S&P Global Ratings has assigned an investment grade “BBB-“ long-term issuer credit rating with “stable outlook” to Stoneweg European REIT (SERT).
“S&P Global Ratings’ ‘stable outlook’ reflects SERT's sound portfolio quality and good cash flow visibility over the next 12-24 months,” says Simon Garing, CEO of the manager.
“It also recognises the proactive measures that our team has undertaken to safeguard the portfolio quality and performance, including but not limited to pivoting to logistics, divesting noncore assets as well executing responsible capital management strategies,” he adds.
As at the end of 2024, SERT had 105 assets in 10 European countries, with majority of them in European gateway cities. The REIT’s logistics and industrial properties account for 55% of its portfolio and are located near distribution hubs or are suited for last-mile logistics. Office buildings make up 43% of the portfolio as of Dec 31, 2024, with most being “good-quality assets”, says S&P Global Ratings.
“The REIT's office buildings in Netherlands and Italy accounted for about 31% of its portfolio and have consistently maintained positive rent reversions or stable valuations,” it adds, noting that the REIT’s “sound” portfolio translates into a healthy occupancy rate. The REIT’s logistics and industrial portfolio stood at around 95% consistently while its office portfolio also stood at a relatively stable 90%.
In its report dated Jan 9 (US time), S&P also highlighted the REIT manager’s proactive portfolio management, which supports its quality and resilient performance.
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“Since 2022, SERT has been expanding in the logistics and industrials sector while divesting noncore assets. This has reduced the REIT's exposure to the office segment and helped it maintain stable valuations despite rising interest rates and structural changes affecting office demand,” says S&P.
This is reflected in the lower-than-average portfolio decline of 3.5% from June 2022 to December 2023 compared to the average 8.8% decline of S&P’s rated REITs in Europe, the Middle East and Africa over the same period, the agency notes. It adds that the REIT’s valuation began to stabilise in 2024 with like-for-like valuations up by 0.6% as of June 2024 and up another 0.3% as of Dec 31, 2024.
Rental reversions have remained positive since the REIT’s inception in 2017 with a 2.3% reversion in the 9MFY2024, S&P continues.
Other plus points in the agency’s view: the REIT manager’s continued proactive portfolio management strategy, lease structures and favourable logistics and industrial market.
While S&P also expects the subdued office leasing environment to continue due to work-from-home (WFH) arrangements, this is mitigated by the REIT’s long lease maturity profile with a weighted average lease expiry profile (WALE) of 4.4 years for SERT's offices and high tenant retention rate of 88%.
“We expect positive rental reversions for SERT's office buildings in strategic locations over the next 24 months. However, rent reversions for office assets could be negative in markets with weaker office sentiment. These include Poland and Finland,” says the report.
Despite the pluses, S&P notes SERT’s modest portfolio and weaker margins, which offsets its credit strengths.
As of Dec 31, 2024, SERT had a portfolio value of EUR2.2 billion ($3.1 billion), which is 40% to 55% lower than its peers such as Argan S.A and AXA Core Europe Fund S.C.S.
“We believe a stronger market presence and larger scale are important for attracting and retaining tenants during cyclical downturns. These will also improve economies of scale and the REIT's flexibility to rotate tenants across assets in the same geographies,” says the agency.
SERT’s ebitda margin of 56% to 57% based on its gross revenue, or 70% to 72% based on its net rental income is also at the lower end of the margin profile for the REIT’s peers.
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Looking ahead, S&P says the REIT is likely to maintain a stable set of credit metrics in 2025 and 2026 with the REIT estimated to have enough financial buffers to withstand higher borrowing costs.
“Despite peaking policy rates in Europe and a potential further moderation in rates this year, we expect the refinancing rate of SERT's EUR450 million notes due in November 2025 to be higher than the existing coupon of 2.125%,” says S&P. “We estimate an ebitda interest coverage ratio of about 2.6 times - 2.8 times for FY2025 - FY2026, down from about 3.2 times in FY2024.”
In the agency’s view, SERT’s organic rental growth of 1% to 2% a year for its existing leases with support from inflation indexation or rental step ups will partly mitigate the negative rental reversions for its office assets in Poland and Finland, which account for 13% to 15% of SERT’s revenue.
“Loss of revenue from planned asset sales in 2025-2026 should have a limited impact on revenue, given their small revenue contributions of about 2%. We anticipate a stable debt-to-ebitda ratio of 7.6 times -7.8 times for the next two years,” S&P adds.
The agency also expects SERT to remain proactive by refinancing early and extending its weighted average debt maturity profile to above three years. As of Sept 30, 2024, the REIT had a weighted average debt maturity profile of about 2.9 years, which is at the lower end of what the agency expects for the real estate sector.
Units in SERT closed flat at $2.23 or EUR1.59 on Jan 10.
