TEXT-Fitch:Unibail-Rodamco's German acquisition is a positive strategic step

June 15 - Fitch Ratings says that Unibail-Rodamco SE's (Unibail-Rodamco) ('A'/Stable) announcement that it is buying a 51% non-controlling stake in major German shopping centre owner mfi Management fur Immobilien AG (mfi) is a positive strategic step for the group and will underpin the group's current ratings.

The agency believes that the purchase of mfi and Ruhr-Park is a logical and low-cost move for Unibail-Rodamco, giving it a significant presence in one of the largest and highest potential retail markets in Europe. The cash consideration of EUR383m (paid in 2 instalments with EUR316m at closing and EUR67m as of June 30, 2014) is modest as Unibail-Rodamco has one of the strongest liquidity positions in the EMEA REIT sector, with over EUR3.3bn of undrawn committed facilities and cash. The group's currently strong financial metrics are unlikely to be negatively affected by the purchase.

Unibail-Rodamco's move into Germany is a logical progression into one of the largest retail markets in Europe, which has been underdeveloped in retail space terms in recent years. Overall Germany has 130 square metres of shopping centre space per inhabitant against 249 square metres in Europe on average. German consumers are less indebted than their European neighbours, and the German retail sector is now slowly de-regulating from what used to be a highly restricted market in terms of opening hours and shopping formats.

mfi and Rurh-Park, currently own six shopping centres in Germany valued at EUR1.5bn and are building four new shopping malls. It also manages a further 20 shopping centres for third parties. Under the agreement signed with vendor Perella Weinberg Partners LP, Unibail will own 51% of the shares but will not have control of mfi. Unibail will have an option to gain full control of mfi between 30 June 2014 and 1 January 2015. Perella Weinberg Partners LP will have an option from 1 July 2014 until 31 March 2017 to sell the remaining 49% shares in mfi for a further EUR288m.

Unibail-Rodamco has been selling non-core retail assets (disposals of EUR1,326m in FY11 including EUR1,084m of retail assets) and re-investing into greater growth potential super-regional type shopping centres. These centres usually dominate their local regions and have shown more resilient footfall and sales patterns during the current eurozone turmoil.

Unibail-Rodamco is Europe's largest REIT with over EUR25.9bn of assets. With over 74 prime shopping centres, Unibail-Rodamco is one of the three largest real estate investment trusts (REIT) in the world (with Westfield Group ; 'A-/Stable' and Simon Property Group Inc. ; 'A-/Stable'). It focuses on super-regional centres with seven million or more visitors per year in major cities, where the zoning restrictions limit the entry of new competitors. The group is diversified by both sector (retail 76% by assets; office 15% and exhibition centre 8% as at FY11) and geography (presence in 12 countries) with property assets in both western and central Europe.

The portfolio has a good quality and diversified tenant base (over 9,350 individual lease contracts, with no single tenant representing more than 2.2% of total rent roll).