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Fitch Rates Vornado's $450MM 2.5% Senior Unsecured Notes Due 2019 'BBB'; Outlook Stable

June 12, 2014

NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has assigned the following debt obligation rating to Vornado Realty, L.P.:

--$450 million 2.5% senior unsecured notes 'BBB'.

The notes mature in June 2019 and were priced at 99.619% of their face amount to yield 2.581%, representing a 90 basis point (bps) spread over the benchmark treasury. The company will use the net proceeds from the offering to fund, in whole or in part, 'Eligible Green Projects', including the development and redevelopment of such projects.

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 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 6.7x pro forma for the trailing 12 months ended (TTM) March 31, 2014 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 fourth quarter 2012 (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 6.2x on a net unsecured debt basis and 4.0x on a gross debt basis after reducing cash and equivalents by $500 million for estimated working capital needs and the net issuance proceeds which will be redeployed into Eligible Projects and not available as a source of contingent liquidity. 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 7.5% divided by net unsecured debt.

STRONG LIQUIDITY

VNO's pro forma liquidity is appropriate for the rating with a base case liquidity ratio of 2.3x for the period April 1, 2014 - Dec. 31, 2015 assuming no refinancing of maturing debt and including estimated development expenditures. Assuming VNO refinances 80% of its secured obligations, the ratio improves to 3.4x. 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 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 Washington, D.C.'s same store net operating income (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 the TTM ended March 31, 2014 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 (TTM leverage was 6.6x at March 31, 2014 and 6.7x pro forma);

--Fitch's expectation of fixed-charge coverage sustaining above 2.5x (coverage was 1.9x for TTM ended March 31, 2014 and 1.8x 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:

--'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 Non-Financial Corporate and REIT Credit Analysis' Dec. 23, 2013;

--'Recovery Ratings and Notching Criteria for Equity 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=834352

ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE 'WWW.FITCHRATINGS.COM'. PUBLISHED RATINGS, CRITERIA AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE 'CODE OF CONDUCT' SECTION OF THIS SITE. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE.



Fitch Ratings

Primary Analyst

Britton Costa

Director

+1-212-908-0524

Fitch Ratings, Inc.

33 Whitehall Street

New York, NY 10004

or

Secondary Analyst

Steven Marks

Managing Director

+1-212-908-9161

or

Committee Chairperson

Michael Weaver

Managing Director

+1-312-368-3156

or

Media Relations:

Sandro Scenga, +1-212-908-0278 (New York)

sandro.scenga@fitchratings.com


Source: Fitch Ratings


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