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Fitch Revises British Land's Outlook to Positive; Affirms 'BBB+'
December 7, 2016 / 5:11 PM / 10 months ago

Fitch Revises British Land's Outlook to Positive; Affirms 'BBB+'

(The following statement was released by the rating agency) LONDON, December 07 (Fitch) Fitch Ratings has revised the Outlook on the Long-Term Issuer Default Rating (IDR) of The British Land Company PLC to Positive from Stable. The agency has affirmed the Long-Term IDR at 'BBB+', the Short-Term IDR at 'F2' and the senior unsecured rating at 'A-'. The Outlook reflects the continuing positive steps management has been taking to improve the business. At March 2016 (FYE16), occupancy levels exceeded 98%, while the remaining lease terms averaged 9.0 years to break (10.2 years to expiry). The office and residential portfolio is concentrated on prime areas of London with a diverse and robust tenant base. In addition, the company has further improved key credit metrics. At FYE16, the loan/value ratio (LTV) excluding joint ventures (JVs) stood at 34% while net debt/EBITDA was 7.8x. EBITDA net interest cover (NIC) was a sound 4.2x and the average maturity of debt was a long 8.1 years. With the completion of its key development programme, Fitch expects British Land to focus on further reducing debt levels through disposal proceeds, while generating stable rental income. This should allow it to effectively manage the currently uncertain property market in London and the UK. Fitch stress tests indicate that the company can withstand a substantial shock without jeopardising its current rating position. Nevertheless, the timing of a potential upgrade is uncertain given the hesitancy of property markets. Fitch focuses its analysis on the statutory reported group basis excluding any non-recourse activities (Hercules Unit Trust, consolidated from February 2014). EBITDA is calculated adding regular dividend income from JVs and other non-recourse interests. KEY RATING DRIVERS Sound Financial Position: The LTV decrease largely reflects a reduction in net debt, as well as an increase in asset values. The company benefits from strong liquidity with undrawn committed facilities exceeding GBP1.0bn, as well as unrestricted cash of around GBP80m (FYE16). This is sufficient to cover commitments through 2020. Under our base case, we expect British Land to further reduce the LTV by FYE17, maintaining stable levels thereafter as the company manages its development programme in the current uncertain property markets. Stable Revenues From Quality Tenants: High occupancy levels, long leases, and a robust and diverse tenant base are key rating strengths. No single occupier accounts for more than 6% of total contracted rent, which provides significant security of income and enhances property values. Active Portfolio Management: British Land has continued to reshape its property portfolio, expanding office space in the West End and the City of London, while reducing the Retail & Leisure segment, particularly single-let superstores. Each division now accounts for about half of the portfolio. Since March 2016, British Land exchanged or disposed of GBP690m of non-core Retail assets, including the Debenhams flagship store on Oxford Street for GBP400m (post EU referendum), as well as GBP79m of superstores. Cautious Project Development: British Land has finished its "2010 Development Programme". Given the uncertain post-Brexit economy, management is taking a cautious approach to development, having recently scaled back the near-term pipeline. British Land's committed development equates to 5% of the portfolio value on a total cost basis, which mainly comprises the large 100 Liverpool Street project. The most significant medium-term project is Canada Water, a 5.5m sq ft mixed-use development in partnership with the London Borough of Southwark. This long-term scheme is only in the pre-submission phase, which gives the company flexibility over the project. British Land has effective risk management policies in place and a good history of delivering projects. Market Uncertainty: Economic uncertainty since the EU referendum is affecting the property market. British Land and other London-focused real estate investment trusts (REITs) reported a slight drop in property values at end-1H16 - the first since 2009 - with a marginal uptick in vacancies. British Land, nevertheless, is in a sound position to manage Brexit's possible repercussions. Low LTVs, high occupancy, good liquidity and flexibility in the pipeline provide the company with defensive measures against economic volatility. In addition, its focus on prime areas in the deeply liquid London market should ensure demand remains sound. DERIVATION SUMMARY British Land is in a strong position relative to many peer REITs. While it is less geographically diverse than Atrium and Unibail-Rodamco, its office and residential portfolio is concentrated in prime areas of London, which feature high demand and strong clients. The retail portfolio, which is spread across the UK, provides business and geographical diversification. Compared to most European REITs, British Land's average remaining lease terms of 9.0 years are long, as is the average debt maturity of 8.1 years (FYE16). The LTV, at 34%, and net debt/EBITDA of 7.8x are lower than the sector averages and we expect these levels to further reduce by FYE17. No Country Ceiling, parent/subsidiary or operating environment aspects impact the ratings. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Rental income based on actual contracted rents, adjusted for 3% of expiring leases not renewed and 1% tenants default - Stable dividends from JVs - Capex based on committed total development spend - Cash settlement of the 2017 GBP400m convertible bond RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Clarity or indications of stabilisation in the London property markets - Proportional consolidated LTV below 40% on a sustained basis - Fitch-adjusted group EBITDA NIC above 3.0x on a sustained basis - Fitch-adjusted net debt/EBITDA (including dividends from joint ventures) below 8.0x on a sustained basis - Improved asset diversification, reducing the exposure to cyclicality in the London office market Future Developments That May, Individually or Collectively, Lead to Negative Rating Action - Fitch-adjusted group LTV above 50% and proportionally consolidated LTV above 55% on a sustained basis - Unencumbered asset cover below 2.0x or material deterioration in the unencumbered asset pool quality - Fitch-adjusted group EBITDA NIC below 2.0x on a sustained basis LIQUIDITY Active Debt Management: During FY16, British Land raised and refinanced GBP915m of debt, including a GBP350m zero-coupon convertible bond launched in June 2015. The company also purchased GBP110m of 6.75% First Mortgage Debenture Bonds due 2020. This activity has reduced the group's proportionally consolidated weighted average interest rate to 3.3% at FYE2016 from 3.8% in the previous fiscal year. Robust Liquidity: There are no significant maturities within one year. While the GBP400m convertible bond matures in FY18, liquidity is sufficient to cover this amount: available and undrawn committed facilities exceed GBP1.0bn with unrestricted cash of around GBP80m. Contact: Primary Analyst Bram Cartmell Senior Director +44 20 3530 1874 Fitch Ratings Limited 30 North Colonnade London E14 5GN Secondary Analyst Diego Della Maggiore Associate Director +44 20 3530 1791 Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Date of Relevant Rating Committee: 06 December 2016 Media Relations: Peter Fitzpatrick, London, Tel: +44 20 3530 1103, Email: peter.fitzpatrick@fitchratings.com. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Criteria for Rating Non-Financial Corporates (pub. 27 Sep 2016) here Recovery Ratings and Notching Criteria for Equity REITs (pub. 16 Nov 2016) here Treatment and Notching of Hybrids in Non-Financial Corporate and REIT Credit Analysis (pub. 29 Feb 2016) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here _id=1016036 Solicitation Status here Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. 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