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Rating action

Scope Ratings GmbH (Scope) has today affirmed the B+/Stable issuer rating of Appeninn Holding Nyrt. Scope has also affirmed the senior unsecured debt rating of B+.

Rating rationale

The affirmation is driven by credit metrics that have remained well within Scope’s rating guidance, largely due to robust operating performance and the successful integration of recently acquired properties. At the same time, Scope expects the company to keep leverage under control amid a challenging commercial real estate sector and continued pressure on property values.

The business risk profile (assessed at B) remains constrained by the company’s limited size, with Scope-adjusted total asset of EUR 190m at end-2023 (up 42% YoY), the still high concentration in Hungary despite recent diversification efforts, and the high concentration of the tenant portfolio, which increases risk of cash flow volatility. Scope is positive about the portfolio split between office, retail and industrial properties, as they benefit from slightly different patterns.

The perceived quality of Appeninn’s portfolio tends to be weak, underpinned by a high exposure to secondary locations and older properties in need of maintenance. These factors reduce attractiveness to potential tenants/investors, limit rental growth potential, contribute to high and persistent vacancy rates, and lower attainable values and liquidity. To address these issues, the company plans to increase capital expenditure (allocating approximately 2% of the portfolio value to maintenance annually), but also to consider disposing of some of its non core properties.

Profitability, as measured by the Scope-adjusted EBITDA margin reached 87% at the end of 2023 (based on preliminary figures; up 5 pp YoY), although it has been volatile, for example due to large fluctuations in transaction or maintenance costs. Scope expects profitability to remain volatile but above 60% going forward, as it will continue to be constrained by these variable costs.

The financial risk profile (revised to BB from BB-) reflects the company’s adequate debt protection and moderate leverage. Debt protection, as measured by the Scope-adjusted EBITDA/interest cover ratio reached 33.8x at the end of 2023 (based on preliminary figures; net interest income in 2022), as the higher interest burden was largely offset by interest income from excess liquidity. The level of interest cover is sufficient to meet current and future interest payments, while providing a buffer against potential cash flow volatility. In a dramatically changed interest rate environment, Appeninn will benefit from its relatively favourable debt structure (fixed-rate and long-dated), especially if profitability continues to develop positively.

Leverage, as measured by the Scope-adjusted loan/value ratio decreased to 48% at end-2023 (based on preliminary figures), down from 57% in 2022. The current leverage remains satisfactory for a buy-and-hold company, as it provides some headroom against potential volatility or decline in property values. Scope believes that property yields will remain under pressure due to weak market fundamentals, particularly in secondary locations. The agency anticipates that the company will keep its leverage below 55%, taking into account the additional debt to be raised in 2024 within conservative loan/value parameters.

Leverage on a cash flow basis has improved significantly, with Scope-adjusted debt/EBITDA falling to 8.6x at the end of 2023 (based on preliminary figures; 16.6x in 2022), thanks to the accretive EBITDA contribution from largely cash-financed acquisitions. Scope expects it to remain at similar levels going forward, although there is downside risk to cash flow due to the low weighted average unexpired lease term of the portfolio (approximately 4 years).

Appeninn’s liquidity is adequate, with cash sources (available cash of EUR 20.4m as of end-2023 and forecasted FOCF in 2024 of EUR 3m) fully covering short-term debt of EUR 2.3m due in the 12 months to end-December 2024. The company will be able to comfortably repay its debt in the next 12-18 months. Scope considers liquidity/refinancing risks to be manageable and expects liquidity to remain adequate in the short-term, owing largely to the lack of major upcoming debt maturities (no major repayments due before 2029).

Scope highlights that Appeninn’s senior unsecured bond issued under the Hungarian National Bank’s Bond Funding for Growth Scheme has a covenant requiring the accelerated repayment of the outstanding nominal debt amount (HUF 20bn) if the debt rating of the bond stays below B+ for more than two years (grace period) or drops below B- (immediate repayment). Such a development could adversely affect the company’s liquidity profile. The rating headroom to entering the grace period is zero notches. Given the limited rating headroom, the company must at least maintain its current credit profile to avoid triggering the rating-related covenant.

Scope acknowledges that improvements have been made in relation to the previously identified transparency and corporate governance issues (ESG factor: credit negative). In particular, Scope sees positive developments with the redefined strategy (which is expected to be maintained), the simplification of the corporate structure (registered regulated property investment company with SZIT status obtained in January 2024), the strengthening of management and internal functions, and the clarity and transparency of financial disclosures. However, Scope still sees persisting issues, particularly in relation to numerous interdependencies with closely related companies and the extensive use of outsourcing and third-parties.

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 the successful integration of recent acquisitions and Scope’s expectations that the company will continue to deliver solid operating performance and keep credit metrics within Scope’s rating guidance. The Stable Outlook also captures that liquidity will remain adequate and that the company will maintain a conservative financing policy. Scope expects leverage, as measured by the Scope-adjusted loan/value ratio, to remain below 55% and Scope-adjusted EBITDA/interest to remain above 2.2x.

A positive rating action is currently seen remote but could be warranted if the company reduced interdependencies with the owners’ other holdings and significantly improved its business risk profile, while keeping credit metrics in line with the rating scenario including a Scope-adjusted loan/value ratio of below 50% and a Scope-adjusted EBITDA/interest cover of at least 2.2x. An enhanced business risk profile could come from improved asset quality, broader diversification, or an increase in portfolio size that reduces the exposure to single tenants, thereby making cash flow less volatile.

A negative rating action could result from the Scope-adjusted loan/value ratio rising above 55% and Scope-adjusted EBITDA/interest cover falling below 1.7x on a sustained basis. This could be triggered by property yields widening beyond Scope’s expectations or high cash flow volatility arising from increased vacancies. Additionally, a change in strategy or business plan in the near or medium term could also lead to a downgrade.

Long-term debt rating

Scope has affirmed the B+ rating on Appeninn’s senior unsecured debt. Despite showing an ‘above-average’ recovery in a hypothetical 2025 default scenario based on the issuer’s liquidation value, Scope caps the rating to the issuer level given the limited creditor protection available to senior unsecured bondholders. Scope’s view is based on the assumption that the company would use all available headroom on a secured basis to maximise liquidity on the path to default, noting that the company already intends to do so in part to finance potential acquisitions in the near term. At the end of 2023, Appeninn had a large pool of assets not pledged as collateral, translating into an unencumbered asset ratio of well over 110%.

The rating was prepared with the application of Scope’s European Real Estate Rating Methodology, 25 January 2023. The application of the European Real Estate Rating Methodology, 28 March 2024, does not have an impact on the 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, (European Real Estate Rating Methodology, 28 March 2024; General Corporate Rating Methodology, 16 October 2023), 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 Credit Ratings were not requested by the Rated Entity or its Related Third Parties. The Credit Rating process was conducted:
With the Rated Entity or Related Third Party participation     YES
With access to internal documents                                        YES
With access to management                                                 YES
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 and/or Outlook 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: Fayçal Abdellouche, Specialist
Person responsible for approval of the Credit Ratings: Philipp Wass, Managing Director
The Credit Ratings/Outlook were first released by Scope Ratings on 1 October 2019. The Credit Ratings/Outlook were last updated on 5 April 2023.

Potential conflicts
See www.scoperatings.com under Governance & Policies/Regulatory for a list of potential conflicts of interest disclosures related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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