Correction: Fitch Rates Kimco's Senior Unsecured Bonds due 2026 'BBB+'
Fitch Ratings has assigned a 'BBB+' rating to the senior unsecured notes due 2026 issued by Kimco Realty Corporation (NYSE: KIM). Net proceeds are expected to be used for the redemption of the $290.9 million aggregate principal amount of outstanding 5.70% senior notes due May 1, 2017 (the 2017 notes), with the remainder, if any, to be used for general corporate purposes. 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 the elevated leverage after the Kimstone transaction.
RESTORING HEADLINE METRICS
Kimco has reduced leverage over the past few quarters with 5.4x leverage for both the quarter and trailing 12 months (TTM) ended June 30, 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 5.9x for both the quarter and TTM ended June 30, 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 5.7x at June 30, 2016.
Kimco's liquidity is sufficient at 1.6x for the period July 1, 2016 - Dec. 31, 2017 pro forma for the note issuance. 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 (3.2x and 3x for the quarter and TTM ended June 30, 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 8.6% of leases mature on average in 2016 through 2018 and only 3.2% 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 2Q16 at 11.1% and 16.2%, 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 3.1% in 2Q16, 3.1% in 2015 and 3.3% in 2014 for the U. S. same-space portfolio.
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 2.4x 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 (80.8% of adjusted funds from operations [AFFO] for the TTM ended June 30, 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 June 30, 2016, unfunded development costs remaining (including redevelopment) comprised 2.7% 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.
Fitch's key assumptions within the rating case for KIM include:
--SSNOI growth of 3.5% in 2016 and 1.7% in 2017 before tenant defaults;
--General and administrative expenses growth to approximate 12%-13% of recurring operating EBITDA;
--Recurring maintenance capital expenditures grow to approximate 11%-12% of recurring operating EBITDA;
--Development expenditures of approximately $260 million and redevelopment expenditures of $225 million through 2017;
--Fitch has not explicitly assumed any net transactional activity in 2016 or 2017, noting that volume over the past three years has generally balanced acquisitions and dispositions;
--Unsecured debt issuances of $600 million in 2016 and 2017 to repay secured and unsecured maturities (including the rated issuance).
Fitch does not envision positive momentum on Kimco's ratings and/or Outlook; however, the following factors may have a positive impact:
--Fitch's expectation of FCC sustaining above 2.5x (coverage was 3.2x for 2Q16);
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 5x (leverage was 5.4x for the TTM ended June 30, 2016).
The following factors may have a negative impact on Kimco's ratings and/or Outlook:
--Fitch's expectation of FCC sustaining below 2x;
--Fitch's expectation of leverage sustaining above 6.5x.
FULL LIST OF RATING ACTIONS
Fitch currently rates KIM as follows:
Kimco Realty Corporation
--Issuer Default Rating 'BBB+';
--Unsecured revolving credit facility 'BBB+';
--Senior unsecured term loan 'BBB+';
--Senior unsecured notes 'BBB+';
--Preferred stock 'BBB-'.
Kimco North Trust III:
--Senior unsecured guaranteed notes 'BBB+'.