Rating Action: Moody's has placed Vornado Realty's Baa2 debt rating on review for downgrade
Global Credit Research - 15 Jul 2020
New York, July 15, 2020 -- Moody's Investors Service, ("Moody's") has placed Vornado Realty L.P's (Vornado Realty, or collectively ' the REIT') senior unsecured debt, debt shelf and subordinate shelf ratings under review for downgrade. In the same rating action, the debt, preferred stock, debt shelf and preferred shelf ratings of the REIT, Vornado Realty Trust, the parent of Vornado Realty LP, were also placed on review for downgrade. The review reflects the weak near-term outlook for Vornado Realty's retail, hotel and trade show assets and operating challenges in the New York office market. The REIT's net debt + preferred to EBITDA ratio is likely to weaken in the next few quarters due to decline in EBITDA. Moody's regards the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety.
On Review for Downgrade: Issuer: Vornado Realty L.P.
Senior unsecured, Placed on Review for Downgrade, currently Baa2
Senior unsecured shelf, Placed on Review for Downgrade, currently (P)Baa2
Subordinate shelf, , Placed on Review for Downgrade, currently (P)Baa3
Issuer: Vornado Realty Trust
Backed Senior unsecured, Placed on Review for Downgrade, currently Baa2
Backed Senior unsecured shelf, Placed on Review for Downgrade, currently (P)Baa2
Preferred Stock, Placed on Review for Downgrade, currently Baa3
Preferred Shelf, Placed on Review for Downgrade, currently (P)Baa3
Preferred Shelf Non-cumulative , Placed on Review for Downgrade, currently (P)Baa3
Outlook Actions: Issuer: Vornado Realty L.P.
Outlook changed to Rating Under Review from stable
Issuer: Vornado Realty Trust
Outlook changed to Rating Under Review from stable
RATINGS RATIONALE / FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
A well-occupied office portfolio in major CBD markets, diverse tenant base, laddered lease maturity schedule and strong liquidity are important credit strengths for Vornado Realty. Its Baa2 senior unsecured debt rating also reflects its elevated leverage metrics, modest fixed charge coverage, geographic concentration and large development pipeline. The REIT's preference for asset-level mortgage debt results in high secured leverage and a modest unencumbered asset ratio. Meaningfully lower income contribution from its retail, hotel and trade show properties, and modest new leasing in the office segment would likely pressure aggregate income through YE2021.
During the review, we will focus on Vornado Realty's ability to pursue and substantially conclude deleveraging transactions that will reduce its net debt + preferred/ EBITDA, calculated including its prorata share of joint ventures and 100% of Alexander's Inc.(NYSE: ALX) and excluding the Moynihan train obligation. Vornado Realty Trust owns 32.4% of Alexander's Inc.and the CEO of Vornado Realty is also the CEO of Alexander's. The outlook for the fixed charge coverage ratio, liquidity, progress in leasing new developments and trends in the spread/containment of the pandemic will be other material credit considerations.
To the extent, Vornado Realty is able to reduce net det to EBITDA to about 9x and demonstrate improvement in fixed charge coverage to about 2.5x, the rating could remain at the current level. The rating outlook will likely reflect the still elevated leverage and weak operating conditions in the New York retail, hotel and, to a lesser extent, office markets.
Vornado Realty's 19.1 million square feet operating office portfolio at share was 96.4% occupied at the end of Q1 2020. The REIT owns high-quality assets in the New York market and its buildings in Chicago and San Francisco are also prized assets. Same-store NOI trends have been modestly negative for the New York portfolio reflecting pressure on pricing due to new supply. The San Francisco segment has been reporting solid growth in same-store NOI and so was the case for the Chicago until market conditions in 2020 affected the trade show business. The REIT has a manageable lease maturity schedule with less than 11% of its office leases expiring by YE 2021.
The tenants' inability to tour prospective office spaces since March would significantly affect new leasing volume for the rest of the year. On the flip side, tenants' are generally renewing expiring leases for a few quarters to a couple years, thereby deferring significant real estate decisions. Trends like remote working, distributed office locations and migration to economical office markets will be important considerations for the sector however, many are yet to be proven and will not meaningfully influence leasing decisions in the next 12-18 months.
Vornado Realty's exposure to New York street retail has declined significantly when the REIT sold many of its assets to an unconsolidated joint venture in Q2 2019. In, the second half of 2019, the retail segment accounted for 20.9% of the REIT's aggregate NOI. The NOI from the retail sector further declined to 16.4% in 2020 due to the deteriorating retail landscape and growing concerns about the pandemic. Cash rent collection from retail tenants has been lower than the office rent collections, in the low 50% range versus close to 90% for office, highlighting distress among its retail tenant pool. Occupancy and pricing especially in the retail segment would be weak over the next few quarters likely to result in further decline in income. The REIT's hotel property has been closed since March and would also be a drag on earnings in 2020 and possibly 2021.
The REIT's three development projects are in the in-demand New York Penn station market, but sizeable project costs and leasing announcements are cause for concern in the current competitive environment. The proceeds from condominium sales at the 220 Central Park South have been used to fund the projects and Vornado Realty will likely continue to do so.
Vornado Realty's net debt + preferred to EBITDA was 8.8x at the end of Q1 2020 and would likely increase by 0.5-1.0x due to decline in recurring EBITDA. The ratio is 1.-1.5x lower if the pro-rata share of joint ventures and Alexanders Inc are excluded from the calculation. Given the portfolio mix, the REIT's track record in the New York office market and diversified capital structure that includes a high proportion of non-recourse debt and preferred stock, leverage tolerance is moderately higher than similarly rated peers, nevertheless projected levels are inconsistent with expectations for the rating.
Vornado Realty's secured leverage and to a lesser extent effective leverage are also high for the rating level. The metrics excluding prorata share of joint ventures are moderate because the joint venture arrangements tend to be more levered and use asset level secured debt financing.
The REIT's liquidity profile has been a key credit strength for many years and the financial policy is likely to remain the same. At the end of Q1 2020, Vornado Realty had over $2.0 billion in cash, including its share in unconsolidated joint ventures and Alexanders Inc., and $1.7 billion of remaining capacity in its unsecured credit facility. In the near-term, cash proceeds from condominium sales will exceed development capital expenditure. Modest increase in maintenance capital expenditure is likely, but capital investment related to new leasing will be low. Dividend policy over the next few quarters and the capital strategy adopted for the potential asset transactions related to two large assets will influence its liquidity position in the next 2-4 quarters. The REIT has about $1.5 billion of mortgage debt maturing in the next four quarters, all of which will likely be extended or refinanced.
The rapid spread of the coronavirus outbreak, deteriorating global economic outlook, low oil prices, and high asset price volatility have created an unprecedented credit shock across a range of sectors and regions. We regard the coronavirus outbreak as a social risk under our ESG framework, given the substantial implications for public health and safety. Today's action reflects the impact on Vornado Realty of the deterioration in credit quality it has triggered, given its exposure to office real estate located in high density metro areas, which has left it vulnerable to shifts in market demand and sentiment in these unprecedented operating conditions.
Vornado Realty's ratings will likely be downgraded if the net debt + preferred to EBITDA remains well above 9.0x, fixed charge is materially below 2.5x and weak operating trends, same-store NOI, occupancy and re-leasing spreads persist.
An upgrade is unlikely near-term but would require net debt + preferred to EBITDA close to 8.0x, fixed charge coverage above 3.0x and secured leverage below 20%.
Vornado Realty Trust (NYSE: VNO) is a large office focused REIT that owns over 24 million square feet of office space, including its share in unconsolidated joint venture assets, in New York City, Chicago and San Francisco, has interests in over 2.2 million square feet of primarily street retail in New York City and 1678 residential units in New York City.
The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
At least one ESG consideration was material to the credit rating action(s) announced and described above.
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Ranjini Venkatesan Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Philip Kibel Associate Managing Director Corporate Finance Group JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653 Releasing Office: Moody's Investors Service, Inc. 250 Greenwich Street New York, NY 10007 U.S.A. JOURNALISTS: 1 212 553 0376 Client Service: 1 212 553 1653
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