NEW YORK--(BUSINESS WIRE)--Fitch Ratings has affirmed the Issuer Default Rating (IDR) of SL Green Realty Corp. (NYSE: SLG) and its subsidiaries SL Green Operating Partnership, L.P., and Reckson Operating Partnership, L.P. as follows:
SL Green Realty Corp.
--IDR at 'BB+';
--Perpetual preferred stock at 'BB-'.
SL Green Operating Partnership, L.P.
--IDR at 'BB+';
--Unsecured revolving credit facility at 'BB+';
--Exchangeable senior notes at 'BB+'.
Reckson Operating Partnership, L.P.
--IDR at 'BB+';
--Senior unsecured notes at 'BB+';
--Exchangeable senior debentures at 'BB+'.
In addition, Fitch has upgraded SL Green Operating Partnership L.P.'s junior subordinated notes to 'BB' from 'BB-'.
The Rating Outlook is Stable.
The affirmations reflect SLG's credit strengths, including its manageable lease maturity and debt expiration schedules, granular tenant base and the company's maintenance of leverage and coverage ratios appropriate for the rating category.
SLG's leverage ratio remains consistent with a 'BB+' rating, as the company's net debt to recurring operating EBITDA ratio was 9.3 times (x) as of Dec. 31, 2010, up from 8.4x and 8.7x as of Dec. 31, 2009 and 2008, respectively. However, when annualizing SLG's December 2010 acquisitions, this ratio declines to the mid-8.0x's as of Dec. 31, 2010.
SLG's fixed-charge coverage ratio (defined as recurring operating EBITDA less capital expenditures and straight-line rents, divided by interest expense, capitalized interest, and preferred stock distributions) was 1.4x for the year ended Dec. 31, 2010, down from 1.7x and 1.6x in 2009 and 2008, respectively. Coverage declined primarily due to free rent periods offered to tenants, combined with capital expenditure costs related to longer-term leases signed in 2009 and 2010. Fitch expects coverage to improve from 2010 levels as free rents decline and recurring capital expenditure costs level off.
The company's portfolio benefits from tenant diversification with the top 10 tenants representing only 29.8% of annual base rent. Further, SLG has a manageable lease expiration schedule with only 30% of consolidated Manhattan rents expiring over the next five years. While over 60% of suburban consolidated suburban property rents expire over the next five years, the company's suburban portfolio represents a fairly limited portion of SLG's total portfolio.
Further supporting the ratings are the company's manageable debt maturity schedule. Excluding the SLG's unsecured line of credit, the company has no more than 10% of its debt maturing in any given year between 2011 and 2015.
The affirmations are supported by SLG's unencumbered property pool coverage of unsecured debt, which gives the company financial flexibility as a source of contingent liquidity. Unencumbered asset coverage of net unsecured debt (calculated as 2010 unencumbered property net operating income divided by a conservative 8% capitalization rate) results in coverage of 1.7x, which is strong for the rating category.
The ratings also point to the strength of SLG's management team and its ability to maintain occupancy and liquidity and demonstrate access to various types of capital throughout the downturn. In addition, the company's ratios under its unsecured credit facilities' financial covenants do not hinder the company's financial flexibility.
Offsetting these strengths are Fitch's concerns regarding the uncertain Midtown Manhattan leasing environment. While the New York City leasing environment has strengthened over the last year, the company has incurred significant costs in the form of tenant improvements, leasing commissions and free rent incentives as tenant inducements, which has placed pressure on SLG's fixed charge coverage. In addition, a downturn in space demands from the financial services industry, which accounts for 39% of SLG's share of base rental revenue, may result in reduced cash flows or values of SLG's properties.
Consistent with Fitch's criteria, 'Parent and Subsidiary Rating Linkage' dated June 19, 2007 and available on 'www.fitchratings.com', Reckson's IDR is linked and synchronized with SLG's due to strong legal, operational and strategic ties between SLG and Reckson, including each entity guaranteeing certain corporate debt of the other.
The Stable Rating Outlook is driven by SLG's liquidity profile. For the period Jan. 1, 2011 to Dec. 31, 2012, the company's sources of liquidity (cash, availability under SLG's unsecured revolving credit facility after an assumed stressed one-third reduction in the commitment size upon renewal in 2012, and Fitch's expectation of retained cash flows from operating activities after dividends and distributions) covered uses of liquidity (pro rata debt maturities and Fitch's expectation of recurring capital expenditures) by 1.2x. However, this stressed analysis assumes that no additional capital is raised to repay obligations, and SLG has demonstrated good access to a variety of capital sources over time. If maturing secured debt were refinanced at a rate of 80% of current debt outstanding, liquidity coverage would improve to 2.3x.
The upgrade of SLG Operating Partnership's junior subordinated notes to 'BB' from 'BB-' is based on the noteholders' ability to demand full repayment of unpaid principal and interest in the event of default, which generally consist of missed interest (after allowable deferral periods) or principal payment at maturity. These notes have no covenants or cross-default provisions relative to SLG's corporate debt and are explicitly stated to be subordinate to such indebtedness. The upgrade results in these obligations being notched down one relative to SLG's IDR.
The two-notch differential between SLG's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BB+' IDR. Based on Fitch's report, 'Equity Credit for Hybrids and Other Capital Securities' (dated Dec. 29, 2009 and available at 'www.fitchratings.com'), SLG's preferred stock is 75% equity-like and 25% debt-like since they are perpetual and have no covenants but have a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring operating EBITDA was 9.4x as of Dec. 31, 2010, compared with 8.5x and 8.8x, as of Dec. 31, 2009 and Dec. 31, 2008, respectively.
The following factors may have a positive impact on SLG's ratings:
--Total net debt to recurring operating EBITDA sustaining below 7.5x for several quarters (leverage was 9.3x as of Dec. 31, 2010).
--Fixed charge coverage sustaining above 2.0x for several quarters (coverage was 1.4x for the 12 months ended Dec. 31, 2010).
The following factors may have a negative impact on SLG's ratings:
--Leverage sustaining above 8.5x for several quarters.
--Fixed charge coverage sustaining below 1.5x for several quarters.
--A liquidity shortfall (base case liquidity coverage was 1.2x as of Dec. 31, 2010)
Additional information is available at 'www.fitchratings.com'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 13, 2010;
--Parent and Subsidiary Rating Linkage, July 14, 2010;
--'Criteria for Rating U.S. Equity REITs and REOCs', April 16, 2010;
--'Equity Credit for Hybrids & Other Capital Securities - Amended', Dec. 29, 2009;
--'Rating Hybrid Securities', Dec. 29, 2009;
--'Recovery Rating and Notching Criteria for REITs', Dec. 23, 2009.
Applicable Criteria and Related Research:
Recovery Rating and Notching Criteria for REITs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828
Rating Hybrid Securities
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086
Equity Credit for Hybrids & Other Capital Securities - Amended
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112
Criteria for Rating U.S. Equity REITs and REOCs
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465
Parent and Subsidiary Rating Linkage Criteria Report
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826
Corporate Rating Methodology
http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=546646
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