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Fitch Upgrades BRE Properties' IDR to 'BBB'; Outlook Stable

^{Published on 2011-03-15 09:30:41 - Market Wire}
 

NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has upgraded the Issuer Default Rating (IDR) and outstanding obligation ratings of BRE Properties, Inc. (NYSE: BRE) as follows:

--IDR to 'BBB' from 'BBB-';
--Unsecured revolving credit facility to 'BBB' from 'BBB-';
--Senior unsecured notes to 'BBB' from 'BBB-';
--Convertible senior notes to 'BBB' from 'BBB-';
--Preferred stock to 'BB+' from 'BB'.

The Rating Outlook is Stable.

The upgrades reflect Fitch's view that BRE's multifamily portfolio fundamentals will continue to improve in 2011, 2012, and 2013, following declines in 2009 and 2010 and that the company's current and expected leverage are appropriate for a 'BBB' IDR. Fitch notes BRE's management team navigated the business through a difficult operating cycle and raised $290 million of equity during 2010, which was higher than Fitch's expectation. These actions demonstrated management's commitment to maintaining credit metrics at levels commensurate with a 'BBB' rating.

BRE's leverage improved to 7.5 times (x) for 2010 as compared to 8.4x for 2009, and Fitch expects BRE's leverage to remain below 8.0x, a level appropriate for a 'BBB' IDR. Further, BRE's fixed charge coverage ratio has improved to 2.1x for 2010, as compared to 1.9x for 2009 and is expected to remain appropriate for a 'BBB' IDR. BRE's risk-adjusted capital ratio also improved to 1.2x as of Dec. 31, 2010 at a 'BBB' rating category stress level, up from 1.1x as of Dec. 31, 2009 and 0.9x as of Dec. 31, 2008. This ratio improved largely because of the increase in the company's equity base and the reduced amount of construction in progress.

While BRE experienced a same store net operating income (SSNOI) decline of 6.4% in 2009, the company benefited from improving fundamentals in 2010. The calendar year 2010 SSNOI decline was 3.7%, with the fourth quarter of 2010 slightly positive at 0.4%.

Fitch expects that BRE's portfolio will continue to experience positive operating fundamentals with SSNOI growth between 2.5% and 4% in 2011 and 2012. Consistent with these expectations, Fitch projects BRE's leverage, measured as net debt divided by recurring operating EBITDA, will trend towards 7.0x in 2011 and 2012. Leverage improved from 2009 due to delevering equity raises, and leverage is expected to remain below 8.0x as earnings power improves from incremental NOI from properties acquired and developments delivered in 2010 and 2011, as well as the expected improvements in the company's operating fundamentals. Additionally, BRE's fixed charge coverage ratio (defined as recurring operating EBITDA less renewal and replacement capital expenditures, divided by cash interest expense, capitalized interest and preferred stock dividends), which was 2.1x in 2010 and 1.9x in 2009 and 2008, is expected to be between 2.0x and 2.1x in 2011 and 2012.

BRE's operating strategy of focusing on owning assets in supply-constrained coastal destination markets is a credit positive. These markets exhibit relatively strong long-term demand, limited buildable land and high construction costs, curtailing substantial supply growth.

Somewhat offsetting these credit positives is BRE's significant geographic concentration with 84.1% of SSNOI in 2010 derived from the state of California. Fitch rates California's general obligation bonds 'A-' with a Stable Outlook. While BRE's SSNOI has performed in line with a market-weighted PPR index, Fitch notes the seismic risks of the state. Additionally, while the company has little capital committed as of Dec. 31, 2010 for development projects (2.9% of total development cost as % of total undepreciated assets), Fitch expects that the company will increase its development pipeline and risks associated with lease up will increase.

The Stable Outlook centers on Fitch's expectation that BRE's credit profile will remain appropriate for the 'BBB' rating through economic cycles, supported by management's commitment to maintain leverage in the current range to offset development risks and declining operating fundamentals. Further, BRE continues to access various sources of capital and maintains a solid liquidity profile. For the period of Jan. 1, 2011 to Dec. 31, 2012, Fitch calculates that BRE's sources of liquidity (cash, availability under its unsecured revolving credit facility assuming the commitment size is reduced by one-third given its maturity in 2012, and projected retained cash flows from operating activities after dividends and distributions and adjusting for the company's increased dividend) exceed uses of liquidity (pro rata debt maturities and amortization and projected renewal and replacement capital expenditures) by 2.2x, which is strong for the 'BBB' rating. In addition, BRE has a smooth debt maturity schedule with less than 13% of debt maturing before 2014, excluding its line of credit ($209 million drawn at Dec. 31, 2010) which matures in 2012. The company's next large debt maturity is its $300 million of unsecured notes maturing in 2017.

In addition, BRE maintains an adequate level of unencumbered assets that provides solid coverage of unsecured debt for the rating category. Per the company's bond covenant calculations, BRE's unencumbered assets covered unsecured debt by 2.71x and 2.22x as of Dec. 31, 2010 and Dec. 31, 2009, respectively. Fitch calculates that BRE's ratio of unencumbered operating real estate, valued at a blended 7.5% capitalization rate, to net unsecured debt was 2.4x and 1.9x as of Dec. 31, 2010 and Dec. 31, 2009, respectively.

The financial covenants in the company's unsecured debt agreements do not limit BRE's financial flexibility.

The two-notch differential between BRE's IDR and its preferred stock ratings is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. Based on Fitch's criteria report ('Equity Credit for Hybrids & Other Capital Securities'), BRE's preferred stock is 75% equity-like and 25% debt-like since it is perpetual and has no covenants but has a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring EBITDA was 7.6x as of Dec. 31, 2010, compared with 8.6x as of Dec. 31, 2009.

Guidelines for Further Rating Actions

The following factors may have a positive impact on BRE's ratings and/or Outlook:
--Leverage, defined as net debt to recurring operating EBITDA, sustaining below 7.0x for several consecutive quarters (leverage was 7.5x as of Dec. 31, 2010);
--Fixed charge coverage sustaining above 2.5x for several consecutive quarters (coverage was 2.1x for the year ended Dec. 31, 2010).

The following factors may have a negative impact on BRE's ratings and/or Outlook:
--Leverage sustaining above 8.0x for several consecutive quarters;
--Fixed charge coverage sustaining below 2.0x for several consecutive quarters.
--A liquidity shortfall (liquidity coverage was 2.2x for the period Jan. 1, 2011 - Dec. 31, 2012).
--If operating fundamentals relapse similar to the environment of 2009, rather than improve as currently expected.

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

Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 13, 2010;
--'Criteria for Rating U.S. Equity REITs and REOCs', March 15, 2011;
--'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.

Applicable Criteria and Related Research:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646 ]
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]
Equity Credit for Hybrids & Other Capital Securities - Amended
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]
Recovery Rating and Notching Criteria for REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]

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