Rating Action: Moody's assigns Baa1 to Waypoint REIT's USPP notes
Global Credit Research - 17 Aug 2020
Sydney, August 17, 2020 -- Moody's Investors Service has assigned a Baa1 rating to the senior unsecured notes issued by VER Finco Pty Limited, a wholly owned subsidiary of Waypoint REIT Limited (Baa1 stable).
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The notes will rank pari passu with the existing senior unsecured debt of Waypoint REIT.
The outlook is stable. RATINGS RATIONALE
The Baa1 rating assigned to the notes reflects Waypoint REIT's geographically diversified and good quality asset base that provides the REIT with stable and predictable cashflows. As of 30 June 2020, the REIT owned 474 service station and convenience retail properties across Australia, primarily located in metropolitan areas.
In addition, the REIT benefits from stable and predictable cash flow underpinned by predominantly triple net lease structures, fixed rental increases, long weighted average lease expiries (WALE) and 100% occupancy.
The industry has high barriers to entry. Waypoint REIT's portfolio of assets, which forms part of a leading fuel retailing and convenience store network in Australia, would be difficult to replicate, given the scarcity of available properties in strategically significant locations.
Moody's expects the REIT to apply the use of proceeds towards general corporate purposes, including growth initiatives.
Despite the increase in debt, Moody's expects Waypoint REIT's gearing to remain within the board's policy band of 30%-45%. Moody's also expects the REIT's leverage, as measured by net debt/EBITDA to remain below the 7.0x threshold set for the rating.
Waypoint REIT's credit profile is constrained by its small asset size when compared to rated global peers, high tenant concentration risk, the risk of industry disruption from the increasing use of electric vehicles, and the threat of environmental liabilities, given that Waypoint REIT's portfolio is subject to environmental standards, regulations and laws notwithstanding environmental obligations primarily reside with the tenant under the terms of the lease.
The REIT faces high tenant concentration risk, because around 97% of it's leases are with a single tenant (Viva Energy Australia), which Moody's views to have weaker credit quality than Waypoint REIT itself. This high exposure constrains the REIT's rating to a maximum of a two-notch difference between the Baa1 rating and Moody's view of the tenant's credit quality.
Moody's has also considered the growth of the electric vehicle market and corresponding reduction in fuel consumption. However, electric vehicle adoption rates in Australia have lagged due to the limited availability of electric vehicle models, higher purchase costs, and Australia's less stringent vehicle emission standards when compared to Europe.
As a result, electric vehicles make up a very small segment of the Australian new car market. While penetration rates will increase over time, Moody's does not expect a material impact on fuel sales before 2030, because the growth in the country's population and economy are continuing to support increases in overall demand for fossil fuels.
In terms of corporate governance, Waypoint REIT has a good track record and has demonstrated prudent financial management over the years.
Waypoint REIT is an ASX-listed REIT, and abides by the country's prevailing laws and regulations which largely govern risk management, compliance and reporting, board structure, and policies and procedures.
The REIT's gearing level is managed within the board's policy band of 30%-45%, with Waypoint REIT historically operating at a gearing of 30%-37%. Waypoint REIT has a policy of maintaining minimum cash balances and long-term committed facility headroom. The group hedges some or all of its exposure to changes in interest rates on variable rate borrowings by using floating-to-fixed interest rate swaps.
The stable outlook on the rating reflects Moody's expectation that Waypoint REIT will adhere to its financial policy and operate within the parameters set for the rating.
FACTORS THAT COULD LEAD TO AN UPGRADE OR DOWNGRADE OF THE RATINGS
An upgrade of Waypoint REIT's rating is unlikely, because of Moody's view of the credit quality of the key counterparty, Viva Energy Australia, and Waypoint REIT's small asset size.
Moody's could downgrade Waypoint REIT's rating if Viva Energy Australia's credit profile deteriorates or Waypoint REIT's financial and operating profiles weaken, such that net debt/EBITDA increases above 7x, EBITDA/interest falls below 3x, and debt/assets increase above the stated gearing level of 45%.
The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018 and available at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1095505. Alternatively, please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.
Waypoint REIT Limited was incorporated in 2016 and is the owner of 474 service stations and convenience retail properties across Australia.
REGULATORY DISCLOSURES
For further specification of Moody's key rating assumptions and sensitivity analysis, see the sections Methodology Assumptions and Sensitivity to Assumptions in the disclosure form. Moody's Rating Symbols and Definitions can be found at: https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004.
For ratings issued on a program, series, category/class of debt or security this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series, category/class of debt, security or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.
The ratings have been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.
These ratings are solicited. Please refer to Moody's Policy for Designating and Assigning Unsolicited Credit Ratings available on its website www.moodys.com.
Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.
Moody's general principles for assessing environmental, social and governance (ESG) risks in our credit analysis can be found at https://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_1133569.
The Global Scale Credit Rating on this Credit Rating Announcement was issued by one of Moody's affiliates outside the EU and is endorsed by Moody's Deutschland GmbH, An der Welle 5, Frankfurt am Main 60322, Germany, in accordance with Art.4 paragraph 3 of the Regulation (EC) No 1060/2009 on Credit Rating Agencies. Further information on the EU endorsement status and on the Moody's office that issued the credit rating is available on www.moodys.com.
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Saranga Ranasinghe Vice President - Senior Analyst Corporate Finance Group Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Patrick Winsbury Associate Managing Director Corporate Finance Group JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077 Releasing Office: Moody's Investors Service Pty. Ltd. Level 10 1 O'Connell Street Sydney NSW 2000 Australia JOURNALISTS: 61 2 9270 8141 Client Service: 852 3551 3077
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