The latest information on the rating, including rating reports and related methodologies, is available on this LINK.

Rating action

Scope Ratings GmbH (Scope) has affirmed the A-/Stable issuer rating of Vonovia S.E and its financing subsidiary Vonovia Finance B.V. The senior unsecured debt rating has been affirmed at A-, the subordinated (hybrid) debt rating has been affirmed at BBB and the short-term rating has been affirmed at S-1.

Rating rationale

The rating affirmation follows the successful takeover of Deutsche Wohnen S.E. by Vonovia, which secured around 87.6% of the voting rights as at end-October 2021. Scope believes that the negative impact on Vonovia’s credit metrics of the EUR 19bn all-cash transaction (including Deutsche Wohnen’s convertible bonds and transaction costs) will be of a short-term nature. This is based on successfully executed deleveraging, including a EUR 8bn rights issue (closed on 7 December 2021), the EUR 2.5bn disposal of 15,000 residential units to the City of Berlin as well as EUR 5.1bn in fair value appreciation YTD. The latter benefited from the existing portfolio’s improved cash generation (3.5% like-for-like rental growth for the 12 months ending September 2021) as well as a severe supply shortage fuelling price levels for residential properties (evidenced by a rise in fair value of around 40% in Vonovia’s recurring sales segment YTD). Consequently, Scope forecasts that leverage will return to pre-transaction levels by YE 2022 at the latest.

Following the takeover of Deutsche Wohnen, Vonovia commands a portfolio of 568,451 residential units (+37% compared to end-March 2021), with Scope-adjusted total assets of EUR 106bn (+72%). This cements its leading position in Europe as well its status as one of the largest real estate companies in the world with a combined market capitalisation of over EUR 50bn.

While Vonovia has improved its market shares in Germany, the acquisition of the Germany-focused Deutsche Wohnen has decreased its share of non-domestic rental income to around 14% (-5pp), thus increasing the concentration on the German regulatory framework. However, Scope believes that Vonovia will reduce its relative exposure to Germany, based on its unchanged strategical goal to pursue further European expansion. As such, Scope expects Vonovia to increase its share of non-domestic rental income to above 15% in the medium term.

The stable performance of Vonovia’s existing portfolio (occupancy: 97.3% as at end September 2021 – unchanged YoY; 3.5% like-for-like rental growth for the 12 months ending September 2021) as well as that of Deutsche Wohnen (98.4% occupancy; 1.2% like-for-like rental growth, predominately exposed to markets with strong tenant and investor demand) support robust cash generation going forward. Profitability will take a slight hit from acquisition-related integration costs, stronger cost inflation as well as voluntarily limited rental growth in Berlin¹. However, Scope forecasts that Vonovia’s Scope-adjusted EBITDA margin will remain between 70%-75% in the next 12-18 months (73% for the 12 months ending September 2021 [+155bp YoY]) with some upside once expected synergies of EUR 105m (run rate) from the Deutsche Wohnen transaction have been achieved.

Robust cash generation supports Vonovia’s Scope-adjusted EBITDA interest cover (4.2x for the 12 months ending September 2021). Despite the increase in Scope-adjusted debt to EUR 46bn as at end-September 2021 (+84% compared to end-March 2021), interest cover is forecasted to remain above 4x going forward. Drivers are: i) the reduced weighted average cost of debt (1.1% as at end-September / -27bp); ii) a stable Scope-adjusted loan/value ratio (below 45%); iii) a fixed/hedged debt ratio (99%); and iv) a balanced maturity profile (around 10% of debt due per year).

Vonovia’s liquidty remains adequate.

Outlook and rating-change drivers

The Outlook for Vonovia remains Stable and incorporates the significantly increased operational portfolio following the successful acquisition of Deutsche Wohnen in Q4 2021. The Outlook further reflects credit metrics remaining constant in the medium term, with the Scope-adjusted loan/value ratio and Scope-adjusted debt/Scope-adjusted EBITDA anticipated to reach around 40%-45% and 18x respectively by YE 2022 following post-transaction peaks. Scope does not expect any further deleveraging as financial headroom will be used to cover bolt-on acquisitions as well as regular portfolio investment forecasted to range between EUR 2.0bn-2.3bn yearly, targeting a climate neutral portfolio by 2050.

A negative rating action is possible if Vonovia’s Scope-adjusted loan/value ratio rises above 45% on a sustained basis. This could be triggered by: i) a change in financial policy; or ii) a significant drop in portfolio value following an adverse change in German regulations. A negative rating action could also be triggered if Vonovia does not manage to return the non-domestic net rental income contribution to above 15% in the medium term, likely triggered by growth focused on German peers.

A positive rating action is unlikely but could be warranted if the Scope-adjusted loan/value ratio dropped below 40% and Scope-adjusted debt/Scope-adjusted EBITDA fell to around 8x, both on a sustained basis. This could result from a change in capital allocation or a reduction in both expansion capex and shareholder remuneration.

Long-term and short-term debt ratings

As at end-October 2021, Vonovia had partially utilised a EUR 30bn EMTN programme with issuances by Vonovia Finance B.V. guaranteed by Vonovia S.E. Senior unsecured debt benefits from an unencumbered asset ratio of 178%, as disclosed by the issuer, which provides a pool of collateral to debt holders.

Vonovia has also issued EUR 1bn in hybrid bonds. Scope has granted a 50% equity credit for the subordinated, unsecured and perpetual EUR 1bn hybrid bonds, which benefit from possible coupon deferral.

The S-1 short-term rating is supported by better-than-adequate internal liquidity, good banking relationships, strong access to diverse funding sources and access to undrawn, committed credit lines, which Scope believes allow the company to address short-term refinancing needs. Vonovia had a non-utilised EUR 3bn commercial paper programme as at end-November 2021.

Rating driver references
1. Press conference City of Berlin, Vonovia S.E. Deutsche Wohnen S.E.  

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 Outlooks, (Rating Methodology: 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, 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 Outlooks and the principal grounds on which the Credit Ratings and/or Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlooks are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlooks are UK-endorsed.
Lead analyst: Philipp Wass, Executive Director
Person responsible for approval of the Credit Ratings: Olaf Tölke, Managing Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 13 December 2019. The Credit Ratings/Outlooks were last updated on 26 May 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.
Scope Ratings provided the following Other Services to the Rated Entity and/or its Related Third Parties within the two years preceding this Credit Rating action: Rating Assessment Service.

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.