Scope Ratings GmbH (“Scope”) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations, performs a monitoring review.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. As part of the monitoring review, Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted either by performing a peer comparison, benchmarking against the rating change drivers, and/or a review of the credit ratings` performance over time, as deemed appropriate by the Lead Analyst or the Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology(ies), including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Deutsche Konsum REIT-AG (BB+/Stable) on 27 September 2021.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action on the credit ratings of this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

The issuer rating of BB+ is supported by the size Deutsche Konsum REIT-AG (DKR) has achieved in the niche market of commercial real estate with a focus on non-cyclical retail. The company grew strongly in the 12 months to end-June 2021, adding 33 (net) properties to its portfolio. This lifted its gross leasable area to 988,862 sq m (+14% YoY) and Scope-adjusted total assets to EUR 1.0bn (23%), also benefitting from EUR 52m in fair value uplifts in the year ending June 2021. However, Scope still considers DKR’s size to be limited in a European context and expects this to constrain the company’s access to capital markets in times of economic turmoil.

While DKR’s portfolio is diversified across Germany, it remains exposed to relatively high – though improving – tenant concentration. The top three tenants account for 33% of (pro forma) annualised rental income (-6pp YoY) as at end-June 2021. Scope sees associated risk as manageable since the top three tenant exposures consist of 112 individual lease contracts across eleven different sales banners, including as an example EDEKA, Netto Marken-Discount, NP Discount, diska and trinkgut (all for Edeka Group). Furthermore, Scope views all of the top three tenants as having investment grade credit quality.

Key performance indicators of DKR’s asset quality remained broadly unchanged. Occupancy is stable, at 89% (based on gross leasable area), the weighted average unexpired lease term is 5.6 years (-0.1 year YoY) and average rent is around EUR 6 per sq m and month (-1% YoY), all of which lead to predictable and steady cash flows. Nonetheless, Scope sees high downside volatility for the property portfolio due to relatively small ticket sizes and weak macro locations, both resulting in limited fungibility. However, DKR disposed of seven properties at a yield of 5.5%¹, evidencing increased investor demand for small food-anchored retail properties.

The Scope-adjusted EBITDA margin remained flat at 63% for the twelve months to end-June 2021 (+/-0 pp YoY). This was despite more severe restrictions on operations (lockdown) than in 2020, as the government responded to the second and third waves of the pandemic. Going forward, Scope believes that profitability should improve back to around 70%, benefitting from economies of scale as evidenced by a 13% YoY decline in the administrative expense ratio.

An implicit floor on revenue diversification affords good debt protection. Thus, even though Scope-adjusted EBITDA interest cover has weakened over the last twelve months to 4.1x (-0.7x YoY) for the year ending June 2021, it is still at a level commensurate with DKR’s financial risk profile (assessed at BBB-). Scope expects interest cover to remain above 3x for the foreseeable future. This is based on Scope’s expectation that growth will be funded with a balance of debt and equity (i.e. capital increases, fair value uplifts and disposal profits from capital recycling), largely offsetting yield compression in DKR’s acquisition pipeline. The company’s Scope-adjusted loan/value ratio stood at 55% as at end-June 2021 (+2pp YoY), in line with Scope’s rating case. Implicit caps on leverage (G-REIT regulation) support the agency’s view that DKR will maintain a maximum loan/value ratio of 55% going forward.

Scope’s overall assessment of DKR’s financial risk profile is negatively affected by its ambitious growth plans for the next few years.

Rating driver references
1. Company announcement, 29.09.2021 

The methodologies applicable for the reviewed ratings and rating 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.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0.
Lead analyst: Philipp Wass, Executive Director

© 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