Business & Finance
Business and Finance
Business and Finance
Fri, July 30, 2010
Thu, July 29, 2010 Fitch Downgrades AMB Property Corp.'s IDR to 'BBB'; Outlook to Stable
NEW YORK--([ BUSINESS WIRE ])--Fitch Ratings has downgraded the credit ratings of AMB Property Corp. (NYSE: AMB) and AMB Property, L.P., the operating partnership of AMB Property Corp. (together AMB), as follows:
AMB Property Corp.
--Issuer Default Rating (IDR) to 'BBB' from 'BBB+';
--Preferred Stock to 'BB+' from 'BBB-'.
AMB Property, L.P.,
--IDR to 'BBB' from 'BBB+';
--Unsecured revolving credit facilities to 'BBB' from 'BBB+';
--Senior unsecured notes to 'BBB' from 'BBB+'.
Additionally, Fitch has assigned a rating of 'BBB' to AMB Japan Finance Y.K.'s 55 billion yen unsecured term loan.
The Rating Outlook has been revised to Stable from Negative.
The rating downgrade is based on Fitch's expectation that AMB's near-to-medium term credit profile will remain consistent with an IDR of 'BBB'. The downgrade also contemplates Fitch's Negative Outlook for industrial REITs in 2010, which is driven by challenging macroeconomic fundamentals that have weakened overall industrial tenant demand and significantly reduced market rents and occupancy rates during this cycle.
The downgrade also reflects Fitch's view that while conditions have modestly improved in the industrial market, macroeconomic conditions remain uncertain and weakening global macroeconomic growth could put further pressure on the operating performance of AMB's portfolio that could have a negative impact on AMB's fixed charge coverage and leverage metrics.
The ratings reflect AMB's large, high quality, and well-diversified portfolio of global industrial properties, a well-diversified tenant roster, demonstrated access to a wide variety of capital sources throughout cycles, a good liquidity position, and a large pool of unencumbered assets.
With assets in 48 markets in 15 countries in the Americas, Europe, and Asia, the company has one of the premier investment platforms geared to industrial assets. At June 30, 2010, approximately 70% of gross square footage in the operating portfolio (78% based on AMB's ownership percentage) was located in the U.S. but the proportion of the portfolio located outside the U.S. has been increasing over time. The portfolio is also concentrated in higher barrier-to-entry locations, which provides value to AMB's assets as well as contingent liquidity to investors.
The company has demonstrated good access to capital through cycles and has raised approximately $2.5 billion of public and private debt and equity capital since the beginning of 2009.
Given the fragile economic recovery, operating fundamentals remain challenging with rental rates on renewal and rollover leases declining by 6.9% in 1Q'10 and 9.1% in 2Q'10 across AMB's portfolio, driving down same-store cash net operating income by 4.5% in 1Q'10 and 5.1% in 2Q'10. While the company's lease expiration schedule is reasonably staggered, 38.8% of the company's leases by annualized base rents (ABR) expire by the end of 2012, indicating the potential for further pressure on rent renewals and rollovers going forward.
AMB's portfolio exhibits tenant and geographical diversification. The company's top 20 tenants only represented 21.5% of 2010 ABR and only two tenants, Deutsche Post World Net (3.3%) and the U.S. Government (2.4%), represented over 2% of ABR. The portfolio spans North America, Europe and Asia, with top markets in the U.S., including Southern California (13.1% of ABR in 2Q'10), Northern New Jersey/New York (9.2%), the San Francisco Bay Area (7.6%), Chicago (7.1%), and South Florida (5.2%).
AMB also maintains a good liquidity position. Pro forma for two financings completed in July and assuming that AMB refinances 80% of its pro rata share of secured debt, AMB's sources of liquidity (unrestricted cash, availability under the company's unsecured credit facilities and expected retained cash flows from operating activities after dividends) divided by uses of liquidity (pro rata share of debt maturities, expected recurring capital expenditures and development costs) result in a liquidity coverage ratio of 2.1 times (x) for July 1, 2010 to Dec. 31, 2011, assuming the commitment sizes of AMB's unsecured revolving credit facilities with a final maturity date in 2011 are reduced by one-third. Notwithstanding the company's liquidity position and demonstrated access to capital, AMB maintains elevated joint venture debt maturities between 2011 and 2013, representing approximately 58% of AMB's share of debt maturities.
AMB maintains a large pool of unencumbered assets to service its unsecured borrowings. AMB's trailing 12 months unencumbered cash NOI capitalized at a stressed 7.5% capitalization rate covered its unsecured debt net of excess cash by approximately 1.9x at June 30, 2010. Unencumbered asset coverage, when also including non-stabilized unencumbered real estate, was 2.4x as of June 30, 2010.
Offsetting these credit strengths, AMB's leverage and fixed charge coverage are expected to be in a range that is appropriate for the 'BBB' level in the near to medium term. For the trailing 12 months ended June 30, 2010, AMB's net debt to recurring operating EBITDA was approximately 7.9x on a consolidated basis, compared with 9.0x and 8.5x as of Dec. 31, 2009 and 2008, respectively. For the trailing 12 months ended June 30, 2010, AMB's fixed charge coverage (defined as recurring operating EBITDA including cash distributions from joint ventures less recurring capital expenditures and straight-line rent adjustments, divided by interest expense, capitalized interest and preferred dividends) on a consolidated basis, including cash flow distributions from unconsolidated joint ventures, was 2.1x compared with 1.8x and 1.7x for the year ended Dec. 31, 2009 and 2008, respectively.
AMB maintains a sizable completed development pipeline which includes 30 properties with a carrying value of approximately $877 million that have been completed but not yet stabilized. These projects were 51.8% leased at June 30, 2010. Additionally, AMB has seven projects in its development pipeline that are currently under construction. These projects were approximately 53% pre-leased. AMB's share of the remaining cost to fund the development pipeline, including expected leasing costs, was approximately $35 million as of June 30, 2010. Further leasing progress could increase the cash flow from these assets and reduce AMB's leverage.
The two-notch differential between AMB's IDR and its preferred stock rating is consistent with Fitch's criteria for corporate entities with a 'BBB' IDR. Based on Fitch's criteria report ('Equity Credit for Hybrids & Other Capital Securities'), AMB's preferred stock is 75% equity-like and 25% debt-like since it is perpetual and has no covenants but has a cumulative deferral option in a going concern. Net debt plus 25% of preferred stock to recurring EBITDA was 8.0x as of June 30, 2010, compared with 9.1x as of Dec. 31, 2009.
The following factors may have a positive impact on the ratings and/or Outlook:
--Fitch-defined fixed charge coverage on a consolidated basis, including Fitch's estimate of recurring distributions cash flow from unconsolidated joint ventures, sustaining above 2.3x (coverage was 2.0x for the trailing 12 months ended June 30, 2010);
--Net debt to recurring operating EBITDA sustaining below 6.5x on a consolidated basis (leverage was 7.9x as of ended June 30, 2010).
The following factors may have a negative impact on the ratings and/or Outlook:
--Fitch-defined fixed charge coverage sustaining below 1.7x on a consolidated basis including Fitch's estimate of recurring distributions cash flow from unconsolidated joint ventures;
--Net debt to recurring operating EBITDA sustaining above 8.3x;
--Reduced access to capital.
These rating actions reflect the application of Fitch's current criteria which are available at '[ www.fitchratings.com ]' and specifically include the following reports:
--'Parent and Subsidiary Rating Linkage' (July 14, 2010);
--'Criteria for Rating U.S. Equity REITs and REOCs' (April 16, 2010);
--'Equity Credit for Hybrids & Other Capital Securities- Amended' (Dec. 29, 2009);
--'Rating Hybrid Securities' (Dec. 29, 2009);
--'Recovery Rating and Notching Criteria for REITs' (Dec. 23, 2009);
--'Corporate Rating Methodology' (Nov. 24, 2009);
--'Evaluating Corporate Governance' (Dec. 12, 2007).
AMB is a global industrial REIT based in San Francisco with $7.1 billion in total book assets (approximately $7.9 billion market capitalization) as of June 30, 2010. The company's strategy is to invest in and manage properties in the world's busiest distribution markets, specifically large, supply-constrained locations with proximity to key airports, seaports, and major freeway systems. The company's properties largely consist of industrial facilities that are located in infill submarkets. AMB is also one of the world's largest providers of air cargo/freight facilities.
Additional information is available at '[ www.fitchratings.com ]'.
Related Research:
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=510465 ]
Equity Credit for Hybrids & Other Capital Securities - Amended
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493112 ]
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=493086 ]
Recovery Rating and Notching Criteria for REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=492828 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=489018 ]
Evaluating Corporate Governance
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=363502 ]
Parent and Subsidiary Rating Linkage Criteria Report
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=534826 ]
ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: [ HTTP://FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS ]. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEBSITE '[ 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.
