Fitch Ratings has affirmed UK-focused REIT The British Land Company PLC's (BL) Long-Term Issuer Default Rating (IDR) at 'A-' and senior unsecured rating at 'A'.
The Outlook is Stable. A full list of ratings is provided below.
The ratings reflect the stability of BL's GBP10.5 billion (at share) portfolio, and the benefits of its mix of retail and office investment properties (54% and 45% by annualised rent, 30% and 67% by value at financial year to March 2022). While BL's retail portfolio has seen a near-50% decline in valuations since 2018, in part reflecting passing rent declines, the quality office portfolio has remained stable. Both asset classes exhibit longevity of income with their respective weighted average lease lengths to earliest breaks of 4.6 and seven years, respectively. Occupancy across the portfolio is a subdued 94% (FYE21: 92%), weighed down by unlet retail assets and City offices.
Fitch expects BL's cash-flow leverage, measured by net debt/EBITDA, to be 7.0x-7.5x over the next three years (FYE22: 7.8x). Net disposal proceeds would fund BL's developments and investment.
Key Rating Drivers
Prime Office Portfolio: BL has an established, sizeable, campus-focused West End and City-weighted office portfolio (Broadgate, Regent's Place, Paddington Central, fledgling Canada Water). The size of these multi-building campuses enables BL to co-ordinate and invest in these locations, creating conducive rental evidence for future negotiations and existing valuations. BL's office portfolio is prime, with fairly new assets, many with long-term leases (average seven years to earliest-break), and attractive ESG qualities to existing and prospective tenants.
Prime Offices Attract Quality Tenants: Fitch believes that prime offices will continue to be in demand despite established use of some remote working. This continued demand is underpinned by the quality of modern flexible offices in good locations, used as a coordinated hub by staff, and representing the quality of employees the tenant aims to attract. The new buildings' ESG credentials also attract future generations of office tenants. Across the portfolio, BL has increasingly migrated away from a tenant base that was concentrated in financial services to one with more tech and professional consultancy services entities.
Stabilising Retail Parks: The retained retail-park portfolio has stabilised in valuation as wider investment activity picked up in 2021. This format (usually on the edge of or out of town, free car parking, larger unit sizes, lower occupancy costs for tenants) continues to be attractive to retailers. The units are conducive to omnichannel retail, as they act as shops, convenient click-and-collect, and have space for storage and mini-distribution.
Lower Retail Rents: BL's retail parks continue to be over-rented (passing rent is higher than current market rents), implying near-term lease maturities may crystalise into lower passing rents. Despite this feature, BL retained its retail park portfolio for the asset class's long-term qualities and, unlike Hammerson plc (BBB/Stable), it had the financial flexibility to continue to retain them within its portfolio during the pandemic period.
Shopping Centres Remain Vulnerable: Consistent with other UK shopping-centre portfolios, BL reports footfall at, and tenants' sales around 90% of, pre-pandemic levels. Occupancy at BL's retail park and shopping-centre portfolio is 95% and 92% respectively, although its top 10 retail assets tend to be 95%- 100% occupied.
As the UK retail market sees a peak-to-trough decline in rents of 30%-35%, some of BL's passing rents have already been rebased to lower levels on lease expiry or cessation, with more due as near-term scheduled leases expire. BL reported a net 6% decrease (FYE21: -19.3%) in the previous passing rent for FY22 lettings (Hammerson: -17% in 2021 on its UK principal shopping-centre tenants). Prospective consumer and tenant retailer weakness will keep retail rent growth subdued.
Portfolio Churning: BL has continued selling assets. The most significant is selling a 75% stake in the majority of its Paddington Central office campus to GIC, which will result in an initial GBP700 million cash inflow in FY23 with further proceeds subsequently when this Paddington JV raised debt on these assets.
Like other part-ownership vehicles, BL typically coordinates the non-recourse funding structure, retains an equity stake, is remunerated for any subordinated funding, and receives a regular fee income stream (including asset management). From these part-owned entities BL receives a recurring, albeit post-debt service, cash dividend derived from rental income or from re-gearing the balance sheet. This former type of recurring income (FYE22: GBP97 million) is included in Fitch's calculation of BL's EBITDA.
Development Activity: BL's committed capex at FYE22 was GBP648 million, which was higher than in FY21 but a manageable 6% of its property assets pre-Paddington disposal. Pre-letting has helped de-risk these investments. The office-led, 100%-owned Norton Folgate is 32% pre-let, while the 50%-owned 1 Broadgate is 100% pre-let or under option. Other major projects include the 50%-owned Canada Water, a multi-phase, long-term campus project for which marketing for the residential portion is yet to be launched.
Stable Financial Profile: Fitch expects BL's net debt/EBITDA, which deconsolidates Hercules Unit Trust (HUT) but includes JV recurring cash dividends, to be at 7.0x-7.5x over the next three years (FY22: 7.8x). Further declines in retail rents would be mitigated by stable office rents and net disposals, which also partly fund BL's developments and investments. Fitch's rating case assumes increased interest rates for variable-rate and refinanced debt, but for BL's interest cover ratio to remain above 2.5x.
Derivation Summary
The closest rated peers to BL include Land Securities plc (Short-Term IDR: F1) with its office and retail portfolio totalling GBP12 billion, Derwent London plc (IDR: BBB+/Stable) with its GBP7.5 billion all-office portfolio in central London, and M&G European Property Fund SICAV-FIS (IDR: A-/Stable), which has a diversified continental European (office, retail, logistics and residential-for-rent) portfolio totaling EUR4 billion.
All four entities have high-quality office properties in good business locations with attractive ESG credentials to attract future tenants. BL's campus clusters (comparable to Land Securities' Victoria portfolio) have the advantage of BL coordinating and investing in the amenities for the location, complimentary adjacent rental evidence, and gradually building-out or refurbishing the location in a phased approach. This is different to Derwent and M&GEPF, who operate in areas with multiple (competing) landlords with different agendas and investment time-horizons, such that appetite to re-invest in the location is less coordinated. The topped-up net initial yields (NIYs) - including rent-frees - for the respective office portfolios denote their high quality (BL: 4%; Land Securities 4.4%; Derwent: 4.4%).
Although three entities have exposure to retail assets, not all their retail assets have been adversely affected by subdued market conditions. Continental European retail rents and valuations have been less adversely affected than the over-supplied UK where difficult market conditions have resulted in peak-to-trough passing rent reductions of 30%-35% and retail park and shopping-centre valuation declines of 60%. The all-retail portfolio of Hammerson plc (IDR: BBB/Stable) has seen similar adverse operating metrics, but it has now sold its UK retail park portfolio and retained its growth-mode retail outlet portfolio, albeit within its complicated Value Retail Plc group structure. BL's retail portfolio owns the largest retail park portfolio among these entities.
BL has an active development programme, investing in office development including some outside London. Land Securities also has an active development portfolio (Manchester's MediaCity, purchase of the U+I portfolio) together with some central London mixed-use projects. Both groups have the financial capacity to undertake these schemes that can create sizeable conurbations over time. Derwent's 2022 rating downgrade reflected the burden of its active development programme, especially given the multi-year rent-frees granted to new builds' tenants relative to the size of its rental income-producing investment property portfolio, despite the group's low loan-to-value (LTV).
Although Hammerson has a convoluted group structure, in Fitch's view, BL has the most complex group structure with CMBS-funded assets in JVs (Broadgate, Meadowhall), non-recourse debt-funded assets in JVs (including Paddington Central and retail assets including HUT). However, this is mitigated by good transparency and disclosure. Some JVs are currently debt-free (like some of Hammerson's) but BL's likely template is to have some non-recourse debt in JVs, usually organised and overseen by BL. Around 35% of Fitch-calculated FY22 EBITDA for BL is derived from subordinated recurring (post-interest expense and any amortising debt payments) cash dividends from JVs - mainly Broadgate, which has 33% LTV, and from wholly-owned HUT with its 45% LTV. For various reasons, rated groups have injected forms of capital and liquidity into such JVs - particularly in the retail JVs as pandemic-affected rents were not paid, plus retail values declined - to support headroom under these financings' financial covenants. Land Securities and Derwent have fewer JV arrangements.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Fitch continues to treat HUT as an entity that pays BL cash dividends rather than consolidate the 100%-owned entity into the group's profile
Fitch forecasts future rental income using cash-based rent, rather than straight-line rent incorporating non-cash income based on accounting principles. Like-for-like cash-based retail rental income to decline around 8% in FY23 and 5% in FY24, due to continued declines in retail passing rents when existing leases expire. Rents for the office portfolio are expected to be stable and mainly increase when completed developments' scheduled rent-free incentives expire
Capex of around GBP1 billion during FY23-FY25, with the committed portion totaling around GBP650 million. In line with BL's historical practice, net disposals of around GBP1.9 billion is assumed to fund capex and other investments
Funds from operation (FFO) dividend cover at around 1.2x
Increased cost of debt for variable-rate, and refinanced, debt
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Material diversification of the portfolio by tenant, rental and geography with financial metrics maintained
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Fitch-adjusted net debt/EBITDA (including recurring, rental-derived dividends from JVs) above 8.0x on a sustained basis
Fitch-adjusted EBITDA net interest cover below 2.5x on a sustained basis
Proportional consolidated LTV above 40% on a sustained basis
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from 'AAA' to 'D'. Best- and worst-case scenario credit ratings are based on historical performance. For more information about the methodology used to determine sector-specific best- and worst-case scenario credit ratings, visit https://www.fitchratings.com/site/re/10111579.
Liquidity and Debt Structure
Good Liquidity: At FYE22, BL had GBP45 million of available cash (excluding cash subject to security interest and cash located at HUT). It also has access to around GBP1.9 billion of undrawn committed revolving credit facilities (RCFs). Its cash balance increased post-FY22 following the Paddington disposal.
This cash and substantially undrawn RCF is more than sufficient to cover BL's direct FYE23 debt maturities of GBP12 million. It also provides parent-level contingency funding should the wider group need resources. For example, during the pandemic, this liquidity enabled BL to support its part-owned retail assets that experienced delayed rental receipts. This included the Meadowhall CMBS financing.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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RATING ACTIONS
Entity / Debt
Rating
Prior
British Land Company PLC (The)
LT IDR
A-
Affirmed
A-
ST IDR
F1
Affirmed
F1
senior unsecured
LT
A
Affirmed
A
Page
of 1
VIEW ADDITIONAL RATING DETAILS
Additional information is available on www.fitchratings.com
PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer's available public disclosure.
BRITISH LAND COMPANY PLC 
