Rating Action Commentary
ֳ Affirms DVI at 'BBB-'; Outlook Stable
Thu 12 Dec, 2024 - 12:03 PM ET
ֳ - Frankfurt am Main - 12 Dec 2024: ֳ has affirmed D.V.I. Deutsche Vermoegens- und Immobilienverwaltungs GmbH's (DVI) Long-Term Issuer Default Rating (IDR) and senior unsecured rating at 'BBB-'. The Outlook on the IDR is Stable.
DVI's rating affirmations reflect a deleveraging profile, comfortable interest cover, and solid income visibility from its fully-occupied, affordable rent Berlin residential-for-rent portfolio, which generated 67% of the group's 2023 rental income. DVI's secondary commercial portfolio has persistent vacancies, necessitating capex, but offers potential rental growth.
The Stable Outlook reflects ֳ's expectation that DVI will address its January 2027 EUR350 million unsecured bond maturity with available options. DVI also holds a large share of assets through stakes in funds' units, which are less liquid, also due to minority interest ownerships. This constrains DVI's ratings.
Key Rating Drivers
Residential Rental Growth: Despite slowing inflation in Germany and rental increases on existing leases being limited by the rent cap (Kappungsgrenze), ֳ expects DVI's annual rent increases to be approximately 4%. Rental growth from DVI's Berlin-focussed residential segment (2023: 67% of rental income) is negatively affected by low tenant churn. Rent increases on tenant churn, which reduced in 2023 to a low 6.8% from 7.2%, can be up to 30%, depending on location and building age, bringing them closer to local reference rents.
Energy Performance Certificates (EPCs): At end-2023, the majority of DVI's residential buildings were in the EPC band B, indicating that capex requirements are limited over the coming years. This reflects its building types and those extensively refurbished in the last few decades. This is particularly relevant as regulatory requirements for minimum standards might be increased to achieve environmental targets on a national level.
Rental Regulation Prospects: Regulatory uncertainties have increased, which further constrain housing investments and could disincentivise much-needed investment to the sector. With the recent collapse of the German government, an extension of the key regulatory tool of the rent cap (Mietpreisbremse) beyond 2025 is unlikely to be implemented before the February 2025 snap election. However, other significant market interventions such as the unconstitutionally declared rent freeze in Berlin or the proposed expropriation from the city's housing landlords currently seem unlikely.
Commercial Portfolio Challenges: Vacancies in DVI's commercial segment remain high at above 10%, which management is addressing with increased capex, which totalled EUR18 million in 2023, versus EUR8 million in 2021. Financial returns on fit-outs and building upgrades ahead of letting vacant space have been incorporated into a new tenant's rent, as reflected in double-digit like-for-like rental growth in the commercial portfolio recently.
Higher Risk Profile in Commercial: The commercial portfolio, consisting of secondary offices (55% by fair value at end-2023), logistics/light industrial (30%), and retail assets (typically ground floor units in residential buildings: 14%), contributed an average 30% of DVI's rental income during 2020-2023. ֳ views this portfolio as having a higher risk profile than residential, despite the commercial portfolio's solid tenant quality, low tenant concentration and good cash flow visibility with an average lease length of 4.7 years at end-2023.
Refinancing Options: To address the bulk maturity of its EUR350 million senior unsecured bond in January 2027, DVI has various options. These include selling assets, raising debt from existing sub-50% loan-to-value (LTV) residential financings to help part-repay the bond, and/or approach existing bondholders to possibly refinance all or a part-repaid bond. A DVI refinancing will be helped by a solid ongoing financial profile.
Defensive Forward Swaps: DVI has entered into forward swap agreements totalling a notional EUR1.1 billion at an average interest rate of 3.4% to hedge against potentially higher interest costs. The swaps start in January 2027. ֳ calculates that these would increase DVI's average cost of debt to 4.2% by end-2027 (end-2023: 2.8%), also driven by debt refinancings. ֳ forecasts EBITDA interest cover to remain above 1.9x over the rating horizon, with the swaps limiting increased interest costs.
Measuring Leverage: In ֳ's view, residential-for-rent and offices in Germany have different debt capacities. ֳ has allocated the regional office portfolio a 9x net debt/EBITDA, which is consistent with an investment-grade rating. This results in a residential-focused net debt/EBITDA ratio of 19x for the remaining group at end-2023. The residential-based measure, which we forecast to reduce to below 17.7x in 2024, is used for DVI's rating sensitivities.
Derivation Summary
ֳ compares DVI with several peers, including the German portfolio-based Vonovia SE (BBB+/Stable), Peach Property Group AG (CCC+), and residential peer Heimstaden Bostad AB (BBB-/Outlook Negative), which has a core German (Berlin and Hamburg) and Nordic portfolio.
At end-2023, 92% of DVI's EUR2.3 billion residential portfolio (excluding EUR687 million of commercial/development assets) was located in Berlin. This portfolio is significantly smaller and less diversified than Vonovia's EUR81 billion primarily German portfolio and Heimstaden Bostad's EUR29 billion continental European portfolio. All maintained low vacancy rates of 1%-2%, while Peach's vacancy was higher at around 7%.
In terms of asset quality, DVI's average rent per square metre of EUR8.9 is higher than Peach's EUR6.2 and Vonovia's EUR7.7 (of which its Berlin portfolio was EUR7.6). DVI's portfolio is concentrated in Berlin, while Peach's is in North Rhine-Westphalia and is more secondary and consists of lower-quality assets.
Both Peach and DVI have seen fairly low expansionary capex on residential assets recently. For DVI, this is due to its assets already being in good condition, whereas Peach lacks the necessary liquidity. Vonovia's capex is moderate, while Heimstaden Bostad has undertaken capex to achieve higher rents.
DVI's residential-based net debt/EBITDA is forecast to improve to 17.7x in 2024, aligning with its investment-grade rating. It is lower than Peach's 22.6x, Heimstaden Bostad's 21.4x, and Vonovia's 18.8x. Heimstaden Bostad's and Vonovia's lower 3.2%-3.5% average income-yielding assets at end-2023, compared with DVI's 4%, contribute to their higher leverage.
DVI's strategy of acquiring illiquid units and its exposure to non-prime commercial assets remain key constraints on its 'BBB-' rating.
Key Assumptions
ֳ's Key Assumptions within Our Rating Case for the Issuer
-- Annual rental indexation and a rental rise on annual renewals of 4% during 2024-2027. This increase blends contractual CPI uplifts on the commercial portfolio and prospective increases in the Berlin residential-for-rent portfolio
-- Net disposals of EUR67 million during 2024-2026
-- Expansionary capex of EUR83 million during 2024-2027
-- Cash outflows for minority buyouts of EUR56 milling during 2024-2026
-- Cash inflows from loan receivables of EUR56 million during 2024-2027
-- No annual dividend to DVI shareholders in 2024 and EUR10 million from 2025, subject to realisation of planned asset disposals
-- Refinancing of the EUR350 million unsecured bond in 2025
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
-- Residential portfolio (rather than group consolidated) net debt/EBITDA above 18x
-- A change in commercial portfolio qualities, including lease length, rent level and locations, which prompts a change in ֳ's debt capacity assumption for this sub-sector
-- EBITDA net interest cover below 2.0x
-- Increase in Berlin authorities' restrictions on DVI's residential operations
-- Increased exposure to illiquid equity stakes, rather than DVI-consolidated investments
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
-- Material geographic diversification of the portfolio with financial metrics being maintained
-- A conducive operating environment for residential companies in Berlin
-- Residential portfolio (rather than group consolidated) net debt/EBITDA below 16x
Liquidity and Debt Structure
At end-2023, DVI had EUR97 million readily available cash and no undrawn revolving credit facilities (RCFs). This, combined with an expected EUR12 million cash outflow for 2024 after acquisitions and divestitures and transactions with minorities, should cover EUR61 million of maturing debt within the next 12 months. The refinance risk of EUR198 million of debt maturities during 2025-2026 remains limited as these consist of secured financings, which ֳ expects to be rolled over by domestic banks.
DVI's EUR350 million unsecured bond (24% of the group's financial debt) matures in January 2027, which ֳ expects to be refinanced ahead of time which, for an investment-grade issuer, typically means 12-18 months before expiry.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
MACROECONOMIC ASSUMPTIONS AND SECTOR FORECASTS
to access ֳ's latest quarterly Global Corporates Macro and Sector Forecasts data file which aggregates key data points used in our credit analysis. ֳ's macroeconomic forecasts, commodity price assumptions, default rate forecasts, sector key performance indicators and sector-level forecasts are among the data items included.
ESG Considerations
DVI has an ESG Relevance Score of '4' for Governance Structure, as the privately-owned group has key person risk, including the chief executive as a major shareholder of the company and no independent representation on the board. This has a negative impact on the credit profile and is relevant to the rating in conjunction with other factors.
DVI also has an ESG Relevance Score of '4' for Group Structure, reflecting its complexity with part-ownership of, and shares in, many entities, some of which have related-party connections. This has a negative impact on the credit profile, and is relevant to the rating in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. ֳ's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on ֳ's ESG Relevance Scores, see .
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PARTICIPATION STATUS
The rated entity (and/or its agents) or, in the case of structured finance, one or more of the transaction parties participated in the rating process except that the following issuer(s), if any, did not participate in the rating process, or provide additional information, beyond the issuer’s available public disclosure.
APPLICABLE CRITERIA
APPLICABLE MODELS
Numbers in parentheses accompanying applicable model(s) contain hyperlinks to criteria providing description of model(s).
- Corporate Monitoring & Forecasting Model (COMFORT Model), v8.1.0 (1)
ADDITIONAL DISCLOSURES
ENDORSEMENT STATUS
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