Fitch Affirms Mirvac at 'A-'; Outlook Stable

(The following statement was released by the rating agency) Fitch Ratings-Sydney-23 August 2020: Fitch Ratings has affirmed Australia-based Mirvac Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Mirvac's ratings are based on a consolidated profile of a group, which comprises Mirvac Limited, Mirvac Property Trust and Mirvac Group Finance Limited. A full list of rating actions can be found at the end of this commentary. The affirmation of Mirvac's ratings reflects the benefits the REIT derives from its diversification across commercial, industrial and retail properties amid the impact of the measures taken in Australia to combat the coronavirus. This was demonstrated by solid results in its office portfolio, which reported collections of 98% for the year on occupancy of over 98%, helping to offset weakness in its retail portfolio as it absorbed the impact of lower footfall due to the lockdowns and around AUD50 million in rental relief it provided to tenants in the financial year ended 30 June 2020 (FYE20). As a result, Mirvac's leverage, defined as net debt/recurring operating EBITDA, rose to 5.9x by FYE20 from the previous year's 5.0x, but remained well below the 7.5x level at which we would consider taking negative rating action. Fitch expects the benefits of diversification and Mirvac's portfolio quality to continue to provide some protection from expected structural changes in both the retail and office sectors, underscoring the Stable Outlook. Fitch expects the structural changes to affect Mirvac, but we believe the impact will be immaterial as there will likely be a flight to quality in a declining market, underscoring continued high occupancy at Mirvac's properties. The lower structural demand will nonetheless manifest in a drop in rental revenue and further pressure on the valuation of its assets. Mirvac has already taken a haircut of around 10% to the valuations in its retail portfolio in FYE20, reflecting the expected structural changes, among other factors. This rental decline, excluding incremental revenue from completing projects, will raise leverage in FY21, although it will remain below the negative rating sensitivity, before improving from FY22. There is also considerable headroom in the net debt/investment property sensitivity as we estimate that the value of Mirvac's REITs would have to decline by about 20%, all else being equal, before it breaches Fitch's negative sensitivity. We expect Mirvac to keep its leverage within its own target guidelines by reducing construction or adjusting its capital structure and will monitor its progress. Key Rating Drivers COVID-19 Structural Changes: Fitch expects structural demand in retail and office property to decline due to the rise in online shopping and flexible working arrangements. Mirvac has already reduced the valuations on its retail assets by around 10% in FYE20 in expectation of lower revenue, among other factors, although the longer weighted-average lease expiries (WALE) in the office portfolio protect the REIT in the short term and give it more time to address demand changes. Nevertheless, further declines in retail market valuations and the evolving structural dynamics in the office market over the next few years may put pressure on Mirvac's leverage, although we believe Mirvac currently has headroom in this metric. Property Quality Supports Rental Income: Mirvac has good visibility over investment cash flows, driven by WALEs of around seven years in its office and industrial portfolios and around four years in its retail portfolio, with no more than 10%-12% of leases expiring in any year. Fitch expects continued high visibility on rental income despite the structural changes in the commercial and retail sectors amid the lockdowns in Australia, with the properties' quality supporting demand and occupancy. However, we expect lower structural demand to reduce effective rents, which may affect Mirvac's financial structure. Attractive Investment-Property Portfolio: Mirvac has one of the largest REIT portfolios in Australia across the office, industrial and retail sectors, with over AUD11 billion in invested capital that generated around AUD600 million in recurring EBITDA in FY20. The portfolio is concentrated in Australia's two largest cities, Sydney and Melbourne, which the company sees as the drivers of Australian economic growth. The portfolio's occupancy has remained high, above 96% on a total basis since FY13, and stayed at around 98% in office, 99% in industrial and 98% in retail at FYE20. Residential Development Risks: Fitch believes Mirvac's residential-development business increases the company's overall business risks, given the long cash-conversion cycle between outflows to acquire land for construction and inflows occurring only upon settlement. However, the cash-flow visibility from Mirvac's minimum pre-sale requirements and disciplined land restocking help mitigate the risk. Mirvac had AUD1.0 billion in pre-sold residential revenue and around 27,000 lots under control at FYE20, supporting around seven years of lot settlements, and no settlement risk issues. Mirvac seeks to control its risk exposure through a maximum allocation of 20% of total invested capital to the development business; the proportion was 13% at FYE20 and we expect it to remain within the company's guidance of 10%-15% over the next few years as it completes its office pipeline, realises its pre-sold residential revenue and reduces development activity to reflect lower demand. Fitch believes Mirvac's leading position and long history in the Australian residential-development market reduces the impact of market cyclicality, and the company's scale and access to recurring cash flow from its investment portfolio afford it greater flexibility in managing the market conditions. Robust Capital Access: Strong access to capital from diverse sources underscores Mirvac's strong credit profile. The company was able to secure additional facilities of around AUD800 million at the start of the coronavirus-related lockdowns and has also demonstrated access to equity markets, highlighted by its AUD750 million fully underwritten institutional equity placement and share purchase plan in FYE19. It raised debt in multiple currencies and across a wide range of tenors, including a 20-year transaction as part of its AUD665 million US private placement. Derivation Summary Mirvac's IDR reflects the strength of its investment-property portfolio, which is diversified across the office, industrial and retail sectors, and positions it well against similarly rated domestic and international peers including Scentre Group Limited (A/Negative), Simon Property Group (NYSE:SPG), Inc. (A/Negative), The British Land Company PLC (A-/Stable) and Unibail-Rodamco-Westfield SE (BBB+/Negative). Scentre's rating reflects its larger scale and limited development exposure, compared with Mirvac, which has higher development exposure through its homebuilding business. These factors offset Mirvac's more conservative financial profile as it seeks to manage its development exposure risk. The Stable Outlook on Mirvac reflects the diversification in its REIT portfolio between office, industrial and retail, compared with the Negative Outlook on Scentre, reflecting its exposure solely to the retail industry. Simon Property's rating also reflects its strong property portfolio, which benefits from international diversification despite concentration in the retail sector. The one-notch difference is due to Mirvac's weaker financial profile, reflecting its exposure to residential development, compared with Simon Property, whose development exposure is limited to additions in its investment portfolio. However, Fitch's expectation that Simon's leverage and its capital access will be weakened by the ongoing coronavirus pandemic's impact on its department store and apparel retailer tenant base is reflected in its Negative Outlook. Mirvac's exposure to residential development also explains its weaker financial profile compared with that of British Land. However, Mirvac's stronger property portfolio from its larger scale and diversification across sectors and locations throughout Australia, compared with British Land's portfolio concentration in London, results in both companies being rated at the same level. Unibail's property portfolio, however, is stronger than Mirvac's, as it benefits from both its larger scale and stronger geographical diversification, with exposure mainly in larger densely populated areas, including Paris, London, New York City and Los Angeles, despite concentration in the retail sector. Nevertheless, Mirvac's better financial profile, particularly given Unibail's elevated leverage as a result of the acquisition of Westfield Corporation, offsets the strength of its property portfolio. Furthermore, Unibail's exposure to accelerated structural change in the retail industry underscores Mirvac being rated one notch higher than Unibail and the Negative Outlook on Unibail's IDR. Mirvac's investment portfolio is comparable within the Asia-Pacific region with that of higher-rated Chinese peer, Sun Hung Kai Properties Limited (A/Stable), due to the high quality of Mirvac's assets and low rental-income risk even though Sun Hung Kai has a larger scale. The one-notch gap in their ratings reflects Mirvac's weaker financial profile and the underlying difference in the strategic focus of the companies' residential-development businesses, with Sun Hung Kai focusing on asset turnover, allowing it to be self-funding. However, exposure to this business risk caps its rating at 'A'. Key Assumptions Fitch's Key Assumptions Within Our Rating Case for the Issuer - EBITDA margin to range between 30% and 36% from FY21 to FY24 - Capex of around AUD490 million in FY21 and around AUD350 million in FY22 to FY24 - Inventory restocking to continue from FY20, but investment to be capped at AUD2 billion - Distribution payout ratio of around 80% of operating profit after tax (excluding unrealised revaluations) from FY21. RATING SENSITIVITIES Factors that could, individually or collectively, lead to positive rating action/upgrade: - Recurring EBITDA/cash interest expense increasing to above 4.5x for a sustained period (FY20: 3.9x). - Net debt/investment property valuation falling to below 20% for a sustained period (FY20: 30%). - Net debt/recurring EBITDA falling to below 4.5x (FY20: 5.9x). Factors that could, individually or collectively, lead to negative rating action/downgrade: - Recurring EBITDA/cash interest expense falling to below 2.5x for a sustained period. - Net debt/investment property valuation rising to above 40% for a sustained period, with a deviation from managing this ratio conservatively throughout the cycle. - Net debt/recurring EBITDA rising to above 7.5x for a sustained period. Best/Worst Case Rating Scenario International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579. Liquidity and Debt Structure Improved Liquidity; Response to Pandemic: Mirvac has improved its liquidity position as a response to the COVID-19 lockdowns, entering into AUD810 million of new debt facilities with maturities ranging from 3-4.5 years and extending the maturity date of some existing facilities for another 12 months into FY22 in 2HFY20. The company had cash and undrawn debt facilities in excess of AUD1.4 billion at FYE20, with only AUD200 million of debt due for repayment before February 2022. The company typically has a minimum liquidity target of the higher of AUD300 million or 12 months of debt maturities, consisting of cash and undrawn committed facilities. REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING The principal sources of information used in the analysis are described in the Applicable Criteria. ESG Considerations The highest level of ESG credit relevance, if present, is a score of 3. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity(ies), either due to their nature or to the way in which they are being managed by the entity(ies). For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg. Mirvac Limited; Long Term Issuer Default Rating; Affirmed; A-; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; A- Mirvac Group Finance Limited ----senior unsecured; Long Term Rating; Affirmed; A- Contacts: Primary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Suite 15.01, Level 15 135 King Street Sydney 2000 Secondary Rating Analyst Leo Park, Associate Director +61 2 8256 0323 Committee Chairperson Vicky Melbourne, Senior Director +61 2 8256 0325 Media Relations: Peter Hoflich, Singapore, Tel: +65 6796 7229, Email: peter.hoflich@thefitchgroup.com Leslie Tan, Singapore, Tel: +65 6796 7234, Email: leslie.tan@thefitchgroup.com Additional information is available on www.fitchratings.com Applicable Criteria Corporate Rating Criteria (pub. 01 May 2020) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10120170) Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) (including rating assumption sensitivity) (https://www.fitchratings.com/site/re/10090792) Sector Navigators - Addendum to the Corporate Rating Criteria (pub. 26 Jun 2020) (https://www.fitchratings.com/site/re/10125796) Applicable Model Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s). Corporate Monitoring & Forecasting Model (COMFORT Model), v7.9.0 (1 (https://www.fitchratings.com/site/re/973270)) Additional Disclosures Dodd-Frank Rating Information Disclosure Form (https://www.fitchratings.com/site/dodd-frank-disclosure/10133781) Solicitation Status (https://www.fitchratings.com/site/pr/10133781#solicitation) Endorsement Status (https://www.fitchratings.com/site/pr/10133781#endorsement_status) Endorsement Policy (https://www.fitchratings.com/site/pr/10133781#endorsement-policy) ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS (HTTPS://WWW.FITCHRATINGS.COM/UNDERSTANDINGCREDITRATINGS). IN ADDITION, THE FOLLOWING HTTPS://WWW.FITCHRATINGS.COM/RATING-DEFINITIONS-DOCUMENT (https://www.fitchratings.com/rating-definitions-document) DETAILS FITCH'S RATING DEFINITIONS FOR EACH RATING SCALE AND RATING CATEGORIES, INCLUDING DEFINITIONS RELATING TO DEFAULT. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE AT HTTPS://WWW.FITCHRATINGS.COM/SITE/REGULATORY (https://www.fitchratings.com/site/regulatory). FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH RATINGS WEBSITE. Copyright © 2020 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch's factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch's ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided "as is" without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the "NRSRO"). While certain of the NRSRO's credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see https://www.fitchratings.com/site/regulatory), other credit rating subsidiaries are not listed on Form NRSRO (the "non-NRSROs") and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.