Fitch Ratings Affirms Mirvac at 'A-'; Outlook Stable

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Fitch Ratings Affirms Mirvac at 'A-'; Outlook Stable
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(The following statement was released by the rating agency) Fitch Ratings-Sydney-August 26: Fitch Ratings has affirmed Australia-based Mirvac Limited's Long-Term Foreign-Currency Issuer Default Rating (IDR) at 'A-'. The Outlook is Stable. Mirvac Limited's Long-Term IDR and senior unsecured rating were transferred from Mirvac Group, which is the stapled group. The ratings of Mirvac Limited are based on a consolidated profile, and the group will be referred to as Mirvac, comprising 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 reflects the strength of Mirvac's investment-property portfolio, which continues to be enhanced by its active development pipeline. Mirvac is focusing on the Sydney and Melbourne markets to take advantage of the cities' strong economies and above-average population growth, which we expect to support demand for its properties. Occupancy rates remain high across the portfolio at 99% and over 90% of the group's development sites were pre-committed at the end of the financial year ended 30 June 2019 (FYE19), demonstrating the high demand for the company's properties and supporting the strong recurring revenues the portfolio generates.Mirvac's more volatile and capital-intensive residential-development business continues to perform well. The company reported that settlement defaults in FYE19 were below historical levels of around 2%, despite two years of falling property prices in Sydney and Melbourne, where the majority of its completed developments were located. We expect Mirvac's settlement risk to be minimised by the quality of its developments that will be settled over the next one to two years, a stabilisation in prices and an improvement in the availability of credit, particularly in FY20 when 71% of its AUD1.7 billion pre-sales are due to settle. Mirvac's financial profile improved in FYE19 with its net debt/recurring EBITDA falling to 5.0x and its net debt/investment properties (LTV) improving to 28%, reflecting the realisation of pre-sold residential revenues and growing rental income, as well as the proceeds of a AUD750 million equity issuance, which we expect to help the company fund its next development cycle. We expect the company to have sufficient headroom within the guideline for its rating to absorb an increase in cash outflows as it begins land restocking in its residential business and invests in its future development pipeline over the next few years, with leverage and LTV forecast to increase to 5.8x and 31% by FYE23. Key Rating Drivers Stable Rental Income Underscores Rating: Mirvac has good visibility over future investment cash flow, driven by weighted-average lease expiries at around seven years in both its office and industrial portfolios and around four years in its retail portfolio - with no more than 10%-12% of leases expiring in any given year. We expect demand for Mirvac's properties to remain strong. The company's leasing spreads across its portfolio have ranged from 1% to 5% since FY14, and it has already let 90% of its active development pipeline, while its retail properties continue to deliver above-average three-year comparable total sales, specialty sales and foot-traffic growth.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 FY19. The portfolio is mainly concentrated in Australia's two largest cities, Sydney and Melbourne - which the company sees as the drivers of Australian economic growth. The quality of the portfolio is reflected in historically high occupancy levels, which have remained above 96% on a total portfolio basis since FY13 and around 98% in office, 100% in industrial and 99% in retail at FYE19.Mirvac's retail assets are unique in an Australian context, demonstrated by the company's focus on inner-urban areas. Mirvac's properties have outperformed those of its Australian peers when measured across like-for-like income growth, occupancy and leasing spreads, following the company's strategic re-weighting of its portfolio towards more resilient and experiential stores, such as food and beverage and entertainment, and away from department stores, together with a focus on high-traffic locations with superior demographics. The strength of its performance is also highlighted by the challenges that a number of Australian retailers are facing.Residential-Development Risk Exposure: Fitch believes Mirvac's residential-development business increases the company's overall business risk due to the long cash-conversion cycle between outflows to acquire land for construction and inflows only occurring upon settlement. However, the cash-flow visibility created by Mirvac's minimum pre-sale requirements, as well as disciplined land restocking, helps mitigate this risk; Mirvac had AUD1.7 billion in pre-sold residential revenue and around 28,000 lots under control at FYE19, supporting over 13,000 potential lot settlements over the next four years, 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 FYE19 and we expect it to remain between the company's guidance of 10% to 15% over the next few years as it completes its office pipeline and realises its pre-sold residential revenue. Fitch also believes Mirvac's leading position and long history in the Australian residential-development market reduce the impact of market cyclicality, and that the company's scale and access to recurring cash flow from its investment portfolio afford it greater flexibility in managing the business to market conditions.Development Business Increases Leverage: Mirvac's exposure to its more capital-intensive development business leads to higher leverage than that of its international peers, while its strategic focus on generating target margins through the cycle and managing its business to market conditions can lead to leverage peaking at higher levels for longer. Fitch forecasts LTV will remain at around 30% until FY23, but leverage will rise to around 5.5x in FY20 and to around 6.0x from FY21 to FY23, as Mirvac embarks on its next development cycle, while also completing its active developments.Robust Capital Access: Strong access to capital from diverse sources underscores Mirvac's strong credit profile. The company has demonstrated access to equity markets, highlighted by its AUD750 million fully underwritten institutional equity placement and share purchase plan in FYE19; and debt capital in multiple currencies, such as the Australian dollar and US dollar, and across a wide range of tenors, including a 20.25-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 international peers: Simon Property Group (NYSE: SPG ), Inc. (A/Stable), The British Land Company PLC (A-/Stable) and Unibail-Rodamco (AS: URW ) SE (A-/Stable).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's, whose development exposure is limited to additions in its investment portfolio.Mirvac's exposure to residential development also explains its weaker financial profile compared with British Land. However, Mirvac's stronger property portfolio resulting 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 its exposure mainly in large 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, mitigates the strength of Unibail's property portfolio and underscores rating the two issuers at a similar level.Within the Asia-Pacific region, Mirvac's investment portfolio is comparable with that of higher-rated Chinese peer, Sun Hung Kai Properties Limited (A/Stable), due to the quality of Mirvac's assets and low rental income risk even though Sun Hung Kai has a larger scale. Mirvac's weaker financial profile underscores the one-notch rating differential and reflects the underlying difference in the strategic focus of the companies' respective 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 32% and 33% from FY20 to FY23- Capex of AUD362 million from FY20 to FY23- 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) RATING SENSITIVITIES Developments That May, Individually or Collectively, Lead to Positive Rating Action- Recurring EBITDA/cash interest expense increasing to above 4.5x on a sustained basis (FY19: 3.9x).- Net debt/investment property valuation falling to below 20% on a sustained basis (FY19: 28%).- Net debt/recurring EBITDA falling to below 4.5x (FY19: 5.0x).Developments That May, Individually or Collectively, Lead to Negative Rating Action- 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 through the cycle.- Net debt/recurring EBITDA rising to above 7.5x for a sustained period. Liquidity and Debt Structure Well-Managed Funding Structure: Mirvac has a minimum liquidity target of the higher of AUD300 million or 12 months of debt maturities, consisting of cash and undrawn committed facilities. Mirvac had AUD134 million in cash and AUD1.3 billion in undrawn committed facilities at FYE19. The company's formalised debt and liquidity-management policies allow it to effectively match its assets and liabilities, while ensuring it has sufficient liquidity to meet commitments as and when they fall due - the difference between its portfolio's weighted-average lease expiries (5.7 years) and weighted-average debt tenor (8.5 years) is over one year - reflecting Mirvac's extension of its weighted-average debt tenor following its AUD665 million US private placement in FY19. Its USD750 million equity issuance, which is intended to be used to fund Mirvac's next development cycle, underscores management's commitment to maintaining its conservative financial profile. ESG Considerations Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of 3 - ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity.For more information on our ESG Relevance Scores, visit www.fitchratings.com/esg. Mirvac Group Finance Limited ----senior unsecured; Long Term Rating; Affirmed; A- Mirvac Limited; Long Term Issuer Default Rating; Affirmed; A-; RO:Sta ----senior unsecured; Long Term Rating; Affirmed; A- Contacts: Primary Rating Analyst Kelly Amato, CFA, , 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

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