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Rating action

Scope Ratings GmbH (Scope) has today affirmed the BB/Stable issuer rating of MG RE Invest S.A. (MG RE). Scope has also affirmed the BB senior unsecured debt rating.

Rating rationale

The affirmation is driven by credit metrics that have remained well within Scope’s rating guidance, largely thanks to the successful pipeline execution, which is predominantly exposed to the logistics segment with robust underlying fundamentals. Scope expects the company to keep leverage under control amid a challenging environment for real estate developers and the repricing of properties.

The business risk profile (assessed at BB-) is driven by the high industry risk for commercial real estate development (80% of the development pipeline) and MG RE’s relatively small size, which is balanced by a sound record as a developer, a prudent approach towards development risks and a strong focus on high quality properties. The company is among the largest developers of industrial and logistics space in its home market of Belgium where it held more than 10% of delivered space in 2022, but remains comparatively small in the European context despite its sizeable pipeline (1.3 million sq m of gross lettable area). While the company has been pursuing a stepwise geographical expansion since 2015, projects remain predominantly located in Belgium (70% of the pipeline). In terms of segments, the development portfolio is largely skewed towards industrial/logistics projects (71% of the pipeline as of end-2022), although it is complemented by other property segments (i.e. office, retail, residential) that have slightly different patterns. The industrial/logistics segment benefits from long-running positive market drivers, mainly provided by the rapid growth of e-commerce and the occupiers’ willingness to optimise supply chains, which the company is well positioned to capitalise on. The development pipeline is well distributed across 27 projects (of which 13 were under construction as of end-2022), thus limiting concentration risks and the need to deploy substantial resources, as only a handful of projects individually exceed EUR 75m in investment. The high-quality positioning of the company’s projects also translates into high rental values (in line or above prime rents), long-dated lease terms (above 10 years on average) and high sustainability standards (minimum ‘very good’ BREEAM building certification), which supports the saleability of properties.

Scope anticipates profitability (Scope-adjusted EBITDA margin) will remain between 30% and 40% in 2023, supported by the volume of secured sales and the assumption that part of the higher costs will be passed on to the end-buyers. Nonetheless, Scope expects profitability to fall back towards 30% or below from 2024, on the back of potential lower exit values due to yield movements and inflationary tensions. In that regard, Scope believes that MG RE will enforce cost discipline and keep potential cost overruns under control.

As a private company owned and directed by a single individual, it is subject to key man risk (ESG factor: credit negative). This risk is partially mitigated by a competent senior management team.

MG RE’s financial risk profile (assessed at BBB-) reflects the company’s adequate debt protection and moderate leverage. Debt protection, as measured by the Scope-adjusted EBITDA interest cover, reached 10.1x as of end-2022 (end-2021: 10.3x), largely supported by robust sales and improved profitability. Scope considers the interest cover to be sufficient to serve current and future interest payments, while providing some headroom against potential cash flow volatility. Having about two-thirds of its debt at a floating rate (indexed to Euribor), the issuer is exposed to interest risks and its cost of debt climbed to 4.5% as of Q1 2023. To mitigate the impacts of rising interest rates, the company has opened an interest-rate-swap position (2% cap rate up to EUR 80m of debt). Scope anticipates interest cover will stand above 4x, taking into consideration a higher interest burden from project financings, potential volatility in earnings and reliance on short-term financing with development spendings unmatched by cash flow generation.

Leverage, as measured by Scope-adjusted debt/EBITDA, stood at 3.9x as at end-2022 (end-2021: 3.2x), although it remains well below its 2018-2020 peaks. Leverage remains satisfactory for a real estate developer, as it provides some headroom against potential volatility in earnings, a decline in property values or a decrease in demand. Indebtedness has been rising since 2020, with Scope-adjusted debt reaching EUR 268m at end-2022 (up by EUR 141m from end-2020). As most ongoing developments are already financed through project loans (loan-to-cost ranging from 50% to 90%), Scope does not anticipate any major debt issuance in the foreseeable future, but rather a recourse to short-term instruments that will be rolled over (i.e. commercial papers, revolving credit lines) to fund working capital. As such, Scope expects leverage to remain below 6x, noting that the company still has some leeway under its development spendings, having the discretion to postpone or even cancel projects to safeguard capital.

Liquidity remains adequate despite being below par for the 12 months to end-December 2023 with an anticipated shortfall of EUR 55m. Scope’s view is comforted by the company’s prudent liquidity management, which aims to maintain a minimum cash position of EUR 20m (EUR 36.4m as of end-2022), its consistent record of rolling over or repaying debt and its access to committed credit facilities. In view of the issuer’s good relationship with a diversified banking pool and its sound record in the capital markets, liquidity and refinancing risks are manageable, also thanks to the lack of major upcoming debt maturities in the short term.

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

Outlook and rating-change drivers

The Outlook is Stable and reflects Scope’s view that the company will successfully execute its development pipeline amid favourable market drivers for the logistics segment and maintain a careful approach towards development risks. Moreover, the Stable Outlook reflects Scope’s expectations that the company will keep leverage under control, with Scope-adjusted debt/EBITDA below 6x.

A negative rating action could be warranted if Scope-adjusted debt/EBITDA exceeded 6x or Scope-adjusted EBITDA/interest cover dropped below 4x on a sustained basis. This could be triggered by lower exit values due to widening yields, cost overruns or prolonged disposal periods.

A positive rating action might be warranted if the company increased its size and improved its development pipeline diversification while keeping credit metrics within Scope’s rating guidance.

Long-term debt rating

Scope has affirmed the BB debt rating to senior unsecured debt issued by MG RE Invest S.A. Scope expects an ‘average’ recovery for outstanding senior unsecured debt in a hypothetical default scenario in 2024 based on the company’s liquidation value.

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 Outlooks, (European Real Estate Rating Methodology, 25 January 2023; General Corporate Rating Methodology, 15 July 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 and the Rated Entity.
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 Outlooks and the principal grounds on which the Credit Ratings and Outlooks are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and 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: Fayçal Abdellouche, Specialist
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlooks were first released by Scope Ratings on 7 April 2022.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory 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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