Business & Finance
Business and Finance
Business and Finance
Fri, October 28, 2011 Duke Realty's 'BBB-' IDR Unchanged Following Announcement of Asset Sale to Blackstone
NEW YORK--([ BUSINESS WIRE ])--The announced sale by Duke Realty Corporation (NYSE: DRE) of a $1.08 billion suburban office portfolio to an affiliate of Blackstone Real Estate Partners VII (Blackstone) has no impact on the current 'BBB-' Issuer Default Rating (IDR) and Stable Outlook for Duke Realty Corporation and its operating partnership, Duke Realty Limited Partnership (collectively, DRE or the company).
Fitch views the transaction positively as the company is disposing of slower-growth suburban office assets and focusing on industrial assets with higher long-term growth potential. Credit metrics are expected to improve slightly more than Fitch's previous expectations, although will remain consistent with the 'BBB-' IDR.
The portfolio sale consists of 82 buildings and includes substantially all of the company's wholly owned suburban office properties in Atlanta, Chicago, Columbus, Dallas, Minneapolis, Orlando and Tampa. The portfolio is 84.6% leased and has an average age of 15 years. The total purchase price includes the assumption of $30 million of mortgage debt, and DRE expects to close the sale on or about Dec. 1, 2011.
The transaction is consistent with DRE's stated portfolio repositioning strategy of shifting the portfolio to 60% industrial, 25% office, and 15% medical office. Pro forma for the transaction and additional closings in the fourth quarter of 2011 (4Q'11), DRE's portfolio will be 54% industrial, 32% office, 10% medical office and 4% retail.
The transaction accelerates the speed of the portfolio repositioning. Fitch had previously anticipated $50 million of dispositions in the second half of 2011 (2H'11) and $500 million in 2012. The sale is dilutive to EBITDA in the near term, as the use of proceeds will be primarily to retire debt and preferred shares, with the remainder for acquisition and development of industrial and medical office assets.
The price of the transaction translates to an 8.5% capitalization rate based on annualized 3Q'11 net operating income (NOI), or 8.2% based on annualized year-to date NOI. Based on the anticipated use of proceeds and assuming the company acquires new assets at a 7% yield, DRE's fixed charge coverage ratio would be 1.5 times (x) in 2012. This compares with 1.4x for the trailing 12 months (TTM) ended Sept. 30, 2011, 1.5x for 2010 and 1.4x for 2009. DRE's net debt to recurring operating EBITDA ratio would be approximately 6.5x in 2012 and 6.5x at Dec. 31, 2011 pro forma for the Blackstone transaction, compared with 7.0x for the TTM ended Sept. 30, 2011, 7.2x for 2010 and 6.7x for 2009.
Additional information is available at '[ www.fitchratings.com ]'.
Applicable Criteria and Related Research:
--'Corporate Rating Methodology', Aug. 12, 2011;
--'Parent and Subsidiary Rating Linkage', Aug. 12, 2011;
--'Rating Hybrid Securities', July 28, 2011;
--'Treatment of Hybrids in Corporate and REIT Credit Analysis', July 11, 2011;
--'Recovery Rating and Notching Criteria for Equity REITs', May 12, 2011.
--'Criteria for Rating U.S. Equity REITs and REOCs', March 15, 2011.
Applicable Criteria and Related Research:
Rating Hybrid Securities
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647091 ]
Treatment of Hybrids in Corporate and REIT Credit Analysis
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=642132 ]
Recovery Rating and Notching Criteria for Equity REITs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=628490 ]
Criteria for Rating U.S. Equity REITs and REOCs
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=610687 ]
Corporate Rating Methodology
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647229 ]
Parent and Subsidiary Rating Linkage
[ http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=647210 ]
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