Fitch Rates Federal Realty's $250 Million 4.50% Sr. Unsecured Notes 'A-'

NEW YORK--(BUSINESS WIRE)--

Fitch Ratings has assigned a rating of 'A-' to the $250 million 4.50% senior unsecured notes due Dec. 1, 2044 issued by Federal Realty Investment Trust FRT (Federal). A full list of ratings is provided at the end of this release.

The notes were priced at 98.86% of par or 148 basis point premium to the benchmark treasury, resulting in a yield to maturity of 4.57%. Federal will use the proceeds to prepay its $125 million of 5.65% notes that mature in 2016 and unencumber its East Bay Bridge asset in Emeryville, CA by repaying its $61.2 million mortgage due in March 2016. Federal will use the remaining balance to repay its line of credit and for general corporate purposes.

The Rating Outlook is Stable.

KEY RATING DRIVERS

The consistent and steady cash flow growth provided by Federal's community shopping centers underpins Fitch's ratings and Outlook, together with the company's track record of prudent balance sheet management and creative redevelopment and mixed-use development.

The potential for near-term weakness in Federal's Washington, D.C. portfolio (33% of annualized base rent [ABR]) due to softer regional economic growth and some remaining execution risk related to its mixed-use developments under construction balance these credit positives.

Buy-And-Hold Strategy

Fitch views positively Federal's buy-and-hold strategy that targets premier retail properties in supply-constrained markets with above average demographics. This strategy, augmented by the company's redevelopment activities, has enabled Federal to produce consistently strong operating performance that has historically been stronger and more stable - through the cycle - than the retail real estate market generally and its public shopping center REIT peers specifically.

Consistent and Superior Growth

Federal's property management expertise of its 89 properties comprising 20.1 million square feet (excluding joint ventures) as of Sept. 30, 2014 is evidenced by consistently positive same store net operating income (SSNOI) growth, excluding redevelopments, through multiple cycles. Within the last 10 years, the lone exception was 2009 when SSNOI declined -0.3%.

This compares favorably to its public shopping center peers who declined an average of -4% in 2009. When including NOI from redevelopment properties, Federal's SSNOI growth has not dipped below 1.6% in any year over the last decade, resulting in year-over-year recurring operating EBITDA growth significantly stronger than its peers.

Federal's consistently strong rent growth on expiring leases largely reflects the high quality infill locations of its properties. Federal's releasing spreads have been higher than peers during this economic and commercial real estate recovery. Moreover, the company was unique among shopping center REITs in its ability to maintain positive leasing spreads throughout the recent economic downturn.

Conservative Leverage

Federal's leverage and coverage metrics are strong and appropriate for the rating. Federal has historically managed leverage at conservative levels with net debt to recurring operating EBITDA levels ranging between the mid-4.0 times (x) and mid-5.0x during the last 10 years. Fitch expects Federal's leverage to sustain in the high-to-mid 5.0x range, trending towards the lower end by 2016 as the company's larger developments come on-line and begin to contribute to portfolio cash flows during the next two to three years. Leverage was 5.4x for the trailing 12 months (TTM) ending Sept. 30, 2014 compared to 5.4x and 5.5x in 2013 and 2012, respectively.

Strong Fixed-Charge Coverage

Federal's fixed-charge coverage was 3.3x for the TTM ending Sept. 30, 2014 compared to 3.0x in 2013 and 2.7x in 2012. Fitch expects fixed-charge coverage to improve to the high 3.0x range in 2016, which is strong for the rating. Fitch calculates fixed-charge coverage as recurring operating EBITDA less tenant improvements and incentives, recurring maintenance capital expenditures and straight-line rent adjustments divided by interest incurred and preferred dividends.

Good Contingent Liquidity

Federal's sizeable unencumbered asset pool provides additional protection to unsecured debt holders. As of Sept. 30, 2014, 74 of the company's 89 properties were unencumbered. Fitch calculates the company's unencumbered asset value coverage of unsecured debt (UA/UD) was 3.1x at Sept. 30, 2014, based on applying a stressed 7% capitalization rate to the third quarter 2014 (3Q'14) unencumbered NOI.

Fitch's ratings for Federal incorporate the high quality of its unencumbered asset pool which includes the company's three largest (by ABR) and most valuable properties, Santana Row (San Jose, CA), Bethesda Row (Bethesda, MD) and Third Street Promenade (Los Angeles, CA) which together comprised approximately 14% of ABR.

Granular Tenant Base

High tenant credit quality and granularity within Federal's portfolio help mitigate tenant bankruptcy risk. Only one tenant (grocer Ahold USA, Inc./not rated) represents more than 3% of ABR, and the top 25 tenants represent a relatively low 29.4% of total ABR as of Sept. 30, 2014.

The company maintains well laddered lease expirations by year with average annual lease expirations of 9.1% of ABR between 2015 and 2023 and a maximum of 13.7% of ABR expiring in a single year (excluding tenant lease extension options).

Strong Access to Capital

Further, the company has maintained good access to the capital markets and has a reasonably well laddered debt maturity schedule, notwithstanding moderate increases in the company's 2017 debt maturities to 18.3% of total debt, which Fitch views as manageable.

Solid Liquidity Coverage

Fitch's base case analysis shows liquidity coverage of 2.1x through the end of 2016 (1.1x including unfunded development commitments) on a pro forma basis that incorporates the proceeds from the newly issued debt. The company's pro forma liquidity coverage ratio (including development) would improve to 1.4x assuming it refinanced 80% of its secured debt maturing through 2016. However, Fitch recognizes Federal's preference for owning assets on an unencumbered basis, reducing the likelihood of that scenario.

Fitch defines liquidity coverage as sources of liquidity (unrestricted cash, availability under the company's unsecured revolving credit facility pro forma for the recent commitment size increase, projected retained cash flows from operating activities after dividends and distributions) divided by uses of liquidity (pro rata debt maturities and projected recurring capital expenditures) for Oct. 1, 2014 to Dec. 31, 2016.

Federal's demonstrated access to multiple forms of capital further supports its liquidity profile and offsets refinancing risk. In addition, Federal's retained operating cash flow after dividend payments provides over $100 million of internally generated capital annually that can be used to make accretive investments and/or satisfy its financing obligations. Fitch calculates that the company's dividends represented 77% adjusted funds from operations during the nine months ending Sept. 30, 2014.

Geographic Concentration

The portfolio's moderate asset and market concentrations and continued industry-wide weakness among select retailer tenants - primarily local small-shop tenants - are moderate credit concerns. Federal's three largest properties comprise roughly 14% of total ABR. Also, Federal generates approximately 33% of its ABR from the D.C. Metro market where commercial real estate market conditions are weakening due to cutbacks in U.S. government spending.

Preferred Stock Notching

The two-notch differential between Federal's IDR and preferred stock rating is consistent with Fitch's criteria for corporate entities with an IDR of 'A-'. Based on Fitch research titled 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available on Fitch's web site at 'www.fitchratings.com', 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.

Stable Outlook

The Stable Outlook centers on Fitch's expectation that Federal's credit profile will remain appropriate for the 'A-' rating through economic cycles, barring any significant changes in the company's capital structure. The Stable Outlook reflects the quality of management and consistency of cash flows resulting in stable credit metrics, in line with an 'A-' rating. Further, Federal continues to access various sources of capital and maintains a solid unencumbered asset base and liquidity profile.

RATING SENSITIVITIES

While Fitch does not expect near-term positive momentum on the rating, the following factors may have a positive impact on Federal's ratings and/or Outlook:

-- Fitch's expectation of net debt to recurring operating EBITDA sustaining below 4.5x (leverage was 5.4x at Sept. 30, 2014);

-- Fitch's expectation of fixed charge coverage sustaining above 3.5x (coverage was 3.3x at Sept. 30, 2014).

-- Greater asset diversification of the portfolio via growth (Federal's three largest assets generate roughly 14% of total ABR).

The following factors may result in negative momentum on the rating and/or Outlook:

-- Shift in management strategy away from owning and redeveloping retail assets in infill locations;

-- Unencumbered asset coverage of unsecured debt below 2.5x (coverage was 3.1x at Sept. 30, 2014 utilizing a stressed 7% capitalization rate);

-- Fitch's expectation of leverage above 5.5x;

-- Fitch's expectation of fixed charge coverage sustaining below 2.5x.

Fitch currently rates Federal as follows:

-- Issuer Default Rating (IDR) 'A-';

-- Unsecured revolving credit facility 'A-';

-- Senior unsecured term loan 'A-';

-- Senior unsecured notes 'A-';

-- Redeemable preferred shares 'BBB'.

Additional information is available at 'www.fitchratings.com'.

Applicable Criteria and Related Research:

-- 'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage' (May 28, 2014).

-- 'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' (Feb. 26, 2014);

-- 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis' (Dec. 23, 2013);

-- 'Recovery Rating and Notching Criteria for REITs' (Nov. 19, 2013).

Applicable Criteria and Related Research:

Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=749393

Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=737957

Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=726863

Recovery Ratings and Notching Criteria for Equity REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=722363

Additional Disclosure

Solicitation Status
http://www.fitchratings.com/gws/en/disclosure/solicitation?pr_id=920255

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