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Rating action

Scope Ratings GmbH (Scope) has assigned a first-time issuer rating of BB/Stable to Luxembourg registered real estate developer MG RE Invest S.A. Scope has also assigned a first-time rating of BB to the company’s senior unsecured debt.

Rating rationale

MG Real Estate’s business risk profile (assessed at BB-) is driven by the high industry risk for commercial real estate developers and the company’s relatively small size, balanced by a strong developer track record, a conservative approach to development risk, high asset quality and a large pipeline.

With an active development pipeline of EUR 500-600m (500-600k sqm of GLA) for 2022 and 2023 combined, the company has a sizeable market position in logistics real estate development in its home market of Belgium (68% of pipeline), but it is relatively small in a European context, compared to for example Panattoni with over 4m sqm under construction. MG Real Estate also has significant developments underway in Denmark (16% of development pipeline) and Sweden (9%). Its relatively small size has resulted in high cash flow volatility in the past. However, this is partially mitigated by the fact that the development pipeline is diverse for a company of its size, with 16 assets under construction, largely pre-let or pre-sold to tenants and investors with a good credit standing. The developments are generally of a high quality, commanding above-average rent, benefitting from very long (15+ year) leases and BREEAM assessments of at least “very good”.

Around 75% of developments scheduled for completion in 2022 and 70% of those scheduled for completion in 2023 are either pre-let or pre-sold, significantly mitigating development risk. This reflects the very strong demand and shortage of supply for logistics real estate in Europe, fuelled by the rise in e-commerce and supply chain optimization. MG Real Estate is well positioned to benefit from this with a pipeline of around 1.0m sqm of logistics real estate secured by a land bank (freehold, leasehold and contract). The company also develops residential real estate in Belgium (18% of development pipeline), which adds some diversification and stability. As a private company owned and directed by a single individual, it is subject to key man risk [ESG factor: credit negative]. We think this risk is partially mitigated by a competent senior management team, however.

MG Real Estate’s financial risk profile (assessed at BBB-) reflects moderate financial leverage with Scope-adjusted debt (SaD)/Scope-adjusted EBITDA of 2.8x at YE 2021 and Scope-adjusted EBITDA interest coverage of 10.3x. Although the company has operated with much higher leverage in the past and experienced significant cash flow volatility, we expect leverage and interest coverage metrics to remain around these levels for the next two years as MG Real Estate executes its pipeline of largely pre-let and pre-sold properties and no M&A or shareholder distributions are expected. The timing of development handovers, rapidly rising inflation and working capital fluctuations could still cause volatility, however, and with about half of debt floating, the company is exposed to interest rate risk.

Liquidity is adequate. It is supported by the company policy of maintaining at least EUR 20m of cash balances (EUR 35m at YE 2021) as well as EUR 35m of long-term committed credit lines (of which EUR 7.5m were utilised at YE 2021), compared to short-term debt of EUR 61m. MG Real Estate also had EUR 147m of unencumbered real estate (land and projects under development) at YE 2021 that can be used as collateral for external financing. Development expenditures are 60%-80% financed by secured bank loans at the SPV level, largely covering associated cash outflow.

One or more key drivers of the credit rating action are considered an ESG factor.

Outlook and rating-change drivers

The Stable Outlook is based on robust market conditions for logistics property in Europe and residential property in Belgium, as well as MG Real Estate’s strong backlog, robust level of pre-lets and pre-sales for 2022 and 2023, with execution risk partially mitigated by strong developer track record. We expect SaD/Scope-adjusted EBITDA to remain around 3x and Scope-adjusted EBITDA/interest cover above 6x over the next two years.

A negative rating action might occur if the Scope-adjusted EBITDA/interest cover ratio drops to significantly below 4x or SaD/Scope-adjusted EBITDA significantly exceeds 6x on a sustained basis. This could result from, for example, cost overruns or delays in the company’s existing development projects, or the inability to sustain the delivery of new developments at the current pace.

A positive rating action might be warranted if MG Real Estate continues to grow in size and geographic diversification, and maintains credit metrics in line with the above guidelines.

Long-term and short-term debt ratings

About half of debt is accounted for by secured development loans at SPV level. The other half comprises unsecured bonds and bank loans at the holding company level (MG RE Invest S.A.). The company plans to issue a EUR 50m senior unsecured corporate green bond in 2022.

Our recovery analysis is based on a hypothetical default scenario at year-end 2023 and assumes a liquidation of the business. This scenario results in an average (30%-50%) recovery rate for senior unsecured debt, which is legally and structurally subordinated to the development loans. Unencumbered assets covered unsecured debt by about 1.7x at YE 2021. This assessment translates into a BB rating for senior unsecured debt, at the same level as 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, 25 January 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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-governance/definitions-and-scales. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://scoperatings.com/governance-and-policies/regulatory/eu-regulation. 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-governance/definitions-and-scales. 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://scoperatings.com/governance-and-policies/rating-governance/methodologies.
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/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not 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: Tommy Träsk, Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 7 April 2022.

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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