[0] S&P Assigns Rtg to Heritage Realty Invest Trust Inc.

Business Editors

NEW YORK--(BUSINESS WIRE)--Standard & Poor's CreditWire

Sept. 18, 2000--Standard & Poor's today assigned its double-'B'-plus corporate credit rating to Heritage Realty Investment Trust Inc. In addition, corporate credit and unsecured debt ratings on its operating partnership, Bradley Operating L.P., were lowered to double-'B'-plus from triple-'B'-minus.

The rating actions follow the acquisition of Bradley Real Estate Inc. by Heritage. The new rating acknowledges the diversity and stability of the Heritage's cash flow stream. However, these strengths are mitigated by a higher level of secured indebtedness, lower coverage levels, and potentially significant refinancing risk in the medium-term relating, in part, to a put option on $200 million of invested equity.

Boston-based Heritage is a successor to a company formed in 1970 to manage the real estate investments of the New England Teamsters and Trucking Industry Pension Fund. The company was reorganized into a private REIT in July 1999 and now ranks as one of the nations largest owners of predominantly grocery-anchored neighborhood and community shopping centers, with 139 properties in 27 states throughout the Midwest and Eastern U.S. Most of its properties are located in suburban in-fill locations that are characterized by stable economic bases and favorable demographics. The merger of these two companies significantly increases diversification. The largest state, Illinois, will contribute just 15% of the company's pro forma net operating income (NOI), and the top five states will combine to contribute less than half of total NOI. Furthermore, the company has a very diverse tenant base. The top 10 tenants, led by TJX Cos. (single-'A'-minus) and Fleming Cos. (double-'B'-minus), will contribute less than 20% of the company's pro forma rental revenue.

Manageable lease rollover, below market rents, and historically steady occupancy signal the stability of Heritage's cash flow stream in the future. Lease expirations are very consistent with an average of only 8% of annual rent expiring in each of the next 10 years. Base rent of those expiring leases is believed to be below market. Occupancy on a combined basis is currently 93%. Historical occupancy from 1997 through June 2000 is about 93%. These occupancy rates are expected to be maintainable in the future as the dense, mature markets the company generally operates in offer barriers to new development. The company's growth strategy focuses on properties that offer the opportunity for expansion and redevelopment of existing shopping centers. Heritage will frequently add soft goods retailers such as TJ Maxx or Office Max to the existing grocery store/drug store mix. This expansion strategy offers favorable returns on invested capital, while avoiding the risks involved in ground-up development.

As a private REIT, Heritage had operated with an extremely conservative financial profile. However, the logistics of completing the Bradley transaction, at generally full price for the Bradley assets, has forced the company to pursue a more aggressive financial policy than either Heritage or Bradley had followed in the past. As a result, the company is tolerating higher leverage, more encumbered properties and lower coverage levels. Debt totals 53% of book-value capital. Secured debt will encumber properties that, in total, will provide about 42% of the company's cash flow. The total capital structure will be made up of $982 million in debt, $223 million of common shares and common operating partnership units, $580 million of preferred shares, and $75 million of perpetual preferred units. The pension fund investor requires a certain percentage of its investments to provide a fixed rate of return. This has resulted in the large proportion of preferred equity. The preferred shares would convert to common stock should the company choose to go public.

Debt service coverage is 2.00 times (x). Fixed-charge coverage, including only the Bradley perpetual preferred operating units, is 1.9x. If the preferred share dividends are included, fixed-charge coverage would fall to 1.2x. These cash flow protection measures may be vulnerable to refinancing risk. About 25% of total debt will be variable rate. As part of the financing package, Prudential Real Estate Investors (and one other investor) purchased $200 million of preferred and common equity. These investors have the right, exercisable for 18 months, to cause Heritage to purchase its shares at fair-market value beginning on the third anniversary of investment. An initial public offering or public event eliminates the put option. Because of this put option, this layer of capital is considered more "debt like." This layer of capital increases leverage to 63% of total book-value capital and Heritage could possibly be faced with having to repay or refinance its line of credit and potentially repurchase $200 million of equity sometime between 2003 and 2005.

OUTLOOK: STABLE

The stable outlook acknowledges the diversity and stability of the company's cash flow stream. The outlook and the rating on the unsecured notes are contingent upon the company maintaining the unencumbered pool of properties at or above current levels. The long-term potential for an upgrade exists should the company successfully go public, either through an initial public offering or reverse merger. At that point, the put option on $200 million of equity would expire, eliminating a significant contingent refinancing risk. In addition, preferred shares would convert to common stock, eliminating a substantial fixed charge, Standard & Poor's said.---CreditWire