September 28, 2017 / 8:05 PM / 23 days ago

Fitch Affirms Mid-America Apartment Communities at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, September 28 (Fitch) Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) of Mid-America Apartment Communities, Inc. and its operating partnership, Mid-America Apartments LP. (collectively MAA) at 'BBB+'. Fitch has also assigned a 'BBB-' rating to the Series I preferred stock MAA assumed in the recent acquisition of Post Properties. The Rating Outlook is Stable. KEY RATING DRIVERS Leverage Strong for Rating: Fitch expects leverage to remain between 5.0x-5.5x through the forecast horizon as MAA continues to utilize a mix of unsecured bond issuances and dispositions to fund investment activity. This is comparable to recent periods (5.2x at June 30, 2017) and down from 6.9x in 2016 following the Post Properties Inc (PPS) acquisition and 9.6x in 2013. following the Colonial Properties Trust (CLP) acquisition. Comparability of leverage against prior periods is limited given the timing effects of the acquisitions which both closed later in the year. A public commitment to maintaining leverage at or below 5.0x would be viewed positively by Fitch as would be leverage sustaining below 5.5x through-the-cycle. Fixed charge coverage was 3.7x as of June 30, 2017. Fitch expects fixed charged cover to settle in the low 4x range following full-year results of the combined portfolio. Deceleration in Property Fundamentals: Fitch expects low-single digit growth in same store net operating income (SSNOI) as a result of continued elevated levels of supply in MAA's markets levels. Operating EBITDA should also benefit from additional net operating income (NOI) generated from improvements and redevelopments in legacy PPS assets that have historically underperformed MAA's. These expectations follow MAA reporting its third lowest SSNOI growth in six years at 3.1% in 2Q17. Oversupply pressures continue to limit rent growth especially in markets such as Houston (3.7% of NOI) and Little Rock (1.1% of NOI), though the D.C market (5.8% of NOI) has performed better than expected. Sunbelt Market Susceptible to Overbuilding: Offsetting MAA's strengths are the company's exposure to assets in markets with limited barriers to entry, given the availability of land and more lenient zoning regulations. These factors have led to cycles of overbuilding in the region, with a negative impact on supply/demand fundamentals. As a result, Fitch expects that MAA's same-store NOI growth will be lower than its peers over the next several years. Fitch will also monitor the impact of the PPS acquisition on the growth and stability of the MAA portfolio. Addition of Development Capacity: Fitch views MAA retaining the development capacity acquired from PPS as a change in strategy, despite expectations that it will remain manageable in terms of exposure. Fitch had viewed positively MAA's recognition of the weaker relative barriers to entry in its markets (discussed above) and corresponding strategy of limiting development to mostly expansions of existing communities. The retention of PPS' development capacity and introduction of it as another lever for growth does not weigh on the rating outright but potentially increases the company's risk profile. Fitch will continue to monitor the company's development pipeline exposure. MAA's gross development pipeline peaked at $561 million in 2016 and has since declined to approximately $400 million. The company's unfunded costs as a percentage of gross assets are below 1%, where it has generally operated for the last five years, and below peers' average at 2.9%. Moreover, MAA and its peers' development are meaningfully below the mid-to-high single digit exposures seen heading into the last downturn. Preferred Stock Notching: The two-notch differential between MAA's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch's 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', also available 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. DERIVATION SUMMARY MAA's 'BBB+' rating reflects the company's ownership of multifamily assets, which Fitch views to be the most financeable amongst commercial real estate asset classes, low leverage and adequate liquidity. MAA is rated a notch lower than the closest peer, Camden Property Trust (A-/Stable), which reflects the latter's lower leverage and Fitch's view that it has more seasoned access to capital. As compared to the rest of the multifamily REIT universe, MAA is rated a notch lower than Equity Residential (A-/Stable), which Fitch views to have sector leading access to capital and a highly sought-after coastal infill portfolio. These factors offset Fitch's expectation that Equity Residential will operate with higher leverage than MAA through the cycle given its financial policies (current leverage is low given lack of reinvestment opportunities). Essex Property Trust's (BBB+/Stable) ratings reflect its higher growth West Coast assets offset by slightly weaker but comparable financial policies. Lastly, AIMCO's (BBB-/Stable) ratings reflect the company's portfolio quality versus the peers and a secured debt focused borrowing strategy. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --A deceleration in operating fundamentals with SSNOI growth of 3.1% in 2017 declining to 1.9% by 2019; --Net acquisitions between $120 million-$175 million throughout the forecast period; --The company continues to maintain its current level of development exposure; --Improvements in operating performance of legacy PPS assets continue to narrow the gap with MAA legacy assets. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Fitch views MAA's ability to demonstrate superior, REIT sector-leading capital access through-the-cycle as the primary driver of positive momentum. Fitch does not expect this will occur during the rating horizon. Were this to occur, Fitch would also look for MAA to demonstrate and have a financial policy to maintain leverage below 5.5x. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Fitch's expectation of leverage sustaining above 6.5x; --Should MAA demonstrate a higher risk tolerance from both a business and liquidity perspective based on an increase in its development pipeline. LIQUIDITY Adequate Liquidity Coverage: Fitch expects MAA's liquidity coverage to remain adequate for the rating. Fitch estimates MAA's sources of liquidity (unrestricted cash, availability under its $1.0 billion in combined revolving credit facility capacity and retained cash flow from operations) cover its uses (debt maturities, committed development expenditures, and maintenance capital expenditures) by 1.4x for the period July 1, 2017 to Dec. 31, 2018. MAA has appropriate contingent liquidity in its unencumbered asset pool, which covers unsecured debt by 2.5x on a net basis assuming a stressed 8.5% cap rate. Lastly, liquidity is enhanced by MAA's consistently low adjusted funds from operations (AFFO) payout ratio, which was 70.3% in 2Q17, 66.1% in 2016, and 91.9% in 2009 and which allows the issuer to retain organically generated liquidity. Fitch expects MAA's payout ratio to remain between 65% and 70%. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Mid-America Apartment Communities, Inc: --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 is Stable Fitch has assigned the following rating: Mid-America Apartment Communities, Inc: --Preferred stock 'BBB-'. Contact: Primary Analyst Peter Siciliano Director +1-646-582-4760 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Christopher Pappas Director +1-646-582-4784 Committee Chairperson Britton Costa Senior Director +1-212-908-0524 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; --Fitch has included 50% of the company's cumulative perpetual preferred stock as debt in certain ratios; --Fitch has adjusted the historical and projected net debt by assuming the issuer requires $20 million of cash for working capital purposes which is otherwise unavailable to repay debt. 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