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Fitch Affirms Mid-America Apartment Communities' IDR at 'BBB'; Revises Outlook to Positive
June 2, 2014 / 2:31 PM / 3 years ago

Fitch Affirms Mid-America Apartment Communities' IDR at 'BBB'; Revises Outlook to Positive

(The following statement was released by the rating agency) NEW YORK, June 02 (Fitch) Fitch Ratings has affirmed the following ratings for Mid-America Apartment Communities, Inc. and its operating partnership, Mid-America Apartments, L.P. (collectively MAA, or the company), as follows: Mid-America Apartment Communities, Inc.: --Issuer Default Rating (IDR) at 'BBB'. Mid-America Apartments, L.P.: --IDR at 'BBB'; --Unsecured Revolving Credit Facility at 'BBB'; --Senior Unsecured Term Loans at 'BBB'; --Senior Unsecured Notes at 'BBB'. The Rating Outlook has been revised to Positive from Stable. KEY RATINGS DRIVERS The affirmation of MAA's IDR at 'BBB' is 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. OUTLOOK REVISED TO POSITIVE FROM STABLE The Outlook revision to Positive from Stable reflects the improving overall credit risk profile and Fitch's expectation that management will manage the balance sheet to maintain credit metrics appropriate for 'BBB+' through-the-cycle driven in large part by the lower volatility of operating results on a relative, historical basis. 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. 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. TRANSITION TO BECOMING UNSECURED ISSUER LARGELY COMPLETE During 2013, the company continued the transition to an unsecured borrowing model by completing an inaugural $350 million public unsecured bond issuance in October 2013. The transition was accelerated through the merger with Colonial Properties Trust wherein MAA assumed $452 million of senior unsecured notes. Post-merger, secured debt represented 52% of total debt as of March 31, 2014 compared to 71% at Dec. 31, 2012. Fitch views this transition positively, as it diversifies sources of capital and increases financial flexibility by broadening the company's unencumbered asset pool. SLIGHTLY ELEVATED DEBT MATURITIES & ADEQUATE LIQUIDITY Near-term maturities are slightly elevated with $784.4 million or 22.6% of debt coming due through 2015 and another $680.6 million due by 2017. An additional $434.4 million of debt matures in 2018 or 12.5% of total debt. Fitch calculates that MAA's sources of liquidity (unrestricted cash, available draw capacity under its unsecured credit facilities, expected retained cash flows from operating activities after dividend distributions) exceed uses of liquidity (pro rata share of debt maturities, expected development and recurring capital expenditures) by $178 million from April 1, 2014 to Dec. 31, 2015, resulting in a liquidity coverage ratio of 1.2x. Assuming 80% of secured debt is refinanced, there would be a liquidity surplus of $495 million resulting in a liquidity coverage ratio of 1.9x, though Fitch views this scenario as less likely given the company's preference to continue reducing secured debt borrowings. 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 to 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. FAVORABLE PROPERTY FUNDAMENTALS MAA's same-property NOI growth was 5.2% in 2013, following 6.6% and 4.9% in 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. RATING SENSITIVITIES 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. Contact: Primary Analyst Boris Alishayev Associate Director +1-212-612-7880 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Britton Costa Director +1-212-908-0524 Committee Chairperson Robert Curran Managing Director +1-212-908-0515 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available at ''. 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 here Criteria for Rating U.S. Equity REITs and REOCs here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis here Recovery Ratings and Notching Criteria for Equity REITs here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.

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