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 on Vonovia S.E and its financing subsidiary Vonovia Finance B.V. Scope has also affirmed the senior unsecured debt rating at A- and the short-term debt rating at S-1. The subordinated (hybrid) debt rating of BBB has been withdrawn as related debt instruments have been repaid in full.

Rating rationale

The rating affirmation is driven by Scope’s unchanged assessment on the company’s business risk profile (assessed at A) and financial risk profile (assessed at BBB). A new strategy adopted by Vonovia to counteract the steep rise in the cost of capital will have no impact on its strong position in the residential real estate markets of Germany, Sweden and Austria. The new strategy includes refraining from incremental debt issuances while potentially releasing capital via asset disposals. Scope also expects credit metrics to remain constant, supported by stable market fundamentals.

Vonovia’s portfolio grew to around 550,000 residential units as at end-March 2022 (up 33% YoY) following the acquisition of 87.6% of voting rights of Deutsche Wohnen S.E. as at end-October 2021 and the sale of around 15,000 residential units to the City of Berlin (Q1 2022). This number is expected to remain broadly stable with smaller bolt-on acquisitions and the development of rental apartments balancing recurring sales (2022 target: 3,300 units). Vonovia is considering disposing of i) its healthcare services division and related properties; ii) portfolios that do not strategically match; and iii) portfolios to joint venture structures to broaden the investor base while maintaining a majority stake. These potential disposals are not part of Scope’s rating case but would release capital, substantially reducing leverage. The disposals would have no effect on Vonovia’s position as a major stakeholder in the residential real estate markets of Germany (86% of net rental income as at end-March 2022), Sweden (11%) and Austria (3%).

Vonovia’s portfolio remains well-diversified and spread across metropolitan areas in Germany, Austria and Sweden. The addition of Deutsche Wohnen’s portfolio significantly increased the exposure to Germany – 89% of residential units (up 4pp YoY) and 86% of net rental income (up 5pp) as at end-March 2022 –, and especially to Berlin (around 27% of net rental income). Vonovia is seeking to mitigate inherent regulatory risk by appeasing stakeholders, through i) limiting rent increases; ii) actively contributing to government-led initiatives¹; and iii) not passing costs of refurbishing housing stock to save energy to tenants in full. Meanwhile, Vonovia has had to delay expansion plans beyond Germany as accretive acquisitions have become more scarce and less accessible. This is because of the higher cost of capital (due to rising interest rates and Vonovia’s falling share price) while market fundamentals have not changed. Hence, non-domestic rental income is only likely to reach above 15% in the medium term, the level commensurate with the assigned business risk profile.

Scope expects the portfolio’s key performance indicators to remain strong. These are the occupancy rate (97.6% as at end March 2022, up 40bp YoY), sticky tenant portfolio (12.8-year average lease) and rental income growth (3.9% like-for-like rental growth for the 12 months ending March 2022). Scope’s view is driven by the good property locations with positive demographics and liquidity as well as the improving property condition backed by substantial capex (EUR 2.2bn in 2021, estimated at EUR 76.1 per sq m). Scope forecasts that capex will remain at around EUR 1.7bn (including Deutsche Wohnen) to maintain the high run-rate for energy efficiency (at least 3% of the portfolio yearly) (ESG factor: credit-positive). However, the level is around EUR 0.6bn lower than Scope’s expectation for 2022 from the last rating review, driven by the company’s increased cost of capital.

Still, rental growth will remain strong (at least 3.3%) and support operating cash flow, boosted by expected synergies from the Deutsche Wohnen acquisition (EUR 105m run rate by 2024). These should help ease i) inflationary pressure on the company’s costs; ii) the impact of the shift of the development portfolio’s focus towards to develop-to-sell*; and, c) the higher risk of rent impairments given increased utility costs (mostly energy-related) that some tenants may be unable to cover. Thus, Scope anticipates stable profitability as measured by the Scope-adjusted EBITDA margin at around 75% (12 months to end-March 2022: 73%; up 20bp YoY).

Cash flow after discretionary spending will remain at break-even on average, benefiting from a lower acquisition volume and expansion capex for develop-to-hold projects. As a result, Vonovia has limited need for incremental debt issuances, allowing it to keep gross indebtedness stable and thereby support leverage and debt protection.

Debt protection as measured by Scope-adjusted EBITDA/interest cover is forecasted to remain above 4x (12 months ending March 2022: 4.5x; up 0.3x YoY) in the next few years. This will be backed by i) growing Scope-adjusted EBITDA on the back of high like-for-like rental growth; ii) the shift in expansion strategy targeting no incremental debt issuance for the time being; and iii) almost full hedging of interest rates (96% as at end-March 2022) and long average maturity (7.7 years) of debt, which will protect the weighted average cost of debt (1.2%) from rising interest rates (due to central banks attempting to stem inflation).

The Scope-adjusted loan/value ratio decreased to 44% as at end-March 2022 from a peak of above 50% in October 2021 that followed the cash-financed Deutsche Wohnen acquisition. The decrease was helped by a EUR 8.0bn equity issuance and EUR 2.8bn in fair value appreciations. The Scope-adjusted loan/value is forecasted to decline to around 40% in the coming years based on stable indebtedness and performance-driven fair value appreciation. Any significant downside in fair values will be largely mitigated by the remaining difference between reinstatement costs for residential real estate, of at least EUR 3,500 per sq m, and the company’s current valuation, which is significantly lower. Scope-adjusted debt/EBITDA is forecasted to fall from its 2021 peak (25x; up 10x YoY) and return to pre-acquisition levels of around 15x. Main drivers are the anticipated growth in EBITDA while indebtedness remains stable.

Vonovia’s liquidity is adequate based on Scope’s expectation that sources of liquidity will cover uses by about 1.0x in the 12 months to YE 2022. As at YE 2021 liquidity was exposed to a high amount of short-term debt (EUR 7.1bn) maturing in 2022. However, most was repaid in Q1 2022, including EUR 3.5bn related to the takeover of Deutsche Wohnen, reducing the amount to EUR 2.7bn as at end-March 2022. This balance can be easily covered by forecasted free operating cash flow (EUR 2.6bn), available cash (EUR 3.5bn as at end-March 2022) and undrawn committed credit lines (EUR 3.1bn).

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

Outlook and rating-change drivers

The Outlook for Vonovia remains Stable and reflects improving credit metrics in the medium term driven by lower expansion capex following the issuer’s ‘no incremental debt’ target, with the Scope-adjusted loan/value ratio anticipated to decline to around 40% and Scope-adjusted debt/EBITDA forecasted to reach around 15x in the next 12 to 18 months. The Outlook includes investments of EUR 2.0bn-2.8bn yearly during the forecasted period (including bolt-on acquisitions) targeting a carbon-neutral portfolio by 2045.

A negative rating action is possible if the Scope-adjusted loan/value ratio rose 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 or weaker market sentiment regarding residential real estate valuations, which Scope sees as a remote possibility at present. A negative rating action could also be triggered if the share of non-domestic net rental income cannot return above 15% in the medium term, likely triggered by growth focused on German peers.

A positive rating action is unlikely in the short term but could be warranted if the Scope-adjusted loan/value ratio dropped below 40% and Scope-adjusted debt/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. It is more likely that a positive rating action would be a consequence of an advanced business risk profile driven by a continued improvement of profitability.

Long-term and short-term debt ratings

As at end-May 2022, Vonovia had partially utilised a EUR 40bn EMTN programme. Senior unsecured debt, affirmed at A-, continues to benefit from an unencumbered asset ratio of 163%, as disclosed by the issuer, which provides a pool of collateral to debt holders.

Vonovia has repaid its EUR 1bn hybrid bond in 2021 and does not intend to issue similar debt instruments for the time being. Therefore, Scope has withdrawn its subordinated (hybrid) debt rating.

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-May 2022.

*Achievable EBITDA margins for the develop-to-sell business are significantly lower compared to buy-and-hold activities

Rating driver references
1. Company press release, 20 June 2022

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, (Corporate Rating Methodology, 6 July 2021; European Real Estate Rating Methodology, 25 January 2022), are available on https://scoperatings.com/governance-and-policies/rating-governance/methodologies
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 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 9 December 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 preceding this Credit Rating action: Rating Assessment Service.

Conditions of use/exclusion of liability
© 2022 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.