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Fitch Affirms Federal Realty Investment Trust's IDR at 'A-'; Outlook Stable
(The following statement was released by the rating agency) NEW YORK, April 25 (Fitch) Fitch Ratings has affirmed the credit ratings of Federal Realty Investment Trust (NYSE: FRT) (Federal) as follows: --Issuer Default Rating (IDR) at 'A-'; --Unsecured revolving credit facility at 'A-'; --Senior unsecured term loan at 'A-'; --Senior unsecured notes at 'A-'; --Redeemable preferred shares at 'BBB'. The Rating Outlook is Stable. KEY RATING DRIVERS The ratings are driven by the company's prudent balance sheet management and the high quality and consistent cash flow streams provided by FRT's community shopping centers. Fitch views positively FRT's strategy of operating a high-quality retail real estate portfolio with assets located in infill locations with strong demographic characteristics, as opposed to engaging in speculative development in less mature retail markets. Buy-And-Hold Strategy FRT employs a buy-and-hold strategy with respect to its properties and has successfully augmented its internal property operating income growth through redevelopment activity. This strategy has enabled the company to produce stronger and more stable results than that of the retail real estate market generally, and public shopping center peers. Consistent and Superior Growth FRT's property management expertise of its 88 properties comprising 1962 million square feet (excluding joint ventures) as of Dec. 31, 2012 is evidenced by consistently positive same property net operating income (NOI) growth, excluding redevelopments since 2001, with the exception of 2009 when same-store NOI (SSNOI) declined -0.3%. This compares to its public shopping center peers who declined an average of -4% in 2009. When including NOI from redevelopment properties, FRT's SSNOI growth has not dipped below 1.6% in any year over the last decade, resulting in year-over-year recurring operating EBITDA growth. Fitch attributes this outperformance to FRT's aforementioned strategy. Conservative Leverage FRT's leverage is appropriate for the rating. FRT has historically managed leverage at conservative levels with net debt to recurring operating EBITDA levels ranging between 4.8 times (x) and 5.7x since 2006. Fitch expects leverage to remain in the mid-5.5x range before decreasing to 5.0x as Federal's larger developments come on-line in 2014 and 2015. Leverage stood at 5.5x as of Dec. 31, 2012, as compared to 5.7x at Dec. 31, 2011. Strong Fixed-Charge Coverage FRT's fixed charge coverage metrics decreased modestly to 2.7x for the year ended Dec. 31, 2012 from 2.9x for the year ended 2011, primarily due to higher interest expense and capital expenditures. Fitch expects fixed charge coverage to remain between 2.5x and 3.5x, which is appropriate for the rating. Fitch calculates fixed charge coverage as recurring operating EBITDA less tenant improvements and incentives, recurring maintenance capital expenditures and straight-line rent adjustments divided by interest incurred and preferred dividends. Good Contingent Liquidity Federal's sizeable unencumbered asset pool provides additional protection to unsecured debt holders. As of Dec. 31, 2012, 68 of the company's 88 properties were unencumbered. Based on applying a stressed 8% capitalization rate to 2012 unencumbered NOI, implied unencumbered asset value covered net unsecured debt by 2.8x, which is appropriate for the rating. Fitch notes the quality of the unencumbered asset pool which includes FRT's three largest (by annualized base rent ) and most iconic properties, Santana Row (San Jose, CA), Bethesda Row (Bethesda, MD) and Third Street Promenade (Los Angeles, CA) which together comprise approximately 15% of ABR. Granular Tenant Base The high credit quality and granularity of FRT's tenant base help mitigate tenant bankruptcy risk. Only one tenant represents more than 3% of ABR, and the top 25 tenants represent a low 30% of total ABR, as of Dec. 31, 2012. Fitch rates nine of the top 25 tenants as investment grade. The company maintains well laddered lease expirations by year with average annual lease expirations of 9% of total square footage and a maximum of 14.1% of square feet expiring in a single year (excluding tenant lease extension options). Consistently Positive Leasing Spreads FRT has consistently reported strong rent growth on expiring leases, reflecting both the high quality infill locations of its properties and the long term nature of leases. Lease spreads remained positive throughout the economic downturn offsetting downward pressure on NOI from declining occupancy levels. FRT is unique among its retail REIT peers in its ability to maintain positive leasing spreads throughout the recent economic downturn. Strong Access to Capital The company has maintained good access to the capital markets and has a reasonably well laddered the debt maturity schedule, notwithstanding moderate increases in the company's 2014 and 2017 debt maturities as a percent of total debt - both of which Fitch views as manageable. Low Liquidity Coverage Fitch's base case analysis shows liquidity coverage of 1.4x through the end of 2014 excluding development expenditures and 0.8x including development. While Federal has expressed preference for owning assets on an unencumbered basis, the company would have a liquidity coverage ratio of 0.9x (including development) assuming it refinanced 80% of its secured debt maturing in 2013 and 2014. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility pro forma for the recent commitment size increase, projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and projected recurring capital expenditures) for Jan. 1, 2013 to Dec. 31, 2014. Offsetting this low liquidity coverage ratio is FRT's demonstrated access to multiple forms of capital, offsetting refinancing risk. In addition, FRT's retained cash flow creates internally generated capital. Fitch calculates that the company's dividends represented approximately 84% of 2012 adjusted funds from operations. Geographic Concentration The portfolio's moderate asset and market concentrations and continued weakness in the broader retail sector balance the company's credit strengths. FRT's three largest properties comprise roughly 15% of total ABR. Also, Federal generates approximately 35% of its rental revenues from the D.C. Metro market where commercial real estate market conditions are weakening due to cutbacks in U.S. government spending. Preferred Stock Notching The two-notch differential between FRT's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'A-'. Based on Fitch's criteria (see 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available 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. Stable Outlook The Stable Outlook centers on Fitch's expectation that FRT's credit profile will remain appropriate for the 'A-' rating through the economic cycles, barring any significant changes in the company's capital structure. The Stable Outlook reflects the quality of management and consistency of cash flows resulting in stable credit metrics, in line with an 'A-' rating. Further, FRT continues to access various sources of capital and maintains a solid unencumbered asset base and liquidity profile. RATING SENSITIVITIES While Fitch does not expect near-term positive momentum on the rating, the following factors may have a positive impact on FRT's ratings and/or Outlook: --Fitch's expectation of net debt to recurring EBITDA sustaining below 4.5x (leverage was 5.5x as of Dec. 31, 2012); --Fitch's expectation of fixed charge coverage sustaining above 3.5x (coverage was 2.7x for the 12 months ending Dec. 31, 2012); --Greater asset diversification of the portfolio via growth (FRT's two largest assets generate roughly 12% of total ABR). The following factors may result in negative momentum on the rating and/or Outlook: --Shift in management strategy away from owning and redeveloping retail assets in infill locations; --Unencumbered asset coverage of unsecured debt below 2.5x (coverage was 2.6x as of Dec. 31, 2012 utilizing a stressed 8% capitalization rate); --Fitch's expectation of leverage above 5.5x; --Fitch's expectation of fixed charge coverage sustaining below 2.5x. Contact: Primary Analyst Stephen Boyd, CFA Director +1-212-908-9153 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Sean Pattap Senior Director +1-212-908-0642 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Additional information is available at 'www.fitchratings.com'. Applicable Criteria and Related Research: --'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013); --'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 13, 2012); --'Recovery Rating and Notching Criteria for REITs' (Nov. 12, 2012). --'Corporate Rating Methodology' (Aug. 8, 2012). Applicable Criteria and Related Research Criteria for Rating U.S. Equity REITs and REOCs here Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis here Recovery Ratings and Notching Criteria for Equity REITs here Corporate Rating Methodology here Additional Disclosure Solicitation Status here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.
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