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Fitch Rates Essex Portfolio L.P.'s $300MM 3.25% Sr. Unsecured Notes due 2023 'BBB+'; Outlook Stable
April 9, 2013 / 5:49 PM / in 5 years

Fitch Rates Essex Portfolio L.P.'s $300MM 3.25% Sr. Unsecured Notes due 2023 'BBB+'; Outlook Stable

(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 corporate purposes. Fitch currently rates Essex as follows: Essex Property Trust, Inc. --Issuer Default Rating (IDR) 'BBB+'; --Preferred stock 'BBB-'. Essex Portfolio L.P. --IDR 'BBB+'; --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 charges, appropriate projected leverage level, solid liquidity and adequate unencumbered asset coverage of unsecured debt. Further supporting the ratings are the company's 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 in supply 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 for multifamily housing. Offsetting these positive attributes are a geographically concentrated portfolio 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 expected to 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 defines fixed-charge coverage as recurring operating EBITDA including Fitch's estimate of recurring distributions from unconsolidated joint ventures, less Fitch's estimate of recurring capital improvements divided by total interest incurred and preferred stock distributions. DECLINING LEVERAGE 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 a 'BBB+' rating. Leverage was 7.7x and 8.3x as of Dec. 31, 2011, and 2010 respectively. SOLID LIQUIDITY AND ADEQUATE UNENCUMBERED ASSET COVERAGE ESS has a manageable debt maturity schedule with only 5.4% of total debt (including pro rata share of JV debt) maturing from Jan. 1, 2013 through Dec. 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 of liquidity (unrestricted cash, availability under ESS' unsecured revolving credit facility, and expected retained cash flows from operating activities after dividend distributions) divided by uses of liquidity (pro rata share of debt maturities, remaining development / redevelopment expenditures and expected recurring capital expenditures). Further supporting the ratings is an adequate ratio of unencumbered assets to unsecured debt. Based on applying a stressed 7.5% capitalization rate to annualized 4Q'12 unencumbered net operating income (NOI), ESS' unencumbered assets covered unsecured debt by 2.2x. The unencumbered pool is growing as the company replaces maturing secured debt with unsecured debt and funds new acquisitions and development with equity and unsecured debt, which Fitch views positively. 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 remain strong due to moderate job growth, moderate new supply, and a high cost of for-sale single-family housing in ESS' markets, which will drive SSNOI growth in the mid-single digit range through 2014. ESS has outperformed a market-weighted Property and Portfolio Research index over the long term. The ratings also point to the strength of ESS' long-tenured management team, including senior officers and property and leasing managers. Offsetting these credit strengths are the company's geographically concentrated portfolio, and large development pipeline. GEOGRAPHIC CONCENTRATION The company is geographically concentrated in three primary markets: Southern California (45.4% of NOI), San Francisco Bay Area (34.4%), and the Seattle metropolitan area (17.5%). As such, the company is more heavily exposed to fluctuations in only a few markets. Fitch rates California GO bonds 'A-' with a Positive Outlook; however, Fitch notes the seismic risks of the state. DEVELOPMENT EXPOSURE 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). Remaining funding 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 rates. STABLE OUTLOOK The Stable Outlook is driven by Fitch's expectation that positive multifamily fundamentals in ESS' markets, combined with Fitch's expectations of declining leverage and stable coverage, will support credit metrics that are consistent with the rating. PREFERRED STOCK NOTCHING The two-notch differential between ESS' IDR and preferred stock rating 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', 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. RATING SENSITIVITIES 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 Outlook: --Fitch's expectation of net debt to recurring operating EBITDA sustaining below 6.0x (as of Dec. 31, 2012 leverage was 7.1x based on annualized 4Q'12 recurring EBITDA); --Fitch's expectation of fixed-charge coverage sustaining above 3.5x (fixed-charge coverage was 3.0x in 2012); --Fitch's expectation of unencumbered asset coverage of unsecured debt sustaining above 3.0x (this ratio was 2.2x at Dec. 31, 2012). The following factors may have a negative impact on the ratings and/or Outlook: --Fitch's expectation of leverage sustaining above 7.0x; --Fitch's expectation of fixed-charge coverage sustaining below 2.5x; --A liquidity shortfall. Contact: Primary Analyst George Hoglund, CFA Associate Director +1-212-908-9149 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Reinor Bazarewski Associate Director +1-212-908-0291 Committee Chairperson John Culver Senior Director +1-312-368-3216 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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, 2013); --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013); --'Treatment and Notching of Hybrids in Nonfinancial Corporates and REIT Credit Analysis' (Dec. 13, 2012); --'Recovery Rating and Notching Criteria for REITs' (Nov. 12, 2012); --'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 here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Recovery Ratings and Notching Criteria for Equity REITs here Corporate Rating Methodology here Parent and Subsidiary Rating Linkage here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. 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.

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