Fitch Ratings has revised the Outlook on Unibail-Rodamco-Westfield SE's (Unibail) Long-Term Issuer Default Rating (IDR) to Stable from Negative and affirmed the IDR at 'BBB+'.
Fitch has also affirmed Unibail's senior unsecured rating at 'BBB+' and the instrument rating on Unibail's subordinated perpetual bonds at 'BBB-'. A full list of rating actions is below.
The revision of the Outlook reflects Unibail's reduced leverage, with forecast net debt/EBITDA at 11.0x in 2023 and closer to around 10x in 2024 and 2025 using proceeds from continued asset disposals. We view the retail property investment market as improving but conditions may delay the remaining EUR0.7 billion European disposal programme and further streamlining of the US regional mall portfolio.
The ratings also reflect the high quality of Unibail's portfolio of actively-managed, mostly prime shopping centres (SCs) across Europe and US. Most of these assets have catchment areas with above-average purchasing power. This should limit the impact of increased cost of living on consumers' discretionary spending.
Key Rating Drivers
Strong European Tenants' Performance: In 1H23, tenants' sales in Unibail's Continental Europe SCs (55% of rents) increased by 11.8% (vs. 1H22, and above pre-pandemic levels), which exceeded the core inflation for eurozone countries. Tenants' growing sales enabled them to absorb Unibail's 1H23 like-for-like net rental income increase in Europe of 12.3% (of which CPI-linked rent indexation was 6.1%). The occupancy cost ratio (OCR, occupancy costs/tenants' sales) for Continental Europe remained below pre-pandemic levels at 14.8% (1H19: 15.6%) and 19.4% (19.9%) for the UK assets where business rates are included.
High MGR Uplifts: In 1H23, Unibail signed 749 leases (1H22: 755) procuring EUR123 million of minimum guaranteed rent (MGR; 1H22: EUR139 million) in Europe. These included 74% on long-term leases (above three years; 1H22: 69%) with MGR of EUR103 million (EUR111 million). The MGR uplift for all leases was 6.6% on top of indexed passing rents, of which 4.6% was for Continental Europe and 18.8% for the UK (where no indexation applies). For long-term leases, the MGR uplift was 8.5%, of which 6.5% was for Continental Europe and 20.1% for the UK. For short-term leases (between 12 and 36 months), the MGR for newly-signed agreements was 3.3% lower.
After 2020 and 2021 lfl net rental income yoy reductions or lower increases, recent MGR uplifts are welcome as Unibail shifts from rent negotiations in 2020 and 2021 that resulted in shorter leases to optimise occupancy and speed up negotiations while the pandemic disrupted tenants' sales, and Unibail did not increase rents. These agreements are now expiring, and with retailing volumes recovering, increased rents are being negotiated and a greater percentage as longer leases.
US Flagships Performance: In 1H23, US flagships, which constitute around 90% of Unibail's US portfolio at end-June 2023 (on a proportional basis, the value includes two central business district (CBD) assets) recorded footfall at pre-pandemic levels and 4.6% tenants' sale increase (vs. 1H22; compared with 5.4% core inflation). The performance of US regionals and CBD assets was weaker. The flagships occupancy was stable at 92%. Good operational metrics accompanied higher leasing activity. In 1H23, Unibail contracted USD104 million of MGR (1H22: USD64 million), of which 71% (60%) was for long-term leases. The MGR uplift was 22% for US SCs and 26% for flagships.
US Exposure Reduction Postponed: Unibail has continued to reduce its exposure to the US, including foreclosure of secured-financed assets. So far in 2023, the company has sold its interest (Unbail's share of 42% to 100%) in three regional assets and a flagship at a 3%-12% discount to the recent (reduced) book values (on a portfolio basis, some 30% reduction since 2018). Additionally, San Francisco Centre, a CBD asset with a market value close to the debt secured on it, has been earmarked for foreclosure. Given the improved operating performance of the US flagships, Unibail's management no longer states end-2023 as a target for what it calls the 'radical reduction of the group's US financial exposure'.
European Disposals Delayed: As at end-1H23, Unibail completed EUR3.3 billion of European asset disposals (end-2022: EUR3.2 billion), of the EUR4 billion programme initially planned for 2021-2022. Management intends to reach its target by end-2023. In 1H23, Unibail sold the 'V' office building in Versailles (France) at book value (EUR95 million, net initial yield (NIY) of 5.7%). In July, the company agreed to sell a hotel in Lyon (France) for an undisclosed price, reflecting a 21% premium to the last valuation. The transaction is scheduled for completion in September 2023. Due to less-conducive property investment market conditions, Fitch forecasts completion of the disposal programme by end-2024.
Leverage Decreasing: Fitch forecasts net debt/EBITDA to decrease to 11.0x in 2023 (2022: 12.0x) aided by rent growth, including CPI indexation in Continental Europe and significant uplifts on rent renewals. The forecast EUR900 million disposal proceeds from sale of European and selected US assets will also help reduce the debt. Net leverage is expected to decrease to around 10x during 2024-2026 as Unibail continues debt reduction by disposing of more of its consolidated US flagships.
EBITDA interest cover (including hybrid interest at 100%) remains comfortably over 3x, supported by long-dated interest rate fixing. The Fitch-calculated loan-to-value (where value is investment property assets, proportionate basis) was 59% at end-2022.
Measured Development Capex: Unibail's committed developments at end-June 2023 required EUR1.1 billion capex to complete. The top project is a mixed-use Westfield Hamburg with EUR1.6 billion total investment costs (TIC) and completion scheduled for 1H24. At end-June 2023, 85% of the project retail gross leasable area (GLA) was pre-let and 88% of construction costs (Unibail's share) contracted. The yield-on-cost for the total group's pipeline was 4.9% at end-June 2023 (end-2022: 5.1%). The yield-on-cost for 19,300 sqm GLA Garbera extension (opened in May 2023) with TIC of EUR135 million, was 6.8%.
Derivation Summary
Unibail's closest peer is Klepierre SA (IDR: BBB+/Stable). Klepierre has 70+ quality SC (its top 20 average 76,000 sqm) across 11 continental European countries. Unibail is larger and has the established Westfield brand for its higher quality, larger destination SCs (its top 20 European SCs average 140,000 sqm) with a greater focus on higher-price brands, thus higher rents and OCRs. The quality of Unibail's continental SC portfolio, which also has a different mix of countries than Klepierre, is indicated by an end-1H23 topped-up NIY of 5.1% versus Klepierre's 5.9%. Unibail's geographical presence is wider than Klepierre's with assets in the UK (5% of the group's end-1H23 SC portfolio) and the US (25%).
Both companies are active managers and developers of their asset class, responding to retail's ever-evolving changes.
The post-pandemic operational performance so far is broadly comparable. Unibail's Continental European portfolio has occupancy of 96%-97% versus Klepierre's 96%. Unibail's rent uplift on renewals and re-lettings relative to the previous passing rent were -0.5% in 2021, +6% in 2022 and +4.6% in 1H23. This compares with Klepierre's increases of +0.9% in 2021, +4.1% in 2022 and +5.3% in 1H23. Klepierre's OCR is 12.8% (end-2022: 12.9%) whereas Unibail's is 14.8% (end-2022: 15%), reflecting each entity's approach to optimising mall rents.
Unibail has a more complex group structure, with part-ownership of some assets. Unlike Klepierre's senior unsecured rating uplift above its IDR, reflecting its unencumbered investment property portfolio/unsecured debt of 2.5x, Fitch has equalised Unibail's IDR and unsecured debt rating. This reflects Unibail's increased secured financings within the group, including its key French SCs (some in JVs) since 2020 and US assets mortgage loan financings, resulting in a Fitch-calculated unencumbered investment property assets/unsecured debt at 1.6x at end-June 2023.
Unibail's Fitch-calculated net debt/EBITDA in 2022 was 12.0x and is forecast to decrease to around 10x during 2024-2026. Klepierre end-December Fitch-calculated leverage is already lower with net debt/EBITDA at around 8.5x.
Unibail's leverage is higher than Hammerson plc (IDR: BBB/Stable) whose end-2022 SC mix and value retail portfolio (at share) was 31% UK, 45% France, and 24% Ireland. Fitch's other rated retail SC owners are country-specific and do not benefit from the geographic diversification and size of SCs that Unibail has. Lar Espana Real Estate SOCIMI, S.A (IDR: BBB/Stable) has actively-managed smaller regional SCs and retail parks across Spain, procuring low single-digit year-on-year like-for-like increases in rents and an active development programme - extending existing assets.
Like Lar Espana, IGD SIIQ S.p.A (IDR: BBB-/Rating Watch Negative) has grocery-anchored SCs (in IGD's case its part-shareowner: Coop Alleanza) but has been more lenient towards tenants' rent abatements during the pandemic period, and recent rent increases, given the more regional positioning of its SC portfolio.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Like-for-like rental income increase of over 5% for the group in 2023, resulting from CPI rent indexation and over 10% rent uplift on renewed leases. Thereafter increases per year of 3%-2% reflecting CPI indexation and 4% uplifts on renewals of expiring leases.
Rental income-derived dividends from JVs fluctuate in line with gross rental income changes (excluding disposals or foreclosures, and capex effect). As in previous years, cash JV dividends received are assumed to be rental-derived.
Development capex of around EUR0.9 billion per year with average yield-on-cost of 6%
Unibail's own external cash dividends are not paid until after end-2023, then a pay-out ratio of 90% of FFO is assumed in 2024 and 2025
Around EUR3.7 billion disposal proceeds by 2026, including proceeds arising from the disposal of some US flagship assets
Refinancing debt with 1.75% spread over base rate
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Net debt/EBITDA less than 9.0x on a sustained basis.
EBITDA net interest cover (NIC) above 2.25x on a sustained basis.
Unencumbered investment property assets/unsecured debt ratio towards 2x and commitment to a senior unsecured debt-funded structure.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
A material rise in tenant defaults or lease arrears, leading to a fall in total rents beyond Fitch's base case.
Deteriorating occupancy rates below 90%.
Net debt/EBITDA consistently above 10x.
EBITDA NIC below 1.75x.
Liquidity and Debt Structure
Ample Liquidity: At end-June 2023 Unibail had EUR5.1 billion in undrawn committed credit lines with maturities beyond the next 12 months and EUR3.8 billion of cash on balance sheet. This comfortably covers all debt maturing in the next 12 months, including EUR753 million of bonds, EUR227 million of bank loans and EUR155 million of cash payable as a part of the EUR1.25 billion 2023 hybrids' exchange offer.
In June 2023 Unibail announced the exchange offer on its EUR1.25 billion hybrids with 2.13% coupon until first reset date in October 2023. As a result of the offer, EUR1.15 billion of the existing hybrid was exchanged at par for EUR995 million of the new hybrid with 7.25% coupon and EUR155 million repaid in cash. The transaction was completed in July 2023. After the transaction the total outstanding hybrids was EUR1.85 billion.
Apart from this transaction, Unibail did not access the unsecured bond market in 1H23. However, it procured EUR789 million (including a EUR120 million mortgage loan in a 50% JV) of bank debt and extended the maturity of EUR3.25 billion of credit facilities in Europe by one year. At end-June 2023, Unibail's average debt maturity was 6.6 years and its average cost of debt decreased to 1.8% (2022: 2.0%) aided by interest rate hedges and improved remuneration on its cash position.
Fitch's Unsecured Debt Recovery Uplift: Fitch aligns Unibail's senior unsecured debt rating with its IDR. In previous years Unibail sold some of its retail assets into JVs funded with secured debt depleting the group's unencumbered pool. This and portfolio valuation declines resulted in a decrease in the Fitch-calculated unencumbered investment property assets/unsecured debt which at end-June 2023 was 1.6x. This is below the 2.0x that in Fitch's view, allows unsecured creditors to benefit from higher asset recoveries, as reflected in a one-notch uplift to the senior unsecured debt rating.
In August 2023, Unibail procured USD925 million mortgage loan secured on Westfield Century City, a fully-owned US flagship mall valued at around USD1.9 billion. If we exclude Century City from URW's asset pool, the pro-forma unencumbered investment property assets/unsecured debt would be 1.5x.
Hybrids Rated Below IDR: The hybrid instruments are rated two notches below Unibail's unsecured debt rating. This reflects the notes' deeply subordinated status, ranking behind senior creditors and senior only to ordinary equity, with coupon payments deferrable at the discretion of the issuer and no formal maturity date. The notching of the hybrids reflects the notes' greater loss severity and higher risk of non-performance relative to senior obligations. The securities qualify for 50% equity credit in accordance with Fitch's hybrid criteria.
Issuer Profile
Unibail is Europe's largest REIT/SIIC with a property portfolio valued at EUR52 billion at share (as of 30 June 2023) across 11 European countries and the US. The company owns and operates 75 mostly prime SCs, of which the company designates 52 as flagship assets (over 10 million visitors per year or certain size).
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.
UNIBAIL-RODAMCO-WESTFIELD SE 
