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Rating action

Scope Ratings GmbH (Scope) has today affirmed its BB/Stable issuer rating on Summus Capital OÜ. Scope has also affirmed the BB rating on the senior unsecured debt category.

Rating rationale

Summus continued to grow during the 12 months ending June 2022. Scope-adjusted total assets rose to EUR 416m (+16% YoY) and gross lettable area increased by 19%, partially enabled by positive funds from operations and the first tapping of capital markets (EUR 10m bond issued in 2021). The addition of two properties (Depo DIY and Damme shopping centre) to its core portfolio of income-generating assets as well as future acquisitions and the planned expansion in current assets (investment of about EUR 65m until 2024) will support the company’s current standing as the shopping mall operator in the Baltics. Summus’ geographical foothold is unchanged, with properties across the Baltic countries, but the presence in Latvia has increased (37% of total rental income). Thus, the company partially benefits from different demand patterns.

Summus’ business risk profile (assessed at BB) continues to be driven by the quality of its commercial real estate portfolio, with assets in Baltic capital cities, which are second-tier investment markets with stable tenant demand. This is evidenced by the portfolio’s high and stable occupancy rate of 97% as of June 2022. The rating remains underpinned by the ‘buy-and-hold’ investment approach, which results in stable rental cash flow. Although over 50% of rental income is derived from retail tenants, Summus’ properties proved resilient during the Covid-19 pandemic, with no significant impact on rent collections. Scope expects occupancy to remain above 95% based on healthy tenant demand and Summus’ ability to keep occupancy high.

Profitability, as measured by the Scope-adjusted EBITDA margin, was stable and stood at 64% as at end-June 2022. Scope foresees the EBITDA margin to remain above 60% in the next few years. Although operating expenses could come under pressure from increasing energy costs, Summus can pass on utilities costs in around 62% of lease agreements and most tenants with fixed-rate agreements pay their electricity costs, with their consumption measured by counters. In addition, Scope expects the inflation-driven rise in costs to be balanced by corresponding rental growth (around 95% of lease contracts have an indexation clause).

The rating remains constrained by the company’s small size and market shares. Even with plans to expand the income-generating portfolio, Summus will remain small in the European context and exposed to the retail segment. As such, Summus does not have substantial market power and is highly exposed to unforeseen shocks and volatile cash flows, although this is partially mitigated by the portfolio’s weighted average unexpired lease term of about five years. While there are more than 390 letting agreements, tenant diversification is still modest, with the top 10 accounting for about 40% of rental income. Tenants are mainly small retail operators, exposed to potential major changes in consumer habits accelerated by the pandemic such as the shift to e-commerce.

Summus’ financial risk profile (assessed at BB) is driven by its moderate credit metrics. Debt protection, as measured by Scope-adjusted EBITDA interest cover, stood at 2.8x in December 2021 (3.6x for the 12 months to June 2022). Scope expects debt protection to remain above 2x from 2022 on the back of i) stable operational cash flow; ii) the addition of income-producing assets; and iii) the relatively low average cost of bank financing (2.8% as at end-June 2022). Summus is exposed to interest rate risk as its bank loans pay variable interest rates (EURIBOR + 1.8%-2.5%), although mitigated by the policy to keep at least 50% of the loan portfolio hedged by interest rate swaps (60% to Q2 2022). Although Scope expects an increase in indebtedness as the portfolio grows, it also believes debt protection will remain above 2x, driven by the cash flow contribution from planned acquisitions.

Leverage, as measured by the Scope-adjusted loan/value ratio, stabilised as expected in a range of 50%-55% (end-June 2022: 53.8%), not considering outstanding subordinated loans from the shareholders (EUR 28.1m). The Scope-adjusted loan/value ratio is forecast to increase at around 55% in the coming years. This is based on the around EUR 60m in additional loans needed to finance the company’s business plan and the assumption of a 60%-65% loan/value ratio financing structure for the intended acquisitions. In addition, Summus’ portfolio is exposed to market pressure that could lead to yield expansion, especially regarding its shopping centres.

Summus’ liquidity is adequate, supported by unrestricted cash (EUR 13.8 m as at end-June 2022) and positive operational cash flow that covers short-term debt of about EUR 5m. Even if free operating cash flow turns negative due to investments in the next few years, capex is mostly discretionary and will be financed by a combination of available internal resources and financial debt.

Outlook and rating-change drivers

The Outlook remains Stable and incorporates: i) the successful execution of Summus’ business plan in the next few years, including acquisitions; ii) the extension of Riga Plaza, and iii) the portfolio’s average occupancy rate remaining above 97%. The rating case assumes that the Scope-adjusted loan/value ratio will stay around 55% going forward.

A positive action is possible if the Scope-adjusted loan/value ratio (leverage) decreased to around 50% while the company grew in size, thereby decreasing portfolio concentration. This could be achieved through new acquisitions financed with a higher share of equity relative to debt.

A negative rating action is possible if the Scope-adjusted EBITDA interest cover decreased below 2.0x and/or leverage increased, indicated by a Scope-adjusted loan/value ratio of above 60%. Leverage could rise if property values in the portfolio dropped considerably due to a shock in the Baltic real estate market – particularly regarding shopping centres – or if new properties are acquired via external financing with higher leverage than in Scope’s rating base case.

Long-term and short-term debt ratings

Summus has a EUR 10m senior unsecured corporate bond in terms of capital market debt as at end-June 2022. The bond’s tenor is three years with a fixed coupon of 6.75% and payments made four times a year.

Scope’s recovery analysis is based on a hypothetical default scenario in FY 2023 with a company liquidation value of EUR 337m. This value is based on a haircut of 25% to reflect liquidation costs and reasonable discounts to the company’s asset base as well as 10% for insolvency proceedings. Scope expects an ‘above average’ recovery for Summus’ senior unsecured debt (EUR 10m) but notes the high sensitivity of the portfolio to property advance rates. Scope has therefore assigned the debt class a rating of BB, in line with 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, (General Corporate Rating Methodology, 15 July 2022; 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, the Rated Entities' Related 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 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Henrik Blymke, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 September 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.

Conditions of use/exclusion of liability
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