Fitch Affirms Kimco's 'BBB ' IDR; Outlook Stable
Fitch also assigns a 'BBB+' rating to the \\$350 million of 4.25% senior unsecured notes due 2045 issued in March 2015.
KEY RATING DRIVERS
The ratings reflect Kimco's large, diversified portfolio, its consistent and conservative headline credit metrics over the past five years and its demonstrated strong access to capital. The largest constraint on the rating is leverage, which Fitch expects will be high as a result of the Kimstone transaction. However, the Stable Outlook recognizes that the issuer's long-term target capitalization is unchanged despite the protracted amount of time that may be required for KIM to reduce leverage back to the mid-5x range.
KIMSTONE TRANSACTION INITIALLY STRESSES LEVERAGE & LIQUIDITY
In February 2015, Kimco acquired Blackstone's 67% interest in an unconsolidated joint venture (Kimstone) for \\$925 million including assumed debt. Fitch estimates the transaction was effected at a 5.5%-6% cap rate with a gross value of \\$1.4 billion. The transaction causes leverage to increase by approximately a full turn to 6.3x pro forma at Dec. 31, 2014, which is at the high end of the 5x-6.5x range considered appropriate for Kimco's 'BBB+' rating and compares to 5.4x for both 2014 and 2013.
Fitch projects leverage could sustain above 6x through 2017 though the issuer has stated plans to reduce leverage before then. 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.
Kimco's liquidity is adequate at 1x for the period Jan. 1, 2015-Dec. 31, 2016 pro forma for the recent unsecured bond issuance, although below the sector median. Liquidity was initially stressed by the Kimstone transaction. Fitch calculates liquidity coverage as sources (unrestricted cash, availability under the unsecured revolving credit facility, completed unsecured debt financings subsequent to Dec. 31, 2014 and retained cash flow from operations after dividends) divided by uses (debt maturities, development expenditures, recurring maintenance capital expenditures and the cash payment for Kimstone). Liquidity coverage should improve further should Kimco issue equity and sell assets. In general, Fitch views Kimco as having above-average access to capital through-the-cycle, which is a key qualitative factor supporting the ratings.
Fixed charge coverage (FCC) is projected to remain strong at 2.8x through 2017, consistent with recent periods. 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 10.6% of leases mature on average over the next three years and only 3.8% on average assuming tenant extension options are exercised before considering month-to-month leases. Moreover, 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 has assumed SSNOI will grow 3.5% in both 2015 and 2016 as compared to 3.3% in 2014 and 3.8% in 2013 for the U.S. same-space portfolio. Leasing spreads in the U.S. same-space portfolio accelerated in 2014 to a blended 8.8% as compared to 7.7% in 2013. Partially offsetting these improvements were increases in tenant improvement costs. Reported costs in 2014 reflect certain redevelopment expenses without which they would have been \\$29.12/sf as compared to \\$26.69/sf in 2013.
ADEQUATE CONTINGENT LIQUIDITY
Kimco maintains adequate contingent liquidity in the form of unencumbered assets which covered unsecured debt net of readily available cash by 2.5x at a stressed 8% cap rate. Kimco's UA/UD ratio has steadily increased over the past few years as non-income producing/non-real estate assets were replaced primarily with income producing unencumbered assets, and as unencumbered assets in joint ventures were consolidated. In addition to unencumbered assets, Fitch estimates Kimco can retain approximately \\$115 million to \\$150 million per year of cashflow from operations based on its dividend payout ratio (77% of adjusted funds from operations [AFFO]). Kimco's payout ratio is consistent with the median in Fitch's rated universe.
INCREASING DEVELOPMENT EXPOSURE
Kimco's development pipeline has increased after being curtailed significantly in past years and initially focused on redevelopment and expansion projects in 2012 and 2013. At Dec. 31, 2014, development costs remaining (including redevelopment) comprised 3.3% of gross assets and were 64% development versus redevelopment. Of the five projects, one is 100% leased, one is 76% leased and the remaining three are 0% pre-leased. Further, Kimco acquired the land parcels for four of the aforementioned future developments in fourth quarter 2014 for \\$114 million.
STABLE OUTLOOK
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 Nov. 25, 2014, 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.
KEY ASSUMPTIONS
--SSNOI growth of 3.5% in 2015 and 2016 and 1.7% in 2017;
--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;
--The disposition of \\$750 million of assets at a 7% yield in 2015. 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;
--Equity issuance of \\$500 million in 2015 and dividends per share of \\$0.97, \\$1.01 and \\$1.05 in 2015, 2016 and 2017, respectively;
--Unsecured debt issuances of \\$300 million in the second half of 2015 and \\$600 million in 2016 and 2017 to repay secured and unsecured maturities.
RATING SENSITIVITIES
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 2.7x for 2014 pro forma for Kimstone);
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 5x (leverage was 6.3x at Dec. 31, 2014 pro forma).
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.
Fitch has affirmed the following ratings:
Kimco Realty Corporation:
--IDR at 'BBB+';
--Unsecured revolving credit facility at 'BBB+';
--Senior unsecured term loan at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Preferred stock at 'BBB-'.
Kimco North Trust III:
--Senior unsecured guaranteed notes at 'BBB+'.
In addition, Fitch has withdrawn the ratings on the senior guaranteed term loan issued by KRC Lending S.A. de C.V. SOFOM ENR as the debt instrument was repaid.
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