Fitch Initiates 'BB-' IDR on Forest City; Outlook Stable
NEW YORK -- March 26, 2013
Fitch Ratings has assigned initial credit ratings to Forest City Enterprises,
Inc. (NYSE:FCEA/FCEB, collectively FCE) as follows:
--Issuer Default Rating (IDR) 'BB-';
--Bank revolving credit facility 'BB-';
--Senior unsecured notes 'BB-';
--Convertible senior unsecured notes 'BB-'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The 'BB-' IDR centers on FCE's high leverage and lack of unencumbered assets.
FCE's corporate financing strategy emphasizes secured debt to isolate
refinancing and operating risks to individual properties as opposed to the
general corporate credit and equity holders. Credit strengths include the
quality of FCE's portfolio, strong relative operating performance, adequate
fixed charge coverage, manageable debt maturity schedule and sufficient
The IDR also reflects FCE's significant equity cushion after adjusting for
secured debt that partially mitigates the lack of an unencumbered asset pool.
Further, FCE's REOC structure is worth a one-notch uplift relative to a
comparable REIT, due to FCE's ability to retain cash for development and other
FCE's leverage was high at 11.9x for the nine months ended Oct. 31, 2012. FCE
has made demonstrable progress in its efforts to delever, as leverage was
13.0x at Jan. 31, 2011. Fitch projects leverage will improve further to below
11x over the next 24 months, driven by modest same-store net operating income
(SSNOI) growth. Fitch defines leverage as net debt to recurring operating
Lack of Unencumbered Assets
FCE does not maintain a pool of unencumbered assets which typically serves as
support for IDRs of higher-rated REITs and REOCs and a source of contingent
liquidity. The lack of unencumbered assets is a material rating constraint
partially mitigated by the existence of a post-secured debt equity cushion.
High-Quality Albeit Idiosyncratic Portfolio
Since its founding, FCE has grown its expertise in developing large, mixed-use
master planned communities, notably those in densely populated markets.
Year-to-date (YTD) net operating income (NOI) was well-diversified by segment
(35% office, 33% retail, 24% multifamily) and located in strong markets (29%
in New York City with Washington, D.C., Los Angeles, Boston, San Francisco,
Denver, Chicago and Philadelphia each comprising 4%-10%).
Strong Operating Performance
FCE's operating performance has been strong on an absolute basis and relative
to its underlying markets and select public peers, evidencing durable
operating cash flows. FCE's SSNOI growth has averaged 1.9% since 2003 and FCE
weathered the recent downturn with only a single-year decline of 0.8% in 2009.
Fitch expects SSNOI growth will be in the low single digits over the next
12-24 months driven by positive leasing spreads and incremental occupancy
Proven Track Record Developing Large, Mixed-Use Sites
The company has a proven capacity to acquire, aggregate and entitle adjoining
plots of land and to work with local municipalities, community groups and
government agencies to receive requisite approvals and tax credit financings.
Going forward, Fitch expects development to be significantly smaller, due
mostly to the Multifamily Development Fund which will allow FCE to develop off
balance sheet and limit its equity requirements to contributing entitled land.
At Oct. 31, 2012, FCE remaining development commitments of $141 million
represent less than 2% of total assets and can be funded through internal
Manageable Debt Maturity Schedule / Sufficient Liquidity
Liquidity coverage of 0.6x is adequate for the rating for the period Nov. 1,
2012-Jan. 31, 2015 and improves to 2.2x assuming 90% of secured debt is
refinanced. Notably, internal liquidity covers unsecured debt obligations
maturing through FY2015 by 3.8x, thereby limiting the likelihood of a
corporate default. In addition the covenants under the company's credit
facility that limit cash distributions and share buybacks facilitate financial
Fitch defines liquidity coverage as sources of liquidity (unrestricted cash,
availability under the revolving credit facility, committed but undrawn
project financing) divided by uses (unsecured debt maturities, secured debt
maturities, pro-rata unconsolidated debt maturities, maintenance capital
expenditures and committed development expenditures).
Adequate Fixed Charge Coverage
Fitch projects fixed charge coverage will improve to 1.5x from 1.3x for FY2011
over the next 12-24 months driven by lower fixed charges from the retirement
of all outstanding preferred stock. Fitch defines fixed charge coverage as
recurring operating EBITDA less straight line rent adjustments and maintenance
capital expenditures divided by total interest incurred and preferred stock
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:
--The maintenance of a sizable unencumbered asset pool;
--Fitch's expectation of leverage sustaining below 10.0x (leverage was 11.9x
as of Oct. 31, 2012).
The following factors may have a negative impact on Forest City's ratings or
--Fitch's expectation of leverage sustaining above 13.0x;
--Fitch's expectation of fixed charge coverage sustaining below 1.0x (fixed
charge coverage was 1.3x YTD);
--Material growth in on-balance-sheet development projects;
--A material investment in a non-real estate project or entity.
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:
--Criteria for Rating U.S. Equity REITs and REOCs, February 26, 2013;
--Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit
Analysis, Dec. 13, 2012;
--Recovery Rating and Notching Criteria for Equity REITs, Nov. 12, 2012;
--Corporate Rating Methodology, Aug. 8, 2012.
Applicable Criteria and Related Research
Recovery Ratings and Notching Criteria for Equity REITs
Corporate Rating Methodology
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Britton Costa, +1-212-908-0524
Fitch Ratings, Inc.
One State Street Plaza
New York, NY 10004
Steven Marks, +1-212-908-9161
Daniel Chambers, +1-212-908-0782
Brian Bertsch, +1-212-908-0549 (New York)
Elizabeth Fogerty, +1-212-908-0526 (New York)
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