Fitch Upgrades Camden Property Trust to 'A-'; Outlook Stable

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has upgraded the ratings of Camden Property Trust (CPT), including the Issuer Default Rating (IDR), to 'A-' from 'BBB+'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.

KEY RATING DRIVERS

CPT's 'A-' IDR reflects the issuer's appropriately low leverage for the rating and Fitch's expectation that the issuer has the willingness and capacity to maintain it through-the-cycle. Fitch views CPT as having strong access to capital, although not necessarily the market leading access typically associated with other 'A' category REITs. This relative difference is mitigated in part by the government-sponsored enterprise's multifamily platforms that limit consequences of differences in access to unsecured debt capital.

LOWEST LEVERAGE WITH CAPACITY TO SUSTAIN

CPT's 'A-' IDR is predicated on the expectation that the issuer will operate with leverage between 4.5x - 5.5x through-the-cycle. CPT's focus on markets with lower physical and zoning barriers to entry and therefore more volatile operating cashflows relative to peers necessitate operating with lower leverage. While CPT's leverage is typically one of the lowest for multifamily REITs, Fitch recognizes that this is influenced by CPT acquiring and developing in higher-cap rate markets.

Fitch projects leverage will sustain around 5x through 2018 assuming positive but decelerating operating fundamentals (3.5% and 2% SSNOI growth in 2017 and 2018, respectively) and development spending will continue at current levels. Should operating fundamentals be stronger than Fitch's expectations or development spending be less, leverage could be closer to 4.5x. Either level should provide a sufficient cushion to sustain through a downturn similar to the financial crisis. These levels compare to the 6.4x - 7.3x levels in 2009 - 2011 and slightly better than the 5x-5.5x range that the issuer has operated in since 2013.

Camden's significant disposition activity in 2016 ($840 million through the 2Q16 earnings call with guidance for another $310 million in 2H16) has improved leverage beyond Fitch's prior expectations even after the payment of a special dividend. Camden's preference to be a net seller and not redeploy the proceeds signals the issuer's conservatism later in the multifamily cycle which is more telling than the incremental reduction in leverage.

Fitch projects fixed-charge coverage (FCC) will sustain in the low-4x range through 2018 as compared to 3.7x, 4x and 4.2x for 2014, 2015 and 2Q16, respectively. Fitch places less emphasis on recent improvements in REIT FCC given the low interest rate environment. Fitch defines leverage as debt less readily available cash-to-recurring operating EBITDA. Fitch defines FCC as recurring operating EBITDA less maintenance capital expenditures-to-total interest incurred.

STRONG LIQUIDITY STEMMING FROM DISPOSITIONS

CPT has a liquidity coverage ratio of 1.6x for the period July 1, 2016 through Dec. 31, 2017 pro forma for the completed asset sales and amounts held for 1031 exchanges and a special dividend. CPT's debt maturities are generally well-staggered through the rating horizon. CPT's liquidity is further supported by its low dividend payout ratio (70%-75% over the past four years) and the size of its unencumbered pool. Unencumbered assets cover unsecured debt by 2.9x assuming a stressed 8.5% cap rate.

Fitch calculates liquidity as sources (unrestricted cash, availability under the $600 million unsecured revolving credit facility due 2019 and an estimated $135 million of retained cash flow from operations per year) to uses (debt maturities, development expenditures and recurring maintenance capital expenditures).

SUN BELT AND DEVELOPMENT FOCUS

Camden targets Sunbelt and mid-Atlantic markets which benefit from migration and job growth but also face lower physical and zoning barriers to entry. Camden's same-store net operating income has grown on average by 2.5% per year compared to the sector's 2.8% average, albeit with higher volatility as measured by standard deviation (4.9% to 4.5%).

Development is a core tenet of Camden's business that generally enhances portfolio quality and competitiveness but can pressure corporate liquidity and leverage. While unfunded development costs comprise only 2.4% of gross assets at June 30, 2016, Camden has demonstrated a willingness to operate with larger pipelines (e.g. 10.6% in 2006 and 7.8% in 2014).

STABLE OUTLOOK

The Stable Outlook reflects Fitch's expectation that operating fundamentals will remain positive but decelerate and that the issuer will not materially alter its investing activity to drive metrics beyond its financial policies.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for CPT include:

--Operating fundamentals will remain positive but moderate towards historic averages while maintaining operating margins;

--Fitch assumes CPT will be a net seller in 2016 with $1.2 billion of dispositions;

--Fitch assumes CPT will complete its current development pipeline and incur $300 million per year on average of development expenditures. Fitch assumes developments will stabilize at a 6% yield;

--Fitch has assumed CPT will not access to the equity markets but will issue senior unsecured notes in 2017 and 2018 to refinance maturing mortgages.

RATING SENSITIVITIES

Fitch views positive momentum in the ratings and/or Outlook as unlikely absent CPT demonstrating market-leading capital markets access across the broader REIT universe while maintaining or improving its metrics and financial policies.

The following factors could result in negative momentum on the ratings and/or Outlook:

--A material change to the countercyclical liquidity provided to the multifamily sector by the government sponsored enterprises, Fannie Mae and Freddie Mac;

--CPT operating at or Fitch's expectation that CPT's financial policies would allow it to operate with leverage above the 4.5x - 5.5x range that the 'A-' rating assumes;

--Fitch's expectation of cost-to-complete development sustaining above 10% of gross asset value.

FULL LIST OF RATING ACTIONS

Fitch has upgraded the ratings as follows:

Camden Property Trust

--IDR to 'A-' from 'BBB+';

--Unsecured revolving credit facility to 'A-' from 'BBB+';

--Senior unsecured notes to 'A-' from 'BBB+'.

The Rating Outlook is Stable.

Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:

--Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock based compensation and include operating income from discontinued operations and distributions from joint venture operations;

--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $1 million of cash for working capital purposes which is otherwise unavailable to repay debt.

Additional information is available on www.fitchratings.com.

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)

https://www.fitchratings.com/site/re/869362

Additional Disclosures

Dodd-Frank Rating Information Disclosure Form

https://www.fitchratings.com/creditdesk/press_releases/content/ridf_frame.cfm?pr_id=1011041

Solicitation Status

https://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=1011041

Endorsement Policy

https://www.fitchratings.com/jsp/creditdesk/PolicyRegulation.faces?context=2&detail=31

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. 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.

View source version on businesswire.com: http://www.businesswire.com/news/home/20160831006060/en/

Fitch Ratings
Primary Analyst
Britton Costa, CFA, +1-212-908-0524
Director
Fitch Ratings, Inc.
33 Whitehall Street
New York, NY 10004
or
Secondary Analyst
Stephen Boyd, CFA, +1-212-908-9153
Senior Director
or
Committee Chairperson
Steven Marks, +1-212-908-9161
Managing Director
or
Media Relations
Sandro Scenga, New York, +1-212-908-0278
[email protected]

Source: Fitch Ratings

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