June 20 - Fitch Ratings has assigned a 'BB+' rating to the $300 million
aggregate principal amount 4.625% senior unsecured notes due 2022 issued by DDR
Corp. (NYSE: DDR).
The notes were priced at 98.104% of par to yield 4.865% to maturity, or 325
basis points over the benchmark treasury rate. Net proceeds from the offering of
$291.7 million are expected to be used to fund the redemption of approximately
$223.5 million of 5.375% senior unsecured notes due 2012, along with general
Fitch currently rates DDR as follows:
--Long-term IDR 'BB+';
--$815 million unsecured revolving credit facilities 'BB+';
--$250 million unsecured term loans 'BB+';
--$1.6 billion senior unsecured notes 'BB+';
--$310.2 million senior unsecured convertible notes 'BB+';
--$375 million preferred stock 'BB-'.
The Rating Outlook is Stable.
The 'BB+' IDR reflects:
--Sustained improving fundamentals across DDR's retail property portfolio;
--A largely prime asset base that exhibits a manageable lease expiration
schedule and a granular tenant roster;
--An established joint venture platform that provides earnings diversification;
--Solid liquidity position; and
--Strong management team.
The rating is balanced by leverage and unencumbered asset coverage ratios
consistent with a 'BB+' IDR.
Fundamentals are solid. During first-quarter 2012 (1Q'12), leasing spreads
including new leases and renewals increased by 5.5% on a blended basis, after
increasing by 6.1% for full-year 2011. DDR's same-store net operating income
(NOI) increased by 2.9% in 1Q'12 and 3.5% for full-year 2011. These figures are
reflective of strong locations and tenant demand. Fitch anticipates that demand
will remain strong and drive low-single-digit same-store NOI growth over the
next 12-to-24 months.
DDR's fixed charge coverage ratio (recurring operating EBITDA including
recurring cash distributions from unconsolidated entities less recurring capital
expenditures and straight-line rent adjustments divided by interest incurred and
preferred dividends) was 1.8 times (x) in 1Q'12 pro forma for the forward equity
offering to fund DDR's interest in the EDT Retail Portfolio and the offering of
4.625% senior unsecured notes due 2022. Fixed-charge coverage was 1.7x in 2011
and 1.6x in 2010.
Fitch anticipates coverage to approach 2.0x over the next 12-to-24 months due to
positive leasing spreads and earnings from the lease up of
construction-in-progress. . This is solid for a 'BB+' rating. If same-store NOI
declines are consistent with DDR's performance in 2009 (a scenario Fitch deems
unlikely), fixed charge coverage could approach 1.5x. This would be weak for a
In 1Q'12, 89% of the company's NOI was generated from prime assets compared with
70% in 1Q'09. These prime properties are largely in market-dominant locations
within areas that have strong household income profiles and dense populations.
Across the entire portfolio, DDR has a manageable lease expiration schedule as
of March 31, 2012. 9.2% of leases are expiring during the remainder of 2012 and
11.9% expiring in 2013. In addition, DDR's top five tenants contribute modestly
toward revenues and include:
--Walmart (IDR of 'AA' with a Stable Outlook by Fitch) at 3.2%;
--TJX Companies at 2.1%;
--PetSmart at 1.9%;
--Bed Bath & Beyond at 1.9%; and
--Kohl's (IDR of 'BBB+' with a Stable Outlook by Fitch) at 1.8%.
DDR has a deep JV franchise that provides supplementary revenue via common and
preferred equity returns along with fee income. In January 2012, affiliates of
DDR and The Blackstone Group L.P. (IDR of 'A+' with a Stable Outlook) formed a
JV to acquire 46 shopping centers known as the EDT Retail Portfolio for $1.4
billion, including assumed debt of $640 million. DDR raised common equity
through a 19 million forward offering and will use the net proceeds to purchase
a 5% common equity stake and $150 million 10% dividend preferred equity stake in
the Blackstone JV. Broadly, the JV platform provides recurring cash
distributions coupled with fee income.
The 4.625% senior notes due 2022 improve DDR's liquidity profile. As of March
31, 2012, pro forma for the forward equity offering and unsecured bond issuance,
base case liquidity coverage (calculated as sources of liquidity divided by uses
of liquidity) is 1.3x for April 1, 2012 through Dec. 31, 2013. Sources of
liquidity include unrestricted cash and availability under DDR's revolving
credit facilities pro forma for the forward equity offering. Other sources
include unsecured bond issuance along with projected retained cash flows from
operating activities. Uses of liquidity include pro rata debt maturities and
projected recurring capital expenditures.
DDR has a staggered debt maturity schedule. As of March 31, 2012 pro forma for
the unsecured bond issuance, 6.9%, 10.4% and 7.9% of pro rata debt matures
during the remainder of 2012, full-year 2013 and full-year 2014, respectively.
Leverage is consistent with a 'BB+' rating. Net debt to 1Q'12 annualized
recurring operating EBITDA including recurring cash distributions from
unconsolidated entities was 8.3x. This compares with 8.2x at Dec. 31, 2011 and
8.6x at Dec. 31, 2010. Retained cash flow used to repay debt has contributed
towards leverage reductions.
Pro forma for the forward equity offering and unsecured bond issuance, leverage
would be 7.9x and improving fundamentals will sustain leverage between 7.0x and
8.0x over the next 12-24 months. If same-store NOI declines are consistent with
DDR's performance in 2009 (a scenario Fitch deems unlikely), leverage could
increase to approximately 8.5x. This would be appropriate for a 'BB' rating.
DDR has solid access to capital. However, contingent liquidity is appropriate
for the 'BB+' IDR. Unencumbered assets (unencumbered NOI for the trailing 12
months ended March 31, 2012 divided by a stressed capitalization rate of 8%) to
unsecured debt was 1.6x. However, retained cash flow as well as new unsecured
debt used to repay secured debt should result in improving unencumbered asset
coverage. In addition, the covenants under DDR's credit agreements do not
restrict financial flexibility.
The two-notch differential between DDR's IDR and preferred stock rating is
consistent with Fitch's criteria for corporate entities with an IDR of 'BB+'. As
per Fitch's report, 'Treatment and Notching of Hybrids in Nonfinancial Corporate
and REIT Credit Analysis', 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 Outlook reflects Fitch's view that fixed charge coverage will
approach 2.0x and leverage will remain below 8.0x. Base case liquidity coverage
will remain above 1.0x as DDR maintains strong borrowing capacity under its
revolving credit facility.
The following factors may have a positive impact on DDR's Outlook:
--Fixed charge coverage sustaining above 2.0x (1Q'12 pro forma fixed charge
coverage was 1.8x);
--Net debt to recurring operating EBITDA sustaining below 7.5x (pro forma
leverage was 7.9x);
--A sustained base case liquidity coverage ratio of above 1.3x (pro forma base
case liquidity coverage was 1.0x for April 1, 2012 to Dec. 31, 2013).
The following factors may have a positive impact on DDR's rating:
--Fixed charge coverage sustaining above 2.0x as noted above;
--Leverage sustaining below 7.0x;
--Unencumbered asset coverage of unsecured debt sustaining above 2.0x
(unencumbered assets - valued as unencumbered NOI for the trailing 12 months
ended March 31, 2012 divided by a stressed capitalization rate of 8% - to
unsecured debt was 1.6x).
The following factors may have a negative impact on DDR's ratings and/or
--Fixed charge coverage sustaining below 1.8x;
--Net debt to recurring operating EBITDA sustaining above 8.5x;
--Reductions in liquidity coverage.
Additional information is available on 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:
--'Recovery Ratings and Notching Criteria for Equity REITs' (May 3, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012);
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis' (Dec. 15, 2011);
--'Corporate Rating Methodology' (Aug. 12, 2011).
Applicable Criteria and Related Research:
Recovery Ratings and Notching Criteria for Equity REITs
Criteria for Rating U.S. Equity REITs and REOCs
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Corporate Rating Methodology