TEXT-Fitch affirms Vornado Realty Trust
June 1 - Numerous strategic initiatives are unlikely to result in positive ratings momentum for Vornado Realty Trust (NYSE: VNO) given certain factors (outlined below), though Fitch Ratings views a more streamlined VNO as a credit positive longer term. The redeployment of sales proceeds from non-core investments to repay amounts outstanding or re-invest into core markets will likely be beneficial to unsecured creditors despite a concern that the disposition or monetization process for some of the larger, non-core investments may be protracted. As such, Fitch has affirmed the credit ratings of VNO and Vornado Realty, L.P. (collectively, Vornado) as follows: Vornado Realty Trust: --Issuer Default Rating (IDR) at 'BBB'; --Preferred Stock at 'BB+'; Vornado Realty, L.P.: --IDR at 'BBB'; --Unsecured revolving credit facility at 'BBB'; --Senior unsecured notes at 'BBB'. The Rating Outlook is Stable. In addition, Fitch has withdrawn the 'BBB' rating on Vornado Realty, L.P.'s convertible and exchangeable senior debentures, which were redeemed in April 2012 and which are no longer considered by Fitch to be relevant to the agency's coverage. The affirmations reflect Vornado's credit strengths, including its strong access to capital, exceptional unencumbered assets to unsecured debt, and maintenance of leverage appropriate for the rating category, a high-quality portfolio of properties, manageable lease maturities and granular tenant base. These positive rating elements are offset by the likelihood for declining recurring operating EBITDA and higher recurring capital expenditures as the Base Realignment and Closure statute(BRAC) related leases expire resulting in a lower fixed charge coverage ratio. Fitch also notes the company's debt maturity schedule has sizable concentrations of secured debt in 2013 but should be refinanced and not negatively impact liquidity. Fitch will also monitor whether Vornado's future investments deviate from its renewed focus on its core New York and Washington, D.C. office and retail markets. Vornado's leverage ratio remains consistent with a 'BBB' rating, as the company's net debt to recurring operating EBITDA ratio was 6.4 times (x) for the trailing twelve months (TTM) ended March 31, 2012, down from 6.8x and 7.1x as of Dec. 31, 2010 and 2009, respectively. Leverage including Fitch's estimate of recurring JV distributions (namely dividends from ownership interests in Alexander's Inc. and Lexington Realty Trust) in recurring operating EBITDA lowers leverage to 6.2x for the TTM ended March 31, 2012. Fitch forecasts leverage including JV distributions to remain around the 6.5x level through 2014. Fitch defines leverage as net debt divided by recurring operating EBITDA. The company's fixed-charge coverage ratio was 2.0x for the TTM ended March 31, 2012, consistent with 2.0x in 2010 and up from 1.6x in 2009. Fitch expects coverage to decline to 1.8x in 2014 due to BRAC, and be modestly higher than 1.8x when incorporating Fitch's estimate of recurring JV distributions. Fitch defines fixed-charge coverage as recurring operating EBITDA less recurring capital expenditures and straight-line rents, divided by interest incurred and preferred stock and OP unit distributions. The company's portfolio benefits from tenant diversification with the top 30 tenants representing only 27% of total revenue. However, the largest tenant is the United States Government which accounts for 7% of total revenue and the implementation of BRAC for the Department of Defense, coupled with the move by related contractors have caused this exposure to become a temporary credit negative. Offsetting this exposure is the otherwise manageable lease expiration schedule (as measured by annual escalated expiring rent) with no segment's (excluding Merchandise Mart) surpassing 15% annually and averaging 8% going forward. The ratings are further supported by VNO's unencumbered property coverage of unsecured debt, which gives the company significant financial flexibility as a source of contingent liquidity. Consolidated unencumbered asset coverage of net unsecured debt (calculated as annualized first-quarter 2012 unencumbered property EBITDA divided by a blended 7.8% stressed capitalization rate) results in coverage of 4.0x (and surpasses 5.0x pro-forma for the April note redemptions). The ratio is strong for the rating, particularly given the unencumbered Manhattan office and retail properties are highly sought after by secured lenders and foreign investors, resulting in stronger contingent liquidity relative to many asset classes. The company's investments in public companies improves coverage by a half-turn after a 50% haircut although they are not captured under Fitch's criteria. The two-notch differential between VNO's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'. Based on Fitch Research on '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 Rating Outlook is driven in part by Fitch's expectation that VNO will maintain appropriate credit metrics in light of the BRAC related earnings erosion, in addition to its average liquidity profile. For the period April 1, 2012 to Dec. 31, 2013, the company's sources of liquidity (cash, availability under the company's unsecured revolving credit facility, and Fitch's expectation of retained cash flows from operating activities after dividends and distributions) covered uses of liquidity (pro rata debt maturities and Fitch's expectation of committed development and recurring capital expenditures) by 1.0x. Although Fitch does not anticipate positive ratings momentum in the near- to medium-term, the following factors may result in positive momentum on the rating and/or Outlook: --Net debt to recurring operating EBITDA sustaining below 5.5x (trailing twelve months leverage was 6.5x as of March 31, 2012); --Fixed-charge coverage sustaining above 2.7x (coverage was 2.0x for the trailing twelve months ended March 31, 2012). The following factors may result in negative momentum on the rating and/or Outlook: --Leverage sustaining above 7.5x; --Fixed-charge coverage sustaining below 1.8x; --A sustained liquidity coverage ratio below 1.0x.
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