French Property Investment Company Carmila Outlook Revised To Positive On Financial #BBB# Rating Affirmed

Stocks and Financial Services Press Releases Wednesday June 13, 2018 18:15
PARIS--13 Jun--S&P Global Ratings

PARIS (S&P Global Ratings) June 13, 2018--S&P Global Ratings said today that it has revised its outlook on French property investment company Carmila S.A. to positive from stable. At the same time, we affirmed our 'BBB' long-term issuer credit rating on the company.

We also affirmed our 'BBB' long-term issue rating on the group's senior unsecured debt.

The outlook revision reflects our view that Carmila has managed to expand its portfolio in recent years--through organic growth and acquisitions--while maintaining moderate financial discipline, and we now believe the company's operating performance may exceed our previous base-case expectations. We consider that in the next 24 months Carmila might maintain a debt-to-debt-plus-equity ratio (leverage) no higher than 40%, and an EBITDA-interest-coverage ratio above 3.5x. In our view, this will be contingent on the company sticking to a disciplined financial policy. We also expect the company to continue delivering organic growth in the coming years, despite the structural challenges currently faced by physical retailers.

We understand that management's financial policy is to maintain its loan-to-value ratio at around 40% on a long-term basis, translating into S&P Global Ratings-adjusted debt-to-debt-plus-equity of about 43%.

Following Carmila's IPO and the EUR600 million capital increase in July 2017, the company's S&P Global Ratings-adjusted debt-to-debt-plus-equity ratio improved significantly to 33.8% at end-2017. In 2018, the company's leverage increased as a result of the acquisition of eight shopping centers (EUR392 million in total). We forecast the S&P Global Ratings-adjusted debt-to-debt-plus-equity ratio will reach 39.0% by the end of this year.

In our base case, we expect Carmila to maintain moderate leverage, with the debt-to-debt-plus-equity ratio close to 40%. We factor in the company's EUR1.2 billion pipeline of extensions, which will slightly increase leverage. We also assume Carmila will benefit from the reinvestments of 20% of its dividends, and the disposal of around EUR100 million of mature assets per year in the next two years, which will help it maintain moderate leverage.

We also project that the company will report a strong interest coverage ratio of more than 4x over the next two years. We however expect Carmila's debt-to-EBITDA ratio to remain relatively high, in the 9x-10x range, due to the relatively low yields from its portfolio given its moderate risk level.

We believe the company's leverage target will very much depend on its ability to dispose of assets in a timely manner, or benefit from dividends reinvested. If these two endeavours are not successful, this could result in debt to debt plus equity being higher than 40%. This could also happen in case of unexpected debt-funded acquisitions, or a devaluation of the portfolio.

We continue to view Carmila's income-producing retail portfolio as resilient, with a gross asset value of EUR6.2 billion across France, Spain, and Italy, without any exposure to speculative development projects. We think the company enjoys a good degree of tenant diversity, with more than 5,000 different lease contracts, and its largest tenant accounting for less than 2% of total revenues. Carmila's portfolio includes 214 small-to-midsize shopping centers, most of which are leaders in their catchment areas.

We view as positive Carmila's partnership with European retail leader Carrefour, the group's majority shareholder (35.6%) and the food anchor of all of its shopping centers. We understand that Carrefour also carried a major part of development costs related to the renovation of Carmila's existing assets and that this partnership enhances the overall quality of Carmila's assets. Carrefour's retail stores have historically been a driver of footfall, and this alliance ensures smooth functioning of the shopping centers, faster renovations, and additional value creation by way of shopping center extensions. However, we do not align our ratings on Carmila with those on Carrefour, nor do we cap them at the same level. This is because Carmila has established a track record of operating as an independent company, with only 0.3% of rental dependence on Carrefour, and is likely to maintain its arm's-length, albeit synergetic, relationship. We also currently consider that Carmila's performance is not directly correlated to Carrefour's. We would view any impact from Carrefour's potential deteriorating performance on Carmila as a negative sign.

We consider that Carmila's rent stability will be supported by the French right-to-lease structure ("droit au bail"), which is a cashable asset and provides a greater incentive for tenants to renew their contracts. Other positives, in our view, include the group's low occupancy cost ratio of 11.1% of the overall portfolio, and the improvement of occupancy in recent years to 96.4% at end-2017 from 94.3% in 2014. Despite the potential for Carmila's growth, we believe the company's focus will remain on France, with at least 70% of its assets based in that country. We note that Carmila has generated organic growth in its three markets, with 2.5% like-for-like growth of rental income from 2016 to 2017.

We believe that Carmila's portfolio is less resilient than that of other real estate investment companies, such as the more geographically diverse Klepierre, whose business risk profile is at the upper end of our strong category. This leads us to choose a 'bbb+' anchor, the lower of two possible initial analytical outcomes, for Carmila. Also, Carmila's portfolio is smaller, less diverse, and not as seasoned as those of peers rated 'BBB+', such as Gecina and Icade, whose multisegment portfolios are worth more than EUR10 billion, and Klepierre, whose retail portfolio amounted to EUR23.7 billion as of Dec. 31, 2017. This is why we deduct one notch from our 'bbb+' anchor for Carmila. The positive outlook on Carmila reflects that we could raise the rating in the next two years if Carmila continues to grow organically in its three operating markets, while maintaining a debt-to-debt-plus-equity ratio no higher than 40% and EBITDA interest coverage above 3.5x.

We might raise the long-term rating if the company continues delivering a strong track record of organic growth in its three markets, while maintaining debt to debt plus equity (fair-value adjusted) no higher than 40%. This would happen if the company manages to increase equity through shareholders' reinvestment of dividends or other ways, and successfully disposes of some mature assets. A positive rating action would also depend on positive perspectives in the retail markets in France, Spain, and Italy, and on any potential performance deterioration at Carrefour not hurting Carmila's operations.

We could revise the outlook to stable if Carmila was unable to maintain its debt-to-debt-plus-equity ratio at 40% or lower, and its EBITDA interest coverage above 3.5x. That could stem from lower-than-expected reinvested dividends and disposal proceeds, or from debt-funded acquisitions. Ratings pressure could also come from flat to negative organic growth in the coming years, a slowdown in the retail market, or any impact from Carrefour's potential performance deterioration.


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