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Rating action

Scope Ratings has assigned a first-time issuer rating of B+ to SkyGreen Buildings Kft. The Outlook is Stable. Senior unsecured debt is rated at BB.

Rating rationale

The B+ issuer rating on SkyGreen benefits from the portfolio’s exposure to the second-tier investment market of Budapest, stable tenant demand expressed by a fully let portfolio as at July 2019, and relatively high profitability. In addition, the company’s credit metrics have improved, with EBITDA interest cover of greater than 3x and a loan/value ratio of below 50%, driven by the mainly equity-financed portfolio expansion in 2019.

Rating constraints include the company’s limited size, which leads to greater sensitivity to unforeseen shocks and volatile cash flows, as well as the very concentrated portfolio, comprising only four properties in Budapest, with a chunky lease maturity profile.

The BB rating for SkyGreen’s senior unsecured debt reflects the high probability of recoupment for investors, with Scope’s view based on the company’s moderate leverage and adequate unencumbered asset ratio of 5.3x forecasted for YE 2019.

Scope’s rating scenario assumes the following:

• No extension or re-letting of expired lease contracts/vacated lease area
   
• 3.2% inflation rate used for operational expenditure
   
• Interest to increase by 50bp for floating-rate and newly issued debt from 2019 onwards, based on a weighted average cost of debt of 3.23% as at YE 2018
   
• 9% tax rate (tax loss carried forward EUR 3.9m for 2019)
   
• EUR 51m of in-kind contribution from Váci Greens D in Q3 2019 (fully consolidated for the FY 2019)
   
• Bond issuance in Q4 2019 (EUR 88m; 2% coupon) to acquire a similar sized property at a net initial yield of 5.8%
   
• Dividend payments of 50% of Hungarian GAAP result

Positive rating drivers

Focus on a second-tier investment market in and around the city centre. By asset value (August 2019), 50% of the portfolio is located in Budapest’s central business district, 20% in Buda North on the outskirts of Buda Central, and 30% in the Váci Corridor. These areas benefit from healthy tenant demand supported by relatively robust GDP growth and low unemployment rates.

Healthy tenant demand. SkyGreen’s occupancy rate stood at 100% as at August 2019, supported by the moderately aged portfolio with around 40% of rental contracts starting in 2018. However, the low weighted average unexpired lease term of 4.3 years limits cash flow visibility beyond the re-letting cliff in 2022.

Fully let property portfolio and lean operational setup. Most services provided by third parties aid profitability, at 73% for FY 2018 and forecasted at well above 80% for the next few years. Even so, profitability is under pressure from the concentrated portfolio in terms of tenants and assets.

Stable and improving debt protection. EBITDA interest cover is forecasted at above 3x for FY 2019 (2018: 1.7x) along with a moderate leverage with the loan/value ratio expected to decline to below 50% by YE 2019 (2018: 65%). These significant improvements are driven by the mainly equity-financed and strong portfolio growth with Scope-adjusted total assets expected at roughly EUR 170m by YE 2019 (+194% YoY).

Negative rating drivers

Relatively small property company. This is despite three significant property acquisitions in 2019 (Millénaris Avantgarde valued at EUR 7m; Millénaris Classic, EUR 26m; Váci Greens D, EUR 51m) that lifted total assets to EUR 170m by YE 2019 and funds from operations to EUR 5m. Scope anticipates a further significant growth of the company’s portfolio to around EUR 250m in total assets in the near future using proceeds from the planned bond issuance. The company’s size exposes it to greater sensitivity to unforeseen shocks and volatile cash flows. Its small size is also attributed to a small share of an increasingly competitive market.

Cluster risks arising from weak geographical diversification and high tenant concentration:

• A single tenant’s default has the potential to impair cash flow, with the top three tenants representing 30% of total rental income as at July 2019 (top 10: 64%). This is partially mitigated by the investment grade credit quality of tenants generating 25% of rental cash flows as well as the bank guarantees and cash deposits covering three months’ gross rent.
   
• High tenant concentration also leads to a chunky lease maturity profile, with 75% of leases maturing between 2022 and 2024. Competition is also expected to intensify in the medium term given the company’s limited geographical outreach.
   
• Performance hinges on the macroeconomic environment of Budapest as the portfolio’s sole regional exposure. Budapest has benefitted from a healthy economy that has not only supported tenant demand but also led to a significant increase in completions of office stock (532,000 sq m delivered between 2014 and 2018; 522,000 sq m under construction). As such, SkyGreen’s portfolio is expected to become less attractive once most of the leases end between 2022 and 2024. Current spending on maintenance and refurbishment (3% of rental income) might be insufficient to compete with newer office stock, ultimately leading to declining rents or substantial capex needs.

Liquidity

Scope considers liquidity to be adequate. In detail:

Position: YE 2018 I YE 2019E

Unrestricted cash: EUR 1.1m I EUR 3.0m
Open committed credit lines: EUR 0.0m I EUR 0.0m
Free operating cash flow (t+1): EUR 4.9m I EUR 9.4m
Short-term debt: EUR 0.4m I EUR 0.4m

Coverage: 14.9x I 30.7x

Scope excludes discretionary expansion capex from the liquidity calculation, as such investments are made only if external financing is available. SkyGreen’s liquidity is judged to be adequate but exposed to a ‘maturity wall’ in June 2021, upon which EUR 39.5m provided by Raiffeisen Bank Zrt. will mature. Refinancing the loan will depend on either property disposals or external financing. Scope believes refinancing risk is manageable due to i) a relatively low loan/value ratio for this loan, at 46% as at YE 2018 (loan is secured with a mortgage on the Eiffel Square Office Building, valued at EUR 85m); and ii) an unencumbered asset position of EUR 83.7m as at August 2019 (including Váci Greens D). The agency highlights that these unencumbered assets also provide indirect security for the EUR 88m senior unsecured bond to be issued in Q4 2019 (expected to be used to acquire a similar-sized property, lifting unencumbered assets to around EUR 172m).

Scope’s assessment of liquidity prior to the refinancing of the EUR 39.5m loan in June 2021 is likely to be impaired in the event of a significant reduction in either the absolute amount of unencumbered assets or the unencumbered asset ratio (unencumbered asset to unsecured debt) from a forecasted 2.0x at YE 2020 (as at YE 2019: 5.3x ) through the issuance of new secured or unsecured debt.

Senior unsecured debt

Scope’s recovery analysis for the company’s senior unsecured debt indicates an ‘excellent recovery’ based on the company’s relatively high share of unencumbered assets, allowing a two-notch uplift on the company’s issuer rating. Consequently, Scope assigns a debt class rating of BB.

Recovery is based on a hypothetical default scenario in FY 2020 with a company liquidation value of EUR 132m. This value is based on a haircut applied to the assets of roughly 40%, reflecting a market value decline of 14% as well as liquidation costs of around 21% for the assets and 10% for insolvency proceedings. This compares to secured financing of a forecasted EUR 39m, and senior unsecured debt of EUR 80m. 

Please note: In Q4 2019, SkyGreen plans to issue a EUR 88m senior unsecured bond with a 2% coupon and a ten-year tenor.

Outlook

The Outlook for SkyGreen is Stable and incorporates i) the successful execution of the in-kind contribution from the Váci Greens D property for EUR 50.7m (HUF 16.2bn) in Q3 2019; and ii) the successful placement of a EUR 88m (HUF 28.5bn) bond in Q4 2019, with proceeds intended for real estate acquisitions in 2020 at a net initial yield of at least 5.75%. Driven by the aforementioned portfolio expansion, Scope forecasts the EBITDA interest cover at around 3x and the loan/value ratio at between 45% and 50%.

Rating-change drivers

A positive action would require the company to grow significantly in size, leading to a less concentrated portfolio, and a loan/value ratio sustained at below 50%.

A negative rating action is possible if leverage notably increased, indicated by a loan/value of more than 60%, or if the unencumbered asset ratio were to fall to below 1.7x.

About the issuer:

SkyGreen Buildings Kft. (SkyGreen) was founded in 2016 as Eiffel Square Building Kft. and is owned by Green Ingatlanfejlesztő Investment Fund. SkyGreen is the universal legal successor of New Multiples Kft (which was founded in 2000). The company’s main activity is renting and operating its own or leased real estate. It currently directly owns four properties in the city of Budapest.

Cash flow analysis & Stress testing
Scope performed its standard cash flow forecasting for the company and no stress testing was performed.

Methodology
The methodologies used for this rating and/or rating outlook (Corporate Rating Methodology; Rating Methodology: European Real Estate Corporates) are available on www.scoperatings.com.
Historical default rates of the entities rated by 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 definitions of default and rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale.
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 not amended before being issued.

Regulatory disclosures
This credit rating and/or rating outlook is issued by Scope Ratings GmbH.
Lead analyst Philipp Wass, Executive Director
Person responsible for approval of the rating: Olaf Tölke, Managing Director
The ratings/outlooks were first released by Scope on 4 October 2019.

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
© 2019 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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