NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the ratings of CBL & Associates Properties, Inc. (NYSE: CBL) and its operating partnership, CBL & Associates Limited Partnership at 'BBB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of the release.
KEY RATING DRIVERS
Fitch views CBL as having weaker access to capital (particularly unsecured debt and equity) than most other investment grade REITs. Market sentiment for 'B' malls generally and CBL specifically has eroded given the challenges ascertaining the long-term productivity and financability of the assets. Moreover, Fitch's original expectations that CBL would continue to unencumber assets and become a regular issuer of unsecured debt appear less likely as the economics increasingly favor a secured borrowing strategy.
These factors are balanced by Fitch's expectation of otherwise positively trending and investment grade leverage and fixed-charge coverage (FCC) and sufficient liquidity given the only debt maturing through the rating horizon is non-recourse. Further, while 'B' malls are less financeable than most traditional real estate assets, they are considerably more financeable than niche asset classes such as casinos, data centers and hospitals.
EVOLVING ACCESS TO UNSECURED DEBT CAPITAL
Mortgage availability for 'B' malls is less plentiful and more discerning than it was in prior years. Similarly, Fitch views CBL's access to non-bank unsecured debt capital to be at the weaker end of the spectrum attributable to both its asset class and being a less-seasoned issuer. CBL raised $300 million via an unsecured bond offering in October 2014 and $450 million via its inaugural unsecured bond offering in November 2013. However, the company's decision in 3Q'15 to terminate an announced bond offering due to market conditions highlights the challenges of REITs that own less favored portfolios in more volatile credit market environments. In 4Q'15, the company obtained a $350 million, two-year unsecured bank term loan (extendable to 2019 at the company's option), which Fitch views as a weaker form of unsecured debt issuance. CBL's access to capital is further (albeit potentially temporarily) impaired as the issuer works to address the accounting claims that spurred an investigation by the SEC.
The company does not have any unsecured debt maturities until 2018 (including company extension options), when $450 million of term loans come due. The company typically has meaningful amounts drawn on its unsecured lines of credit; thus Fitch expects the company will need to access the unsecured bond market prior to 2018, absent the company utilizing proceeds from sales to repay amounts drawn on its line. Fitch would view another term loan negatively as it would further increase the amount of term loans outstanding and fail to demonstrate access to other sources of unsecured debt capital.
SECURED MATURITIES WEIGH ON LIQUIDITY
CBL's base case liquidity ratio of 0.9x through the end of 2017 is low for the rating and constrained by more than $1.1 billion of 2016 and 2017 pro rata mortgage maturities. Liquidity coverage improves to 2x under a scenario whereby the company refinances 80% of secured debt with new mortgages. Fitch expects the company will seek to address these debt maturities via net asset sale proceeds, new secured debt refinancings or give backs to lenders, due to the unattractive levels at which the company could issue unsecured bonds. It was Fitch's previous expectation that the company would attempt to access the bond market frequently to repay secured debt.
Fitch defines liquidity coverage as sources of liquidity divided by uses of liquidity. Sources of liquidity include unrestricted cash, availability under unsecured revolving credit facilities, and projected retained cash flow from operating activities after dividends. Uses of liquidity include pro-rata debt maturities, expected recurring capital expenditures and remaining development costs.
INVESTMENT-GRADE CREDIT METRICS; SLIGHTLY HIGH LEVERAGE
CBL's leverage was 6.6x at March 31, 2016, as compared with 6.6x and 6.5x as of Dec. 31, 2015 and 2014, respectively. Fitch expects that leverage will remain in the high 6.0x's into 2018, driven by low single-digit SSNOI growth and asset sales, offset by (re)development spending. Should CBL continue to return over-levered mortgages to lenders, leverage could improve towards 6x.
Fitch recently revised the treatment of REIT cumulative perpetual preferred stock to 50% equity credit from 100%. CBL's run rate leverage based on net debt including 50% of preferred stock was 7.0x at March 31, 2016, unchanged from both Dec. 31, 2015 and 2014.
Fixed-charge coverage was 2.2x for the trailing 12 months (TTM) ended March 31, 2016, and Fitch expects it to remain around this level over the next 12-24 months. This level is appropriate for the rating. Fitch defines fixed-charge coverage as recurring operating EBITDA, less recurring capital expenditures and straight-line rent adjustments, divided by total interest incurred and preferred dividends.
Fitch's key assumptions within our rating case for CBL include:
--SSNOI growth of 1% annual growth in 2016 - 2017;
--Development/redevelopment spend of $250 - 330 million annually in 2016 - 2017. The weighted average initial yield on cost for projects coming online is approximately 8%;
--Non-core asset sales totalling $40 million. The forecasted capitalization rate is 7% - 9% given the lower-productivity nature of the assets;
--Recurring capital expenditures of $100 million annually in 2016 - 2017, reflecting the reduced real estate footprint given asset sales and lender givebacks.
The following factors may have a negative impact on the company's ratings and/or Outlook:
--Should Fitch's opinion of CBL's access to debt and equity capital fail to improve;
--Failure to execute the asset repositioning strategy as a result of weaker liquidity in, or unattractive valuations of lower-tier properties;
--Fitch's expectation of leverage sustaining above 7.0x (leverage before preferred stock was 6.6x at March 31, 2016);
--Fitch's expectation of fixed-charge coverage sustaining below 1.8x (coverage for the TTM ended March 31, 2016 was 2.2x);
--Reduced financial flexibility stemming from sustained high secured leverage and/or significant utilization under lines of credit;
--Failure to maintain unencumbered asset coverage of unsecured debt (based on a stressed 9% cap rate) around 2.0x (coverage was 1.8x as of March 31, 2016).
While Fitch does not envision positive rating momentum in the near term, the following factors may have a positive impact on CBL's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 6.0x;
--Fitch's expectation of fixed-charge coverage sustaining above 2.5x.
FULL LIST OF RATING ACTIONS
Fitch has affirmed the ratings as follows:
CBL & Associates Properties, Inc.
--Long-Term Issuer Default Rating (IDR) at 'BBB-';
--Preferred stock at 'BB'.
CBL & Associates Limited Partnership
--Long-Term IDR at 'BBB-';
--Senior unsecured lines of credit at 'BBB-';
--Senior unsecured term loans at 'BBB-';
--Senior unsecured notes at 'BBB-'.
The Rating Outlook is Stable.
In accordance with Fitch's policies the issuer appealed and provided additional information to Fitch that resulted in a rating action which is different than the original rating committee outcome.
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 and Fitch's estimate of recurring cash distributions from joint venture operations;
--Fitch has adjusted the historical and projected net debt by assuming the issuer requires $25 million of cash for working capital purposes which is otherwise unavailable to repay debt;
--Fitch has included 50% of the company's cumulative perpetual preferred stock as debt.
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage (pub. 17 Aug 2015)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016)
Dodd-Frank Rating Information Disclosure Form