Australian Prime Property Fund Retail Ratings Affirmed At #A+/A-1# On Modest Financial Profile

Stocks and Financial Services Press Releases Friday October 21, 2016 17:06
MELBOURNE--21 Oct--S&P Global Ratings

MELBOURNE (S&P Global Ratings) Oct. 21, 2016--S&P Global Ratings today said it has affirmed its 'A+/A-1' ratings on Australian Prime Property Fund Retail (APPF Retail), a wholesale, unlisted property trust engaged in long-term ownership and development of quality diversified retail assets across Australia. The outlook is stable.

The ratings affirmation on APPF Retail reflects the fund's portfolio of 12 good quality retail assets across Australia, their stable performance and cash flows, and committed developments that will reinforce the asset quality and market position of the retail centers over the medium term. We expect APPF Retail to maintain strong financial metrics and adequate liquidity to support the major developments over the medium term.

Overall, the fund's performance remains in line with peers. Its occupancy level remains stable and high at 98%, with a reasonably well-spread lease expiry profile.

The expected debt funding of retail center developments of about A$450 million over fiscal 2017 to fiscal 2019 could see the fund's gearing move marginally above its target gearing range of 10%-15%. The two major developments are the A$122 million expansion (fund's 50% share) at Macarthur Square, Sydney, scheduled for completion by March 2017 and the recently announced A$220 million (fund's 50% share) redevelopment of Sunshine Plaza (in Sunshine Coast) by the first half of fiscal 2019. Until the full benefits of the development accrue, net debt to EBITDA could be stretched to 2.5x to 3.5x while funds from operations (FFO) to total debt is expected to remain comfortably above 20%. These metrics are now consistent with a modest financial profile and in combination with the business risk moves APPF Retail's anchor score to 'a'.

At the same time, we have removed the previously applied negative financial policy modifier as we expect the fund to operate above its gearing range.
However, as the forecast financial metrics remain strong we have applied a positive rating comparator. This results in no change to the issuer ratings on APPF Retail.

The fund has historically used dividend reinvestment in a prudent manner to support developments and manage its gearing levels. Should this be the case, the fund could continue to operate within its gearing policy levels. In contrast, should the fund prefer to operate well north of 15% gearing on a sustained basis after the current development phase, it would reflect a higher risk appetite and could place pressure on the rating.

The stable outlook reflects APPF Retail's reasonably strong portfolio of assets and their stable cash flows. We also expect that the redevelopments underway will enhance the fund's asset quality and assist in maintaining the current credit profile. The fund could reach the upper end of its leverage policy of 10%-15% during its peak investment phase over the next two to three years, however, we expect management to continuously assess the operating environment and implement steps to maintain FFO to total debt of about 25% and debt to EBTIDA well below 3.5x.

Any potential weakening in the fund's asset quality, change in operating strategy toward higher-risk investments or shift to aggressive financial policies will likely result in pressure on the rating. FFO to total debt of below 20% or debt to EBITDA exceeding 3.5x on a sustained basis would indicate a higher risk appetite and could lead to downward rating pressure. Further, any potential shift to a gearing level toward 25% for strategic opportunities (such as acquisitions) without a clearly articulated plan to bring it back to less than 15% in a timely manner would also weaken the rating.

Upward rating momentum is unlikely in the near to medium term as the committed development pipeline will stretch the financial profile. Also, the fund's current portfolio size and asset quality constrain its business profile.

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