By a News Reporter-Staff News Editor at Investment Weekly News -- Fitch rates the $150 million reopening of Kimco Realty Corporation's (NYSE: KIM) 4.25% senior unsecured notes due 2045 'BBB+'. The notes were priced at 97.96% of the principal amount to yield 4.375% or a 175 basis point spread over the benchmark rate. A full list of Fitch's current ratings on KIM follows at the end of this release.
KEY RATING DRIVERS
The ratings reflect Kimco's large, diversified portfolio, its generally consistent and conservative credit metrics over the past five years and its demonstrated strong access to capital. Kimco has made progress reducing elevated leverage after the Kimstone transaction.
RESTORING HEADLINE METRICS
Kimco has reduced leverage over the past few quarters to 5.3x and 5.5x for the quarter and trailing twelve months (TTM) ended March 31, 2016, respectively. This compares to 6.3x immediately after the close of the Kimstone transaction (for the quarter ended March 31, 2015). In February 2015, Kimco acquired Blackstone's 67% interest in an unconsolidated joint venture (Kimstone) for $925 million including assumed debt. When including 50% of preferred stock in total debt, KIM's leverage was 5.8x and 5.9x for the quarter and TTM ended March 31, 2016. Fitch defines leverage as debt minus readily available cash to recurring operating EBITDA including Fitch's assumption for recurring cash distributions from joint venture operations.
Fitch expects Kimco will reduce leverage further over the next few years as the issuer is targeting net debt / EBITDA as adjusted (on its calculations) of 5x - 5.5x versus its calculation of 5.9x at March 31, 2016.
Kimco's liquidity is adequate at 1.1x for the period April 1, 2016 - Dec. 31, 2017 pro forma for the $150 million note issuance. Fitch expects the issuer will fund the slight deficit by being a net seller in 2016. Moreover, Fitch views Kimco as having above-average access to capital through-the-cycle, which is a key qualitative factor supporting the ratings.
Fitch calculates liquidity coverage as sources (unrestricted cash, availability under the $1.75 billion unsecured revolving credit facility, estimated proceeds from ATM issuance subsequent to the end of 1Q16 and retained cash flow from operations after dividends) divided by uses (debt maturities, development expenditures and recurring maintenance capital expenditures).
Fitch projects that Kimco's fixed-charge coverage (FCC) will remain strong around 3x through 2017, consistent with recent periods (3.3x and 3x for the quarter and TTM ended March 31, 2016). Fitch defines FCC as recurring operating EBITDA including Fitch's estimate of recurring cash distributions from joint venture operations less straight-line rent and recurring maintenance capital expenditures to interest and preferred stock dividends.
DURABLE OPERATING CASHFLOWS FROM ENVIRONMENT & DIVERSIFICATION
The scale, diversification and lease staggering of Kimco's portfolio provide for generally durable cash flows from operations. Approximately 9.7% of leases mature on average in 2016 through 2018 and only 3.5% on average assuming tenant extension options are exercised before considering month-to-month leases. Leasing spreads in the U.S. same-space portfolio remained strong in 2015 and 1Q16 at 11.1% and 7.5%, respectively as compared to 8.8% in 2014.
Limited new supply for shopping centers and a generally accommodative economic backdrop have supported positive growth as measured by same-store net operating income (SSNOI) and same-store occupancy. Fitch assumes SSNOI will grow 3.5% in 2016 before the effects of tenant defaults and 1.7% in 2017 as compared to 1.5% in 1Q16, 3.1% in 2015 and 3.3% in 2014 for the U.S. same-space portfolio. The most recent quarter was negatively impacted by a 140 basis point reserve for Sports Authority as well as reserves for two other tenants.
ADEQUATE CONTINGENT LIQUIDITY
Kimco maintains adequate contingent liquidity in the form of unencumbered assets which covered unsecured debt (UA / UD) net of readily available cash by 2.3x at a stressed 8% cap rate. Kimco's UA/UD ratio has steadily increased over the past few years as it replaced non-income producing/non-real estate assets with income producing unencumbered assets, and as unencumbered assets in joint ventures were consolidated or purchased outright.
Fitch also estimates Kimco will retain approximately $75 million to $150 million per year of cashflow from operations based on its dividend payout ratio (79.7% of adjusted funds from operations [AFFO] for the TTM ended March 31, 2016). Kimco's payout ratio is consistent with the median in Fitch's rated universe.
INCREASING DEVELOPMENT EXPOSURE
Kimco has increased its development exposure after curtailing its activities during the last downturn and focusing on redevelopment and expansion projects until recently during this recovery. At March 31, 2016, unfunded development costs remaining (including redevelopment) comprised 4.4% of gross assets which remains manageable but is increasingly focused on development projects.
The Stable Outlook reflects Fitch's expectation that the issuer's long-term capitalization target is unchanged and that it will restore leverage back to the mid-5x range. The Outlook also reflects the accommodative operating environment for the sector being offset in part by increasing development exposure.
PREFERRED STOCK NOTCHING
The two-notch differential between Kimco's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'BBB+'. Based on Fitch's criteria report, 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' dated Feb. 29, 2016, the company's preferred stock is deeply subordinated and has loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
Keywords for this news article include: Fitch Ratings, Banking and Finance, Investment and Finance.
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