Rating action

Scope Ratings affirms ADLER Real Estate AG’s (ADLER) issuer rating of BB and senior unsecured debt rating of BB+. Rating status revised to ‘under review for possible upgrade’.

Rating rationale

The affirmation of the ratings for Germany-based ADLER is driven primarily by the relatively low downside risk of a failed acquisition of BCP with minor impact on the company’s financial risk profile.

ADLER’s BB issuer rating remains unchanged as it continues to benefit from a supportive business risk profile. This is attributed to the company’s scale, which was achieved despite Germany’s fragmented, low-risk residential real estate industry, and its well-diversified portfolio in terms of geographies and tenants.

Voluntary tender offer to acquire a majority shareholding in Dutch-Israeli company Brack Capital Properties

On 16 February 2018, ADLER announced a voluntary public tender offer to acquire up to 70% + one share of the share capital of BCP.

The offer is an all-cash acquisition with an estimated purchase price of EUR 539m. The offer is split into an all-cash offer for the 41.04% stake held by Teddy Saggy (the largest shareholder of BCP) and a special tender offer to acquire up to 25.80% in BCP with a minimum acceptance hurdle of 5%. According to ADLER, BCP’s co-CEOs and a member of the senior management team entered into an aggregate tender commitment for 5.62% of shares in BCP, with a right to sell any shares not taken up through the special tender offer.

ADLER disclosed that the acquisition will be financed by cash only, including exit proceeds of EUR 180m from the executed ACCENTRO deal and an estimated EUR 170m from the non-executed sale of the company’s non-core portfolio. The remaining EUR 189m will be financed with a bridge loan.

The special tender offer was launched on 19 February 2018 and ends on 22 March 2018. The settlement of the cash and the special tender offer is expected by 1 April 2018.

Business risk profile

A successful acquisition of BCP is likely to positively alter Scope’s assessment of ADLER’s business risk profile driven by the following:

• Greater industry risk as a consequence of added exposure to the higher-risk development and commercial real estate segments (representing 14% and 34% of BCP’s gross asset value respectively).
• Significant improvement of the company’s total assets by EUR 1.5bn to around EUR 5bn (based on Q3 2017) as well as funds from operations by EUR 20m to around EUR 60m for 2018 (excluding BCP’s retail portfolio).
• Enhanced granularity of the residential tenant base due to the addition of 11,000 residential units from BCP with an almost constant top five city exposure of 33%.
• Introduction of a retail portfolio into the company’s business exposes ADLER to the ongoing transformation of the German retail landscape. This is, however, largely mitigated by the portfolio’s high occupancy rate of 96% and a weighted average unexpired lease term of around 10 years.
• Increasing exposure to ‘B’ locations with exposure to Leipzig, Hanover, Dortmund, Bremen and Kiel anticipated to rise to 17.1% from 5.1% as at Q3 2017 also leading to improved occupancy rates of 93%, up from 92% in Q3 2017 (excluding non-core portfolio).
• High pre-sale rate of 83% for development under construction mitigates risk associated with property developments. The remainder of the development pipeline is expected to be added to ADLER’s balance sheet on completion, thus further improving the company’s portfolio quality.
• EBITDA margin expected to increase to between 55% and 60% for 2019, up from initial expectations of around 50%. Forecasted upswing in margin is a result of: i) EUR 3m in property and asset management related synergies (run-rate) following a successful acquisition at an expected cost of EUR 1m; and ii) the higher profitability of the retail portfolio which will be gained.

Financial risk profile

Scope expects ADLER’s financial risk profile to remain unchanged following the acquisition of BCP as the company’s leverage is anticipated to continue in line with Scope’s rating case, with loan/value expected to stay below 60% going forward. In addition, the agency forecasts leverage (measured by Scope adjusted debt/EBITDA) to remain stable for the coming years at around 15x (excluding one-off effects).

EBITDA interest expense is anticipated to improve to 1.9x benefitting from: i) the low cost of BCP’s debt; and ii) EUR 3m (run-rate) of savings given additional refinancing synergies for BCP properties’ debt with estimated breakage costs of EUR 12-14m.

Review

If the proposed acquisition were to be completed, Scope would reassess ADLER’s creditworthiness in light of its improved business risk profile and stronger credit metrics. This is likely to result in a rating upgrade for the company.

Rating-change drivers

A negative rating action is possible if debt protection, as measured by EBITDA interest cover, decreased below 1.5x or if the company’s access to external financing weakened.

A positive rating action could be warranted by a further improvement in ADLER’s financial risk profile, i.e. if EBITDA interest cover were to remain above 1.9x and the loan/value ratio were to fall below 55%, both on a continuing basis.

Stress testing
No stress testing was performed.

Cash flow analysis
No cash flow analysis was performed. Scope produced its standard cash flow forecast for the company.

Methodology
The methodologies used for this rating and rating outlook (Corporate Rating Methodology; Rating Methodology: European Real Estate Corporates) are available on www.scoperatings.com.
Historical default rates of Scope Ratings can be viewed in the rating performance report on https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA Please also refer to 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 definition of default as well as definitions of rating notations can be found in Scope’s public credit rating methodologies on www.scoperatings.com.
The rating outlook indicates the most likely direction of the rating if the rating were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The rated entity and/or its agents participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity, third parties and Scope internal sources.
Scope considers the quality of information available to Scope on the rated entity or instrument to be satisfactory. The information and data supporting Scope’s ratings originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data.
Prior to the issuance of the rating or outlook action, the rated entity was given the opportunity to review the rating and/or outlook and the principal grounds on which the credit rating and/or outlook is based. Following that review, the rating was <amended/not amended> before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Philipp Wass, Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 25.07.2016. The ratings/outlooks were last updated on 11.01.2018.

Potential conflicts
Please see www.scoperatings.com. for a list of potential conflicts of interest related to the issuance of credit ratings.

Conditions of use / exclusion of liability
© 2018 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Analysis GmbH, Scope Investor Services GmbH and Scope Risk Solutions GmbH (collectively, Scope). All rights reserved. The information and data supporting Scope’s ratings, rating reports, rating opinions and related research and credit opinions originate from sources Scope considers to be reliable and accurate. Scope does not, however, independently verify the reliability and accuracy of the information and data. Scope’s ratings, rating reports, rating opinions, or related research and credit opinions are provided ‘as is’ without any representation or warranty of any kind. In no circumstance shall Scope or its directors, officers, employees and other representatives be liable to any party for any direct, indirect, incidental or other damages, expenses of any kind, or losses arising from any use of Scope’s ratings, rating reports, rating opinions, related research or credit opinions. Ratings and other related credit opinions issued by Scope are, and have to be viewed by any party as, opinions on relative credit risk and not a statement of fact or recommendation to purchase, hold or sell securities. Past performance does not necessarily predict future results. Any report issued by Scope is not a prospectus or similar document related to a debt security or issuing entity. Scope issues credit ratings and related research and opinions with the understanding and expectation that parties using them will assess independently the suitability of each security for investment or transaction purposes. Scope’s credit ratings address relative credit risk, they do not address other risks such as market, liquidity, legal, or volatility. The information and data included herein is protected by copyright and other laws. To reproduce, transmit, transfer, disseminate, translate, resell, or store for subsequent use for any such purpose the information and data contained herein, contact Scope Ratings GmbH at Lennéstrasse 5 D-10785 Berlin.

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