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Research Update: Goodman Australia Partnership 'BBB' Ratings Affirmed; Outlook Stable

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Research Update: Goodman Australia Partnership 'BBB' Ratings Affirmed; Outlook Stable

Rating Action Overview

  • Goodman Australia Partnership's (GAP) financial leverage profile has increased on the back of A$700 million of capital distributions over the past 18 months.
  • This has no impact on the 'BBB' issuer credit rating on GAP since our rating incorporates the property trust's financial policies, which allow gearing (net liabilities to net tangible assets) to potentially increase to 30% to 40% from 20.6% as of Sept. 30, 2021.
  • On Nov. 25, 2021, S&P Global ratings affirmed its 'BBB' long-term issuer credit and issue-level ratings on GAP.
  • The stable outlook reflects GAP's good quality portfolio of stabilized industrial assets. We believe this asset portfolio, supported by a light development pipeline, will enable GAP to maintain gearing below its target range.

Rating Action Rationale

We affirmed the ratings as we forecast GAP will generate relatively stable cash flow from its good-quality portfolio of industrial assets, despite gearing recently increasing.  GAP's sound market position is supported by its A$5.3 billion portfolio, which is 98.1% occupied and has a weighted average lease expiry of 4.8 years. The partnership's assets across business parks, industrial estates, office parks and warehouse/distribution centers support our business risk assessment. The fund benefits from a diverse customer base and industry sectors. For example, consumer and transportation/logistics sectors make up 38% and 33% of GAP's income, respectively, as of Sept. 30, 2021.

Growth in the digital economy will continue to drive the favorable prospects in the industrial property sector.  Many consumer-facing businesses face COVID-related operational disruptions. However, demand from tenants in sectors such as retail, ecommerce, and pharmaceuticals continues to underpin the industrial leasing market. The acceleration of digital retail sales penetration during the pandemic has increased the desirability of quality industrial assets. GAP owns assets in attractive leasing markets across the east coast of Australia, and we believe GAP will benefit from these e-commerce trends. We expect growth in the digital economy, which is giving businesses confidence to expand their operations, will support solid rental growth and continued high occupancy of well positioned industrial assets. During the quarter ended Sept. 30, 2021, GAP achieved an average increase in passing income of 3.2% a year, indicating supportive market conditions. As of Sept. 30, 2021, GAP has 71% of its leasing reviews as fixed-rent escalations, with 14% being consumer price index (CPI)-linked, 13% expiring in the next 12 months, and 2% vacant. In our view, this rental mix provides high visibility on its rental income growth and predictability.

GAP's gearing ratio (net liabilities to net tangible assets) has been substantially below 20% over the past few years.  The low gearing position was a result of noncore asset sales since 2016 and a decreasing capitalization rate environment, which bolstered asset values for industrial REITs. However, the partnership has paid A$700 million of capital distributions back to its unitholders over the past 18 months. This has lifted GAP's gearing ratio to 20.6% as of Sept. 30, 2021. At these gearing levels, we forecast funds from operations (FFO) to debt to be well above 9% and debt to EBITDA below 7.5x.

If GAP were to approach the lower end of its 30% to 40% gearing range, we anticipate that its credit metrics would weaken toward our downside rating thresholds and pressure the 'BBB' rating. However, we believe the manager of GAP is positioning the partnership's balance sheet to withstand any potential asset valuation declines in future years. As such, we expect gearing to be comfortably below 30%. Should asset values fall by about 25%, we expect that gearing could increase into the target range of 30% to 40%.

Outlook

The stable outlook reflects our expectation that GAP will prudently manage its committed development pipeline and maintain gearing below its target levels. We expect GAP's FFO-to-debt ratio to be comfortably greater than 9% and debt-to-EBITDA ratio to be less than 7.5x over the next 24 months.

Downside scenario

Downward pressure on the rating could occur if GAP adopted a more-aggressive growth strategy or introduced more-speculative developments that deteriorate the partnership's business risk profile. In addition, downward rating pressure could arise if GAP's financial metrics materially weaken, such that the partnership maintains its FFO to debt ratio at below 9% without a plan to restore metrics in the near term.

Upside scenario

An upgrade could eventuate if GAP adopted more conservative financial policies, while maintaining its operating strategy to invest in high quality industrial assets.

Company Description

GAP is an unlisted property trust in Australia that invests in quality logistics and business park assets. As of Sept. 30, 2021, GAP owned 35 properties with a combined value of A$5.3 billion. Its portfolio is mainly located on the Australian eastern seaboard, particularly Sydney.

Our Base-Case Scenario

Assumptions
  • Australian GDP growth rates of 4.2% in 2021 and 3.3% in 2022; CPI growth of about 2.5% in calendar year 2021 and 2.6% in 2022. These indicators should support Australia's industrial leasing market, particularly GAP's Sydney properties;
  • 5% to 7% growth in GAP's rental income over fiscal 2022 (year ending June 30, 2022);
  • Occupancy rate of more than 97%;
  • Capital expenditure (capex) of A$110 million-A$140 million in fiscal 2022;
  • Distribution of 80%-90% of operating earnings for fiscal 2022; and
  • No capital distributions back to unitholders.
Key metrics

Based on these assumptions, we arrive at the following credit metrics for fiscal 2022 and 2023:

  • Ratio of FFO to debt of 13% to 15%; and
  • S&P Global Ratings' adjusted debt to EBITDA of 5.7x to 6.2x.

Liquidity

We view GAP's liquidity position as strong. This is based on our expectation that GAP's sources of funds will exceed uses by more than 1.5x over the next 12 months and remain above 1.0x over the subsequent 12 months. If EBITDA decreases by 15%, we expect net sources versus uses to remain positive and the partnership to remain compliant with financial covenants.

In our view, the partnership has sound relationships with its banks and a high standing in credit markets as demonstrated by its A$400 million seven-year medium-term note issuance in August 2020. GAP has a total of A$770 million of committed banking facilities, with the next major expiry of A$230 million bank facilities in June 2024.

As of June 30, 2021, the partnership had the following liquidity profile:

Principal liquidity sources:

  • Cash balance of about A$33.1 million;
  • About A$330 million of undrawn committed bank facilities of greater than one year; and
  • FFO of about A$155 million to A$165 million.

Principle liquidity uses:

  • No debt maturities over the next 12 months;
  • Capex of about A$110 million to A$140 million; and
  • Distributions of 80%-90% of operating earnings.

Issue Ratings - Subordination Risk Analysis

Capital structure

As of June 30, 2021, GAP's capital structure consisted of about A$440 million drawn bank facilities, A$400 million of medium-term notes, A$250.1 million of unsecured U.S. private placement debt, and A$330 million of undrawn bank facilities with a weighted-average debt maturity of about 4.5 years.

Analytical conclusions

We rate GAP's debt at 'BBB', in line with the long-term issuer credit rating, given that no significant elements of subordination risk are present in the capital structure.

Ratings Score Snapshot

Issuer Credit Rating: BBB/Stable/--

Business risk: Satisfactory

  • Country risk: Very low
  • Industry risk: Low
  • Competitive position: Satisfactory

Financial risk: Intermediate

  • Cash flow/Leverage: Intermediate

Anchor: bbb

Modifiers

  • Diversification/Portfolio effect: Neutral (no impact)
  • Capital structure: Neutral (no impact)
  • Liquidity: Strong (no impact)
  • Financial policy: Neutral (no impact)
  • Management and governance: Satisfactory (no impact)
  • Comparable rating analysis: Neutral (no impact)

Related Criteria

Ratings List

Ratings Affirmed

Goodman Australia Partnership

Issuer Credit Rating BBB/Stable/--

GTA Finance Co. Pty Ltd.

Senior Unsecured BBB

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:Victor Lai, CFA, Melbourne + 61 3 9631 2008;
victor.lai@spglobal.com
Secondary Contact:Craig W Parker, Melbourne + 61 3 9631 2073;
craig.parker@spglobal.com

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