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New York, September 08, 2022 — Moody’s Investors Service ("Moody’s") has affirmed Washington Real Estate Investment Trust’s ("Washington REIT") senior unsecured rating at Baa2. The outlook is stable.
The stable outlook reflects Moody’s expectation that Washington REIT will continue expanding its portfolio while maintaining its conservative credit metrics.
The following ratings were affirmed:
Washington Real Estate Investment Trust — senior unsecured debt at Baa2; MTN Program at (P)Baa2; senior unsecured shelf at (P)Baa2
Outlook Action:
Issuer: Washington Real Estate Investment Trust
Outlook, Remains Stable
RATINGS RATIONALE
The Baa2 rating reflects the REIT’s experienced management team and proven track record as a multifamily operator in the Washington metro area. It also reflects the company’s solid fixed charge coverage and good financial flexibility. These credit strengths are offset by the REIT’s relatively small size at $2.4 billion in gross assets (as of June 30, 2022) and geographically concentrated portfolio in Northern VA. Near-term challenges include a slower transaction market amid more volatile market conditions which could inhibit Washington REIT’s ability to scale and grow its apartment portfolio more rapidly.
Moody’s rating also reflects Washington REIT’s efforts to strengthen existing and future cash flows by expanding its multifamily platform and selling its riskier commercial assets. The company’s conservative financial policies earmarked by consistently modest leverage also support the stable outlook. At June 30, 2022, Washington REIT’s leverage as measured by net debt to EBITDA (including Moody’s standard adjustments) was 6.2x. Since divesting its commercial assets, the company has targeted and acquired multifamily assets in Southeast markets with $440 million invested since 2021 (having closed five acquisitions in Atlanta); Moody’s continues to see strong demographic trends and historical highs in rent growth in Southeast apartment markets, driven by its affordability and pro-business environment. Management has a good track record as an apartment operator and proven ability to drive rent growth; New lease rates and renewal lease rates for the same-store multifamily portfolio were strong, at 11.7% and 10.9%, respectively for 2Q22.
Lastly, the REIT’s liquidity position is supported a large, unencumbered asset pool and access to a $700 million unsecured revolving credit facility that matures in August 2026, assuming its two 6-month extension options are exercised. There was zero outstanding on the credit facility at June 30, 2022. The company’s debt maturities remain well-laddered with only $100 million coming due in 2023.
The stable outlook reflects Moody’s expectation that Washington REIT will continue expanding its portfolio while maintaining its conservative credit metrics.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
Upward ratings movement is unlikely and would require greater scale and profitability, in addition to sustaining fixed charge coverage above 6.0x (with capitalized interest), Net debt/EBITDA below 5.5x and growth in size closer to $10 billion in gross assets with market diversification.
Downward rating pressure would result from a shift in the REIT’s credit metrics such that fixed charge coverage falls below 3.0x, Net debt/EBITDA approaching 7.0x and secured debt levels approaching 15% of gross assets. Any stress on the REIT’s liquidity position would also result in negative ratings pressure.
Washington Real Estate Investment Trust [NYSE: WRE] is a REIT that that owns approximately 8,900 residential apartment homes in the Washington, DC metro and Southeast regions. The REIT also owns approximately 300,000 square feet of commercial space in the Washington, DC metro region.
The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms Methodology published in July 2021 and available at https://ratings.moodys.com/api/rmc-documents/74168. Alternatively, please see the Rating Methodologies page on https://ratings.moodys.com for a copy of this methodology.
REGULATORY DISCLOSURES
For further specification of Moody’s key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody’s Rating Symbols and Definitions can be found on https://ratings.moodys.com/rating-definitions.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody’s rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider’s credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the issuer/deal page for the respective issuer on https://ratings.moodys.com.
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Alice Chung
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