NEW YORK--(BUSINESS WIRE)--Fitch Ratings has assigned a 'BBB-' rating to the $600 million senior unsecured notes due 2026 issued by Brixmor Operating Partnership LP (Issuer Default Rating [IDR] 'BBB-'/Outlook Stable), the operating partnership of Brixmor Property Group Inc. (NYSE: BRX). A full list of ratings follows at the end of this release.
KEY RATING DRIVERS
The 'BBB-' rating and Stable Outlook reflect BRX's large and diverse portfolio of 518 shopping centers and solid fixed charge coverage (FCC). These positive rating elements are offset by lower asset quality relative to peers and low unencumbered asset coverage of unsecured debt (UA/UD).
Naming Senior Executives Reduces Uncertainty
Following the resignation of the company's CEO, CFO and CAO in February 2016, Brixmor installed interim management and subsequently named a new CEO and CFO with strong retail real estate experience. It was Fitch's expectation that the company would be able to access the unsecured bond market during our rating horizon, dependent upon market sentiment towards new management. Fitch views positively the quick actions taken by the company to name well-known non-interim senior executives, reducing investor uncertainty as to portfolio and financial strategy.
BRX's base case liquidity coverage ratio is 1.3x pro forma for the bond offering. Liquidity coverage improves to 3.9x under a conservative mortgage refinancing approach whereby the company is only able to refinance 80% of upcoming mortgage maturities with new mortgages.
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).
Expected Steady De-Leveraging
Fitch expects BRX's leverage to improve to the mid-6x range by the end of 2018 through a combination of same store net operating income (SSNOI) growth, incremental net operating income (NOI) from redevelopments and retained cash flow. BRX's leverage (net debt as of March 31, 2016 divided by recurring operating EBITDA, including recurring cash distributions from joint ventures, but excluding non-cash above and below market lease income) was 7.2x, compared with 7.2x and 7.4x as of year-end 2015 and 2014, respectively.
Significant Unencumbered Pool Growth Should Continue
Brixmor's long-term goal is to have an entirely unencumbered portfolio. At March 31, 2016, 61.5% of the company's NOI was from unencumbered assets. The company has over $1.2 billion of mortgages maturing in 2016-2017, and intends on repaying these mortgages with the proceeds from unsecured bond issuances.
Fitch expects BRX's unencumbered assets will cover its unsecured debt (UA/UD ratio) by approximately 1.8x over the rating horizon, based on the interplay between the company's asset unencumbrance plan and the related incremental unsecured borrowings.
Fitch calculates the company's UA/UD ratio was 1.7x at March 31, 2016. 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 low for the 'BBB-' rating, as Fitch considers 2.0x coverage generally consistent with an investment-grade profile.
Fitch expects BRX's FCC to sustain in the high 2.0x range through 2018, 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 3.1x and 2.9x for the quarter and trailing 12 months (TTM) ended March 31, 2016, compared to 2.8x and 2.3x for the years ended Dec. 31, 2015 and 2014, respectively. Fitch defines FCC 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 518 properties comprise 87 million square feet (sf) and are located in 38 states and over 170 metropolitan statistical areas (MSAs).
BRX's largest shopping center by annualized base rent (ABR) comprised only 1.5% of portfolio rents. 36.8% of its ABR is located in the top-10 U.S. MSAs by population and 65.3% is in the top-50 MSAs. New York/Northern New Jersey metro was the company's largest market exposure at 6.6% of ABR.
The company has approximately 5,500 tenants in its portfolio with approximately 10,000 leases. BRX's top-20 tenants comprise 26.6% of its ABR as of March 31, 2016. Fitch rates five of the tenants as investment grade, including The Kroger Co.'s (IDR 'BBB'/Outlook Stable), which was the company's largest tenant at 3.3% of the company's ABR.
Solid Internal Growth
Fitch expects the company's SSNOI to grow in the mid-2% range throughout 2016-2018. Positive spreads on new and renewal leases underpin Fitch's internal growth projections.
Occupancy at March 31, 2016, was 92.4% with no change from the comparable year-ago period. Spreads on new and renewal leases (including options exercised) were positive 40.4% and 10.1%, respectively, for the quarter ended March 31, 2016.
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.
Brixmor has an elevated amount of lease expirations through 2018, with over 34% of its leased gross leasable area (GLA) scheduled to expire (excluding extension options).
Simple Portfolio Management 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 in its projections, and only modest dispositions, targeting stabilized assets with fully-realized growth potential.
Asset Quality Lower than Peers
Fitch considers BRX's asset quality to be at or near the lower end of its publicly traded peers, based on the portfolio's current operating metrics, including per square foot lease signings, occupancy, surrounding population density and demographics.
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 compares favorably with the stock of U.S. retail properties, generally.
Concentrated Ownership, Albeit Dissipating
Blackstone remains the largest owner of Brixmor through several of its sponsored funds, notwithstanding the May 2016 secondary offering and two offerings completed during 2015 that have reduced its ownership to 29.7% as of March 31, 2016 from 77.2% subsequent to the company's fourth quarter of 2013 (4Q13) IPO.
On the positive side, BRX likely benefits from Blackstone's extensive CRE experience and network of capital provider relationships. Blackstone representatives hold two of nine board seats (down from five at 4Q13), and 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, Fitch expects Blackstone to favor maximizing value for shareholders over bondholders, if forced to choose. Fitch expects Blackstone to exit its investment in BRX during the next one to two years.
This overhang could limit the company's flexibility to issue primary 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.
The Stable Outlook reflects Fitch's expectation that BRX's financial profile will remain appropriate for a 'BBB-' REIT during the rating horizon (typically one to two years). Fitch expects the company will reduce leverage from the low-7.0x range into the mid-6.0x range by 2018, which would be in line with a Positive Rating Outlook and/or higher rating.
Fitch's key assumptions within our rating case for the issuer include:
--SSNOI growth of 2.6%, 2.7%, 2.6% in 2016-2018, respectively;
--No acquisitions during the forecast period; dispositions of $125 million in 2016;
--Approximately $100 million of capital spending per year related to re-tenanting and redevelopment initiatives;
--$140 million of maintenance and capitalized leasing costs 2016-2018;
--$1.2 billion in contractual mortgage maturities from 2016-2018 refinanced with unsecured debt;
--Unsecured debt issuance of $1.35 billion in both 2017 and 2018;
--No primary equity offerings.
The following factors may collectively, or individually, result in positive ratings momentum for BRX:
--Fitch's expectation of leverage sustaining in the mid-6x range (leverage was 7.0x as of March 31, 2016);
--Fitch's expectation of fixed charge coverage sustaining above 2.3x (coverage was 2.9x for the TTM ended March 31, 2016);
--Fitch's expectation of unencumbered asset coverage of net unsecured debt sustaining above 2x (unencumbered assets - valued as 1Q16 annualized unencumbered NOI divided by a stressed capitalization rate of 8.5% to net unsecured debt was 1.7x).
The following factors may collectively, or individually, result in negative ratings momentum for BRX:
--Fitch's expectation of fixed charge coverage sustaining below 2x;
--Fitch's expectation of leverage sustaining above 7.5x;
--Base case liquidity coverage sustaining below 1.25x.
FULL LIST OF RATING ACTIONS
Fitch currently rates Brixmor as follows:
Brixmor Property Group, Inc.
--Long-Term Issuer Default Rating (IDR) 'BBB-'.
Brixmor Operating Partnership, L.P.
--Long-Term IDR 'BBB-';
--Senior unsecured revolver 'BBB-';
--Senior unsecured term loans 'BBB-';
--Senior unsecured notes 'BBB-'.
The Rating Outlook is Stable.
Date of Relevant Committee: March 21, 2016
Additional information is available on www.fitchratings.com.
Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below:
--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $30 million of cash for working capital purposes that is otherwise unavailable to repay debt.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)