Fitch Ratings has affirmed Land Securities PLC's (Landsec) Short-Term Issuer Default Rating (IDR) at 'F1'.
The rating applies to Landsec's GBP1.75 billion euro commercial paper programme. Landsec is a subsidiary of the UK REIT Land Securities Group PLC.
The rating reflects the quality of Landsec's property portfolio, which includes predominantly prime central London offices and retail assets, and major retail shopping centres and outlets across the UK. Rents from its office properties are supported by high occupancy rates and stable demand. While occupancy rates in its retail segment are high, rents are expected to remain subdued. The rating also reflects good income visibility, with the company's weighted average unexpired lease length being 6.5 years at end-March 2023 (FY23).
We expect Landsec's net debt/EBITDA to remain around 8.0x during FY24 to FY27 with potential short-term deviations depending on the timing and size of rental income streams from new developments. We anticipate development capex and acquisitions to be supported by the company's asset recycling strategy and internally generated cash flow.
Key Rating Drivers
Prime Office and Retail Focus: Landsec's GBP10.2 billion UK portfolio benefits from diversity across prime offices and retail assets. The occupancy rate was high at 95.9% at end-FY23 (FY22: 95.1%) across its portfolio, in contrast to elevated vacancy rates in the UK retail market and London office segment. This points to tenants increasingly demanding quality, flexible, well-located, office space with good sustainability credentials. Prime office and retail assets in central London, and major regional shopping centres and outlets, comprised 51% and 24%, respectively, of net rental income in FY23.
Active Asset Disposals: Landsec sold GBP1.4 billion of London offices in FY23 as part of its asset recycling strategy, which entails selling low-yielding mature London offices and, over time, assets from its subscale segment (leisure, hotel and retail parks). These disposals have focussed Landsec's central London portfolio on the prime West End and Southwark submarkets. Landsec's property portfolio remains sizeable and the loss of rental income from the disposals was offset by 6% like-for-like gross rental income growth in FY23.
Stable Occupancy in Office Portfolio: We expect Landsec to maintain stable occupancy rates in its central London offices, supported by the improving green building credentials of its office portfolio, the ongoing strong markets in the West End and Southwark and increasing demand for the company's Myo brand of flexible office space. Occupancy rates in its West End and City office portfolios rose to 99.5% and 90.5%, respectively, at end-FY23 (FY22: 98.4% and 89.3%). Fitch expects demand for London prime office assets to remain steady despite the effects of remote working.
Retail Rents Remain Pressured: Fitch believes that the retail segment will continue to suffer from weaker consumer sentiment and that rents have reached their trough from the peak in 2018. Occupancy rates in Landsec's major retail segment rose to 94.3% in FY23 (FY22: 93.2%) but rents are around 35% below their 2017 peak. Sales and footfall in the retail portfolio have recovered to pre-pandemic levels. Footfall increased 12% in FY23 from the year before, but is 90% of pre-pandemic levels. Like-for-like store sales were up 4.4% compared with pre-pandemic 2020.
Limited Committed Development Exposure: Landsec's development pipeline is mostly speculative but we estimate its committed development capex to be only about 5% of its investment property portfolio's value. Landsec's two key developments are London offices Thirty High in Victoria, and Timber Square in Southwark. These locations are well-known to Landsec given past investments there. Both developments are targeted to complete by end-2025, when office space supply in London is expected to be tight, which should aid demand. The company has a large development pipeline for its central London and mixed-use asset portfolios, but it is long-term and uncommitted.
Increasing Diversification: We view Landsec's diversification strategy as positive as it is reducing asset and geographic concentration in central London. The company plans to have 40%-50% of its property portfolio in major retail and mixed-use assets, up from the current 26%. In FY23, Landsec acquired the remaining 50% ownership in a major shopping centre St David's, in Cardiff. The company is also developing mixed-used assets, particularly through regeneration schemes at Mayfield in Manchester and Finchley Road in London.
Minimal Impact from Inflation: We anticipate build-cost inflation will result in higher capex for Landsec's committed developments, but expect this to be balanced by higher rents and the use of fixed-price construction contracts. We do not expect inflation to affect Landsec in other areas, as energy costs are usually passed through to tenants.
Leverage to Remain Stable: Fitch expects Landsec's leverage to remain around 8.0x. The company reduced its borrowings in FY23 by using disposal proceeds. Landsec's consolidated net debt stood at GBP3.4 billion at end-FY23 and net debt/EBITDA declined to 7.5x (FY22: 10.3x), representing a low 36% loan-to-value (LTV), excluding developments. EBITDA interest cover was 5.0x. We anticipate Landsec will fund its investments and capital expenditure over the next 12-18 months through internally generated cash flow or phased sales of its non-core assets.
Derivation Summary
Landsec's portfolio of central London offices and retail properties across the UK is similar to that of The British Land Company plc (British Land; IDR: A-/Stable). Both companies have investment property portfolios that are greater than GBP9 billion and generate most of their rental income from central London offices. Landsec's office portfolio is largely in the West End while British Land's office portfolio is focussed on three established London campuses (Broadgate, Regent's Place and Paddington Central) and one developing campus (Canada Water). Derwent London plc (IDR: BBB+/Stable) owns a London office portfolio of around GBP5.8 billion with its assets primarily in the West End.
Landsec's occupancy rate for its West End offices at 99.5% (end-FY23) is higher than its City offices at 90.5%. This is comparable with British Land's office occupancy of 92.4% (FY23) and Derwent's 94% (FY22). There are pockets of vacancies in the London office market, largely reflecting unlet, older secondary buildings with poorer sustainable credentials and in secondary locations.
In the retail segment, Landsec has major regional shopping centres and outlets, but plans to divest its remaining retail parks. British Land has a smaller, non-core shopping centre portfolio, but has the largest retail park portfolio in the UK. The retail portfolios of both UK REITs have had peak-to-trough valuation declines since 2018 of around 50%-60% and have experienced 30%-40% reductions in retail rents post-2018.
Compared with Landsec and British Land, Derwent has historically undertaken a larger amount of development activity relative to its size. Landsec's committed development capex is about 5% of its investment property portfolio compared with 5.5% for British Land (as a percentage of its at-share portfolio) and 6.4% for Derwent.
Landsec's Short-Term IDR meets our guidelines for a 'F1' rating relative to the group's undisclosed Long-Term IDR. Under Fitch Navigator's Financial Profile factors, Landsec fulfils the financial flexibility factor at a minimum mid-point of 'a', financial structure at or above 'bbb' and the operating environment factor of at least 'a-'. Under its Short-Term Rating Criteria, a material weakening in Fitch's assessment of Landsec's financial flexibility, and financial structure or operating environment conditions, could result in a lower Short-Term IDR.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer:
About 4% yearly increase in rent for central London lease renewals during FY24-FY26 and market standard 18-24 month rent-free incentives for newly-developed properties
A 5% yearly decline in rent for leases renewed for the major retail portfolio during FY24-FY26
Capex of about GBP610 million during FY24-FY27 covering development capex and ESG initiatives
Dividend distribution at around 80% of pre-tax income
Using Fitch's September 2023 Global Economic Outlook policy rates, Landsec's new and refinanced debt uses base rates of FY24: 5.5%, FY25: 4.5% and FY26: 3.5%
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade:
Material tenant, rental and geographic diversification of the portfolio with financial metrics maintained
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade:
Liquidity score below 1.25x
Net interest cover ratio below 2.5x on a sustained basis
Negative change to leverage including net debt/EBITDA above 8.0x and LTV above 40% on a sustained basis
Liquidity and Debt Structure
Robust Liquidity Profile: At end-FY23, Landsec had GBP2.6 billion of undrawn committed facilities and cash of GBP41 million, which provides the company with ample liquidity. We expect the company's strong liquidity and active capital recycling to support capex commitments and debt refinancing needs. The company has GBP427 million of medium-term notes (MTNs) due in FY24, based on its expected maturity dates, and GBP380 million of debt (GBP87 million of MTNs and the rest 75%-owned MediaCity secured debt) in FY25. Landsec's average debt maturity is 10.3 years and was fully fixed or hedged at end-FY23. All of Landsec's debt is secured other than its commercial paper (CP).
CP Back-Up Liquidity Lines: The CP dealership agreement requires authorised credit facilities to maintain a minimum undrawn amount at least equal to drawn CP. Cash and undrawn facilities net of drawn CP was GBP2.4 billion at end-FY23, which we estimate would cover committed capex by over 4x.
Issuer Profile
Landsec owns a GBP9.6 billion investment property portfolio (or GBP10.2 billion including share of assets held in JVs), which by value at end-FY23 includes Central London properties (61%), major retail (18%), leisure, hotels and retail parks (collectively referred to as subscale sectors, 13%) and mixed-use urban (8%).
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
BRITISH LAND COMPANY PLC 
