Fitch Upgrades Mid-America Apartment's IDR to 'BBB+'; Outlook Stable
KEY RATING DRIVERS
The rating upgrade reflects the sustained improvement in MAA's key credit metrics in recent years, including leverage and unencumbered asset coverage of unsecured debt (UA/UD). The all-stock acquisition of lower-levered Post Properties, Inc. announced today will further strengthen MAA's balance sheet to level's that Fitch believes will provide sufficient cushion to maintain a stronger credit profile through-the-cycle.
LOWER LEVERAGE WITH THROUGH-CYCLE CUSHION
Fitch projects leverage could be in the 5x - 5.5x range in 2017 depending upon the time of the close. This compares favorably to 5.7x for 2015, 6.4x for 2014 and the sub 6.5x level that Fitch views as being consistent with the 'BBB+' rating. Fitch estimates the transaction terms (i. e. the assumption of PPS' debt and the issuance of 0.71 shares of MAA for each share of PPS) will reduce leverage by approximately 0.3x, all else being equal.
However, as the transaction is initially dilutive on an earnings basis, the issuer has some incentive to maintain or increase leverage to reduce the amount of dilution and the time frame for it to turn accretive. Fitch defines leverage as debt less readily available cash to recurring operating EBITDA.
Fitch expects fixed-charge coverage will improve further to the mid-4x range through 2017 as compared to 3.7x for 2Q16 and 3.6x for 2015. Fitch defines fixed-charge coverage as recurring operating EBITDA less maintenance capital expenditures to total interest.
LOGICAL TRANSACTION WITH MODEST CHANGE IN STRATEGY
The PPS acquisition is a logical strategic transaction that improves MAA's portfolio quality and should result in scale benefits from deeper market penetration. The combined company's increased size should also improve its public debt and equity markets access, resulting in lower capital costs.
Fitch is comfortable with the integration risk given MAA's demonstrated experience integrating Colonial Properties Trust and deriving operational improvements. A modest detraction from the transaction that operating results may be more volatile relative to MAA's prior strategy which had less infill locations and did not have a material development strategy.
MAA paid a relatively high premium to consensus net asset value (NAV) for Post that will cause the transaction to be dilutive initially to earnings and NAV per share. These issues are less of a near-term credit consideration given the all-stock financing. However, they could weigh on MAA's equity valuation and, therefore access going forward, possibly influencing its financial policy targets.
NEAR-TERM LIQUIDITY PRESSURE
The transaction is not subject to any financing risk given the all-stock consideration being paid and MAA's assumption of all of PPS' debt (excluding the balance on its revolving credit facility). Nonetheless, liquidity coverage will be stressed initially given the assumption of PPS' development pipeline. Fitch calculates sources of liquidity cover uses of liquidity by 0.7x for the period July 1, 2016 through Dec. 31, 2017.
As the liquidity deficit totals $359 million, Fitch envisions MAA will look to improve coverage by issuing unsecured debt, expanding its revolving credit facility or some combination thereof. Fitch considers sources of liquidity as readily available cash, availability under the revolving credit facility pro forma for transaction costs and the PPS balance and estimated retained cash flow from operations. Fitch considers uses of liquidity as total debt maturities, estimated recurring capital expenditures and committed development expenditures.
EXPECTS TO RATE PPS OBLIGATIONS
As MAA will be merging the PPS operating partnership into its own, Fitch expects to rate Post's senior unsecured obligations at 'BBB+' upon completion of the merger.
STABLE OUTLOOK
The Stable Outlook reflects Fitch's expectations that the operating environment will remain accommodative but decelerating and that the issuer will maintain leverage around 5.5x through 2018.
KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for MAA include:
--Growth in same-store net operating income of 2% - 5% per year through 2018;
--The acquisition of PPS as contemplated but no other material acquisitions;
--The funding of PPS' existing development pipeline and $80 million per year of redevelopment expenditures;
--Senior unsecured debt issuances of at least $250 million in 2016 and 2018.
RATING SENSITIVITIES
Positive Momentum: Fitch views MAA's ability to demonstrate superior, REIT-sector leading capital access through-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.
Negative Momentum: The following factors could have negative momentum on the ratings and/or Outlook.
--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 the sizing of its development pipeline.
FULL LIST OF RATING ACTIONS
Fitch has upgraded the following ratings:
Mid-America Apartment Communities, Inc.
--IDR to 'BBB+' from 'BBB'.
Mid-America Apartments, L. P.
--IDR to 'BBB+' from 'BBB';
--Unsecured revolving credit facility to 'BBB+' from 'BBB';
--Senior unsecured term loans to 'BBB+' from 'BBB';
--Senior unsecured notes to 'BBB+' from 'BBB'.
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