Credit analyst says continue to avoid Rouse on little prospect of improvement

By Ronda Fears

Nashville, Tenn., Sept. 25 - Felice Shiroma, bond analyst at Gimme Credit, advises continuing to avoid The Rouse Co. as she sees little opportunity for improvement in the credit profile.

Rouse (Baa3/BBB-), whose properties include New York's South Street Seaport and Chicago's Water Tower Place, recently issued $400 million of 10-year senior notes with proceeds going to retire the bridge loan used for its $1.6 billion acquisition of Rodamco's properties in May.

"REITs have been active issuers this month, as lower interest rates offset modest spread widening caused by fears of a double-dip recession and slowing consumer spending," Shiroma noted.

"With its ongoing capital needs for development activities and modest acquisitions, Rouse is unlikely to achieve meaningful improvements in leverage.

"We give Rouse credit for its quality assets, but in view of the limited potential for balance sheet strengthening, we would avoid this credit.

"Rouse's tenant base is well diversified, although we remain concerned about the health of the retail industry."

Retailers recently posted disappointing back-to-school sales and Rouse is approaching the crucial holiday season with a highly leveraged balance sheet, the analyst noted.

Although the Rodamco properties are a good fit with Rouse's strategy and asset portfolio, she added, "its limited financial flexibility remains worrisome."

Second quarter results received a boost from the acquired properties, with total net operating income rising 16% year over year, up over 3% on a same-store basis. Retail occupancy levels at 93% inched up modestly versus the first quarter and year over year while office occupancy levels declined to 89%.

Rouse's good results despite a weak economy reflect the quality of its retail properties, she said, but with a high ratio of secured debt to total debt - in the mid-70s - financial flexibility is limited.

Its debt maturity schedule is spaced out well, however, with about $700 million due in the next 12 months.

At June 30, the company had $230 million available on its credit facility for short-term liquidity needs.

Leverage improved from year end levels with the equity issuance, but Rouse remains highly leveraged for its rating level.

At June 30, total debt as a percent of total book capital was in the low eighties, including off-balance-sheet commitments of around $400 million. EBITDA coverage of fixed charges for the first six months including preferred dividends was weak at less than 2x.

"Rouse generates consistent cash flow from operations and we view the company as a weak BBB credit with limited debt capacity for any further acquisitions," Shiroma said.

"Management does appear committed to maintaining credit metrics that are appropriate for a low investment grade rating, however, as exemplified by the funding package for the acquisition."

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