Fitch Revises Camden Property Trust's Outlook to Positive; Affirms IDR at 'BBB+'
NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the credit ratings for Camden Property Trust (NYSE: CPT or Camden) as follows:
--Issuer Default Rating (IDR) at 'BBB+';
--$500 million unsecured revolving credit facility at 'BBB+';
--$1.6 billion senior unsecured notes at 'BBB+'.
The Rating Outlook has been revised to Positive from Stable.
KEY RATING DRIVERS
The Positive Outlook reflects leverage that is approaching levels appropriate for the 'A-' level, along with excellent unencumbered asset coverage of unsecured debt. Other credit strengths are Camden's management team's commitment to maintaining strong credit metrics and the company's proven access to capital. In addition, job growth in many of Camden's markets should support increases in rental rates and EBITDA (though growth is slowing relative to the 2011-2013 period), and fixed-charge coverage is expected to sustain at levels consistent with an 'A-' rating.
Camden targets Sunbelt and mid-Atlantic markets with features such as economic growth that lead to household formation and job growth, an attractive quality of life, and/or high single family home prices making the company's apartments an economical housing choice. Camden's same-store NOI growth through the cycle has been in line with other apartment REITs, a testament to strong asset quality despite lower barriers to new supply compared with more coastal-focused multifamily REITs. Credit concerns center on the development pipeline (cost-to-complete is the highest of the multifamily REITs), which improves asset quality but adversely impacts corporate liquidity.
Camden's leverage was 5.5x for the trailing 12 months ended March 31, 2014, which is the lowest of Fitch rated multifamily REITs. Fitch projects that Camden's leverage will be in the low 5x range over the next 12-to-24 months due to same-store NOI growth and incremental EBITDA from new developments. This is expected to be strong for the 'BBB+' rating for a multifamily REIT in Sunbelt markets. In a stress case not anticipated by Fitch in which the company experiences same-store NOI declines that occurred during 2009-2010, leverage would approach the mid-6x range, which would be appropriate for a 'BBB+' rating.
The company has consistently sold assets and/or issued equity to improve and maintain leverage since 2009 and targets 5x debt to EBITDA. In addition, Camden has the lowest leverage as a percentage of asset value among multifamily REITs even when adjusting for a slightly above-average capitalization rate used to value its portfolio.
Excellent Unencumbered Asset Coverage
The company has primarily utilized the unsecured bond market for debt financing except during periods of capital market dislocation. Unencumbered assets (1Q2014 unencumbered property NOI divided by a stressed 7.5% capitalization rate) covered unsecured debt by 3.2x at March 31, 2014, which is strong for the 'BBB+' rating and indicates strong financial flexibility. This metric has been above 3.0x since 2012. In addition, CPT's unencumbered debt yield was 23.8% as of March 31, 2014, well above its 14.3% secured debt yield, indicating that the company has lower corporate leverage than total enterprise leverage and thus strong financial flexibility from its unencumbered pool.
Strong Management Team Focused on Credit
Richard Campo (Camden's Chairman of the Board of Trust Managers and Chief Executive Officer) and Keith Oden (Camden's President and Trust Manager) co-founded Camden's predecessor companies in 1982 and have steered the company through multifamily and capital markets cycles. The Board incorporates various metrics in management compensation, looking at the enterprise holistically; performance metrics relate to equity returns (adjusted funds from operations per share and growth as well as total shareholder return), asset performance (SSNOI growth), leverage (notably debt to EBITDA in the top third of Camden's peer group), asset quality (development, acquisitions and dispositions) and culture.
Proven Access to Capital
The company has issued $1.4 billion of unsecured bonds since 2006, most recently a $250 million 4.25% 10-year offering in December 2013 priced to yield 4.272% to maturity or 150 basis points (bps) over the benchmark rate. Camden has issued $1.5 billion of common stock since 2006, including follow-on offerings in May 2009 and January 2012 as well as via at-the-market offering programs, at a weighted average discount to net asset value of 1.1%, indicating a willingness to defend the balance sheet in periods of high leverage.
Job Growth Supports Cash Flow and Fixed-Charge Coverage
Job growth in the energy sector particularly is supporting cash flow growth. Houston (12.6% of pro rata NOI) employment growth has been strong, as the metro added roughly three jobs for every one lost in the recession. ExxonMobil is relocating employees from Ohio and Virginia to the Houston metro in 2015. Tampa (6.8% of pro rata NOI) has employment growth driven by back office accounting and call center operations, while Dallas (6.7% of pro rata NOI) has experienced the largest nominal number of job gains in any U.S. metro over the past year due to population growth twice the U.S. average, according to CoStar. The Washington D.C. metro (15.9% of Camden's pro rata NOI) has an economy that is driven by the government sector, but the largest industry in D.C. is actually professional, scientific, and technical services, according to CoStar.
Camden's portfolio rent rollover rate was 2.1% on new leases and 6.7% on renewals on average for the trailing 12 months ended March 31, 2014, the primary component of 6.2% average same-store NOI growth, as occupancy has remained between 95% and 96% (95.6% as of March 31, 2014).
Fixed charge coverage was 3.6x for the trailing 12 months ended March 31, 2014, up from 3.5x in 2013 and 3.0x in 2012. Fitch projects that fixed charge coverage will remain between 3.5x and 4.0x over the next 12-to-24 months due to organic and development driven EBITDA growth, which is strong for the 'BBB+' level for a multifamily REIT. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures divided by total interest incurred. In a stress case not anticipated by Fitch in which the company experiences same-store NOI declines that occurred during 2009-2010, fixed-charge coverage would remain above 3.0x which would be adequate for a 'BBB+' rating.
Fitch expects Camden's same-store NOI growth to average approximately 3.5% through 2016. The company's same-store NOI growth averaged 3.1% from 2004 through 1Q2014, in line with multifamily peers (3.3%), with slightly higher volatility (standard deviation of 5.1% compared with the peer average of 4%). Fitch attributes this to strong performance subsequent to the Summit acquisition in 2005 as well as weaker performance than peers in 2009. Above average development activity in the previous upcycle led to a decline in single family and multifamily housing fundamentals during the recession. Stronger job growth over the next 12-to-24 months in Camden's markets should lead to more cushion on credit metrics through the cycle.
Large Development Pipeline
As of March 31, 2014, the company's cost-to-complete development was moderately elevated at 7.2% of gross assets, representing a commitment of $533.2 million across 14 projects. Development is a core tenet of Camden's business that generally enhances portfolio asset quality but can pressure its corporate liquidity.
Fitch estimates the company's liquidity coverage ratio at 0.8x for the period April 1, 2014 to Dec. 31, 2015. Fitch defines liquidity coverage as liquidity sources divided by liquidity uses. Liquidity sources include readily available cash, availability under the company's $500 million unsecured revolving credit facility and projected retained cash flow from operating activities. Liquidity uses include pro rata debt maturities, projected recurring capital expenditures and projected development expenditures. Fitch expects that the company will access the unsecured bond market and also use proceeds from asset sales and retained cash to fund development and acquisitions.
The company's AFFO payout ratio was 65.7% in 1Q2014, down from 73% in 2013 and 75.5% in 2012. Based on the current payout ratio, Fitch projects the company will retain nearly $120 million annually in organic cash flow, bolstering its liquidity profile.
The Positive Outlook centers on Fitch's expectation that Camden's leverage is approaching the low 5x range, which is a level appropriate for the 'A-' rating. The Positive Outlook also incorporates Fitch's projections of unencumbered asset coverage in excess of 3x, and fixed-charge coverage in the high 3x range. However, development continues to negatively impact liquidity coverage.
The following factors may result in an upgrade to 'A-':
--Fitch's expectation of leverage sustaining below 5.25x, which would provide cushion through the cycle at the 'A-' level (leverage was 5.5x as of March 31, 2014);
--Fitch's expectation of fixed-charge coverage sustaining above 3.5x (fixed-charge coverage was 3.6x for TTM ended March 31, 2014).
The following factors may result in negative momentum on the ratings and/or Rating Outlook:
--Fitch's expectation of cost-to-complete development sustaining above 10% of gross asset value (this metric was 7.2% as of March 31, 2014);
--The funding of development primarily via debt incurrence, which is not Fitch's current expectation;
--Fitch's expectation of leverage sustaining above 6.0x;
--Fitch's expectation of fixed-charge coverage ratio sustaining below 2.5x;
--Fitch's expectation of 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);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 19, 2013).
Applicable Criteria and Related Research:
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage