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Rating action

Scope Ratings GmbH (Scope) has affirmed its BB/Stable corporate issuer rating and BB+ senior unsecured debt rating on German real estate company Adler Real Estate AG.

Rating rationale

Following Adler Real Estate’s acquisition by Adler Group last year and their subsequent integration, the ratings on Adler Real Estate are now influenced by Scope’s view of the credit standing of Adler Group. Adler Real Estate’s operational and financial strategies are now directed by Adler Group.

Adler Real Estate continues to benefit from a strong business risk profile, based on its large-scale, well-diversified property portfolio by both geographies and tenants, bolstered by the integration with the even larger Adler Group. The ratings are constrained by Adler Group’s slightly higher leverage and weaker debt service cover than at Adler Real Estate.

Adler Group reported significantly stronger earnings for H1 2021 on the back of the full-period contribution from Adler Real Estate and Consus Real Estate AG, along with refinancing initiatives, portfolio rotation and positive like-for-like rental growth. Adler Group now ranks as Europe’s fourth largest residential real estate company, controlling 69,701 residential real estate units (EUR 8.9bn of which are yielding assets) in seven of Germany’s largest cities and a develop-to-hold pipeline of around 10,000 units. Like-for-like rental growth was 4.3% in H1 2021 on the back of active portfolio management/optimisation and the overturning of the Berlin rent freeze (37% of Adler Group’s net rental income is generated in Berlin). The portfolio vacancy stood at a low 3.8% at June 2021.

Adler Group has realised financial and operational synergies with the acquired companies, including the lowering of its average cost of debt through the issuance of EUR 2.6bn of bonds and bank loans in H1 2021, with part of proceeds used to refinance debt at Adler Real Estate and Consus Real Estate AG.

Revaluation gains at Adler Group and Adler Real Estate resulted in a reduction in their Scope-adjusted loan-to-value ratios, to 56% and 53% respectively as at June 2021. Scope notes positively Adler Group’s medium-term loan-to-value target of below 50%. The financial risk assessments are held back by the relatively weak Scope-adjusted EBITDA interest cover ratios of 1.7x for Adler Real Estate and 0.7x for Adler Group during H1 2021. Scope expects the ratios to improve to above 2.0x and 1.5x respectively within a year.

With EUR 2.6bn of funds raised in 2021, Adler Group’s liquidity is considered adequate. Scope expects Adler Real Estate to continue to finance debt maturities through intragroup loans with Adler Group, as was the case during H1 2021. Adler Group had EUR 370m of cash, a EUR 300m unutilised revolving credit facility and EUR 1bn of short-term debt as at June 2021.

Adler Group acquired Adler Real Estate in April 2020 and held 97% of its shares as at June 2021. Scope believes Adler Group’s willingness to support Adler Real Estate is high, given the anticipated execution of a domination agreement in the near term, the consolidation of operations, the integration of financial and asset management operations and a shared name. Scope expects the two companies to be fully integrated once the domination agreement has been executed and sees the credit profiles of the two companies as closely linked.

Outlook and rating-change drivers

The Outlook for Adler Real Estate is Stable. Scope expects the business and financial risk profiles of Adler Real Estate and its controlling parent to remain broadly stable, with a gradual improvement in credit metrics over time, somewhat offset by the greater development exposure with the associated execution risks (permitting, construction, letting and sales risk).

A negative rating action is possible if debt protection, measured by Scope-adjusted EBITDA interest cover, decreased below 1.7x or the Scope-adjusted loan/value ratio increased above 60% on a sustained basis. This could be the result of a significant drop in rents because of changes in regulation, a more prolonged economic downturn due to the Covid-19 pandemic, and/or debt-financed growth.

A positive rating action could be warranted if leverage reduced in line with the group’s medium-term target once the domination agreement with Adler Group is in place.

Long-term and short-term debt ratings

Scope’s recovery analysis indicates a ‘superior’ recovery rate for senior unsecured creditors of Adler Real Estate. The recovery assessment is based on a hypothetical default scenario in 2023 with the company’s liquidation value amounting to EUR 4.1bn. This value is based on a 43% haircut applied to the forecast book value of the asset, reflecting a ‘BB’ category stress (including liquidation costs) and a 10% cost for insolvency proceedings. This compares to secured debt forecast at EUR 2.2bn and senior unsecured debt of EUR 1.1bn. The recovery assessment translates into a senior unsecured debt rating of BB+, one notch above the issuer rating.

Scope has not rated the senior unsecured debt higher than the issuer rating because Adler Group intends to raise more secured financing. The current headroom is up to EUR 930m of additional secured debt under its unencumbered asset ratio covenant of a minimum 125% (actual figure as at June 2021 of 139.5%). 

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 Outlooks (European Real Estate Corporates, 15 January 2021; Corporate Rating Methodology, 6 July 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 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 Outlook and the principal grounds on which the Credit Ratings and Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
The Credit Ratings and Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and Outlook iare UK-endorsed.
Lead analyst: Tommy Träsk, Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The issuer Credit Rating/Outlook was first released by Scope Ratings on 25 July  2016. The Credit Rating/Outlook was last updated on 30 September 2020.
The senior unsecured debt Credit Rating was first released by Scope Ratings on 11 January* 2018. The Credit Rating was last updated on 30 September 2020.
* The month was amended on 15 October 2021. In the original publication the month was November.

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
© 2021 Scope SE & Co. KGaA and all its subsidiaries including Scope Ratings GmbH, Scope Ratings UK Limited, Scope Analysis GmbH, Scope Investor Services GmbH, and Scope ESG Analysis 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.