June 9, 2017 / 3:58 PM / a year ago

Fitch Affirms France's Unibail at 'A'; Outlook Stable

(The following statement was released by the rating agency) LONDON, June 09 (Fitch) Fitch Ratings has affirmed France-based real estate investment trust (REIT) Unibail-Rodamco SE's (Unibail) Long-Term Issuer Default Rating (IDR) at 'A' and senior unsecured rating at 'A+'; the Outlook is Stable. The Short-Term IDR has been affirmed at 'F1' and the Short- Term senior unsecured debt rating at 'F1'. The ratings reflect Unibail's geographically diverse portfolio of prime shopping centres that generate robust rental income. Unibail's operating performance remains solid, reflecting occupancy rates of about 97%, strong rent renewal increases and high tenant retention, mitigating comparatively short average lease maturities. The group also benefits from strong liquidity and wide access to capital markets. We expect Unibail's published loan-to-value (LTV), currently at 33%, to remain well below 40% in 2017. KEY RATING DRIVERS Significant Property Diversification: Unibail's properties span 11 countries across Europe and encompass retail (82% of rent), office (10%) and exhibition centres (7%), providing strong geographic diversification. The company has exposure to both mature markets, such as France and Holland, and strongly emerging retail consumer markets, such as Poland. Strong Fundamentals: The like-for-like rental growth of Unibail's shopping centre portfolio remained high at 3.4% in 2016, supported by prime assets, high tenant quality and occupancy rates exceeding 97%. While 2016 sales of Unibail tenants fell below national indices - mainly owing to terror attacks in Paris and weather affecting fashion sales - Unibail's tenants have historically outperformed the indices (2015 was 240bp higher). Dominant Centres Outperform: Large shopping centres, with more than six million visitors (97% of the retail portfolio) continue to outperform smaller assets, posting a EUR1.6 billion revaluation gain. Smaller asset valuations remained flat in 2016. Large assets outperformed, both in terms of yield impact (valuation impact of +3.8% for large assets, 1.3% for smaller assets) and rent assumptions (impact of +2.6% compared to -0.9%). Fitch expects e-commerce growth to widen the gap between the two. LTV Lower through Revaluation: Over the last three years, Unibail's revaluation gains on its property portfolio exceeded EUR4 billion, mainly driven by yield compression, which helped the company reduce its published LTV. Nonetheless, Unibail compares favourably with some REITs, as the revaluation gains linked to rent impact nearly equals the impact from yield compression over the current cycle. Lower Cost, Longer-term Debt: In-line with previous years, Unibail has lengthened the average debt maturity from 4.3 years in 2010 to 7.0 years in 2016 and reduced the average cost of debt from 3.9% in 2010 to 1.6% in 2016. Most notably, the company issued several long-dated bonds in 2016 and 2017 (up to 20 years) and is further diversifying its funding sources through three private placements (EUR, SEK and HKD) while also accessing the US commercial paper market. High Cash Flow Leverage: Unibail's low interest costs and its improving published LTV (down to 33% in 2016) are offset by high cash flow leverage at this rating level (net debt to EBITDA above 9x in 2016). Fitch positively notes some modest improvement, both in terms of LTV and net debt to EBITDA. DERIVATION SUMMARY Unibail is the highest rated property company within the Fitch EMEA universe. Unibail benefits from superior scale (EUR30 billion plus), strong quality of assets and a high degree of diversification. The company also has access to a wider range of financing instruments than peers. While leverage is in the higher part of the range for the current rating, Unibail better managed its balance sheet through the last cycle than most EMEA peers. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Moderate indexation and increase in rent at renewals, with flat occupancy ratio for shopping centres. - Pay-out ratio in-line with the group policy and within a range of 85-95% of net recurring result. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - A very significant decrease in leverage, assuming the current operating profile. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Significant rise in tenant defaults and lease arrears, leading to a material fall in total rents. - LTV adjusted for minorities above 40% on a sustained basis and a deviation from managing this ratio conservatively through-the-cycle. - EBITDA NIC below 2.5x on a sustained basis. LIQUIDITY Comfortable Liquidity: The company currently has EUR5,995 million of undrawn committed lines and EUR400 million of cash on balance sheet. This more than covers EUR3.1 billion debt maturing over the next 24 months at year-end 2016, including EUR1.2 billion of commercial paper. It also covers the EUR0.9 billion committed capex. The company also recently raised EUR1 billion of bonds in May 2017 (proceeds will mostly be used for refinancing). Contact: Principal Analyst Fredric Liljestrand Associate Director +44 20 3530 1285 Supervisory Analyst Jean-Baptiste Bouillaguet Associate Director +44 20 3530 1606 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Bram Cartmell Senior Director +44 20 3530 1874 Summary of Financial Statement Adjustments - Financial statement adjustments that depart materially from those contained in the published financial statements of the relevant rated entity or obligor must be disclosed (in bullet points). Analysts should refer to the relevant section of the Data Control Form and discuss and agree the proposed disclosure at the rating committee. This disclosure should appear after the analyst contact information. Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. 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