--Issuer Default Rating (IDR) at 'BBB'.
--IDR at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB';
--Senior unsecured term loan at 'BBB'.
The Rating Outlook has been revised to Positive from Stable.
KEY RATING DRIVERS & POSITIVE OUTLOOK
The ratings reflect Home's key credit strengths, namely its durable operating performance along with leverage and fixed charge coverage metrics that are expected to remain strong for the rating through the cycle. These positive elements are balanced by a capital structure that is still predominantly Fannie Mae and Freddie Mac-led (the GSEs) secured debt and untested access to the public unsecured bond markets. The Positive Outlook is predicated on Home continuing to unencumber its portfolio and demonstrating access to the public unsecured bond market over the next 12-to-24 months, which combined, would result in a more mature capitalization consistent with the higher rating.
STILL DEVELOPING CAPITAL MARKETS ACCESS
The largest ratings constraint is the sizable percentage of secured debt in HME's capital structure (though Fitch notes the company's progress over the past few years) and its untested access to the public unsecured bond market. At
DURABLE OPERATING CASHFLOWS
HME's portfolio performance, measured by same-store net operating income (SSNOI) growth and occupancies, has been strong on an absolute and relative basis to both its public peers and markets. Since 2001, HME has averaged SSNOI growth of 3.9% that troughed at -1.1% in 2003 and was flat during the most recent recession. This compares favorably to the REIT peer group which averaged lower annual growth (1.9%), troughed at -6.2% in 2003 and declined -4.7% in 2009. Further, HME's cash flow durability has not come at the expense of upside potential as HME's highest annual growth rate (8.1%) has been within 100bps of its peers' average of 9%. Fitch notes that HME's same-store portfolio benefits from the company's rehabilitation strategy and expenditures. Due to the short turnaround and unit-by-unit nature of the program, assets are not removed from the same-store pool, thus some of the growth is attributable to the asset improvements.
Fitch expects national multifamily operating fundamentals will continue to moderate from recent highs as supply increases and rental affordability and rent-versus-buy dynamics shift in favor of home ownership. However, the effects of moderation will be more muted for Home as many of its tenants are renters by necessity and do not ultimately envision owning a home. Fitch's forecasts assume HME's SSNOI growth will moderate to 3% through 2016 from 4% and 8.1% in 2013 and 2012, respectively.
HME's operating performance runs counter to the notion that older, lower quality, lower rental-rate multifamily properties exhibit lower growth. The focus on tenants that rent by necessity and are often lifelong renters has resulted in lower tenant turnover (typically in the 30%-40% range as opposed to the 50%-60% range for other multifamily REITs), lower property performance volatility, and generally flat-to-positive net operating income (NOI) growth, all of which are credit positives.
STRONG CREDIT METRICS
HME's leverage and fixed charge coverage metrics have consistently improved since 2010, are appropriate for a 'BBB+' IDR, and can be maintained through-the-cycle in Fitch's view. Leverage was 5.9x for the trailing 12 months (TTM) ended
HME's fixed charge coverage has seen a similar improvement, rising to 3.1x for the TTM ended
HME's ratings are also supported by its strong unencumbered asset coverage of unsecured debt and manageable dividend distributions. Fitch estimates unencumbered assets cover unsecured debt obligations by 3.9x assuming a stressed 8.5% capitalization rate. Fitch expects that unencumbered asset coverage would decline to 2.5x-3.0x through 2016 should HME refinance mortgage maturities with unsecured debt, which would remain appropriate for the ratings.
Additionally, Home has kept its AFFO dividend payout ratio (dividends divided by adjusted funds from operations) between 75% to 85%, allowing the company to retain some operating cashflow (
HME's liquidity coverage ratio is appropriate for the ratings at 1.3x for the period
The following factors may result in positive momentum in HME's ratings and/or Outlook:
--Reduced reliance on secured debt and demonstrated access to the public unsecured bond markets;
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 6.5x (leverage was 5.9x for TTM ended
--Fitch's expectation of fixed-charge coverage sustaining above 3.0x (coverage was 3.1x for the TTM ended
The following factors may result in negative momentum in HME's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 8.0x;
--Fitch's expectation of fixed-charge coverage sustaining below 2.0x;
--Fitch's expectation of a liquidity shortfall.
Additional information is available at 'www.fitchratings.com'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage'
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors'
--'Recovery Ratings and Notching Criteria for Equity REITs'
Recovery Ratings and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Source: Fitch Ratings
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