Fitch Ratings, the global credit rating firm, has recently upgraded the rating outlook of DDR Corp. (DDR), a real estate investment trust (REIT), based on its improved long-term credit profile and strong liquidity. The rating outlook of the company is currently pegged to be Positive compared to an earlier Stable outlook.
While raising DDR’s rating, Fitch has considered its high-quality asset portfolio, better operating performance of late, strong liquidity, stable fixed-charge coverage ratio, manageable debt maturity schedule, and its ability to access capital from varied sources.
The core portfolio of the company comprises of assets in high barrier-to-entry markets with strong household income. During the last reported quarter (third quarter 2012), the core portfolio represented 89.3% of total net operating income, up from 81.6% at the beginning of 2010 and 70.0% at the beginning of 2009.
The stellar performances were backed by solid operating results and diligent execution of its strategic plan. During the past few quarters, DDR has followed a significant redevelopment program, disciplined acquisition policy, and monetization of non-income producing assets. The company has long been minimizing ground-up development spending in its domestic portfolio, and instead started allocating capital to the lease-up of existing projects. These redevelopments have created a growth opportunity for the company’s existing assets without the level of risk or capital required for new development. This in turn has enabled DDR to de-lever the balance sheet and generate considerable cash flow for portfolio reinvestment, as well as increase the cash distribution to its shareholders.
Over the years, DDR has also augmented the overall quality of its portfolio by acquiring prime assets while selling non-core assets, and Fitch expects this strategy to be accretive going forward. In addition, DDR’s top tenants are large discount chains, including Wal-Mart Stores Inc. (WMT), The Home Depot, Inc. (HD), Lowe's Companies Inc. (LOW), and Target Corp. (TGT), all of which provide value-for-money items. These companies should fare relatively better in the coming quarters than specialty retailers, as consumers become more and more price conscious in the aftermath of recession. This provides an upside potential for the top-line growth of the company.
Fixed-charge coverage ratio during third quarter 2012 improved to 2.0x from 1.7x in 2011. Fitch anticipates DDR to sustain the fixed-charge coverage ratio in the low 2x range. Furthermore, the company had no unsecured debt maturities until May 2015. DDR has an adequate liquidity position that include unrestricted cash, availability under the company's unsecured revolving credit facilities, and projected retained cash flows from operating activities after dividends and distributions. The company also has a large unencumbered property pool, which could provide additional sources of liquidity.
In a nutshell, the key takeaways for DDR’s Positive outlook reflects Fitch's expectation that the portfolio will primarily comprise core high-quality properties, fixed charge coverage will sustain above 2.0x, leverage will sustain below 7.0x, and unencumbered asset coverage will sustain above 2.0x.
Headquartered in Beachwood, Ohio, DDR acquires, owns, develops, leases and manages shopping centers and business centers across 39 states in the U.S., along with Puerto Rico and Brazil. Currently, DDR owns and manages 459 retail operating (primarily open-air, value-oriented shopping centers) and development properties spanning approximately 116 million square feet.
We maintain our Neutral recommendation on DDR for the long term. The company presently has a Zacks #3 Rank, which translates into a short-term Hold rating.
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