Fitch Ratings has affirmed the ratings of Vornado Realty Trust and its
operating partnership, Vornado Realty, L.P. (NYSE: VNO, collectively
'Vornado') with the IDR at 'BBB'. Fitch rates VNO as follows:
Vornado Realty Trust:
--Issuer Default Rating (IDR) at 'BBB';
--Preferred stock at 'BB+';
Vornado Realty, L.P.:
--IDR at 'BBB';
--Unsecured revolving credit facility at 'BBB';
--Senior unsecured notes at 'BBB'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The affirmation and ratings reflect that Vornado's credit profile will
be unaffected by the planned spin-off of most of its remaining retail
assets into a separate public entity (SpinCo). The eventual disposition
of the portfolio was well-telegraphed and largely reflects the
culmination of Vornado's simplification efforts over the past few years
which have included the sale of its interests in LNR, J.C. Penney
Company, Inc. and non-core real estate assets.
Pro-forma, Vornado's credit strengths remain unchanged and include
exceptional contingent liquidity in the form of unencumbered asset
coverage of unsecured debt, maintenance of leverage appropriate for the
rating category and a high-quality property portfolio. These positive
rating elements are offset by a weak fixed charge coverage ratio and the
continued negative impact of the Base Realignment and Closure statute
(BRAC) on recurring operating EBITDA and recurring capital expenditures
on Vornado's Washington, D.C. office portfolio.
LEVERAGE UNAFFECTED AND APPROPRIATE FOR RATING
Vornado's leverage remains consistent with a 'BBB' rating and is
expected to be 6.8x pro forma as compared to 6.7x at Dec. 31, 2013 and
7.4x and 6.5x as of Dec. 31, 2012 and Dec. 31, 2011, respectively.
Leverage for 2012 was negatively affected by the timing of the 4Q'12 666
Fifth Avenue retail acquisition ($707 million). Fitch forecasts leverage
will remain between 6.5x - 7.0x through 2014. Fitch defines leverage as
net debt divided by recurring operating EBITDA including Fitch's
estimate of recurring distributions from partially owned entities.
CULMINATION OF SIMPLIFICATION OF INVESTMENT STRATEGY
In 2012, VNO embarked on a plan to divest many of its non-core assets
including non-cash flowing or non-recurring operating EBITDA
contributing assets such as LNR. The pace at which VNO completed the
simplification exceeded Fitch's expectations, including, notably the
sale of the interests in J.C. Penney. Pro-forma for SpinCo, Toys R Us
and shares in Lexington Realty Trust will be VNO's largest remaining
non-core assets.
STRONG UNENCUMBERED ASSET COVERAGE
The ratings are further supported by VNO's unencumbered property
coverage of unsecured debt, which gives the company significant
financial flexibility as a source of contingent liquidity. Pro forma
consolidated unencumbered asset coverage of unsecured debt results in
coverage of 8.3x on a net unsecured debt basis as compared to 9.1x at
Dec. 31, 2013 and 5.4x on a gross debt basis (versus 5.9x). The ratio is
strong for the rating, particularly given the unencumbered Manhattan
office and retail properties are highly sought after by secured lenders
and foreign investors, resulting in stronger contingent liquidity
relative to many asset classes. Fitch calculates unencumbered asset
coverage as fourth-quarter 2013 unencumbered property EBITDA divided by
a blended stressed capitalization rate of 7.6% divided by net unsecured
debt.
GOOD LIQUIDITY
VNO's pro forma liquidity is appropriate for the rating with a base case
liquidity ratio of 2.0x for the period Jan. 1, 2014 - Dec. 31, 2015
assuming no refinancing of maturing debt. Assuming VNO refinances 80% of
its secured obligations, the ratio improves to 2.8x (2.2x when including
Fitch's estimated development expenditures). Fitch calculates liquidity
as sources (unrestricted cash, availability under the unsecured line of
credit facilities, and retained cash flow from operations) over uses
(debt maturities and recurring capital expenditures).
VNO benefits from limited near-term debt maturities with only 12.4% of
pro forma debt maturing through 2015 and a manageable AFFO payout ratio
(91% and 83% in 2013 and 2012, respectively). Fitch expects Vornado will
reduce its dividend post-spin to maintain a comparable payout ratio.
FAIR OPERATING PERFORMANCE
As anticipated, Vornado's operating performance was negatively affected
by BRAC with Washington, D.C.'s SSNOI declining 9.8% in 2012 and an
additional 3.8% in 2013. Historically, VNO had materially outperformed
its underlying markets as measured by both occupancy and same-store
EBITDA over the longer term. From 2005 through 2013, the New York and
Washington, D.C.'s portfolio's same-store EBITDA growth was 370 bps and
100 bps above that of the market, respectively. Such performance
reflects the quality of the portfolio's assets, as well as management's
capabilities. Fitch forecasts VNO's portfolio will experience low single
digit SSNOI growth through 2015. Further, both VNO's tenant granularity
and lease maturities are appropriate for the rating and enhance cash
flow predictability.
COVERAGE LOW FOR RATING
The company's fixed-charge coverage ratio is projected to be 1.7x pro
forma as compared to 1.8x for 2013 and below the 2.1x level of 2011
largely from the loss of BRAC related income and higher recurring
capital expenditures. Fitch expects coverage will improve above 2.0x in
2014 and improve further in 2015 as the company continues to repay
higher coupon secured and unsecured debt obligations. Fixed-charge
coverage sustaining, or Fitch's expectation that it will sustain, below
1.8x may result in negative ratings momentum. Fitch defines fixed-charge
coverage as recurring operating EBITDA less recurring capital
expenditures and straight-line rents, divided by interest incurred and
preferred stock and preferred OP unit distributions.
PREFERRED STOCK NOTCHING
The two-notch differential between VNO's IDR and preferred stock rating
is consistent with Fitch's criteria for corporate entities with an IDR
of 'BBB'. Based on Fitch's research on '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 Rating Outlook is driven in part by Fitch's expectation that
VNO will maintain appropriate credit metrics in light of the BRAC
related earnings erosion and the impact of potential increased
development activity.
RATING SENSITIVITIES
The following factors may result in positive momentum on VNO's ratings
and/or Outlook:
--Fitch's expectation of net debt to recurring operating EBITDA
sustaining below 6.0x (leverage was 6.7x at Dec. 31, 2013 and 6.8x pro
forma);
--Fitch's expectation of fixed-charge coverage sustaining above 2.5x
(coverage was 1.8x for 2013 and 1.7x pro forma).
The following factors may result in negative momentum on VNO's ratings
and/or Outlook
--Fitch's expectation of leverage sustaining above 7.5x;
--Fitch's expectation of fixed-charge coverage sustaining below 1.8x;
--Fitch's expectation of a sustained liquidity coverage ratio below 1.0x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors' Feb. 26,
2014;
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT
Credit Analysis' Dec. 23, 2013;
--'Recovery Ratings and Notching Criteria for Equity REITs' Nov. 19,
2013;
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent
and Subsidiary Linkage' Aug. 5, 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=715139
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=700091
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=826974
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