NEW YORK - (Business Wire) Fitch Ratings has assigned initial credit ratings to Federal Realty Trust, Inc. (NYSE: FRT) as follows: --Issuer Default Rating (IDR) 'BBB+';
--$300 million unsecured revolving credit facility 'BBB+';
--$272 million unsecured term loan 'BBB+';
--$1,052.8 million senior unsecured notes 'BBB+';
--$10 million redeemable preferred shares 'BBB'.
The Rating Outlook is Stable.
The ratings are based on FRT's consistent operating strategy that has produced a track record of strong performance, low leverage levels, a large, high-quality pool of unencumbered assets, solid liquidity position, manageable debt maturity schedule, and demonstrated access to a range of capital sources. Balancing these strengths are geographic and asset concentration in the pool as well as a challenging retail industry, which has had a negative impact on the company's performance over the past year.
FRT has consistently followed a strategy of operating a high-quality retail real estate portfolio with assets located in infill locations with strong demographic characteristics. The company maintains a long-term hold strategy with respect to its properties and has successfully grown revenues through redevelopment activity. This strategy has enabled the company to produce consistently strong operating performance, which, while weaker due to the downturn, is stronger than the retail real estate market generally.
Over the past year, FRT has demonstrated that it has access to a range of capital sources through its capital markets activities. On May 4, 2009, the company obtained a $372 million unsecured term loan facility, which bears interest at an annual rate of LIBOR (subject to a 1.50% floor) plus 300 basis points and has a maturity date of July 2011. The financing was originally marketed as a $200 million loan, but was upsized due to demand. In addition, in August 2009, FRT issued $150 million of five-year senior unsecured notes priced to yield 6.15% and raised $115 million of common equity.
The company maintains a solid liquidity position. Fitch calculates that FRT's sources of liquidity (cash, availability under its unsecured revolving credit facility and expected retained operating cash flows after dividend payments) are sufficient to meet uses of liquidity (debt maturities and expected recurring and redevelopment capital expenditures) over the period from Oct. 1, 2009 through Dec. 31, 2011 with a liquidity coverage ratio of 1.0 times (x).
The 'BBB+' IDR and senior unsecured debt ratings reflect FRT's low leverage levels. Net debt to recurring operating EBITDA has been below 6.0x since year-end 2006 and stood at 4.8x for the trailing 12 months ended Sept. 30, 2009. In addition, FRT's risk adjusted capitalization ratio was 1.26x at the 'BBB' stress level as of Sept. 30, 2009.
FRT maintains a large pool of unencumbered assets, which provides significant financial flexibility to the company. Of the company's 84 properties, 59 were unencumbered at Sept. 30, 2009 with a gross book value of $2.4 billion, or 66% of total gross book value (excluding construction in progress). Unencumbered assets to unencumbered debt coverage, when measured by applying an 8.0% capitalization rate to unencumbered net operating income (NOI), stood at 2.6x for the first six months of 2009.
The company has maintained solid debt coverage metrics even throughout the downturn, which has weighed on its operating performance. Under Fitch's calculations, FRT's fixed charge ratio (defined as adjusted EBITDA less straight-line rents and recurring capital expenditures, divided by total interest incurred and preferred dividends) has increased to 2.8x for the 12 months ended Sept. 30, 2009 from 2.2x for full-year 2006, which is considered strong for the company's ratings. NOI from unencumbered assets covered unsecured interest expense by 3.4x for the quarter ended June 30, 2009.
In addition, the financial covenants in the company's unsecured debt agreements do not limit FRT's financial flexibility.
Balancing these strengths are moderate geographic and asset concentration, as well as weaknesses in the retail sector. FRT's two largest properties measured by total annual base rent (ABR), Santana Row (San Jose) and Bethesda Row (Washington DC-NoVA-MD) comprise roughly 11% of total ABR. These are both premier retail assets in their markets with highly diversified tenant rosters and have maintained strong occupancy throughout the downturn, with Bethesda Row 96% leased and Santana Row 97% leased at Sept. 30, 2009.
FRT's largest three markets generated roughly 57% of total ABR at Dec. 31, 2008. The Washington DC.-NoVA-MD market is by far the company's largest, accounting for 29% of the total portfolio gross leasable area (GLA) and 35% of the portfolio's total ABR. The second and third largest markets by ABR were Philadelphia and San Jose, accounting for 11% and 10% of the total, respectively. Operating fundamentals in the Washington DC-MD-NOVA market have exceeded the national average over long periods of time due to supply constraints, as well as positive employment and demographic trends. The market has continued to outperform the national average during this downturn and is expected to experience a strong recovery beginning in 2011. Santana Row makes up over 50% of FRT's San Jose concentration. Moreover, the company's portfolio in both Philadelphia and San Jose remain well leased at 95% and 97%, respectively, as of Sept. 30, 2009.
FRT reported declining property-level fundamentals for the first two quarters of 2009, and while these appear to have stabilized somewhat during third-quarter 2009, reflected in same store NOI growth excluding redevelopments of 1.8%, Fitch expects conditions to remain challenging in the retail sector in 2010, particularly if the holiday season is lackluster. Nevertheless, relative to the broader retail real estate segment, FRT has fared better during this downturn than the retail real estate sector due to the high quality of its properties and its granular tenant roster, which has limited the downside in the event of tenant bankruptcies. The company's portfolio was 94.4% leased at Sept. 30, 2009, well above the average for the 54 markets tracked by Property and Portfolio Research of 81.4%. Under Fitch's base case analysis, which assumes a 3.2% and 1.0% decline in same store NOI in 2010 and 2011, respectively, FRT's fixed charge coverage remains solid at 2.9x and 2.8x, while recurring debt to operating EBITDA remain at a low 5.2x and 4.9x. These strong metrics support the Stable Outlook.
The one-notch differential between FRT's IDR and the rating of the company's preferred stock is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch's criteria report, 'Equity Credit for Hybrids & Other Capital Securities,' dated June 25, 2008, available at 'www.fitchratings.com', the company's preferred stock is 75% equity-like and 25% debt-like, since it is perpetual and has no covenants but has a cumulative deferral option or conversion feature.
The following factors may have a positive impact on FRT's ratings:
--Greater asset diversification of the portfolio, particularly a reduction in the company's two largest assets, which generate roughly 11% of total ABR;
--Total debt to recurring EBITDA sustaining below 4.5x for several quarters (4.8x for the 12 months ending Sept. 30, 2009);
--Fixed charge coverage sustaining above 3.0x for several quarters (2.8x for the 12 months ending Sept. 30, 2009).
The following factors may have a negative impact on FRT's ratings:
--Total debt to recurring EBITDA sustaining above 6.5x for several quarters;
--Fixed charge coverage sustaining below 2.0x for several quarters.
Founded in 1962, FRT is an equity real estate investment trust specializing in the ownership, management and redevelopment of a portfolio of retail and mixed-use properties located throughout the Northeast, Mid-Atlantic and California. The company is headquartered in Rockville, MD. As of Sept. 30, 2009, FRT owned or had a majority interest in 84 community and neighborhood shopping centers and mixed-use properties comprising approximately 18.2 million square feet. In total, the portfolio was 94.2% occupied at Sept. 30, 2009. In addition, FRT owns a 30% interest in seven retail real estate projects totaling approximately 1 million square feet as of Sept. 30, 2009 through its only joint venture. FRT is an S&P Mid-Cap 400 company and its shares are traded on the NYSE under the symbol FRT.
Additional information is available at 'www.fitchratings.com'.
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