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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BBB-/Stable issuer rating of Globe Trade Centre S.A. (GTC) and its subsidiary GTC Real Estate Development Hungary Zrt. The senior unsecured debt rating has been affirmed at BBB-. Concurrently, Scope has affirmed the BBB- rating of the green notes (XS2356039268) issued by GTC Aurora Luxembourg S.A. that GTC unconditionally and irrevocably guarantees.

Rating rationale

The affirmation is driven by Scope’s expectation that GTC will show stable credit metrics despite increasing pressure on portfolio value and interest coverage due to rising interest rates and weaker tenant demand amid the economic slowdown and despite increasing obsolescence risk for parts of the portfolio.

GTC’s business risk profile (assessed at BBB-) benefits from the issuer’s positioning as one of the main commercial real estate players in Central Eastern Europe and Southeast Europe despite the disposal of its Serbian office portfolio in January 2022 (book value EUR 267m) and further disposals executed or earmarked in Romania, Hungary and Croatia (EUR 106m). The ongoing execution of GTC’s project pipeline with a gross development volume of EUR 507m as at end September 2022¹ and investments in a minority share of the Kildare Innovation Campus largely balance those disposals.

The Kildare Innovation Campus is a 72 ha site located outside Dublin. It has a focus on logistics and manufacturing activities but should be developed to host data centres and a life science park, offering rental spaces to leading science and technology companies. Scope views positively GTC’s decision to orientate its strategy towards the technology sector as demand is expected to grow for research centres, data centres, logistics infrastructure and digital hubs. Nevertheless, the agency does not expect this investment to generate positive cash flow in the short term. That means income-generating assets will remain mostly in GTC’s main markets of Poland and Hungary, with the latter being plagued by a strong increase in inflation, skyrocketing interest rates and depreciation of the Hungarian forint against the euro. However, GTC’s lease contracts are euro-denominated, protecting cash generation for the time being.

GTC’s exposure to retail tenants (35% of annualised in-place rent as at end-September 2022; down 6 pp YoY) benefits from retail performance that appears to have recovered following the pandemic. Turnover during the first nine months of 2022 exceeded the pre-Covid level, and October 2022 revenues from retail tenants were 111% of revenues in October 2019. The occupancy rate was 96%, up slightly (1 pp) versus December 2021.

GTC’s office segment has suffered from declining occupancy (down 4 pp YoY), driven by limited demand in some secondary markets, the ongoing refurbishment of Centre Point 1 and 2 and continued below-average occupancy rates for ABC II (delivered in 2020). Scope does not expect occupancy rates to improve in the short term given the planned disposal of higher-quality properties (Matrix A and B, Forrest Office Debrecen) that show above-average occupancy rates between 95%-100% and softer demand for office space in general. Risk regarding future occupancy levels is amplified by the relatively short WAULT of 3.6 years as at end-September 2022, which exposes GTC to ongoing re-letting risk, especially in light of muted demand. Going forward, Scope expects GTC will need to increase spending on aged assets in the portfolio to be able to successfully re-let vacant space. However, it views the majority of GTC’s portfolio as relatively well protected thanks to several supporting features, such as a low economic age of around eight years, locations in the central business district (offices) and relatively little competition (retail excluding Warsaw).

The Scope-adjusted EBITDA margin remained above 80% (last twelve months to end-September 2022: 84%; down 1 pp YoY) and is forecasted to do so going forward. This trend will be driven by a relatively lean organisational setup paired with relatively strong year-on-year top line growth of around 5% in 2023 (like for like) and 2% in 2024.

GTC’s financial risk profile (assessed at BBB-) is supported by Scope’s expectation of stable credit metrics despite widening yields and increasing cost of debt. This is thanks to at least break-even free operating cash flow (FOCF) and a strategy to fund future expansion through own liquidity and equity issuances.

Scope does not expect the issuer to be significantly impacted by a changing interest rate environment in the short to medium term as 95% of its debt is either fixed or hedged. However, new debt will bear notably higher interest rates, and the unhedged share of debt, while negligible, allows the pass-through of rate increases that have taken place since Q1 2022. Thus, Scope expects the weighted average cost of debt to increase to close to 3% by YE 2023. Still, interest cover should remain comfortably above 3x, supported by the issuer’s inflation-linked revenue base. Nevertheless, the agency only believes a portion will be passed on to tenants given the challenging economic environment and limited demand for some of GTC’s office portfolio.

In addition, committed capital expenditure of EUR 127m between 2022 and 2024 is expected to be covered by operational cash flow. This will create room to deleverage to compensate for pressure on achievable rent levels, rising interest rates and yield-widening.

The Scope-adjusted loan-to-value (LTV) ratio stood at 46% as at end-September 2022. Scope expects the LTV ratio to remain between 45%-50% due to a steadily growing revenue base. This will partially compensate for widening yields (anticipated to widen between 150 bps and 175 bps by YE 2024) and support break-even FOCF that allows for deleveraging. The issuer’s strategy is to maintain or reduce its leverage given the current unfavourable cost of funding and to fund future expansion through own liquidity and equity issuances.

Scope views positively GTC’s ability to keep its Scope-adjusted debt/EBITDA stable at around 10x in the past. This level indicates that the fair value growth of its properties was well balanced between yield compression and rent increases, protecting leverage levels in a changing yield environment going forward.

Liquidity is expected to remain adequate going forward based on debt maturities in the 24 months to end-September 2024 (EUR 101m), which are expected to be easily covered by cash sources. Such sources include available cash of EUR 127m, an undrawn revolving credit facility of EUR 94m (both as at end-September 2022) and positive FOCF of EUR 107m forecasted for the same period. Still, GTC shows a relatively low weighted average debt maturity of four to five years (end-September 2022: 4.5 years) including major refinancings in 2026 (EUR 770m).

Outlook and rating-change drivers

The Outlook for GTC is Stable and reflects Scope’s view that the issuer’s portfolio will show positive like-for-like growth in rents. This will partially compensate for pressure on capitalisation rates and increasing cost of debt while supporting at least break-even FOCF, which will help cover dividend payments equating to approximately 50% of reported FFO annually. Consequently, the agency assumes broadly stable credit metrics going forward, with a Scope-adjusted LTV ratio between 45%-50% and Scope-adjusted EBITDA interest cover of above 3x.

A positive action is seen as remote and would require the issuer to reduce leverage, as measured by its Scope-adjusted LTV ratio, to around 40% on a sustained basis, supported by commensurate financial policy. This could happen if GTC managed to increase rental cash flow, thus enlarging its financial headroom to repay debt and support stable or increasing portfolio value.

A negative rating action is possible if the issuer’s Scope-adjusted LTV ratio increased to around 55% on a sustained basis, potentially triggered by a drop in the portfolio value of GTC’s assets beyond Scope’s expectations.

Long-term debt ratings

GTC has EUR 689m in capital market debt outstanding as at end-September 2022. All issuances are irrevocably and unconditionally guaranteed by Globe Trade Centre S.A.

The issuer’s unencumbered asset ratio stands at around 200% as at end-September 2022. This provides sufficient collateral to bondholders, justifying the senior unsecured debt rating of BBB-.

1. Current pre-letting rates of 64% based on estimated rental values

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, (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 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 12 November 2020. The Credit Ratings/Outlooks were last updated on 24 January 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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