June 5 (SeeNews) - Moody's Investors Service said it has changed to positive from stable the outlook on the ratings of Bucharest-listed real estate investment trust (REIT) New Europe Property Investments (NEPI) [BSE:NEP] and its subsidiary NE Property Cooperatief.
At the same time, Moody's has affirmed the Baa3 long-term issuer rating of NEPI and the Baa3 senior unsecured rating of NE Property Cooperatief, the credit agency said in a statement last week.
The rating actions follow NEPI's plan to merge with Rockcastle, a Mauritius-based commercial property company and investor owning shopping centres in Poland and the Czech Republic, Moody's said.
Moody's also said in the statement:
"The positive outlook primarily reflects the significantly larger property portfolio and improved geographical diversification of the combined entity", says Roberto Pozzi, a Moody's VP - Senior Credit Officer and lead analyst for NEPI. "Upon completion of the transaction, the combined entity will own a diversified portfolio of direct properties valued at approximately EUR3.9 billion with strong market positions in Romania, Poland and Slovakia".
The merger is expected to complete by the end of July 2017. NEPI and Rockcastle will issue relevant documentation requesting shareholders' approval for the transaction and noteholders' approval for the change of Guarantor. Upon completion of the merger, NEPI Rockcastle plc ("NEPI Rockcastle") will be the new Guarantor under both companies' notes and bank loans, including the outstanding EUR400 million senior unsecured notes issued by NE Property Cooperatief U.A.
RATINGS RATIONALE
The positive outlook reflects Moody's view that the rating of NEPI pro forma for the merger could be a notch higher than that of the Romanian government (Baa3/Stable) because the concentration of properties in Romania, although still high, will decrease significantly to 48% from 71% of total investment property portfolio. Additionally, Moody's expects the proceeds from the disposal of Rockcastle's large holdings in listed securities to be reinvested in acquisitions of shopping centres in Poland (A2), and other CEE countries.
Pro forma for the merger with Rockcastle and based on 31 March 2017 figures, we estimate that the combined entity will have total assets of around EUR5.3 billion, including physical investment properties worth an estimated EUR3.9 billion and a portfolio of listed securities with a market value of around EUR1.0 billion, and annualised rental income of EUR257.0 million. Around 90% of the direct property portfolio will be focused on retail properties (mainly shopping centres), with the remainder represented mainly by office buildings. Assets located in Romania will represent around 48% of combined direct property portfolio (excluding listed securities), down from 71% before the merger, Poland (A2 stable) around 30% and Slovakia (A2 positive) 10%. In Moody's view, NEPI Rockcastle will become a leading owner of shopping centres in Eastern Europe, strengthening its ability to provide retail space to international retailers.
Counterbalancing these positives, Moody's estimate an increase in combined entity's effective leverage, as measured by gross debt to total assets, to around 32%, compared with NEPI's 26% as of 31 December 2016 (including the implied gross debt related to the gross exposure of Rockcastle to a portfolio of listed stocks representing 20% of combined total assets). We also expect a deterioration in the amount of unencumbered assets to 63% from 87% (Moody's adjusted, excluding joint ventures) because of Rockcastle's debt structure which is mostly made up of mortgages. Although pro-forma leverage will increase and it is likely to be volatile due to a significant component of listed stocks in total assets, it remains appropriate for the rating.
NEPI's Baa3 issuer rating factors in the company's (i) important franchise value as the largest retail property owner in Romania, (ii) very strong financial metrics for its rating level, (iii) good quality, modern assets with high occupancy rates (98% as of end of December 2016), (iv) steady cash flows from contractual rental income with limited tenant concentration risk, and (v) supportive shareholders.
The rating is mainly constrained by the company's (i) reliance on the Romanian economy whose sovereign rating is currently Baa3/Stable (albeit reduced for the combined entity), (ii) a declining but still sizeable development pipeline, (iii) the currency risk ensuing from the mismatch between the company's euro-denominated leases and tenants' local currency revenues.
RATIONALE FOR POSITIVE OUTLOOK
The positive outlook reflects Moody's expectation that if the merger is successful NEPI will benefit from improved geographical diversification and market position. The outlook also incorporates the expectation of a gradual reduction in the portfolio of listed securities as well as the company's public commitment to maintain its loan-to-value ratio below 35% on a reported basis. Moody's could consider stabilizing the outlook should the merger fail or present material differences from what NEPI has outlined in its public announcements."