May 11 - Fitch Ratings has affirmed Unibail-Rodamco SE’s (Unibail) Long-term Issuer Default Rating (IDR) at ‘A’, Short-term IDR at ‘F1’ and senior unsecured rating at ‘A+'. The Outlook on the Long-term IDR is Stable.
“Unibail’s ratings continue to reflect its concentration on large shopping centres in prime locations with resilient trading patterns, moderate leverage, ample interest coverage and a high tenant retention rate mitigating relatively short average lease maturities,” says Jean-Pierre Husband, a Director in Fitch’s EMEA Corporate Finance team. “The group also benefits from one of the strongest liquidity positions in the EMEA REIT sector.”
With 74 prime shopping centres, Unibail is one of the three largest real estate investment trusts (REIT) in the world (with Westfield Group ; ‘A-/Stable’ and Simon Property Group Inc. ; ‘A-/Stable’). It focuses on super-regional centres with six million or more visitors per year in major cities, where the zoning restrictions limit the entry of new competitors. The group is diversified by both sector (retail 76% by assets; office 15% and exhibition centres and services 9% as at FY11) and geography (presence in 12 countries) with property assets in both western and central Europe. The purposefully managed shopping centres benefit from dynamic tenant line-ups and up-to-date leisure and entertainment facilities.
As per Fitch’s “Recovery Ratings and Notching Criteria for Equity REITs” dated 3 May 2012 for EMEA commercial property, a generic sector uplift is applied to the senior unsecured rating. The latter is therefore one notch above the IDR at ‘A+'.
Although the group has a shorter lease profile than its UK peers, Unibail benefits from both a good quality and a diversified tenant base (with no single tenant representing more than 2.2% of total rent roll). This is underpinned by a low tenant default rate (1.1% at FY11), high occupancy rates (98.1% at FY11), low percentage of rents expressed as a percentage of turnover (less than 2% of gross rents in FY11) and the ‘key’ money invested by tenants on units (ie the deposit paid up front by tenants when taking the lease).
Fitch expects Unibail’s EBIT interest coverage (NIC) to remain strong at over 3.0x and above its peers, notably thanks to its low average cost of debt at 3.6%. Despite the EUR1.8bn special dividend paid out in October 2010, Unibail remains moderately leveraged, with a Fitch adjusted loan-to-value leverage of 37% at FY11. The group’s liquidity score (undrawn committed facilities plus unrestricted cash plus free cash flow divided by debt maturities within the next two years plus committed capex over two years) of 1.5x is strong with nearly EUR3.2bn of undrawn committed facilities and cash deposits at FY11. Unibail’s debt maturity profile was further enhanced by the March 2012 issuance of a EUR750m 3.000% 2019 unsecured bond.
With only EUR1bn of mortgage debt, December 2011 unsecured asset cover was strong at 2.8x. Almost 100% of the debt is fully hedged to 2012, limiting Unibail’s sensitivity to higher interest rates. Only EUR1.0bn of gross debt (around 10% of total gross debt at FY10) is secured. If leverage increased above 45% on a sustained basis, it would be considered negative for the rating.
Committed development exposure (currently estimated at EUR1.2bn, of a total of EUR1.7bn “committed” total future expenditure) is measured and well timed in the property cycle and currently represents a moderate 5% of the investment property portfolio at FY11. In addition, the retail development projects are usually around 40%-50% pre-let as building commences. The risks are further mitigated by the fact that most of the development comprises extensions to already built and trading shopping centres (such as Forum des Halles, Paris, Taby Centrum, Stockholm and Centrum Cerny Most, Prague).
Unibail is Europe’s largest REIT with over EUR25.9bn of assets.