Fitch Ratings has assigned an 'A-' rating to the $250 million aggregate principal amount 3.00% senior unsecured notes due 2022 issued by Federal Realty Investment Trust (NYSE: FRT).
The notes were priced at 98.743% of par to yield 3.147% to maturity. Net proceeds from the offering are expected to be used to repay any outstanding indebtedness under FRT's revolving credit facility and for general corporate purposes, which may include funding potential acquisition opportunities or the company's redevelopment pipeline.
Fitch currently rates FRT as follows:
--Issuer Default Rating (IDR) 'A-';
--Unsecured revolving credit facility 'A-';
--Senior unsecured term loan 'A-';
--Senior unsecured notes 'A-';
--Redeemable preferred shares 'BBB'.
The Rating Outlook is Stable.
The ratings 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 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 rental 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 public shopping center peers, specifically.
FRT's property management expertise of its 87 properties comprising 19.2 million square feet is reflected in consistently positive same property net operating income (NOI) growth, excluding redevelopments since 2001, with the exception of 2009 when same-store NOI (SSNOI) declined -0.3%. This compares to its public shopping center peers which declined an average of -4% 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 aforementioned strategy.
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 5.7x 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 March 31, 2012, as compared to 5.0x at Dec. 31, 2010. Leverage has increased due to certain acquisitions which had high amounts of in-place secured debt. Conversely, FRT's fixed charge coverage metrics have improved to 2.8x for the quarter ended March, 2012, up 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% 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 annualized base rent [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 four tenants representing more than 3% of ABR and the top 25 tenants represent a low 29% of total ABR, as of March 31, 2012. Fitch rates nine of the top 25 tenants as investment grade. The company maintains well laddered lease expirations by year with no more than 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 high quality infill locations of its properties coupled with the long term nature of leases. New lease spreads have remained positive throughout the economic downturn offsetting 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 the capital markets and management has prudently laddered the debt maturity schedule excluding 2014 when nearly 15% of debt matures. Despite the moderate concentration in 2014, the absolute amount of debt coming due (including scheduled amortization) of $308 million will likely be easily re-financed by FRT. FRT has a base case liquidity surplus of $162 million through the end of 2013 excluding development expenditures, and Fitch expects a slight shortfall including development. While FRT has expressed its 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. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility pro forma for the recent commitment size increase, projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and projected recurring capital expenditures) for March 31, 2012 to Dec. 31, 2013.
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 99% leased, Bethesda Row (92%) and Third Street Promenade (98%) as of March 31, 2012. 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
--Net debt to recurring EBITDA sustaining below 4.5x (leverage was 5.5x as of March 31, 2012);
--Fixed charge coverage sustaining above 3.5x (coverage was 2.8x for the 12 months ending March 31, 2012);
--Greater asset diversification of the portfolio, particularly a reduction in the company's two largest assets, which generate roughly 12% of total ABR.
The following factors may result in negative momentum on the rating
--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 (coverage was 2.8x as of Dec. 31, 2011);
--Net debt to recurring EBITDA sustaining above 5.5x;
--Fixed charge coverage sustaining below 2.5x.
Additional information is available at www.fitchratings.com. The ratings above were unsolicited and have been provided by Fitch as a service to investors.
Applicable Criteria and Related Research:
--'Recovery Ratings and Notching Criteria for Equity REITs' (May 3, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 15, 2011);
--'Corporate Rating Methodology' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Corporate Rating Methodology
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