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Fitch Rates DDR's $150MM 6.25% Class K Preferred Stock 'BB-'; Outlook Positive
March 27, 2013 / 5:52 PM / in 4 years

Fitch Rates DDR's $150MM 6.25% Class K Preferred Stock 'BB-'; Outlook Positive

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(The following statement was released by the rating agency) NEW YORK, March 27 (Fitch) Fitch Ratings has assigned a 'BB-' rating to the $150 million 6.25% Class K cumulative redeemable preferred stock issued by DDR Corp. (NYSE: DDR). DDR expects to use the net proceeds from the offering to redeem a portion of its 7.375% Class H cumulative redeemable preferred stock, which consisted of $205 million of outstanding securities as of Dec. 31, 2012. Fitch currently rates DDR as follows: --Issuer Default Rating (IDR) 'BB+'; --$815 million unsecured revolving credit facilities 'BB+'; --$350 million unsecured term loans 'BB+'; --$1.8 billion senior unsecured notes 'BB+'; --$317.9 million senior unsecured convertible notes 'BB+'; --$405 million preferred stock 'BB-'. The Rating Outlook is Positive. Key Rating Drivers The Positive Outlook reflects Fitch's expectation that DDR's credit profile will improve to a level consistent with a 'BBB-' IDR over the next 12-24 months. The Outlook also reflects the expansion of net operating income from a prime shopping center portfolio, a granular roster of retailer tenants, and a fixed-charge coverage ratio that is expected to sustain at levels appropriate for the 'BBB-' rating due to upward leasing spreads and joint venture cash flow growth. The Outlook also takes into account the company's good access to capital on increasingly favorable terms, and adequate liquidity position including a large unencumbered pool. Leverage remains consistent with the 'BB+' rating, although Fitch anticipates that DDR's management team will continue to utilize equity issuances and retained cash flow from organic growth and redevelopment to reduce leverage to a level consistent with a 'BBB-' IDR. High-Quality Portfolio The prime portfolio, which DDR defines as assets in higher barrier-to-entry markets with strong household income profiles, represented 89.3% of total net operating income in the trailing 12 months ended fourth quarter 2012 (4Q'12), up from 81.6% at the beginning of 2010 and 70.0% at the beginning of 2009. DDR continues to acquire high quality assets on balance sheet and in joint ventures while selling lower quality assets, and Fitch expects this strategy of portfolio recycling to continue going forward. Strong Tenant Roster As of Dec. 31, 2012, top tenants by base rental revenue were Wal-Mart Stores, Inc. (3.2% of rental revenues, Fitch IDR of 'AA' with a Stable Outlook), TJX Companies (2.5%), Bed Bath & Beyond (2.3%), PetSmart (2.3%), and Kohl's Corporation (2.2%, Fitch IDR of 'BBB+' with a Stable Outlook). For 2012, weighted average lease terms were 8.2 years on new leases and 5.2 years on renewals, signaling cash flow stability absent tenant bankruptcies. Fitch's most recent U.S. Retail Stats Quarterly report noted generally steady operating and credit trends across the U.S. retail sector. Improving Fixed-Charge Coverage Fixed-charge coverage continues to improve and was 2.0x in 2012 pro forma for the class K preferred stock offering, up from 1.7x in 2011 and 1.6x in 2010. Fitch defines fixed-charge coverage as recurring operating EBITDA including Fitch's estimate of recurring cash distributions from unconsolidated entities less recurring capital expenditures and straight-line rent adjustments divided by total interest incurred and preferred stock dividends. New supply is limited, resulting in improved property-level fundamentals. Same-store net operating income (NOI) grew by 3.4% in 2012 due to continued positive leasing spreads of 7.0%, coupled with occupancy gains. Recent same-store NOI results exceeded the 10-year average of 1.5% from 2003-2012 and contributed towards the improvement in coverage. Additionally, DDR's 2012 joint venture with Blackstone Real Estate Partners VII and growth in Sonae Sierra Brasil BV Sarl distributions resulted in recurring unconsolidated entity cash flow to DDR of $37.3 million annually, more than 2x levels achieved in 2011 and bolstering corporate earnings power going forward. Fitch anticipates that low same-store NOI growth as well as incremental earnings from re-development will result in fixed-charge coverage sustaining in the low 2x range, which is appropriate for a 'BBB-' rating. In a stress case not anticipated by Fitch in which DDR's results revert to 2009 levels, coverage would fall below 2x, which would be more consistent with a 'BB+' rating. Strong Access to Capital Capital access remains solid and terms continue to improve. In June 2012, the company issued $300 million 4.625% senior unsecured notes due 2022 priced to yield 4.865% to maturity, or 325 basis points over the benchmark treasury rate and in July 2012, DDR issued $200 million 6.5% Class J preferred stock. In November 2012, DDR re-opened the 4.625% notes due 2022 and priced $150 million to yield 3.465% to maturity, or 185 basis points over the benchmark treasury rate. DDR also accessed the secured debt market and its at-the-market equity offering program in 4Q'12. In January 2013, the company refinanced its unsecured revolving credit facilities with a pricing reduction to LIBOR plus 140 basis points (a decrease of 25 basis points from the previous rate) and refinanced its secured term loan with a pricing reduction to LIBOR plus 155 basis points (a decrease of 15 basis points from the previous rate). DDR subsequently issued $150 million of 6.25% class K preferred stock. Adequate Liquidity Liquidity coverage, defined as liquidity sources divided by liquidity uses, is 1.3x for the period from Jan. 1, 2013 to Dec. 31, 2014. Liquidity sources include unrestricted cash, availability under the company's unsecured revolving credit facilities, and projected retained cash flows from operating activities after dividends and distributions. Liquidity uses include pro rata debt maturities and projected recurring capital expenditures and redevelopment expenditures. Assuming a 75% refinance rate on upcoming secured debt maturities, liquidity coverage would be strong at 3.1x. As of Dec. 31, 2012, the company had no unsecured debt maturities through May 2015. The debt maturity schedule as of Dec. 31, 2012 had 2.5% maturing in 2013, 7.7% maturing in 2014, and 20.7% in 2015. Notably, the weighted average debt duration is approximately 5 years as of Dec. 31, 2012, indicating appropriate long-term asset and liability matching. DDR also has contingent liquidity from a large unencumbered property pool that is consistent with a 'BB+' rating. Unencumbered properties valued at an 8% capitalization rate, and a 50% haircut on unencumbered land covered unsecured debt by 1.8x as of Dec. 31, 2012. A haircut on land is conservative given impairments incurred on DDR's land during previous years. The covenants in the company's debt agreements do not restrict financial flexibility. Leverage Consistent with 'BB+' IDR Net debt-to-recurring operating EBITDA was 7.4x in 4Q'12 (8.0x for FY2012) compared with 8.2x as of Dec 31, 2011 and 8.6x as of Dec. 31, 2010. Organic EBITDA growth and equity-funded acquisitions have resulted in declines in leverage. However, Fitch anticipates that favorable fundamentals and continued ATM utilization will push leverage below 7x over the next 12-to-24 months, which would be appropriate for a 'BBB-' rating. In a stress case not anticipated by Fitch in which DDR's results revert to 2009 levels, leverage would sustain above 7x, which would be more consistent with a 'BB+' rating. Preferred Stock Notching The 'BB-' rating of the preferred stock (a two-notch differential from the IDR) is consistent with Fitch's criteria for corporate entities with an IDR of 'BB+'. Based on Fitch's research on 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' 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. Positive Outlook The Positive Outlook reflects Fitch's expectation that the portfolio will remain almost entirely prime, coverage will sustain above 2.0x, leverage will sustain below 7.0x, and unencumbered asset coverage will sustain above 2.0x. Rating Sensitivities The following factors may result in an IDR upgrade to 'BBB-': --Fitch's expectation of fixed-charge coverage sustaining above 2.0x (2012 pro forma coverage was 2.0x); --Fitch's expectation of leverage sustaining below 7.0x (leverage was 7.4x in 4Q'12); --Fitch's expectation of unencumbered asset coverage of unsecured debt sustaining above 2.0x (unencumbered assets - valued as 2012 unencumbered NOI divided by a stressed capitalization rate of 8% plus a 50% haircut to land - to unsecured debt was 1.8x). The following factors may have a negative impact on DDR's ratings and/or Outlook: --Fitch's expectation of fixed-charge coverage sustaining below 1.8x; --Fitch's expectation of leverage sustaining above 8.5x; --Base case liquidity coverage sustaining below 1.0x. Contact: Primary Analyst Sean Pattap Senior Director +1-212-908-0642 Fitch Ratings, Inc. One State Street Plaza New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Monica Aggarwal Senior Director +1-212-908-0282 Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549, Email:; Elizabeth Fogerty, New York, Tel: +1 (212) 908 0526, Email: Additional information is available at ''. The ratings above were solicited by, or on behalf of, the issuer, and therefore, Fitch has been compensated for the provision of the ratings. 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 --Parent and Subsidiary Rating Linkage, Aug. 8, 2012 Applicable Criteria and Related Research Recovery Ratings and Notching Criteria for Equity REITs here Criteria for Rating U.S. Equity REITs and REOCs here Parent and Subsidiary Rating Linkage here Corporate Rating Methodology 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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