Aug 15 (The following statement was released by the rating agency)
Fitch Ratings has affirmed The British Land Company Plc's (British Land) Long-term
Issuer Default Rating (IDR) at 'BBB+, Short-term IDR at 'F2' and senior unsecured rating at
'A-'. The Outlook on the Long-term IDR is Stable.
The ratings reflect the company's strong lease profile (10.7 years to first
break) which is above average for the sector, and excellent tenant profile,
which gives sound defensive qualities in a property downturn. The ratings also
take into account British Land's active asset management, building on its
long-term relationships with prime tenants and its concentration on markets
where the group has a competitive advantage, such as London offices and large
out-of-town retail parks. The liquidity position is healthy with over GBP2.2bn
of undrawn committed lines of credit and cash at March 2013.
The group's financial structure remained strong in FY12, thanks partly to a
capital increase of GBP493m in March 2013 and Fitch expects stable group
leverage in the next two years. Fitch adjusted group leverage (LTV) was 37% at
31 March 2013 (LTV including equity in JVs of 26% at 31 March 2013), and 7.5x
(on a net debt/EBITDAR basis), below the average for the Fitch EMEA REIT sector
and in line with its 'BBB+' IDR.
KEY RATING DRIVERS
Prime Quality Retail and Office Portfolio
British Land's investment property portfolio is considered prime as a result of
its location at or near key transport nodes (such as Liverpool Street station
for Broadgate), construction to top quality building standards (to latest BRE
Environmental Assessment Method) building standards which minimise energy use
and maximise recycling. The buildings are usually let to top quality tenants,
with a currently low level of doubtful debtors.
Defensive Income Profile
British Land has a longer average lease profile than any other major UK REIT
(over 10.7 years to first break or expiry) and between 2013 and 2015 has only
GBP56m of rents expiring (9.6% of gross rent roll). Over 25% of leases by income
have fixed or RPI linked uplifts. In addition British Land has over GBP30m p.a.
of contracted rental increases due to the expiry of rent-free periods and
fixed/minimum uplifts in the next three years and GBP44.5m pre-lets coming on
Improved Interest Serviceability
As a result of expiry of rent-free periods and some outstanding rent uplifts,
both consolidated (EBIT net interest coverage (NIC) of 2.8x at FY12 (March
2013)) and de-consolidated (4.8x at FY12) interest coverage showed stable
interest cover in FY12. Fitch's rating case forecasts show continued EBIT NIC
resilience to FY16, based on new contracted rents improving gross rent roll.
Over 85% of debt is hedged against rising interest rates and hence British Land
will not be materially affected by any new rise in GBP interest rates.
Tenant Defaults Are Well Contained
Tenant defaults are low (0.5% of tenant rent roll in administration at June
2013, versus 0.8% at June 2012) due to active asset management, better customer
relationship management (CRM) and concentration on better performing property
sectors, such as prime shopping centres and new retail parks. However, British
Land is cautious about tenant defaults and continually monitors rent receipts
Robust Financial Structure
The group's financial structure remained strong in FY12, thanks partly to
disposals of assets in 2012 and a capital increase of GBP493m in March 2013.
Fitch LTV was 44% excluding development properties (37% including) at 31 March
2013 (46% at March 2012). Unsecured asset cover was strong at 3.7x at FY12.
Further to the recent central Paddington estate acquisition, Fitch expects
leverage metrics to remain steady during the year.
Cost Base Controlled
Net operating costs as a percentage of gross rental income stood at 15.3% at
FYE12 (March 2013) (14.9% at FY11), one of the lower operating ratios in the
EMEA REIT sector. As a percentage of British Land's gross assets, operating
costs were only 0.9%. British Land has traditionally outsourced much of its
property overheads, and keeps control of these costs through constant
Healthy Liquidity Position
At March 2013, British Land had over GBP2.2bn of undrawn committed lines of
credit and cash and only GBP232m of debt maturing in the next two years. Despite
a weak UK banking environment British Land arranged GBP1.2bn of financings
during 2012. The unsecured facilities benefit from an unsecured
debt/unencumbered property covenant at a maximum of 70% (actual at FY12, March
2013: 23%), giving unsecured creditors some comfort. Overall British Land has
one of the strongest liquidity positions of any major UK REIT, and this is a
significant competitive advantage in the current market.
Measured Development Expenditure
Around GBP188m remains to be spent on the three major British Land office
projects and these have been de-risked. Overall around 65% of the total office
and retail space under construction is pre-let, which reflects well on the
group's letting skills. British Land's development pipeline remains moderate
with total current development exposure of GBP327m (or 3% of investment property
portfolio at March 2013). This remains well within Fitch's guidelines for
development exposure at IG level.
Diverse Debt Profile
British Land has always diversified its funding sources to reduce refinancing
risk and minimise costs of funding while maximising financial flexibility. In
2012 it further widened its funding base by issuing a low-coupon GBP400m 1.5%
2017 convertible issue.
Positive: Future developments that could lead to positive rating actions
- Fitch de-consolidated EBIT NIC including securitisation and joint venture
residual income above 3.0x and consolidated EBIT NIC above 3.0x on a sustained
- Leverage to be below Fitch adjusted 40% on a sustained basis.
Negative: Future developments that could lead to negative rating action include:
- De-consolidated EBIT NIC including securitisation and joint venture residual
income below 3.0x on a sustainable and underlying basis and consolidated EBIT
NIC below 2.0x.
- Group leverage above 55% on a sustained basis.
- Material deterioration in liquidity.
- Material reduction in the unencumbered asset pool quality.