Kimco Realty Corp. (NYSE: KIM) is a real estate investment trust (REIT) headquartered in New Hyde Park, N.Y., that is one of North America's largest publicly traded owners and operators of open-air shopping centers. As of December 31, 2016, the company owned interests in 524 U.S. shopping centers comprising 85 million square feet of leasable space across 34 states and Puerto Rico.
NEW YORK--(BUSINESS WIRE)-- Fitch Ratings has affirmed the credit ratings of Kimco Realty Corporation as shown below (NYSE: KIM) and assigned initial ratings to two wholly-owned unsecured issuing subsidiaries: Kimco North Trust III and KRC Lending S.A. de C.V. SOFOM ENR (collectively, Kimco or the company). Certain obligations of Kimco North Trust III previously listed under Kimco Realty Corporation were affirmed and now listed under their respective issuers.
Fitch affirms the following ratings:
Kimco Realty Corporation:
--Issuer Default Rating (IDR) at 'BBB+';
--Unsecured revolving credit facility at 'BBB+';
--Senior unsecured term loans at 'BBB+';
--Senior unsecured notes at 'BBB+';
--Preferred stock at 'BBB-'.
Fitch assigns the following ratings:
Kimco North Trust III (as the issuing entity for Kimco's Canadian unsecured notes offerings):
--Issuer Default Rating (IDR) 'BBB+';
--Senior unsecured notes 'BBB+'.
KRC Lending S.A. de C.V. SOFOM ENR (as the issuing entity for Kimco's Mexican unsecured notes offerings):
--Issuer Default Rating (IDR) 'BBB+';
--Senior unsecured term loan 'BBB+'.
The Rating Outlook is Stable.
KEY RATING DRIVERS
The ratings reflect Kimco's solid track record owning a large and diversified pool of community and neighborhood shopping centers, its experienced leasing and management team and its high-quality, diversified tenant mix with a well-laddered lease expiration schedule. The ratings also factor in the company's track record of accessing a wide variety of capital sources and the long-term effects of the in-progress portfolio simplification strategy.
These positive rating elements are balanced by slightly low (albeit improving) fixed-charge coverage for the rating category, adequate liquidity and a U.S. retailer environment where market share defensibility remains a key challenge for many traditional retailers.
Kimco owns and operates a large and diversified portfolio of consolidated and unconsolidated interests in 874 properties aggregating 88 million square feet of pro-rata gross leaseable area (GLA), located throughout the United States, Puerto Rico, Canada, Mexico, Chile, Brazil and Peru. Since 2010, Kimco has embarked on a strategy to streamline the portfolio through the disposal of non-core and non-retail assets and reinvest the proceeds into higher quality properties. Kimco has exited the majority of its non-core assets through June 30, 2013 and is now seeking to further streamline the portfolio by exiting South America.
Fitch views the sale of Kimco's South American portfolio favorably, given reduced political and currency risks, and current strong commercial real estate valuations. The move (along with the non-core dispositions) also provides capital (both monetary and human) that the company can re-direct into its domestic redevelopment pipeline at attractive incremental returns.
The company's portfolio is well-diversified with the largest tenant accounting for 3% of annualized base rent (ABR) and the top 10 tenants collectively accounting for less than 20% of ABR. Lease maturities are well-laddered with no more than 14% of annual base rent expiring in any one year and less than 5% expiring in any one year when assuming the exercise of tenant renewal options.
APPROPRIATE LEVERAGE AND COVERAGE
Leverage was 6x at June 30, 2013, up slightly, from 5.8x at both Dec. 31, 2012 and 2011. Fitch expects leverage to approximate 6x through 2015, primarily due to modestly positive same store net operating income (NOI) growth offset in part by redevelopment expenditures and the acquisition of higher quality though lower yielding properties. Fitch defines leverage as net debt-to-trailing 12 months (TTM) recurring operating EBITDA (including estimated recurring cash distributions from unconsolidated joint ventures).
Kimco's fixed-charge coverage is adequate for the 'BBB+' rating level. Fixed-charge coverage was 2.3x for the TTM ended June 30, 2013, up slightly from 2.1x and 2.2x for 2012 and 2011, respectively. Fitch projects fixed-charge coverage will improve modestly through 2015 but remain below that of other 'BBB+' rated REITs. Fitch defines fixed-charge coverage as recurring operating EBITDA plus estimated recurring cash distributions from unconsolidated joint ventures less recurring capital expenditures and non-cash straight-line rental income divided by total interest incurred and preferred stock dividends.
POSITIVE OPERATING PERFORMANCE
Despite a generally constrained economic environment, Kimco has generated modestly positive same-store NOI (SSNOI) growth due to the lack of new supply nationally. SSNOI for the U.S. portfolio grew by 4.2% in 2Q'13, marking the 13th straight quarter of positive growth and the best quarter since 3Q'07. The high (97%) occupancy for anchor space (76% of GLA) has been a primary factor driving positive leasing spreads over the past several years. In 2Q'13, new leases were 28% higher while renewals were 14% higher for a total leasing spread of 17%, more than double the growth achieved in 2010 and 2011.
Fitch expects the company's SSNOI to grow by 2%-4% per year through 2015. Kimco's metrics would deteriorate to levels weak for the 'BBB+' rating under adverse scenarios unanticipated by Fitch in which SSNOI growth is flat or experiences declines worse than 2009.
STRONG ACCESS TO CAPITAL & LIQUIDITY
Kimco's liquidity position is slightly low with a coverage ratio of 0.9x through 2015. Fitch calculates liquidity as sources (unrestricted cash, availability under the unsecured revolving line of credit and retained cash flows from operations) divided by uses (secured and unsecured debt maturities, pro-rata joint venture [JV] debt maturities, development expenditures and maintenance capex). Assuming Kimco refinances 80% of maturing secured debt, its liquidity coverage improves to 1.5x.
Although its liquidity coverage ratio tends to hover around 1x, Kimco has periodically been willing to accept some near-term dilution in order to refinance debt ahead of stated maturities. Since 2011, Kimco has demonstrated access to competitively priced capital through a variety of capital sources, including bank term loans, senior unsecured bonds and preferred equity.
Kimco maintains a large unencumbered asset pool to support its unsecured borrowings. As of June 30, 2013, unencumbered asset coverage of unsecured debt was 2x assuming an 8% capitalization rate, which is slightly low for the 'BBB+' IDR. Lastly, Kimco's dividend payout policies do not inhibit its financial flexibility with an AFFO payout ratio of 73% for the six months ended June 30, 2013.
PREFERRED STOCK NOTCHING
The two-notch differential between Kimco'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 criteria report, 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis,' dated Dec. 13, 2012, the company's preferred stock is deeply subordinated and has loss absorption elements that would likely result in poor recoveries in the event of a corporate default.
The Stable Outlook reflects Fitch's view that metrics will remain relatively unchanged and the company's demonstrated access to capital will offset a slightly low liquidity coverage ratio.
The following factors may have a positive impact on Kimco's ratings and/or Outlook:
--Fitch's expectation of fixed-charge coverage sustaining above 2.5x (coverage was 2.3x for the TTM ended June 30, 2013);
--Fitch's expectation of net debt-to-recurring operating EBITDA sustaining below 5x (leverage was 6x as of June 30, 2013).
The following factors may have a negative impact on Kimco's ratings and/or Outlook:
--Fitch's expectation of fixed-charge coverage sustaining below 2x;
--Fitch's expectation of leverage sustaining above 6.5x.
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology' (Aug. 5, 2013);
--'Parent and Subsidiary Linkage' (Aug. 5, 2013);
--'Criteria for Rating U.S. Equity REITs and REOCs' (Feb. 26, 2013);
--'Recovery Rating and Notching Criteria for Equity REITs' (Nov. 12, 2012).
Applicable Criteria and Related Research:
Parent and Subsidiary Rating Linkage
Corporate Rating Methodology - Effective from 8 August 2012 - 5 August 2013
Recovery Rating and Notching Criteria for Equity REITs -- Effective May 12, 2011 to May 3, 2012
Criteria for Rating U.S. Equity REITs and REOCs
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Source: Fitch Ratings