Federal Realty Investment Trust

Transcription

1 CREDIT OPINION Update to Discussion of Key Credit Factors Update Summary Rating Rationale RATINGS Domicile Rockville, Maryland, United States Long Term Rating A3 Type Senior Unsecured Dom Curr Outlook Stable Please see the ratings section at the end of this report for more information. The ratings and outlook shown reflect information as of the publication date. Analyst Contacts Griselda Bisono AVP-Analyst Ken Acuña Associate Analyst Philip Kibel Associate Managing Director Nick Levidy MD-Structured Finance The A3 senior unsecured rating of (NYSE: FRT) reflects the REIT s long and successful history of adding value to its high quality retail properties located in well-established, densely populated communities with attractive demographics. Federal Realty has maintained strong occupancy levels while achieving sector-leading releasing spreads. The rating also reflects the REIT s good liquidity and solid credit metrics which have remained stable through market cycles. The retail sector remains challenged due to growing competition among retailers and the effects of e-commerce on spending habits. In addition, weaker demand for large box space is placing leasing pressure on landlords. Although FRT s exposure to failing tenants has been limited to date, the company does have a large redevelopment pipeline which carries construction and leasing risk. Credit Strengths High quality portfolio of shopping center properties Well-laddered debt maturity schedule Strong fixed charge ratio, moderate leverage, and healthy unencumbered asset pool Credit Challenges Expanded redevelopment pipeline Impact of ever changing retail landscape, which should affect FRT to a lesser extent due to its necessity-based portfolio Rating Outlook The stable outlook reflects Moody's expectation that Federal Realty will continue to follow a conservative business strategy focused on high-quality non-mall retail properties, while maintaining leadership in its core markets and engaging in measured, strategic growth. Factors that Could Lead to an Upgrade Upwards rating movement, which would be difficult in the intermediate term, would be contingent upon the following: CLIENT SERVICES Americas Increased asset size approaching $10 billion with greater geographic diversity Asia Pacific Fixed charge coverage consistently and comfortably in the upper-3x range Net debt/ebitda below 4x Japan EMEA

2 Factors that Could Lead to a Downgrade An increase in development activity to >10% of gross assets Effective leverage increased such that Net debt/ebitda is consistently over 6x A sustainable decline in fixed charge coverage to below 3x A material shift in the REIT's financing or growth strategy, inclusive of ramping up joint ventures or fund activity Key Indicators Exhibit [1] Total Revenue (US$ mil) Recurring EBITDA (US$ mil) % 64.8% 65.5% 5.6x 5.4x 5.5x 5.4x 5.5x Recurring EBITDA / Total Revenue Total Debt / Recurring EBITDA Recurring EBITDA / Fixed Charge 4.3x 3.9x 3.4x Total Assets (US$ mil) 5,656 5,423 4,897 4,534 4,209 Secured Debt / Gross Assets 6.3% 6.6% 7.4% 9.4% 10.6% 40.7% 39.3% 40.8% 40.1% 41.8% Total Debt + Pfd Equity / Gross Assets [1] For the three months ended March 31, 2017 Source: Moody's, FRT SEC filings Detailed Rating Considerations Federal Realty owns and operates community shopping centers and mixed-use retail projects and as of 1Q17 its portfolio totaled approximately 23.1 million square feet of GLA and was 94.6% leased. Federal Realty's management maintains a relatively straightforward structure and limits acquisitions or higher risk, opportunistic and large-scale joint ventures. The REIT's primary business strategy is focused on sustainable, high-quality property operating income growth from releasing and redeveloping existing assets, while also pursuing select new acquisition and development opportunities. Key factors currently influencing the ratings and outlook include: Factor 1 - Liquidity and Funding Trend - Moody s views FRT s liquidity profile as good, providing sufficient coverage to its near-term obligations. Federal Realty has a manageable debt maturity schedule with $221 million due for the remainder of 2017 and $291 million due in 2018, when its existing unsecured term loan matures. The term loan can be extended for one-year, at Federal s option. In April 2016, the REIT upsized its unsecured revolving credit facility to $800 million from $600 million and extended the maturity date to 2020, with two six-month extension options. As of the first quarter 2017, $583 million was available (73%) on the line. In June 2017 FRT issued $300 million of 3.25% senior unsecured notes due July 2027 and issued $100 million in a reopening of its 4.5% 2044 bonds, the proceeds of which were used to pay down the outstanding balance on the credit facility and for other general corporate purposes. Federal Realty's FFO payout ratio was a manageable 71.1% at 1Q17 and is expected to be maintained at similar levels going forward. Its largely unencumbered asset base provides the REIT with financial flexibility-- unencumbered assets were 88.6% of gross assets at 1Q17. This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on for the most updated credit rating action information and rating history. 2

3 Factor 2 - Leverage and Capital Structure Trend - Federal Realty's leverage, which reflects the low historical cost basis of the assets of this 55-year old REIT, was steady at 40.7% at 1Q17, while Net debt/ebitda has consistently remained in the low to mid 5x range (5.6x at 1Q17) since its peak of 5.7x at YE11. Secured debt/gross assets also improved to 6.3% at 1Q17, down from a peak of 15.6% at year-end We view Federal Realty s access to capital as excellent, reflecting a proven record of accessing all four quadrants of the capital markets (public, private, debt and equity). This flexibility is important for REITs given the need to distribute most of their cash flow in the form of dividends and therefore making it necessary to raise capital more frequently. Factor 3 - Market Positioning and Asset Quality Trend - Federal Realty's portfolio is focused on high-barrier-to-entry markets. Its properties are mainly located in the affluent coastal markets of Washington, DC metro (27.3% of investments), California (26.9%), New England (14.3%), and New York metro (10.8%) areas. Federal Realty's same store portfolio leased rate was down 10 basis points year over year, at 95.8% at 1Q17 compared to 95.9% for the same period last year as a result of a number of tenant vacancies that occurred in 2016 that are still in the process of being released. The REIT has a very productive portfolio with double-digit rent increases (GAAP, including the impact of straight-line rents) on lease rollovers (23% at 1Q17). Federal Realty's portfolio has well-laddered lease expirations, and its largest tenant (Ahold USA) contributes only 3% of base rent as of 1Q17. The REIT reported strong same store NOI growth of 4.3% at 1Q17 compared to the same period last year including redevelopment/expansions (same store NOI growth of 1% excluding redevelopment/expansions). The company maintains an active redevelopment pipeline that include expansions and repositioning of assets, with an average investment per project between $5-20 million and projected unleveraged returns of approximately 8%. In addition, Federal Realty is in the process of developing three large mixed use developments, Assembly Row (phase II), Pike & Rose (phase I and II) and Santana Row (700 Santana Row) for a total investment of $1.1 billion. These developments include a mixture of retail, office, residential units and hotel components, with the non-retail portions typically developed and operated by a joint venture partner. The projected unleveraged returns on these investments is between 6-7%. Factor 4 - Cash Flow & Earnings Trend - Federal Realty's earnings have been stable in recent years. The REIT maintains a healthy EBITDA margin at of revenues as of 1Q17, and fixed charge coverage is solid at, up from 3.9x at YE14. In January 2016, Federal Realty acquired the remaining 70% interest in its joint venture with affiliates of a discretionary fund created and advised by Clarion Partners for approximately $154 million. As a result of the transaction, FRT gained control of the six underlying properties and has since consolidated them. Moody's does not anticipate any shift in the firm's business strategy in the intermediate term. Key Covenants The REIT's bonds contain the standard bond covenants: leverage limited to 60% of gross assets; secured debt below 40% of gross assets; fixed charge coverage above 1.5x; and unencumbered assets above 150% of unsecured debt. Structural Considerations Federal Realty's preferred stock is rated Baa1, one notch below its senior unsecured rating, consistent with Moody's notching practices for REITs rated Ba2 or above. Corporate Profile (NYSE: FRT) located in Rockville, MD, is a real estate investment trust (REIT) specializing in the ownership, operation and redevelopment of retail centers. The REIT's portfolio (excluding joint venture properties) currently contains 3

4 approximately 23.1 million square feet located primarily in major coastal markets including Washington, DC, San Francisco, Los Angeles, Boston and New York. At March 31, 2017, FRT had total book assets of $5.7 billion and total book equity of $2.1 billion. Rating Methodology and Scorecard Factors Exhibit 2 Global Rating Methodology for REITs and Other Commercial Property Firms Rating Drivers Aa A Baa Ba Liquidity & Funding Liquidity Coverage Ca Implied Score Adjusted Score Trend 14.9% FFO Payout 71.1% Amount of Unencumbered Assets 88.6% Leverage & Capital Structure Debt + Preferred/Gross Assets 40.7% Net Debt/EBITDA 5.6x Secured Debt/Gross Assets 6.3% Access to Capital Market Positioning & Asset Quality Franchise/ Brand Name Gross Assets $7.4 Diversity-location/tenant/industry/economic Good 0.0% Asset Quality Cash Flow & Earnings EBITDA/Revenues EBITDA Margin Volatility Fixed Charge Coverage Caa Good Debt Maturities Development % Gross Assets B 1.7% JV/Fund Business % Revenues Overall Assessment Implied Score Adjusted Score As of March 31, 2017 Source: Moody's, FRT SEC filings Ratings Exhibit 3 Category FEDERAL REALTY INVESTMENT TRUST Outlook Senior Unsecured Subordinate Shelf Pref. Shelf Moody's Rating Stable A3 (P)Baa1 (P)Baa1 Source: Moody's Investors Service 4

5 2017 Moody s Corporation, Moody s Investors Service, Inc., Moody s Analytics, Inc. and/or their licensors and affiliates (collectively, MOODY S ). All rights reserved. CREDIT RATINGS ISSUED BY, INC. AND ITS RATINGS AFFILIATES ( MIS ) ARE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY S PUBLICATIONS MAY INCLUDE MOODY S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY MAY NOT MEET ITS CONTRACTUAL, FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT RATINGS AND MOODY S OPINIONS INCLUDED IN MOODY S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY S PUBLICATIONS MAY ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY S ANALYTICS, INC. CREDIT RATINGS AND MOODY S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY S PUBLICATIONS COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY S PUBLICATIONS WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER CONSIDERATION FOR PURCHASE, HOLDING, OR SALE. MOODY S CREDIT RATINGS AND MOODY S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR RETAIL INVESTORS TO USE MOODY S CREDIT RATINGS OR MOODY S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW, AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY PERSON WITHOUT MOODY S PRIOR WRITTEN CONSENT. All information contained herein is obtained by MOODY S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well as other factors, however, all information contained herein is provided AS IS without warranty of any kind. MOODY'S adopts all necessary measures so that the information it uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However, MOODY S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody s publications. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any such information, even if MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a particular credit rating assigned by MOODY S. To the extent permitted by law, MOODY S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY S or any of its directors, officers, employees, agents, representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information. NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY S IN ANY FORM OR MANNER WHATSOEVER. Moody s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody s Corporation ( MCO ), hereby discloses that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody s Investors Service, Inc. have, prior to assignment of any rating, agreed to pay to Moody s Investors Service, Inc. for appraisal and rating services rendered by it fees ranging from $1,500 to approximately $2,500,000. MCO and MIS also maintain policies and procedures to address the independence of MIS s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at under the heading Investor Relations Corporate Governance Director and Shareholder Affiliation Policy. Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY S affiliate, Moody s Investors Service Pty Limited ABN AFSL and/or Moody s Analytics Australia Pty Ltd ABN AFSL (as applicable). This document is intended to be provided only to wholesale clients within the meaning of section 761G of the Corporations Act By continuing to access this document from within Australia, you represent to MOODY S that you are, or are accessing the document as a representative of, a wholesale client and that neither you nor the entity you represent will directly or indirectly disseminate this document or its contents to retail clients within the meaning of section 761G of the Corporations Act MOODY S credit rating is an opinion as to the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors. It would be reckless and inappropriate for retail investors to use MOODY S credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser. Additional terms for Japan only: Moody's Japan K.K. ( MJKK ) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody s Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody s SF Japan K.K. ( MSFJ ) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally Recognized Statistical Rating Organization ( NRSRO ). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively. MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for appraisal and rating services rendered by it fees ranging from JPY200,000 to approximately JPY350,000,000. MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements. REPORT NUMBER