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Fitch Affirms Kimco's IDR at 'BBB+'; Outlook Stable
November 30, 2017 / 6:08 PM / 12 days ago

Fitch Affirms Kimco's IDR at 'BBB+'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, November 30 (Fitch) Fitch Ratings has affirmed the ratings of Kimco Realty Corporation (NYSE: KIM) at 'BBB+'. A full list of rating actions follows at the end of the release. KEY RATING DRIVERS The ratings reflect KIM's large, stable and diversified portfolio as demonstrated by the company's good historic and expected operating performance, and strong access to capital. These strengths are balanced by the company's elevated leverage ratio of 6.6x for the quarter ended Sept. 30, 2017, weaker contingent liquidity as measured by the ratio of unencumbered assets to unsecured debt and weakened access to the equity markets stemming from a large NAV discount at which the company's common stock currently trades. The company is also retaining less cash flow after dividends than its peers and less than it has historically. Fitch expects leverage will decline from its current level, however it is still expected to sustain in the low to mid-6.0x range, in excess of the company's stated financial policy of sustaining leverage between 5.0x - 5.5x. Higher Leverage: KIM's leverage was 6.6x for the quarter ended Sept. 30, 2017. The company's debt has increased by nearly $600 million since 3Q16 to fund its growing (re)development pipeline while EBITDA has remained largely flat. KIM had reduced and maintained leverage at or below 6x following a brief increase post-Kimstone transaction in 2015. Leverage has now exceeded 6x for several quarters and has exceeded 6.5x the past two quarters. KIM's leverage was 7.1x when including 50% of preferred stock as debt for the quarter ended Sept. 30, 2017. Fitch expects KIM's leverage to sustain in the low to mid 6x range through the forecast period aided by the company's liquidation of a portion of its Albertson's investment, but absent any issuance of common equity. The company's shares currently trade an estimated 20%-25% below consensus net asset value (NAV) as retail real estate operators have suffered declining share values due to broader brick-and-mortar retail industry concerns. Assuming market sentiment does not shift back in favor of retail (real estate) Fitch anticipates KIM is unlikely to issue shares at the current discount. Fitch expects the company's FCC will sustain in the high 2.0x to 3.0x range. Despite higher leverage, KIM has maintained its strong fixed charge coverage (FCC) at 3.0x for the TTM ended Sept. 30, 2017. Weaker Contingent Liquidity: Fitch measures KIM's contingent liquidity as the ratio of unencumbered assets to unsecured debt (UA/UD ratio). This ratio was 2.0x when stressing unencumbered NOI at an 8% capitalization rate. KIM's UA/UD ratio has weakened from the mid-2x's as the company utilized unsecured debt to repay secured mortgage debt and invest in a (re)development pipeline which currently provides limited unencumbered NOI. The company's UA/UD ratio is at the 2.0x level that Fitch typically views as appropriate for investment-grade REITs. If improvement in UA/UD is to occur, the company will need to continue to unencumber the portfolio as mortgages with high debt yields mature. The stabilization of unencumbered (re)development projects should also help improve the UA/UD ratio. Capital Access: The company has demonstrated strong access to the unsecured bond market, likely due to the company's absolute size and size of its issuances, which offer a liquid trading market for its bonds. Further, the company is a consistent bond issuer. In 2017, KIM's bonds have generally priced in line with 'BBB+' rated issuers. However, the company's shares currently trade an estimated 20%-25% below consensus net asset value (NAV) as retail real estate operators have suffered declining share values due to broader brick-and-mortar retail industry concerns. Fitch's base case analysis assumes the company does not issue equity due to continued weakness in the company's stock price. Further, KIM's AFFO payout ratio has increased steadily since 2012 as dividend increases have outpaced AFFO growth, limiting the amount of capital the company retains. The company's 86.3% adjusted funds from operations (AFFO) payout ratio through the first nine months of 2017 is higher than the 75%-80% REIT average in Fitch's rated universe. Stable, Diversified Portfolio: SSNOI growth has been weaker than peers since 4Q13 but still positive, averaging 2.4% per quarter (2.9% when including redevelopment). Fitch assumes SSNOI, excluding redevelopment, will grow 1%-2% annually through the forecast period as occupancy levels remain flat while the company sustains its low double-digit blended lease rate. The scale, diversification and laddered leasing within KIM's portfolio provide for generally durable cash flows from operations. 9.2% of ABR expires on average annually through 2021 including month-to-month leases (3.2% assuming tenants exercise available extension options). Leasing spreads have continued to increase portfolio cash flows, growing at a blended 12.7% for the TTM ended Sept. 30, 2017, exceeding the 12% spread in FY16 and 11.1% spread in FY15, but leasing costs have also trended up negatively impacting effective leasing spreads. The company has intentionally focused its portfolio within the top MSAs in the country as ranked by per capital income and population density. KIM's portfolio is well diversified with some concentration in the northeast U.S. The company's top seven markets representing 42.3% of ABR are all coastal markets; approximately 30% of ABR is from the New York - Washington D.C. corridor, which includes Philadelphia and Baltimore. Kimco has a well-diversified tenant roster comprised of a mix of national, regional, and local retailers. The company's 25 largest tenants represent a low 34.7% of total annual base rent as of Sept. 30, 2017 with no tenant representing more than 4% of ABR. Overall, many of the top tenants which include Home Depot (A/Stable) and Ahold Delhhaize (BBB/Positive) are strong credits. The most notable credit concerns relate to Kmart/Sears Holdings (IDR 'CC') and Toys R Us, each comprising 0.8% - 1.0% of ABR. Increased Development Exposure: Exiting the economic downturn, KIM scaled back its pipeline of larger development projects instead focusing on smaller redevelopment and expansion projects. However, five ground-up development projects are in the company's current pipeline totalling just under $500 million in estimated costs. When combined with active redevelopment projects, the unfunded portion of the overall pipeline's costs equalled approximately 4.2% of gross assets as of Sept. 30, 2017. Fitch views this level as manageable for the company, but the increase in higher-risk ground-up development activity warrants monitoring particularly given the extent of speculative development. Fitch estimates that approximately one-third of KIM's $493 million pipeline of active developments is preleased as of Sept. 30, 2017. Fitch expects the company will limit future ground-up development projects once the current pipeline is stabilized and instead focus investment in redeveloping existing assets. Fitch would view this strategy favorably as it would reduce riskier development exposure while still strengthening the value and durability of its portfolio cash flows. Stable Outlook: The Stable Outlook reflects Fitch's expectation that the KIM will reduce leverage to a level in the low to mid 6x range. Preferred Stock Notching: The two-notch differential between KIM'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 "Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis," these preferred securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default. DERIVATION SUMMARY KIM's credit metrics and internal growth are commensurate with its shopping center peers in the BBB category. The company's large and diversified portfolio of 507 assets held in high barrier-to-entry markets positions it at the higher range of the rating category, with its capital access a factor supporting the 'BBB+' IDR. However, KIM's leverage is in the mid 6x range with Fitch expecting leverage to sustain in the low to mid 6x range, commensurate with BBB- rated peers Brixmor Property Group (BBB-/Stable) and DDR Corp. (BBB-/Stable) and significantly higher than Regency Centers, for which Fitch has a credit opinion. In addition, KIM''s UA/UD ratio at 2.0x is on the cusp of the level Fitch views as appropriate for investment grade REIT issuers. Federal Realty's (A-/Stable) lower leverage, stronger portfolio demographics and metrics and capital access justify its higher rating. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for KIM include: --Low single-digit SSNOI growth through the forecast period; --Development yields of 8% and redevelopment yields of 10% on delivered stabilized projects; --Monetization of the company's investment in Albertson's in 2019 - 2021; --Gradual repayment of secured mortgage debt with unsecured debt; --No common equity issuance through the forecast period. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action --Fitch's expectation of leverage sustaining below 5x (leverage was 6.6x for the quarter ended Sept. 30, 2017); --Fitch's expectation of fixed charge coverage sustaining above 2.5x (coverage was 3.0x for the TTM ended Sept. 30, 2017). Future Developments That May, Individually or Collectively, Lead to Negative Rating Action --Fitch's expectation of leverage sustaining above 6.5x; --Fitch's expectation of fixed charge coverage sustaining below 2x. --Failure to maintain unencumbered asset coverage of unsecured debt (based on a stressed 8% cap rate) above 2.0x. LIQUIDITY Liquidity Coverage at 1.7x: KIM's liquidity coverage is adequate at 1.7x for the period Oct. 1, 2017 to Dec. 31, 2019. Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under its unsecured revolving credit facility, estimated retained cash flow from operating activities less distributions) divided by uses of liquidity (pro rata debt maturities, cost-to-complete development and redevelopment expenditures and maintenance capital expenditures). Fitch estimates KIM is on pace to retain nearly $75 million of operating cash flow in 2017 based on its 86.3% adjusted funds from operations (AFFO) payout ratio through the first nine months of 2017. The company's payout ratio is higher than the 75%-80% average in Fitch's rated universe. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Kimco Realty Corporation --IDR at 'BBB+'; --Unsecured revolving credit facility at 'BBB+'; --Senior unsecured notes at 'BBB+'; --Preferred stock at 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Christopher G. Pappas Director +1-646-582-4784 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Steven Marks Managing Director +1-212-908-9161 Committee Chairperson Britton Costa, CFA Senior Director +1-212-908-0524 Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. Summary of Financial Statement Adjustments -Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected recurring operating EBITDA is adjusted to add back non-cash stock-based compensation and include operating income from discontinued operations; --Fitch adjusts historical and projected net debt by the average ($37.5 million) of the issuer's stated cash working capital needs of $25 million - $50 million and considering it otherwise unavailable to repay debt. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Hybrids Treatment and Notching Criteria (pub. 27 Apr 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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