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Rating action

Scope Ratings affirms its B+/Stable issuer rating on FCR Immobilien AG (FCR). Secured debt consisting of three bonds (ISIN: DE000A2BPUC4, DE000A2G9G64 and DE000A2TSB16) is affirmed at BB-. Scope assigns a BB- rating to the newly issued secured bond (ISIN: DE000A254TQ9). Following this affirmation, Scope Ratings withdraws for business reasons the issuer rating and Outlook of FCR Immobilien AG and the rating for its senior secured debt class and bonds.

Rating rationale

The rating affirmation is driven by FCR’s geographically well-diversified property portfolio in regions expected to have stable tenant demand, leading to predictable recurring income. The portfolio’s stable demand is evidenced by its occupancy rate of 89% as at end-June 2020 (88% as of December 2019) and improved weighted average unexpired lease term, which stood at 5.4 years as at June 2020 (4.4 years as of December 2019). Both provide good visibility on future cash flow from recurring rental income. FCR’s portfolio shows a good geographical diversification, with assets spread across Germany (96% of net rental income as at June 2020) and some exposures to Italy, Austria and Spain, allowing the company to partially benefit from different demand patterns. While the company’s tenant industry diversification is modest, its portfolio tenant mix has proved resilient during the 2020 Covid-19 lockdown, with rent collections largely stable. This is mainly due to the tenant mix characteristics: more than 50% corresponds to properties with food markets as an anchor tenant and other non-cyclical tenants operating drugstores, bakeries, healthcare services and residences.

The rating continues to be constrained by the company’s small size, with total assets of around EUR 338m and funds from operations of EUR 3m as at June 2020, resulting in a lack of economies of scale. Scope also considers the company’s size to limit access to capital markets. Ambitious growth plans (with net expansion capex of EUR 170m in the last three years) have led to persistently negative free operating cash flows and a dependence on external financing. Moreover, the ability to procure external financing is weak, with the 2019 EUR 30m bond needing six months after issuance to be fully placed and only 10% of the new EUR 30m bond (March 2020) estimated to have been marketed as at August 2020. While this might be due to the Covid-19 crisis, with markets delaying investment decisions, this also reflects the company’s investor base, limited mostly to retail investors.

The unbalanced financing of the company’s aggressive growth took a toll on leverage earlier than expected, with the loan/value ratio increasing to above 60% in the last two years. FCR is unlikely to significantly deleverage in the coming months, as growth plans are pursued using available external financing. Nevertheless, the agency expects FCR to continue to benefit from an ability to realise hidden reserves for properties acquired while financing this partially through capital recycling, allowing leverage to remain between 60% and 70%. While Scope-adjusted EBITDA interest cover is slightly below prior year levels, at close to 1.7x, Scope estimates it to remain adequate, supported by recurring EBITDA in the next few years.

Relatively weak asset quality also constrains the rating, as the portfolio has a high economic age of about 30 years, resulting in a low attractivity to tenants and high capex needs. In addition, the asset portfolio is predominately in illiquid ‘D’ locations, which might lead to a drop in property fair values as well as substantial price haircuts in a distressed sales scenario.

FCR’s liquidity is judged to be adequate. The company benefits from a backloaded maturity profile, with EUR 7.8m in short-term bank debt as of H1 2020, the next bond maturity in October 2021 (EUR 15.0m) and most debt due from 2022 on (86%). This leaves sufficient time to address the refinancing of debt due on a property company level. Negatively seen are FCR’s aggressive growth ambitions, which result in negative free operating cash flows and a heightening dependence on external financing, particularly for holding-level debt. This is further compounded by a relatively low unencumbered asset ratio that offers little headroom to increase financial debt.

Long-term and short-term debt ratings

As at end-August 2019, FCR had EUR 70m in secured bond debt outstanding. All bonds benefit from a second-ranking pledge – behind bank loans – on investment properties. This could positively impact recovery rates in a default scenario. According to Scope’s methodology and reasonable discounts on the company’s asset base (as described below), an ‘above average’ recovery is expected for all bonds issued, warranting a one-notch uplift on the company’s issuer rating of B+. Scope therefore rates senior secured bonds at BB-.

The determination of an ‘above average’ recovery is based on a hypothetical default scenario in FY 2021 and a company liquidation value of EUR 273m. This value is based on a haircut applied to FCR’s assets, incorporating market value declines commensurate with a ‘BB’ rating case as well as liquidation costs of approx. 25% for assets and 10% for insolvency proceedings. 

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 this rating and 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 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, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Rigel Scheller, Director
Person responsible for approval of the rating: Thomas Faeh, Executive Director
The ratings/outlooks were first released by Scope on 17 May 2018. The ratings/outlooks were last updated on 11 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
© 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.

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