Fitch Ratings: Major Australian Retail REITs to Withstand Retailer Pressure

(The following statement was released by the rating agency) Fitch Ratings-Sydney-February 06: Fitch Ratings believes that the strong financial profiles of major Australian REITs with retail exposure - in particular, Fitch-rated entities Scentre Group Limited (A/Stable) and Mirvac Limited (A-/Stable) - will be able to withstand an expected uptick in pressure after several national retailers entered administration. Several national retailers announced store closures during end-2019 and January 2020 - either voluntarily or after entering into receivership or administration - including fashion retailers Bardot and Jeanswest, electronics-retailer EB Games and discount department store Harris Scarfe. We expect there to be further closures announced following accessories retailer, Colette by Colette Hayman, entering administration in the first week of February. This follows a period of subdued consumer confidence and retail spending. Stronger competition, in particular the improved offerings from discount department stores and the entry of new international retailers, changing consumer preferences, and heavy discounting in response to the increased competition, have also contributed to the demise of these retailers. Most of the announced store closures, nearing 200 in total, are in shopping malls across Australia, and will result in an increase in vacancies, including in centres owned by major REITs such as Scentre, Mirvac, Vicinity Limited (not rated) and Stockland Corporation Limited (not rated). Fitch believes that these REITs will be able to withstand the impact on their high occupancy rates as retailers will continue to demand space in their market-leading centres and allow the REITs to continue to tailor their offerings to meet the needs of the local communities, thereby limiting any impact on occupancy and earnings. This demand for space is demonstrated by historically high occupancy rates across the REITs' portfolios - at over 99% for Scentre and Mirvac since 2014 - which reflect their strategic locations. For instance, over 65% of the Australian population lives within 30 minutes of one of Scentre's Westfield malls, while Mirvac's smaller properties are typically located in east coast suburban areas with desirable demographics. Furthermore, the work that each respective REIT has done to transform their centres from retail-focused shopping malls to lifestyle centres - with a greater variety of food, leisure, services and entertainment options - has driven comparable specialty same-store sales growth (SSSG) across their portfolios each year since the financial year ended June 2015 (FY15). This also continues to drive increases in footfall, which benefits retailers through growing their online sales - which are not captured in SSSG or occupancy costs metrics. Nevertheless, even if the REITs were unable to maintain their high levels of occupancy and took no mitigating actions, Scentre would need to see occupancy in each of its malls fall to around 85% over the next few years before leverage hits the level at which Fitch would consider negative rating action. For Mirvac, its retail portfolio occupancy would need to fall even further - to around 60% - before it reaches its negative rating sensitivity because the trust's other businesses in industrial and office space and property development would offset the retail downturn. This provides both REITs with a substantial buffer at their current rating levels to continue to navigate the changing landscape. However, Fitch expects retailers in Australia to continue to seek better terms and rent reduction as part of negotiations on renewals or new leases following the spate of high-profile store closures. This may affect leasing spreads, which weakened over the past couple of years. The REITs have nevertheless been successful in keeping speciality occupancy costs relatively stable since FY15, at around 18% at Scentre and 15% at Mirvac. In addition, the well-spread-out lease maturity profiles at Scentre and Mirvac, and the standard annual increases in the rental agreements will help protect overall margins in their retail portfolios over the medium term. These factors, and the consistent demand for the properties, will continue to support the visibility of retail income and limit potential negative effects on financial profiles. We still believe that changing consumer preferences will drive the REITs to continue to partner tenants to maintain their leading positions in Australian retail. In particular, the REITs will need to keep adding value to tenants by providing a mix of stores, operators and experiences that will drive consumer footfall into the centres, and sharing information with retailers to help them tailor their offerings to the evolving consumer preferences. Contact: Kelly Amato, CFA Director +61 2 8256 0348 Fitch Australia Pty Ltd Level 15, 77 King Street, Sydney NSW 2000 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 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. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. 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