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Rating action

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

The affirmation reflects Scope’s expectation of stable credit metrics underpinned by Summus’s portfolio of properties, which benefits from stable recurring income. The addition of new properties to the portfolio, with an estimated total investment of around EUR 100m, will improve Summus’ recurring income generation, but will also put some pressure on the company’s leverage and interest coverage due to the higher interest expenses.

The full list of rating actions and rated entities is at the end of this rating action release.

Key rating drivers

Business risk profile: BB (unchanged). The business risk profile remains underpinned by the issuer’s high-quality portfolio of assets in Baltic capital cities, which are second-tier investment markets with stable tenant demand.

Summus buy-and-hold investment approach provides stable rental cash flows. The portfolio generated EUR 30m in net annual rental income in 2023, an increase of 8% YoY. Scope expects that rental growth to remain resilient, supported by the portfolio’s high and stable occupancy rate and the inflation-linked contracts covering almost all rental income.

With higher capital costs and fewer opportunities in core markets, most market participants have taken a wait-and-see approach to property sales in recent years. Summus made no additions to its portfolio in 2023, and its Scope-adjusted total assets* remained broadly stable at EUR 410m (down 0,7% YoY) at the end of 2023. However, the company intends to invest around EUR 100m to expand its portfolio over the next twelve months, with potential acquisitions being outside its traditional key markets. Nevertheless, Scope therefore expects Summus’ geographic footprint to remain predominantly in the Baltic region.

The portfolio’s occupancy rate remains high and stable at 97% as of June 2024. Although demand for office space is uncertain due to the massive shift to hybrid working models, Scope expects Summus’ office portfolio to continue to enjoy robust demand. This is due to tenants’ preference for best-in-class, energy-efficient space in prime locations –Summus’ office building properties have LEED or BREEAM environmental certifications. Regarding the retail portfolio (over 50% of rental income), Summus’ properties proved resilient during the Covid-19 pandemic and footfall that continues to recover. About 86% of the portfolio’s gross asset value is LEED or BREEAM certified. Summus’ aims to ensure that 100% of new investment is in buildings with at least a BREEAM or LEED Silver certification by 2025.

Profitability, as measured by the EBITDA margin, remained stable at over 85% at the end of June 2024 (and 5pp above Scope’s forecast). In 2023, the company’s energy efficiency initiatives taken in recent years combined with lower energy costs, resulted in a 9% reduction in the net service costs. Summus is able to pass on approximately 60% of utility costs through leases and most tenants with fixed-rate agreements pay for electricity consumption as measured by counters. Scope foresees the EBITDA margin to remain at above 85% over the next few years, since inflation-driven rise in costs will be largely offset by corresponding rental growth as around 95% of the lease contracts have an indexation clause.

The rating remains constrained by the company’s limited size and market shares, as Summus remains small in the European context and exposed to the retail segment. As such, Summus 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 around four years and relatively good diversification across various segments. Summus’ properties proved resilient during the Covid-19 pandemic with no significant impact on rental income. While there are almost 350 letting agreements, tenant diversification remains modest, with the top 10 accounting for about 34% of rental income. The tenant portfolio includes small retail operators, which exposes the company to major changes in consumer habits accelerated by the pandemic such as the shift to e-commerce.

Financial risk profile: BB (unchanged). The company’s financial risk profile is driven by its moderate credit metrics, although leverage will be under pressure from the anticipated debt issuance to finance the company’s planned real estate acquisitions in the next twelve months.

Debt protection, as measured by EBITDA interest cover, stood at 2.4x in December 2023 (2.2x for the 12 months to June 2024). Scope expects debt protection to remain above 2x on the back of stable operating cash flow and a relatively low average cost of bank financing (interest margin of 2.9% as at end-June 2024). Summus is exposed to interest rate risk as its bank loans pay variable interest rates (2.7%-3.3% + Euribor). This risk is partially mitigated by the company’s policy to have interest rate swaps on at least 50% of its loans (52% to Q2 2024). Scope expects higher financial expenses in the coming years, given Summus’s partially debt-funded portfolio expansion. Nevertheless, Scope expects EBITDA interest cover to remain above 2x, supported by the issuer’s inflation-linked revenue base and because the target assets will also contribute to EBITDA from day one.

Leverage, as measured by the loan/value ratio, stood at 51% as at December 2023, not considering outstanding subordinated loans from the shareholder (EUR 10m as at June 2024). Summus’ portfolio is exposed to market pressure that could lead to yield expansion. However, Scope expects the portfolio value to remain resilient (slightly positive fair value adjustment of EUR 1.9m in 2023) and foresees only minor adjustments of about 1%-2% by end-2024. Like-for-like rental growth in the next years – as the market will remain supportive – will likely compensate for any potential yield expansion. Scope anticipates the leverage to increase to above 55% in the coming years (57% in 2025) but stabilize at 55% from 2026 on. The agency’s view is driven by Summus’s intention to increase its bank debt by around EUR 60m to partially finance the company’s business plan and the assumption of around 60% loan/value ratio financing structure for the intended acquisitions.

Liquidity: adequate. Summus’ liquidity is adequate, supported by high cash balance (EUR 41m as at end-June 2024, thereof EUR 5.4m restricted cash) and positive operating cash flow that covers short-term debt of about EUR 8m. Free operating cash flow will remain positive in the next few years, as capex is mostly discretionary and will be financed by available internal resources and financial debt.

The financial covenants set forth in Bond Terms, including: i) equity to total assets ratio of at least 30%, and ii) DSCR of at least 1.2x, were met as of June 2024. Scope assumes that financial covenants are in compliance at all times.

Supplementary rating drivers: credit-neutral. Supplementary rating drivers have no impact on the issuer rating.

Outlook and rating sensitivities

The Outlook remains Stable, reflecting Scope’s expectation that rental growth will strengthen cash generation, as well as: i) the successful execution of Summus’ planned acquisitions; ii) the expansion of Riga Plaza, and iii) the portfolio’s average occupancy rate remaining above 97%. The rating case assumes that the loan/value ratio will temporarily increase after the acquisitions but stabilize at around 55%.

The upside scenario for the ratings and Outlook is:

1. Scope-adjusted loan/value ratio decreased to around 50% while the company significantly grew in size, thereby decreasing portfolio concentration. This could be achieved through new acquisitions financed with a higher share of equity relative to debt.

The downside scenarios for the ratings and Outlook are (individually):

1. EBITDA interest cover decreased to below 2.0x;
    
2. Leverage increased, indicated by a loan/value ratio of above 60% on a sustained basis. 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.

Debt ratings

In June 2024, Summus has issued a three-year EUR 15m senior unsecured corporate bond, with a fixed coupon of 9.5%. Part of the proceeds were used to refinance its EUR 10m bond while remaining amount should help the company to partly finance planned acquisitions.

Scope’s recovery analysis is based on a hypothetical default scenario in FY 2025 with a company liquidation value based on a haircut of 25% to reflect liquidation costs, reasonable discounts to assets and cost related to insolvency proceedings. Scope expects an ‘above average’ recovery for Summus’ senior unsecured debt (EUR 15m) but notes the high sensitivity of the portfolio to property advance rates. Scope has therefore affirmed the debt class a rating of BB, in line with the issuer rating.

Environmental, social and governance (ESG) factors

Overall, ESG factors have no impact on this credit rating action.

All rating actions and rated entities

Summus Capital OÜ

Issuer rating: BB/Stable, affirmation

Senior unsecured debt rating: BB, affirmation

*All credit metrics refer to Scope-adjusted figures.

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, 16 October 2023; European Real Estate Rating Methodology, 28 March 2024), 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 these 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: Rigel Scheller, Director
Person responsible for approval of the Credit Ratings: Thomas Faeh, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 3 September 2021. The Credit Ratings/Outlook were last updated on 5 September 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, as well as a list of Ancillary Services and certain non-Credit Rating Agency services provided to Rated Entities and/or Related Third Parties.

Conditions of use / exclusion of liability
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