Business & Finance
Business and Finance
Business and Finance
Wed, August 11, 2010
Tue, August 10, 2010 Fitch Rates DDR's $300MM 7.875% Sr. Unsecured Notes 'BB'; Outlook Stable
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has assigned a 'BB' rating to the $300 million par value 7.875% senior unsecured notes due September 2020 issued by Developers Diversified Realty Corporation (NYSE: DDR). Net proceeds from the offering, which was priced at 99.139% of principal amount to yield 8% (518 basis points over the benchmark treasury rate), are expected to be used to repay existing debt. DDR's Issuer Default Rating is 'BB' and the Rating Outlook is Stable.
DDR's credit strengths include increased stabilization of the company's retail property portfolio, the company's demonstrated access to capital, a large pool of unencumbered assets, limited development risk, and geographically diverse portfolio with a varied tenant roster. Offsetting factors include leverage and fixed charge coverage ratios that are more consistent with a 'BB' IDR, a liquidity profile that will continue to depend on access to the capital markets, and significant debt maturities in 2012.
DDR's leasing velocity continued to improve during the quarter ended June 30, 2010, with the core portfolio leased rate increasing to 91.6% as of June 30, 2010 from 91.3% and 91.2% as of March 31, 2010 and Dec. 31, 2009, respectively. In addition, spreads on new leases during second quarter 2010 (2Q'10) increased by 7.0% and spreads on renewals increased by 3.2%, while 2Q'10 same-store year-over-year net operating income grew by 1.5%. Fitch expects that same-store sales of retailers will continue to show improvement and that DDR's net operating income will remain relatively flat through 2010 in the face of a fragile economic recovery. That being said, DDR has signed numerous leases since 1Q'09 on space vacated by bankrupt tenants, and some of that space will begin to cash flow later in 2010 into 2011, indicating longer-term upside prospects.
DDR's access to the capital markets continues to allow the company to manage debt maturities. The recently consummated $300 million senior unsecured notes issuance extends the duration of the company's debt maturity schedule, and additionally, the company maintains a large pool of unencumbered properties that enable financial flexibility.
DDR's portfolio exhibits geographical diversification that provides downside protection against regional demand drivers, as the company owns and manages retail operating and development properties in 42 states, Brazil, Canada and Puerto Rico totaling more than 137 million square feet. Aside from Wal-Mart Stores, Inc. (IDR of 'AA', with a Stable Outlook by Fitch), which comprised 4.5% of total base rent as of June 30, 2010, no other tenant contributed more than 2% of total base rents.
DDR's leverage ratio remains consistent with a 'BB' IDR, with net debt-to-recurring operating EBITDA at 10 times (x) as of June 30, 2010 (9.8x when adjusted for non-cash general and administrative expenses), compared with 11.4x as of Dec. 31, 2009 (11.0x as of Dec. 31, 2009 when adjusted for non-cash general and administrative expenses). Leverage sustaining below 9.0x may have a positive impact on DDR's ratings and/or Outlook, while leverage sustaining above 10.0x may have a negative impact.
DDR's fixed charge coverage ratio (defined as recurring operating EBITDA less recurring capital expenditures less straight-line rent adjustments, divided by cash interest expense, capitalized interest and preferred dividends) was 1.5x for the trailing 12 months ended June 30, 2010, compared with 1.5x for fiscal year 2009 (1.6x for fiscal year 2009 when adjusted for non-cash general and administrative expenses). Fixed charge coverage sustaining above 1.6x may have a positive impact on DDR's ratings and/or Outlook, while coverage sustaining below 1.4x may have a negative impact.
DDR's liquidity position is commensurate with the 'BB' IDR. The company's sources of liquidity (unrestricted cash pro forma for the senior unsecured notes offering, availability under unsecured revolving credit facilities pro forma for a 33% reduction in the overall commitment size, projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata share of debt maturities and projected recurring capital expenditures) for July 1, 2010 through Dec. 31, 2011 result in a liquidity coverage ratio of 0.6x.
In addition, DDR has sizable debt maturities in 2012, when 29.5% of pro rata consolidated debt matures, which is a concern in the event that conditions in the commercial real estate debt capital markets become more challenging.
For additional information, please refer to Fitch's full rating report titled "Developers Diversified Realty Corporation," dated May 13, 2010 at '[ www.fitchratings.com ]'.
This rating action reflects the application of Fitch's current criteria which are available at '[ www.fitchratings.com ]' and specifically include the following reports:
--'Criteria for Rating U.S. Equity REITs and REOCs' (April 16, 2010);
--'Recovery Rating and Notching Criteria for REITs' (Dec. 23, 2009);
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Evaluating Corporate Governance' (Dec. 12, 2007).
DDR is a self-administered and self-managed real estate investment trust (REIT), in the business of owning, managing and developing a portfolio of shopping centers. As of June 30, 2010, DDR's portfolio consisted of 581 shopping centers and six business centers (including 249 shopping centers owned through unconsolidated joint ventures and 29 that are otherwise consolidated by DDR). As of June 30, 2010, DDR had $9.5 billion of gross book assets, a total market capitalization of $7.7 billion, and common equity market capitalization of $2.5 billion.
Additional information is available at '[ www.fitchratings.com ]'.
Related Research:
Evaluating Corporate Governance
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=363502 ]
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]
Recovery Rating and Notching Criteria for REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018 ]
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