(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
consisted of $205 million of outstanding securities as of Dec.
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
shopping center portfolio, a granular roster of retailer
tenants, and a
fixed-charge coverage ratio that is expected to sustain at
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
large unencumbered pool. Leverage remains consistent with the
although Fitch anticipates that DDR's management team will
continue to utilize
equity issuances and retained cash flow from organic growth and
reduce leverage to a level consistent with a 'BBB-' IDR.
The prime portfolio, which DDR defines as assets in higher
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
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
Inc. (3.2% of rental revenues, Fitch IDR of 'AA' with a Stable
Companies (2.5%), Bed Bath & Beyond (2.3%), PetSmart (2.3%), and
Corporation (2.2%, Fitch IDR of 'BBB+' with a Stable Outlook).
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
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
Fitch's estimate of recurring cash distributions from
less recurring capital expenditures and straight-line rent
by total interest incurred and preferred stock dividends.
New supply is limited, resulting in improved property-level
Same-store net operating income (NOI) grew by 3.4% in 2012 due
positive leasing spreads of 7.0%, coupled with occupancy gains.
same-store NOI results exceeded the 10-year average of 1.5% from
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
unconsolidated entity cash flow to DDR of $37.3 million
annually, more than 2x
levels achieved in 2011 and bolstering corporate earnings power
Fitch anticipates that low same-store NOI growth as well as
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
anticipated by Fitch in which DDR's results revert to 2009
would fall below 2x, which would be more consistent with a 'BB+'
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
and in July 2012, DDR issued $200 million 6.5% Class J preferred
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
rate. DDR also accessed the secured debt market and its
offering program in 4Q'12.
In January 2013, the company refinanced its unsecured revolving
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.
Liquidity coverage, defined as liquidity sources divided by
liquidity uses, is
1.3x for the period from Jan. 1, 2013 to Dec. 31, 2014.
include unrestricted cash, availability under the company's
credit facilities, and projected retained cash flows from
after dividends and distributions. Liquidity uses include pro
maturities and projected recurring capital expenditures and
expenditures. Assuming a 75% refinance rate on upcoming secured
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
duration is approximately 5 years as of Dec. 31, 2012,
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
debt by 1.8x as of Dec. 31, 2012. A haircut on land is
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
compared with 8.2x as of Dec 31, 2011 and 8.6x as of Dec. 31,
EBITDA growth and equity-funded acquisitions have resulted 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
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
Corporate and REIT Credit Analysis,' these preferred securities
subordinated and have loss absorption elements that would likely
result in poor
recoveries in the event of a corporate default.
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
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
--Fitch's expectation of unencumbered asset coverage of
sustaining above 2.0x (unencumbered assets - valued as 2012
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
--Fitch's expectation of fixed-charge coverage sustaining below
--Fitch's expectation of leverage sustaining above 8.5x;
--Base case liquidity coverage sustaining below 1.0x.
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Media Relations: Brian Bertsch, New York, Tel: +1 212-908-0549,
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Additional information is available at 'www.fitchratings.com'.
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
Criteria for Rating U.S. Equity REITs and REOCs
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology
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