DDR's Debt Rating Downgraded By Moody's Post Spin-Off News

DDR Corp. (NYSE:DDR) recently experienced a rating downgrade by Moody's Investors Service. Specifically, the rating of its senior unsecured debt has been downgraded by a notch to Baa3 from Baa2. However, the rating outlook has been revised from negative to stable.

The downgrade comes after DDR’s decision to spin-off a portfolio of 50 sellable assets into a separate public-traded real estate investment trust (REIT) — Retail Value Trust (“RVT”). (Read more: DDR to Spin-Off Sellable Properties Into a New Company)

While this portfolio repositioning strategy eliminates the company’s exposure to Puerto Rico and other U.S. properties with low growth potential, it leaves DDR with a less sustainable portfolio as compared to other shopping center REITs.

Per the rating agency, DDR’s remaining portfolio will be more prone to leasing pressure and tenant bankruptcies. Further, its portfolio might face challenges in markets where the company does not have a sturdy presence.

In addition, retail landlords, including DDR, The Macerich Company (NYSE:MAC) , Kimco Realty Corporation (NYSE:KIM) and Taubman Centers (NYSE:TCO) , have been witnessing decline in store sales as e-commerce continues to transform the retail landscape. This has resulted in a number of store closures and bankruptcy filing by retailers. The rating agency predicted that this choppy retail environment will impact DDR’s leasing and occupancy in the upcoming 12-18 months. Also, the company might increase rent concessions and relax co-tenancy clauses in a bid to improve occupancy. This is expected to mar DDR’s operating performance, per Moody’s.

Per the rating agency, the downgrade also reflects DDR’s unclear long-term growth strategy.

The revised rating outlook reflects volatility in operating results stemming from retail headwinds. However, it also acknowledges DDR’s efforts to maintain a conservative capital structure supported by decent net debt/ EBITDA ratios. In fact, the Baa3 senior unsecured rating also reflects fixed charge coverage in the mid 2x band. The company also has solid liquidity with a well-laddered debt profile. DDR has a $1-billion unsecured revolver and a large pool of unencumbered assets. Moody’s expects that these factors will reduce operating volatility for the next two years.

Rating upgrades and downgrades are important for investors because these indicate a company’s creditworthiness in the market. Such movements denote the company’s accessibility to capital and determine borrowing costs on debts. Notably, the downgrade will affect DDR’s securities worth $3.3 billion.

DDR currently carries a Zacks Rank #3 (Hold). Shares of the company have underperformed its industry year to date. The stock has plummeted 42% as compared to the industry’s gain of 13%.

You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

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DDR Corp. (DDR): Free Stock Analysis Report

Kimco Realty Corporation (KIM): Free Stock Analysis Report

Macerich Company (The) (MAC): Free Stock Analysis Report

Taubman Centers, Inc. (TCO): Free Stock Analysis Report

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