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TEXT-Fitch raises Federal Realty Investment Trust ratings
April 26, 2012 / 4:36 PM / 5 years ago

TEXT-Fitch raises Federal Realty Investment Trust ratings

April 26 - Fitch Ratings has upgraded the credit ratings of Federal Realty
Investment Trust (NYSE: FRT) as follows:	
	
--Issuer Default Rating (IDR) to 'A-' from 'BBB+';	
--Unsecured revolving credit facility to 'A-' from 'BBB+';	
--Senior unsecured notes to 'A-' from 'BBB+';	
--Redeemable preferred shares to 'BBB' from 'BBB-'.	
	
In addition, Fitch has assigned an 'A-' rating to the company's $275 million 	
senior unsecured term loan.	
	
The Rating Outlook is Stable.	
	
The rating actions 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 consistent 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. FRT maintains a 	
long-term hold strategy with respect to its properties and has successfully 	
grown rent revenues through redevelopment activity. This strategy has enabled 	
the company to produce consistently strong operating performance, which, while 	
weakened slightly during the downturn, is stronger and more stable than that of 	
the retail real estate market generally, and its shopping center peers, 	
specifically.	
	
FRT's property management expertise of its 87 properties comprising 19.3 million	
square feet is reflected in consistently positive same property NOI growth, 	
excluding redevelopments since 2001, with the exception of 2009 when SSNOI 	
declined -0.3%. This compares to its shopping center peers which declined an 	
average of -4.0% 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 disciplined strategy of owning assets in infill 	
markets with above-average household income. 	
	
FRT's leverage and coverage metrics remain strong and 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 5.5x	
since 2006. Fitch expects leverage to remain between 4.5x to 5.5x and fixed 	
charge coverage to remain between 2.5x and 3.5x, ranges appropriate for the 	
rating. 	
	
Leverage stood at 5.5x as of Dec. 31, 2011, pro forma for 2011 acquisitions, as 	
compared to 5.0x at Dec. 31, 2010. 2011 leverage increased due to certain 	
acquisitions which had high amounts of in-place secured debt. Additionally, 	
FRT's fixed charge coverage metrics have improved to 3.0x for the twelve months 	
ended Dec. 31, 2011, pro forma for 2011 acquisitions, from 2.4x at year end 	
2007. 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 total interest incurred and 	
preferred dividends. 	
	
Further protecting unsecured debt holders is a sizeable unencumbered pool of 	
assets. As of Dec. 31, 2011, 65 of the company's 87 properties were 	
unencumbered. Based on a stressed 8.0% capitalization rate 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 ABR) and most iconic properties, Santana Row (San Jose, 	
CA), Bethesda Row (Bethesda, MD) and Third Street Promenade (Los Angeles, CA) 	
which together comprise almost 15% of ABR.	
	
The high credit quality and granularity of FRT's tenant base offset any 	
potential bankruptcy risk of one of the tenants, with only three tenants 	
representing more than 2% of ABR and the top 25 tenants represent a low 29% of 	
total ABR, as of Dec. 31, 2011. Fitch considers seven of the top 25 tenants 	
investment grade. The company maintains well laddered lease expirations by year 	
with no more than 4.5% of total square footage expiring in any given year, when 	
considering tenant lease extension options.	
	
FRT has consistently reported strong rent growth on expiring leases, reflecting 	
both the strong infill locations of its properties coupled with the long term 	
nature of leases. New lease spreads have remained positive throughout the 	
economic downturn. These positive lease spreads have helped offset downward 	
pressure on NOI from declining occupancy levels. FRT is unique among its retail 	
REIT peers in its ability to maintain positive leasing spreads for both new and 	
renewal leases throughout the recent economic downturn.	
	
Further, the company has maintained good access to capital markets and 	
management has prudently laddered the debt maturity schedule. Although nearly 	
15% of debt matures in 2014, the absolute amount of debt coming due of $325 	
million will likely be easily re-financed by FRT. FRT has a base case liquidity 	
surplus of $164.5 million through the end of 2013 excluding development 	
expenditures, and Fitch expects a slight $95.7 million shortfall including 	
development. While FRT has expressed preference for owning assets on an 	
unencumbered basis, the company would have a liquidity coverage ratio of 1.5x if	
it refinanced 80% of its maturing secured debt, and 1.0x under the same 	
scenario, but considering development expenditures expected by Fitch.	
	
Balancing these strengths are the portfolio's moderate asset concentration and 	
continued weakness in the broader retail sector. FRT's three largest properties 	
comprise roughly 15% of total ABR. These properties are premier retail assets in	
their markets, with highly diversified tenant rosters, and have maintained 	
strong occupancy throughout the downturn, with Santana Row 94% leased, Bethesda 	
Row (91%) and Third Street Promenade (99%) as of Dec. 31, 2011. These assets are	
comprised of multiple buildings across multiple non-contiguous blocks and cash 	
flow from the properties is diverse across tenants, mitigating asset 	
concentration.	
	
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. 	
	
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 research titled '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.	
	
Guidelines for Further Rating Actions:	
	
The following factors may have a positive impact on FRT's ratings and/or 	
Outlook:	
	
--Net debt to recurring EBITDA sustaining below 4.5x (leverage was 5.5x as of 	
Dec. 31, 2011); 	
	
--Fixed charge coverage sustaining above 3.5x (coverage was 3.0x for the 12 	
months ending Dec. 31, 2011).	
	
--Greater asset diversification of the portfolio, particularly a reduction in 	
the company's two largest assets, which generate roughly 12.0% 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;	
	
--Decelerating trends in NOI; 	
	
--Unencumbered Asset coverage of Unsecured Debt below 2.5x (UAUD coverage was 	
2.8x for 2011)	
	
--Net debt to recurring EBITDA sustaining above 5.5x;	
	
--Fixed charge coverage sustaining below 2.5x.

Our Standards:The Thomson Reuters Trust Principles.
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