Fitch Downgrades Taubman Centers' Preferred Stock Rating.
NEW YORK--(BUSINESS WIRE)--Dec. 15, 2000
Fitch has downgraded its rating for $200 million cumulative preferred stock Cumulative preferred stock
Preferred stock whose dividends accrue, should the issuer not make timely dividend payments. Related: Non-cumulative preferred stock. issued by Taubman Centers, Inc. (NYSE NYSE
See: New York Stock Exchange : TCO (1) (Total Cost of Ownership) The cost of using a computer. It includes the cost of the hardware, software and upgrades as well as the cost of the inhouse staff and/or consultants that provide training and technical support. See ROI. ) from `BB+' to `BB' reflecting a weakening retail environment and its potential impact on Taubman's significant development pipeline. The Rating Outlook is Stable.
Taubman Centers, Inc. (Taubman) is a $2.2 billion (market) equity real estate investment trust (REIT REIT
See: Real Estate Investment Trust
See real estate investment trust (REIT). ) focused on the operation and development of upscale regional malls. As of Sept. 30, 2000, Taubman's in-service portfolio included nine wholly owned malls, minority interests in seven malls, and interests in five malls in the development pipeline. Fitch's ratings recognize Taubman's mall portfolio as one of the most productive in the public or private sector, providing good protection against potential anchor store closings. Dominant regional malls are also considered to be among the most stable and highly valued of all real property types. Taubman's positive portfolio attributes are tempered by a high concentration of value and cash flow within a small number of properties and risks associated with an aggressive $1.26 billion, five mall development pipeline.
Fitch's downgrade is based on the following factors. First, the mall-based retail environment has weakened over the past year as reflected by retailers' decelerating sales growth and store opening plans. This could pressure Taubman's ability to maintain rent growth and occupancy levels. Second, refinancing risk for Taubman is considered high due to 47% variable rate debt and slower than anticipated lease- up for several developments that could delay property stabilization and refinancing of construction loans. Third, Taubman's preferred dividend coverage Preferred dividend coverage
Net income after interest and taxes (before common stock dividends) divided by preferred stock dividends.
preferred dividend coverage capacity has been impacted by increased debt and issuance of preferred partnership units, with 3Q'00 fixed charge coverage of 1.4 times (x) expected to decline over the next several quarters with increased capitalized interest Capitalized interest
Interest that is not immediately expensed, but rather is considered as an asset and is then amortized through the income statement over time. In the context of project financing, interest that is paid by additional borrowing. , and eventually stabilize near 1.6X upon development completions. Fourth, financial flexibility remains constrained by high dividend payout, an ongoing stock buyback Stock buyback
A corporation's purchase of its own outstanding stock, usually in order to raise the company's earnings per share.
See buyback. program, and a limited number of properties that could be mortgaged to higher loan- to-value levels.
Following a September 1998 restructuring that included Taubman's tender for its unsecured senior notes, the company has encumbered Encumbered
A property owned by one party on which a second party reserves the right to make a valid claim, e.g., a bank's holding of a home mortgage encumbers property. its entire portfolio with either mortgage debt or secured bank loans. Fitch estimates current leverage at 46%, including Taubman's share of debt at joint venture properties, with valuation based on an 8% capitalization rate Capitalization Rate
According to the Appraisal Institute, it is a method used to convert an estimate of a single year's income expectancy into an indication of value in one direct step, by dividing the income estimate by an appropriate rate. applied to the company's share of EBITDA (Earnings Before Interest, Taxes, Depreciation and Amortization) A metric used to show a company's profitability, but not its cash flow. EBITDA became popular in the 1980s to show the potential profitability of leveraged buyouts, but has become , plus funded construction in progress. Preferred stock Stock shares that have preferential rights to dividends or to amounts distributable on liquidation, or to both, ahead of common shareholders.
Preferred stock is given preference over common stock. Holders of preferred stock receive dividends at a fixed annual rate. represents an additional 12% of the capital structure.
Fitch considers Taubman's strategy to fund development without additional common equity to be credit negative for preferred shareholders, notwithstanding benefits that include increased diversification and a potentially significant premium of property value over cost. Taubman has relied primarily on refinancing activities, as well as $100 million of preferred partnership unit issuance, to fund its $330 million equity commitment to the development pipeline, now fully invested. Refinancings have pushed mortgage loan- to-value ratios to moderately higher levels for seasoned properties, and although capacity for increased mortgaged debt on seasoned properties is limited to one or several properties, eventual refinancing of construction loans could result in significantly higher leverage for the development pipeline.
Construction loans are expected to total $930 million ($115 million drawn as of Sept. 30), representing 74% of budgeted cost and a Fitch-estimated 60% of value at stabilization. Taubman's recent refinancing of MacArthur Center to an estimated 69% loan-to-value ratio Loan-to-value ratio (LTV)
The ratio of money borrowed on a property to the property's fair market value. suggests that the pipeline could support an incremental $150 million of long-term debt Long-Term Debt
Loans and financial obligations lasting over one year.
For example debts obligations such as bonds and notes which have maturities greater than one year would be considered long-term debt. proceeds that would further strain fixed charge coverage capacity, but may be necessary to maintain balance sheet liquidity. Refinancing risk is magnified by high variable rate debt exposure and approximately $734 million in debt maturities through year-end 2002, but is mitigated by strong mortgage lender interest in dominant malls, interest rate caps on nearly all of the company's approximately $630 million share of floating rate debt (caps average approximately 50 basis points over current floating rates), and potential to reduce construction loan interest rates when refinanced on a fixed rate basis.
Taubman's financial flexibility remains constrained by moderate bank borrowing capacity ($161 million available of $240 million in total commitments as of Sept. 30), active pursuit of new development opportunities, and management's commitment to support its stock price through share repurchase. Fitch's current rating and Rating Outlook anticipate that management will maintain line availability in the $100 million range while repurchasing shares, with potential equity sources including sale of joint venture interests in existing or developed properties.