Business & Finance
Business and Finance
Business and Finance
Thu, February 12, 2009
Wed, February 11, 2009 Fitch Revises Duke Realty's Rating Outlook to Negative; Affirms IDR at 'BBB'
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has affirmed the following ratings of Duke Realty Corporation (NYSE:DRE) and its operating partnership, Duke Realty Limited Partnership (collectively, Duke):
Duke Realty Corporation
--Issuer Default Rating (IDR) at 'BBB';
--$876.2 million preferred stock at 'BBB-';
Duke Realty Limited Partnership
--Issuer Default Rating at 'BBB';
--$2.6 billion senior unsecured notes at 'BBB';
--$725.0 million senior unsecured exchangeable notes affirmed at 'BBB';
--$1.3 billion unsecured line of credit at 'BBB'.
In addition, Fitch has revised the Rating Outlook on Duke to Negative from Stable.
The rating affirmations revolve around the company's consistent operating performance in a very challenging environment for industrial and office real estate. Duke's portfolio of 738 properties across the bulk distribution, suburban office and health care segments is located across 20 markets and has performed in a manner consistent with Duke's existing credit ratings: DRE's fixed-charge coverage ratio (defined as recurring EBITDA less capital expenditures and straight-line rent adjustments divided by interest expense, capitalized interest and preferred dividends) was 1.5 times (x) during 2008.
Duke's large unencumbered asset pool also provides support for the company's 'BBB' ratings. As of Dec. 31, 2008, the company had 474 stabilized unencumbered properties with a gross book value of approximately $6 billion. Moreover, Duke's unencumbered asset coverage of unsecured debt was 193% as of Dec. 31, 2008, which is consistent with the company's ratings.
The rating affirmations also take into account the prudent steps that management has recently taken in response to extraordinary market conditions. Duke has reduced operating expenses by ceasing its retail and national build-to-suit businesses, discontinued operations in start-up markets, reduced its workforce, and frozen management salaries. In addition, Duke has strengthened its liquidity position through asset sales and a reduction of its common stock dividend. Fitch calculates that DRE has a liquidity surplus in 2009 and 2010, both before and after taking into account development activities.
The Negative Outlook revolves around the likelihood that Duke's operating performance will remain stressed in 2009, as same-store net operating income (NOI) is projected to remain flat or decline by up to 5% in 2009. This is consistent with Fitch's Negative Outlook on both the industrial and office sectors at large. The recession has weakened industrial tenant demand, pressuring occupancy, rental pricing, and earnings power potential. Likewise, GDP contraction and weak employment levels will continue to pressure the office sector going forward.
The Negative Rating Outlook also reflects Fitch's view that Duke's leverage ratios remain high for the 'BBB' rating level, as the company's risk-adjusted capital ratio at a 'BBB' stress level was 0.9x as of Dec. 31, 2008, whereas a risk-adjusted capital ratio of at least 1.0x would be more consistent with Duke's ratings. In addition, the company's intention to access the secured debt markets in the near term (though understandable given the poor state of the REIT unsecured bond market) will result in a decrease in the size of the unencumbered pool, thereby weakening the position of bondholders. The company has already announced a $113 million 7.5% 10-year interest-only secured debt transaction in January.
Any of the following factors may result in Fitch downgrading Duke's ratings by one notch:
--If same-store NOI declines by more than 5% for several quarters or if occupancy falls below 85% for several quarters (same-store NOI grew 2.95% in 2008 and total portfolio occupancy was 88.89% as of Dec. 31, 2008);
--If the unencumbered pool decreases in size to the point where unencumbered assets-to-unsecured debt falls below 180% as calculated using bond covenant definitions for several quarters (as of Dec. 31, 2008, unencumbered assets-to-unsecured debt was 193%);
--If debt plus preferred stock divided by undepreciated book capital rises above 65% for several quarters (as of Dec. 31, 2008, debt plus preferred stock divided by undepreciated book capital was 63.7%).
The following factors may result in Fitch revising the Rating Outlook back to Stable at the 'BBB' level:
--Same-store NOI returns to positive territory for several quarters and fixed-charge coverage ratio remains above 1.5x;
--Risk-adjusted capital ratio returns to 1.0x or higher;
--Unencumbered assets-to-unsecured debt returns to above 200% for several quarters.
Duke is an equity REIT based in Indianapolis, IN, that owns, manages, and develops office, industrial and health care real estate. Duke's property operations are conducted through a partnership in which Duke is the sole general partner owning a 96% interest as of Dec. 31, 2008. As of Dec. 31, 2008, the company had approximately $8.9 billion in undepreciated book assets and approximately $4 billion in undepreciated book equity.
Fitch's rating definitions and the terms of use of such ratings are available on the agency's public site, [ www.fitchratings.com ]. Published ratings, criteria and methodologies are available from this site, at all times. Fitch's code of conduct, confidentiality, conflicts of interest, affiliate firewall, compliance and other relevant policies and procedures are also available from the 'Code of Conduct' section of this site.
