Nov. 12 - Fitch Ratings has upgraded the following credit
ratings of BRE Properties, Inc. (NYSE: BRE):
--Issuer Default Rating (IDR) to 'BBB+' from 'BBB';
--Unsecured revolving credit facility to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB';
--Preferred stock to 'BBB-' from 'BB+'.
The upgrade reflects improvement in BRE's credit metrics to levels consistent
with a 'BBB+' rating. Leverage and fixed-charge coverage are expected to improve
further with sufficient cushion to sustain through the cycle. Moderating, yet
still notably strong operating fundamentals will continue to drive growth in
recurring operating EBITDA through 2014. The company's lack of meaningful debt
maturities through 2017, appropriate liquidity and adequate unencumbered asset
coverage of unsecured debt also support the rating.
As noted in Fitch's '2012 Midyear Outlook: U.S. REITs', Fitch expects the
positive operating environment for multifamily REITs will drive a material and
sustained improvement in credit metrics going forward. BRE's same-store net
operating income growth (SSNOI) has strengthened in 2012 to 6.3% for 3Q'12 from
4.3% for the year ended Dec. 31, 2011. Despite Fitch's expectation that
fundamentals will moderate, SSNOI growth is expected to continue in the
low-to-mid single digits through 2014.
BRE has meaningfully reduced debt on an absolute and relative basis since 2007
through raising equity, selling non-core assets and reducing development
spending. Leverage improved to 6.9 times (x) for the trailing twelve months
(TTM) ended Sept. 30, 2012 from 7.0x and 8.1x as of Dec. 31, 2011 and Dec. 31,
2010, respectively. Fitch expects BRE's leverage to decline to 6.1x in 2014
primarily through organic de-levering (EBITDA growth). Fitch notes BRE's ability
to sustain leverage metrics through the cycle. To breach 7.0x in 2015,
forecasted recurring operating EBITDA would need to decline 13% under the base
case and 8% under a slow growth scenario, in excess of the declines experienced
in 2009. Fitch defines leverage as net debt to recurring operating EBITDA.
BRE's fixed-charge coverage has improved to 2.5x for the TTM ended Sept. 30,
2012 as compared to a trough of 1.8x in 2008 and 2.2x in 2011. Fitch expects
fixed charge coverage to remain between 2.5x and 3.0x through 2014. Fitch
defines fixed charge coverage as recurring operating EBITDA less renewal and
replacement capital expenditures, divided by total interest incurred and
preferred stock dividends.
In a stress case whereby same-store NOI declines are similar to those
experienced by BRE in 2009 and 2010, leverage would surpass 7.5x in 2013 and
2014 and coverage would decline to 2.3x, which could place pressure on the
BRE has no material debt maturities until 2017 when 17.9% of total debt matures.
As a result of the long-dated debt maturity schedule and the recent $300 million
unsecured note issuance, liquidity coverage is appropriate for the rating at
2.1x for the period from Oct. 1, 2012 through Dec. 31, 2014. Fitch defines
liquidity coverage as sources (cash, availability under the unsecured revolving
credit facility and projected retained cash flows from operating activities
after dividends and distributions) divided by uses (debt maturities and
amortization, development spending and projected renewal and replacement capital
In addition, BRE maintains a strong level of unencumbered assets that provides
solid coverage of unsecured debt for the rating category. Fitch calculates that
BRE's ratio of unencumbered operating real estate to unsecured debt ranges from
2.5x to 3.1x using a range of capitalization rates from 6.5% to 8.0%.
Balancing these credit positives are the inherent volatility in multifamily
fundamentals, a relatively large development pipeline and a geographically
In recent years, BRE's SSNOI growth (year-over-year) has ranged between negative
6.4% and 6.5%. As such, metrics can deteriorate or improve rapidly. Although
BRE's portfolio operating performance has been strong on an absolute basis, it
is weak relative to its underlying markets and public peers, underperforming by
50 - 80bps and 210 - 240bps, respectively from 2008 through 2011.
BRE has traditionally focused on development as an essential component for
growth. The sizeable scale of BRE's development pipeline has historically been a
credit concern and negatively impacted the company's leverage ratios. BRE's
management intends to front-end its development activity and decrease the
pipeline's size through dispositions and contributions to joint ventures.
Unfunded costs to complete construction in progress are less than 5% of gross
assets and annual development advances of $200-$250 million can be funded
without additional sources of external capital. As such, Fitch does not view the
current pipeline as a significant concern given the positive operating
fundamentals and relatively low new project-specific sub-market supply.
The company's portfolio is geographically concentrated. California comprised 82%
of total same-store NOI year-to-date in 2012 with the San Francisco Bay Area and
San Diego accounting for 22% and 21%, respectively. Fitch notes the seismic
risks of the state and the potential for government budget dynamics to pressure
The Stable Outlook centers on Fitch's expectation that BRE's credit profile will
remain consistent with a 'BBB+' rating through the cycle, supported by solid
multifamily fundamentals and management's commitment to maintain metrics
appropriate for the 'BBB+' rating. The outlook is also supported by BRE's
demonstrated access to various sources of capital and solid liquidity profile.
The two-notch differential between BRE's IDR and its preferred stock ratings is
consistent with Fitch's criteria for corporate entities with a 'BBB+' IDR. Based
on Fitch research on 'Treatment and Notching of Hybrids in Nonfinancial
Corporate and REIT Credit Analysis' dated Dec. 15, 2011, these preferred
securities are deeply 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 term. However,
the following factors may have a positive impact on the ratings and/or Rating
--Fitch's expectation of leverage sustaining below 6.0x (leverage was 6.9x for
TTM ended Sept. 30, 2012);
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x (coverage
was 2.5x for the TTM ended Sept. 30, 2012);
--Fitch's expectation of unencumbered asset coverage of unsecured debt
sustaining above 3.0x (as of Sept. 30, 2012, UAUD was 2.7x).
The following factors may result in negative momentum on the ratings and/or
--Fitch's expectation of leverage sustaining above 7.0x;
--Fitch's expectation of fixed-charge coverage sustaining below 2.5x;
--A liquidity shortfall.
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George Hoglund, CFA
John Culver, CFA
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