A real estate investment trust that owns warehouse and logistics properties is among the latest companies to link the pricing on its revolving credit facility to sustainability goals, in what market participants say is part of a trend toward environmental sensitivity in capital markets.
Duke Realty Corp. said March 29 that it refinanced the facility, maturing in March 2025, with lending commitments from 13 banks and a capacity of up to $1.2 billion. Borrowings will bear an annual interest rate of Libor plus 0.775%, and Duke will save one basis point of pricing in years when it meets goals for the percentage of environmentally friendly properties in its portfolio.
The pricing is not a game-changer for the company's balance sheet: Duke has $295 million of debt outstanding through the revolver, so one basis point of savings equates to $29,500. Still, the company's CFO, Mark Denien, said in an interview that the terms of the structure are important because they demonstrate the company's commitment to improving its environmental sustainability.
"It's easy for us to make this commitment, and it's the right thing to do," Denien said. "It's as much around the publicity to make sure the world knows corporate responsibility means a lot to Duke Realty."
Green lending popularity
Stephen Boyd, a senior director at Fitch Ratings, said sustainably-linked bonds and credit facilities have been "quite a trend" recently, growing in popularity across the corporate world because they tap into investor and lender demand, with some pricing upside and generally limited downside.
Denien said the company's advisers at JPMorgan Chase & Co. and Wells Fargo Securities LLC told him that roughly 10 other REITs have introduced sustainability goals into their revolving credit facilities, with the concept gaining popularity in the last two years. Others include Healthpeak Properties Inc. in 2019, Invitation Homes Inc. in 2020 and Ventas Inc. and Empire State Realty Trust Inc. in 2021 — the latter of which closed days after Duke's deal.
Companies incorporating sustainability goals typically have flexibility on their deal terms. Duke's goals apply to stabilized properties it has developed itself, which represent 65% of its portfolio by square footage. Of those properties, 6.3% as of the end of 2020 had LEED Certification, a designation from the U.S. Green Building Council that scores properties based on their design, construction, materials and other factors.
The credit facility goals call for the company to increase that share to 8.3% by the end of 2021, 12.3% by the end of 2022, 16.3% by the end of 2023, 17.3% by the end of 2024 and 19.3% by the end of 2025. For each year the company meets its goal, it gets the one-basis-point borrowing discount in the following year; If it falls short, the discount goes away.
Denien said building new facilities to LEED certification does not typically add much to the development cost, but said the company's thinking, and that of its tenants, has nevertheless evolved in recent years.
"There was a day, three four, five years ago where if you put an extra $100,000 in a $30 million building, you couldn't get any extra rent out of it," he said. "And if all you cared about was the financial bottom line, you'd ask yourself, 'Why am I putting an extra $100,000 into this building to get LEED certification when the tenant's not willing to pay me anything?"
In the ensuing years, however, more companies began implementing sustainability goals, including warehouse customers such as Amazon, Duke's largest tenant, which pledged to be carbon-neutral by 2040.
"We are now actually getting into where companies are making commitments around sustainability and the environment, [and] they actually now are willing to pay a little bit more rent," Denien said. "Can I quantify that exactly? Most of the time, no. But we do believe in some cases we are now getting rent premiums for having these LEED-certified buildings."
Appeal for lenders
A key difference between green bonds and sustainable credit facilities is that demand for green bonds is driven in part by mutual funds and other investors with strategies dedicated to environmentally sustainable investments. In contrast, the lenders in corporate revolving credit facilities are banks, which typically keep the debt issued through the facilities on their balance sheets, Fitch's Boyd said.
Even without a formal mandate to pursue green lending, the 13 banks in the Duke facility — which also include The Bank of Nova Scotia, Regions Financial Corp. and Morgan Stanley — support the sustainable structure, Denien said.
"Just like I'm trying to show that we're a leader in sustainable, environmentally friendly buildings, in building them, they're trying to show that they're a leader in funding them," he said. "It's a great advertisement, for lack of a better word, showing that they're doing the right thing, and they're willing to give up that one basis point on the borrowing spread for that."
Doug Conn, an executive director and corporate credit strategist at SMBC Nikko, said in an interview that the benefits to companies and lenders in sustainably linked loan facilities lie outside of pricing.
"The more interesting question to ask is, why does this company want to have this in their structure?" he said. "I think it is showing a little bit of a leadership position, and I think it also shows the commitment that these companies have to this space. And I think in the current environment that we live in right now in 2021, showing commitment and leadership is an important thing for a lot of corporations."