The notes mature in
Fitch currently rates the company 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 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 for SpinCo and unsecured note issuance, 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
LEVERAGE UNAFFECTED AND APPROPRIATE FOR RATING
Vornado's leverage remains consistent with a 'BBB' rating and is expected to be 6.7x pro forma for the trailing 12 months ended (TTM)
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,
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 6.2x on a net unsecured debt basis and 4.0x on a gross debt basis after reducing cash and equivalents by
VNO's pro forma liquidity is appropriate for the rating with a base case liquidity ratio of 2.3x for the period
VNO benefits from limited near-term debt maturities with only 15.1% of pro forma debt maturing through 2015 and a manageable adjusted funds from operations (AFFO) payout ratio (91%, 91% and 83% in 1Q'14, 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
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 the TTM ended
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.
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.
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 (TTM leverage was 6.6x at
--Fitch's expectation of fixed-charge coverage sustaining above 2.5x (coverage was 1.9x for TTM ended
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'.
--'Corporate Rating Methodology: Including Short-Term Ratings and Parent and Subsidiary Linkage'
--'Rating U.S. Equity REITs and REOCs: Sector Credit Factors'
--'Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis'
--'Recovery Ratings and Notching Criteria for Equity REITs'
Corporate Rating Methodology - Including Short-Term Ratings and Parent and Subsidiary Linkage
Rating U.S. Equity REITs and REOCs (Sector Credit Factors)
Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis
Recovery Ratings and Notching Criteria for Equity REITs
Source: Fitch Ratings
Most Popular Stories
- Neighbor Warns Chris Brown to Stay Off His Property
- Venezuelan Officials Banned From Traveling in U.S.
- Adrienne Bailon Disses Ex-Lover Rob Kardashian
- Hiring on the Rise at Small Businesses
- NSHMBA Names Lincoln as Automotive Partner
- Hispanic Arts Leaders Unite Across the Border
- Islamic State Fights for Control of Syrian Oil Wealth
- How to Fit Green Energy Into Your Portfolio
- Sanctions Will Hit Russia Hard if Not Lifted Quickly
- Jerry Brown Favors More Shelters for Immigrant Kids