Fitch Ratings has upgraded
The Outlook is Stable. Fitch also upgraded NEPI's unsecured debt rating and the senior unsecured ratings on
The upgrades reflect the improvements in recent years in NEPI's operational metrics, with increasing occupancy, footfall and tenants' sales exceeding pre-pandemic levels. NEPI's
The upgrades also reflect NEPI's long record of a prudent financial profile and Fitch's expectation that this will continue. With end-2021 net debt/EBITDA leverage at 5.7x, NEPI has maintained a significant buffer from our previous 7.0x upgrade to 'BBB+' rating sensitivity. Its interest coverage was 5.7x at end-2021 and is forecast to remain strong despite rising interest rates.
Key Rating Drivers
Improved Operating Performance: In 1H22 tenants' sales in NEPI's portfolio were 8% higher than the equivalent period in 2019. This was due to an increase in average shopping basket value, which was 27% higher in 1H22 compared with 1H19, while footfall still lagged pre-pandemic levels. The pattern of lower footfall but higher tenants' sales in retail is evident across several European markets. The sales of all tenants' segments in NEPI's portfolio in 1H22 exceeded pre-pandemic levels except for entertainment (2% of the portfolio's total tenants' sales) where sales were around 17% lower and fashion (45% of total), which was broadly in line with 1H19.
The vacancy rate for NEPI's retail portfolio decreased to 3.2% at end-1H22 (1H21: 4.4%). Of the leases expiring during 2022, 80% were renewed by mid-August.
Uncertain Rental Growth Prospects: Inflation, which has so far aided growth of the shopping basket, may erode households' disposable income, affecting retailers' performance. Inflation also feeds into higher rents through inflation-linked rent indexation clauses included in most of NEPI's leases. These leases are usually euro-denominated and use EU27 CPI as a reference. Fitch expects that eurozone CPI will be lower than inflation in countries where NEPI operates.
Combined with a moderate occupancy cost ratio (1H22: 13.3%, excluding hypermarkets), this will help tenants absorb rent increases to some extent. However, if lower disposable incomes lead to lower tenants' sales, rent increases may prove to be unsustainable. To maintain the portfolio's high occupancy rate like other retail landlords, NEPI may choose not to maximise CPI-linked rent increases. The affordable rent profile may also be affected by a sharp depreciation of the domestic currencies, in which retailers' revenues are earned, versus the euro.
Stable Cash Flow Leverage: NEPI's end-2021 net debt/EBITDA remained low at 5.7x despite pandemic-related rent discounts provided to some tenants. Fitch forecasts net leverage to increase moderately to 6.1x during 2023-2025 as the capex programme continues, after falling to 5.4x in 2022 as expiring rent discounts are partially offset by increased cash dividend and capex. We expect interest cover to remain comfortable (2022: 6.6x; 2023: 6.9x) as NEPI benefits from strong cash flows, low leverage and long-dated interest rate fixing.
Accelerated Development Activity: As at 1H22, NEPI had four projects under construction with total capex to complete at around
CEE Retailers: NEPI's tenants include well-known international and regional brands. Compared with their western European peers, regional retailers have been less exposed to flat retail sales growth, other geographies' higher and increasing e-commerce share and their oversupply of retail space. This provides some buffer against the risk of a decline in consumer demand, increasing staff salaries or inventories prices in CEE retail markets. NEPI's tenant diversification (top 10 generating 24% of total rental income) helps mitigate the risk of specific tenant default.
Property Management Internalisation: NEPI decided to unify its property management operations and systems. This means that in
New Management Team: In
Derivation Summary
NEPI's peers include
NEPI's end-2021 net debt/EBITDA, at 5.7x, is lower than GTC's leverage of around 10x and Globalworth's of about 8.5x.
NEPI has a net initial yield (NIY, this measures annualised net rents to investment property asset values) of 6.7%. The remaining CEE peers do not disclose directly comparable NIY data. Fitch believes the quality of Globalworth and GTC's portfolios is broadly similar to that of NEPI.
Akropolis has the lowest leveraged financial profile, with 2022 net debt/EBITDA at 4.9x ahead of a planned construction project, which will increase its leverage. Akropolis's portfolio has a NIY estimated at around 7% and LTV of below 40%. However, its rating is constrained by its concentration on a limited number of assets, restricting asset and geographical diversification.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Rent changes arising from acquisitions, disposals or developments coming on stream annualised rather than accounted on a part-year basis.
Like-for-like rent increase of 3% in 2022 and 2% increase in 2023, reflecting partial forfeiture of inflation-linked rent indexation and a mix of rental levels upon lease renewals. Rent increases of 1% per year in 2024 and 2025.
Around
Over
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Given the retail-focused portfolio and mix of CEE countries, Fitch does not expect an upgrade of NEPI to the 'A' rating category in the near future.
Factors that could, individually or collectively, lead to negative rating action/downgrade:
Material expansion in new or existing non-investment-grade countries, either through expansion or through downgrades.
Significant deterioration of operating metrics on a sustained basis, such as higher vacancies.
Increase in leverage with such metrics as loan-to-value (adjusted net debt/investment properties) consistently exceeding 40% or net debt/EBITDA surpassing 7.0x on a sustained basis.
A liquidity score below 1.25x on a sustained basis.
Best/Worst Case Rating Scenario
International scale credit ratings of Non-Financial Corporate issuers have a best-case rating upgrade scenario (defined as the 99th percentile of rating transitions, measured in a positive direction) of three notches over a three-year rating horizon; and a worst-case rating downgrade scenario (defined as the 99th percentile of rating transitions, measured in a negative direction) of four notches over three years. The complete span of best- and worst-case scenario credit ratings for all rating categories ranges from '
Liquidity and Debt Structure
Strong Liquidity: At end-1H22, NEPI had
NEPI's debt is predominantly unsecured. At
Issuer Profile
NEPI is a retail-focused property company with an income-producing portfolio of regionally dominant shopping centres spread over nine CEE countries, valued at
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.
ESG Considerations
Unless otherwise disclosed in this section, the highest level of ESG credit relevance is a score of '3'. This 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. For more information on Fitch's ESG Relevance Scores, visit www.fitchratings.com/esg
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