NEW YORK--(BUSINESS WIRE)--Fitch Ratings has upgraded the credit ratings of Brixmor LLC (Brixmor) as follows:
--Issuer Default Rating (IDR) to 'BB+' from 'BB-';
--Senior unsecured notes to 'BB+' from 'BB-'.
Fitch has revised the Rating Outlook to Positive from Stable.
KEY RATING DRIVERS
The upgrade reflects the improved financial and liquidity profile of Brixmor LLC's indirect parent company, Brixmor Property Group, Inc. (BRX or the company), including reduced leverage, stronger fixed charge coverage, and improved contingent liquidity, including a $1.25 billion revolving line of credit and an increased portfolio of unencumbered assets.
The Positive Outlook reflects Fitch's expectation that BRX's leverage and coverage metrics will continue to improve, and that the company will aggressively unencumber assets by refinancing secured mortgage debt with unsecured bonds and, or unsecured bank term loan borrowings.
Fitch views the relationship between Brixmor LLC and BRX as an important rating consideration. The ratings and Positive Outlook incorporate implicit support from BRX. Fitch views Brixmor LLC as a core part of BRX's business, reflecting strong operational and financial linkages between the two companies and Fitch analyzes Brixmor LLC's credit quality based on BRX's consolidated financial statements.
In addition, Fitch considers Brixmor LLC's 128 properties (pro forma for the IPO distributions) as being of comparable quality and market granularity to BRX's properties.
Highly Diversified Portfolio
BRX's credit profile benefits from widespread cash flow diversification by geography, assets, tenants and leases. The company's 522 properties comprise 87 million sf and are located in 38 states and over 175 metropolitan statistical areas (MSAs). The company's largest shopping center represents only 1.5% of ABR. Thirty-six percent of the company's annualized base rent (ABR) is located in the top-10 U.S. MSAs by population and 63% is in the top-50 MSAs. The company's largest market is the New York/Northern New Jersey metro, which comprises 6.1% of its ABR. The company has approximately 5,400 tenants in its portfolio with approximately 9,300 leases. BRX's top-20 tenants comprise 26.4% of its ABR as of Sept. 30, 2013. Five are investment grade rated, including The Kroger, Co. (IDR 'BBB'), which was the company's largest tenant at 3.4% of the company's ABR.
Improved Capitalization and Liquidity
BRX has strengthened its liquidity profile by obtaining a $2.8 billion credit facility in July 2013 and gaining access to the public equity markets in November 2013 through an upsized IPO that generated $891.3 million of net proceeds, including overallotments. The company used revolver and term loan borrowings under its credit facility to unencumber assets by paying off $2.4 billion of mortgages. The company used the IPO proceeds to pay down its revolver. Fitch expects that BRX's enhanced liquidity, access to capital and financial position should provide additional flexibility for the company to maintain and improve its properties. This, in turn, should result in higher occupancies and above average same store net operating income (SSNOI) growth that will strengthen the company's credit metrics.
Revolving lines of credit typically comprise the largest source of liquidity for REITs given the cash distribution requirements associated with electing REIT tax status do not enable issuers to retain meaningful amounts of cash. Fitch had traditionally viewed the lack of a revolving credit facility within the BRX corporate group (and Brixmor LLC specifically) as a key credit concern.
Fitch's base case analysis shows BRX's sources of liquidity through 2015 covering uses by 1.0x (0.9x including planned redevelopment expenditures). BRX's liquidity coverage improves to 2.2x (2.0x including redevelopment) under an alternate scenario in which the company refinances its secured maturities at an 80% advance rate, although Fitch views this scenario as less likely given the company's strategy to unencumber assets. Fitch calculates liquidity coverage as sources (cash, availability under the revolving credit facility and retained cash flow from operations after dividends) dividend by uses (debt maturities and recurring capital expenditures).
Slow and Steady De-Leveraging
Fitch expects BRX's leverage to improve to the high 6.0x range by the end of 2015, due to a combination of SSNOI growth, incremental NOI from redevelopments and modest debt reduction funded from free cash flow. BRX's leverage was 7.7x based on annualizing the company's pro forma recurring operating EBITDA for the quarter ended Sept. 30, 2013. The pro forma results adjust for portfolio and capitalization changes that occurred subsequent to quarter end as a result of BRX's IPO on Nov. 4, 2013. Fitch defines leverage as consolidated net debt divided by recurring operating EBITDA, including recurring cash distributions from joint ventures, but excluding non-cash above and below market lease income.
Improving Fixed-Charge Coverage
Fitch expects BRX's fixed charge coverage to improve to the high-2.0x range in 2015, due to higher property NOI, partially offset by higher interest costs associated with refinancing low cost, variable rate, secured borrowings with higher cost fixed rate unsecured debt. BRX's fixed-charge coverage was 2.1x for the year-to-date and annualized quarter ended Sept. 30, 2013. Fitch defines fixed-charge coverage as recurring operating EBITDA less non-cash revenues and recurring capital expenditures divided by cash interest incurred.
Above Average Internal Growth
Fitch expects BRX to generate above-peer average SSNOI growth of 4%, 3.5% and 3.5% in 2013, 2014 and 2015. Improved anchor and small shop occupancy rates and positive spreads on new and renewal leases commencing underpin Fitch's internal growth projections. BRX's occupancy has increased on a year-over-year basis in each of the last 11 quarters. Occupancy at Sept. 30, 2013, was 92.1% - up 90 basis points (bps) from the comparable year-ago period. Rental rate growth in BRX's portfolio has been positive for 11 consecutive quarters. Spreads on new and renewal leases (including options exercised) were positive 50.9% and 7.6%, respectively during the third quarter 2013.
Moreover, the company's pipeline of anticipated new leases signed and under letter of intent, has an average contractual rental rate of $14.57 per square foot (psf), which is a 23% premium compared to the $11.87 psf portfolio average rent. Fitch views the company's unbalanced lease expiration schedule, with an emphasis on near-term expirations as less of a credit concern given the below market nature of existing leases against the backdrop of favorable retail CRE industry fundamentals, including rising rental rates in most markets.
Simple Story; Few Legacy Issues
BRX operates with a relatively straightforward business model that includes whole ownership of U.S. based neighborhood and community shopping centers. The company has no material joint ventures and does not intend on making joint venture equity a focus of its growth strategy going forward. BRX's external growth strategy will focus on redevelopment of its existing centers. The company does not plan on engaging in ground-up development and has no legacy stalled development projects to work through from the prior cycle. Fitch does not expect the company to sell assets in the near term. BRX transferred 45 properties deemed to be non-core to Blackstone in exchange for 43 assets acquired by Blackstone from Regency Centers (IDR 'BBB') and Equity One. Fitch views the assets acquired from Blackstone to be of significantly higher quality than those transferred based on factors including market locations, occupancy rates, tenant credit quality and average rents.
Growing Unencumbered Pool
Fitch calculates the company's unencumbered assets cover its unsecured debt (UA/UD) by 1.9x. Fitch uses a direct capitalization approach of unencumbered property NOI assuming a stressed 8.5% capitalization rate. BRX's UA/UD is strong for the 'BB+' rating and the company plans to significantly unencumber assets over the next 1-3 years through refinancing (in some cases ahead of maturities) secured obligations with unsecured bonds and term loans and, to a lesser extent, through debt repayments with retained free cash flow. Given the debt yields of maturing mortgages, Fitch expects UA/UD to center in the 2.0x over the next several years.
Experienced Management and Sponsor
BRX has a cycle-tested management team with extensive real estate operating and capital markets experience, including prior executive-level roles at other publicly traded retail REITs. BRX management is committed to improving its balance sheet as part of its broader strategy of regaining access to the public unsecured bond markets.
Fitch views Blackstone's 77% majority ownership of BRX (70% voting interest) as moderate net negative to the credit. Positive aspects include access to Blackstone's extensive CRE experience and network of relationships. Although Blackstone representatives control the majority (five of nine) of its board seats, BRX has a strong set of corporate governance practices, including a non-staggered board, no shareholder rights plan and opting out of Maryland unsolicited takeover laws that generally favor management entrenchment.
However, if forced to choose, Fitch expects Blackstone to favor maximizing value for shareholders over bondholders. Blackstone plans to exit its investment in BRX during the next 3-5 years. This could also limit the company's flexibility to issue equity, which may be in competition with selling by Blackstone. REITs have historically relied on the equity capital markets to fund new investments, as well as to meet maturing debt obligations during times of economic and financial stress.
Asset Quality Lower than Peers
Fitch considers BRX's asset quality to be at or near the low end of its publicly traded peers, based on the portfolio's current operating metrics, including occupancy and rent psf, surrounding demographics and exposure to tertiary markets. Deferred maintenance due to lack of reinvestment under financially stressed previous owner Centro Properties is partly responsible for BRX's weak relative operating metrics. Fitch expects BRX to continue the program of reinvestment in its properties started under Blackstone's ownership. Longer term, Fitch expects BRX to reduce its exposure to secondary and tertiary markets by selling assets and recycling capital into primary markets. Although BRX's asset quality is below its publicly traded REIT peers, it shows well against the stock of U.S. retail properties, generally.
The following factors may result in an IDR upgrade for Brixmor LLC to 'BBB-'; based on the consolidated financial metrics of BRX:
--Fitch's expectation of fixed-charge coverage sustaining above 2.0x (annualized 3Q'13 pro forma coverage was 2.1x);
--Fitch's expectation of leverage sustaining below 7.0x (annualized 3Q'13 leverage was 7.7x);
--Fitch's expectation of unencumbered asset coverage of unsecured debt sustaining above 2.0x (unencumbered assets - valued as 3Q'13 annualized unencumbered NOI divided by a stressed capitalization rate of 8.5% to unsecured debt was 1.9x).
The following factors may negatively impact Brixmor LLC's ratings and/or Outlook; based on the consolidated financial metrics of BRX:
--Fitch's expectation of fixed-charge coverage sustaining below 1.8x;
--Fitch's expectation of leverage sustaining above 8.5x;
--Base case liquidity coverage sustaining below 1.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Recovery Ratings & Notching Criteria for Equity REITs' (Nov. 19, 2013);
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Rating Linkage' (Aug. 5, 2013);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Parent and Subsidiary Rating Linkage Fitch's Approach to Rating Entities within a Corporate Group Structure
Criteria for Rating U.S. Equity REITs and REOCs