NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings for Federal Realty Investment Trust (NYSE: FRT), including the company's Issuer Default Rating (IDR) at 'A-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The consistent and steady cash flow growth provided by Federal's community shopping centers underpins 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 (approximately 33% of annualized base rent [ABR]) due to softer regional economic growth and some remaining execution risk related to Federal's 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 robust 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 real estate investment trust (REIT) peers specifically.
Consistent and Superior Growth
Federal's expertise in managing its 90 properties, which comprised 20.7 million square feet (excluding joint ventures) as of March 31, 2015 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 which declined an average of 4% in 2009. When including NOI from redevelopment properties, Federal'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 shopping center REITs in its ability to maintain positive leasing spreads throughout the recent economic downturn.
Fitch expects Federal's leverage to sustain in the high-to-mid-5.0x range, trending towards the lower end by 2017 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 5.5x for the trailing 12 months (TTM) ending March 31, 2015 compared to 5.3x and 5.4x in 2014 and 2013, respectively. Federal's leverage and coverage metrics are strong and appropriate for the rating. Federal has historically managed leverage at conservative levels with net debt-to-recurring operating EBITDA levels ranging between the mid-4.0x and mid-5.0x during the last 10 years.
Strong Fixed-Charge Coverage
Fitch expects SSNOI growth, the stabilization of its phase 1 mixed-use developments and interest savings from recent debt refinancings to help improve Federal's fixed-charge coverage (FCC) to the low 4.0x range in 2017, which is strong for the rating. Federal's FCC was 3.4x for the TTM ending March 31, 2015, compared to 3.4x in 2014 and 3.0x in 2013. Fitch calculates FCC 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.
Strong Contingent Liquidity
Federal's sizeable unencumbered asset pool provides additional protection to unsecured debt holders. As of March 31, 2015, 81.2% of the company's property NOI was unencumbered. Fitch calculates the company's unencumbered asset value coverage of unsecured debt (UA/UD) was 2.9x at March 31, 2015, based on applying a stressed 7% capitalization rate to the first quarter 2015 unencumbered NOI.
Fitch's ratings for Federal incorporate the high quality of Federal's 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 made up 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 (grocer Ahold USA, Inc./not rated) represents more than 3% of ABR, and the top 25 tenants represent a relatively low 29.0% of total ABR as of March 31, 2015.
The company maintains well-laddered lease expirations by year with average annual lease expirations of 8.9% of ABR between 2016 and 2024 and a maximum of 13.4% of ABR expiring in a single year (excluding tenant lease extension options).
Adequate Liquidity Coverage
Fitch's base case analysis shows liquidity coverage of 2.0x through the end of 2016 (1.2x including unfunded development commitments). The company's pro forma liquidity coverage ratio (including development) would improve to 1.5x assuming it refinanced 80% of its secured debt maturing through 2016. 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 April 1, 2015 to Dec. 31, 2016.
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 75% adjusted funds from operations during the three months ending March 31, 2015.
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 33% of its ABR from the D.C. Metro market where commercial real estate market conditions weakened due to cutbacks in U.S. government spending, but more recently have apparently stabilized.
Preferred Stock Notching
The two-notch differential between Federal'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 Federal's credit profile will remain appropriate for the 'A-' rating through 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, Federal continues to access various sources of capital and maintains a solid unencumbered asset base and liquidity profile.
--GAAP SSNOI will grow by approximately 4% per year (including redevelopments) through 2017, primarily due to positive leasing spreads and, to a lesser extent, occupancy gains.
--Acquisitions of $150 million during 2015, 2016, and 2017.
--No incremental dispositions in 2015, 2016 and 2017.
--Annual development and redevelopment capex of $350 million in 2015, $250 million in 2016 and $250 million in 2017.
--Maintenance capex spending of $65 million per annum for tenant improvements, leasing costs and maintenance capex in 2015, 2016 and 2017.
--Federal will pay off at maturity $147 million of secured debt in 2015, $18.5 million in 2016 and $44.3 million in 2017.
--Federal issues $400 million of senior unsecured notes in 2015 and $200 million in 2016 and 2017 at average rates of approximately 4.0%, 4.0% and 4.25%, respectively.
--Federal issues $100 million of equity in 2015, 2016 and 2017.
While Fitch does not expect a near-term positive change in the rating, the following factors may have a positive impact on Federal's ratings and/or Outlook:
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 4.5x (leverage was 5.5x at March 31, 2015);
--Fitch's expectation of FCC sustaining above 3.5x (coverage was 3.4x at March 31, 2015).
--Greater asset diversification of the portfolio via growth (Federal's three largest assets generate roughly 15% of total ABR).
The following factors may result in a negative movement in 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 2.9x at March 31, 2015 using a stressed 7% capitalization rate);
--Fitch's expectation of leverage above 5.5x;
--Fitch's expectation of FCC sustaining below 2.5x.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings of Federal Realty Investment Trust:
--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'.
Additional information is available on www.fitchratings.com
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 28 May 2014)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 25 Nov 2014)
Dodd-Frank Rating Information Disclosure Form