S&P: Vicinity Centres Ratings Affirmed At 'A'; Outlook Stable

S&P Global Ratings said today that it had affirmed its 'A' corporate credit and issue ratings on Australian REIT (AREIT) Vicinity Centres and the AREIT's senior unsecured debt. The outlook on the long-term rating is stable. At the same time, we affirmed the issue rating on the group's senior secured debt at 'A+'.

We affirmed the ratings to reflect Vicinity's sustained strong market position as the second-largest retail landlord in Australia. The group benefits from a good-quality portfolio of shopping centers that span across the full spectrum of major Australian retail property classes. These properties include a mix of super-regional, regional, sub-regional, and convenience shopping centers, as well as retail outlets.

Also supporting the ratings are the group's moderate financial policies, which include gearing (net debt-to-net tangible assets) between 25% and 35%. Vicinity's financial profile remains solid and is comfortably positioned at the 'A' rating. For the six months ended Dec. 31, 2017, Vicinity's gearing was 26.6% (net debt-to-net tangible assets) and remains at the lower end of the gearing range.

We expect the group's key financial metrics of EBITDA interest coverage to remain above 4x and funds from operations (FFO)-to-debt of greater than 13% over the next two years. For the year ended June 30, 2017, the group's EBITDA interest coverage was 4.8x and FFO-to-debt 17.7%.

Vicinity's operating strategy continues to evolve, with the AREIT considering mixed-use developments to complement its core asset repositioning strategy. Details regarding the strategy are yet to be determined, although a market update is likely in mid-2018.

We consider execution risks are likely to increase with the introduction of a mixed-use strategy. However, we recognize that the senior management has a long association with the portfolio and a solid track record of growing the asset base that supports the AREIT's strong competitive position.

Proceeds from divestments as well as capital partnering have supported the AREIT's redevelopment strategy, while limiting pressure on the balance sheet. We expect Vicinity to continue prudently managing its finances in implementing its mixed-use strategy. Management's track record of capital partnering is an important consideration in limiting the AREIT's balance-sheet exposure.

We have revised our liquidity assessment on Vicinity to adequate from strong. This reflects the group's sizable amount of maturing debt and the refinancing task over the next two years.

The stable outlook reflects our expectation that the quality and diversity of Vicinity's portfolio will reduce earnings volatility through the cycle. In addition, we expect Vicinity will continue to recycle assets and seek capital partners to achieve its investment objectives while limiting pressure on its balance sheet. Over the longer term, we expect the AREIT's asset quality to improve further as the group executes its repositioning strategy.

Downward pressure could occur if Vicinity's operating performance persistently weakens or if it were to adopt a more-aggressive growth strategy. In addition, we would consider downward rating action if its FFO-to-debt ratio falls below 12% or if the gearing (net debt-to-net tangible assets) exceeds 35%.

We are not likely to raise the ratings in the foreseeable future. However, we would consider an upgrade if Vicinity adopts more-conservative financial policies. Over the longer-term, we may upgrade Vicinity if we believe that its scale and asset quality have improved materially.

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