NEW YORK--(BUSINESS WIRE)--
Fitch Ratings has assigned the following debt obligation rating to Corporate Office Properties, L.P.:
--$250 million 5.25% senior unsecured notes 'BBB-'.
The notes mature in February 2024 and were priced at 98.783% of their face amount to yield 5.405%. The notes are obligations of Corporate Office Properties, L.P. and fully and unconditionally guaranteed by Corporate Office Properties Trust (COPT, NYSE: OFC).
The company will use net proceeds from the notes offering to repay borrowings under the company's unsecured revolving credit facility and for general corporate purposes.
Fitch currently rates the companies as follows:
Corporate Office Properties Trust
--Issuer Default Rating (IDR) 'BBB-';
--Preferred Stock 'BB'.
Corporate Office Properties, L.P.
--IDR 'BBB-';
--Senior unsecured line of credit 'BBB-';
--Senior unsecured term loans 'BBB-';
--Senior unsecured notes 'BBB-';
--Senior unsecured exchangeable notes 'BBB-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
Strong Franchise/Defense-Driven Portfolio
Approximately 70% of annualized rents are generated from properties occupied primarily by government agencies or defense contractors. As a result, the majority of COPT's assets are located in close proximity to strategic locations (i.e. Fort Meade), which gives rise to geographic concentration in the greater Washington DC and Baltimore region. Given these locations, tenants have historically been 'sticky' (retention rates have averaged 72% over the past five years) and invest heavily in their properties. Their missions involve R&D and high-tech areas that are critical to national cyber-security in the United States. Together with its strong relationship with the federal government and defense contractors, COPT's strategic locations and strong franchise create meaningful barriers to entry.
Improving Credit Metrics
The company commenced its Strategic Reallocation Plan (SRP) in 2011, aimed at divesting non-core assets and improving financial flexibility. This has led to a leverage reduction to 6.8x at June 30, 2013 (based on annualized second-quarter recurring operating EBITDA) from 8.6x at Dec. 31, 2011. Fitch expects continued de-levering via asset sales and lease-up of the development pipeline, with leverage projected to fall to the mid-6x range by the end of 2015. Fixed-charge coverage was 1.8x for the trailing 12 months (TTM) ended June 30, 2013 and is projected to improve to the low-2x range over this span, driven by EBITDA growth, declining leverage and reduced preferred dividends.
Adequate Financial Flexibility
COPT has strong liquidity with $9.2 million of unrestricted cash and approximately $650 million of availability under its $800 million senior unsecured line of credit at June 30, 2013. Pro-forma sources of capital cover projected uses by 1.9x for the period July 1, 2013 to Dec. 31, 2015, which is strong for the 'BBB-' IDR. If secured debt maturities are 80% refinanced, the metric improves to 3.5x, although this scenario is unlikely as the company intends to unencumber these properties.
Adequate Unencumbered Asset Coverage
COPT also benefits from contingent liquidity provided by its $2.4 billion unencumbered asset pool (calculated using a stressed 9% cap rate on annualized 2Q'13 unencumbered net operating income (NOI), which covered outstanding unsecured debt at June 30, 2013 by 2.0x. Fitch expects that coverage will remain relatively flat over the next 12-24 months as increased unsecured debt from the company's bond offering is mitigated by the repayment of maturing mortgage debt, thus increasing the size of the pool.
Diversified Funding Strategy
COPT's demonstrated access to the unsecured bond market in 2013 is a material credit positive. The company has also raised more than $360 million of common equity since 2012 as well as over $170 million of preferred equity, with proceeds used to repay debt, redeem higher cost preferred stock, and finance acquisitions and development. The company has also accessed three unsecured term loans aggregating $770 million ($100 million has been subsequently repaid). Going forward, Fitch expects COPT to fund its growth conservatively with more than 50% equity contribution. Equity funding will be sourced via asset sales, a $150 million at-the-market (ATM) program and marketed follow-on offerings.
Elevated Lease Expirations
The company faces elevated lease expirations with 38% of portfolio rent rolling by year-end 2015. The average rent expiring for the remainder of 2013 is $31.59/sf, which is high relative to the $28.60/sf lease rates signed on renewals year-to-date. The elevated expiring lease rate is driven by the fact that nearly 80% of remaining 2013 expiring leases are in the Baltimore/Washington corridor and command higher rents. Expiring rents in this market during 2013 have a weighted average rate of $32.96/sf compared to executed renewal leases signed at $29.89/sf year-to-date. Fitch expects that leasing spreads will decline to the mid-single digits on a cash basis during 2013.
Modest AFFO Payout Ratio
COPT cut its dividend 33% in 1Q'12 as part of its strategy to improve the balance sheet. This brought the AFFO payout ratio to a more reasonable level. For the TTM ended June 30, 2013, the company's AFFO payout was 73%. Fitch expects COPT to increase the dividend over the next 12-24 months, but the payout ratio is expected to remain in a prudent range.
RATING SENSITIVITIES
The following factors may have a positive impact on COPT's ratings and/or Outlook:
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 5.5x (leverage was 6.8x as of June 30, 2013);
--Fitch's expectation of fixed-charge coverage maintaining above 2.5x (fixed-charge coverage ratio was 1.8x for the TTM ended June 30, 2013);
--Fitch's expectation of unencumbered asset coverage of unsecured debt (UA/UD) maintaining above 2.5x (coverage was 2.0x as of June 30, 2013).
The following factors may have a negative impact on the company's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 7.2x;
--Fitch's expectation of fixed-charge coverage sustaining below 1.8x;
--Fitch's expectation of UA/UD sustaining below 1.8x;
--Material macroeconomic weakness affecting the defense industry, such that a larger portion of COPT's portfolio would consist of standard suburban office assets.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 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 Ratings and Notching Criteria for Equity REITs' (Nov. 12, 2012).
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
Parent and Subsidiary Rating Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=685552
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=715139
Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=693751
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=696670
Additional Disclosure
Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=801745
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