Alstria Office REIT-AG Outlook Revised To Positive On Lower Debt Leverage; Ratings Affirmed At 'BBB'

  • Alstria's credit metrics have improved more than we anticipated in the first half (H1) of 2019 following further asset sales and revaluation gains.
  • Given the positive trends in Alstria's office portfolio, Alstria is likely to keep its credit ratios strong for the current rating.
  • We are therefore revising our outlook on Alstria to positive from stable, and affirming our 'BBB' issuer credit rating. We are also affirming our issue ratings of 'BBB' on the unsecured debt.
  • The positive outlook reflects our view that Alstria's S&P Global Ratings-adjusted ratio of debt to debt-plus-equity may not increase back to 35% or above and EBITDA interest coverage should stay well above 4.0x over the next two years.
STOCKHOLM (S&P Global Ratings) Sept. 2, 2019--S&P Global Ratings today took the rating actions listed above. The revision of the outlook to positive reflects the significant improvement in Alstria's credit metrics in the last 12 months, which we believe may stay strong over the next two-to-three years. In our view, this may result from the company sticking to a disciplined financial policy and well-balanced asset rotation strategy in the next 12-24 months. The reduction in S&P Global Ratings' adjusted ratio of debt to debt-plus-equity to 29.6% as of June 30, 2019, from 35.5% in the same period one year ago, mainly reflects the sale of some noncore assets as well as the ongoing positive portfolio revaluation. While ratios are very strong due to the recent efforts of liability management, our assessment incorporates potential acquisitions and renovation projects that push leverage closer to 35%. However, we consider that, at current levels, Alstria has headroom under the current rating to sustain strong ratios, including debt to debt-plus-equity of around 35% on a consistent basis and an EBITDA interest coverage ratio of 4x or above.
Although Alstria's management financial policy does not include any loan to value (LTV) target, we expect the LTV ratio to remain below 35% on a long-term basis. We expect the ratio of debt to debt-plus-equity to stay at 30%-35% over the next 12 months in our base case, which includes Alstria's current pipeline of renovation projects and anticipated asset rotation activity. Our base case, however, does not factor in any additional acquisitions. Any large debt-funded acquisitions or higher-than-expected capital expenditure (capex) projects could lead to LTV ratios of 35% or above, which could lead us to revise the outlook back to stable.
We believe Alstria's office portfolio will continue benefiting from the favorable market in Germany, in particular in and close to metropolitan areas where demand is outpacing new supply, and where the majority of Alstria's portfolio is located. As of H1 2019, the company reported like-for-like rental income growth of 4.9% and a European Public Real Estate Association (EPRA)-defined vacancy rate of 7.6%, declining from 9.7% at year-end 2018. We noticed the company's overall net rental income has been declining in the last two years due to the company's position as net seller. We forecast its cash flow generation will remain stable and that rental growth of existing lease agreements and improved occupancy levels will fully offset any negative rental impact from asset sales. Therefore, we anticipate the ratio of debt to EBITDA will remain between 8x and 9x.
We believe the company's capacity to cover its interest charges will remain strong, with its EBITDA interest coverage expected to remain well above 4x. This is explained by the lower leverage and the company's relatively low cost of debt (1.8%) and debt maturity of around 5 years. As a result, we have revised our assessment of Alstria's financial risk profile to modest from intermediate.
With a total value of €4.2 billion and 118 properties as of June 30, 2019, the company remains one of the largest listed office players in Germany. That said, we continue to view the German market as highly fragmented. Most of Alstria's assets are in or near city centers where demand for office assets tends to be stronger. They have access to good infrastructure and positive rental growth prospects thanks to low unemployment and solid tenant demand for office spaces.
Our rating incorporates a one-notch downward adjustment on our comparable rating analysis modifier to reflect our expectations that Alstria's leverage could remain at the weaker end of its financial category, meaning close to 35%. In addition, compared to other 'BBB+' rated companies, Alstria remains small.
The positive outlook reflects the chance that Alstria will maintain strengthened credit ratios over the next few quarters, assuming a disciplined financial policy and a well-balanced asset rotation strategy. This includes notably an EBITDA interest cover ratio above 4x and a debt-to-debt-plus-equity ratio sustainable well below 35%.
We expect its property portfolio to continue to generate stable cash flow thanks to its improved occupancy rate and lease maturity length, and its focused investment strategy on centrally located offices within German metropolitan cities.
We could revise the outlook back to stable if Alstria's leverage increases to previous levels, most likely as a result of larger-than-anticipated debt-funded acquisitions or higher-than-anticipated renovation projects. We would also revise the outlook back to stable if the debt to debt-plus-equity rose to 35% or above.
We could raise the issuer credit rating if Alstria maintains its debt-to-debt-plus-equity ratio well below 35% on a permanent basis, with EBITDA interest coverage remaining well above 4.0x or above. An upgrade would also be contingent on Alstria's ability to demonstrate healthy organic rental income growth and a stable or further improving occupancy rates in its office portfolio.
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