NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of Kimco Realty Corporation (NYSE: KIM), including the Long-Term Issuer Default Ratings (IDR), at 'BBB+'. Fitch has also withdrawn all ratings for Kimco North Trust III as the company has redeemed the senior unsecured guaranteed notes. A full list of Fitch's rating actions follows at the end of this release
KEY RATING DRIVERS
The ratings reflect Kimco's large, diversified portfolio, its generally consistent and conservative credit metrics over the past five years and its demonstrated strong access to capital. Kimco has made progress reducing the elevated leverage after the Kimstone transaction, and the issuer is targeting net debt / EBITDA as adjusted (on its calculations) of 5x - 5.5x versus its calculation of 5.7x at June 30, 2016. We could see positive ratings momentum, should the company delever beyond our expectations.
RESTORING HEADLINE METRICS
Kimco has reduced leverage over the past few quarters with 5.4x leverage for both the quarter and trailing 12 months (TTM) ended June 30, 2016. This compares to 6.3x immediately after the close of the Kimstone transaction (for the quarter ended March 31, 2015). In February 2015, Kimco acquired Blackstone's 67% interest in an unconsolidated joint venture (Kimstone) for $925 million including assumed debt. When including 50% of preferred stock in total debt, KIM's leverage was 5.9x for both the quarter and TTM ended June 30, 2016. Fitch defines leverage as debt minus readily available cash to recurring operating EBITDA including Fitch's assumption for recurring cash distributions from joint venture operations.
Kimco's liquidity is sufficient at 1.6x for the period July 1, 2016 - Dec. 31, 2017 pro forma for the recent note issuance. Fitch views Kimco as having above-average access to capital through-the-cycle, which is a key qualitative factor supporting the ratings.
Fitch calculates liquidity coverage as sources (unrestricted cash, availability under the $1.75 billion unsecured revolving credit facility, estimated proceeds from ATM issuance subsequent to the end of 2Q16 and retained cash flow from operations after dividends) divided by uses (debt maturities, development expenditures and recurring maintenance capital expenditures).
Fitch projects that Kimco's fixed charge coverage (FCC) will remain strong through 2018, reaching the high 3x range, slightly higher than recent periods (3.2x and 3x for the quarter and TTM ended June 30, 2016). Fitch defines FCC as recurring operating EBITDA including Fitch's estimate of recurring cash distributions from joint venture operations less straight-line rent and recurring maintenance capital expenditures to interest and preferred stock dividends. Fitch believes that the company will pay off its preferreds through the rating horizon, improving FCC.
DURABLE OPERATING CASHFLOWS FROM ENVIRONMENT & DIVERSIFICATION
The scale, diversification and lease staggering of Kimco's portfolio provide for generally durable cash flows from operations. On average, approximately 8.6% of leases mature in 2016 through 2018 and only 3.2% assuming tenant extension options are exercised before considering month-to-month leases. Leasing spreads in the U.S. same-space portfolio remained strong in 2015 and 2Q16 at 11.1% and 16.2%, respectively, compared to 8.8% in 2014.
Limited new supply for shopping centers and a generally accommodative economic backdrop have supported positive growth as measured by same-store net operating income (SSNOI) and same-store occupancy. Fitch assumes SSNOI will grow 3% from 2016-2018 as compared to 3.1% in 2Q16, 3.1% in 2015 and 3.3% in 2014 for the U.S. same-space portfolio.
ADEQUATE CONTINGENT LIQUIDITY
Kimco maintains adequate contingent liquidity in the form of unencumbered assets which covered unsecured debt (UA/UD) net of readily available cash by 2.4x at a stressed 8% cap rate. Kimco's UA/UD ratio has steadily increased over the past few years as it replaced non-income-producing/non-real estate assets with income-producing unencumbered assets, and as unencumbered assets in joint ventures were consolidated or purchased outright.
Fitch also estimates Kimco will retain approximately $75 million to $150 million per year of cashflow from operations based on its dividend payout ratio (80.8% of adjusted funds from operations [AFFO] for the TTM ended June 30, 2016). Kimco's payout ratio is consistent with the median in Fitch's rated universe.
INCREASING DEVELOPMENT EXPOSURE
Kimco has increased its development exposure after curtailing its activities during the last downturn and focusing on redevelopment and expansion projects until recently during this recovery. At June 30, 2016, unfunded development costs remaining (including redevelopment) comprised 2.7% of gross assets which remains manageable but is increasingly focused on development projects.
The Stable Outlook reflects Fitch's expectation that the issuer's long-term capitalization target is unchanged and that it will maintain leverage in the low- to mid-5x range. The Outlook also reflects the accommodative operating environment for the sector being offset in part by increasing development exposure.
PREFERRED STOCK NOTCHING
The two-notch differential between Kimco's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch's criteria report, 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' dated Feb. 29, 2016, the company's preferred stock is deeply subordinated and has loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
Fitch's key assumptions within the rating case for KIM include:
--SSNOI annual growth of 3.0% in 2016-2018. These increases reflect contractual rent escalations and improved leasing spreads;
--General and administrative expenses grow to approximate 12%-13% of recurring operating EBITDA;
--Recurring maintenance capital expenditures grow to approximately 11%-12% of recurring operating EBITDA;
-- Development expenditures of $700 million and redevelopment expenditures of $550 million through 2018;
--Fitch has not explicitly assumed any net transactional activity in 2016 or 2017, noting that volume over the past three years has generally balanced acquisitions and dispositions;
--Sufficient unsecured debt issuances through the rating horizon to repay secured and unsecured maturities;
--Equity issuances used to redeem preferreds and reduce leverage;
--Acquisitions of $350 million, $250 million and $250 million in 2016, 2017 and 2018, respectively;
--Divestments of $850 million, $150 million and $150 million in 2016, 2017 and 2018, respectively.
The following factors may have a positive impact on Kimco's ratings and/or Outlook:
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 5x (leverage was 5.4x for the TTM ended June 30, 2016).
--Fitch's expectation of FCC sustaining above 2.5x (coverage was 3.2x for 2Q16);
The following factors may have a negative impact on Kimco's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining above 6.5x.
--Fitch's expectation of FCC sustaining below 2x;
FULL LIST OF RATING ACTIONS
Fitch has affirmed the following ratings:
Kimco Realty Corporation
--IDR at 'BBB+';
--Unsecured revolving credit facility at 'BBB+';
--Senior unsecured term loan at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Preferred stock at 'BBB-'.
Fitch has withdrawn the following rating:
Kimco North Trust III:
--Senior unsecured guaranteed notes at 'BBB+'.
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:
--Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation and include operating income from discontinued operations;
--Recurring joint venture distributions are added to EBITDA to calculate leverage and fixed-charge coverage;
--Fitch has adjusted recurring operating EBITDA by $125 million per year to reflect estimated recurring cash distributions from joint venture operations;
--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $25 million to $50 million of cash for working capital purposes which is otherwise unavailable to repay debt.
Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis (pub. 29 Feb 2016)
Dodd-Frank Rating Information Disclosure Form
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