Fitch Affirms WP Glimcher, Inc. at 'BBB-'; Outlook Stable
OREANDA-NEWS. Fitch Ratings has affirmed the ratings, including the 'BBB-' Issuer Default Ratings (IDRs), of WP Glimcher, Inc. (NYSE: WPG) and its operating partnership, Washington Prime Group, L.P.. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release.
KEY RATING DRIVERS
The affirmation and 'BBB-' IDR reflect the fact that WPG has largely executed on its plans to reduce leverage and its reliance on short-term debt following the company's merger with Glimcher Realty Trust. Headline metrics such as leverage, fixed-charge coverage (FCC) and liquidity are appropriate for the rating but towards the lower end of the rating range. These factors are balanced by Fitch's cautious views on less dominant retail real estate and WPG's weaker access to capital relative to other REITs.
ADEQUATE HEADLINE METRICS
Fitch projects that WPG's leverage will sustain in the high 6x range through 2018 assuming low single digit operating cash flow growth is offset by continued investment in redevelopment projects without any external equity. Fitch's projections imply leverage will be largely unchanged from recent periods and towards the high-end of the 6x - 7x range that Fitch has indicated is appropriate for WPG at the 'BBB-' IDR. Fitch views WPG's long-term leverage target of 6.5x favorably but notes that achieving it would require some combination of stronger than expected operating fundamentals, less expansionary capital expenditures or incremental equity raises, all of which Fitch views to be unlikely through the rating horizon. Leverage was 6.6x for 2015 though this was positively impacted by partial year earnings from the assets that were contributed to the O'Connor joint venture in June 2015.
Fitch forecasts FCC will sustain around 3x through 2018 as the aforementioned modestly accommodative operating fundamentals are offset by higher interest expense as WPG continues to replace bank term financing with longer tenor albeit higher rate notes. FCC was 3.1x for the trailing twelve months (TTM) ended Dec. 31, 2015. Fitch defines leverage as net debt including 50% of preferred stock to recurring operating EBITDA on a consolidated basis. Fitch defines fixed-charge coverage as recurring operating EBITDA less maintenance capital expenditures and straight-line rent to total interest and preferred dividends.
SUFFICIENT LIQUIDITY, PAYOUT RATIO ENABLING REDEVELOPMENT
Most measures of WPG's liquidity are sufficient through the rating horizon. Fitch calculates that sources of liquidity (unrestricted cash, availability under the $900 million unsecured revolving credit facility and retained cash flow from operations after dividends) cover uses (debt maturities, maintenance capital expenditures and redevelopment expenditures) by 1x for the period Jan. 1, 2016 - Dec. 31, 2017 assuming no access to external capital. Liquidity improves to 2x assuming 80% of secured debt is refinanced. Fitch expects WPG will assess upcoming mortgage maturities on a case by case basis depending upon the performance and value of the assets and the relative pricing between the secured and unsecured debt markets.
A key part of WPG's liquidity has been its low dividend payout ratio which is enabling it to partially fund redevelopment expenditures with retained free cash flow from operations. Common dividends comprised 62% and 65% of 2015 and 4Q15 adjusted funds from operations (AFFO), respectively, which allows for $105 million to $130 million of retained cash as compared to the $150 million to $200 million of redevelopment expenditures that WPG has guided to.
Similar to other liquidity measures, WPG's contingent liquidity in the form of unencumbered asset coverage of unsecured debt, is adequate for the rating. Fitch estimates that unencumbered assets based on a 9% cap rate cover unsecured debt by 1.9x at Dec. 31, 2015. Fitch typically views 2x as being consistent with an investment grade rating.
EVOLVING ACCESS TO CAPITAL
Fitch views WPG's access to most forms of debt and equity capital to be at the weaker end of the REIT spectrum. While liquidity is not a concern given the lack of unsecured debt maturities over the next few years, access to attractively priced debt and equity capital is a key rating consideration for REITs given distribution requirements.
WPG's common equity is trading at a 37% discount to consensus net asset value (NAV) which is one of the largest discounts in Fitch's rated universe (the REIT index is at a 1% discount). Fitch attributes the discount to the wide bid-ask spread for 'B' malls generally as the market struggles to ascertain the long-term viability and value of less productive malls. By extension, thinner investor demand for the malls limits the extent to which WPG can raise equity through asset sales.
This dynamic is also present in the debt capital markets. Mortgage availability for 'B' malls is less plentiful and more discerning than it was in prior years. Similarly, Fitch views WPG's access to non-bank unsecured debt capital to be towards the weaker end of the spectrum attributable to both its asset class and being a less-seasoned issuer, and notes the continued reliance on bank debt capital and its inaugural bond offering being smaller and shorter tenor than Fitch's original expectations. Less-seasoned REITs have exhibited more volatile and more expensive access to unsecured debt in recent months.
Fitch's key assumptions within the rating case for WPG include:
--A modestly accommodative operating environment with low single digit growth in operating cash flows attributable in part to redevelopment expenditures;
--WPG's access to unsecured debt and equity capital remains limited and the issuer does not issue equity or engage in meaningful asset sales to reduce leverage;
--WPG limits investment activity to redevelopment projects.
Although Fitch does not envision positive momentum in the ratings through the rating horizon, the following factors may have a positive impact on WPG's ratings and/or Outlook:
--Fitch's expectation of leverage sustaining below 6.0x (6.6x for TTM ended Dec. 31, 2015);
--Fitch's expectation of fixed charge coverage sustaining above 2.5x (3.1x for TTM ended Dec. 31, 2015);
--Fitch's expectation of unencumbered assets, using a stressed 9% capitalization rate, coverage of net unsecured debt sustaining above 3.0x (1.9x at Dec. 31, 2015).
The following factors may have a negative impact on WPG's ratings and/or Outlook:
--Liquidity coverage sustaining below 1.0x;
--Sustained deterioration in operating fundamentals or asset quality (e.g., negative SSNOI results or negative leasing spreads);
--Fitch's expectation of leverage sustaining above 7.0x;
--Fitch's expectation of fixed charge coverage sustaining below 1.8x.
FULL LIST OF RATING ACTIONS
Fitch has affirmed WPG's ratings as follows:
WP Glimcher, Inc.
--Issuer Default Rating (IDR) at 'BBB-'
Washington Prime Group, L.P.
--IDR at 'BBB-';
--Senior unsecured revolving credit facility at 'BBB-';
--Senior unsecured term loans at 'BBB-';
--Senior unsecured notes at 'BBB-'.
Fitch has also assigned a 'BB' rating to the preferred stock issued by Washington Prime Group, L.P. that was assumed in the Glimcher Realty Trust merger.