Fitch Assigns Scentre an 'F1' Sort-Term Rating; Rates EMTN Programme 'A'

(The following statement was released by the rating agency) Fitch Ratings-Sydney-February 28: Fitch Ratings has assigned Scentre Group Limited (A/Stable) a Short-Term Issuer Default Rating of 'F1' and an 'A' rating to the EUR10 million Euro medium-term note (EMTN) programme whose issuers are Scentre Management Limited and RE1 Limited. The programme is guaranteed on a joint and several basis by Scentre, Scentre Management, RE1 and RE2 Limited and by RE (NZ) Finance and Scentre Finance (Aust) Limited as subsidiary guarantors. The ratings are assigned to the programme and not to the notes issued under the programme. There is no assurance that notes issued under the programme will be assigned a rating or that the rating assigned to a specific issue under the programme will have the same rating as the rating assigned to the programme. The ratings are based on Scentre's Long-Term IDR of 'A' and the Stable Outlook, which was assigned on 20 February 2019. KEY RATING DRIVERS Australia's Largest Retail REIT: Scentre's portfolio of Australian premier shopping centres was valued at around AUD54 billion at end-2018 - of which its share was around AUD39 billion. The portfolio is concentrated in the retail sector and contains 16 of the country's top-25 retail malls, including trophy assets. Over 80% of capital was invested in centres that generated retailer in-store sales in excess of AUD500 million in 2018 and over 80% of invested capital was located in Sydney, Melbourne and Brisbane - cities that drive economic growth. Around 65% of the population lives within a 30-minute drive from Scentre's malls. This saw around 7% of total retail sales being made at a Scentre mall and over 535 million customer visits a year across the portfolio. Scentre is strategically re-weighting its portfolio towards more resilient and experiential stores, such as food and beverage, health and beauty as well as entertainment, to address the changing retail landscape and consumer preferences, particularly the effect of e-commerce. This, combined with the prime location of its retail malls, respected brand and the diversity of its centres, limits exposure to challenges faced by smaller retailers and lower-grade malls. Strong Asset Quality: Scentre has strong visibility over rental cash inflow, driven by high occupancy levels that have historically exceeded 99%, lease tenure of around 15-20 years for anchor tenants and five years for specialty tenants, weighted-average lease expiries of around six years, around 10% of leases expiring annually and 99% of rental income being derived from minimum base rents, with less than 1% linked to turnover. This demonstrates the high demand for space in Scentre's shopping centres and offsets risks around the company's 70% renewal rate, which is still lower than the average of Fitch's rated universe for Scentre's rating level, particularly as around half of non-renewals occur when Scentre strategically positions its portfolio. The company has reported comparable net operating income growth of between 2%-3% since 2014, with around 75% of rental growth driven by contractual annual rent escalation - typically CPI plus 2% - lending itself to high rental-income visibility. Scentre reported negative low-single-digit-percentage leasing spreads in 2017 and 2018 due to structural challenges in the retail sector as well as the company offering shorter-term leases at lower rentals as part of its planning for upcoming developments. Nevertheless, with the contracted rent escalations, the negative leasing spreads are typically caught up within one year, limiting any deterioration in Scentre's rental stability and visibility. Diverse Portfolio Exposure: Scentre's portfolio includes around 11,500 stores representing more than 3,500 brands, which reduces tenant concentration despite exposure to anchor tenants that typically lease larger areas for longer. Furthermore, space is limited in Scentre's sought-after Westfield locations, incentivising tenants to remain current on their rental payments. These factors mean Scentre has negligible delinquent debtors and offset tenant quality issues. However, around 11% of total square metres of Scentre's portfolio - or 23 stores - is leased to Australian department store, Myer, which remains affected by structural changes in the retail sector and management issues. Nevertheless, Scentre's exposure is mainly to key Myer locations, such as Sydney's central business district, limiting tenant-longevity risk. Prudent Development Exposure: Scentre has limited development exposure, with the company's new five-year plan focusing on optimising its current portfolio to meet changing consumer preferences, particularly in updating its food and beverage and lifestyle offerings. Scentre had active development projects worth AUD0.8 billion (both past and future cash flow) in 2018, of which its share was AUD0.4 billion, or around 1% of the value of its investment properties; the company typically invests around AUD600 million on development each year. Scentre's business profile may weaken if its development exposure were to become more speculative, which could result in a change in its rating. Market-Leading Access to Capital: Fitch sees Scentre as having sector-leading and durable access to capital, along with relative and absolute access to debt capital. Substantiating this view is the diversity of Scentre's capital sources. The company has demonstrated access to debt capital in multiple currencies, including the US dollar, European euro, British pound and Australian dollar, and across a wide range of tenors. DERIVATION SUMMARY Scentre's rating is well positioned compared with US peer, Simon Property Group (NYSE:SPG), Inc. (A/Stable). The ratings of both REITs reflect their high-quality retail real-estate portfolios - being among the world's largest REITs and market leaders - cycle-tested management teams, market-leading access to capital, conservative financial policies and significant scale, which influences efficiencies. Simon is more conservatively levered than Scentre, but Scentre's level is consistent with its rating. The quality of Scentre's portfolio is comparable with that of European peer, Unibail-Rodamco (AS:URW) SE (A-/Stable). The one-notch difference reflects Unibail's elevated leverage following its acquisition of Westfield's international operations. The one-notch difference between Scentre and Australian peer, Mirvac Group (A-/Stable), reflects Scentre's larger scale and limited development exposure as well as Mirvac having a homebuilding business. These factors offset Mirvac's more conservative financial profile as it looks to manage risk from its development exposure. KEY ASSUMPTIONS Fitch's Key Assumptions Within Our Rating Case for the Issuer - Leasing spread of between -2.5% and -4.5% (2018: -3.5%), with average contracted annual rent escalations of CPI plus 2% - Rent per square metre to increase by 4% to 6% from 2019-2022 (2018: -3.3%) - Capital expenditure of AUD600 million in 2018 and then AUD500 million a year in 2019-2022 - Dividend payout ratio of 85% of FFO RATING SENSITIVITIES Developments that May, Individually or Collectively, Lead to Positive Rating Action - Net debt/operating EBITDA improving to below 6.0x on a sustained basis. - Operating EBITDA/interest paid improving to above 4.0x on a sustained basis. Developments that May, Individually or Collectively, Lead to Negative Rating Action - Net debt/operating EBITDA deteriorating to above 7.5x for a sustained period. - Operating EBITDA/interest paid deteriorating to below 3.0x for a sustained period. - Large and sustained decline in occupancy LIQUIDITY Adequate Liquidity and Asset-Liability Management: Scentre had AUD2.1 billion in liquidity as at end-2018; its average debt maturity was 4.4 years against weighted-average lease expiries of 5.9 years. The company's funding comprises bonds and bank facilities and it has access to global markets with outstanding bonds denominated in US dollars, euros, pound sterling and Australian dollars. Scentre swaps all of its foreign-exchange debt into floating Australian dollars to minimise foreign-exchange and interest-rate risk, then manages interest-rate risk with the remainder of its portfolio - where typically more than 75% of its interest rates are fixed (2018: 69%). Contact: Primary Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney, NSW, 2000, Australia Secondary Analyst Leo Park Associate Director +61 2 8256 0323 Committee Chairperson Vicky Melbourne Senior Director +61 2 8256 0325 Summary of Financial Statement Adjustments: Fitch has treated Scentre's property-linked notes as an effective sale of the underlying assets, based on the note holders having no recourse on other assets held by Scentre, annual returns being determined by the notes' proportionate interest in the underlying asset and the noteholders being unable to elect to have the property-linked notes redeemed for cash. 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. 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