(The following statement was released by the rating agency)
Oct 08 - Fitch Ratings has upgraded Atrium European RealEstate Limited's (Atrium) Long-term Issuer Default Rating (IDR) and seniorunsecured rating to 'BBB-' from 'BB+'. The Outlook on the IDR is Stable. Theagency has also upgraded the Short-term IDR to 'F3' from 'B'.
The upgrade reflects Atrium's strong operating performance driven by the growtheconomies of Central Eastern Europe and a more mature rental income streambenefiting from improved average lease tenure of 5.5 years and operationalefficiencies. Material litigation claims are now largely resolved and followingthe debt buyback during 2012, the average debt maturity profile at 4.9 years isclosely aligned to its lease maturity profile.
Fitch believes Atrium's EBIT NIC should remain comfortable at around 6.0x withan LTV remaining within managements range of 30%-35% over the medium term, evenwhen assuming modest acquisitions. These key financial metrics on aforward-looking trajectory look above average for the investment grade EMEA REITuniverse. However, Atrium is only funded on a secured debt basis, which to someextent limits operational flexibility. However, around 40% of Atrium'sinvestment property portfolio is unencumbered and current liquidity isreasonable for the rating. Overall, the stronger than average balance sheet andinterest serviceability offset the lack of unsecured funding.
The tenant profile continues to benefit from solid diversification with a focuson food anchor tenants, typically large European-based retail chains that payrents in euros, mitigating currency risk. Geographical diversification is broad,with the main focus on Poland (47% of investment properties), Czech Republic(21%) and Russia (16%). Divestments in countries where Atrium lacks a solidmarket presence would be viewed favourably. Conversely a material refocusing ofthe portfolio towards Russia could be viewed as increasing operational risk.
Fitch expects future rental income to demonstrate resilient characteristicsdriven by indexation and modest rent increases upon renewals. Recent rentalincome performance is solid, with H112 gross rental income increasing 5.6% on alike-for-like basis. Growth relates to indexation stemming from the relativelyhigher inflation outlook in Central Eastern European countries. Solid demand andsupply dynamics are evident from Atrium's high renewal rates, with Fitchexpecting the occupancy rate to remain above 95%. Atrium's geographical marketsare benefiting from structural growth with strong retail spending allowing forhigher retail space density. Until FY14, only 28% of the total rent roll isscheduled for renewal, providing high visibility over future cash flows.
Fitch views Atrium's liquidity position as reasonable for the rating, withunrestricted cash of EUR207m at H112. This is sufficient to cover debtmaturities (EUR86m) and committed development costs (EUR74m) until FY14.
WHAT COULD TRIGGER A RATING ACTION IN THE FUTURE?
Positive: Future developments that may, individually or collectively, lead topositive rating action include:
- Improved quality of property portfolio focusing on prime and good secondaryproperties
- Rationalisation of assets in markets with limited geographic critical mass
- Liquidity score above 1.5x on a two-year cycle on a sustainable basis drivenby evidence of diversification of funding sources
Negative: Rating issues that may both individually or collectively, lead to a negativerating action include:
- LTV (adjusted net debt/investment properties) above 35% on a sustained basis - EBIT net interest cover below 2.5x on a sustained basis - Liquidity score below 1.25x on a two-year cycle on a sustainable basis - Unencumbered investment property assets of below EUR750m on a sustained basis - Assuming unsecured debt issuance; an unencumbered asset cover below 3.0x