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Fitch Affirms Brixmor's IDR at 'BBB-'; Outlook Stable
April 20, 2017 / 5:28 PM / 8 months ago

Fitch Affirms Brixmor's IDR at 'BBB-'; Outlook Stable

(The following statement was released by the rating agency) NEW YORK, April 20 (Fitch) Fitch Ratings has affirmed the Long-term Issuer Default Ratings (IDR) for Brixmor Property Group, Inc. (NYSE: BRX) and its operating partnership, Brixmor Operating Partnership, L.P., at 'BBB-'. The Rating Outlook is Stable. A full list of rating actions follows at the end of this release. KEY RATING DRIVERS The rating and Stable Outlook reflect BRX's large and diverse portfolio of 512 shopping centers, solid fixed charge coverage (FCC), and appropriate leverage for the rating level. These positive rating elements are offset by lower relative portfolio asset quality and sustained weak unencumbered asset coverage of unsecured debt (UA/UD). Leverage Declining Steadily Fitch expects BRX's leverage to improve to the mid-6x range in the near term and continue into the low-6x range by 2019 through a combination of same store net operating income (SSNOI) growth, incremental net operating income (NOI) from redevelopments, and retained cash flow as the company limits dividend growth in the near term to drive portfolio investment. BRX's leverage for the three and 12 months ended Dec. 31, 2016 was 6.7x and 6.8x, respectively. Progressing to Fully Unencumbered Portfolio BRX seeks to have an entirely unencumbered portfolio and has made progress in repaying or refinancing maturing mortgages via less costly unsecured bank and bond capital. 76.1% of the company's NOI was derived from unencumbered assets at Dec. 31, 2016 compared to 61.7% at year-end 2015. The company has over $300 million of mortgages maturing in 2017, and Fitch expects the company will pull forward an additional $97 million in 2020 mortgage debt later this year when it will not incur any prepayment penalties. Fitch anticipates the company will reduce its exposure to bank debt by continuing to access the public unsecured bond market where it prices favorably with respect to select retail REIT peers. Despite the company's unencumbering efforts, Fitch expects unencumbered assets will continue to cover unsecured debt (UA/UD ratio) at a level below Fitch's typical 2.0x threshold for investment-grade issuers due to the interplay between the debt yields on to-be unencumbered assets and incremental unsecured borrowings. This ratio was 1.7x at Dec. 31, 2016 when utilizing a stressed 8.5% capitalization rate. Improvement to 2.0x UA/UD would require 16% growth in unencumbered NOI if net unsecured debt remained at current levels, or meaningfully reduced debt balances which Fitch views unlikely in the near term as the company focuses capital investment on the redevelopment and repositioning of its portfolio to drive cash flow growth. Asset Quality Below Publicly-Traded Peers Fitch considers BRX's asset quality to be at the lower end of its publicly traded peers, based on the portfolio's current operating metrics including in-place rents for anchor and shop tenants, per square foot lease signings for new and renewal rents, occupancy, and surrounding population demographics. BRX has reaffirmed its commitment to invest in the portfolio in the form of repositioning capital and more intensive redevelopment spend. Fitch expects the company to make decisions regarding its single-asset markets during the portfolio transformation period by either injecting more capital to form critical mass in a location to enhance influence or disposing of assets in markets that it sees with challenging future growth prospects to recycle proceeds into the former. Unsecured Capital Access Strengthens Liquidity BRX demonstrated strong access to unsecured debt capital via the banks and public bond market in 2016 and the first quarter of 2017 following accounting irregularities in early 2016. The company has issued bonds three separate times in the public market since June 2016 for an aggregate $1.5 billion face value, and recast its $2.75 billion corporate credit facility at reduced pricing in July 2016, allaying Fitch's concerns regarding potential overhang from the actions of previous management. Fitch expects BRX's liquidity to remain adequate, bolstered by manageable mortgage maturities in 2017 and proceeds from its March 2017 unsecured bond issuance that went toward partial repayment of its $1 billion term loan maturing in July 2018. Fitch estimates base case liquidity coverage for BRX at 1.3x for the period Jan. 1, 2017 to Dec. 31, 2018 pro forma for its March 2017 unsecured bond proceeds, with coverage improving to 1.5x under a scenario in which the company refinances 80% of secured debt maturities. Fitch views the refinancing scenario unlikely and expects BRX will repay all 2017 secured maturities as well as pull a portion of scheduled 2020 mortgage maturities forward in late September before turning its attention to the remaining term obligation. The company has strategically measured its repositioning costs with a long-term view and Fitch believes it will not overextend itself in any one calendar year. Improving FCC FCC for the year-ended Dec. 31, 2016 was 3.2x, and Fitch expects BRX's FCC to sustain in the low- to mid-3x range through the forecast period due to higher property NOI and declining interest costs associated with refinancing more costly mortgage debt with unsecured bond capital. Improvements in coverage have been balanced by growth in maintenance capital expenditures and leasing costs within a portfolio that has historically been undercapitalized. Fitch anticipates recurring capex will continue to grow to reach a level more appropriate for the size of the portfolio. Simple Portfolio Management Story; No Legacy Issues BRX operates a simplified business model with whole ownership of U.S.-based neighborhood and community shopping centers. The company has no material joint ventures, and Fitch does not expect the company will add joint venture equity to supplement its growth strategy going forward. Fitch expects BRX's external growth strategy will focus on anchor repositionings and redevelopment of existing centers and modest acquisition volume. Stable Outlook The Stable Outlook reflects Fitch's expectation that BRX's financial profile will remain appropriate for a 'BBB-' REIT during the rating horizon. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: --Low single-digit revenue and SSNOI growth; --Low double-digit leasing spreads on lease renewals; --Acquisitions and dispositions largely match funded; --Average annual development spend of $170 million; --Development deliveries at yields between 9% - 10%; --Capital intensity (recurring capex/revenues) approximating 11%; --$2+ billion in unsecured bond issuance in 2017-2019 to refinance maturing mortgage debt and unsecured bank term loans; --No equity issued through the forecast period. RATING SENSITIVITIES The following factors may collectively, or individually, result in positive ratings momentum for BRX: --Fitch's expectation of unencumbered asset coverage of net unsecured debt sustaining above 2x (unencumbered assets - valued as 4Q'16 annualized unencumbered NOI divided by a stressed capitalization rate of 8.5% to net unsecured debt was 1.7x); --Fitch's expectation of leverage sustaining in the mid-6x range (leverage was 6.8x for the year-ended Dec. 31, 2016); --Fitch expectation of fixed charge coverage sustaining above 2.3x (coverage was 3.2x for the year-ended Dec. 31, 2016). The following factors may collectively, or individually, result in negative ratings momentum for BRX: --Fitch's expectation of leverage sustaining above 7.5x; --Fitch's expectation of fixed charge coverage sustaining below 2x; --Base case liquidity coverage sustaining below 1.25x. FULL LIST OF RATING ACTIONS Fitch has affirmed the following ratings: Brixmor Property Group, Inc. --Long-term IDR at 'BBB-'. Brixmor Operating Partnership, L.P. --Long-term IDR at 'BBB-'; --Senior unsecured revolver at 'BBB-'; --Senior unsecured term loans at 'BBB-'; --Senior unsecured notes at 'BBB-'. The Rating Outlook is Stable. Contact: Primary Analyst Steven Marks Managing Director +1-212-908-9161 Fitch Ratings, Inc. 33 Whitehall Street New York, NY 10004 Secondary Analyst Stephen Boyd, CFA Senior Director +1-212-908-9153 Committee Chairperson Alex Bumazhny Senior Director +1-212-908-9179 Summary of Financial Statement Adjustments: Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor are disclosed below: --Historical and projected operating EBITDA is adjusted to add back non-cash stock based compensation; --Fitch has adjusted the historical and projected net debt by assuming the issuer requires $30 million of cash for working capital purposes which is otherwise unavailable to repay debt; --Fitch removes FAS 141 (non-cash) revenues from historical and projected EBITDA. Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: sandro.scenga@fitchratings.com. 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