NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned the following debt obligation rating to Mid-America Apartments, L.P.:
--$400 million 3.750% senior unsecured notes 'BBB'.
The notes mature in June 2024 and were priced at 98.873% of their face amount to yield 3.887%, representing a 125 basis point spread over the benchmark treasury. The notes are obligations of Mid-America Apartments, L.P. and fully and unconditionally guaranteed by Mid-America Apartment Communities, Inc. (NYSE: MAA).
The company will use net proceeds from the offering to repay borrowings under its $200 million secured credit facility with the Federal Home Loan Mortgage Corporation, all of the borrowings under its $500 million revolving credit facility and for general corporate purposes.
Fitch currently rates the company as follows:
Mid-America Apartment Communities, Inc.:
--Issuer Default Rating (IDR) 'BBB'.
Mid-America Apartments, L.P.:
--IDR at 'BBB';
--Unsecured Revolving Credit Facility 'BBB';
--Senior Unsecured Term Loans 'BBB';
--Senior Unsecured Notes 'BBB'.
The Rating Outlook is Positive.
KEY RATINGS DRIVERS
The ratings are driven by moderate leverage and strong coverage of fixed charges, combined with the Company's strong management team and long-term track record of generating above-average cash flow returns from its stabilized property portfolio.
Further, MAA's portfolio diversity and competitive position in the Sunbelt region should continue to support stable operating performance over the next few years. In addition, the completion and lease-up of development projects should further bolster the company's earnings power over the next 12 to 24 months.
Pro forma liquidity coverage improves to 1.7x through 2015 as a result of this transaction, driving a $576 million liquidity surplus (Fitch's previous analysis as of March 31, 2014 lead to 1.2x coverage and a $168 million surplus). Further, MAA's $4.2 billion unencumbered asset pool (based on a stressed 8.5% cap rate) can provide liquidity in a more challenged capital markets environment. Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources of liquidity include unrestricted cash, availability under the unsecured revolving credit facility, and projected retained cash flow from operating activities after dividends. Uses of liquidity include pro rata debt maturities, expected recurring capital expenditures, and remaining development costs.
Additionally, the company's adjusted FFO payout ratio continued to trend down to 60% for the quarter ended March 31, 2014 from the 80% range in 2008 - 2010, which allows the company to retain some operating cash flow to meet other corporate needs. Fitch expects MAA will raise the dividend per share modestly over the next 12 - 24 months in line with AFFO growth. Nonetheless, Fitch expects the AFFO payout ratio to remain in a conservative range.
STRONG COVERAGE AND LEVERAGE
Fixed charge coverage for the quarter ended March 31, 2014 was 3.3x, which is strong for the 'BBB' rating. Fixed charge coverage was 3.2x for the quarter ended Dec. 31, 2013 and 3.6x for the 12 months ended 2012. Fitch forecasts fixed charge coverage will continue to improve toward 3.8x through 2016, driven principally by lower fixed charges from retirement of higher coupon secured and senior unsecured notes. Fitch defines fixed charge coverage as recurring operating EBITDA less Fitch's estimate of recurring capital improvements divided by interest incurred and preferred stock distributions.
Similarly, MAA's net debt to recurring operating EBITDA was 6.2x at March 31, 2014 compared to 6.2x and 6.3x as of Dec. 31, 2013 quarter end and Dec. 31, 2012 year end respectively, which is one of the lowest in the multifamily sector and strong for a 'BBB' rated multifamily REIT in lower barrier to entry markets. Fitch projects that leverage will stabilize around 6.0x over the next 12 - 24 months, which is strong for the 'BBB' rating level.
FAVORABLE PROPERTY FUNDAMENTALS
MAA's same-property NOI growth was 2.6% in 1Q14, following 5.2%, 6.6% and 4.9% in 2013, 2012 and 2011, respectively. Fitch anticipates that fundamentals will remain strong but moderate for the foreseeable future due to increasing supply and a slowing growth rate in asking rents in MAA's markets. Fitch estimates SSNOI growth will moderate from the highs seen in 2012 and 2013 to more sustainable low-to-mid single digit growth of 2 - 3%. Fitch projects same-property NOI growth of 2.5% in 2014, 2% in 2015 and 2.5% in 2016. Moderating growth will be driven primarily by ample supply of apartment rentals, decreasing rental affordability and increasing attractiveness of homeownership.
LIMITED DEVELOPMENT EXPOSURE
The company maintains a modest unfunded development pipeline representing just 1.8% of total gross assets as of March 31, 2014. The company is primarily an acquirer as opposed to a developer; it has limited in-house development staff and thus contracts out development projects, which Fitch views positively, especially given MAA's markets which are prone to overbuilding. MAA also actively redevelops properties and historically has targeted yields of 10%, primarily through interior rehab. MAA completed the renovations of over 2,500 units in 2013 achieving 11% rental rate increases on average. The company is expanding the redevelopment program as a result of the Colonial merger and aims to complete redevelopment on approximately 4,000 units in 2014. The redevelopment of existing properties generally carries a lower market risk due to the proven locations, existing tenant base and provides the highest risk-adjusted returns over the longer term.
STRONG RELATIVE OPERATING PERFORMANCE
The ratings are supported by MAA's long-tenured management team, conservative acquisition and development strategy, and lower property-level cash flow volatility through real estate cycles relative to many of its multifamily peers. For 2001 - 2013, MAA's same-property NOI growth averaged 2.2% compared with 1.5% for a select group of sunbelt-focused multifamily peers, and the standard deviation of same-property NOI growth was 3.8% compared with 5.3% for these multifamily peers.
SUN BELT MARKETS ARE PRONE TO OVERBUILDING
Offsetting these ratings strengths is the company's exposure to assets in markets with limited supply constraints and barriers to entry.
MAA's properties are concentrated in the Sunbelt region, which has limited supply constraints and barriers to entry given the availability of land combined and more lenient zoning regulations. These factors have led to cycles of overbuilding in the region, negatively impacting supply / demand fundamentals. In this regard, supply constrained markets tend to outperform during periods of multifamily recoveries, as demand outpaces supply. Fitch expects that MAA's same-store NOI growth will be lower that of its peers over the next several years given that the sector continues to exhibit strong SSNOI growth nationally.
The following factors may have a positive impact on the ratings and/or Outlook:
--Demonstrated consistent access to the public unsecured bond market;
--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 6.5x (leverage was 6.2x as of March 31, 2014);
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x (coverage was 3.3x for quarter ended March 31, 2014);
--Maintenance of the ratio of unencumbered assets to net unsecured debt above 2.5x (asset coverage was 2.7x using a stressed 8.5% capitalization rate).
The following factors may have a negative impact on the ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 7.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 2.0x;
--Unencumbered assets to unsecured debt sustaining below 2.0x;
--Liquidity coverage sustaining below 1.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (May 28, 2014);
--'Rating U.S. Equity REITs and REOCs (Sector Credit Factors)' (Feb. 26, 2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis'(Dec. 23, 2013);
--'Recovery Rating and Notching Criteria for Equity REITs'(Nov. 19, 2013).
Applicable Criteria and Related Research:
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis - Effective Dec. 13, 2012 to Dec. 23, 2013
Recovery Rating and Notching Criteria for Equity REITs ￢ﾀﾓ Effective May 12, 2011 to May 3, 2012