Blackstone Property Partners Europe Holdings Assigned Preliminary #BBB-# Outlook Positive

Stocks and Financial Services Press Releases Friday June 15, 2018 17:49
LONDON--15 Jun--S&P Global Ratings

LONDON (S&P Global Ratings) June 15, 2018--S&P Global Ratings said today that it had assigned its preliminary 'BBB-' long-term issuer credit rating to pan-European open-ended real estate vehicle, Blackstone Property Partners Europe Holdings S.a.r.l. (BPPEH). The outlook is positive.

We also assigned our preliminary 'BBB-' issue rating to BPPEH's proposed unsecured bonds.

Final ratings will depend on our receipt and satisfactory review of all final transaction documentation related to the proposed issuance of the unsecured bonds and the closing of the remaining acquisitions (about EUR850 million) that comprise the initial EUR2.4 billion portfolio. Accordingly,

the preliminary ratings should not be construed as evidence of final ratings. If S&P Global Ratings does not receive final documentation within a reasonable timeframe, or if final documentation departs from materials reviewed, we reserve the right to withdraw or revise our ratings. The preliminary rating reflects BPPEH's position within a pan-European, cross-sector "Core+" real estate fund managed by Blackstone (a global asset manager with assets under management of $450 billion, rated 'A+/Stable'). BPPEH has a gross asset value of EUR2.4 billion (after completion of certain committed acquisitions by August 2018) across the industrial, residential, and office property sectors in mostly Western European countries. The company's strategy is to continue investing in quality assets in major European markets and gateway cities.

The European fund was launched to mimic the strategy of its U.S. counterpart, Blackstone Property Partners, which started in 2014. The "Core+" strategy in the US has now expanded to a portfolio of $28 billion, and is also invested across multiple sectors. Both these funds mark a different strategy to other existing Blackstone funds, which tend to exhibit a more opportunistic approach and have a short- or medium-term life span, where the assets would eventually be sold and investors' money returned. In contrast, Blackstone Property Partners Europe L.P. (BPPE) is open-ended, with quarterly closings providing additional capital. The fund owns high-quality stabilized assets that it intends to hold for the long term. Additionally, we understand that the fund is not required to sell assets to meet redemption requests from investors.

BPPEH's portfolio mainly comprises logistics assets spread across Europe (46% of the assets), a residential portfolio located primarily in Berlin (35%), and office assets in prime cities, such as Paris (18%). We therefore view BPPEH's geographical and sector diversity as a key competitive strength over the more traditionally domestic and one-sector-only, real estate companies. Specialized players benefit from their local presence and deep knowledge of the markets in which they operate. Having exposure to multiple European economies and owning properties in sectors that are less correlated with each other could, however, prove a more resilient strategy during a downturn, in our view. We also note the current favorable trends in the European logistics market and the robust fundamentals of the German residential market, which should support future rental growth and high occupancy rates.

We understand that BPPEH's logistics assets are in key locations near ports and gateway cities across Europe (five countries), and the company is working with leading tenants who have signed relatively long leases (5.6 average lease maturity). The residential assets in Berlin should continue to generate stable and predictable rental income, especially as BPPEH is embarking on a modest capital expenditure program on the apartments. This should progressively translate into an improvement of the current 94% occupancy rate. Additionally, the office segment contains three high-quality office assets located in Paris, Berlin, and Munich, which enjoy high occupancy rates (98%) and long leases.

On the other hand, our assessment of BPPEH's business risk profile factors in the current relatively small size of the portfolio at EUR2.4 billion (expected at the end of August 2018 once the acquisitions of about EUR850 million assets have formally closed), which is on the low side compared with relevant European real estate peers rated by S&P Global Ratings. While we understand that management intends to significantly increase and diversify the portfolio further in the next few quarters, which should further strengthen the fund's diversity and scale, we note the execution risks related to a material expansion plan. Given the current market conditions, we also believe that it might prove difficult to buy portfolios in prime locations without either paying a large premium or sacrificing the average asset quality. However, we take some comfort in the growth record of the US "Core+" strategy; it expanded from $14 billion of gross asset value at end-2015 to $28 billion by March 2018. This demonstrates Blackstone's ambition and commitment to its "Core+" fund strategy, of owning high quality income producing stabilized assets.

We also note the fund's limited track record as it has only recently been incorporated and there is limited information on the historical performance of the assets that have been acquired, especially compared with established real estate peers. This issue is partly mitigated by Blackstone's seasoned experience of investing in the European real estate markets for over 20 years.

Our assessment of BPPEH's financial risk profile is underpinned by the company's prudent financial policy and its loan-to-value target of 45%-50%, with 50% being the maximum limit allowed by Blackstone Property Partners Europe L.P. (BPPE). We expect BPPEH's adjusted debt to debt plus equity to moderately improve from its current 50% toward around 45%-50%, and the adjusted EBITDA to interest ratio should be at least 2.7x-2.8x for the coming years. We also view favorably the absence of a dividend requirement from the fund and the lack of any upcoming debt maturities after the bonds are issued. BPPEH is fully owned and consolidated by BPPE, and we therefore consider the whole group's creditworthiness. As BPPE's credit quality is broadly similar to BPPEH, given that it operates under comparable financial and investment policies, we see no rating differential between the two entities at this time. BPPEH represents a significant majority of BPPE's total assets, and will be the principal investment vehicle of BPPE going forward.

We see limited subordination risk for BPPEH's unsecured lenders as the capital structure only includes a very limited portion of secured mortgage debt (about 5% of total assets). In addition, we understand that there is a covenant limitation in the bond documentation for BPPEH, set at 40% of secured debt to total assets. Therefore, we align our preliminary issue rating on the unsecured bonds with our preliminary issuer credit rating. The positive outlook indicates that we might upgrade BPPEH within the next 12-24 months if the company is able to expand and diversify the portfolio further while maintaining its current financial ratios and average asset profile. An upgrade would also require the portfolio expansion to focus on good quality assets in markets across Europe that benefit from sustained demand.

Our base-case scenario reflects our view that BPPEH's assets will likely generate stable and predictable income, benefiting from high occupancy rates and from the wide-ranging diversity within the portfolio.
We forecast that BPPEH's debt-to-debt plus equity ratio will remain below 50% and its EBITDA interest coverage around 3x.

We would most likely raise the rating if BPPEH were to significantly expand its portfolio and increase its diversity while using equity such that its S&P Global Ratings-adjusted debt-to-debt-plus-equity ratio remains below 50%, and its EBITDA interest coverage around 3x. We will monitor the growth pipeline and the asset quality of the property acquisitions. In our view, an upgrade is therefore linked to the delivery and commitment of the current strategy.

We could revise the outlook to stable if BPPEH's acquisition pipeline does not materialize with the portfolio value remaining around EUR2.4 billion. We would also view negatively acquisitions of properties with weaker characteristics, for example, including higher vacancy rates or negative like-for-like growth.


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