Fitch Revises Atrium's Outlook to Positive; Affirms 'BBB-'
(The following statement was released by the rating agency) LONDON, December 11 (Fitch) Fitch Ratings has revised Atrium European Real Estate Limited's (Atrium) Outlook to Positive from Stable, while affirming the company's Long- and Short-Term Issuer Default Ratings (IDR) at 'BBB-' and 'F3', respectively. Concurrently, Fitch has affirmed Atrium's senior unsecured rating at 'BBB-'. The Positive Outlook reflects Fitch's view that a continued improvement in the quality and diversity of Atrium's property portfolio, paired with intensified positive operating momentum across the company's geographies, particularly in Russia (although from a low base), could lead to a positive rating action in the coming 12-18 months. KEY RATING DRIVERS Improved Portfolio, yet Higher Concentration: Fitch believes Atrium is improving the overall quality of its portfolio, by acquiring and developing several large shopping centres in Poland and the Czech Republic. The company has also disposed of a large part of its smaller assets. Improving asset quality is offset by increased portfolio concentration, with its 10 largest properties now representing 63% of market value. Concurrently, Atrium has increased its exposure to more stable countries with the entirety of its assets now located in investment-grade countries with healthy GDP and disposable income growth prospects. Rental Income Profile Improving: The group's rental dynamics improved in 2017 on the back of positive market developments in central and eastern Europe (CEE) and a continued recovery of the Russian operations. Group like-for-like (lfl) rental income growth increased 8% in 9M17, following a 2015 trough. High Occupancies: Atrium's occupancy rates, which have consistently remained high, were about 96% in 2016, despite the drag from a weak Russian market over the past few years. Since early 2014, when market conditions in Russia worsened owing to geopolitical crises, management initially gave short-term lease incentives to tenants to help maintain occupancy levels. Nonetheless, Russian occupancies fell to 93% by 2016, before improving to 94.4% in 1H17. Shorter Lease Lengths: Fixed-term rent agreements had an average remaining lease length of nearly five years at end-2016. This is a slight decrease from 5.5 years in 2012, owing to the disposal of some longer lease assets. Nonetheless, lease lengths remain in line with investment-grade retail REIT peers, such as Unibail-Rodamco SE (four years) and Hammerson plc (six years). Fitch expects Atrium's average remaining lease length to remain around five years. Prudent Development Pipeline: Fitch views Atrium's development pipeline as prudent, as activities are focussed on lower-risk brownfield extensions, staged investment commitments and pre-leasing hurdle rates (50%) before construction begins. The group's development pipeline comprises capex totalling EUR237 million spread over 2018 to 2020, which is less than 10% of the group's investment properties. Selective M&A: Atrium has been selective in acquisitions, including Palac Pardubice (Czech Republic) and Focus Mall in Bydgoszcz (Poland), which were acquired in late 2014, as well as the acquisition of a 75% stake in Arkady Pankrac (Czech Republic) from Unibail-Rodamco SE in June 2015. The acquisition of fully operating shopping centres lowers the risk of development as it eliminates the need for pre-lets. In addition, the company can focus on developing the assets into dominant shopping centres. Fitch believes that Atrium will moderately pursue acquisitions on an opportunistic basis to further strengthen its presence in its core markets. Low Leverage: Fitch-calculated loan-to-value (LTV, excluding the landbank and developments) remains comfortable for the rating and is forecast to be around 33% at end-2017, even after increased dividend payments for the second consecutive year and the company's conclusion of its Austrian legacy legal dispute, which comprised a final settlement payment of around EUR45 million in 2H17. Atrium's largest assets are likely to have benefitted from a yield-shift revaluation gain, but we believe this effect will have been less than for its peers in western Europe. Net debt-to-EBITDA is set to remain low at between 5.0x and 6.0x, while interest cover is forecast to remain comfortably around 4.0x. Less-Encumbered Balance Sheet: Atrium has transitioned towards a less-encumbered capital structure, with only 10% of assets now encumbered. Adjusting for the November 2017 refinancing of Prague-based shopping mall 'Flora', the company's only remaining secured asset, Atrium's unencumbered asset ratio stands at 2.8x. DERIVATION SUMMARY Atrium's rating is underpinned by an improved property portfolio focusing on dominant assets in CEE. All of Atrium's assets are located in investment-grade countries, of which about 84% are rated 'BBB' or higher. This geographical spread compares well with CEE peer NEPI Rockcastle plc (BBB/Stable), which has 95% of its portfolio in investment-grade countries, but at the same time has a significantly larger exposure to countries rated 'BBB-' and lower (60%), mostly driven by the company's strong focus on Romania (BBB-/Stable). At the same time, Atrium has exposure to the historically volatile, albeit recently improving, Russian market and is about half the size of NEPI Rockcastle. Atrium is also significantly smaller and more concentrated than western European peers, such as British Land plc (BBB+/Stable), Unibail-Rodamco SE (A/Stable), or Hammerson plc (BBB+/Rating Watch Negative). Atrium's moderately weaker business profile is offset by a solid and now almost fully unencumbered balance sheet and strong financial profile. The company, both in terms of LTV (around 33%) and net debt/EBITDA (around 6.0x) is on a par with NEPI Rockcastle and compares well with most peers in Fitch's rated universe. KEY ASSUMPTIONS Fitch's key assumptions within our rating case for the issuer include: - Continued positive operating environment across all of Atrium's geographies; - Further asset rotation towards core geographies and monetisation of non-core land-bank; - Total development capex of EUR276 million spread over 2017-2020, with a peak of EUR98 million in 2018; - Dividend payments of EUR154 million and long-term pay-out of 90% of reported funds from operations (FFO); and - Aggregate of EUR45 million cash settlement of Austrian legacy dispute paid over the course of 2H17/1Q18. RATING SENSITIVITIES Future Developments That May, Individually or Collectively, Lead to Positive Rating Action - Further improvement of the quality of the portfolio and liquidity of CEE investment markets, while maintaining similar leverage. - Rationalisation of assets in markets in which Atrium has limited geographic critical mass. - Improved sources of liquidity evidenced by a diversification of funding sources such as an undrawn committed credit line. Future Developments That May, Individually or Collectively, Lead to Negative Rating Action -Stalling or a reversal of recovery in Russia, or significant operational headwinds from one of its core geographies, resulting in weakening credit metrics, including LTV trending towards 40%, which may lead to the Outlook being revised to Stable. -LTV (as defined by Fitch) consistently above 45%, EBIT net interest cover below 2.5x (2016: 3.6x) on a sustained basis; liquidity score sustainably below 1.25x over a two-year cycle or unencumbered asset cover ratio below 2.0x to 3.0x on a sustained basis LIQUIDITY Strong Liquidity; No Immediate Repayments: Atrium's liquidity profile remained comfortable as at 30 September 2017, supported by cash on balance sheet of EUR58 million (after adjusting for restricted cash of EUR31 million, earmarked for the outstanding 'Meinl' litigation settlement, expected to be paid in late 4Q17/early 2018) and access to a EUR225 million revolving credit facility (RCF, upsized by EUR50 million in September 2017), which was entirely undrawn as at the same date. In 2020, EUR200 million of the RCF matures, with an extension option of one year. The liquidity profile is supported by the absence of short-term maturities (pro forma for 'Flora' refinancing) and the first sizeable debt maturity is not until 2020, when EUR333 million of the company's unsecured notes fall due. Further, committed investments of the group's development pipeline remain moderate with EUR98 million and EUR73 million in 2018 and 2019, respectively. Contact: Principal Analyst Severin Testroet Associate Director +49 69 7680 76 113 Supervisory Analyst Bram Cartmell Senior Director +44 20 3530 1874 Fitch Ratings Limited 30 North Colonnade London E14 5GN Committee Chairperson Paul Lund Senior Director +44 20 3530 1244 Media Relations: Adrian Simpson, London, Tel: +44 203 530 1010, Email: adrian.simpson@fitchratings.com. Summary of Financial Statement Adjustments -Fitch treats a further EUR18 million of cash at end-2016 as restricted, which is added to the reported EUR27 million restricted cash, all being earmarked for the aggregate EUR45 million settlement of the legal dispute. This adjustment falls away, once full cash settlement has been made. Additional information is available on www.fitchratings.com. For regulatory purposes in various jurisdictions, the supervisory analyst named above is deemed to be the primary analyst for this issuer; the principal analyst is deemed to be the secondary. Applicable Criteria Corporate Rating Criteria (pub. 07 Aug 2017) here Non-Financial Corporates Notching and Recovery Ratings Criteria (pub. 16 Jun 2017) here Additional Disclosures Dodd-Frank Rating Information Disclosure Form here Solicitation Status here#solicitation Endorsement Policy here ALL FITCH CREDIT RATINGS ARE SUBJECT TO CERTAIN LIMITATIONS AND DISCLAIMERS. PLEASE READ THESE LIMITATIONS AND DISCLAIMERS BY FOLLOWING THIS LINK: here. IN ADDITION, RATING DEFINITIONS AND THE TERMS OF USE OF SUCH RATINGS ARE AVAILABLE ON THE AGENCY'S PUBLIC WEB SITE AT WWW.FITCHRATINGS.COM. PUBLISHED RATINGS, CRITERIA, AND METHODOLOGIES ARE AVAILABLE FROM THIS SITE AT ALL TIMES. FITCH'S CODE OF CONDUCT, CONFIDENTIALITY, CONFLICTS OF INTEREST, AFFILIATE FIREWALL, COMPLIANCE, AND OTHER RELEVANT POLICIES AND PROCEDURES ARE ALSO AVAILABLE FROM THE CODE OF CONDUCT SECTION OF THIS SITE. DIRECTORS AND SHAREHOLDERS RELEVANT INTERESTS ARE AVAILABLE here. FITCH MAY HAVE PROVIDED ANOTHER PERMISSIBLE SERVICE TO THE RATED ENTITY OR ITS RELATED THIRD PARTIES. DETAILS OF THIS SERVICE FOR RATINGS FOR WHICH THE LEAD ANALYST IS BASED IN AN EU-REGISTERED ENTITY CAN BE FOUND ON THE ENTITY SUMMARY PAGE FOR THIS ISSUER ON THE FITCH WEBSITE. Copyright © 2017 by Fitch Ratings, Inc., Fitch Ratings Ltd. and its subsidiaries. 33 Whitehall Street, NY, NY 10004. Telephone: 1-800-753-4824, (212) 908-0500. Fax: (212) 480-4435. Reproduction or retransmission in whole or in part is prohibited except by permission. All rights reserved. In issuing and maintaining its ratings and in making other reports (including forecast information), Fitch relies on factual information it receives from issuers and underwriters and from other sources Fitch believes to be credible. Fitch conducts a reasonable investigation of the factual information relied upon by it in accordance with its ratings methodology, and obtains reasonable verification of that information from independent sources, to the extent such sources are available for a given security or in a given jurisdiction. The manner of Fitch’s factual investigation and the scope of the third-party verification it obtains will vary depending on the nature of the rated security and its issuer, the requirements and practices in the jurisdiction in which the rated security is offered and sold and/or the issuer is located, the availability and nature of relevant public information, access to the management of the issuer and its advisers, the availability of pre-existing third-party verifications such as audit reports, agreed-upon procedures letters, appraisals, actuarial reports, engineering reports, legal opinions and other reports provided by third parties, the availability of independent and competent third- party verification sources with respect to the particular security or in the particular jurisdiction of the issuer, and a variety of other factors. Users of Fitch’s ratings and reports should understand that neither an enhanced factual investigation nor any third-party verification can ensure that all of the information Fitch relies on in connection with a rating or a report will be accurate and complete. Ultimately, the issuer and its advisers are responsible for the accuracy of the information they provide to Fitch and to the market in offering documents and other reports. In issuing its ratings and its reports, Fitch must rely on the work of experts, including independent auditors with respect to financial statements and attorneys with respect to legal and tax matters. Further, ratings and forecasts of financial and other information are inherently forward-looking and embody assumptions and predictions about future events that by their nature cannot be verified as facts. As a result, despite any verification of current facts, ratings and forecasts can be affected by future events or conditions that were not anticipated at the time a rating or forecast was issued or affirmed. The information in this report is provided “as is” without any representation or warranty of any kind, and Fitch does not represent or warrant that the report or any of its contents will meet any of the requirements of a recipient of the report. A Fitch rating is an opinion as to the creditworthiness of a security. This opinion and reports made by Fitch are based on established criteria and methodologies that Fitch is continuously evaluating and updating. Therefore, ratings and reports are the collective work product of Fitch and no individual, or group of individuals, is solely responsible for a rating or a report. The rating does not address the risk of loss due to risks other than credit risk, unless such risk is specifically mentioned. Fitch is not engaged in the offer or sale of any security. All Fitch reports have shared authorship. Individuals identified in a Fitch report were involved in, but are not solely responsible for, the opinions stated therein. The individuals are named for contact purposes only. A report providing a Fitch rating is neither a prospectus nor a substitute for the information assembled, verified and presented to investors by the issuer and its agents in connection with the sale of the securities. Ratings may be changed or withdrawn at any time for any reason in the sole discretion of Fitch. Fitch does not provide investment advice of any sort. Ratings are not a recommendation to buy, sell, or hold any security. Ratings do not comment on the adequacy of market price, the suitability of any security for a particular investor, or the tax-exempt nature or taxability of payments made in respect to any security. Fitch receives fees from issuers, insurers, guarantors, other obligors, and underwriters for rating securities. Such fees generally vary from US$1,000 to US$750,000 (or the applicable currency equivalent) per issue. In certain cases, Fitch will rate all or a number of issues issued by a particular issuer, or insured or guaranteed by a particular insurer or guarantor, for a single annual fee. Such fees are expected to vary from US$10,000 to US$1,500,000 (or the applicable currency equivalent). The assignment, publication, or dissemination of a rating by Fitch shall not constitute a consent by Fitch to use its name as an expert in connection with any registration statement filed under the United States securities laws, the Financial Services and Markets Act of 2000 of the United Kingdom, or the securities laws of any particular jurisdiction. Due to the relative efficiency of electronic publishing and distribution, Fitch research may be available to electronic subscribers up to three days earlier than to print subscribers. For Australia, New Zealand, Taiwan and South Korea only: Fitch Australia Pty Ltd holds an Australian financial services license (AFS license no. 337123) which authorizes it to provide credit ratings to wholesale clients only. Credit ratings information published by Fitch is not intended to be used by persons who are retail clients within the meaning of the Corporations Act 2001 Fitch Ratings, Inc. is registered with the U.S. Securities and Exchange Commission as a Nationally Recognized Statistical Rating Organization (the â€œNRSROâ€). While certain of the NRSROâ€™s credit rating subsidiaries are listed on Item 3 of Form NRSRO and as such are authorized to issue credit ratings on behalf of the NRSRO (see here), other credit rating subsidiaries are not listed on Form NRSRO (the â€œnon-NRSROsâ€) and therefore credit ratings issued by those subsidiaries are not issued on behalf of the NRSRO. However, non-NRSRO personnel may participate in determining credit ratings issued by or on behalf of the NRSRO.