NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the credit ratings of Federal Realty Investment Trust (NYSE: FRT) as follows:
--Issuer Default Rating (IDR) at 'BBB+';
--Unsecured revolving credit facility at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Redeemable preferred shares at 'BBB-'.
The Rating Outlook is Stable.
Fitch's affirmation of FRT's ratings stems from the view that the company's credit profile will remain consistent with the current 'BBB+' rating level. Fitch notes the strength of FRT's management team which prudently navigated the company through a difficult operating cycle. The company maintained its credit metrics within a range appropriate for the 'BBB+' rating, despite the difficult operating environment. In addition, the company's pool of unencumbered properties provides protection to unsecured creditors and preferred share holders. Credit concerns include the asset concentration of the portfolio, as well as the continued challenges of the retail industry.
FRT has consistently followed a 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. The company 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 than that of the retail real estate market generally.
The company's leverage and fixed charge coverage ratios have remained within a range appropriate for the 'BBB+' rating. Leverage (defined as net debt to recurring operating EBITDA) stood at 5.0 times (x) at Dec. 31, 2010, up slightly from 4.8x at Dec. 31, 2009. In addition, the company's fixed charge coverage ratio (defined 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) stood at 2.8x for the 12 months ended Dec. 31, 2010, unchanged from the same period ended Dec. 31, 2009.
Further supporting the 'BBB+' rating is the company's large pool of unencumbered assets, which provides significant financial flexibility to the company. As of Dec. 31, 2010, 60 of the company's 85 properties were unencumbered with a gross book value of $3 billion (80% of total undepreciated assets excluding construction in progress). The company's unencumbered assets (valued at a stressed 8.5% capitalization rate) covered the company's unsecured debt by 3.0x, which is strong for the rating category. In addition, FRT's risk-adjusted capitalization ratio was strong at 1.34x at the 'BBB+' stress level as of Dec. 31, 2010.
While FRT's total sources of liquidity (unrestricted cash, availability under the unsecured revolving credit facility, and projected retained cash flow from operating activities after dividends) exceed uses of liquidity (pro rata debt maturities, expected recurring capital expenditures, and remaining non-discretionary development costs) by only 0.9x for the period Jan. 1, 2011 to Dec. 31, 2012, if the company were to refinance 80% of the its secured debt, the company would have a liquidity coverage ratio of 1.0x. The company has strong access to the capital markets and would be able to refinance its upcoming secured and unsecured debt maturities, mitigating any liquidity shortfalls.
FRT's largest three markets generated roughly 55.5% of total ABR at Dec. 31, 2010. The Washington, D.C. metropolitan area market is by far the company's largest, accounting for 32% of the total portfolio gross leaseable area (GLA) and 35.6% of the portfolio's total ABR. The second and third largest markets by ABR were San Jose and Philadelphia, accounting for 10% and 9.8% of the total, respectively. Operating fundamentals in the Washington, D.C. metropolitan area market have exceeded the national average over long periods due to supply constraints, as well as positive employment and demographic trends. The market has continued to outperform the national average during this downturn and is expected to experience strong recoveries in 2012 and 2013. The company's portfolio in San Jose and Philadelphia remain well leased at 97% and 92%, respectively.
Balancing these strengths is the portfolio's moderate asset concentration, as well as continued weakness in the retail sector. FRT's two largest properties measured by total annual base rent (ABR), Santana Row (San Jose) and Bethesda Row (Washington, D.C. metro) comprise roughly 12% of total ABR. These properties are both premier retail assets in their markets, with highly diversified tenant rosters, and have maintained strong occupancy throughout the downturn, with Santana Row 99% leased and Bethesda row 96% leased as of Dec. 31, 2010.
FRT's property level fundamentals have stabilized and improved over the last 24 months with same store NOI growth (including redevelopments) of 2.3% in 2010 after increasing 1.6% in 2009. The company's portfolio was 94.3% leased as of Dec. 31, 2010, well above the average of the 54 markets tracked by Property and Portfolio Research (PPR) of 81.5%. Relative to the broader retail real estate segment, FRT has fared better during this downturn than the retail real estate sector due to the high quality of its properties and its granular tenant roster, which has limited the downside in the event of tenant bankruptcies.
Fitch forecasts FRT's same store NOI (excluding redevelopments) will grow modestly, around 1% for each of the next three years. Under this base case analysis, FRT's leverage remains below 5.0x and the company's fixed charge coverage ratio improves to slightly above 3.0x, levels appropriate for the 'BBB+' rating and the Stable Outlook.
The two notch differential between FRT's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB+' IDR. Based on Fitch's criteria report 'Equity Credit for Hybrids & Other Capital Securities', FRT's preferred stock is 75% equity-like and 25% debt-like, since it is perpetual and has no covenants but has a cumulative deferral option in a going concern.
Guidelines for Further Rating Actions:
The following factors may have a positive impact on FRT's ratings or Outlook:
--Greater asset diversification of the portfolio, particularly a reduction in the company's two largest assets, which generate roughly 12.3% of total ABR;
--Net debt to recurring EBITDA sustaining below 4.5x for several quarters (leverage was 5.0x as of Dec. 31, 2010);
--Fixed charge coverage sustaining above 3.0x for several quarters (coverage was 2.8x for the 12 months ending Dec. 31, 2010).
The following factors may have a negative impact on FRT's ratings or Outlook:
--Total debt to recurring EBITDA sustaining above 6.0x for several quarters;
--Fixed charge coverage sustaining below 2.0x for several quarters.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--Criteria for Rating U.S. Equity REITs and REOCs, March 15, 2011;
--Corporate Rating Methodology, Aug. 16, 2010;
--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.
Applicable Criteria and Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology
Equity Credit for Hybrids & Other Capital Securities - Amended
Rating Hybrid Securities
Recovery Rating and Notching Criteria for REITs