The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope affirms the issuer rating of Proform Ingatlanbefektetési Zrt. at B+/Stable as well as the rating on senior unsecured debt of BB- after the 2019 full year numbers and the updated business plan of the company.

Rating rationale

The affirmation reflects the stable operating profits from its commercial real estate portfolio as well as the planned office development projects and the successful placement of a HUF 5bn senior unsecured bond within the second half of 2020.

With regards to the business profile the company is still a small player at a total portfolio market value of c. EUR 270m and being geographically concentrated around the Budapest office real estate market. Both its office and hospitality division consisting of three hotels therefore show weak market positioning and diversification. Asset quality is more credit positive as the group continued to show high occupancy levels of 97% for its office portfolio in 2019, along with an increased weighted average lease term of more than 8 years as of August 2020, after c. 6 years at the time of our initial rating last year. Although the hospitality division has suffered substantially within the period from mid-March to mid-June, there has been a clear recovery of occupancy at the two leisure Park Inn hotels. The third hotel, a Park Inn in Budapest city is showing a slower recovery at this point. Rent collection rates in the office portfolio were above 95% within the first half of the year. Profitability is expected to decrease at the level of the rated entity, since we expect a sharp increase in revenues, but at substantially lower margins from 2020 to 2022 as a result of the planned construction activity on the two new planned office development projects F99 and T4. All in all, we affirm our business risk profile rating of B in the light of the inherent development risks and the clustered development pipeline at this point.

The financial risk profile – rated BB - continues to benefit from moderate financial leverage, in particular after the company has repaid the remainder of its outstanding financial debt on the level of the rated entity within 2019. Leverage measured by SaD/EBITDA is expected to stay at 4.0x to 5.0x for the next two years, while interest coverage is expected to stay between 4.0x and 9.0x in the same period. Those figures in our financial base case reflect discounts to the issuers internal financial planning. Going forward we nevertheless expect an increase in the loan-to-value ratio on a look-through basis (reflecting both indebtedness on SPV level and on the level of the rated entity Proform) to a range of 50% to 60% in the years 2020 to 2022. This is subject to a successful placement of the HUF 5bn bond as well as the development of the two new projects within the planned timeline.

Outlook and rating-change drivers

The Outlook for Proform is Stable and incorporates the assumption that the issuer shows LTV calculated on a look-through basis in a range of 50% to 60% while successfully executing its growth plans and showing stable recurring income from its existing portfolio.

A positive rating action would require the issuer to significantly increase the level of recurring revenue while showing LTV on a look-through basis moving substantially below 50% on a sustained basis.

A negative rating action might be warranted if the issuer shows a slump in recurring operating income and/or shows LTV on a look-through basis of more than 60% on a sustained basis. This could be caused by market value declines of its existing portfolio or underperformance of its development projects.

Long and short-term debt instrument ratings

Proform plans to issue a new 10-year senior unsecured bond (HUF 5bn) within the MNB funding for growth bond scheme. The instrument will feature amortization of 20% p.a. in the years 2026 to 2030. The issuer is expecting a coupon of c. 2.75% p.a.. We incorporated a successful placement of this 5bn corporate bond in our base case financial forecast at an average cost of debt of 3.5%. The proceeds are earmarked for additional commercial real estate development projects, namely T4 and F99. Both developments are located in Budapest.

Our recovery analysis assumes a hypothetical default at year-end 2022 with a haircut of c. 21% on market values as well as other liquidation costs of 10%. Our liquidation scenario also takes into account the net asset value of the non-consolidated entities. Given the expected recovery rate as well as the structural subordination of senior unsecured creditors of the rated entity below any current and future secured debt at property SPV level loans at the hypothetical point of default, we rate senior unsecured debt one notch higher than the issuer rating.

This translates into an affirmation of the BB- rating for senior unsecured debt.

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

Methodology
The methodology/ies used for this rating(s) and/or rating outlook(s)( Corporate Rating Methodology, 26 February 2020; European Real Estate Corporates Rating Methodology, 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 rating was not requested by the rated entity or its agents. The rating process was conducted:
With Rated Entity or Related Third Party Participation      YES 
With Access to Internal Documents                                   YES 
With Access to Management                                             YES
The following substantially material sources of information were used to prepare the credit rating: public domain, the rated entity 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: Denis Kuhn, Associate Director
Person responsible for approval of the rating: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 3 September 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
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