OREANDA-NEWS. Fitch Ratings has affirmed France-based real estate investment trust (REIT) Unibail-Rodamco SE's (Unibail) Long-term Issuer Default Rating (IDR) at 'A' and senior unsecured rating at 'A+'. The Outlook on the Long-term IDR is Stable. The Short-term IDR has been affirmed at 'F1'.

The ratings continue to reflect Unibail's focus on geographically diversified prime shopping centres with a defensive rental income profile. Its operating performance continues to be outstanding, benefiting from high occupancy, solid rent renewal increases and high tenant retention mitigating fairly short average lease maturities. Fitch expects loan-to-value (LTV) and EBITDA net interest cover (NIC) to remain below 40% and around 4.0x, respectively, in 2015. The group also benefits from one of the strongest liquidity positions in the sector and has improved its debt maturity and funding cost.

KEY RATING DRIVERS

Regular Churn Improves Portfolio
Unibail accelerated the disposal of non-core assets as the company sold more than EUR2bn of assets in 2014 and announced further disposals in Q1 15 and Q2 15. It follows years of portfolio transformation that saw the value of Unibail's average shopping centre grow to EUR395m of gross market value with 10.8 million footfall in 2014, from EUR170m with a 7.9 million in 2009. Large shopping centres (more than 6 million footfall) outperformed in 2014, most notably in valuation or minimum guaranteed rent uplift, therefore validating Unibail's strategy.

Higher Minority Interests
Unibail recently announced it will keep mfi, a German subsidiary, fully consolidated after the sale of a 46% stake. While Unibail has one of the cleanest group structures of Fitch's property universe, we note the increased usage of minority interests. At end-2014 the Fitch-calculated LTV-adjusted for minorities was 3% above Unibail's LTV calculation. Fitch does not adjust its LTV calculation for equity-accounted investments given the control Unibail is exercising and the non-material, non-permanent nature of the debt sitting at the level of equity-accounted investments. Also Fitch continues to deduct cash minority dividends from EBITDA.

Modest Decrease in LTV
Unibail slightly reduced its non-adjusted LTV to 37% in 2014 as it financed most of its acquisitions and developments with record proceeds from disposals. Like-for-like changes in valuation were also supportive. Unibail's through-the-cycle LTV proved to be less volatile than other rated EMEA REITs thanks to its prime portfolio and geographical diversification. Although management have a track record of managing the LTV conservatively through the cycle, it has not adopted a debt-neutral strategy, which has left the company with less headroom for further leverage.

Longer and Cheaper Debt
Unibail was able to further reduce its average cost of debt to 2.6% in 2014 (2.9% in 2013) and increase its average debt maturity to 5.9 years (5.4 in 2013). While such a trend is not new, Unibail was able to issue bonds with long maturities (15 year) and low financing costs (0% coupon for its convertible bond). Use of secured debt remains limited but increased following the full consolidation of mfi. On a lfl basis, mortgage debt would have actually decreased. Fitch estimates unencumbered asset cover of around 2.5remains adequate.

Significant Geographical Diversification
Unibail's property activities span three different sectors (retail 79%, office 12% and exhibition centres 9%) and 12 countries from western to eastern Europe. Unibail has exposure to mature markets such as France and Holland and strongly emerging retail consumer markets, such as Poland. Its property investment portfolio's diversification by geography and sector is unrivalled in Europe.

KEY ASSUMPTIONS
Fitch's key assumptions within the rating case for Unibail
-Moderate indexation and increase in rent at renewals with flat occupancy ratios for shopping centres
-A similar level of profitability to previous years

RATING SENSITIVITIES
Positive: Future developments that could lead to positive rating actions include:
- A very significant decrease in leverage, assuming the current operating profile

Negative: Future developments that could, individually or collectively, lead to negative rating action include:
- Significant rise in tenant defaults and lease arrears, leading to a material fall in total rents
- LTV adjusted for minorities above 40% on a sustained basis and a deviation from managing this ratio conservatively through-the-cycle
- EBITDA NIC below 2.5x on a sustained basis

LIQUIDITY AND DEBT STRUCTURE
At end-2014 Unibail had around EUR4.9bn of undrawn committed facilities and EUR831m of cash, sufficient to meet around EUR0.6bn of committed development capex and EUR1.6bn of debt maturities in 2015 and 2016 (excluding commercial paper issuance). The company further diversified its funding sources with inaugural green bonds in SEK and EUR and its first EMTN private placement in USD in 2014.