(The following statement was released by the rating agency)
NEW YORK, April 09 (Fitch) Fitch Ratings has assigned a credit
rating of 'BBB+'
to the $300 million 3.25% senior unsecured notes due May 1, 2023
issued by Essex
Portfolio L.P., the operating partnership of Essex Property
Trust, Inc. (NYSE:
ESS). The notes were issued at 99.152% of par to yield 3.35%.
Proceeds will be
used to repay balances under ESS' unsecured credit facilities
and for general
Fitch currently rates Essex as follows:
Essex Property Trust, Inc.
--Issuer Default Rating (IDR) 'BBB+';
--Preferred stock 'BBB-'.
Essex Portfolio L.P.
--Unsecured revolving credit facility 'BBB+';
--Senior unsecured term loans 'BBB+';
--Senior unsecured notes 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings are supported by ESS' strong coverage of fixed
projected leverage level, solid liquidity and adequate
coverage of unsecured debt. Further supporting the ratings are
solid management team and long-term track record as astute
operators and capital
allocators in the multifamily sector.
ESS' ratings are also supported by its strategy of owning assets
constrained, high barrier to entry, West Coast markets. These
markets tend to
have high population density, proximity to solid job growth
markets, and high
cost of for-sale single-family housing, improving demand drivers
Offsetting these positive attributes are a geographically
and a large development pipeline.
STRONG FIXED-CHARGE COVERAGE
For the trailing 12 months (TTM) ended Dec. 31, 2012,
fixed-charge coverage was
3.0x, which is appropriate for the 'BBB+' rating level, and is
remain approximately 3.0x through 2014. Fixed-charge coverage
was 2.5x and 2.4x
for the years ended Dec. 31, 2011 and 2010, respectively. Fitch
fixed-charge coverage as recurring operating EBITDA including
of recurring distributions from unconsolidated joint ventures,
estimate of recurring capital improvements divided by total
and preferred stock distributions.
ESS' net debt to annualized 4Q'12 recurring operating EBITDA was
7.1x, which is
high for the current rating. However Fitch projects that
leverage will stabilize
in the mid-low 6.0x range through 2014, which is consistent with
rating. Leverage was 7.7x and 8.3x as of Dec. 31, 2011, and 2010
SOLID LIQUIDITY AND ADEQUATE UNENCUMBERED ASSET COVERAGE
ESS has a manageable debt maturity schedule with only 5.4% of
(including pro rata share of JV debt) maturing from Jan. 1, 2013
31, 2014. Additionally, ESS has a liquidity coverage ratio of
1.4x through 2014
(assuming that $150 million of the proceeds from the notes
offering is used to
fund acquisitions). Fitch defines liquidity coverage as sources
(unrestricted cash, availability under ESS' unsecured revolving
and expected retained cash flows from operating activities after
distributions) divided by uses of liquidity (pro rata share of
remaining development / redevelopment expenditures and expected
Further supporting the ratings is an adequate ratio of
unencumbered assets to
unsecured debt. Based on applying a stressed 7.5% capitalization
annualized 4Q'12 unencumbered net operating income (NOI), ESS'
assets covered unsecured debt by 2.2x. The unencumbered pool is
growing as the
company replaces maturing secured debt with unsecured debt and
acquisitions and development with equity and unsecured debt,
which Fitch views
SOLID MULTIFAMILY FUNDAMENTALS
The ratings are further supported by strong multifamily
fundamentals in ESS'
markets. ESS' same-property NOI (SSNOI) increased by 9.2% in
2012, following a
5.5% increase in 2011. Fitch anticipates that fundamentals will
due to moderate job growth, moderate new supply, and a high cost
single-family housing in ESS' markets, which will drive SSNOI
growth in the
mid-single digit range through 2014. ESS has outperformed a
Property and Portfolio Research index over the long term.
The ratings also point to the strength of ESS' long-tenured
including senior officers and property and leasing managers.
Offsetting these credit strengths are the company's
portfolio, and large development pipeline.
The company is geographically concentrated in three primary
California (45.4% of NOI), San Francisco Bay Area (34.4%), and
metropolitan area (17.5%). As such, the company is more heavily
fluctuations in only a few markets. Fitch rates California GO
bonds 'A-' with a
Positive Outlook; however, Fitch notes the seismic risks of the
The company maintains an active development pipeline with
remaining costs to
complete the pipeline of $286 million (pro rata for ESS'
ownership percentage of
joint ventures where the majority of the projects reside).
represents 4.8% of gross assets as of Dec. 31, 2012, compared
with 3% and 1.2%
as of Dec. 31, 2011 and 2010, respectively. Should demand
decrease in Essex's
markets prior to completion, these projects could serve as a
drag on cash flows
due to longer than projected lease-up at less favorable rental
The Stable Outlook is driven by Fitch's expectation that
fundamentals in ESS' markets, combined with Fitch's expectations
leverage and stable coverage, will support credit metrics that
with the rating.
PREFERRED STOCK NOTCHING
The two-notch differential between ESS' IDR and preferred stock
consistent with Fitch's criteria for corporate entities with a
'BBB+' IDR. Based
on Fitch research on 'Treatment and Notching of Hybrids in
Corporate and REIT Credit Analysis', these preferred securities
subordinated and have loss absorption elements that would likely
result in poor
recoveries in the event of a corporate default.
Fitch does not anticipate positive rating momentum in the near
the following factors may have a positive impact on the ratings
--Fitch's expectation of net debt to recurring operating EBITDA
6.0x (as of Dec. 31, 2012 leverage was 7.1x based on annualized
--Fitch's expectation of fixed-charge coverage sustaining above
(fixed-charge coverage was 3.0x in 2012);
--Fitch's expectation of unencumbered asset coverage of
sustaining above 3.0x (this ratio was 2.2x at Dec. 31, 2012).
The following factors may have a negative impact on the ratings
--Fitch's expectation of leverage sustaining above 7.0x;
--Fitch's expectation of fixed-charge coverage sustaining below
--A liquidity shortfall.
George Hoglund, CFA
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278,
Additional information is available at 'www.fitchratings.com'.
The ratings above
were solicited by, or on behalf of, the issuer, and therefore,
Fitch has been
compensated for the provision of the ratings.
Applicable Criteria and Related Research:
--'Fitch Affirms California's GO Rating at 'A-'; Outlook
Positive (April 2,
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26,
--'Treatment and Notching of Hybrids in Nonfinancial Corporates
and REIT Credit
Analysis' (Dec. 13, 2012);
--'Recovery Rating and Notching Criteria for REITs' (Nov. 12,
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012).
Applicable Criteria and Related Research
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
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