(The following statement was released by the rating agency)
Oct 08 - Fitch Ratings has upgraded Atrium European Real Estate Limited's (Atrium) Long-term Issuer Default Rating (IDR) and senior unsecured rating to 'BBB-' from 'BB+'. The Outlook on the IDR is Stable. The agency has also upgraded the Short-term IDR to 'F3' from 'B'.
The upgrade reflects Atrium's strong operating performance driven by the growth economies of Central Eastern Europe and a more mature rental income stream benefiting from improved average lease tenure of 5.5 years and operational efficiencies. Material litigation claims are now largely resolved and following the debt buyback during 2012, the average debt maturity profile at 4.9 years is closely aligned to its lease maturity profile.
Fitch believes Atrium's EBIT NIC should remain comfortable at around 6.0x with an LTV remaining within managements range of 30%-35% over the medium term, even when assuming modest acquisitions. These key financial metrics on a forward-looking trajectory look above average for the investment grade EMEA REIT universe. However, Atrium is only funded on a secured debt basis, which to some extent limits operational flexibility. However, around 40% of Atrium's investment property portfolio is unencumbered and current liquidity is reasonable for the rating. Overall, the stronger than average balance sheet and interest serviceability offset the lack of unsecured funding.
The tenant profile continues to benefit from solid diversification with a focus on food anchor tenants, typically large European-based retail chains that pay rents 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 solid market presence would be viewed favourably. Conversely a material refocusing of the portfolio towards Russia could be viewed as increasing operational risk.
Fitch expects future rental income to demonstrate resilient characteristics driven by indexation and modest rent increases upon renewals. Recent rental income performance is solid, with H112 gross rental income increasing 5.6% on a like-for-like basis. Growth relates to indexation stemming from the relatively higher inflation outlook in Central Eastern European countries. Solid demand and supply dynamics are evident from Atrium's high renewal rates, with Fitch expecting the occupancy rate to remain above 95%. Atrium's geographical markets are benefiting from structural growth with strong retail spending allowing for higher retail space density. Until FY14, only 28% of the total rent roll is scheduled for renewal, providing high visibility over future cash flows.
Fitch views Atrium's liquidity position as reasonable for the rating, with unrestricted cash of EUR207m at H112. This is sufficient to cover debt maturities (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 to positive rating action include:
- Improved quality of property portfolio focusing on prime and good secondary properties
- Rationalisation of assets in markets with limited geographic critical mass
- Liquidity score above 1.5x on a two-year cycle on a sustainable basis driven by evidence of diversification of funding sources
Negative: Rating issues that may both individually or collectively, lead to a negative rating 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