains below 9.0x;

--If the company's portfolio becomes more geographically diversified.

The following factors may have a negative impact on the ratings and/or Rating Outlook:

--If the company's fixed-charge coverage ratio sustains below 1.3x;

--If the company's leverage ratio sustains above 10.0x;

--If the company has a liquidity shortfall.

Colonial is a multifamily-focused self-administered and self-managed equity REIT, which is engaged in the acquisition, development, ownership, management and leasing of multifamily apartment communities and other commercial real estate properties. As of June 30, 2010, the company had $3.8 billion in undepreciated book assets, a total market capitalization of $3 billion, and an equity market capitalization of $1.1 billion. As of June 30, 2010, Colonial fully or partially owned a portfolio of 155 properties, consisting of multifamily and commercial properties located in Alabama, Arizona, Florida, Georgia, Nevada, North Carolina, South Carolina, Tennessee, Texas and Virginia.

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

Related Research:

--'Corporate Rating Methodology', Aug. 13, 2010;

--'Parent and Subsidiary Rating Linkage', July 14, 2010;

--'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;

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

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