Fitch Assigns 'BBB+(EXP)' First-Time Rating to SELP; Outlook Stable
SELP is a joint venture between SEGRO PLC (BBB+/Stable) and the Public Sector Pension Investment Board (PSP), a large Canadian pension fund. SELP owns and leases large logistics properties ("big box", above 10,000sqm) in continental Europe. SELP owns and develops properties in key locations close to national and international road transport corridors mostly in France, Germany and Poland. The rating reflects the quality of the portfolio and its related rental income stream, together with a conservative financial profile.
The rating is pending the issue of a EUR500m senior unsecured bond and the availability of a EUR200m unsecured revolving credit facility that the company will mostly use to repay its secured financing. The assignment of the final rating is contingent on the receipt of final documentation and confirmation of the use of proceeds.
KEY RATING DRIVERS
Focus on Big-Box Assets
SELP's business profile is supported by the company's ownership and development of modern big-box assets in good locations. SELP's portfolio comprises 125 buildings across 60 locations. Most of the properties are large (average building size of 23,666 sqm) and meet the latest industry building specification such as 10m internal height and number of loading docks.
The portfolio is spread across eight countries and their main logistic infrastructures, meaning that SELP benefits from geographic diversification. While the average age is around 10.5 years, slightly older than peers, a number of the older assets have undergone large refurbishment.
Strong Key Performance Indicators
SELP displays many characteristics of a strong investment-grade company. Its limited track record (the JV was created in 2013) is offset by the contribution of nearly EUR1bn of operating assets by 50% owner SEGRO PLC at start-up. In addition SEGRO is involved in the construction, and property and financial management of the JV under a management contract.
The ratings also reflect SELP's strong levels of occupancy (vacancies below 3%) with a well-diversified asset and tenant base. Fitch expects the fairly long average lease length (5.5 years to break) to support its strong rental income stream.
Periodic Liquidity Creates Repayment Risk
The rating could be exposed to a periodic liquidity event. The shareholder agreement allows shareholders to request repayment from SELP, with the options ranging from the sale of assets to repay shareholders to the outright sale of a shareholding. Fitch expects the listing or sale of shares as the most likely option if either of the shareholders request liquidity.
Good Market Dynamics
Recent years have seen a large increase in demand for continental modern big box assets in good locations, driven by e-commerce and increasingly sophisticated logistics handling. Vacancies have decreased across Europe and are approaching a low point, but Fitch believes rent dynamics are more mixed and generally less favourable than in the UK.
Some Differences to SEGRO
SELP operates across a large number of European cities while SEGRO has a large exposure to London and its vicinity (Slough for instance). As a result we believe that land is not as scarce for SELP even though some limitations exist (fragmented farm lands, regulation etc). This is partially reflected in SELP's higher-yielding portfolio.
Some Development Risk
SELP's low vacancies illustrate the limited availability of modern well-located warehouse buildings, which the company sees as an opportunity to develop more assets. Committed capex remain limited when compared to the size of its portfolio and SELP is conservative compared with its competitors in terms of speculative appetite (developments are mostly pre-let). Nonetheless, increased supply in some markets (Poland in particular) limits upward pressure on rents even as vacancies have decreased.
Senior Unsecured Rating Assumes Refinancing
The company intends to issue a EUR500m senior unsecured bond, supplemented with a EUR200m unsecured RCF. Most of the proceeds are expected to refinance around EUR400m of secured debt and partly repay a shareholder loan. We expect the company to have a comfortable unencumbered asset cover of around 2.5x, although French assets and three of the better quality German assets will remain secured for the time being.
Low Leverage
We expect the company to maintain moderately low loan-to-value (LTV) of around 35% and net debt-to-EBITDA around 7.0x, driven by the higher yield of its assets. While we expect the company to grow its asset base fairly quickly, leverage should remain stable given the commitment of its shareholders to low leverage. This is supported by its shareholder agreement with both LTV targets (40% through the cycle, 45% deleveraging threshold) and equity commitments.
No Uplift for Senior Unsecured Debt
Fitch has not applied a notch-uplift to SELP's senior unsecured debt relative to the company's IDR, as half of the unencumbered assets by value are located in Poland where we view the investment property markets as being less liquid. While the French and German logistic investment markets are more liquid than Poland's industrial portfolio, these assets are not all in the unsecured pool of unencumbered assets.
Variations from Criteria
SELP was only able to provide around two years of historical data on the performance of its assets, whereas our Corporate Rating Methodology refers to a requirement for three years of operating history and financial data.
In Fitch's view, the non-standard mechanism of SELP's periodic liquidity events from 2023 and subsequently every three years is not likely to trigger an adverse liquidity issue for bondholders. Of the various options under this scenario, the route of selling properties to repay debt and equity are controlled through the shareholder agreement's contractual mechanism requiring a 45% LTV ratio (measured on a net debt basis) to be maintained throughout the process.
KEY ASSUMPTIONS
- Operational cost maintained at current levels
- No rental growth
- Significant development activity with around EUR400m-EUR450m of capex until 2018
- Further portfolio growth driven by EUR550m of net acquisitions until 2018
- Net capital injection of around EUR150m in 2016-2017 (including re-investment of paid dividends and shareholder loan interest)
RATING SENSITIVITIES
Positive: Future developments that may, individually or collectively, lead to positive rating action include:
- Material improvement in SELP's sector diversification
- Fitch-adjusted LTV sustainably below 30%
- Improvement of the JV's structural limitations under the Shareholder Agreement
Negative: Future developments that may, individually or collectively, lead to negative rating action include:
- Weaker operational profile most likely resulting from significant rise in tenant defaults, increase in vacancies or unfavourable rental like-for-like dynamics
- Net debt-to-EBITDA substantially above 7.5x on a sustained basis
- Deterioration in EBITDA net interest cover to below 2.0x on a sustained basis
- Fitch-adjusted LTV above 40% on a sustained basis
- Liquidity score below 1.25x (committed undrawn facilities plus cash divided by debt maturities and committed capex) over 18-24 months
- Deterioration in unencumbered asset cover to significantly below 2.0x on a sustained basis
LIQUIDITY
SELP holds some unrestricted cash (EUR97m at end-1H16) and EUR80m of undrawn RCF (post the abovementioned financial transaction) that more than covers its funding needs for the next 24 months (around EUR50m of committed and refurbishment capex, no maturing debt). We expect major development capex to be supported by equity injections or further shareholder loan drawdown in line with its LTV target. We also expect that capex commitments would be supported by substantial pre-lets.
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