April 26 – Fitch Ratings has upgraded the credit ratings of Federal Realty
Investment Trust (NYSE: FRT) as follows:
–Issuer Default Rating (IDR) to ‘A-‘ from ‘BBB+’;
–Unsecured revolving credit facility to ‘A-‘ from ‘BBB+’;
–Senior unsecured notes to ‘A-‘ from ‘BBB+’;
–Redeemable preferred shares to ‘BBB’ from ‘BBB-‘.
In addition, Fitch has assigned an ‘A-‘ rating to the company’s $275 million
senior unsecured term loan.
The Rating Outlook is Stable.
The rating actions are driven by the company’s prudent balance sheet management
and the high quality and consistent cash flow streams provided by FRT’s
community shopping centers. Fitch views positively FRT’s consistent strategy of
operating a high-quality retail real estate portfolio with assets located in
infill locations with strong demographic characteristics, as opposed to engaging
in speculative development in less mature retail markets. FRT maintains a
long-term hold strategy with respect to its properties and has successfully
grown rent revenues through redevelopment activity. This strategy has enabled
the company to produce consistently strong operating performance, which, while
weakened slightly during the downturn, is stronger and more stable than that of
the retail real estate market generally, and its shopping center peers,
specifically.
FRT’s property management expertise of its 87 properties comprising 19.3 million
square feet is reflected in consistently positive same property NOI growth,
excluding redevelopments since 2001, with the exception of 2009 when SSNOI
declined -0.3%. This compares to its shopping center peers which declined an
average of -4.0% in 2009. When including NOI from redevelopment properties,
FRT’s SSNOI growth has not dipped below 1.6% in any year over the last decade,
resulting in year-over-year recurring operating EBITDA growth. Fitch attributes
this outperformance to FRT’s disciplined strategy of owning assets in infill
markets with above-average household income.
FRT’s leverage and coverage metrics remain strong and appropriate for the
rating. FRT has historically managed leverage at conservative levels with net
debt to recurring operating EBITDA levels ranging between 4.8 times (x) and 5.5x
since 2006. Fitch expects leverage to remain between 4.5x to 5.5x and fixed
charge coverage to remain between 2.5x and 3.5x, ranges appropriate for the
rating.
Leverage stood at 5.5x as of Dec. 31, 2011, pro forma for 2011 acquisitions, as
compared to 5.0x at Dec. 31, 2010. 2011 leverage increased due to certain
acquisitions which had high amounts of in-place secured debt. Additionally,
FRT’s fixed charge coverage metrics have improved to 3.0x for the twelve months
ended Dec. 31, 2011, pro forma for 2011 acquisitions, from 2.4x at year end
2007. Fitch calculates fixed charge coverage as recurring operating EBITDA less
tenant improvements and incentives, recurring maintenance capital expenditures
and straight-line rent adjustments divided by total interest incurred and
preferred dividends.
Further protecting unsecured debt holders is a sizeable unencumbered pool of
assets. As of Dec. 31, 2011, 65 of the company’s 87 properties were
unencumbered. Based on a stressed 8.0% capitalization rate implied unencumbered
asset value covered net unsecured debt by 2.8x, which is appropriate for the
rating. Fitch notes the quality of the unencumbered asset pool which includes
FRT’s three largest (by ABR) and most iconic properties, Santana Row (San Jose,
CA), Bethesda Row (Bethesda, MD) and Third Street Promenade (Los Angeles, CA)
which together comprise almost 15% of ABR.
The high credit quality and granularity of FRT’s tenant base offset any
potential bankruptcy risk of one of the tenants, with only three tenants
representing more than 2% of ABR and the top 25 tenants represent a low 29% of
total ABR, as of Dec. 31, 2011. Fitch considers seven of the top 25 tenants
investment grade. The company maintains well laddered lease expirations by year
with no more than 4.5% of total square footage expiring in any given year, when
considering tenant lease extension options.
FRT has consistently reported strong rent growth on expiring leases, reflecting
both the strong infill locations of its properties coupled with the long term
nature of leases. New lease spreads have remained positive throughout the
economic downturn. These positive lease spreads have helped offset downward
pressure on NOI from declining occupancy levels. FRT is unique among its retail
REIT peers in its ability to maintain positive leasing spreads for both new and
renewal leases throughout the recent economic downturn.
Further, the company has maintained good access to capital markets and
management has prudently laddered the debt maturity schedule. Although nearly
15% of debt matures in 2014, the absolute amount of debt coming due of $325
million will likely be easily re-financed by FRT. FRT has a base case liquidity
surplus of $164.5 million through the end of 2013 excluding development
expenditures, and Fitch expects a slight $95.7 million shortfall including
development. While FRT has expressed preference for owning assets on an
unencumbered basis, the company would have a liquidity coverage ratio of 1.5x if
it refinanced 80% of its maturing secured debt, and 1.0x under the same
scenario, but considering development expenditures expected by Fitch.
Balancing these strengths are the portfolio’s moderate asset concentration and
continued weakness in the broader retail sector. FRT’s three largest properties
comprise roughly 15% of total ABR. These properties are premier retail assets in
their markets, with highly diversified tenant rosters, and have maintained
strong occupancy throughout the downturn, with Santana Row 94% leased, Bethesda
Row (91%) and Third Street Promenade (99%) as of Dec. 31, 2011. These assets are
comprised of multiple buildings across multiple non-contiguous blocks and cash
flow from the properties is diverse across tenants, mitigating asset
concentration.
The Stable Outlook centers on Fitch’s expectation that FRT’s credit profile will
remain appropriate for the ‘A-‘ rating through the economic cycles, barring any
significant changes in the company’s capital structure. The Stable Outlook
reflects the quality of management and consistency of cash flows resulting in
stable credit metrics, in line with an ‘A-‘ rating. Further, FRT continues to
access various sources of capital and maintains a solid unencumbered asset base
and liquidity profile.
The two-notch differential between FRT’s IDR and preferred stock rating is
consistent with Fitch’s criteria for corporate entities with an IDR of ‘A-‘.
Based on Fitch research titled ‘Treatment and Notching of Hybrids in
Nonfinancial Corporate and REIT Credit Analysis’, available on Fitch’s web site
at ‘www.fitchratings.com’, 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.
Guidelines for Further Rating Actions:
The following factors may have a positive impact on FRT’s ratings and/or
Outlook:
–Net debt to recurring EBITDA sustaining below 4.5x (leverage was 5.5x as of
Dec. 31, 2011);
–Fixed charge coverage sustaining above 3.5x (coverage was 3.0x for the 12
months ending Dec. 31, 2011).
–Greater asset diversification of the portfolio, particularly a reduction in
the company’s two largest assets, which generate roughly 12.0% of total ABR.
The following factors may result in negative momentum on the rating and/or
outlook:
–Shift in management strategy away from owning and redeveloping retail assets
in infill locations;
–Decelerating trends in NOI;
–Unencumbered Asset coverage of Unsecured Debt below 2.5x (UAUD coverage was
2.8x for 2011)
–Net debt to recurring EBITDA sustaining above 5.5x;
–Fixed charge coverage sustaining below 2.5x.
