NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a credit rating of 'BBB-' to the $500 million unsecured term loan due 2020 entered into by Washington Prime Group, L.P., a subsidiary of WP Glimcher Inc. (NYSE: WPG). The company intends to use the proceeds to repay in full the outstanding indebtedness under, and to terminate, the bridge term loan agreement dated Jan. 15, 2015 and for other corporate purposes. The bridge loan was previously put in place to facilitate the merger of Washington Prime Group, Inc. and Glimcher Realty Trust (previously NYSE: GRT), which formed WP Glimcher Inc. The Rating Outlook is Stable.
KEY RATING DRIVERS
The 'BBB-' IDR takes into account that WPG's leverage is expected to improve towards the 6.0x-6.5x range over the next 12-to-24 months compared with 7.0x as of March 31, 2015 pro forma. Pro forma adjustments include the closing of the O'Connor Mall Partners, L.P. (O'Connor) joint venture, which resulted in approximately $430 million of cash to WPG and the transfer to O'Connor of a 49% share of the mortgage debt on the five assets held by the joint venture, the term loan due 2020, refinancings of mortgage debt on Pearlridge Center located in Aiea, Hawaii and Scottsdale Quarter located in Scottsdale, Arizona and the redemption of series G preferred stock. WPG's credit strengths include improved mall and community center asset quality following the merger and WPG's successful transition towards self-management thus far. WPG will retain ties to Simon Property Group, Inc. (NYSE: SPG, IDR of 'A' with a Stable Outlook), which spun off Washington Prime Group, Inc. in May 2014, for the remaining duration of agreements related to WPG's separation from SPG.
Joint Venture Improves Leverage; Still Above Pre-Merger Levels
Leverage is 7.0x as of March 31, 2015 pro forma, compared with 7.6x as of March 31, 2015 normalized and 5.2x pre-merger for full-year 2014. Leverage is typically higher in the first quarter of the year due to EBITDA seasonality and March 31, 2015 pro forma leverage is before the impact of merger synergies and the announced management transition (addressed below), which the company estimates will result in $12-$16 million of expense savings by year-end 2016. A joint venture to reduce WPG's corporate leverage and improve liquidity was among Fitch's expectations at the time of the merger. The joint venture values the assets at $1.625 billion implying a 5.25% capitalization rate, indicating that the JV properties are certain of WPG's stronger assets. The sale improves the company's leverage but also signaled the company's willingness to monetize certain high quality assets such as Pearlridge Center and Scottsdale Quarter.
WPG is targeting leverage of 6.0x-6.5x by 2016, and leverage sustaining below 6.0x may result in positive momentum in the ratings and/or Outlook. Fitch defines leverage as debt less readily available cash to recurring operating EBITDA.
Material Improvement in Liquidity Position
The term loan due 2020 lifts uncertainty surrounding the bridge loan repayment, which was scheduled to mature in January 2016, and WPG's liquidity coverage ratio is 1.3x for April 1, 2015 through Dec. 31, 2016 pro forma. Fitch defines liquidity coverage as liquidity sources divided by uses. Liquidity sources include unrestricted cash, availability under the company's revolving credit facility, and projected retained cash flows from operating activities. Liquidity uses include pro rata debt maturities, projected recurring capital expenditures, and cost to complete development through 2016. Should the company refinance 80% of secured debt maturities through 2016, which is not Fitch's expectation, liquidity coverage would improve to 2.9x. Following the Pearlridge Center and Scottsdale Quarter mortgage refinancings, the company now has $475.5 million of secured debt maturing through 2016 down from $842.1 million as of March 31, 2015.
The company's contingent liquidity, as measured by unencumbered assets (unencumbered net operating income [NOI] divided by a stressed 8.5% capitalization rate) to net unsecured debt is 2.1x pro forma, which is adequate for the 'BBB-' rating.
Solid Fixed-Charge Coverage
On April 15, 2015, WPG redeemed its 8.125% series G preferred stock. Fixed-charge coverage was 3.3x pro forma, which is solid for the 'BBB-' rating, flat when compared with 1Q2015. However, the repurchase was a leveraging transaction on the margin as Fitch considers preferred stock as equity. Fitch anticipates that this ratio will remain around 3.0x-3.5x for the next several years. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures and straight-line rent adjustments divided by interest incurred and preferred stock dividends.
Diversified Tenant Base; Exposure to Sears and JC Penney
The GRT merger improved WPG's asset quality as measured by increased stabilized mall sales per square foot and rents (rents were $21.11 as of March 31, 2015 compared with $21.00 as of Dec. 31, 2014), which Fitch views favorably. Occupancy declined sequentially, however, to 91.9% as of March 31, 2015 from 93.2% as of Dec. 31, 2014. The merger also deepened WPG's presence in Midwest markets, while expanding the footprint in California, Florida and Texas.
Tenant concentration is limited, and top tenants include Signet Jewelers at 3.2% of total base minimum rent, L Brands Inc. (IDR of 'BB+' with a Stable Outlook) at 2.7% and Foot Locker Inc. at 2.2%. Exposure to weaker tenants such as Sears Holding Corp. (IDR of 'CC') and JCPenney Company, Inc. (IDR of 'CCC') is manageable at only 1.2% and 1.4% of rent, respectively. However, these are the largest two tenants by gross leaseable area at 12.2% and 9.1%, respectively, a credit concern given the potential impact that an anchor's traffic and viability has on the overall mall's traffic.
On June 1, 2015, WPG announced that Mark Ordan, currently the Executive Chairman of the Board, will transition to serve as non-executive Chairman of the Board effective as of January 1, 2016. Michael Glimcher will continue to serve as the Company's Vice Chairman and Chief Executive Officer. Merger integration was effectuated under Ordan's leadership, and this announcement creates a simpler senior management structure going forward and should comprise a component of the $12 million to $16 million of estimated general and administrative expense and property operating expense merger synergies by year-end 2016.
Fitch assumes the following for WPG over the next 12-to-24 months:
--1.5% to 3.5% same-store NOI growth primarily driven by positive re-leasing spreads;
--Ongoing refinancing of debt maturities, capital expenditures and development with long-term capital sources, primarily unsecured bonds along with retained cash flow;
--Adjusted funds from operations payout ratio in 60-65% range;
--Further unencumbering of the portfolio.
The following factors may have a positive impact on the rating and/or Outlook:
--Fitch's expectation of leverage sustaining below 6.0x (pro forma leverage is 7.0x);
--Fitch's expectation of fixed charge coverage sustaining above 2.5x (pro forma fixed-charge coverage is 3.3x);
--Fitch's expectation of unencumbered assets, using a stressed 8.5% capitalization rate, coverage of net unsecured debt sustaining above 3.0x (this ratio is 2.1x pro forma).
The following factors may have a negative impact on the ratings and/or Outlook:
--Liquidity coverage sustaining below 1.0x (this ratio is 1.3x pro forma);
--Sustained deterioration in operating fundamentals or asset quality (e.g., sustained negative SSNOI results or negative leasing spreads);
--Fitch's expectation of leverage sustaining above 7.0x;
--Fitch's expectation of fixed charge coverage sustaining below 1.8x.
FULL LIST OF RATING ACTIONS
Fitch currently rates WP Glimcher Inc. and Washington Prime, Group, L.P. as follows:
WP Glimcher Inc.
Washington Prime Group, L.P.
--$900 million senior unsecured revolving credit facility 'BBB-';
--$1 billion senior unsecured term loans 'BBB-';
--$250 million senior unsecured notes 'BBB-'.
Date of Relevant Committee: April 23, 2015.
Additional information is available on www.fitchratings.com
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