articles Ratings /ratings/en/research/articles/210708-outlooks-on-three-australian-retail-reits-revised-to-stable-from-negative-ratings-on-eight-affirmed-12031379 content esgSubNav
In This List
NEWS

Outlooks On Three Australian Retail REITs Revised To Stable From Negative; Ratings On Eight Affirmed

COMMENTS

A Sudden Correction To Fast-Rising U.S. Home Prices Isn't Likely

COMMENTS

COVID-19 Impact: Key Takeaways From Our Articles

RESUPD

Research Update: Australian Postal Corp. Outlook Revised To Stable On Strong Parcel Earnings; 'A+/A-1' Ratings Affirmed

What's It Worth? The Rise Of Electric Vehicles In European Auto ABS


Outlooks On Three Australian Retail REITs Revised To Stable From Negative; Ratings On Eight Affirmed

  • In our view, the prudent response by Australian retail REITs to the COVID-19 pandemic will provide a buffer for them to weather further disruptions.
  • We expect these REITs to continue to prioritize cash preservation and use available financial levers, such as expenditure curtailment, reduction in cash distributions, and other sources, to offset the impact of the pandemic.
  • Further, a continued disciplined approach to liquidity management underpins rating stability.
  • On July 8, 2021, S&P Global Ratings revised its rating outlook on three Australian retail REITs to stable from negative. We affirmed the ratings on all eight retail REITs. The outlook on one REIT remains negative. The outlook on the other four remains stable.

MELBOURNE (S&P Global Ratings) July 8, 2021--S&P Global Ratings today took the following rating actions on Australian retail REITs.

Australian Retail REITs
Ratings Affirmed; Outlook Revised
To From
GPT Wholesale Shopping Centre Fund BBB+/Stable/-- BBB+/Negative/--
QIC Shopping Centre Fund A-/Stable/A-2 A-/Negative/A-2
Scentre Group A/Stable/A-1 A/Negative/A-1
Ratings Affirmed
AMP Capital Shopping Centre Fund A/Stable/--
Australian Prime Property Fund Retail A-/Negative/A-2
BWP Trust A-/Stable/--
QIC Property Fund A/Stable/--
Vicinity Centres A/Stable/--

We revised the outlook on three REITs to stable from negative reflecting their ability to weather the COVID-19 pandemic and maintain a buffer to absorb further disruptions. The outlook on Australian Prime Property Fund Retail remains negative given the uncertain outlook for the REIT from unitholder redemption requests and recent asset sales. The stable outlooks on the other four REITs reflect their sizable rating buffers to withstand volatile market conditions.

We expect real GDP to grow 4.9% in Australia and 4.6% in New Zealand in 2021 (real GDP was -2.4% in Australia and -1.2% in New Zealand in 2020). The economic recovery will be supported by a robust jobs market and asset price inflation. These factors boosted consumer confidence and lifted Australia's private consumption in the first quarter of 2021 back to pre-COVID-19 levels.

Australia's implementation of the Code of Conduct for small and midsize enterprises in April 2020 resulted in landlords negotiating with tenants facing financial stress or hardship as a direct result of COVID-19. This put the financial onus on landlords and led to substantial credit charges that hit landlords' earnings and credit metrics in 2020. In addition, the provision of the JobKeeper supplement by the federal government ensured that small businesses remained viable. Thus, helped landlords maintain their tenant base and high occupancy rates. Both the Code of Conduct and JobKeeper wage support ended in March 2021. Nevertheless, we expect some of these credit charges to continue into 2021, albeit at lower levels than in 2020.

During this time, landlords received limited government tax relief. However, they pulled the financial levers in their control to create financial headroom. They reduced operating expenses to limit the earnings hit, and put most noncommitted investments, developments, and acquisition plans on hold. Additionally, the likes of Scentre Group issued a hybrid note and Vicinity Centres raised equity during the height of COVID-19 in Australia.

Chart 1

image

Our rated REITs have better asset quality and solid market positions relative to the wider market. Their shopping centers therefore benefitted from a faster recovery in tenancy cash collection and occupancy rates as Australia recovered from COVID-19.

We expect continued suppression of the virus with short, sharp lockdowns will be required until a higher proportion of the population is vaccinated. In response, landlords have offered to temporarily ease payment terms and extend leases for impacted tenants with shorter lease terms. In the longer-term, we expect landlords to ensure the integrity of a retail tenancy lease remains intact. This view is supported by leases that stipulate that rent is increased either by a fixed annual amount or linked to the consumer price index (CPI). Importantly these leases are not tied to a retailer's turnover. This supports our view that the rated retail REITs will maintain their strong competitive positions.

Changing consumer behavior toward retailing is yet to manifest into definitive trends. It is uncertain whether the elevated levels of e-commerce transactions during the pandemic will be sustained. However, we expect the secular industry changes toward online retailing to persist, albeit at a gradual pace. Demand for retail space will therefore be anemic in the next few years. In particular, lesser-quality retail space that does not have a strong catchment area or solely fulfil an essential retailing requirement may be negatively affected in a post-COVID-19 setting. Likewise, the success of omni-channel retailers and their physical store requirements is evolving. Retail centers in central business districts and, to a lesser extent, assets with exposure to public transport hubs will continue to be affected due to the growing work-from-home trend.

Any sizable rental arrears that may continue to be incurred due to the pandemic, and the likelihood of their collectability beyond this ongoing and sporadic business disruption remain key credit factors for REITs. In our stress case, most of our rated REITs have sufficient buffer in their credit metrics. This is illustrated in their leverage and cash flow adequacy metrics. Our stressed assumptions included the following:

  • Standard rental increases in line with our forecast for CPI in Australia;
  • A reduction in occupancy by about 5% from our base case in fiscals 2022 to 2024 (year ending June, with the exception of Scentre Group and AMP Capital Shopping Centre Fund which is December).
  • An increase in holdover leases that raises the lease maturity profile by 5% in fiscal 2022; and
  • Net rental reversions of about -15% in fiscal 2022, improving to -10% in 2023 and 2024.

Chart 2

image

All the Australian and New Zealand REITs we rate have either strong or adequate liquidity, with sufficient cash and undrawn bank lines to meet bank and bond debt maturing over the next 12 months. The rated REITs rely on continued support of their equity base and we acknowledge that institutional money has been seeking to rotate out of retail into other asset classes. Most wholesale REITs have a best endeavors clause to meet equity redemptions that arise from the infrequent liquidity windows. The quantum of equity redemptions can place stress on a REIT's credit quality, particularly if the redemption requires sizable asset divestments that could affect its long-term business prospects, operating diversity, and credit rating headroom.

REITS WITH REVISED OUTLOOKS

GPT Wholesale Shopping Centre Fund (GWSCF)

The stable outlook reflects our view that GWSCF's solid asset quality and sound operating strategies will continue to support the ratings. At the upper end of the REIT's target gearing range (ratio of net debt to total assets) of 10%-30%, we expect the ratio of funds from operations (FFO) to debt to be about 12%.

Downside scenario

Downward rating pressure could arise from erosion of the REIT's portfolio diversity or quality, a change in management's operating strategy, or a shift to more aggressive financial policies. This could include the FFO-to-debt ratio falling sustainably below 12% without a clear deleveraging path.

Upside scenario

Upward rating movement would depend on the REIT improving its portfolio asset quality and diversity while maintaining its financial policies. Portfolio diversity should materially improve if the REIT reduces the largest single-asset exposure to a third or less of its total portfolio value. Upward rating momentum could also arise from a commitment to financial policies consistent with the FFO-to-debt ratio sustaining above 15%.

QIC Shopping Centre Fund (QSCF)

The stable outlook reflects our view that QSCF's moderate financial policies would provide sufficient headroom to absorb some earnings volatility through the economic cycle. By maintaining high occupancy levels and continual investment into its town center strategy, we believe QSCF can sustain its portfolio quality and maintain a ratio of FFO to debt above 9%.

Downside scenario

Downward rating pressure could arise from significant debt-funded development, a change in management's operating strategy, or a shift to more aggressive financial policies. This could be indicated by the FFO-to-debt ratio falling below 9% on a sustained basis, without a clear deleveraging path.

We would also consider a downgrade if structural retail headwinds materially weaken the credit quality of QSCF's tenants, dampening the REIT's business prospects over the next two to three years.

Upside scenario

Upward movement in the rating is likely to depend on QSCF adopting more-conservative financial policies such that, at the top of its target gearing policy, the FFO-to-debt ratio is likely to be greater than 12%.

Scentre Group

The stable outlook on Scentre Group reflect our expectation that Scentre will continue to redevelop its shopping-center portfolio in a measured manner, so as to maintain its superior asset quality and operating stability. We expect management to actively use available financial levers to manage the balance sheet in response to any further fallouts from the pandemic.

The rating on Scentre can accommodate a gearing of 40% for short periods, given management's stated intention to operate within a gearing range of 30%-35%. However, we expect the FFO-to-debt ratio to remain greater than 9% and the ratio of debt to EBITDA to below 7.5x.

Downside scenario

The rating could come under pressure if Scentre's debt exceeds the upper end of its target gearing level for a prolonged period, such that the FFO-to-debt ratio remains less than 9% or the debt-to-EBITDA ratio stays above 7.5x.

This scenario could arise due to a sustained reduction of earnings because of a combination of lower portfolio occupancy, rental abatements, negative rental reversions, or e-commerce beginning to have a demonstrable impact on earnings. Larger capital expenditure than our expectations, material debt-funded acquisitions, substantial share buybacks, or a significant change to the group's operating strategy and distribution policy could also lead to such deterioration.

Upside scenario

We could raise the rating if Scentre adopts a more conservative financial policy, such that FFO-to-debt increases to more than 12% and the debt-to-EBITDA ratio reduces to below 6x at peak gearing.

REITS WITH UNCHANGED OUTLOOKS

AMP Capital Shopping Centre Fund (ASCF)

The stable rating outlook on ASCF reflects our view that the REIT's solid asset quality and sound operating strategies will continue to support the ratings. At the upper-end of the REIT's target gearing range of 15%-25%, we expect the ratio of FFO to debt to be about 15%. Accordingly, we anticipate that ASCF will manage its cash flow adequacy measures well above these levels during periods of reduced development activity.

Downside scenario

The main downside risk to the ratings would be significant debt-funded acquisitions or aggressive development activities that push the FFO-to-debt ratio below 15%, without a plan to return the level of borrowings to the target gearing range in a timely manner.

We may also consider a downgrade if the REIT undertakes asset divestments that noticeably reduces the scale or diversity of the portfolio.

Upside scenario

We are not likely to raise the ratings in the foreseeable future. However, we could raise the rating if ASCF adopts a more conservative financial policy such as a lower target gearing range. We would expect the REIT to maintain its FFO-to-debt ratio at more than 20% to support a higher rating.

Australian Prime Property Fund Retail (APPFR)

The negative outlook on APPFR reflects our view that weak operating conditions could impede the REIT's ability to maintain its S&P Global Ratings-adjusted FFO-to-debt ratio above 17% in fiscal 2022 and beyond. We expect APPFR's earnings to remain under pressure over the next 12 months due to business disruptions and related impacts stemming from the pandemic.

APPFR's asset sales to satisfy unitholder redemptions will affect its portfolio scale and diversity. The corresponding reduction in portfolio earnings and the lack of debt reduction will likely result in continuing elevated leverage.

We expect the REIT to bolster its liquidity, extend its debt maturity profile, and prudently manage capital spending. We also anticipate that the REIT will deploy levers--such as restricting distributions, managing asset sales, or raising new equity--to protect its credit metrics.

Downside scenario

Downward rating pressure could emerge if APPFR's FFO-to-debt (after S&P Global Ratings' adjustments) is likely to remain below 17% in fiscal 2022. This could arise due to a sustained reduction in earnings because of a combination of lower tenant occupancy, rental abatements persisting, or sizable negative rental reversions.

Downward rating pressure could also arise from a significant erosion of the REIT's portfolio diversity or quality (beyond our base-case expectations), a change in operating strategy toward higher-risk investments, or a shift toward more aggressive financial policies.

Upside scenario

We may revise the outlook to stable if we expect APPFR's adjusted FFO-to-debt ratio to remain sustainably above 17% and there is no material change to the REIT's operating strategy. The rating could also be placed on a stable footing if the REIT satisfies the remaining equity redemption requests predominantly by cash inflows from new equity raisings, or from unitholders revoking their original redemption request.

A return to rating stability is also likely be predicated on the REIT operating within its articulated financial policies, in particular, adhering to a 10%-25% look-through gearing range.

BWP Trust

The stable outlook incorporates the counterparty risk associated with BWP's main tenant, Bunnings (wholly-owned by Wesfarmers Ltd.), and the associated long-term leases. Key to rating stability for BWP are our expectations that:

  • The Bunnings tenancies will represent more than 80% of the trust's portfolio income;
  • The trust's weighted-average lease expiry (WALE) will not be materially below five years; and
  • BWP will continue to be of strategic importance to Wesfarmers, and that Wesfarmers will maintain at least 20% ownership in BWP.

Downside scenario

We could lower the rating if Bunnings' operating performance materially weakens and if BWP's WALE falls materially below five years. Downward pressure may also occur if BWP pursues more-aggressive investment strategies or financial policies, such that its FFO-to-debt ratio remains less than 15%.

Upside scenario

Upward rating action is unlikely over the next two years. However, we could raise the rating if BWP adopts more-conservative financial policies. An adjusted debt-to-EBITDA ratio sustaining at less than 2.5x and adjusted FFO-to-debt ratio greater than 20% at peak gearing level will indicate a more conservative financial policy.

QIC Property Fund (QPF)

The stable outlook reflects our view that QPF's conservative financial policies and low gearing positions it well to absorb earnings volatility through the economic cycle. We believe QPF can sustain its portfolio quality and maintain its FFO-to-debt ratio above 12% by maintaining high occupancy levels and continual investments in its town center strategy.

Downside scenario

Downward rating pressure could arise from significant debt-funded development, a change in management's operating strategy, or a shift to more aggressive financial policies. We would also consider a downgrade if structural retail headwinds materially weaken tenant credit quality and occupancy levels, dampening QPF's business prospects over the next two to three years.

Upside scenario

Upward rating movement will depend on the REIT committing to sustaining its adjusted FFO-to-debt ratio above 15% at the top of its gearing policy.

Vicinity Centres

The stable outlook on Vicinity reflects our expectation that the quality and diversity of the REIT's portfolio will reduce earnings volatility through the economic cycle. In addition, we expect Vicinity to continue recycling assets and seeking capital partners to achieve its investment objectives, while limiting pressure on its balance sheet. Over the longer term, we expect the REIT's asset quality to improve as the group executes its repositioning strategy.

Our stable outlook also reflects our expectation that Vicinity will maintain its FFO-to-debt ratio above 12% and gearing (net debt to net tangible assets ratio) below 35%.

Downside scenario

Downward pressure could arise if Vicinity's operating performance persistently weakens or if the REIT adopts a more-aggressive growth strategy. In addition, we would consider a downgrade if Vicinity's ratio of FFO to debt falls below 12%.

We would also consider a downgrade if structural retail headwinds materially weaken the credit quality of Vicinity's tenants, dampening the REIT's business prospects over the next two to three years.

Upside scenario

We are not likely to raise the ratings in the foreseeable future. Upward movement in the rating is likely to depend on Vicinity adopting more-conservative financial policies such that at the top of its target gearing policy, the FFO-to-debt ratio is likely to be greater than 15%.

Related Criteria

Related Research

Ratings List

* * * * * * * * * * * AMP Capital Shopping Centre Fund * * * * * * * * * *
Ratings Affirmed

AMP Capital Shopping Centre Fund

Issuer Credit Rating A/Stable/--
* * * * * * * * * Australian Prime Property Fund Retail * * * * * * * * *
Ratings Affirmed

Australian Prime Property Fund Retail

Issuer Credit Rating A-/Negative/A-2

Australian Prime Property Fund Retail

Senior Unsecured A-
* * * * * * * * * * * * * * * * BWP Trust * * * * * * * * * * * * * * * *
Ratings Affirmed

BWP Trust

Issuer Credit Rating A-/Stable/--

BWP Trust

Senior Unsecured A-
* * * * * * * * * * GPT Wholesale Shopping Centre Fund * * * * * * * * * *
Ratings Affirmed

GPT Wholesale Shopping Centre Fund No. 1

Senior Unsecured BBB+
Ratings Affirmed; CreditWatch/Outlook Action
To From

GPT Wholesale Shopping Centre Fund

Issuer Credit Rating BBB+/Stable/-- BBB+/Negative/--
* * * * * * * * * * * * * * QIC Property Fund * * * * * * * * * * * * * *
Ratings Affirmed

QIC Property Fund

Issuer Credit Rating A/Stable/--
* * * * * * * * * * * * * QIC Shopping Centre Fund * * * * * * * * * * * *
Ratings Affirmed

QIC Finance (Shopping Centre Fund) Pty Ltd.

Senior Unsecured A-
Ratings Affirmed; CreditWatch/Outlook Action
To From

QIC Shopping Centre Fund

Issuer Credit Rating A-/Stable/A-2 A-/Negative/A-2

QIC Retail Pty Ltd.

Issuer Credit Rating A-/Stable/-- A-/Negative/--
* * * * * * * * * * * * * * * Scentre Group * * * * * * * * * * * * * * *
Ratings Affirmed

Scentre Group Trust 1

Senior Unsecured A

Scentre Group Trust 2

Senior Unsecured A
Junior Subordinated BBB+
Ratings Affirmed; CreditWatch/Outlook Action
To From

Scentre Group

Scentre Group Trust 1

Scentre Group Ltd.

Issuer Credit Rating A/Stable/A-1 A/Negative/A-1
* * * * * * * * * * * * * * * Vicinity Centres * * * * * * * * * * * * * *
Ratings Affirmed

Vicinity Centres

Issuer Credit Rating A/Stable/--

Vicinity NVN Trust

Issuer Credit Rating A/Stable/NR

Vicinity Centres Trust

Senior Unsecured A

Vicinity NVN Trust

Senior Unsecured A

AUSTRALIA

S&P Global Ratings Australia Pty Ltd holds Australian financial services license number 337565 under the Corporations Act 2001. S&P Global Ratings'credit ratings and related research are not intended for and must not be distributed to any person in Australia other than a wholesale client (as defined in Chapter 7 of the Corporations Act).

Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column.

Primary Credit Analyst:Rhys Corry, Melbourne + 61 3 9631 2109;
Rhys.Corry@spglobal.com
Secondary Contacts:Victor Lai, CFA, Melbourne + 61 3 9631 2008;
victor.lai@spglobal.com
Aldrin Ang, CFA, Melbourne + 61396312006;
aldrin.ang@spglobal.com
Craig W Parker, Melbourne + 61 3 9631 2073;
craig.parker@spglobal.com

No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor’s Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an “as is” basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT’S FUNCTIONING WILL BE UNINTERRUPTED OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages.

Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P’s opinions, analyses and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. Rating-related publications may be published for a variety of reasons that are not necessarily dependent on action by rating committees, including, but not limited to, the publication of a periodic update on a credit rating and related analyses.

To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw or suspend such acknowledgment at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof.

S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain non-public information received in connection with each analytical process.

S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, www.standardandpoors.com (free of charge), and www.ratingsdirect.com and www.globalcreditportal.com (subscription), and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at www.standardandpoors.com/usratingsfees.

Any Passwords/user IDs issued by S&P to users are single user-dedicated and may ONLY be used by the individual to whom they have been assigned. No sharing of passwords/user IDs and no simultaneous access via the same password/user ID is permitted. To reprint, translate, or use the data or information other than as provided herein, contact S&P Global Ratings, Client Services, 55 Water Street, New York, NY 10041; (1) 212-438-7280 or by e-mail to: research_request@spglobal.com.


Register with S&P Global Ratings

Register now to access exclusive content, events, tools, and more.

Go Back