S&P Global downgrades Lendlease Australian Prime Property Retail Fund to BBB+

S&P Global has downgraded a Lendlease retail fund’s credit rating amid concerns consumer confidence could weigh on the sector in 2023.

S&P Global has downgraded a Lendlease retail fund’s credit rating over concerns about consumer confidence and its focus on unitholder redemptions. Picture: NCA Newswire/Dean Martin

Credit ratings agency S&P Global has moved to downgrade an unlisted Lendlease Group REIT over concerns that sagging consumer confidence, as a result of belt tightening by consumers, will weigh in the new year.

The Australian Prime Property Retail Fund (APPF) also saw its long-term issuer credit rating cut to “BBB+” from “A-” over it selling assets to satisfy unitholder redemptions — rather than cut debt — and take on a cumulative loss of income-generating properties.

S&P ratings analysts Puchen Wang said over the 2022 financial year Covid-19 disruptions from lockdowns and isolation requirements lowered foot traffic at all of APPF Retail’s properties, which include Macarthur Square, Lakeside Joondalup and Craigieburn Central. Mr Wang added that subsequent increases in interest rates by the Reserve Bank this year have further impaired earnings.

“Covid-19 disruptions during the first half of 2022 and higher interest rates in the second half of calendar 2022 have weakened the fund’s ratio of S&P Global Ratings-adjusted funds from operations (FFO) to debt to below our downside threshold of 15 per cent,” Mr Wang said.

“S&P expects this metric will likely remain below 15 per cent in fiscal years 2023-2024.”

S&P said that although portfolio occupancy, sales turnover, and rentals paid have improved over the year, consumer confidence may succumb to pressure in the year ahead.

“We do not expect material earnings improvements in the next 12-18 months,” Mr Wang said.

ANZ on Thursday was the latest bank to warn that Australians were starting to feel the pressure of the fastest rise in interest rates in over three decades, with spending only 10 per cent higher than 2019, despite the benefits of 1.8 per cent population growth and inflation of 10.5 per cent since then. ANZ-Roy Morgan’s consumer confidence finished the year with a reading of 82.5 — significantly below the monthly average since 1990 of 111.7.

“The transition from pent-up demand post Covid-19 to a rate- and inflation-led household budget squeeze will intensify in 2023 as fixed rates roll off,” ANZ senior economist Adelaide Timbrell said.

While the outlook of the Lendlease REIT remained stable, S&P said its “commitments to meet unitholder redemptions have partly caused a deterioration in the credit quality of APPF Retail”.

“We believe APPF Retail has allocated more of the divestment proceeds to satisfying unitholder redemptions than debt reduction,” Mr Wang said.

Mr Wang said that the completed asset sales have led to a cumulative loss of income-generating properties, which has placed pressure on the cash flow adequacy and leverage credit metrics of the retail property fund.

The fund put $310m of the $358m sale price of its Harbour Town Gold Coast shopping centre towards unitholder redemptions, with the remainder towards repaying debt. S&P said that while this lowered debt to $1.01bn from $1.06bn, debt had since climbed to $1.03bn in September, which has played a role in cashflow adequacy measures deteriorating.

The recent sale of the non-core Caneland Central shopping centre has seen the fund’s book value shrink to $3.5bn, but S&P said the number of non-core assets available for divestment was shrinking and its remaining quality Australian assets “underpin its business position”.

Lendlease shares rose 0.4 per cent on Thursday to $7.53, underperforming the broader S&P/ASX200 index lift of 0.5 per cent.