Fitch Affirms Camden Property Trust's IDR at 'BBB+'; Outlook Stable
NEW YORK -- July 16, 2013
Fitch Ratings has affirmed the credit ratings of Camden Property Trust (NYSE:
CPT) as follows:
-- Issuer Default Rating (IDR) at 'BBB+';
-- $500 million unsecured revolving credit facility at 'BBB+';
-- $1.5 billion senior unsecured notes at 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation of Camden's IDR at 'BBB+' takes into account credit strengths
including favorable property fundamentals across the multifamily portfolio,
which are expected to contribute to strong fixed-charge coverage for the
rating. The company also has appropriate leverage for the rating, an
experienced management team, and good financial flexibility as evidenced by
solid unencumbered asset coverage, minimal near-term debt maturities and
moderate retained operating cash flow.
These credit strengths are balanced by a sizeable development pipeline that is
a growth driver for the company but tempers liquidity coverage. In addition,
Camden's ownership concentration in high population growth Sunbelt markets has
led to operational volatility when compared with multifamily peers due to
fewer supply constraints; however, Camden has outperformed its peers on
average through recent cycles.
Job growth in Camden's markets has supported strong occupancy rates and
pricing flexibility, resulting in same-store net operating income (SSNOI) of
8.5% for the trailing 12 months (TTM) ended March 31, 2013. Total SSNOI grew
by 6.7% in the first quarter of 2013 (1Q'13) following 9.2% increase in 2012
and 7.1% growth in 2011.
Fixed-charge coverage is strong for the 'BBB+' rating at 3.2x for the TTM
ended March 31, 2013, up from 3.0x in 2012 and 2.4x in 2011. Strong
fundamentals, lower borrowing costs and equity issuance drove the improvement.
Fitch defines fixed-charge coverage as recurring operating EBITDA less
recurring capital expenditures divided by total interest incurred.
Job growth in Camden's top markets from industries such as energy is leading
to sustained increases in demand. Decreasing rent-to-income ratios (17.7% in
1Q'13 compared with 18% in 1Q'12), partly due to rising household income
($75,752 in 1Q'13 compared with $70,435 in 1Q'12), and moderate new supply
support Fitch's outlook for further rent and SSNOI increases.
Fitch's base case projections contemplate 4% to 6% SSNOI over the next several
years resulting in fixed-charge coverage in the 3.7x-3.8x range. Under a
stress case not anticipated by Fitch in which SSNOI declines by levels
experienced in 2009-2010, fixed-charge coverage would remain in the low 3x
range, which is appropriate for a multifamily REIT rated 'BBB+'.
APPROPRIATE LEVERAGE FOR RATING
Net debt as of March 31, 2013 to TTM recurring operating EBITDA was 5.6x,
compared with 5.9x in 2012 and 6.7x in 2011. The company's $391.6 million
common stock offering in January 2012 and at-the-market common stock offering
programs helped fund acquisitions and development while reducing leverage.
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 and
unsecured bond markets to meet funding obligations. In a stress case not
anticipated by Fitch in which Camden repeats its performance of 2009-2010 over
the next 12-to-24 months, leverage would approach 6.0x, which would be weak
for a multifamily REIT rated 'BBB+'.
EXPERIENCED MANAGEMENT TEAM
Camden's management team continues to improve the quality of the portfolio via
the sale of older assets and through ground-up development. Fitch views
management's focus on asset quality as a key differentiator between Camden and
other Sunbelt and mid-Atlantic-centric apartment owners. Senior management's
tenure with the company is also a key differentiator between Camden and its
STRONG FINANCIAL FLEXIBILITY
The company's unencumbered assets (1Q'13 annualized unencumbered NOI divided
by a stressed capitalization rate of 7.5%) covered net unsecured debt by 3.3x,
which is strong for the 'BBB+' rating. Unencumbered NOI comprised 74.7% of
total 1Q'13 NOI. The rating contemplates that Camden will continue to be a
predominantly unsecured borrower but has the flexibility to encumber the
portfolio if market conditions warrant.
Debt maturities are laddered over the next several years, with 8.1% of debt
maturing in 2013 followed by 1.4% in 2014 and 10.1% in 2015. Full availability
under its $500 million unsecured credit facility net of letters of credit
outstanding provides ample capacity for Camden to address near-term
Camden's adjusted funds from operations (AFFO) payout ratio was 65.9% in
1Q'13, down from 75.5% in 2012 and 99% in 2011. The current AFFO payout ratio
indicates good internally-generated liquidity. In addition, the covenants
under the company's bond indenture and revolving credit facility agreement do
not restrict financial flexibility.
LARGE DEVELOPMENT PIPELINE
The company's development pipeline is a growth vehicle that negatively impacts
liquidity. As of March 31, 2013, cost-to-complete development represented 4.8%
of gross asset value, down slightly from 5.2% as of Dec. 31, 2012. Current
cost-to-complete as a percentage of gross asset value is slightly above levels
of the last upcycle (4.3% as of Dec. 31, 2005 and 4% as of Dec. 31, 2006).
For April 1, 2013 through Dec. 31, 2014, base case liquidity coverage assuming
no additional capital raises is 1.1x when including development costs as a
liquidity use. Fitch defines liquidity coverage as liquidity sources divided
by uses. Liquidity sources include cash, availability under the company's
unsecured revolving credit facility, projected retained cash flows from
operating activities after dividends. Liquidity uses include pro rata debt
maturities and projected recurring capital expenditures.
In 1Q'13, the company's top five markets were D.C. Metro (16.7% of pro rata
NOI), Houston (10.7%), Tampa (7.4%), Dallas (7%), and Las Vegas (6.8%). SSNOI
was positive in all of Camden's markets in 1Q'13, with the top three markets
being Atlanta (+15.9%) Charlotte (+15.5%), and Houston (+14.1%). The bottom
three markets were Las Vegas (+0.3%), San Diego/Inland Empire (+1.4%), and
Camden's portfolio is performing well (6.7% SSNOI in 1Q2013 compared with the
peer average of 5.9%) and has outperformed peers since 2011. For 2003-2012,
Camden averaged SSNOI growth of 2.5% compared with the peer average SSNOI of
Camden has shown more SSNOI volatility than peers during the trailing 10-year
period. Fitch attributes this to strong performance subsequent to the Summit
acquisition in 2005 as well as weaker performance than peers in 2009, stemming
from fewer supply constraints resulting in above-average development activity
in the previous up-cycle. However, rents have recovered relative to
recessionary lows in each of Camden's markets except for Las Vegas and Fitch
has a favorable outlook for most of Camden's markets. Nevertheless, the
company's portfolio overweight in the D.C. metro is a credit concern given
weakening demand and elevated levels of new supply.
The Stable Outlook reflects Fitch's view that fixed-charge coverage will be
strong for the rating in the mid-3x range, leverage will approach 5x over the
next 12-to-24 months and company will continue its active development
pipeline, starting between $250 million and $400 million annually.
The following factors may result in positive momentum on the ratings and/or
-- Fitch's expectation of fixed-charge coverage sustaining above 3.5x (TTM
fixed-charge coverage was 3.2x);
-- Fitch's expectation of leverage sustaining below 5.0x (as of March 31,
2013, leverage was 5.6x);
-- More geographical diversification across the multifamily portfolio into
markets with growth stability.
The following factors may result in negative momentum on the ratings and/or
-- Fitch's expectation of cost-to-complete development sustaining above 10% of
gross asset value (this metric was 4.8% as of March 31, 2013);
-- The funding of development primarily via debt incurrence, which is not
Fitch's current expectation;
-- 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 at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
-- Criteria for Rating U.S. Equity REITs and REOCs (Feb. 26, 2013);
-- Recovery Ratings and Notching Criteria for Equity REITs (Nov. 12, 2012);
-- Corporate Rating Methodology (Aug. 8, 2012).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
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