Fitch Downgrades Colonial Properties' IDR to 'BB+'; Revises Outlook to Stable

Fitch Ratings has downgraded the following credit ratings of Colonial Properties Trust and its operating partnership, Colonial Realty Limited Partnership (collectively, Colonial):

Colonial Properties Trust

--Issuer Default Rating (IDR) to 'BB+' from 'BBB-';

--$100 million preferred stock to 'BB-' from 'BB+'.

Colonial Realty Limited Partnership

--IDR to 'BB+' from 'BBB-';

--$675 million unsecured revolving credit facility to 'BB+' from 'BBB-';

--$1 billion senior unsecured notes to 'BB+' from 'BBB-';

--$100 million preferred stock to 'BB-' from 'BB+'.

In addition, Fitch has revised the Rating Outlook to Stable from Negative.

The rating action revolves around the view that in light of the company's first quarter-2009 (1Q'09) operating results and Fitch's expectations for the performance of CLP's geographically diversified portfolio in 2009-2010, the company's creditworthiness is more consistent with a 'BB+' IDR.

When Fitch revised its Rating Outlook on CLP to Negative from Stable in March 2009, Fitch stated that one factor that may result in a downgrade of CLP's ratings would be if fixed charge coverage were to sustain below 1.5 times (x). In 2008 and 1Q'09, fixed charge coverage (defined as recurring EBITDA less capital expenditures less straight-line rent adjustments divided by interest expense, capitalized interest and preferred dividends) was 1.5x and 1.4x, respectively, and in light of 1Q'09 results, Fitch anticipates that ongoing declines of same-store net operating income (NOI) will result in fixed charge coverage sustaining below 1.5x.

The rating action also reflects the fact that secured debt increased materially, with secured debt-to-total debt rising to 26 percent as of March 31, from 5.9 percent as of Dec. 31, 2008. While this increase was incorporated into Fitch's Negative Outlook, Fitch anticipates that the position of bondholders may further weaken over the next 12-24 months in the event that the company continues to fund unsecured debt maturities with new secured debt funding.

The two notch differential between CLP's IDR and its preferred stock is consistent with Fitch's criteria for corporate entities with an IDR of 'BB+' and further reflects the fact that CLP's preferred stock does not contain covenant protections comparable to those within indentures governing senior CLP's unsecured debt obligations. In addition, based on Fitch's criteria report, 'Equity Credit for Hybrids & Other Capital Securities', CLP's preferred stock is 75 percent equity-like and 25 percent debt-like since CLP's preferred stock is perpetual and has no covenants, but has a cumulative deferral option. Debt plus 25 percent of preferred stock-to-recurring EBITDA and debt plus 25 percent of preferred stock-to-undepreciated book capital were 10.9x and 51.2 percent, respectively, as of March 31, compared with 10.0x and 52.9 percent as of Dec. 31, 2008.

The Stable Outlook takes into account the company's manageable debt maturity schedule and good liquidity position, which was recently bolstered by a $350 million secured credit facility originated by PNC ARCS LLC for repurchase by Fannie Mae. The Stable Outlook further underscores prudent steps that Colonial has taken to strengthen its balance sheet and improve liquidity, through unsecured debt repurchases and reductions in common stock dividends.

With respect to liquidity, Colonial Realty Limited Partnership recently executed a cash tender offer for $250 million of certain series of Colonial Realty Limited Partnership's outstanding notes maturing in 2010 and 2011. In addition, during 1Q'09, the company repurchased $96.9 million of Colonial Realty's outstanding unsecured senior notes under the company's previously announced $500 million unsecured note repurchase program. The purchases were made at an average 27.1 percent discount to par, which represents a 12.6 percent yield to maturity. Fitch views these transactions favorably in that they reduce near-term uses of liquidity. Fitch calculates that proforma for the tender offer, sources of liquidity (cash, availability under the company's revolving credit facility, and retained cash flows from operating activities, including $80 in additional liquidity due to the company's common stock dividend reduction) less uses of liquidity (debt maturities and recurring capital expenditures) result in a liquidity surplus of $334 million from March 31, to Dec. 31, 2010.

The Stable Outlook further reflects that despite the company's $117 million in property impairments that Colonial incurred during 4Q'08 on its for-sale residential properties, mixed-use and for-sale residential land portfolio and a retail development project, impairments were notably modest in 1Q'09 at $736,000. The 1Q'09 impairments were predominantly due to CLP's noncontrolling interest in its Craft Farms joint venture and the sale of all of the remaining units in Regents Park, one of CLP's for-sale residential projects.

While CLP's residential-for-sale portfolio and overall development pipeline remain exposed to further devaluation risk, the Stable Outlook also reflects CLP's reduction in planned development spending in 2009.

Going forward, the following factors may have a positive impact on the ratings:

-If fixed charge coverage (defined as recurring EBITDA less capital expenditures less straight-line rents divided by total fixed charges) sustains above 1.5x (for the trailing 12 months ended March 31, recurring EBITDA divided by total fixed charges was equal to 1.5x).

-If debt-to-recurring EBITDA were to sustain below 9.0x (for the 12 months ended March 31, debt to recurring EBITDA was 10.4x);

-If unencumbered asset coverage as defined under CLP's unsecured bond indenture using undepreciated book value were to sustain above 220 percent (as of March 31, unencumbered assets-to-unsecured debt was 211.2 percent).

The following factors may have a negative impact on CLP's ratings:

-If fixed charge coverage were to sustain below 1.3x for several quarters;

-If the company has a liquidity shortfall;

-If unencumbered assets-to-unsecured debt as defined under CLP's unsecured bond indenture falls below 180 percent.

Colonial Properties Trust is a real estate investment trust (REIT) based in Birmingham, AL that had an interest in 120 multifamily properties and 84 commercial properties (including those under management) across the Sunbelt region of the United States as of March 31. As of March 31, the company had approximately $3.6 billion in undepreciated book assets and a total market capitalization of approximately $2.6 billion.

Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, fitchratings.com.

((Comments on this story may be sent to health@closeupmedia.com))

Related terms: bond, book, capitalization, commercial, corporate, debt, dividends, ebitda, equity, fannie mae, health, investment, joint venture, market, note, partnership, pipeline, property, real estate, reit, residential, retail, schedule, yield