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Rating action

Scope Ratings has affirmed the A-/Stable issuer rating of Vonovia S.E and its financing subsidiary Vonovia Finance B.V. The senior unsecured debt rating was affirmed at A-, the subordinated (hybrid) debt rating was affirmed at BBB, and the short-term rating was affirmed at S-1.

Rating rationale

The rating affirmation is driven by Vonovia’s business risk profile (rated: A), which continues to be strong due to the company’s size, with around 415,000 residential apartments (as at end-June 2020) spread across Germany (85%), Sweden (9%) and Austria (4%), as well as a development pipeline of around 50,000 residential apartments at an estimated volume of EUR 9.9bn as at end-June 2020. Vonovia’s top position in the regulated residential real estate markets of Germany, Sweden and Austria confers several benefits, including the ability to passively influence price levels via the framework for local comparative rents (Germany), which improves its position as a stakeholder in the residential real estate market.

The strong business risk profile also ensures stable cash flows and helps to de-link rental growth from economic growth and inflation, evidenced by the relatively strong 3.9% organic increase in rents for the 12 months ending June 2020. The increase in rents is predominately supported by the high run-rate of the portfolio share subject to energy-efficient modernisation (ESG factor) per year (2019: 4%) – despite the self-imposed limitation of rental uplifts following investments, to EUR 2 per sq m. Together with improved development capacities (largest homebuilder in Germany¹) as well as the diversified portfolio as regards regulatory frameworks, Vonovia has a solid basis for maintaining like-for-like rental growth at above 3% in the coming years. This view is especially supported by the company’s opportunistic approach to entering other European markets (including a recent acquisition of a 2.6% holding in Dutch residential fund Vesteda²), and establishing strong footholds in Sweden and Austria despite the tighter regulation in the company’s core market of Germany^{3, 4}

Scope believes Vonovia’s top line to be generally well protected. Stable and strong occupancy (end-June 2020: 97%) is expected going forward, benefiting from a sticky tenant portfolio (13-year lease terms on average) as well as the limited impact of Covid-19 on rent collection (99% for H1 2020) given the company’s exposure to markets with strong tenancy protection including state subsidies for those in need. In addition, Vonovia has increased its share of markets with high expected growth in demand going forward (population growth of above 2.5% in 2020-2030), to 61% from 54% as at YE 2017 by share of net rental income.

Vonovia has kept its Scope-adjusted EBITDA margin at 72% (last 12 months to end-June 2020), similar to the 2017 level and slightly below Scope’s expectations. However, Scope expects profitability to improve further and eventually outperform the levels of the best-performing peers, at close to 75% in the medium term. This will be driven by i) healthy like-for-like rental growth; ii) a further increase in EBITDA contributed by value-added businesses (mainly via the expected roll-out of services for the Swedish portfolio); and iii) synergies following the integration of Hembla AB, yet to be finalised.

Scope has maintained its assessment of Vonovia’s financial risk profile at BBB, based on expectations of healthy investor and tenant demand in residential real estate, with Covid-19 having a limited impact.

The company’s leverage as measured by the Scope-adjusted loan/value ratio is expected to remain stable (end-June 2020: 42%). This follows positive like-for-like growth in rents and the stable level forecasted for yields. This allows Vonovia to pursue further growth via i) investments in its existing portfolio of EUR 1.6bn per year; and ii) bolt-on acquisitions while the Scope-adjusted loan/value ratio remains within an anticipated range of 40%-45%. Debt protection as measured by Scope-adjusted EBITDA interest cover is forecasted at above 4x (12 months to end-June 2020: 4x) due to the projected increase in Scope-adjusted EBITDA offsetting the expected increase in the weighted average cost of debt.

Liquidity remains adequate – despite coverage of below 1x for 2020 – as Vonovia enjoys good access to debt capital markets, evidenced by its ability to issue bonds at the peak of the Covid-19 crisis (EUR 1bn in April 2020). Furthermore, debt due until YE 2020 (EUR 1.2bn as at end-June 2020) as well as negative Scope-adjusted free operating cash flow forecasted for H2 2020 (EUR 0.5bn) are expected to be fully covered by available cash (EUR 0.9bn as at end June 2020), committed credit lines (EUR 1.0bn) and proceeds from recent bond issuance (EUR 1.5bn in July 2020).

Outlook and rating-change drivers

The Outlook for Vonovia is Stable and incorporates Scope’s view that credit metrics will remain constant, with a Scope-adjusted loan/value ratio of between 40%-45% and Scope-adjusted debt to Scope-adjusted EBITDA of around 15x. Vonovia’s policy of financing total capex (investments and acquisitions) with 50% of equity on average is expected to support these levels going forward. Furthermore, the Outlook incorporates Scope’s view that the pandemic will have a limited impact on Vonovia’s residential real estate markets.

A negative rating action is possible if the Scope-adjusted loan/value ratio increased above 45% on a sustained basis. This could be triggered by either i) a change in financial policy that allows higher leverage; or ii) a significant drop in portfolio value following an adverse change in regulations in Vonovia’s core market of Germany.

A positive rating action is considered unlikely but could be warranted if the Scope-adjusted loan/value ratio reached below 40% and Scope-adjusted debt to Scope-adjusted EBITDA fell to around 8x, both on a sustained basis. This could be achieved via a change in capital allocation or a reduction in both expansion capex and shareholder remuneration to focus on debt repayment.

Long-term and short-term debt ratings

As at end-June 2020, Vonovia had a partially utilised EUR 20bn EMTN programme with all issuances guaranteed by Vonovia S.E. Senior unsecured debt benefits from an unencumbered asset ratio of more than 200%, as disclosed by the issuer, providing a pool of collateral to debt holders.

Furthermore, Vonovia issued EUR 1.0bn in hybrid bonds. Scope grants a 50% equity credit for the subordinated, unsecured and perpetual EUR 1bn hybrid bonds that benefit from possible coupon deferral.

The S-1 short-term rating is supported by the better-than-adequate internal liquidity, good banking relationships, strong access to diverse funding sources and access to undrawn, committed credit lines. As such, Scope believes the company can address any short-term refinancing needs. Vonovia had a non-utilised EUR 1bn commercial paper programme as at end-June 2020.

Rating driver references
1 H1 2020 Earnings Call Presentation of Vonovia S.E. (5 August 2020)
2 Company news (26 June 2020)
3 Extension of observation period for framework for local comparative rents (Haufe: 1 January 2020)
4 Extension of rental break until 2025 (Haufe: 30 March 2020)

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

Methodology
The methodologies used for these ratings and/or rating outlook (Corporate Rating Methodology, 26 February 2020; Rating Methodology: European Real Estate Corporates, 17 January 2020) are available on https://www.scoperatings.com/#!methodology/list.
Information on the meaning of each rating category, including definitions of default and recoveries can be viewed in the “Rating Definitions - Credit Ratings and Ancillary Services” published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. 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. Guidance and information on how Environmental, Social or Governance factors (ESG factor) are incorporated into the rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list. 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 participated in the rating process.
The following substantially material sources of information were used to prepare the credit rating: issuer, public domain, 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst Philipp Wass, Executive Director
Person responsible for approval of the rating: Thomas Faeh, Executive Director
The ratings/outlooks were first released by Scope on 13 December 2019.

Potential conflicts
Please see www.scoperatings.com for a list of potential conflicts of interest related to the issuance of credit ratings. Scope provided the following ancillary services to the rated entity and/or its agents within two years preceding this credit rating action: Rating Assessment Service.*

Conditions of use / exclusion of liability
© 2020 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. Scope Ratings GmbH, Lennéstraße 5, 10785 Berlin, District Court for Berlin (Charlottenburg) HRB 192993 B, Managing Director: Guillaume Jolivet.

* Editor’s note: This sentence was added on 19 October 2020. It was erroneously omitted upon publication of the credit rating action on 17 August 2020.