S&P: AMP Capital Wholesale Office Fund 'A-' Rating Affirmed; Outlook Remains Stable
"The rating affirmation reflects our view that AWOF would maintain its high-quality and well-located office portfolio. AWOF also benefits from the long-term lease contracts to solid tenants and a high proportion of fixed rent reviews supporting its annuity-like cash flow," said S&P Global Ratings credit analyst Craig Parker.
Supporting AWOF's strong business risk profile is its investment portfolio of 11 office properties in Australia valued at about A$4.3 billion. About 98% of the assets are premium-quality or 'A grade' assets that are well-located in the core markets of Sydney (53.7% of portfolio value) and Melbourne (43.7%), with a single-asset exposure in Perth (2.6%). In line with its strategy to focus on Australia, AWOF sold its New Zealand assets in 2016. The portfolio has an occupancy rate of 96.5% and a healthy weighted-average lease expiry (by income) of 7.0 years, as at June 30, 2016.
AWOF holds a 50% interest in 200 George Street, Sydney, which was completed in the first half of 2016. The fund also holds 33.3% interest in a development project, Australian Technology Park, located adjacent to the Sydney central business district (CBD). The development will comprise about 101,000 square meters (sqm) of A-grade office space and will be substantially leased to the Commonwealth Bank for a term of 15 years. In the long term, the fund is considering a substantial redevelopment of 50 Bridge Street, Sydney, called the Quay Quarter Sydney. To date, the redevelopment has secured Stage 2 DA (development application) approval with the City of Sydney.
We view the Quay Quarter Sydney project as being consistent with the fund's strategy of holding high-quality office assets in deep investment markets. Furthermore, we believe that AWOF would seek to secure precommitted leases for a portion of new floor space and fixed–price, fixed-term construction contracts to mitigate the development risk. If the fund elects to proceed with the development, the construction could start in 2018 and would take approximately two-to-three years to complete.
In addition, we believe AWOF would continue to take a measured approach in these projects. In particular, we expect the fund to remain within its policies of limiting development exposure to less than 20% of gross asset value and speculative development below 5%.
We expect the fund to maintain its conservative financial policies with a targeted gearing range of 15%–25% over the next two-to-three years. AWOF's gearing was 10.9% as at June 30, 2016, following the repayment of debt post an equity raising of A$308.5 million. We expect that the fund would maintain gearing around the mid-point of its gearing range over the next 18 months.
Nevertheless, its gearing will incrementally increase as the fund undertakes its development projects. AWOF has a track record of tactically utilizing gearing to fund acquisitions, followed by equity raisings to reduce debt back to within its target gearing range. We anticipate that AWOF would fund the Quay Quarter Sydney development with a mix of debt and equity, and remain within its articulated financial policies.
The financial policy modifier negatively affects the rating by one notch. This reflects the fund's appetite to debt fund acquisitions and increase leverage to the top of its target range on a short-term basis.
We have revised our assessment of AWOF's liquidity to strong from adequate.
Mr. Parker added: "The stable outlook reflects our expectation that AWOF would manage its capital structure such that it will maintain gearing (total debt drawn-to-gross assets) within the fund's targeted range of 15%–25% over the next two-to-three years."
However, the manager intends to potentially push gearing to a peak of about 30% to pursue strategic opportunities, which will pressure AWOF's credit metrics. At these heightened levels, its funds from operations (FFO)-to-debt would be more than 12% for a short period.
We believe these financial ratios are commensurate with the current 'A-' rating. The outlook also reflects our view of the fund's high-asset quality, solid market position, and relatively conservative investment and operating strategy.
We could lower the rating if the fund's FFO to debt falls to less than 12%. This could occur if the trust is unable to raise equity or divest assets in a timely manner, or if it adopts more-aggressive financial policies such that it continually operates at levels outside of its targeted gearing range.
Upward rating movement is unlikely because of AWOF's willingness to pursue debt-funded acquisitions that push its gearing over its targeted range on a short-term basis.