(The following was released by the rating agency) Overview
-- Australian property group Mirvac has grown its investment portfolio and sold noncore assets that continue to strengthen the group’s financial risk profile.
-- We expect that the financial metrics will show a sustained improvement in the short term due to the solid contribution from its investment portfolio, reduced interest expenses from the termination of high-cost interest rate hedges, and lower debt levels.
-- We also expect a return to higher earnings contribution from its development division.
-- As a result, we are revising the outlook on the long-term issuer rating to positive from stable. At the same time, the ‘BBB’ long-term and ‘A-2’ short-term ratings have been affirmed.
-- The positive outlook reflects our view that the rating may be raised in the next 6-12 months if the group can sustain a more conservative financial profile while pursuing its growth objectives.
On Dec. 21, 2012, Standard & Poor’s Ratings Services revised the outlook on the long-term issuer rating on Australian stapled property company Mirvac Group to positive from stable. At the same time, we affirmed the ‘BBB/A-2’ corporate credit ratings.
The outlook revision reflects our view that Mirvac can sustain an improvement in its financial risk profile to levels supportive of a higher rating. The group is generating solid earnings from its investment portfolio, while reducing interest expenses due to the termination of its high-cost interest rate hedges and lowering debt levels from the sale of noncore assets.
We also expect its development division to deliver increased earnings. The ratings on Mirvac Group, an Australia-based stapled property group, reflect our opinion of the relatively stable earnings generated from the group’s diverse property investment portfolio, a well-spread and long-term lease-expiry profile, and Mirvac’s moderate financial policies.
Tempering these strengths are the group’s exposure to cyclical property markets, and the volatile cash flow and lumpy capital requirements of the group’s property-development operations. In our view, Mirvac’s business risk profile is “satisfactory”. A new management team has recently joined the group with a commitment to adhere to the Board’s strategy, which in our view has not materially changed.
Importantly, Mirvac’s management has reinforced its commitment to recycling capital through the business by introducing new capital partners.
For example, Aviva Investors Australian Logistics Property Trust bought a 50% share of the Hoxton Park logistics facility in the state of New South Wales. In addition, Keppel REIT Management Ltd. (BBB/Stable) has entered into equal ownership with Mirvac to own two central business district office assets currently under construction by Mirvac in Sydney and Perth.
In a joint venture with Leighton Holdings, the group is also cementing its role in the development of master planned communities by undertaking the Green Square Town Square project in inner-Sydney. This A$1.7 billion development is expected to be delivered over 10 years.
Mirvac’s portfolio weighting to ‘A’ grade office assets and contribution from retail properties that are focused on nondiscretionary shopping dollars underpin rating stability. At June 30, 2012, the investment portfolio has maintained an occupancy rate of 98.4% by area and a weighted average lease expiry of 7.4 years by area.
The investment portfolio achieved a 3.4% like-for-like net operating income growth, driven by the office portfolio that grew at 4.5%. Faced with sluggish retail sales, the sub-regional shopping centers have recorded a moving annual turnover growth of 0.3%, and the tenant occupancy costs averaged 14.2%. Although residential development remains a key part of the group’s strategy, returns from this business have recently been lackluster.
We expect, however, that future residential infill projects will produce a higher margin and improving returns from this business in the next few years. Supporting our assessment of the business prospects for this division is the strategy of maintaining a high level of pre-sales.
The division had exchanged contracts of A$907.7 million at June 30, 2012. As a result, about 60% of the development EBIT contribution for fiscal 2013 is certain, and about 50% is known for fiscal 2014. In fiscal 2012, the group settled 1,807 residential lots. In our view, Mirvac’s financial profile is “intermediate”. Mirvac has bulked up its asset base over the past few years and although revenue generated would lag the capital outlay, we expect Mirvac’s credit measures to improve in the next couple of years. Moreover, we expect that any sizable acquisitions would be funded in a manner consistent with the group’s financial targets.
Mirvac targets its profit-after-tax split to be 80% from its investment assets and 20% from development assets. We believe that an EBIT split is more meaningful as it excludes the tax and funding costs incurred in the development business; Mirvac’s target would equate to a 70%/30% EBIT split. We expect that the earnings in fiscal 2013 will be subdued due to the lower margin residential developments being sold into flat markets.
As a result, we believe the impact will be reflected in fiscal 2013 credit metrics being in line with those in fiscal 2012. Nevertheless, we expect Mirvac’s funds from operations (FFO) to total debt to be maintained at more than 15% and EBITDA interest cover (including capitalized interest) to improve to above 3x. In fiscal 2012, the FFO-to-debt was 15.9% and EBITDA interest cover was 2.6x. At June 30, 2012, Mirvac’s balance-sheet gearing (net debt-to-net tangible assets) was 22.7% and look-through gearing was 23.6%. The group targets a balance-sheet net debt-to-total tangible assets ratio of up to 25%, which should equate to about 30% on our adjusted debt-to-debt plus equity basis.
The recent asset sale proceeds have enabled Mirvac to reduce debt levels, and interest expenses will benefit from the termination of high-cost interest-rate hedging. Liquidity We consider Mirvac’s liquidity to be “strong”, as defined in our criteria. We expect that over the next 12 months, the sources of funds will exceed the uses by more than 1.5x and this measure will remain above 1x over the next 24 months.
We also expect that Mirvac will achieve positive sources-less-uses in the short term, even if EBITDA were to fall by 30%. The sources of liquidity are derived from its A$77.3 million cash balance and A$727.1 million of undrawn committed bank facilities of greater than one year.
The next sizable debt maturity is A$238 million, due in January 2014. The group’s weighted average debt maturity is 3.5 years, and it has hedged 79% of the interest cost with an average hedged maturity of 4.4 years. We believe that Mirvac maintains adequate financial flexibility provided by its large, diverse, and unencumbered investment property portfolio. The group retains adequate headroom within all financial covenants, in our opinion. Mirvac’s financial covenants include EBITDA interest cover (excluding capitalized interest) of more than 2.25x, and gearing (total liabilities to total tangible assets) of less than 55
At June 30, 2012, the ratios were greater than 3.5x and 31.8%.
The positive outlook reflects our view that the rating may be raised in the next 6-12 months if the group can sustain a more-conservative financial profile. These would include maintaining FFO to debt at more than 15% (15.9% at fiscal 2012), an EBITDA interest cover (including capitalized interest) of greater than 3x (2.6x in fiscal 2012), and debt-to-debt plus equity below 30% (26% in fiscal 2012).
Furthermore, we would expect these earnings-based metrics to exceed these levels in periods of buoyant property-development earnings. The group’s earnings mix has temporarily shifted toward a higher proportion of investment income, but we believe that the group will maintain an average EBIT contribution of 70% from its investment assets and 30% from development assets.
We continue to expect that the group’s diverse investment portfolio, long-term lease-expiry profile, and moderate financial policies should temper the risks associated with the group’s development activities. The rating outlook could be revised to stable if the group undertakes debt-funded growth opportunities that undermine the sustainability of financial metrics consistent with a higher rating.
A financial profile consistent with the ‘BBB’ long-term rating would include an adequate liquidity profile, fully adjusted FFO to total debt of greater than 12%, EBITDA interest cover at about 2.5x or more, and debt-to-debt plus equity at about 30%. The rating outlook could also return to stable if the group’s EBIT became over-weighted to development earnings.