Fitch Affirms Essex Property Trust's IDR at 'BBB+'; Outlook Stable

Fitch Ratings has affirmed its 'BBB+' Issuer Default Rating (IDR) for Essex Property Trust, Inc. (NYSE: ESS) and its operating partnership, Essex Portfolio, L.P. (collectively, Essex, or the company). A full list of rating actions follows at the end of this release.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Fitch's ratings for Essex consider the company's strong multifamily portfolio position within key densely populated and supply constrained markets in Northern and Southern California and Seattle. These markets have favorable demographics that include vibrant and growing labor markets and above-average household income levels, as well as high home-ownership costs that drive demand for apartments. Moreover, Fitch views the company's management team as being among the strongest in the multifamily REIT sector based on its track record of superior asset management and capital allocation.

Elevated but improving leverage for the rating (primarily due to its merger with BRE Properties, which closed on April 1, 2014), geographic portfolio concentration risk and development risk are factors that balance these credit positives.

The Stable Outlook is driven by Fitch's expectations that positive multifamily fundamentals in ESS's markets combined with declining leverage and improving coverage will support credit metrics that are consistent with the rating.

Moderating Leverage

Fitch expects Essex's leverage to approach the low end of the company's targeted 6x-7x range over the rating horizon (two to three years). Same store net operating income (SSNOI) growth, incremental NOI from development deliveries, and opportunistic share issuances under the company's at-the-market (ATM) equity program are the principal drivers that support Fitch's leverage projections.

ESS's leverage was 7.1x at Dec. 31, 2014, which is moderately below the company's 7.3x and 7.4x leverage during 2013 and 2012, respectively. Fitch defines leverage as debt less readily available cash to recurring operating EBITDA including recurring distributions from joint ventures (JVs).

Strong Internal Growth

Fitch expects ESS's SSNOI to grow by 8% during 2015, led by strength in its Northern California portfolio. Strong market demographics and portfolio management should continue to drive the company's SSNOI growth and allow for material organic de-levering.

The company has exhibited strong operating performance as measured by SSNOI growth and occupancy rates on an absolute and relative basis during this recovery. SSNOI growth was 9.2% in 2014, up from 7.4% in 2013, marking the fourth straight year of growth above 5.5%. Essex has maintained same-store occupancy within a range of 96%-97% during the past five years.

Strong Fixed-Charge Coverage (FCC)

Fitch expects ESS's FCC to improve to the mid-3x range through 2017. The company's FCC was 3.2x during 2014, which was in-line with 2013, but down from 3.6x in 2012. Fitch defines FCC as recurring operating EBITDA less recurring capital improvements divided by interest incurred and preferred distributions.

Adequate Liquidity Coverage

ESS has a manageable debt maturity schedule with only 9% of total debt (including pro rata share of JV debt) maturing during the next two years. Fitch estimates that ESS has a liquidity coverage ratio of 2x through Dec. 31, 2016 on a pro forma basis that includes the company's $500 million January 2015 unsecured notes issuance. Fitch defines REIT liquidity coverage as sources of liquidity (unrestricted cash, availability under ESS's unsecured revolving credit facility, and expected retained cash flows from operating activities after dividends) divided by uses of liquidity (pro rata share of debt maturities, remaining development/redevelopment expenditures and expected recurring capital expenditures).

Fitch estimates that ESS' unencumbered asset coverage of unsecured debt (UA/UD) was 2.2x at Dec. 31, 2014. Fitch calculates UA using a direct capitalization approach of annualized fourth quarter 2014 (4Q'14) unencumbered NOI using a stressed 7.5% capitalization rate. ESS's UA/UD is adequate for the rating.

Solid Multifamily Fundamentals

Fitch expects multifamily fundamentals in ESS's markets to remain strong over the near- to intermediate-term due to moderate job growth, low levels of new supply and high home-ownership costs. This should lead to increased cash flows that further support the ratings. ESS's SSNOI grew by 9.2% during 2014, following increases of 7.4% and 9.2% in 2013 and 2012, respectively, and Fitch expects the company to deliver mid- to high-single-digit SSNOI growth through 2017.

Geographic Concentration

The company is geographically concentrated in three primary markets: Southern California (44% of NOI), San Francisco Bay Area (38%), and the Seattle metropolitan area (18%). As such, the company is more heavily exposed to fluctuations in only a few markets. Fitch also notes the seismic risk present in California.

Development Exposure

The company maintains an active development pipeline with remaining costs to complete the pipeline of $420 million (pro rata for ESS's ownership percentage of JVs where the majority of the projects reside). However, ESS has begun to taper its development activities in light of the strong recovery in apartment fundamentals, which has lowered the risk-adjusted returns from development, generally.

Remaining funding represents 3.2% of gross assets as of Dec. 31, 2014, compared with 7.3% at the end of 2013 and the company's 11.2% cycle peak in 2Q'12. Fitch expects this ratio to sustain in the 3% range over the next two years as the company finishes the build-out of its current pipeline. Fitch views ESS's willingness to dial-back development risk in the face of strong multifamily operating fundamentals as evidence of the company's commitment to maintaining a conservative balance sheet.

Preferred Stock Notching

The two-notch differential between ESS's 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.

KEY ASSUMPTIONS

--ESS's SSNOI grows by 8%, 6% and 4% in 2015, 2016 and 2017, respectively;

--Acquisitions total $500 million in 2015, $400 million in 2016 and $350 million in 2017;

--Dispositions total $150 million in 2015 and $100 million in 2016 and 2017;

--Development spending of $350 million per year over the rating horizon;

--$225 million of equity issuance per year through 2017;

--No additional unsecured issuance during 2015; $150 million during 2016 and $550 million during 2017 at rates of 4% and 4.5%, respectively.

RATING SENSITIVITIES

Although Fitch does not anticipate any upwards rating momentum, the following factors could result in a positive revision to ESS's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining below 6x (leverage was 7.1x at Dec. 31, 2014;

--Fitch's expectation of FCC sustaining above 3.5x (coverage was 3.2x at Dec. 31, 2014).

The following factors may result in a negative revision of ESS's ratings and/or Outlook:

--Fitch's expectation of leverage sustaining above 7x);

--Fitch's expectation of FCC sustaining below 2.5x;

--Fitch's expectation of UA/UD sustaining below 2x (UA/UD was 2.2x on a pro forma basis as of Dec. 31, 2014).

Fitch has affirmed the following ratings:

Essex Property Trust, Inc.

--IDR at 'BBB+';

--Preferred Stock at 'BBB-';

Essex Portfolio L.P.

--IDR at 'BBB+';

--Unsecured line of credit at 'BBB+';

--Senior unsecured notes at 'BBB+'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

--Essex Property Trust, Inc. Rating Navigator' (Feb. 26, 2015);

--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Nov. 25, 2014);

--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 18, 2014);

--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=821568

Essex Property Trust, Inc. - Ratings Navigator
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=862042

Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=983130

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.