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 corporate purposes.
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 'BB' rating.
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 Outlook:
--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 Analysis
Corporate Rating Methodology