NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the credit ratings of Federal Realty Investment Trust (NYSE: FRT) (Federal) as follows:
--Issuer Default Rating (IDR) at 'A-';
--Unsecured revolving credit facility at 'A-';
--Senior unsecured term loan at 'A-';
--Senior unsecured notes at 'A-';
--Redeemable preferred shares at 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The consistent and steady cash flow growth provided by Federal's community shopping centers underpin Fitch's ratings and Outlook, together with the company's track record of prudent balance sheet management and creative redevelopment and mixed-use development.
The potential for near-term weakness in Federal's Washington, D.C. portfolio (34% of annualized base rent [ABR]) due to softer regional economic growth and some remaining execution risk related to its mixed-use developments under construction balance these credit positives.
Fitch views positively Federal's buy-and-hold strategy that targets premier retail properties in supply-constrained markets with above average demographics. This strategy, augmented by the company's redevelopment activities, has enabled Federal to produce consistently strong operating performance that has historically been stronger and more stable - through the cycle - than the retail real estate market generally and its public shopping center REIT peers specifically.
Consistent and Superior Growth
Federal's property management expertise of its 87 properties comprising 19.5 million square feet (excluding joint ventures) as of Dec. 31, 2013 is evidenced by consistently positive same store net operating income (SSNOI) growth, excluding redevelopments, through multiple cycles. Within the last 10 years, the lone exception was 2009 when SSNOI declined -0.3%.
This compares favorably to its public shopping center peers who 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 significantly stronger than its peers.
Federal's consistently strong rent growth on expiring leases largely reflects the high quality infill locations of its properties. Federal's releasing spreads have been higher than peers during this economic and commercial real estate recovery. Moreover, the company was unique among its retail REIT peers in its ability to maintain positive leasing spreads throughout the recent economic downturn.
Federal's leverage and coverage metrics are strong and appropriate for the rating. FRT has historically managed leverage at conservative levels with net debt to recurring operating EBITDA levels ranging between the mid-4.0 times (x) and mid-5.0x during the last 10 years. Fitch expects Federal's leverage to sustain in the high-to-mid 5.0x range, trending towards the lower end by 2016 as the company's larger developments come on-line and begin to contribute to portfolio cash flows during the next two to three years. Leverage was 5.4x as of Dec. 31, 2013 compared to 5.5x as of Dec. 31, 2012 and 5.7x at Dec. 31, 2011.
Strong Fixed-Charge Coverage
Federal's fixed-charge coverage was 3.0x for the year ended Dec. 31, 2013 compared to 2.7x in 2012 and 2.9x in 2011. Fitch expects fixed-charge coverage to improve to the high 3.0x range in 2016, which is strong for the rating. 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 interest incurred and preferred dividends.
Good Contingent Liquidity
Federal's sizeable unencumbered asset pool provides additional protection to unsecured debt holders. As of Dec. 31, 2013, 73 of the company's 87 properties were unencumbered. Fitch calculates the company's unencumbered asset value coverage of unsecured debt (UA/UD) was 3.0x at Dec. 31, 2013, based on applying a stressed 7% capitalization rate to the fourth quarter 2013 (4Q'13) unencumbered NOI.
Fitch's ratings for Federal contemplate the high quality of its unencumbered asset pool which includes the company's three largest (by ABR) and most valuable properties, Santana Row (San Jose, CA), Bethesda Row (Bethesda, MD) and Third Street Promenade (Los Angeles, CA) which together comprised approximately 15% of ABR.
Granular Tenant Base
High tenant credit quality and granularity within Federal's portfolio help mitigate tenant bankruptcy risk. Only one tenant represents more than 3% of ABR, and the top 25 tenants represent a relatively low 30% of total ABR as of Dec. 31, 2013.
The company maintains well laddered lease expirations by year with average annual lease expirations of 8.8% of total square footage and a maximum of 14% of square feet expiring in a single year (excluding tenant lease extension options).
Strong Access to Capital
Further, the company has maintained good access to the capital markets and has a reasonably well laddered the debt maturity schedule, notwithstanding moderate increases in the company's 2017 debt maturities to 16.3% of total debt, which Fitch views as manageable.
Solid Liquidity Coverage
Fitch's base case analysis shows liquidity coverage of 2.7x through the end of 2015 and 1.4x including unfunded development commitments. The company's liquidity coverage ratio (including development) would improve to 2.0x assuming it refinanced 80% of its secured debt maturing in 2014 and 2015. However, Fitch recognizes Federal's preference for owning assets on an unencumbered basis, reducing the likelihood of that scenario.
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 Jan. 1, 2014 to Dec. 31, 2015.
Federal's demonstrated access to multiple forms of capital further supports its liquidity profile and offsets refinancing risk. In addition, Federal's retained operating cash flow after dividend payments provides over $100 million of internally generated capital annually that can be used to make accretive investments and/or satisfy its financing obligations. Fitch calculates that the company's dividends represented 84.5% adjusted funds from operations during 2013.
The portfolio's moderate asset and market concentrations and continued industry-wide weakness among select retailer tenants - primarily local small-shop tenants - are moderate credit concerns. Federal's three largest properties comprise roughly 15% of total ABR. Also, Federal generates approximately 34% of its ABR from the D.C. Metro market where commercial real estate market conditions are weakening due to cutbacks in U.S. government spending.
Preferred Stock Notching
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.
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.
While Fitch does not expect near-term positive momentum on the rating, the following factors may have a positive impact on FRT's ratings and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 4.5x (leverage was 5.4x as of Dec. 31, 2013);
--Fitch's expectation of fixed charge coverage sustaining above 3.5x (coverage was 3.0x for the 12 months ending Dec. 31, 2013).
--Greater asset diversification of the portfolio via growth (FRT's three largest assets generate roughly 15% 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;
--Unencumbered asset coverage of unsecured debt below 2.5x (coverage was 3.0x as of Dec. 31, 2013 utilizing a stressed 7% capitalization rate);
--Fitch's expectation of leverage above 5.5x;
--Fitch's expectation of fixed charge coverage sustaining below 2.5x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26, 2014);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 23, 2013);
--'Recovery Rating and Notching Criteria for REITs' (Nov. 19, 2013);
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (Aug. 5, 2013).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage
Criteria for Rating U.S. Equity REITs and REOCs