June 1 - Numerous strategic initiatives are unlikely to result in positive
ratings momentum for Vornado Realty Trust (NYSE: VNO) given certain factors
(outlined below), though Fitch Ratings views a more streamlined VNO as a
credit positive longer term.
The redeployment of sales proceeds from non-core investments to repay amounts
outstanding or re-invest into core markets will likely be beneficial to
unsecured creditors despite a concern that the disposition or monetization
process for some of the larger, non-core investments may be protracted.
As such, Fitch has affirmed the credit ratings of VNO and Vornado Realty, L.P.
(collectively, Vornado) as follows:
Vornado Realty Trust:
--Issuer Default Rating (IDR) at 'BBB';
--Preferred Stock at 'BB+';
Vornado Realty, L.P.:
--IDR at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Stable.
In addition, Fitch has withdrawn the 'BBB' rating on Vornado Realty, L.P.'s
convertible and exchangeable senior debentures, which were redeemed in April
2012 and which are no longer considered by Fitch to be relevant to the agency's
The affirmations reflect Vornado's credit strengths, including its strong access
to capital, exceptional unencumbered assets to unsecured debt, and maintenance
of leverage appropriate for the rating category, a high-quality portfolio of
properties, manageable lease maturities and granular tenant base.
These positive rating elements are offset by the likelihood for declining
recurring operating EBITDA and higher recurring capital expenditures as the Base
Realignment and Closure statute(BRAC) related leases expire resulting in a lower
fixed charge coverage ratio. Fitch also notes the company's debt maturity
schedule has sizable concentrations of secured debt in 2013 but should be
refinanced and not negatively impact liquidity. Fitch will also monitor whether
Vornado's future investments deviate from its renewed focus on its core New York
and Washington, D.C. office and retail markets.
Vornado's leverage ratio remains consistent with a 'BBB' rating, as the
company's net debt to recurring operating EBITDA ratio was 6.4 times (x) for the
trailing twelve months (TTM) ended March 31, 2012, down from 6.8x and 7.1x as of
Dec. 31, 2010 and 2009, respectively. Leverage including Fitch's estimate of
recurring JV distributions (namely dividends from ownership interests in
Alexander's Inc. and Lexington Realty Trust) in recurring operating EBITDA
lowers leverage to 6.2x for the TTM ended March 31, 2012. Fitch forecasts
leverage including JV distributions to remain around the 6.5x level through
2014. Fitch defines leverage as net debt divided by recurring operating EBITDA.
The company's fixed-charge coverage ratio was 2.0x for the TTM ended March 31,
2012, consistent with 2.0x in 2010 and up from 1.6x in 2009. Fitch expects
coverage to decline to 1.8x in 2014 due to BRAC, and be modestly higher than
1.8x when incorporating Fitch's estimate of recurring JV distributions. Fitch
defines fixed-charge coverage as recurring operating EBITDA less recurring
capital expenditures and straight-line rents, divided by interest incurred and
preferred stock and OP unit distributions.
The company's portfolio benefits from tenant diversification with the top 30
tenants representing only 27% of total revenue. However, the largest tenant is
the United States Government which accounts for 7% of total revenue and the
implementation of BRAC for the Department of Defense, coupled with the move by
related contractors have caused this exposure to become a temporary credit
negative. Offsetting this exposure is the otherwise manageable lease expiration
schedule (as measured by annual escalated expiring rent) with no segment's
(excluding Merchandise Mart) surpassing 15% annually and averaging 8% going
The ratings are further supported by VNO's unencumbered property coverage of
unsecured debt, which gives the company significant financial flexibility as a
source of contingent liquidity. Consolidated unencumbered asset coverage of net
unsecured debt (calculated as annualized first-quarter 2012 unencumbered
property EBITDA divided by a blended 7.8% stressed capitalization rate) results
in coverage of 4.0x (and surpasses 5.0x pro-forma for the April note
redemptions). The ratio is strong for the rating, particularly given the
unencumbered Manhattan office and retail properties are highly sought after by
secured lenders and foreign investors, resulting in stronger contingent
liquidity relative to many asset classes. The company's investments in public
companies improves coverage by a half-turn after a 50% haircut although they are
not captured under Fitch's criteria.
The two-notch differential between VNO's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'BBB'.
Based on Fitch Research on '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.
The Stable Rating Outlook is driven in part by Fitch's expectation that VNO will
maintain appropriate credit metrics in light of the BRAC related earnings
erosion, in addition to its average liquidity profile. For the period April 1,
2012 to Dec. 31, 2013, the company's sources of liquidity (cash, availability
under the company's unsecured revolving credit facility, and Fitch's expectation
of retained cash flows from operating activities after dividends and
distributions) covered uses of liquidity (pro rata debt maturities and Fitch's
expectation of committed development and recurring capital expenditures) by
Although Fitch does not anticipate positive ratings momentum in the near- to
medium-term, the following factors may result in positive momentum on the rating
--Net debt to recurring operating EBITDA sustaining below 5.5x (trailing twelve
months leverage was 6.5x as of March 31, 2012);
--Fixed-charge coverage sustaining above 2.7x (coverage was 2.0x for the
trailing twelve months ended March 31, 2012).
The following factors may result in negative momentum on the rating and/or
--Leverage sustaining above 7.5x;
--Fixed-charge coverage sustaining below 1.8x;
--A sustained liquidity coverage ratio below 1.0x.