Wednesday, March 11, 2009

REIT Dominoes Wobbling: DDR Preferred Cut To Junk

Moody's shredder is on max today. The rating agency cut Developers Diversified Realty's unsecured rating to Baa3, the lowest investment grade rating, and its preferred stock rating to Ba1, or junk, and has kept the company on negative outlook. Expect a comparable cut from S&P any minute which last week put virtually the entire REIT space on downgrade watch.

The jist of Moody's report:
The negative outlook reflects the deterioration of DDR's results over the past year due to a difficult operating environment and a development pipeline with a sizable amount of leasing required in a very challenging economic environment. DDR also has exposure to several tenant bankruptcies/store closings, three of which are in the REIT's top ten. Moody's expects earnings and credit metrics will remain pressured over the near term as market conditions for retailers continue to deteriorate. Moody's does note that management is making progress and has clearly defined deleveraging and refinancing goals.

Although DDR has substantially scaled back its developments, and mitigated most of the pre-leasing exposure, Moody's concludes that such near term improvements will have a modest effect on its credit profile. Moody's expects the challenging operating and credit environment will pressure retailers and will continue to increase debt refinancing costs. DDR currently has exposure to manageable bankrupt and troubled retailers such as Mervyns, Circuit City and Rite Aid. In addition, asset sales will be challenged as cap rates are expected to continue to rise and acquisition financing remains scarce.
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