Fitch Rates Brixmor OP's $500MM 3.875% Notes due 2022 'BBB-'; Outlook Stable

NEW YORK--()--Fitch Ratings has assigned a 'BBB-' credit rating to the $500 million unsecured notes issued by Brixmor Operating Partnership LP, a subsidiary of Brixmor Property Group, Inc. (NYSE: BRX). The 2022 notes were priced at 99.223% of par, or at 4.003%, a 200 basis point spread to the benchmark treasury.

BRX expects to use all or a portion of the net proceeds from this offering to refinance maturing indebtedness and for general corporate purposes.

The Rating Outlook is Stable.

KEY RATING DRIVERS

Brixmor's ratings reflect the company's large and diverse portfolio of 519 properties, its strong cycle-tested management team, and fixed-charge coverage (FCC) and unencumbered asset coverage of unsecured debt (UA/UD) that are appropriate for a 'BBB-' rated REIT.

These positive rating elements are offset by elevated leverage and lower asset quality relative to peers.

The Stable Outlook reflects Fitch's expectation that BRX's financial profile will remain appropriate for a 'BBB-' REIT during the Rating Outlook horizon (typically one to two years). However, Fitch anticipates positive momentum in Brixmor's credit profile, based on the agency's expectation for the company to make steady progress against its mid-6.0x leverage target and aggressively unencumber assets.

Expectations of Steady De-Leveraging; Still High

Fitch expects BRX's leverage to improve to the mid-6.0x range by the end of 2016 through a combination of same store net operating income (SSNOI) growth, incremental NOI from redevelopments and modest internally funded debt repayments.

BRX's leverage (gross debt net of readily available cash as of June 30, 2015 divided by recurring operating EBITDA, including recurring cash distributions from joint ventures but excluding non-cash above and below market lease income) for the trailing 12 months (TTM) June 30, 2015 was 7.4x, level from year-end 2014 and down slightly from 7.7x as of year-end 2013.

Improved Liquidity Elements

BRX's enhanced liquidity, access to capital and financial position provide additional flexibility for the company to maintain and improve its properties. Fitch expects this to result in higher occupancies and above average SSNOI growth that will strengthen the company's credit metrics.

BRX 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 its IPO that generated $891.3 million of net proceeds. 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 primary IPO proceeds to pay down its revolver.

BRX further demonstrated its access to unsecured debt through its inaugural $700 million unsecured bond issuance in January 2015 and a $600 million term loan issuance in March 2014.

Growing Unencumbered Pool

Fitch expects BRX's unencumbered assets will cover its unsecured debt (UA/UD) by approximately 2.0x over the rating horizon, based on the interplay between the company's aggressive asset unencumbrance plan (including prepaying select mortgage maturities) and the related incremental unsecured borrowings.

Fitch calculates the company's UA/UD was 2.0x at June 30, 2015. Fitch uses a direct capitalization approach of unencumbered property NOI (excluding non-cash rental revenues) assuming a stressed 8.5% capitalization rate. BRX's UA/UD is appropriate for the 'BBB-' rating.

Improving Fixed-Charge Coverage

Fitch expects BRX's FCC to improve to the high-2.0x range by 2016, due to higher property NOI, partially offset by higher interest costs associated with refinancing lower cost variable rate and/or secured borrowings with higher cost fixed rate unsecured debt.

BRX's FCC was 2.4x for TTM June 30, 2015, compared to 2.3x for year-end 2014 and 2.1x for year-end 2013. Fitch defines fixed-charge coverage as recurring operating EBITDA including recurring cash distributions from joint ventures less non-cash revenues and recurring capital expenditures divided by cash interest incurred.

Highly Diversified Portfolio

BRX's credit profile benefits from widespread cash flow diversification by geography, assets, tenants and leases. The company's 519 properties comprise 87 million sf and are located in 38 states primarily across the top 50 U.S. metropolitan markets. Over 37% of its ABR is located in the top-10 U.S. MSAs by population and over 65% is in the top-50 MSAs. New York/Northern New Jersey metro was the company's largest market exposure at 6.7% of ABR.

The company has approximately 5,600 tenants in its portfolio with approximately 9,500 leases. BRX's top-20 tenants comprise 26.6% of its ABR as of June 30, 2015. Fitch rates four of these tenants as investment grade (Kroger, Wal-mart, Staples, Kohls) and The Kroger, Co. (IDR 'BBB'/Outlook Stable) was the company's largest tenant at 3.2% of the company's ABR.

Solid Internal Growth

Fitch expects the company's SSNOI to grow by 3.5% in both 2015 and 2016, respectively. Positive re-leasing spreads on new and renewal leases underpin Fitch's internal growth projections.

Spreads on new and renewal leases (including options exercised) were positive 40.7% and 8.8%, respectively for the TTM ended June 30, 2015. Occupancy at June 30, 2015, was 92.5%, unchanged from the comparable year-ago period.

Brixmor has an elevated amount of lease expirations through 2016, with nearly 20% of its leased GLA scheduled to expire (excluding extension options). Fitch is comfortable with BRX's leasing risk profile given the below market rents for existing leases and generally favorable retail CRE fundamentals. Healthy demand and low levels of new supply are supporting occupancy and rental rate growth for shopping centers in most U.S. 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 anchor repositioning and 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 has not provided for any property acquisitions or sales in its forecast model. However, Fitch considers it more likely that BRX may begin to sell individual properties, targeting stabilized assets with fully-realized growth potential.

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 being a consistent public unsecured bond issuer.

Modest Near-Term Liquidity Surplus

Fitch's base case analysis, pro forma for the $500 million unsecured issuance, shows BRX's sources of liquidity covering its uses by 1.2x, and 1.1x when including development, from July 1, 2015 through Dec. 31, 2016.

BRX's liquidity coverage improves to 3.0x under an alternate scenario in which the company refinances its secured maturities at an 80% advance rate. However, 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 unsecured revolving credit facility and retained cash flow from operations after dividends) divided by uses (debt maturities and recurring capital expenditures).

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 per square foot, 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, particularly in-place rents. Fitch expects BRX to continue the program of reinvestment in its properties started under Blackstone's ownership and improvements in cash flow from positive rent releasing spreads.

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 compares favorably with the stock of U.S. retail properties, generally.

Concentrated Ownership, Although Declining

Blackstone remains the largest owner of Brixmor through several of its sponsored funds, notwithstanding several secondary offerings that have reduced its voting and economic interests to 40.9% and 41.9%, respectively from 70.3% and 77.2% subsequent to the company's fourth quarter of 2013 (4Q'13) IPO.

On the positive side, BRX likely benefits from Blackstone's extensive CRE experience and network of relationships and Blackstone representatives now have a minority (three of nine) of the company's board seats. BRX also 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, Fitch expects Blackstone to favor maximizing value for shareholders over bondholders, if forced to choose. Blackstone plans to exit its investment in BRX during the next one to two years. This could 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.

KEY ASSUMPTIONS

Fitch's key assumptions within the rating case for Brixmor include:

--SSNOI growth of 3.5% in both 2015 and 2016;

--Approximately $70 million of redevelopment capital spending per year;

--$115 million of maintenance and capitalized leasing costs per year;

--Unsecured debt issuance of $1.3 billion in 2015 and $1.6 billion in 2016;

--No primary equity offerings.

RATING SENSITIVITIES

The following factors may collectively, or individually, result in positive ratings momentum for Brixmor:

--Fitch's expectation of leverage sustaining in the mid-6.0x range (leverage was 7.4x for the TTM ended June 30, 2015);

--Fitch's expectation of FCC sustaining above 2.3x (coverage was 2.4x for the TTM ended June 30, 2015);

--Fitch's expectation of unencumbered asset coverage of unsecured debt sustaining above 2.0x (unencumbered assets - valued as 2Q'15 annualized unencumbered NOI divided by a stressed capitalization rate of 8.5% to unsecured debt was 2.0x).

The following factors may collectively, or individually, result in negative ratings momentum for Brixmor:

--Fitch's expectation of FCC sustaining below 2.0x;

--Fitch's expectation of leverage sustaining above 7.5x;

--Base case liquidity coverage sustaining below 1.25x.

Fitch currently rates Brixmor as follows:

Brixmor Property Group, Inc.

--IDR 'BBB-'.

Brixmor Operating Partnership, L.P.

--IDR 'BBB-';

--Senior unsecured revolver 'BBB-';

--Senior unsecured term loans 'BBB-';

--Senior unsecured notes 'BBB-'.

Brixmor LLC

--IDR 'BBB-';

--Senior unsecured notes 'BBB-'.

Related Committee Held Date: April 27, 2015

Additional information is available on www.fitchratings.com

Applicable Criteria

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Recovery Ratings and Notching Criteria for Equity REITs (pub. 18 Nov 2014)

https://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=813628

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Fitch Ratings
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+1-212-908-9161
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
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Director
+1-212-908-9153
or
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or
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Contacts

Fitch Ratings
Primary Analyst
Steven Marks
Managing Director
+1-212-908-9161
Fitch Ratings, Inc.
33 Whitehall St.
New York, NY 10004
or
Secondary Analyst
Stephen Boyd, CFA
Director
+1-212-908-9153
or
Committee Chairperson
Michael Weaver
Managing Director
+1-312-368-3156
or
Media Relations
Alyssa Castelli, +1 212-908-0540
alyssa.castelli@fitchratings.com