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Essex Portfolio, L.P. -- Moody's affirms Essex Portfolio's Baa1 rating; outlook stable

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Rating Action: Moody's affirms Essex Portfolio's Baa1 rating; outlook stable

Global Credit Research - 04 Dec 2020

New York, December 04, 2020 -- Moody's Investors Service, ("Moody's") has affirmed the ratings of Essex Portfolio, L.P. (Essex), the main operating subsidiary of Essex Property Trust, Inc., including its Baa1 senior unsecured and Baa1 issuer ratings. The ratings affirmation reflects Essex's modest leverage, excellent liquidity and strong operating platform, which will help it to withstand near-term cash flow pressures as the weak macro environment is impacting jobs and apartment demand. The stable outlook reflects our expectation that Essex will retain modest overall and secured leverage levels through various market cycles. The outlook also considers continued short-term cash flow pressure, with expected gradual improvement in the latter part of 2021. Job growth and consumer preferences will remain important drivers of rental demand over time.

The following ratings were affirmed:

Issuer: Essex Portfolio, L.P.

- Issuer rating, Affirmed Baa1

- Senior unsecured, Affirmed Baa1

- Backed senior unsecured, Affirmed Baa1

- Backed senior unsecured shelf, Affirmed (P)Baa1

Outlook Actions: Issuer: Essex Portfolio, L.P. - Outlook, remains stable RATINGS RATIONALE

The Baa1 ratings reflect Essex's meaningful scale, high quality apartment portfolio and its position as the largest publicly traded apartment REIT focused in attractive West Coast markets. Essex benefits from high operating margins, which are a function of historicallly strong market rent growth and high occupancy, as well as strong fixed charge coverage and other cash flow metrics. The REIT remains committed to a largely unsecured capital structure, as well as operating within moderate leverage levels.

Key credit challenges include Essex's geographic concentration, particularly as its West Coast presence means its earnings are heavily reliant on the health of the technology sector. Moreover, the REIT's markets have been particularly hard hit by restrictive lock-down protocols related to COVID-19 that are impacting jobs and apartment demand.

Essex maintains excellent liquidity. As of October 22, the REIT had $1.7 billion of liquidity including $1.2 billion available on its unsecured revolver (matures in 12/2023 plus an 18-month extension option) and $500 million in cash that will be used towards repayment of 2021 maturities that include $500 million of senior notes and $32 million mortgages. 2022 maturities are manageable considering its line capacity with $393 million coming due.

FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS

An upgrade is unlikely absent greater geographic diversification. Consistently maintaining Net Debt/EBITDA below 5.0x, unencumbered assets greater than 80% of gross assets, secured debt less than 10% of gross assets, as well as fixed charge coverage closer to 5.0x could also lead to an upgrade.

A downgrade would be considered if Net Debt/EBITDA were to be sustained above 7.0x, effective leverage rose above 45%, fixed charge declined below 3.5x, or the REIT were to increase utilization of secured debt. Additionally, sustained leasing challenges or signs of structural changes in consumer preferences would cause downward ratings pressure.

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.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 at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.

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 ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.

The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Lori Marks VP - Senior Credit Officer Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Philip Kibel Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653

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