Business & Finance
Mon, November 14, 2011Sun, November 13, 2011Sat, November 12, 2011Fri, November 11, 2011Thu, November 10, 2011Wed, November 9, 2011Tue, November 8, 2011Fitch Affirms Equity Residential's IDR at 'BBB+';; Outlook Stable
Published in Business and Finance on Thursday, November 10th 2011 at 7:41 GMT by Market Wire
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following ratings for Equity Residential (NYSE: EQR) and ERP Operating Limited Partnership, EQR's principal operating subsidiary (collectively EQR):
Equity Residential
--Issuer Default Rating (IDR) at 'BBB+';
--Preferred stock at 'BBB-'.
ERP Operating Limited Partnership
--IDR at 'BBB+';
--Senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
The rating affirmations are based on Fitch's expectation that EQR's near- to medium-term credit profile will be consistent with an IDR of 'BBB+'.
The ratings are supported by EQR's solid franchise, consistent cash flow coverage metrics and strong liquidity management. Franchise strength is evident in EQR's broad geographic diversification, focus on longer-term supply-constrained higher-growth markets, demonstrated access to multiple forms of capital, consistent operating strategy and an adequate level of unencumbered assets covering unsecured debt.
The company's portfolio demonstrates cash flow granularity, as each of EQR's top 10 markets generated net operating income (NOI) between 4.4% and 13.3% of 3Q 2011 stabilized net operating income (NOI). EQR's operating strategy of focusing on owning assets in supply-constrained coastal destination markets is a credit positive. These markets tend to exhibit relatively strong long-term demand, limited buildable land and high construction costs, curtailing meaningful supply growth.
The ratings are also supported by strong property-level fundamentals. EQR's same property NOI increased by 9.0% during 3Q'11 relative to 3Q'10, and Fitch anticipates that fundamentals will remain strong due to modest job growth and limited new supply in EQR's markets, a declining home ownership rate and favorable demographic trends.
For the 12 months ended Sept. 30, 2011, EQR maintained fixed charge coverage (recurring operating EBITDA less capital improvements divided by interest incurred and preferred distributions) of 2.1x, which is slightly low for a 'BBB+' IDR. Fixed charge coverage was 2.0 times (x) and 1.9x for the years ended Dec. 31, 2010 and 2009, respectively.
EQR's net debt to twelve months ended Sept. 30, 2011 recurring operating EBITDA was 7.0x, down from 8.0x and 7.8x as of Dec. 31, 2010 and 2009, respectively. This ratio is strong for the 'BBB+' rating. The company's risk-adjusted capitalization ratio was also strong for the 'BBB' rating category at 1.5x as of Sept. 30, 2011, up from 1.4x and 1.3x as of Dec. 31, 2010 and 2009, respectively.
EQR maintains an adequate level of unencumbered assets that provides strong coverage of unsecured debt for the rating category. EQR's 3Q'11 annualized unencumbered cash NOI capitalized at a 7.0% capitalization rate covered its net unsecured debt by approximately 2.6x at Sept. 30, 2011. In addition, the quality of the company's unencumbered pool is high, with many assets in strong multifamily markets.
Offsetting these rating strengths are the company's near-term debt maturities, which drives an average liquidity coverage ratio and may result in higher fixed charges due to the company refinancing lower-cost debt at higher rates.
Fitch calculates that EQR's sources of liquidity (unrestricted cash, availability under its unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (debt maturities and expected capital expenditures) results in a liquidity coverage ratio of 0.9x for the period Oct. 1, 2011 to Dec. 31, 2013. This slight liquidity deficit is due in large part to over $1.7 billion of debt maturities in 2012 and 2013, or nearly 20% of EQR's total indebtedness. Assuming EQR is able to refinance 80% of its maturing secured indebtedness, liquidity coverage improves to 1.0x.
While the company has a base case liquidity deficit due to an elevated amount of near-term debt maturities, this refinance risk is offset by the company's demonstrated strong access to multiple forms of capital.
Additionally, the financial covenants in the company's unsecured debt agreements do not limit EQR's financial flexibility.
The two-notch differential between EQR's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch Research on 'Rating Hybrid Securities,' dated July 28, 2011, available on Fitch's Web site at [ www.fitchratings.com ], these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
The Stable Outlook reflects Fitch's expectation that multifamily operating fundamentals will remain strong over the next two years. Absent further deleveraging transactions, the company's fixed charge coverage ratio should remain approximately at its current level. Fitch expects that leverage will range between 7.0x to 8.0x as the company acquires assets and increases development.
The following factors may have a positive impact on Equity Residential's ratings and/or Rating Outlook:
--Fixed charge coverage sustaining above 2.3x (for the trailing twelve months ended Sept. 30, 2011, fixed charge coverage was 2.1x);
--Net debt to recurring operating EBITDA sustaining below 7.5x (as of Sept. 30, 2011, net debt to LTM recurring operating EBITDA was 7.0x; however Fitch expects leverage will range between 7.0x and 8.0x on a long-term basis);
--Unencumbered asset coverage sustaining above 2.5x (as of Sept. 30, 2011, unencumbered asset coverage was 2.6x assuming a 7.0% capitalization rate on 3Q 2011 annualized unencumbered NOI).
The following factors may have a negative impact on Equity Residential's ratings and/or Ratings Outlook:
--Fixed charge coverage sustaining below 1.8x;
--Leverage sustaining above 8.5x;
--A liquidity coverage ratio sustaining below 1.0x (base case liquidity coverage was 0.9x as of Sept. 30, 2011).
Additional information is available at '[ www.fitchratings.com ]'. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 12, 2011);
--'Parent and Subsidiary Rating Linkage' (Aug. 12, 2011);
--'Rating Hybrid Securities' (July 28, 2011);
--'Treatment of Hybrids in Corporate and REIT Credit Analysis'(July 11, 2011);
--'Recovery Rating and Notching Criteria for Equity REITs' (May 12, 2011);
--'Criteria for Rating U.S. Equity REITs and REOCs' (March 15, 2011).
Applicable Criteria and Related Research:
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]
Parent and Subsidiary Rating Linkage
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210 ]
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647091 ]
Treatment of Hybrids in Corporate and REIT Credit Analysis
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=642132 ]
Recovery Rating and Notching Criteria for Equity REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]
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