(The following statement was released by the rating agency) Fitch Ratings-Sydney-February 03: Fitch Ratings has affirmed Scentre Group Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A'. The Outlook is Stable . Fitch has also affirmed Scentre's Short-Term IDR at 'F1' and senior unsecured rating of 'A'. The senior unsecured rating is that the same level as the Long-Term IDR, as the debt is guaranteed jointly and severally by Scentre, Scentre Management Limited in its capacity as responsible entity and trustee of Scentre Group Trust 1, RE1 Limited in its capacity as responsible entity and trustee of Scentre Group Trust 2 and RE2 Limited in its capacity as responsible entity and trustee of Scentre Group Trust 3. A full list of rating actions can be found at the end of this commentary. Scentre's ratings are driven by the strength of its business profile, in particular its uniquely positioned portfolio in a global context. Its portfolio of premier Westfield shopping centres across Australia is accessible to over 65% of the country's population and generates over 535 million customer visitations a year. The quality of the portfolio is reflected in consistently high occupancy levels of above 99% and, therefore, high visibility over the company's rental stream. The Stable Outlook reflects Scentre's strong financial profile and our expectation that it will maintain its prudence around its development pipeline. Scentre has identified over AUD3 billion in possible developments - which, if funded by debt, could see metrics deteriorate to levels outside the current rating sensitivities. However, it has already taken steps to reduce its future debt burden and we expect it would continue to do so to minimise any impact on its financial profile. Scentre had raised over AUD2 billion in capital by end-2019 through divestment of its Sydney Office Towers and 50% of its stake in Sydney's Westfield Burwood mall - which helped fund the AUD570 million purchase of a 50% stake in Garden City Booragoon, Perth. Scentre had previously announced that it would increase distributions at a lower rate than earnings growth to help fund development capex, and has additional levers to maintain its metrics in line with its rating, including timing of developments. Key Rating Drivers Australia's Largest Retail REIT: Scentre's portfolio of Australian premier shopping centres was valued at over AUD54 billion at end-June 2019 - of which its share was around AUD38 billion. The portfolio is concentrated in the retail sector and contains seven of the country's top-10 retail malls and four of the top five in New Zealand. Over 80% of capital was located in Sydney, Melbourne and Brisbane - cities that drive economic growth - and over 80% of capital was invested in centres that generated retailer in-store sales in excess of AUD500 million in 2018. In addition, over 65% of Australia's population lives within a 30-minute drive from Scentre's malls. This saw over 7% of total Australian retail sales being made at a Scentre mall and over 535 million customer visits a year to its malls. Scentre has been 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. These stores make up 42% of Scentre's portfolio. This strategy, together with the ongoing high level of demand for space in the Scentre portfolio, will assist Scentre manage vacancies amid the high volume of retailers entering administration and consequent store closures. Fitch believes that the prime location of Scentre's retail malls, respected brand and the diversity of the centres, limits exposure to challenges faced by smaller retailers and lower-grade malls. Notwithstanding our view of limited impact, occupancy would have to fall to around 85% over the next few years to start to see its leverage rise above 7.5x, where we may look to take negative rating action. 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 over 99% of rental income being derived from minimum base rents. 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. These contracted rent escalations typically allow Scentre to offset negative re-leasing spreads within one year and retain the quality of its rental stability and visibility. This was the case when the company reported negative low-single-digit spreads from 2017 to end-June 2019. The negative re-leasing spreads were in part due to structural challenges in the retail sector and Scentre offering shorter-term leases at lower rentals as part of its planning for upcoming developments, as well as reflecting the structure of Scentre's lease portfolio. Diverse Portfolio Exposure: Scentre's portfolio includes around 11,500 stores and 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 rent. However, around 11% of its portfolio by total square metres (sq m) - or 23 stores - was leased at end-2018 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 the first half of 2019, of which its share was AUD0.4 billion, or around 1% of the value of its investment properties; the company typically invests around AUD500 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, euro, pound sterling and Australian dollar, and across a wide range of tenors. It also benefits from its ability to recycle capital through sell-down and entering into joint ventures on its properties, which saw it raise over AUD2 billion in capital in the six months to June 2019 with the sale of its Sydney office tower and divestment of 50% of its Westfield Burwood centre. 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-Westfield SE (A-/Negative). The one-notch difference reflects Unibail's elevated leverage following its acquisition of Westfield's international operations, with its Negative Outlook reflecting that it may take longer for Unibail to deleverage than previously forecasted. The one-notch difference between Scentre and Australian peer Mirvac Limited (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 -Re-leasing spread of around -5%, with average contracted annual rent escalations of CPI plus 2% - Rent per sq m to increase by 2% to 6% from 2019-2022 (2018: -3.3%) - Capital expenditure of AUD400 million in 2019 and then AUD500 million a year in 2020-2022 - Dividend payout ratio of 85% of funds from operations 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 (2018: 7.1x). - Operating EBITDA/interest paid improving to above 4.0x on a sustained basis (2018: 3.7x). 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 and Debt Structure 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-currency debt into floating Australian dollars to minimise foreign-exchange risk, then manages its interest-rate risk on a portfolio basis - where typically more than 75% of its interest rates are fixed (1H19: 96%; 2018: 69%). Summary of Financial 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. ESG Considerations Unless otherwise disclosed in this section, the highest level of Environmental, Social and Governance (ESG) credit relevance is a score of 3 - ESG issues are credit neutral or only have a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. We have assessed Scentre's Exposure to Social Impact at a score of 4, indicating that Scentre has exposure to shifting consumer preferences which, in combination with other factors, affects the rating. RE2 Limited ----senior unsecured; Long Term Rating; Affirmed; A Scentre Group Limited; Long Term Issuer Default Rating; Affirmed; A; RO:Sta ; Short Term Issuer Default Rating; Affirmed; F1 ----senior unsecured; Long Term Rating; Affirmed; A RE1 Limited ----senior unsecured; Long Term Rating; Affirmed; A Scentre Management Limited ----senior unsecured; Long Term Rating; Affirmed; A Contacts: Primary Rating Analyst Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15 77 King Street Sydney NSW 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. 19 Feb 2019) https://www.fitchratings.com/site/re/10062582 Corporates Notching and Recovery Ratings Criteria (pub. 14 Oct 2019) https://www.fitchratings.com/site/re/10090792 Sector Navigators (pub. 23 Mar 2018) https://www.fitchratings.com/site/re/10023790 Additional Disclosures Dodd-Frank Rating Information Disclosure Form https://www.fitchratings.com/site/dodd-frank-disclosure/10109454 Solicitation Status https://www.fitchratings.com/site/pr/10109454#solicitation Endorsement Policy https://www.fitchratings.com/regulatory ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. 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