Rating Action Overview

• Australia-based QIC Property Fund (QPF) could revise its target gearing range to 25%-35% from 10%-20% within the next 12 months.
• We believe the potential for higher gearing could weaken the fund's credit metrics over the medium to long term and result in the 'A' rating being lowered to 'A-'.
• On Nov. 4, 2021, S&P Global Ratings revised its rating outlook on QPF to negative. We removed all ratings from CreditWatch, where we had placed them with negative implications on Sept. 1, 2021.
• The negative outlook reflects our view that at a higher target gearing range, QPF's credit metrics will be inconsistent with our previous expectations for the 'A' rating.

Rating Action Rationale

A unitholder vote to determine the new gearing policy for QPF will be deferred until 2022. We anticipate that this vote on the appropriate gearing range to be adopted by the fund will occur alongside the vote on whether unitholders want to exercise a potential liquidity window (where they have the capacity to redeem units in return for a cash settlement). This vote is likely to be held in the first half of 2022.

If the gearing range is to increase, then we expect the fund's credit metrics to weaken over the medium to long term. While we don't expect QPF to immediately increase its debt usage to the top of the proposed new gearing range, the fund's credit metrics at higher gearing levels would be inconsistent with our previous expectations for the 'A' rating.

At the top of the current gearing range, the fund's ratio of funds from operations (FFO) to debt would remain above 12% and debt-to-EBITDA ratio would stay below 6.0x, in our assessment. Credit metrics were strong during fiscal 2021 (year ended June 30, 2021), with the ratio of FFO to debt at 34%, debt-to-EBITDA at 2.7x, and gearing at 9.6%.

In our view, QPF has sufficient rating headroom to complete a A$300 million unitholder buyback in fiscal 2022 within its existing gearing policy. Upon completion of the proposed unitholder buyback, we expect gearing to increase to the mid-point of the fund's existing 10%-20% gearing range. We understand that this buyback will provide liquidity to some of QPF's unitholders and we note that it is subject to lender consent. It will be funded from asset sale proceeds that have been retained as cash over the past couple of years.

QPF will likely maintain adequate liquidity. We assess QPF to have an ample buffer to meet near-term debt maturities, dividend distributions, and capital expenditure (capex) requirements over the next 12-24 months. QPF's total weighted-average debt maturity was around 4.1 years as of June 30, 2021. About A$950 million of undrawn bank facilities were available as of June 30, 2021. We have not incorporated any outflow of funds from a potential exercise of the forthcoming liquidity event in our analysis.

Outlook

The negative outlook reflects our view that if the upcoming unitholder vote elects to adopt the more aggressive targeted gearing range, this would weaken QPF's prospective credit metrics and financial profile. Resolution of the fund's long-term financial policy is likely to be known within the next 12 months.

Downside scenario

We would lower the rating if QPF's unitholders vote to change the fund's gearing policy to 25%-35%. This would reflect our expectation that, at the top of its new gearing range, the FFO-to-debt ratio would trend toward 9%. Such cash flow adequacy would represent credit metrics that are more consistent with an 'A-' rating.

Upside scenario

We could revise the outlook to stable if QPF's unitholders remain committed to maintaining its conservative financial stance, as indicated by its current gearing policy of 10%-20%. At the top of this gearing range, we would expect that the ratio of FFO to debt would be sustained above 12%.

Our Base-Case Scenario

• Australian GDP growth rates of 4.2% in 2021 and 3.3% in 2022; CPI growth of about 2.5% in 2021 and 2.6% in 2022.
• Like-for-like comparable net operating income growth of 2%-3%;
• Rental reversions to remain negative over the next few years as existing leases are rolled over and renewed;
• Retailers' margins to remain under pressure from growing e-commerce penetration;
• Capex of about A$130 million-A$160 million in fiscal 2022;
• Development pipeline to include projects at Castle Towers, New South Wales; Watergardens, Eastland, and Merrifield, Victoria; Hyperdome and Robina Town Centre, Queensland; Canberra Centre, Australian Capital Territory;
• About A$300 million of unitholder buyback in fiscal 2022; and
• Distribution of 100% of distributable income.

Key Metrics

Based on these assumptions, we arrive at the following credit metrics:

• Ratio of FFO to debt of 21%-24% in fiscal 2022; and 20%-23% in fiscal 2023;
• S&P Global Ratings' adjusted ratio of debt to EBITDA of 3.5x-4.0x in fiscal 2022; increasing to 3.8x-4.3x in fiscal 2023.

Liquidity

Our view of QPF's adequate liquidity reflects primarily the following factors:

• We anticipate that the fund's sources of liquidity will exceed its uses by more than 1.2x over the next 12 months. We also expect QPF to achieve positive liquidity sources-less-uses and to remain compliant with financial covenants over the next 12 months, even if its EBITDA were to fall by 10%.
• QPF has a prudent approach to risk management, fully hedging its U.S. foreign exchange exposure in its debt issuances.
• We have not incorporated any outflow of funds from a potential exercise of the forthcoming liquidity event in our analysis.

The fund maintains the following liquidity profile as of June 30, 2021:

Principal liquidity sources

• Cash and cash equivalents of about A$113.1 million;
• Undrawn committed debt facilities that are available beyond one year of about A$950 million; and
• Our forecast FFO of about A$290 million-A$310 million for the 12 months ending June 30, 2022.

Principal liquidity uses

• Capex of A$130 million-A$160 million for the 12 months ending June 30, 2022;
• Unit buybacks of about A$300 million over the same period; and
• Distributions of A$260 million-A$280 million over the period.

Issue Ratings - Subordination Risk Analysis

Capital structure

The fund's capital structure comprises A$1,414 million of committed facilities, composed of a A$250 million syndicated term loan and A$800 million of bank facilities. Our analysis also incorporates QPF's indirect share of QIC Town Centre Fund's drawn debt of about A$512 million as of June 30, 2021.

QPF's debt is issued on an unsecured basis with a weighted-average debt maturity of about 4.1 years as of June 30, 2021, which includes QPF's pro rata share of unconsolidated debt from its investment in QIC Town Centre Fund.

Analytical conclusions

QPF currently has no rated debt.

Ratings Score Snapshot

Issuer Credit Rating: A/Negative/--

Business risk: Strong

• Country risk: Very low
• Industry risk: Low
• Competitive position: Strong

Financial risk: Modest

• Cash flow/Leverage: Modest

Anchor: a+

Modifiers

• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Financial policy: Negative (-1 notch)
• Management and governance: Satisfactory (no impact)
• Comparable rating analysis: Neutral (no impact)

Related Criteria

• General Criteria: Environmental, Social, And Governance Principles In Credit Ratings, Oct. 10, 2021
• General Criteria: Group Rating Methodology, July 1, 2019
• Criteria | Corporates | General: Corporate Methodology: Ratios And Adjustments, April 1, 2019
• Criteria | Corporates | Industrials: Key Credit Factors For The Real Estate Industry, Feb. 26, 2018
• Criteria | Corporates | General: Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
• General Criteria: Methodology: Industry Risk, Nov. 19, 2013
• General Criteria: Country Risk Assessment Methodology And Assumptions, Nov. 19, 2013
• Criteria | Corporates | General: Corporate Methodology, Nov. 19, 2013
• General Criteria: Methodology: Management And Governance Credit Factors For Corporate Entities, Nov. 13, 2012
• General Criteria: Principles Of Credit Ratings, Feb. 16, 2011

Related Research

• QIC Property Fund 'A' Rating Placed On CreditWatch Negative On Proposed Increase Of Target Gearing Range, Sept. 1, 2021.

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