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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time issuer rating of BB/Stable to Summus Capital OÜ. Scope has also assigned a first-time rating of BB to the company’s senior unsecured debt.

Rating rationale

Summus’ business risk profile (assessed at BB) is driven by its commercial real estate portfolio exposure to second-tier investment markets with stable tenant demand, as evidenced by a high and stable occupancy rate of above 98% in the last four years (96% as at June 2021). The rating is underpinned by Summus’ ‘buy-and-hold’ investment approach, which results in stable rental cash flow generation. Although over 50% of its rental income is derived from retail tenants, Summus’ properties proved resilient during the Covid-19 pandemic, with no significative impact on rent. The rating is also driven by the company’s fairly well diversified portfolio across the Baltic region of Lithuania (47% of gross asset value), Latvia (28%) and Estonia (25%). Although these are relatively small markets in a European context, their slightly different demand patterns should partially mitigate the effects of cyclical swings. Profitability, as measured by the Scope-adjusted EBITDA margin, has also remained stable and above 60% in the last few years. Scope expects occupancy to remain at above 95% based on healthy demand in the tenant market and Summus’ demonstrated ability to maintain high occupancy in its buildings.

The rating is mainly constrained by the company’s small size and market shares, with Scope-adjusted total assets of around EUR 350m as of June 2021. Given its limited size, Summus does not have substantial market power and is highly exposed to unforeseen shocks and volatile cash flows, although this is partially mitigated by the portfolio’s weighted average unexpired lease term (WAULT) of 5.4 years. Summus plans to expand its income-generating portfolio of properties and aims to invest about EUR 150m in the period to 2023. Despite this, Scope expects Summus to remain relatively small and exposed to the retail segment, which faces major changes in consumer habits exacerbated by the pandemic, such as the shift to e-commerce. Modest tenant diversification (the top three tenants account for 20% of rental income as of June 2021) further constrain the rating.

Summus’ financial risk profile (assessed at BB) is driven by its moderate credit metrics. These include adequate debt protection, as measured by Scope-adjusted EBITDA interest cover of 3.4x as at December 2020, benefitting from a relatively low average cost of debt (2.8% on average). Although Scope expects an increase in the company’s indebtedness, the agency believes debt protection will remain above 2x, driven by the positive cash flow contribution from planned acquisitions (estimated additional uplift of EUR 10m in gross rental income by 2023). Leverage, as measured by the Scope-adjusted loan/value ratio, stood at 53% as at December 2020, not considering outstanding majority shareholder loans of EUR 98.6m as at December 2020, of which about 80% was converted into equity in April 2021. Scope forecasts that the Scope-adjusted loan/value ratio will increase towards 60% in the coming years. This is based on the most recent EUR 10m bond issuance, approx. EUR 100m in additional loans needed to finance the company’s business plan and the assumption of a 65% loan/value ratio financing structure for the intended acquisitions.

Summus’ liquidity is adequate, supported by unrestricted cash (EUR 18m as at June 2021) and positive operational cash flow that covers short-term debt of about EUR 8.9m, due in the period to YE 2021. Even if free operating cash flow turns negative due to investments in the next few years, capex is mostly discretionary and will be financed by a combination of available internal resources and financial debt, including the bond issuance and bank loans.

Outlook and rating-change drivers

The Outlook is Stable and incorporates: i) the successful execution of Summus’ business plan including intended acquisitions in the next few years; ii) the extension of Riga Plaza, currently pre-let on a long-term lease basis; and iii) the portfolio’s average occupancy rate to remain above 95%. Scope’s rating case assumes that the Scope-adjusted loan/value ratio will increase towards 60%.

A positive action is possible if the Scope-adjusted loan/value ratio (leverage) decreases to around 50% while the company grows in size, thereby decreasing portfolio concentration. This could be achieved by new acquisitions financed with a higher share of equity relative to debt.

A negative rating action is possible if Scope-adjusted EBITDA interest cover decreases below 2.0x and/or leverage increases, indicated by a Scope-adjusted loan/value ratio above 60%. Leverage could rise if property values in the portfolio drop considerably due to a sudden shock in the Baltic real estate market – particularly regarding shopping centres – or if new properties are acquired via external financing with higher leverage than in our rating base case.

Long-term and short-term debt ratings

Summus issued a EUR 10m senior unsecured corporate bond in June 2021. The bond’s tenor is three years with a fixed coupon of 6.75% and payments made four times per year. Proceeds are earmarked for the acquisition of revenue-generating properties.

Scope’s recovery analysis is based on a hypothetical default scenario in FY 2022 with a company liquidation value of EUR 288m. This value is based on a haircut of 25% to reflect liquidation costs and reasonable discounts to the company’s asset base as well as 10% for insolvency proceedings. This compares to secured financing of a forecasted EUR 230m and senior unsecured debt of EUR 10m.

Scope expects an ‘above average’ recovery for Summus’ senior unsecured debt (EUR 10m) but notes the high sensibility the sensibility analysis regarding the portfolio of property’s advance rate and therefore assigns the debt class a rating of BB, in line with the issuer rating. 

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

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Real Estate Corporates, 15 January 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other 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 Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. 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 Ratings’ definitions of default and Credit 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 factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity, the Rated Entities' Related Third Parties and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 September 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures 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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