OREANDA-NEWS. 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 on the Long-Term IDR is Stable. The Short-Term IDR has been affirmed at 'F1'.

KEY RATING DRIVERS

The ratings reflect Unibail's geographically diversified prime shopping centres with a defensive rental income profile. Unibail's operating performance remains solid, reflecting high occupancy, strong rent renewal increases and high tenant retention mitigating fairly short average lease maturities. Fitch expects loan-to-value (LTV) to remain below 40% and EBITDA net interest cover (NIC) to be above 4.0x in 2016. The group also benefits from strong liquidity and access to capital markets.

Significant Geographical Diversification

Unibail's property activities span three different sectors (retail 80%, office 12% and exhibition centres 7%). Unibail owns assets in 12 countries across Europe, which provides 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.

Significant Developments Improve Portfolio

Unibail completed developments with a total investment cost above EUR2bn in 2015, including three new shopping centres with a combined gross lettable area of 210,000 sq m, and disposed a total of EUR1.6bn of non-core assets across Europe and a minority stake in its German portfolio. The portfolio churn increased the average size and footfall of its centres, further underlining its strategic focus on dominant shopping centres with high asset quality. Fitch expects Unibail to maintain significant development activity. At end-2015, Unibail had EUR1.4bn in committed development pipeline.

Strong Fundamentals

Like-for-like rental growth of Unibail's shopping centre portfolio remained high at 3.9% in 2015, supported by the company's strong asset and tenant quality, with high occupancy rates (above 97%). Tenant sales consistently outperform national sales indices. Large shopping centres (more than 6 million footfall) performed strongly in 2015, most notably in terms of valuation or minimum guaranteed rent uplift.

LTV Lower through Revaluation

The 2014 and 2015 increases in Unibail's like-for-like asset valuation totalling EUR2,250m for shopping centres helped the company to reduce its published LTV, with yield compression as the main driver. Nonetheless Unibail compares favourably with some REITs, as the proportion of valuation gains linked to rents exceeded the proportion of valuation gains linked to yield compression.

More Minority Interests

While Unibail has a fairly simple corporate structure, it has increased the proportion of minority interest over the last few years, notably through the sale of a minority stake in its German portfolio to Canadian Pension Plan Investment Board (CPPIB) in 2015. Fitch adjusts LTV for minority interests and deducts cash minority dividends from EBITDA.

Longer-term, Cheaper Debt

Unibail reduced its average cost of debt to 2.2% in 2015 (2.6% in 2014) while increasing its average debt maturity to 6.5 years (5.9 in 2014). The low funding cost reflects the company's hedging strategy and recent hedge restructuring (EUR0.5bn cost). Hedging put in place limits the short-to-medium-term impact of any future interest rate increases.

Unibail's strong access to capital markets is reflected by the company's very long maturity issuance (up to 20 years in 2016) and low financing costs (2% coupon). Use of secured debt remains limited and relates to specific assets. The company's outstanding secured debt decreased to EUR1.1bn in 2015 from EUR1.8bn in 2014.

High Cash Flow Leverage

Unibail's low interest cost and its improving published LTV is offset by high cash flow leverage at this rating level. Fitch expects Unibail's net debt-to-EBITDA to be around 9x for 2016.

KEY ASSUMPTIONS

- Moderate indexation and increase in rent at renewals with flat occupancy ratio for shopping centres

- Profitability in line with previous years

- Funding costs remaining low due to hedged interest rates

RATING SENSITIVITIES

Positive: Future developments that may, individually or collectively, lead to positive rating action include:

- A very significant decrease in leverage, assuming the current operating profile

Negative: Future developments that may, individually or collectively, lead to negative rating action include:

- 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

At end-2015, Unibail had around EUR5.4bn of undrawn committed facilities and EUR343m of cash, which are sufficient to meet its committed development capex, commercial paper and EUR0.9bn of debt maturities in 2016.