NEW YORK--()--Fitch Ratings assigns a credit rating of 'BBB+' to the $350 million aggregate principal amount 2.95% senior unsecured notes due 2022 issued by Camden Property Trust (NYSE: CPT, Camden). The notes were issued at a spread of 147 basis points over the benchmark rate and priced at 98.945% of par to yield 3.073%.
Camden expects to use the net proceeds of approximately $343.7 million to repay the outstanding balance on its unsecured line of credit, and the remainder for general corporate purposes, which may include property acquisitions and development in the ordinary course of business, capital expenditures and working capital.
Fitch currently rates Camden Property Trust as follows:
--Issuer Default Rating (IDR) 'BBB+';
--$500 million unsecured revolving credit facility 'BBB+';
--$1.7 billion senior unsecured notes 'BBB+'.
The Rating Outlook is Stable.
The 'BBB+' IDR reflects Camden's fixed-charge coverage ratio that Fitch expects will continue to benefit from favorable multifamily property fundamentals, appropriate leverage for the 'BBB+' rating, management's solid stewardship of the portfolio, and a mostly unencumbered asset base that provides financial flexibility as well as value to bondholders as evidenced by robust unencumbered asset coverage. Credit concerns include a large development pipeline that adversely impacts liquidity and CPT's presence in markets that are performing well but have shown higher volatility and lower sustained same-property performance than peers' average through the cycle.
Fixed-charge coverage is appropriate for the 'BBB+' rating and was 3.1x in third quarter 2012 (3Q'12) and 2.9x for the trailing 12 months ended Sept. 30, 2012, compared with 2.4x in 2011 and 2.1x in 2010. Pro forma for the bond offering, 3Q'12 annualized fixed-charge coverage is 2.9x. Improvements stem primarily from occupancy gains and positive leasing spreads in almost all of Camden's markets, which are primarily in the Sunbelt, and lower fixed charges. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures divided by total interest incurred and preferred unit distributions.
Positive demand drivers include an increase in Camden's average household renter income to $72,877 in 3Q'12 from $66,044 in 3Q'11, coupled with low move-outs related to home purchases. Same-property net operating income (NOI) increased by 10.7% in 3Q'12, compared with 7.1% in 2011 and negative 3.5% in 2010. During 3Q'12, the top performing markets as measured by SSNOI growth were Charlotte at 23.7%, Phoenix at 16.2% and Dallas and Houston, both at 15.7%. Even less robust markets remained positive in 3Q'12, including Las Vegas at 3.2%, San Diego/Inland Empire at 4.8% and Washington D.C. Metro at 7.3%.
Fitch anticipates that high single-digit same-property NOI growth in 2012 followed by moderating same-property NOI growth over the next 12-to-24 months along with incremental earnings from development will result in fixed-charge coverage sustaining in the 3.0x to 3.5x range, which would be strong for a 'BBB+' rating. In a stress case not anticipated by Fitch in which Camden repeats its same-property NOI declining performance of 2009-2010 over the next 12-to-24 months, coverage would remain between 2.5x and 3.0x, which would remain appropriate for a 'BBB+' rating.
Growth in portfolio-level cash flow, the company's $392 million follow-on common stock offering in January 2012, and at-the-market common stock offering programs used to fund acquisitions and development have reduced leverage. Net debt to 3Q'12 annualized recurring operating EBITDA was 5.5x, compared with 5.9x for the trailing 12 months ended Sept. 30, 2012, 6.7x in 2011 and 7.2x in 2010.
Fitch anticipates that leverage will approach 5.0x over the next 12-to-24 months due to improving fundamentals and continued access to common stock market to meet funding obligations. In a stress case not anticipated by Fitch in which Camden repeats its same-property NOI declining performance of 2009-2010 over the next 12-to-24 months, leverage would sustain above 6.0x, which would be more consistent with a 'BBB' rating.
Camden's management team continues to improve the quality of the
portfolio. The company's revised fourth quarter 2012 guidance assumes
$270 million in new on-balance sheet development starts in 4Q'12 and the
disposition of $300 million of older properties to push down the average
age of the portfolio. Fitch views this portfolio repositioning
positively, as the company is taking
advantage of low multifamily capitalization rates to improve overall portfolio quality.
A large unencumbered asset base further supports the 'BBB+' rating. Unencumbered assets (calculated as 3Q'12 annualized unencumbered NOI divided by a stressed capitalization rate of 7.5%) covered unsecured debt by 3.4x. The rating contemplates that Camden will continue to be a predominantly unsecured borrower but have the flexibility to encumber the portfolio if market conditions warrant. In addition, the covenants under the company's bond indenture and revolving credit facility agreement do not restrict financial flexibility.
The company's development pipeline is a growth vehicle that negatively impacts liquidity. As of Sept. 30, 2012, development including projected total costs represented 6.9% of gross asset value (GAV), up from 4.4% as of Dec. 31, 2010 and 3.7% as of Dec. 31, 2009. However, current development remains well below peak levels of the last upcycle (11.4% as of Dec. 31, 2005 and 11% as of Dec. 31, 2006). Projected cost to complete was 2.7% of GAV as of Sept. 30, 2012, compared with 3% as of Dec. 31, 2011 and 0.9% as of Dec. 31, 2010.
For the period Oct. 1, 2012 through Dec. 31, 2014, base case liquidity coverage pro forma for the bond offering is 1.3x assuming no additional capital raises. Camden has a manageable debt maturity schedule with no more than 10.8% of debt due in any given year over the next five years. As evidenced by the bond offering, the company has demonstrated good capital markets access, mitigating refinance risk.
Camden's portfolio is performing well -- particularly in recent quarters -- but has shown higher volatility and lower sustained same-property performance than selected multifamily REIT peers through the cycle. From 2002 to 2011, Camden's average same-store NOI growth was approximately 60 basis points below peers, and during a more volatile cycle of 2007 to 2011, Camden's average same-store NOI growth was approximately 150 basis points below peers. Furthermore, Camden's results were achieved with more same-store NOI volatility.
The Stable Outlook reflects Fitch's view that fixed-charge coverage will sustain in the 3.0x to 3.5x range, leverage will approach 5.0x over the next 12-to-24 months, and the portfolio will remain predominantly unencumbered.
The following factors may result in positive momentum in the ratings
and/or Rating Outlook:
--Fitch's expectation of fixed-charge coverage ratio sustaining above 3.5x (3Q'12 pro forma fixed-charge coverage was 2.9x);
--Fitch's expectation of leverage sustaining below 5.0x (3Q'12 pro forma leverage was 5.5x);
--Geographical diversification across the multifamily portfolio into markets with more same-store NOI growth stability.
The following factors may result in negative momentum on the ratings
and/or Rating Outlook:
--Fitch's expectation of development including projected total costs sustaining above 10% of gross asset value (this metric was 6.9% as of Sept. 30, 2012);
--The funding of development primarily via debt incurrence, which is not Fitch's current
--Fitch's expectation of fixed-charge coverage ratio sustaining below 2.5x;
--Fitch's expectation of leverage sustaining above 6.0x;
--Fitch's expectation of liquidity coverage sustaining below 1.0x.
Additional information is available on www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Criteria for Rating U.S. Equity REITs and REOCs