Fitch Ratings has affirmed the Issuer Default Ratings (IDR) and outstanding credit ratings of Equity Residential (NYSE: EQR) and ERP Operating Limited Partnership, EQR's principal operating subsidiary, as follows:
Equity Residential
--IDR at 'A-';
--$200 million preferred stock at 'BBB+';
--$10 million convertible preferred stock at 'BBB+'.
ERP Operating Limited Partnership
--IDR at 'A-';
--$4.5 billion senior unsecured notes at 'A-';
--$650 million exchangeable senior notes at 'A-'.
The Rating Outlook is Stable.
The ratings affirmations center on EQR's strong franchise, solid cash flow coverage metrics, seasoned management and robust corporate governance platform. Franchise strength is evident in EQR's broad geographic diversification, solid access to multiple forms of capital, consistent operating strategy and an adequate level of unencumbered assets.
Furthermore, EQR's ratings are indicative of cash flow granularity, as each of EQR's top 10 markets generated net operating income (NOI) between 4.3% and 10.2% of total first quarter 2008 NOI. Fitch views EQR's operating strategy of focusing on owning assets in supply-constrained, coastal destination markets, particularly given the anticipated slowdown in multifamily fundamentals, as a credit positive. These markets tend to exhibit relatively strong and consistent demand, a dearth of buildable land and high construction costs, curtailing substantial supply growth. Although EQR typically acquires assets at lower capitalization rates than assets it sells, Fitch notes that the longer-term stronger fundamentals within these markets should allow EQR to drive revenue and net operating income growth above the national average.
For the 12 month period ending March 31, 2008, EQR maintained solid and consistent coverage, as reflected by its interest (recurring EBITDA to total interest incurred) and fixed charge coverage (recurring EBITDA less capital expenditures less straight-line rents coverage of interest incurred, preferred dividends and preferred OP units) ratios of 2.2 times (x) and 1.7x, respectively, levels consistent with those of the year ended Dec. 31, 2006.
EQR continues to maintain an adequate, albeit declining, level of unencumbered assets that provides ample coverage for unsecured debt on both a valuation and cash flow basis. EQR's unencumbered assets covered unsecured debt by 2.07x and 2.07x as of March 31, 2008 and Dec. 31, 2007, respectively, down significantly from 2.51x as of Dec. 31, 2006, prior to the company repurchasing approximately $1.2 billion of its common stock. A decrease of this ratio below 2.0x would cause downward pressure on the ratings.
Further evidence of EQR's financial flexibility is its access to both the debt and equity markets, buttressed by its ability to sell unencumbered properties, as well as retain substantial availability under its revolving credit facility. Fitch also views as a positive EQR's endeavors to pre-fund debt maturities via accessing the secured debt markets earlier in 2008 despite the short-term increase in leverage, as well as management's focus on maintaining adequate liquidity by slowing down development starts.
Fitch notes that EQR's ratio of leverage (debt to undepreciated book capital) as of March 31, 2008 of 53.2% and total leverage (debt plus preferred stock to undepreciated book capital) of 54.4% are appropriate for the rating category and artificially inflated by approximately 200 basis points due to pre-funding efforts noted above, and capital on a risk adjusted basis of 1.2x remains adequate. In addition, EQR's ratio of debt-to-recurring EBITDA for the twelve months ended March 31, 2008 was 8.2x, compared to 7.9x for the year ended Dec. 31, 2006, levels supportive of the company's 'A-' IDR. That said, an increase in leverage approaching 55% and a decrease in the risk-adjusted capital ratio below 1.0x would cause downward pressure on the ratings.
Headquartered in Chicago, Illinois, Equity Residential owns in whole or in part multifamily properties located in 24 states and the District of Columbia incorporating approximately 150,000 units as of March 31, 2008. At $19 billion in undepreciated book capital, Equity Residential is one of the largest owners and operators of multifamily properties in the United States.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, 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.
Contacts:
Steven Marks, +1-212-908-9161
Sean Pattap,
+1-212-908-0642 (New York)
Media Relations:
Sandro Scenga,
+1-212-908-0278 (New York)
