TEXT-Fitch rates DDR's $200MM 6.5% class J preferred stock 'BB-'; outlook stable
--Walmart (IDR of 'AA' with a Stable Outlook by Fitch) at 3.2%;
--TJX Companies at 2.1%;
--PetSmart at 1.9%;
--Bed Bath & Beyond at 1.9%; and
--Kohl's (IDR of 'BBB+' with a Stable Outlook by Fitch) at 1.8%.
DDR has a deep JV franchise that provides supplementary revenue via common and preferred equity returns along with fee income. In January 2012, affiliates of DDR and The Blackstone Group L.P. (IDR of 'A+' with a Stable Outlook) formed a JV to acquire 46 shopping centers known as the EDT Retail Portfolio for $1.4 billion, including assumed debt of $640 million. DDR raised approximately $246 million of common equity through a forward offering and used the net proceeds to purchase a 5% common equity stake and $150 million 10% dividend preferred equity stake in the Blackstone JV.
The June 2012 offering of 4.625% senior notes due 2022 improved DDR's liquidity profile. As of March 31, 2012, pro forma for the forward equity offering and unsecured bond issuance, base case liquidity coverage (calculated as sources of liquidity divided by uses of liquidity) is 1.3x for the period April 1, 2012 through Dec. 31, 2013. Sources of liquidity include unrestricted cash and availability under DDR's revolving credit facilities pro forma for the forward equity offering. Other sources include unsecured bond issuance along with projected retained cash flows from operating activities. Uses of liquidity include pro rata debt maturities and projected recurring capital expenditures.
DDR has a staggered debt maturity schedule. As of March 31, 2012 pro forma for the June 2012 unsecured bond issuance, 6.4%, 9.8% and 7.4% of pro rata debt matures during the remainder of 2012, full-year 2013 and full-year 2014, respectively.
Leverage is consistent with a 'BB+' rating. Net debt to 1Q'12 annualized recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated entities was 8.3x. This compares with 8.2x at Dec. 31, 2011 and 8.6x at Dec. 31, 2010. Retained cash flow used to repay debt has modestly contributed towards leverage reductions.
Pro forma for the forward equity offering and June 2012 unsecured bond issuance, leverage would be 8.1x and improving fundamentals should sustain leverage between 7.0x and 8.0x over the next 12-24 months. If same-store NOI declines are consistent with DDR's performance in 2009 (a scenario Fitch deems unlikely), leverage could increase to approximately 8.5x. This would be appropriate for a 'BB' rating.
DDR has solid access to capital and contingent liquidity is appropriate for the 'BB+' IDR. Unencumbered assets (unencumbered NOI for the trailing 12 months ended March 31, 2012 divided by a stressed capitalization rate of 8%) to unsecured debt was 1.6x. Retained cash flow as well as new unsecured debt used to repay secured debt should result in improving unencumbered asset coverage. In addition, the covenants under DDR's credit agreements do not restrict financial flexibility.
The two-notch differential between DDR's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BB+'. As per Fitch's report, 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', 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 reflects Fitch's view that fixed charge coverage will approach 2.0x and leverage will decline just below 8.0x. Base case liquidity coverage will remain above 1.0x as DDR maintains strong borrowing capacity under its revolving credit facility.
The following factors may have a positive impact on DDR's Outlook:
--Fixed charge coverage sustaining above 2.0x (1Q'12 pro forma fixed charge coverage was 1.8x);
--Net debt to recurring operating EBITDA sustaining below 7.5x (pro forma leverage was 8.1x);
--A sustained base case liquidity coverage ratio of above 1.0x (pro forma base case liquidity coverage was 1.3x for April 1, 2012 to Dec. 31, 2013).
The following factors may have a positive impact on DDR's rating:
--Fixed charge coverage sustaining above 2.0x as noted above;
--Leverage sustaining below 7.0x;
--Unencumbered asset coverage of unsecured debt sustaining above 2.0x
(unencumbered assets - valued as unencumbered NOI for the trailing 12 months ended March 31, 2012 divided by a stressed capitalization rate of 8% - to unsecured debt was 1.6x).
The following factors may have a negative impact on DDR's ratings and/or Outlook:
--Fixed charge coverage sustaining below 1.8x;
--Net debt to recurring operating EBITDA sustaining above 8.5x;
--Reductions in liquidity coverage.
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