Fitch Removes Equity Residential from Rating Watch Negative; Affs IDR at 'BBB+'; Outlook Stable
by Business Wire
Fitch Ratings has removed the Rating Watch Negative and affirmed the following ratings for Equity Residential (NYSE: EQR) and ERP Operating Limited Partnership, EQR's principal operating subsidiary (collectively EQR):
Equity Residential
--Issuer Default Rating (IDR) at 'BBB+';
--Preferred stock at 'BBB-'.
ERP Operating Limited Partnership
--IDR at 'BBB+';
--Unsecured revolving credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+'.
Fitch has also assigned a 'BBB+' rating to EQR's unsecured revolving term loan.
The Rating Outlook is Stable.
KEY RATING DRIVERS
RESOLUTION OF RATING WATCH
The removal of the Rating Watch Negative and affirmation of EQR's ratings are the result of the company successfully raising equity and selling assets consistent with the company's de-leveraging plan. EQR issued $1.2 billion of common equity within a week of announcing the Archstone transaction and has sold or was in contract to sell $3.15 billion of the $4.50 billion in targeted dispositions as of Feb. 5, 2013. The company has met or exceeded Fitch's targets for removing the Rating Watch Negative, which were highlighted in Fitch's press release, 'Fitch Places Equity Residential's IDR on Negative Watch Following Proposed Archstone Acquisition', dated Nov. 27, 2012.
SUCCESSFUL EXECUTION OF ARCHSTONE DE-LEVERAGING TRANSACTIONS
EQR has been successfully executing its planned financing and portfolio strategies since announcing the Archstone transaction on Nov. 26, 2012.
On Dec. 4, 2012, EQR sold 21.9 million shares of common stock at $54.75 per share generating net proceeds of approximately $1.2 billion.
On Jan. 7, 2013, EQR entered into an agreement to sell 27 properties representing $1.5 billion of assets to a joint venture between Goldman Sachs & Co. and Greystar Real Estate Partners LLC. The transaction is expected to be completed in two separate closings, both of which will occur in the first quarter of 2013. Inclusive of this transaction, EQR has either sold or has a signed contract to sell over $3 billion of non-core assets. The company plans on completing the remainder of its $4.5 billion disposition program in 2013.
On Jan. 14, 2013, EQR entered into a new $2.5 billion unsecured revolving line of credit and a $750 million term loan. The new $2.5 billion unsecured revolving credit facility matures in April 2018 and has an interest rate of LIBOR + 105 basis points (bps) with an annual facility fee of 15bps. The new unsecured revolving credit facility replaced the previous $1.75 billion facility which was due to mature in July 2014 and had an interest rate of LIBOR + 115bps with an annual facility fee of 20bps. The new senior unsecured $750 million delayed draw term loan facility matures in January 2015, with a one year extension option and has an interest rate of LIBOR + 120bps. As a result of executing these financing facilities, EQR opted to terminate its $2.5 billion bridge facility commitment that it had entered into in connection with the Archstone transaction.
CREDIT METRICS EXPECTED TO STRENGTHEN
Pro forma for the acquisition, Fitch projects EQR's leverage to sustain between 6.5x and 8.0x over the next three years as compared to leverage of 5.8x, 7.4x and 8.0x as of year-end 2012, 2011 and 2010, respectively. Leverage as of year-end 2012 was artificially low due to EQR pre-funding a portion of the Archstone acquisition proceeds via the November 2012 $1.2 billion equity offering. Fitch defines leverage as net debt divided by recurring operating EBITDA.
Pro forma for the acquisition, EQR's fixed-charge coverage is projected by Fitch to sustain in the high 2x range over the next three years as compared to 2.4x, 2.2x and 2.0x in 2012, 2011 and 2010, respectively. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital improvements divided by interest incurred and preferred distributions.
Pro forma for the acquisition, EQR's unencumbered asset coverage of unsecured debt (utilizing a stressed 7% capitalization rate) will be approximately 2.4x, which is good for the 'BBB+' IDR.
LIQUIDITY EXPECTED TO BE ADEQUATE
Fitch calculates that EQR's liquidity, pro forma for the Archstone transaction was at a deficit as uses of liquidity (pro rata debt maturities and expected capital expenditures and development) exceeded sources of liquidity (unrestricted cash, availability under its unsecured revolving credit facility, expected retained cash flows from operating activities after dividends and distributions) over a two year period. As EQR utilizes proceeds from assets sales to pay down the revolving line of credit, EQR should have appropriate liquidity for the 'BBB+' rating.
STRENGTHENED PORTFOLIO
The Archstone acquisition will strengthen EQR's already-existing strong market presence in high barrier-to-entry coastal destination markets, where low single-family housing affordability drives multifamily demand. Fitch views this presence and increased market focus positively, as these markets also have limited buildable land and high construction costs, curtailing meaningful supply growth. Pro forma for the acquisition, EQR's top five markets will be Washington, D.C., New York Metro, San Francisco Bay Area, Los Angeles and Boston.
EQR has demonstrated strong property-level fundamentals. The company's same property NOI increased by 8.1% during the fourth quarter of 2012 (4Q'12) relative to 4Q'11, and Fitch anticipates that fundamentals will remain strong, though moderate, due to modest job growth and limited new supply in EQR's markets, a declining home ownership rate and favorable demographic trends.
PREFERRED UNIT NOTCHING
The two-notch differential between EQR's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch Research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis, dated Dec. 13, 2012 and available on Fitch's web site at www.fitchratings.com, 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.
RATINGS SENSITIVITIES
The following factors may have a positive impact on Equity Residential's ratings or outlook:
--Fitch's expectation of leverage sustaining below 7.0x (Fitch projects leverage of 6.8x in 2013 and expects leverage to sustain between 6.5x - 8.0x on a longer term basis);
--Fitch's expectation of fixed charge coverage sustaining above 2.5x;
--Unencumbered asset coverage sustaining above 2.5x (Pro-forma coverage for 2013 is 2.4x).
The following factors may have a negative impact on Equity Residential's ratings or outlook:
--Fitch's expectation of leverage sustaining above 8.0x;
--Fitch's expectation of fixed charge coverage sustaining below 2.0x;
--A liquidity coverage ratio sustaining below 1.0x.
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 Places Equity Residential's IDR on Negative Watch Following Proposed Archstone Acquisition', Nov. 27, 2012;
--'Criteria for Rating U.S. Equity REITs and REOCs', Feb. 26, 2013;
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', Dec. 13, 2012;
--'Recovery Ratings and Notching Criteria for Equity REITs', Nov. 12, 2012;
--'Corporate Rating Methodology', Aug. 8, 2012;
--'Parent and Subsidiary Rating Linkage', Aug. 8, 2012.
Applicable Criteria and Related Research
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=684460
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
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