September 2, 2011 - Unibail

September 2, 2011
Unibail-Rodamco
Primary Credit Analyst:
Maxime Puget, London +44(0)20 7176 7239; [email protected]
Secondary Contact:
Anna Overton, London (44) 20-7176-3642; [email protected]
Table Of Contents
Major Rating Factors
Rationale
Outlook
Business Description
Business Risk Profile: Excellent; Well-Diversified And High-Quality Retail
Property Portfolio Continues To Post Resilient Operating Performance
Financial Risk Profile: Intermediate; Solid Cash Flow Generation While
Debt Leverage Benefits From Favorable Market Trends
Financial Statistics/Adjustments
Related Criteria And Research
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(Editor's Note: In the full analysis published Sept. 2, 2011, the adjustment to EBIT was incorrectly shown as
positive in table 1. A corrected version follows.)
Major Rating Factors
Strengths:
• Very large and well-diversified European retail property portfolio with
leading positions in stable markets, such as France.
• High-quality assets consisting mostly of dominant shopping centers located
in large cities.
• Stable operating performance with low vacancy rates, a good tenant mix,
and well-spread lease maturities.
• Management's good track record and clear operating strategy.
Corporate Credit Rating
A/Stable/A-1
Weaknesses:
• Large speculative development pipeline.
• Exposure to the depressed Spanish retail market and to more cyclical segments like offices and
convention/exhibitions.
Rationale
The ratings on France-based property group Unibail-Rodamco reflect our view of its position as Europe's largest
listed real estate company with leading market positions, notably in France; its well-diversified and high-quality
property portfolio consisting mostly of dominant shopping centers located in major European cities; its stable
operating performance with low vacancy rates, good tenant mix, and well-spread lease maturities; and
management's good track record and clear focus on managing large shopping centers. Under our sector
methodology we consider asset quality and asset diversity as the most relevant business risk factors for real estate
companies.
Partially offsetting these strengths are Unibail-Rodamco's large development program; its exposure to higher-risk
countries like Spain and more volatile segments like offices and convention/exhibitions activities. To a lesser extent,
we take into account the group's relatively shareholder-friendly financial policy as a financial risk. High dividend
distributions are among the legal obligations of Unibail-Rodamco's real estate investment trust (REIT)-like structure
and the group has a track record of extraordinary dividend payments.
We believe that Unibail-Rodamco should continue to generate stable cash flow over the next 12-24 months, mainly
thanks to the high quality and geographic diversity of its retail property portfolio. These factors enable the group to
attract and retain creditworthy tenants that can continue to pay rents in an economic slowdown. We also view
positively management's strategy to focus on large shopping centers (those that have more than 6 million visitors per
year) in large catchment areas, which are generally more resilient in downturns. The downside risk relates mostly to
slower consumer spending trends in Europe, especially in countries like Spain, which could affect tenant quality and
occupancy levels.
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Key business and profitability developments
We see positive rental income growth for the group in 2011 and in 2012, probably in the low single digits. Our base
assumptions include a slight acceleration in rent rate growth together with a continued high occupancy rate and a
consistent lease maturity profile (of about four years). Planned asset sales, renovation works in shopping centers,
and limited new project deliveries in the next two years will likely offset some of the organic growth in rental
income. Profitability should remain stable over the period, in our view, and the fact that many tenancy agreements
cover maintenance costs will continue to provide support.
In the first half of 2011, the group's net rental income increased by 5.5% on a like-for-like basis. Retail assets
income was up by 5.2%, office assets by 3.2%, and convention centers by 12.4%. Vacancy rate remained very low:
2% for retail assets and 8.2% for offices. The group's occupancy-cost ratio (an indicator of how much
Unibail-Rodamco charges its tenants) remains manageable at 12.2%, supported by average sales growth of 4.2% at
its retail tenants. Profitability remained strong for the six months with an EBITDA margin of 82% and a return on
capital of 5.7%, in line with previous years. In terms of recent acquisitions, Unibail-Rodamco has concluded the
purchase of the remaining 50% stake that it did not own in the Mokotow shopping center in Warsaw for about
€240 million. This transaction will enable Unibail-Rodamco to expand in the Polish retail market, which has been
generally resilient over the past three years.
Key cash flow and capital-structure developments
We anticipate that cash flow generation will continue its slight decline in 2011, due to signed or planned asset
disposals and a higher level of cash interest to be paid, but should stabilize in 2012. We believe that debt leverage
should remain close to a Standard & Poor's-adjusted loan-to-value (LTV) ratio of 40% in 2011 and 2012,
supported by a slightly positive portfolio revaluation in 2011 and a stabilization of the level of debt.
During the first half of 2011, investor demand for prime retail assets remained strong and pushed market yields
down in Central Europe and Austria. This, together with the group's solid rental performance, contributed
positively to Unibail-Rodamco's property portfolio revaluation: up 2.4% on like-for-like basis, compared with the
previous year. Despite solid letting trends, higher cash interest payments weighed on cash flow generation, with FFO
reaching €475 million on June 30, 2011.
Liquidity
The short-term rating on Unibail-Rodamco is 'A-1'. We assess the group's liquidity as adequate under our criteria.
Our liquidity assessment is based on the following factors and assumptions:
• We project that the group's liquidity sources (including cash, FFO, and available credit facilities) over the next
12-18 months will exceed its uses by more than 1.2x.
• We view Unibail-Rodamco's debt maturities over the next two years as manageable.
• In the event that EBITDA declines by 20%, we believe net sources would still adequately cover cash requirements
and that the group could still comply with its financial covenants.
• The debt maturity profile appears well-managed, in our opinion, with an average maturity of four years and no
large refinancing risks in the next two years.
Cash sources include €87 million of cash and cash equivalents, €712 million of signed or planned asset disposals,
and €2.5 billion of undrawn committed credit lines.
The main liquidity use relates to €1.8 billion of debt maturing in less than year, including €579 million issued under
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two commercial paper programs of €1 billion and €750 million.
We anticipate that Unibail-Rodamco will continue to keep significant headroom under its debt covenants and enjoy
easy access to capital markets and bank financing, as shown by its recent successful bond issuances. The quality of
the group's portfolio and the low level of encumbered assets also add some financing flexibility, in our view.
Outlook
The stable outlook reflects our view that Unibail-Rodamco is likely to maintain an intermediate financial risk profile
through stable cash flow generation. This, together with about €2.5 billion of asset disposals scheduled for the next
two years, could help to reduce the amount of debt in the group's capital structure, which has increased since the
€1.8 billion extraordinary dividend payment in 2010. We anticipate that the company should be able to maintain
EBITDA interest coverage near 3.5x and an LTV ratio of less than 45% over the medium term.
We could, however, lower the ratings should Unibail-Rodamco pursue an aggressive development program or a
large debt-financed acquisition that would drive LTV over 45% on a prolonged basis. We would also view as
credit-negative any material shift in the retail property markets leading, for example, to a sustained like-for-like
rental income decline across the group's portfolio.
Rating upside appears remote at this stage, given management's views on the optimal debt leverage for the group.
Additionally, we believe it is unlikely that the operating cash flow base will increase significantly over the short to
medium term. This is in the context of still-subdued consumer spending in Europe and because the group's main
new projects are not anticipated to start generating cash before 2013.
Business Description
Unibail-Rodamco is Europe's largest listed real estate group, with a reported property portfolio value of €24.8
billion on June 30, 2011. Prime retail assets account 76% of the portfolio, while prime office assets, mostly located
in the Paris region, account for 16%. The group also manages convention/exhibition centers and property services
(8%). Unibail-Rodamco currently operates in 12 European countries, with a large geographic footprint in France
(64% of the portfolio value).
The group was formed in 2007, following the merger of real estate companies Unibail Holding (France) and
Rodamco Europe N.V. (The Netherlands). Unibail-Rodamco is listed on Euronext Paris with a total market
capitalization of €13.7 billion on Sept. 1, 2011.
Business Risk Profile: Excellent; Well-Diversified And High-Quality Retail
Property Portfolio Continues To Post Resilient Operating Performance
The major supports for Unibail-Rodamco's excellent business risk profile are:
• Its large (€24.8 billion), well-diversified property portfolio, which focuses mostly on food-anchored, dominant
shopping centers (86% of the retail portfolio) with more than six million visits per year and significant barriers to
entry that provide stable cash flows and resilient asset values. The quality of these assets generally stems from
their prime locations with large catchment areas in major European cities. The high barriers to entry that restrict
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•
•
•
•
competition are generally due to strict planning regulations in areas like the Paris region. Although still skewed
towards France (64% of the portfolio value), the group's portfolio benefits, in our view, from a good geographic
diversification in mature economies.
Its leading market positions in retail, which represents 76% of the portfolio. Unibail-Rodamco currently ranks as
Europe's No. 1 shopping mall owner and No. 3 worldwide, with 77 shopping centers in 12 EU countries. The
large footfall and the good geographic coverage attract prime retailers and put the group in a relatively strong
position to negotiate rents with the tenants.
The group's solid operating performance, supported mainly by the prime quality of its retail portfolio, which
benefits from a high occupancy rate (98%), a relatively moderate occupancy cost (12.2%), and low customer
delinquencies. Leases are mostly indexed-linked and well-spread with an average lease tenor of about four years.
The portfolio of tenants is diversified, including large, profitable fashion retailers such as Hennes & Mauritz AB
(not rated) and Inditex (not rated). Although 32% of the leases have break options in 2011-12, we do not expect
a significant rise in vacancies because of the attractiveness of the shopping centers.
Its prime office properties (16% of the portfolio value) are large, modern buildings. They are located mostly in La
Défense, a major business area near Paris, and in the city's central business district. The occupancy rate (92%)
remains solid and the tenant mix comprises a large number of blue-chip corporations such as Société Génerale
(A+/Stable/A-1) or Societe Nationale des Chemins de Fer Francais (AA+/Stable/A-1+). The average lease tenor is
about five years and lease maturity schedules are well-spread.
The experience and good track record of management, in terms of both strategy and execution. The group has a
clear investment focus, which is to invest and manage a portfolio of large shopping centers producing stable
income combined with an office portfolio that provides some higher returns. The group continues to successfully
expand across Europe, as shown by the recent acquisition of the remaining 50% stake in the Mokotow shopping
center in Warsaw (Poland). In our view, the stable operating performance, notably in terms of rental income
growth, validates this strategy.
These supports are partially offset, in our opinion, by:
• The group's highly capital-intensive investment program for the next four years. The development pipeline stands
at €6.9 billion, or 28% of the portfolio's market value, as of June 30, 2011. Fixed investment commitments have
increased to €2.3 billion (versus €1.3 billion one year ago). Brownfield projects, which we view as more risky
than renovations or extensions, represent 70% of the pipeline. However, risk related to shopping center
developments is mitigated through pre-letting, and construction risks are capped by turnkey contracts.
• The more cyclical nature of office and convention/exhibition segments (16% and 7% of the portfolio
respectively). Asset valuations and rental income are generally more volatile for these assets than for shopping
centers, as we observe that demand for office space usually correlates with unemployment rates. Convention
activities remain a seasonal and cyclical business, but we note that Unibail-Rodamco benefits from a very strong
market share in the Paris region.
• Unibail-Rodamco's exposure to the depressed Spanish retail market (9% of the portfolio value). High
unemployment and fragile consumer spending due to austerity measures are affecting the creditworthiness of
retailers and could affect vacancy rates in Spain. Although we note that the operating performance of the
shopping centers in Madrid and Barcelona has been resilient.
• Unibail-Rodamco's significant asset rotation policy. In the first half of 2011, the group acquired €138 million of
assets, disposing of over €814 million of buildings. Although it is consistent with the strategy of focusing on large
retail assets, this policy results in a decline in operating cash flow until the new projects begin to operate.
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Financial Risk Profile: Intermediate; Solid Cash Flow Generation While Debt
Leverage Benefits From Favorable Market Trends
We consider the main strengths of Unibail-Rodamco's intermediate financial risk profile to be:
• Debt service ratios that compare favorably with Unibail-Rodamco's Standard & Poor's-rated peers. As of June
30, 2011, the trailing-12-months EBITDA to interest coverage of 3.9x is supported by a steady rental
performance and the low cost of debt (3.6% in the first half of 2011).
• Its prudent hedging policy against interest rate risk. 97% of Unibail-Rodamco's debt was hedged at June 30,
2011, and nearly 100% is hedged until 2014 through forward swaps, caps, and collars. This should enable the
group to maintain a low cost of debt.
• Good financial flexibility. The debt maturities are well-spread with no large refinancing due in the next four years
and an average tenor of 4.1 years. The group has a low level of secured debt (11% of total debt) and has been
able to generate cash through €814 million of asset disposals in the first half of 2011. We consider the headroom
under the debt covenants to be significant, with a reported leverage ratio of 38% on June 30, 2011 (versus
maximum leverage of 60% authorized by the debt covenants) and a reported interest coverage ratio of 3.8x
(versus the authorized minimum ratio of 2.0x).
• Well-diversified debt sources. Of current debt outstanding, 56% originates from capital markets and 44% from
bank lending. The group has raised €555 million of debt since January 2011, including €350 million from capital
markets, illustrating its easy access to financing.
These strengths are partially offset by:
• A recent increase in distribution of funds to shareholders. Debt repayment metrics have declined with FFO to
debt of 7.4% for the rolling 12 months to June 2011 (versus 13.7% one year ago). This is mainly due to the
higher level of debt following the extraordinary dividend financing in 2010. However, debt leverage remained
stable with an adjusted LTV of 39.5% at June 30, 2011, supported by favorable portfolio revaluations.
• Relatively large refinancing requirements. With €1.8 billion over the next 12 months, Unibail-Rodamco has large
financing needs in the next two years. However, we consider these to be mitigated by the good availability of
capital (debt and equity) to the group.
• A shareholder-friendly financial policy. We observe that the group proceeded with a €1.8 billion extraordinary
shareholder cash distribution in 2010 and that its REIT-like structure is designed to ensure a continuous high
dividend payout ratio (85%-95% of the recurring profit). However, we anticipate that the group will carefully
manage its financial flexibility by keeping financial ratios well-below their internal limit over the business cycle,
taking into consideration potential volatility in asset values and the large investment program.
Financial Statistics/Adjustments
Unibail-Rodamco reports under International Financial Reporting Standards. The group's real estate portfolio is
accounted at fair market value.
Standard & Poor's mainly adjusts the group's debt for:
• Fair value movements of debt (€189 million at Dec. 31, 2010).
• Finance leases (€62 million at Dec. 31, 2010).
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• Long-term amounts due on investments (€154 million at Dec. 31, 2010).
• Long- and short-term commitments to purchases non-controlling interests (€46 million).
Although Unibail-Rodamco treats its partners' accounts (€638 million at Dec. 31, 2010) as debt in its financial
statements, we exclude this amount from our debt calculations. We view partners' accounts as equity-like
instruments, given the profit-based remuneration provided by minority shareholders and sized pro rata for their
equity stakes. The amount relates mainly to the joint venture with the Chamber of Commerce of Paris in the group's
conference/exhibition activities (ViParis) and two shopping centers in Spain. In addition, we add back capitalized
interest (€35 million on Dec. 31, 2010) to interest expense.
Table 1
Reconciliation Of Unibail-Rodamco Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. €)
--Financial year ended Dec. 31, 2010-Unibail-Rodamco reported amounts
Reported
Cash flow Cash flow
Shareholders'
Operating Interest
from
from Dividends
Capital
Debt
equity Revenues EBITDA
income expense operations operations
paid expenditures
10,139.2
11,025.2
1,484.5 1,296.7
2,994.6
262.6
1,222.1
1,222.1
2,575.5
824.9
Standard & Poor's adjustments
Postretirement
7.1
benefit obligations
2.2
--
3.1
3.1
0.5
(0.3)
(0.3)
--
--
Capitalized interest
--
--
--
--
--
35.1
(35.1)
(35.1)
--
(35.1)
Share-based
compensation
expense
--
--
--
7.5
--
--
--
--
--
--
Reclassification of
nonoperating
income (expenses)
--
--
--
--
28.3
--
--
--
--
--
Reclassification of
interest, dividend,
and tax cash flows
--
--
--
--
--
--
(254.3)
(254.3)
--
--
Reclassification of
working-capital
cash flow changes
--
--
--
--
--
--
--
1.6
--
--
Minority interests
--
1,345.4
--
--
--
--
--
--
--
--
(189.3)
--
--
--
--
--
--
--
--
--
Debt--finance
leases
62.3
--
--
--
--
--
--
--
--
--
Debt--equity
component of
convertible debt
(0.2)
--
--
--
--
--
--
--
--
--
Debt--long-term
commitments to
purchase
noncontrolling
interests
10.4
--
--
--
--
--
--
--
--
--
Debt--current
commitments to
purchase
noncontrolling
interests
35.6
--
--
--
--
--
--
--
--
--
Debt--fair value
adjustments
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Table 1
Reconciliation Of Unibail-Rodamco Reported Amounts With Standard & Poor's Adjusted Amounts (Mil. €) (cont.)
Debt--amounts due
on investments
154.4
--
--
--
--
--
--
--
--
--
(638.2)
--
--
--
--
--
--
--
--
--
EBITDA--gain/(loss)
on disposals of
PP&E
--
--
--
(113.7)
(113.7)
--
--
--
--
--
EBIT--loss/(gain) on
asset revaluation
--
--
--
--
(1,702.3)
--
--
--
--
--
(557.9)
1,347.6
0.0
(103.1)
(1,784.6)
35.6
(289.7)
(288.1)
0.0
(35.1)
Debt--current
accounts with
noncontrolling
interests
Total adjustments
Standard & Poor's adjusted amounts
Adjusted
Debt
9,581.3
Equity Revenues EBITDA
12,372.8
1,484.5 1,193.6
Cash flow
Funds
Interest
from
from Dividends
Capital
EBIT expense operations operations
paid expenditures
1,210.0
298.2
932.4
934.0
2,575.5
789.8
Table 2
Unibail-Rodamco Peer Comparison
Rating as of Sept. 2, 2011
(Mil. €)
Gross rental income
EBITDA
Gross interest expense
Asset revaluation
Gains on disposals
Net income from continuing operations
Funds from operations (FFO)
Unibail-Rodamco Corio N.V.
Klepierre S.A.
A/Stable/A-1 BBB+/Stable/A-2 BBB+/Stable/A-2
--Financial year ended Dec. 31, 2010-1,484.5
451.6
926.3
1,193.6
355.5
783.2
298.2
127.1
322.7
1,702.3
173.4
(408.8)
113.7
6.6
127.3
2,187.6
375.7
124.6
934.0
263.9
449.2
Dividends
2,575.5
183.9
252.2
Debt
9,581.3
3,375.1
7,742.5
24,532.0
7,234.9
15,114.0
Valuation of investment property
Adjusted ratios
EBITDA margin (%)
80.4
78.7
84.5
EBITDA interest coverage (x)
4.0
2.8
2.4
Return on capital (%)
5.6
4.8
6.6
FFO/debt (%)
9.7
7.8
5.8
Debt/EBITDA (x)
8.0
9.5
9.9
Loan to value (%)
39.1
46.7
51.2
Portfolio composition* (%)
Retail
76
96
95
Office
16
4
5
Other
8
0
0
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Table 2
Unibail-Rodamco Peer Comparison (cont.)
Other information*
Weighted average cost of debt service (%)
3.9
4.2
4.5
Proportion of debt fixed or capped (%)
77%
74%
63%
Length of fixed/capped period (years)
4.0
>4.0
4.6
Weighted average debt maturity (years)
4.3
6.1
5.5
Weighted average lease maturity (years)
4.0
>4.5
4.5
Vacancy rate for investment properties (%)
2.6
3.9
3.0
*Based on company data
Table 3
Unibail-Rodamco Financial Summary
--Financial year ended Dec. 31-(Mil. €)
Rating history
2010
2009
2008
2007
2006
A/Negative/A-1 A/Stable/A-1 A/Stable/A-1 A/Stable/A-1 A-/Stable/A-2
Gross rental income
1484.5
1472.9
1422.7
879.5
489.9
Net rental income
1,257.4
1,257.3
1,215.5
765.4
410.8
EBITDA
1,193.6
1,201.1
1,154.4
732.2
428.5
298.2
299.4
316.9
177.0
104.6
1,702.3
(2,192.1)
(1,773.2)
1,667.1
1,701.3
Interest expense
Asset revaluation
Gains/(losses) on disposal
Net income from continuing operations
Funds from operations (FFO)
113.7
(40.2)
47.1
20.7
99.4
2,187.6
(1,467.8)
(1,116.0)
944.8
2,139.8
934.0
969.8
848.6
556.0
314.5
Investments
1,302.8
848.9
2,536.0
1,214.5
507.9
Dividends
2,575.5
517.6
647.6
433.1
190.8
Total debt
9,581.3
7,465.4
7,669.8
7,489.9
3,041.7
24,532.0
22,313.0
24,572.0
25,229.0
10,856.0
80.4
81.5
81.1
83.3
87.5
EBITDA interest coverage (x)
4.0
4.0
3.6
4.1
4.1
EBITDA/(interest plus dividends) (x)
0.4
1.5
1.2
1.2
1.5
Return on capital
5.6
5.4
5.0
(3.4)
25.6
FFO/debt (%)
9.7
13.0
11.1
7.4
10.3
Debt/EBITDA (x)
8.0
6.2
6.6
10.2
7.1
Loan to value (%)
39.1
33.5
31.2
29.7
28.0
Market value of portfolio
Adjusted ratios
EBITDA margin (%)
Related Criteria And Research
All articles listed below are available on RatingsDirect on the Global Credit Portal, unless otherwise stated.
• Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21, 2011
• Methodology And Assumptions: Standard & Poor's Standardizes Liquidity Descriptors For Global Corporate
Issuers, July 2, 2010
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• Criteria Methodology: Business Risk/Financial Risk Matrix Expanded, May 27, 2009
• 2008 Corporate Criteria: Analytical Methodology, April 15, 2008
Ratings Detail (As Of September 2, 2011)*
Unibail-Rodamco
Corporate Credit Rating
A/Stable/A-1
Commercial Paper
Local Currency
A-1
Senior Unsecured (15 Issues)
A
Short-Term Debt (1 Issue)
A-1
Corporate Credit Ratings History
31-May-2011
A/Stable/A-1
21-Jul-2010
A/Negative/A-1
27-Jun-2007
A/Stable/A-1
10-Apr-2007
A-/Watch Pos/A-2
Business Risk Profile
Excellent
Financial Risk Profile
Intermediate
Debt Maturities
On June 30, 2011:
2011: €1.13 bil.
2012: €1.04 bil.
2013: €875 mil.
2014: €525 mil.
2015 and thereafter: €5.84 bil.
Related Entities
Rodamco Europe N.V.
Issuer Credit Rating
A/Stable/A-1
Commercial Paper
Local Currency
Senior Unsecured (2 Issues)
A-1
A
*Unless otherwise noted, all ratings in this report are global scale ratings. Standard & Poor's credit ratings on the global scale are comparable across countries. Standard
& Poor's credit ratings on a national scale are relative to obligors or obligations within that specific country.
Additional Contact:
Industrial Ratings Europe; [email protected]
Additional Contact:
Industrial Ratings Europe; [email protected]
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