Scope Ratings has affirmed German-based Adler Real Estate AG’s (Adler) rating at BB-. The rating outlook remains stable.

This rating action follows Adler’s offer on 16 February 2015 to acquire Westgrund AG (Westgrund), a German real estate corporation with properties located mostly in the German states of Lower Saxony, North Rhine-Westphalia, Berlin, Brandenburg and Saxony, for EUR 0.4 billion.

The majority of the acquisition is to be financed with loans (around 60%), and the remaining percentage will be financed with equity. On 19 February more than 50% of Westgrund’s shareholders agreed to the proposal, exceeding the threshold of 50% plus one share set in the voluntary public takeover offer.

Adler expects the transaction to be completed in the first half of 2015, resulting in acquisition-related synergies of about EUR 20 million over the next three years, with related integration costs of EUR 6 million.

The nature and size of Adler’s acquisition is well in line with its strategy and was factored into Scope’s rating. The transaction, if successful, would create Germany’s 5th largest listed residential real estate company. Although it bears some execution risk, it is considered positive for Adler’s business risk profile.

The combined group’s total asset value would more than double to EUR 2.8 billion (Q3 2014: EUR 1.3 billion), with an increase of residential units to 52,000 (current portfolio of 31,000). Westgrund’s assets, mainly located in suburban areas of German metropolitan regions, are well aligned with Adler’s portfolio. Through the acquisition, Adler will gain higher exposure to cities like Berlin, where economic and demographic trends are expected to support demand in the coming years.

Following completion of the acquisition, Adler’s pro-forma EBITDA margin is expected to deteriorate slightly to about 60% in 2015, compared to 66% for the LTM to September 2014. This is due to Westgrund’s lower profitability (LTM to September 2014: 38%).

Adler’s financial risk profile is in line with the rating. Its pro-forma LTV (following the Westgrund acquisition) is expected by Scope to decrease to 65% at years end 2015 (71% Q3 2014). Debt/EBITDA (x) is also projected to decline to around 12x for the FY 2015 (Q3 2014: 22x) and FFO Fixed charge cover (x) is expected to remain at least at a level of 1.7x (Q3 2014: 1.7x). The liquidity ratio (x) for the combined group is expected to remain above 1.0x.

OUTLOOK
The rating outlook is stable. A positive rating action may be considered if Adler manages to successfully integrate Westgrund while committing itself to maintaining solid financial ratios. A negative rating action would be considered in case of major integration problems.

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Torsten Hinrichs.

The rating analysis has been prepared by Philipp Wass, Lead Analyst
Responsible for approving the rating: Dr. Britta Holt, Committee Chair

Rating history of the Corporate Issuer Credit Rating of Adler Real Estate AG
07.02.2014 Downgrade BB- Stable Outlook
08.03.2013 Initial Rating BB Positive Outlook

The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months. A rating change is, however, not automatically ensured.

Information on interests and conflicts of interest
As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating: Valuation reports, other opinions, Annual reports/semi-annual reports of the rated entity/issuer, Detailed information provided on request, Annual financial statements, Data provided by external data providers, Interview with the rated entity, External market reports, Website of the rated entity/issuer, Press reports / other public information.

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the press release by the rated entity prior to publication / Modification of the press release after the examination
Prior to publication, the rated entity was given the opportunity to examine the rating and the rating drivers, including the principal grounds on which the credit rating or rating outlook is based. The rated entity was subsequently provided with at least one full working day, to point out any factual errors, or to appeal the rating decision and deliver additional material information. Following that examination, the rating was not modified.

Methodology
The methodologies applicable for this rating (Corporate Rating Methodology, Rating Methodology - European Real Estate Corporates) are available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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