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Fitch Rates Kimco's Senior Unsecured Bonds Due 2027 'BBB+'
March 22, 2017 / 7:43 PM / 9 months ago

Fitch Rates Kimco's Senior Unsecured Bonds Due 2027 'BBB+'

(The following statement was released by the rating agency) NEW YORK, March 22 (Fitch) Fitch Ratings has assigned a 'BBB+' rating to the senior unsecured notes due 2027 issued by Kimco Realty Corporation (NYSE: KIM). Net proceeds are expected to be utilized for secured debt repayment and general corporate purposes. A full list of Fitch's current ratings for KIM follows at the end of this release. KEY RATING DRIVERS The ratings reflect KIM's large, diversified portfolio, its generally consistent and conservative credit metrics over the last five years, and its demonstrated strong access to capital. KIM has made progress reducing its elevated leverage that resulted from the Kimstone transaction, and it targets net debt to adjusted EBITDA (per its own calculations) of 5x - 5.5x, which compares to leverage of 5.9x at Dec. 31, 2016. RESTORING HEADLINE METRICS KIM has reduced leverage over the past few quarters to 5.6x for the year and quarter ended Dec. 31, 2016, respectively. This compares to 6.3x immediately following the close of the Kimstone transaction at the end of the first quarter of 2015. Kimco acquired Blackstone's 67% interest in Kimstone, an unconsolidated joint venture, in February 2015 for $925 million including assumed debt. KIM's leverage was 6.0x when including 50% of preferred stock as debt for the year ended Dec. 31, 2016. Fitch projects that KIM's fixed charge coverage (FCC) will remain strong through 2018, reaching the mid-3x range. Fitch anticipates the company will redeem its preferred stock through the rating horizon which would further bolster its FCC. DURABLE OPERATING CASH FLOWS FROM ENVIRONMENT & DIVERSIFICATION The scale, diversification, and laddered leasing within KIM's portfolio provide for generally durable cash flows from operations. 10.3% of lease revenues expire on average in 2017 and 2018 including month-to-month leases (4.6% assuming tenants exercise extension options). Pro rata leasing spreads grew a combined 12% for the full year 2016, a continuation of the strong leasing performance of 11.1% in 2015 and 8.8% in 2014. Limited new supply for shopping centers and a generally accommodative economic backdrop have supported positive growth as measured by same-store net operating income (SSNOI) and same-store occupancy. Fitch assumes SSNOI will grow 3% annually in 2017 and 2018 similar to the level of average growth from 2014 - 2016. ADEQUATE CONTINGENT LIQUIDITY KIM maintains adequate contingent liquidity in the form of unencumbered assets coverage of net unsecured debt (UA/UD) in the low 2x when stressing unencumbered NOI at an 8% capitalization rate. KIM's UA/UD ratio has steadily increased over the past few years as it replaced non-income producing and non-real estate assets with income producing unencumbered assets while also consolidating or fully purchasing unencumbered joint venture assets. Fitch also estimates KIM retained about $100 million of operating cash flow in 2016 based on its 81.8% adjusted funds from operations (AFFO) payout ratio. The company's payout ratio is consistent with the REIT median in Fitch's rated universe. KIM's liquidity is sufficient at 1.7x for the period of Jan. 1, 2017 to Dec. 31, 2018 pro forma for the unsecured issuance proceeds. Fitch views KIM as having above-average access to capital through-the-cycle which is a key qualitative factor supporting the ratings. INCREASING DEVELOPMENT EXPOSURE KIM curtailed larger development projects coming out of the downturn and instead focused on smaller redevelopment and expansion projects, until recently. Larger development projects have returned to the pipeline and KIM's cost-to-complete active projects has risen to 3% of gross assets at Dec. 31, 2016 which is manageable but the trend of growing exposure to unfunded costs and incomplete projects is something Fitch will continue to monitor as a potential credit concern. STABLE OUTLOOK The Stable Outlook reflects Fitch's expectation that the issuer will maintain leverage consistent with its financial policies and appropriate for the rating through the forecast period, which would be within the low- to mid-5x range. The Outlook also reflects the accommodative operating environment for the sector being offset in part by increasing development exposure. PREFERRED STOCK NOTCHING The two-notch differential between KIM'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 'Treatment and Notching of Hybrids in Nonfinancial Corporate and REIT Credit Analysis', available at '', the securities are deeply subordinated and have loss absorption elements that would likely result in poor recoveries in the event of a corporate default. KEY ASSUMPTIONS Fitch's key assumptions within the rating case for KIM include: --SSNOI growth of 3% annually in 2017 and 2018, which reflects contractual rent escalations and improved leasing spreads; --Recurring maintenance capital expenditures to approximate 9%-10% of revenue; --Overall development and redevelopment expenditures of $815 million through 2018; --Unsecured debt issuances utilized to finance maturing secured and unsecured obligations; --Equity issuances used to redeem preferreds and reduce leverage; --Annual acquisitions of $250 million in 2017 and 2018; --Annual divestitures of $150 million 2017 and 2018. RATING SENSITIVITIES The following factors may result in positive momentum for KIM's ratings and/or Outlook: --Fitch's expectation leverage sustaining below 5x (leverage was 5.6x at year-end Dec. 31, 2016); --Fitch's expectation of fixed charge coverage sustaining above 2.5x (coverage was 3.0x at year-end 2016). The following factor may result in negative momentum for KIM's ratings and/or Outlook: --Fitch's expectation of leverage sustaining above 6.5x; --Fitch's expectation of coverage sustaining below 2x. FULL LIST OF RATING ACTIONS Fitch currently rates KIM as follows: Kimco Realty Corporation --Issuer Default Rating (IDR) 'BBB+'; --Unsecured revolving credit facility 'BBB+'; --Senior unsecured term loan 'BBB+'; --Senior unsecured notes 'BBB+'; --Preferred stock 'BBB-'. Contact: Primary Analyst Steven Marks Managing Director +1-212-908-9161 Fitch Ratings, Inc. 33 Whitehall St. New York, NY 10004 Secondary Analyst Ronald Nirenberg Director +1-212-612-7747 Committee Chairperson Michael Weaver Managing Director +1-312-368-3156 Relevant Committee Date: Sept. 28, 2016 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 recurring operating EBITDA is adjusted to add back non-cash stock-based compensation and include operating income from discontinued operations; --Recurring JV distributions are added to EBITDA to calculate leverage and fixed charge coverage; --Fitch has adjusted recurring operating EBITDA by $125 million per year to reflect estimated recurring cash distributions from joint venture operations; --Fitch has adjusted the historical and projected net debt by taking the average ($37.5 million) of the issuer's stated cash working capital needs of $25 million to $50 million and considering that portion of cash otherwise unavailable to repay debt. Media Relations: Sandro Scenga, New York, Tel: +1 212-908-0278, Email: Additional information is available on Applicable Criteria Criteria for Rating Non-Financial Corporates - Effective from 27 September 2016 to 10 March 2017 (pub. 27 Sep 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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