Fitch Rates Vornado Realty Trust's $300MM 5.40% Series L Preferred Stock 'BB+'; Outlook Stable
by Business Wire
Fitch Ratings has assigned a credit rating of 'BB+' to the $300 million 5.40% series L preferred stock issued by Vornado Realty Trust (NYSE: VNO). Net proceeds from the offering are expected to be used for general corporate purposes including the redemption of all of the 6.75% series F and 6.75% series H preferred stock ($262.5 million in aggregate). The issuance will have no impact on VNO's leverage and will result in a negligible improvement in fixed charge coverage.
Fitch currently rates VNO and Vornado Realty, L.P. (collectively, Vornado) as follows:
Vornado Realty Trust:
--Issuer Default Rating (IDR) 'BBB';
--Preferred stock 'BB+';
Vornado Realty, L.P.:
--Unsecured revolving credit facility 'BBB';
--Senior unsecured notes 'BBB'.
The Rating Outlook is Stable.
The ratings reflect Vornado's credit strengths, including its strong access to capital, exceptional unencumbered assets to unsecured debt ratio, 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.
LEVERAGE APPROPRIATE FOR RATING
Vornado's leverage ratio remains consistent with a 'BBB' rating and was 6.5 times (x) for the trailing 12 months (TTM) ended Sept. 30, 2012, down from 6.7x and 6.8x as of Dec. 31, 2011 and 2010, respectively. Leverage including Fitch's estimate of recurring cash distributions from partially owned entities (namely dividends from ownership interests in Alexander's Inc. and Lexington Realty Trust) in recurring operating EBITDA lowers leverage to 6.3x for the TTM ended Sept. 30, 2012. Fitch forecasts leverage including distributions from partially owned entities to remain around the 6.5x level through 2014 and the preferred issuance does not change Fitch's forecast. Fitch defines leverage as net debt divided by recurring operating EBITDA.
COVERAGE SLIGHTLY LOW FOR RATING
The company's fixed-charge coverage ratio was 1.9x for the TTM ended Sept. 30, 2012, consistent with 2.0x in 2011 and in 2010. 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 cash distributions from partially owned entities. 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.
BRAC EXPOSURE OFFSETS TENANT DIVERSITY
The company's portfolio benefits from tenant diversification with the top 30 tenants representing only 26% of total revenue. However, the largest tenant is the United States Government which accounts for 5% 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 expiring rent (excluding Merchandise Mart) surpassing 17% annually through 2017.
STRONG UNENCUMBERED ASSET COVERAGE
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 7.7% stressed capitalization rate) results in coverage of 3.8x. 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.
PREFERRED STOCK NOTCHING
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's 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 Oct. 1, 2012 to Dec. 31, 2014, 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 (debt maturities and Fitch's expectation of committed development and recurring capital expenditures) by 1.5x.
WHAT COULD TRIGGER A RATING ACTION
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 and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA sustaining below 5.5x (leverage was 6.5x as of Sept. 30, 2012);
--Fitch's expectation of fixed-charge coverage sustaining above 2.7x (coverage was 1.9x for the TTM ended Sept. 30, 2012).
The following factors may result in negative momentum on the rating and/or Outlook:
--Fitch's expectation of leverage sustaining above 7.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 1.8x;
--Fitch's expectation of a sustained liquidity coverage ratio below 1.0x.
Additional information is available at '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:
--'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 13, 2012);
--'Recovery Ratings and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'Corporate Rating Methodology' (Aug. 8, 2012);
--'Parent and Subsidiary Rating Linkage' (Aug. 8, 2012);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 27, 2012).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
Parent and Subsidiary Rating Linkage
Criteria for Rating U.S. Equity REITs and REOCs