Fitch Rates Vornado Realty Trust's $300MM 5.40% Series L Preferred Stock
'BB+'; Outlook Stable
NEW YORK -- January 18, 2013
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
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
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
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
--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
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
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