Fitch Affirms Vornado Realty Trust's IDR at 'BBB'; Outlook Stable

NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Ratings (IDRs) and security level ratings of Vornado Realty Trust (NYSE: VNO) and its subsidiary Vornado Realty, L.P. (together, Vornado) as follows:

Vornado Realty Trust

--IDR at 'BBB';

--Perpetual preferred stock at 'BB+'.

Vornado Realty, L.P.

--IDR at 'BBB';

--Unsecured revolving credit facilities at 'BBB';

--Senior unsecured notes at 'BBB';

--Convertible senior unsecured notes at 'BBB';

--Exchangeable senior unsecured notes at 'BBB'.

The Rating Outlook is Stable.

The rating affirmations are supported by a strong management track record, diverse portfolio of high quality assets, large unencumbered asset pool with strong coverage of unsecured debt, strong leasing profile, solid debt service coverage ratios, and manageable leverage.

For the twelve months ended Sept. 30, 2009, Fitch calculated that Vornado's fixed charge coverage (calculated as recurring operating EBITDA less straight line rents less capitalized expenditures divided by total interest incurred plus preferred stock dividends) was 2.0 times (x), up from 1.8x for the year ended Dec. 31, 2008. Net debt to recurring operating EBITDA was 6.9x at Sept. 30, 2009, down from 7.4x at Sept. 30, 2008 and 7.2x at Dec. 31, 2007.

Approximately 70% of the company's EBITDA (including the company's share of Toys 'R Us) for the first nine months of 2009 was generated by its properties in the New York and Washington D.C. metropolitan areas. While operating conditions remain weak compared to peak periods across the company's business units, Fitch expects that long-term fundamentals in New York and Washington D.C. in particular will remain solid, with lender and investor appetite for properties in these markets providing contingent liquidity to the company.

Vornado maintains a strong leasing profile, with the top 20 tenants only representing 23.5% of total rent as of Sept. 30, 2009. Only two tenants, the U.S. Government (7.8%) and Bank of America (2%), represented more than 1.5% of 2009 annualized rent revenue. The company's roster of top 20 tenants also includes many corporate tenants with solid credit profiles. The company's largest business units also have manageable lease expiration schedules, with fewer than 15% of annualized escalated rents coming due in any particular year.

As of Sept. 30, 2009, the company's development and redevelopment pipeline had a cost to complete of approximately $220 million. Rental income from the stabilization of newly developed projects is expected to offset any potential rent roll-downs in the event that above-market lease expirations occur.

Vornado maintains financial flexibility with a large unencumbered pool of assets across its business units that have strong coverage of unsecured debt. Vornado maintains approximately $9 billion of unencumbered assets under the company's unsecured debt covenant definitions, using a 7.5% cap rate. Pro forma for the tender offer for approximately $1.55 billion of convertible senior unsecured notes in Dec. 2009, unencumbered assets covered unsecured debt by 3.7x. Using a stressed 10% capitalization rate, Fitch calculated Vornado's unencumbered asset coverage of unsecured debt to be approximately 2.6x.

Additionally, the company's ratios related to the financial covenants under its unsecured credit facilities and unsecured bond indentures do not hinder the company's financial flexibility.

Pro forma for the company's December 2009 tender offer, Fitch calculated that for the period Sept. 30, 2009 to Dec. 31, 2011, Vornado's sources of liquidity (unrestricted cash, availability of under Vornado's revolving credit facilities and expected retained cash flows from operating activities) were exceeded by uses of liquidity (debt payments, expected development and recurring capital expenditures) by $169 million, assuming Vornado's unsecured credit facility with a final maturity date of June 2011 is reduced by one-third. However, this stressed analysis assumes that no additional capital is raised to repay obligations and Vornado has demonstrated good access to a variety of capital sources over time, including during challenging market conditions in the first half of 2009. If 80% of maturing secured debt was refinanced, Vornado's liquidity coverage ratio (total sources divided by total uses) would be 1.35x.

Fitch's primary credit concerns relate to the geographic concentration inherent in the portfolio, softer operating conditions, and uncertainty surrounding Vornado's opportunistic investment strategy.

While Fitch believes that current market rents are well below peak levels across most of Vornado's business platforms, the company remains protected by long average remaining lease terms with positive mark-to-market re-leasing spreads in some cases. For the nine months ended Sept. 30, 2009, cash same store EBITDA was up 5.7% for the company's New York office division, up 5.2% for the company's Washington D.C. office division, and up 1.8% for the company's retail division. While Fitch believes that some erosion in these metrics is likely in the coming quarters, any declines in same store EBITDA in 2010 and 2011 are likely to be moderate.

The two-notch differential between Vornado's IDR and its perpetual preferred stock rating is consistent with Fitch's criteria for corporate entities with hybrid securities. Based on Fitch's criteria reports 'Rating Hybrid Securities' and 'Equity Credit for Hybrids & Other Capital Securities- Amended,' both dated Dec. 29, 2009, the company's cumulative preferred stock has loss absorption elements that would likely result in poor recoveries in the event of a corporate default.

The Stable Outlook reflects Fitch's expectations that Vornado's leverage and debt service coverage ratios will remain stable, given the company's long average lease terms in place and the effects of incremental new development on portfolio cash flow. Fitch's projected fixed charge coverage under a base case scenario is 2.1x in both 2010 and 2011.

The following factors may have a positive impact on the ratings:

--Net debt to recurring operating EBITDA sustaining below 6.5x; (leverage was 6.9x as of Sept. 30, 2009);

--Fitch-defined fixed charge coverage maintaining above 2.5x; (coverage was 2.0x for the twelve months ended Sept. 30, 2009);

--EBITDA generated from New York and Washington D.C. properties sustaining below 50% of consolidated EBITDA (70% for the first nine months of 2009);

--Stability related to property market fundamentals in New York and Washington D.C., as evidenced by increased absorption of vacant space and rising net effective rents for multiple quarters.

The following factors may have a negative impact on the ratings:

--Net debt to recurring operating EBITDA sustaining above 8.0x;

--Fitch-defined fixed charge coverage maintaining below 1.7x.

A fully integrated Real Estate Investment Trust based in New York City, Vornado Realty Trust is one of the largest owners and managers of real estate in the U.S. As of Sept. 30, 2009, the company owned and managed over 100 million square feet of space in its main business platforms.

These rating actions reflect the application of Fitch's current criteria which are available at 'www.fitchratings.com' and specifically include the following reports:

--'Equity Credit for Hybrids & Other Capital Securities- Amended' (Dec. 29, 2009);

--'Rating Hybrid Securities' (Dec. 29, 2009);

--'Recovery Rating and Notching Criteria for REITs' (Dec. 23, 2009);

--'Corporate Rating Methodology' (Nov. 24, 2009);

--'Updated Criteria for U.S. REIT Risk-Adjusted Earnings' (Aug. 10, 2009);

--'Evaluating Corporate Governance' (Dec. 12, 2007);

--'Updated Criteria for U.S. Equity REIT Capital Standards; (Nov. 12, 2007);

--'Criteria for Rating U.S. Equity REITs' (Aug. 9, 2007);

--'Parent and Subsidiary Rating Linkage' (June 19, 2007).

Additional information is available at 'www.fitchratings.com'.

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