S&P: Ratings On Investa Office Fund Affirmed At 'BBB+' And Removed From CreditWatch Developing; Outlook Stable
"We affirmed the ratings and removed them from CreditWatch with developing implications because we view that IOF's ownership is no longer under any immediate pressure from corporate activity," said S&P Global Ratings credit analyst Craig Parker.
Following the unsuccessful takeover proposal by Dexus Property Group for IOF, no corporate activity has emerged in relation to the ownership of IOF or Investa Office Management Pty Ltd. (IOM), the company that owns the Investa management platform.
While we have not factored in any material corporate activity into our base-case expectations of the fund, we recognize an ongoing event risk, which may be prompted by a number of upcoming milestones that include:The expiry of a break fee of A$23.5 million in mid-December 2016 that an alternative bidder would be required to pay to Dexus. After this point, we would assess the credit implications and impact of any additional proposal to acquire IOF that may emerge. IOF's portfolio value, which exceeded A$3.5 billion as at Aug. 12, 2016. This has enabled the fund to commence the process to negotiate the purchase of a 50% interest in IOM. Such an acquisition would be within our current credit metric forecasts. These metrics incorporate a target gearing policy of 25%-35% debt-to-assets (27.7% at June 30, 2016). The ongoing uncertainty regarding Cromwell Property Group's long-term intentions regarding its 9.83% stake in IOF units. In the absence of any material changes to the ownership of IOF or the management platform, we expect the fund to perform in line with our base-case expectations and continue to execute on its articulated strategy.
IOF has a proven track record of improving the asset quality of its portfolio by repositioning assets in Australia and divesting poorly performing assets. Over time, the quality of the portfolio has improved as IOF continues to lengthen its weighted-average lease expiry (WALE), manages its weaker assets, and completes its high-quality developments. As a result, we consider IOF is operating at the stronger-end of our business risk assessment.
Key to our base-case credit metrics is the assumption that IOF's gearing will remain within its stated policies (25%-35% of debt-to-assets) over the next two-to-three years. We expect the fund's gearing to peak in the year ending June 30, 2018, at the height of the funding required for its development at 151 Clarence St, Sydney. We expect the fund to prudently manage its capital requirements throughout this development phase.
Mr. Parker added: "The stable rating outlook on IOF reflects our expectation that the fund would continue to grow its portfolio of high-quality office assets in Australian central business districts. In addition, we expect IOF to manage any development or refurbishment activity prudently."
The rating does not incorporate any event risk associated with a change in IOF's ownership model or strategic direction.
Downward rating movement could occur if IOF were to remain at the upper-end of its target gearing range without a plan to lower debt in the short term. This would include a material weakening of coverage measures, including EBITDA interest coverage persistently less than 3x or funds from operations (FFO)-to-debt at less than 12%. Downward pressure could also arise from underperformance associated with IOF's redevelopment program or if the portfolio's asset quality worsens.
Upward rating movement could occur if the portfolio's asset quality shifted toward premium and solid A-grade assets and if its exposure to redevelopment and repositioning activity were to meaningfully reduce. We could also raise the rating if the fund adopts more-conservative financial policies.