OREANDA-NEWS. Fitch Ratings has assigned a rating of 'BBB+' to Essex Portfolio L.P.'s senior unsecured 10 year debt issuance. Essex Portfolio L.P. is the operating partnership of Essex Property Trust, Inc. (NYSE: ESS). A full list of Fitch's current ratings for ESS 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.

Geographic portfolio concentration risk and development risk are factors that balance these credit positives. The Stable Outlook is driven by Fitch's expectations that the material improvement in credit metrics is largely complete with growth in operating fundamentals being offset by development and redevelopment expenditures.

ACHIEVED LOWER LEVERAGE TARGETS
Essex's leverage is now at the low end of its 6x-7x policy. Leverage was 5.9x at Dec. 31, 2015 based on debt less readily available cash plus 50% preferred stock to recurring operating EBITDA including recurring joint venture (JV) distributions and 6.3x excluding recurring JV distributions. Leverage was down from 7.1x and 7.4x excluding recurring JV distributions for 2014 and 7.3x and 7.5x for 2013.

STRENGTH IN OPERATING FUNDAMENTALS
Fitch expects multifamily REITs will report another year of mid-single digit growth in same store net operating income (SSNOI) and ESS is likely to outperform its peers given the strength in Northern California. However, Fitch notes the influence that tech employment and venture capital fund flows and valuations can have on market demand. It remains to be seen how long this cycle will last in Northern California.

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 10.7% in 2015, in line with 9.2% in 2014, marking the fifth 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 3.6x during 2015, higher than 2014 and 2013's 3.2x and in line with 2012's FCC. Fitch defines FCC as recurring operating EBITDA less recurring capital improvements divided by interest incurred and preferred distributions.

LIQUIDITY TO IMPROVE PRO FORMA FOR ISSUANCE
ESS has a manageable debt maturity schedule with about 18% of total debt maturing during the next two years. Fitch estimates that ESS has a liquidity coverage ratio of 0.9x or ($217 million deficit) through Dec. 31, 2017. An issuance of $300 million to $500 million will largely correct the deficit. 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's unencumbered asset coverage of unsecured debt (UA/UD) was 3.3x at Dec. 31, 2015, providing sufficient contingent liquidity to unsecured bondholders. Fitch calculates UA using a direct capitalization approach of annualized fourth quarter 2015 (4Q'15) unencumbered NOI using a stressed 7.5% capitalization rate. ESS's UA/UD is adequate for the rating.

GEOGRAPHIC CONCENTRATION
The company is geographically concentrated in three primary markets: Southern California (45% of NOI), San Francisco Bay Area (37%), 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 IS NOTABLE
The company maintains an active development pipeline with remaining costs to complete the pipeline of $624 million pro rata for ESS's ownership percentage of JVs where the majority of the projects reside).

Remaining funding represents 4.5% of gross assets as of Dec. 31, 2015, compared with 3.2% at the end of 2014 and the company's 7.5% cycle peak in 2Q'12. Fitch views unfunded development costs approaching 10% to start becoming a credit concern. Fitch will assess 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 Issuer Default Rating (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
Fitch's key assumptions within the rating case for ESS include:
--SSNOI growth of 6% and 4% in 2016 and 2017, respectively;
--Acquisitions total $400 million in 2016 and $350 million in 2017;
--Dispositions total $200 million in 2016 and $100 million 2017;
--Development spending of $330 million per year over the rating horizon;
--$225 million of equity issuance per year through 2017;
--$400 million of unsecured note issuances during 2016 and $550 million during 2017.

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 5.9x at Dec. 31, 2015);
--Fitch's expectation of FCC sustaining above 3.5x (coverage was 3.6x at Dec. 31, 2015).

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).

FULL LIST OF RATING ACTIONS

Fitch currently rates ESS as follows:

Essex Property Trust, Inc.
--Issuer Default Rating (IDR) 'BBB+';
--Preferred stock 'BBB-'.

Essex Portfolio L.P.
--IDR 'BBB+';
--Unsecured line of credit 'BBB+';
--Senior unsecured notes 'BBB+'.