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Rating action

Scope Ratings affirms its BB issuer rating on ADLER Real Estate AG and revises the Outlook to Stable from Positive. The senior unsecured debt rating is affirmed at BB+.

Rating rationale

The revision of the Outlook reflects Scope’s view that ADLER’s credit metrics will not improve sufficiently in the next 12 to 18 months to justify an upgrade of its standalone issuer rating. The Outlook change is also driven by the limited capacity of the issuer’s parent (ADO Properties S.A.) to provide financial support, although the agency assesses its willingness to do so as high.

As of 9 April 2020 (settlement date), ADO Properties holds 91.9% in ADLER Real Estate following a business combination agreement under which ADO Properties acquired ADLER as part of a public takeover offer (15 December 2019). As at 2 July 2020, ADO exercised its put/call option to acquire around 51% of CONSUS Real Estate AG (adding to the 22.18% previously held by ADO and 3.6% held by ADLER). As a result, the group is now one of Germany’s major real estate developers. The purchase price was paid in new shares as well as treasury shares held by ADLER. ADO Properties S.A. will be renamed ADLER Real Estate Group S.A. this year.

ADLER’s business risk profile (affirmed at BBB-) benefits from the size it has achieved. Scope-adjusted total assets reached EUR 6.6bn as at end-June 2020 (+13%), mostly driven by positive fair value adjustments and capital expenditure. The number of residential units has remained almost unchanged at 57,000. ADLER’s integration into ADO Properties S.A. has increased market visibility, especially in Berlin, where around 19,000 residential units are under group management. Integration into ADO further supports ADLER’s access to capital markets, with financing to be executed on a group level. 

The disposal of the company’s exposure to the more cyclical retail segment (70% by YE 2019, with the remainder to be sold by YE 2020) further supports ADLER’s business risk profile via an improved industry risk assessment. Scope acknowledges the limited downside pressure on profitability from disposing of retail assets compared to the agency’s initial expectations. As a result, profitability as measured by the Scope-adjusted EBITDA margin should remain above 60%, also benefitting from reduced operational expenditure given the integration into ADO Properties S.A. as well as a further like-for-like increase in Scope-adjusted EBITDA. The latter will be aided by further investments in the existing portfolio, with an estimated EUR 60m to EUR 80m in refurbishment capex and execution on the company’s existing development pipeline, which consists of an estimated 4,000 residential units.

The disposal of 5,000 units (outside of ADLER’s 13 core markets), announced in September 2020, is not expected to have a negative effect on the company’s business risk profile. The negative impact on the company’s size will be balanced by slightly improved property-related performance indicators as well as an increasing share of better locations for part of the remaining portfolio.
ADLER’s financial risk profile (affirmed at BB-) supports the current ratings. However, Scope believes it is unlikely that metrics will improve sufficiently to warrant a positive rating change (on a standalone basis), i.e. Scope-adjusted EBITDA interest cover of above 1.9x (last twelve months to end-June 2020: 1.6x) and a Scope-adjusted loan/value ratio of below 55% (end-June 2020: 69%), both on a sustained basis. The allocation of debt within the group is expected to drive ADLER’s credit metrics going forward.

Debt due in 2020 (EUR 0.3bn) is expected to be fully covered by available cash sources, which amount to EUR 0.6bn, as well as forecasted Scope-adjusted free operating cash flow of EUR 0.6bn for 2020, both on a group level. Scope also believes the refinancing of the EUR 1.0bn in debt maturing in 2021 should be a manageable risk. The agency’s assessment of liquidity is based on the assumption that cash will be pooled for the combined entity starting in 2020 and that financing activities will be executed by ADO Properties S.A. on behalf of ADLER Real Estate AG.

The rated entity is held by ADO Properties S.A., which acquired the majority in ADLER Real Estate AG in April 2020. Scope sees the willingness of ADO Properties S.A. to financially support ADLER Real Estate AG as high, given the anticipated execution of a domination agreement in September 2020 as well as the implicit commitment provided by the consolidation of operations including treasury and name equality (ADO to be renamed ADLER Real Estate Group). However, the capacity of ADO Properties S.A. to support ADLER Real Estate AG is limited. On the one hand, ADO benefits from the same business risk profile as ADLER Real Estate AG (which forms part of ADO) as well as slightly better credit metrics. On the other hand, ADO’s credit metrics are expected to deteriorate following the successful acquisition of a majority share in CONSUS Real Estate AG (July 2020), and the anticipated launch in Q4 2020 of a voluntary exchange offer for all remaining outstanding shares in CONSUS. CONSUS has had below-par Scope-adjusted EBITDA interest cover for the last twelve months to end-June 2020 and has comparatively high leverage, with a Scope-adjusted loan/value ratio of 59% as at end-June 2020.

Outlook and rating-change drivers

The Outlook for ADLER has been revised to Stable. The Outlook change incorporates Scope’s expectation that the company’s business risk profile will remain stable going forward, supported by the further upscaling of asset quality, measured by higher occupancy, like-for-like growth at least in line with inflation rates and the addition of new properties from its development pipeline in strong locations. The Outlook further reflects Scope’s expectation that ADLER’s financial risk profile will remain broadly stable. Scope anticipates that Scope-adjusted EBITDA interest cover will stay above 1.7x, although this depends on the allocation of debt between ADLER and its parent (ADO Properties S.A.). Leverage, as measured by the Scope-adjusted loan/value ratio, is expected to remain at around 55%, incorporating a successful debt to equity swap for EUR 0.5bn of the EUR 1.1bn intercompany loan provided by ADO. The allocation of future debt within the group could lead to significant changes in the Scope-adjusted loan/value ratio.

A negative rating action is possible if debt protection, as measured by Scope-adjusted EBITDA interest cover, decreases below 1.7x or if the company’s Scope-adjusted loan/value ratio increases to above 60% on a sustained basis. This could be the result, for instance, of a significant drop in achievable rent levels as a consequence of changes in regulation and/or a more prolonged economic downturn due to the Covid-19 pandemic or a strong reliance on debt-financed future growth.

A positive rating action could be warranted once a domination agreement between ADO Properties S.A. (the controlling entity) and ADLER (the controlled entity) is in place and if there is a positive rating differential between ADO and ALDER.

Long-term and short-term debt ratings

Scope’s recovery analysis indicates a ‘superior recovery’. However, due to risk and the possibility that additional senior secured debt will be introduced into the path to default (capital structure volatility), the agency has only applied one notch of uplift to the issuer rating, which translates into instrument ratings of BB+. Recovery is based on a hypothetical default scenario in FY 2022 with the company’s liquidation value amounting to EUR 3.8bn. This value is based on a 25% haircut applied to ADLER’s assets, reflecting a ‘BB’ category stress as per Scope’s methodology (including liquidation costs) and 10% for insolvency proceedings. This compares to secured financing of a forecasted EUR 1.2bn as well an unsecured EUR 1.5bn in bonds.

The unencumbered asset ratio stood at 129% as at end-June 2020.

Scope does not rate the debentures issued by Brack Capital Properties N.V. as they are not irrevocably guaranteed by ADLER Real Estate AG.

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: the rated entity, 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: Werner Stäblein, Executive Director
The ratings/outlooks were first released by Scope on 25 July 2016. The ratings/outlooks were last updated 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
© 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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