Fitch Revises DDR's Outlook to Positive; Affirms IDR at 'BB+'
NEW YORK -- November 19, 2012
Fitch Ratings has revised the Rating Outlook on DDR Corp. (NYSE: DDR) to
Positive from Stable. In addition, Fitch affirmed the following credit ratings
--Issuer Default Rating (IDR) at 'BB+';
--Senior unsecured revolving credit facilities at 'BB+';
--Senior unsecured term loans at 'BB+';
--Senior unsecured notes at 'BB+';
--Senior unsecured convertible notes at 'BB+';
--Preferred stock at 'BB-'.
The Positive Outlook reflects Fitch's expectation that DDR's credit profile
will improve to a level consistent with a 'BBB-' IDR over the next 12-24
months. The Outlook reflects the expansion of net operating income from a
prime shopping center portfolio, a granular roster of retailer tenants that
are well positioned entering the holiday season, and a fixed-charge coverage
ratio that is expected to sustain at levels appropriate for the 'BBB-' rating
due to upward leasing spreads and joint venture cash flow growth. The Outlook
also takes into account the company's good access to capital on increasingly
favorable terms, and adequate liquidity position including a large
unencumbered pool. Leverage remains consistent with a 'BB+' rating, although
Fitch anticipates that DDR's management team will continue to utilize equity
issuance and retained cash flow from organic growth and redevelopment to
reduce leverage to a level consistent with a 'BBB-' IDR.
The prime portfolio, which consists of assets in higher barrier to entry
markets with strong household income profiles, represented 89.3% of total net
operating income in third quarter 2012 (3Q'12), up from 81.6% at the beginning
of 2010 and 70.0% at the beginning of 2009. DDR continues to acquire prime
assets on balance sheet and in joint ventures while selling non-prime assets,
and Fitch expects this strategy of portfolio recycling to continue going
A strong tenant roster further evidences high-quality cash flow. As of Sept.
30, 2012, top tenants by base rental revenue were Wal-Mart Stores, Inc. (3.1%
of rental revenues, Fitch IDR of 'AA' with a Stable Outlook), TJX Companies
(2.5%), PetSmart (2.2%), Bed Bath & Beyond (2.2%), and Kohl's Corporation
(2.1%, Fitch IDR of 'BBB+' with a Stable Outlook). For 2012 year-to-date,
weighted average lease terms were 8.3 years on new leases and 5.3 years on
renewals, signaling cash flow stability absent tenant bankruptcies. Fitch's
most recent U.S. Retail Stats Quarterly report noted generally steady
operating and credit trends across the U.S. retail sector.
Fixed-charge coverage continues to improve and was 2.0x in 3Q'12, up from 1.9x
in 2Q'12, 1.8x in 1Q'12 and 1.7x in 2011. Fitch defines fixed-charge coverage
as recurring operating EBITDA including Fitch's estimate of recurring cash
distributions from unconsolidated entities less recurring capital expenditures
and straight-line rent adjustments divided by total interest incurred and
preferred stock dividends.
New supply is limited, resulting in improved property-level fundamentals.
Same-store net operating income (NO)I grew by 3.7% in 3Q'12, 3.1% in 2Q'12 and
2.3% in 1Q'12 due to continued positive leasing spreads of 7.0% in 3Q'12, 6.8%
in 2Q'12 and 6.4% in 1Q'12, coupled with occupancy gains. Recent same-store
NOI results exceeded the 10-year average of 1.5% from 2002-2011 and
contributed towards the improvement in coverage.
Additionally, DDR's 2012 joint venture with Blackstone Real Estate Partners
VII and growth in Sonae Sierra Brasil BV Sarl distributions resulted in
recurring unconsolidated entity cash flow to DDR of $37.3 million annually,
more than 2x levels achieved in 2011 and bolstering corporate earnings power
Fitch anticipates that low same-store NOI growth as well as incremental
earnings from re-development will result in fixed-charge coverage sustaining
in the low 2x range, which is appropriate for a 'BBB-' rating. In a stress
case not anticipated by Fitch in which DDR's results revert to 2009 levels,
coverage would fall below 2x, which would be more consistent with a 'BB+'
DDR's funding profile is strong. As of Sept. 30, 2012, the company had no
unsecured debt maturities through May 2015. The debt maturity schedule as of
Sept. 30, 2012 had 0.4% of pro rata debt maturing in 4Q'12, 8.1% maturing in
2013, and 7.1% maturing in 2014. Notably, the weighted average debt duration
is approximately 5 years as of Sept. 30, 2012, indicating appropriate
long-term asset and liability matching.
Capital access remains solid as demonstrated by the June 2012 issuance of $300
million 4.625% senior unsecured notes due 2022 priced to yield 4.865% to
maturity, or 325 basis points over the benchmark treasury rate, and the July
2012 issuance of $200 million 6.5% class J preferred stock.
DDR has an adequate liquidity position with liquidity coverage, defined as
liquidity sources divided by liquidity uses, of 1.4x for the period from Oct.
1, 2012 to Dec. 31, 2014. Liquidity sources include unrestricted cash,
availability under the company's unsecured revolving credit facilities, and
projected retained cash flows from operating activities after dividends and
distributions. Liquidity uses include pro rata debt maturities pro forma for
expected refinancings prior to year-end and projected recurring capital
expenditures and redevelopment expenditures. Assuming a 75% refinance rate on
upcoming secured debt maturities, liquidity coverage would be strong at 3.6x.
DDR also has contingent liquidity from a large unencumbered property pool that
is consistent with a 'BB+' rating. Unencumbered properties valued at an 8%
capitalization rate and a 50% haircut on unencumbered land covered unsecured
debt by 1.7x as of Sept. 30, 2012 pro forma for expected refinancings prior to
year-end. A haircut on land is conservative given impairments incurred on
DDR's land during previous years. The covenants in the company's debt
agreements do not restrict financial flexibility.
Current leverage is consistent with a 'BB+' rating, with net debt to recurring
operating EBITDA of 7.5x as of Sept. 30, 2012 compared with 8.2x as of Dec 31,
2011 and 8.6x as of Dec. 31, 2010. Organic EBITDA growth and equity-funded
acquisitions have resulted in declines in leverage. However, Fitch anticipates
that favorable fundamentals and continued ATM utilization will push leverage
below 7x over the next 12-to-24 months, which is appropriate for a 'BBB-'
rating. In a stress case not anticipated by Fitch in which DDR's results
revert to 2009 levels, leverage would sustain above 7x, which would be more
consistent with a 'BB+' rating.
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+'.
Based on Fitch research on 'Treatment and Notching of Hybrids in Nonfinancial
Corporates and REIT Credit Analysis' dated Dec. 15, 2011, these securities are
deeply subordinated and have loss absorption elements that would likely result
in poor recoveries in a corporate default.
The Positive Outlook reflects Fitch's expectation that the portfolio will
remain almost entirely prime, coverage will sustain above 2.0x, leverage will
sustain below 7.0x, and unencumbered asset coverage will sustain above 2.0x.
The following factors may result in an IDR upgrade to 'BBB-':
--Fitch's expectation of fixed-charge coverage sustaining above 2.0x (coverage
was 2.0x in 3Q'12);
--Fitch's expectation of leverage sustaining below 7.0x (leverage was 7.5x as
of Sept. 30, 2012);
--Fitch's expectation of unencumbered asset coverage of unsecured debt
sustaining above 2.0x (unencumbered assets - valued as unencumbered NOI for
the trailing 12 months ended Sept. 30, 2012 divided by a stressed
capitalization rate of 8% plus a 50% haircut to land - to unsecured debt was
The following factors may have a negative impact on DDR's ratings and/or
--Fitch's expectation of fixed-charge coverage sustaining below 1.8x;
--Fitch's expectation of leverage sustaining above 8.5x;
--Base case liquidity coverage sustaining 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:
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012);
--'U.S. Retail Stats Quarterly' (Sept. 28, 2012);
--'Corporate Rating Methodology' (Aug. 8, 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).
Applicable Criteria and Related Research:
Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Criteria for Rating U.S. Equity REITs and REOCs
Corporate Rating Methodology
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