Fitch Ratings has affirmed
The Outlook is Stable. A full list of rating actions is below.
Peach's ratings reflect the stability of the rental income from its
Although Peach's net debt/EBITDA leverage is consistent with the rating, interest cover will decline with the higher cost of debt upon refinancing. At
Market fundamentals remain solid for German residential-for-rent assets, such as Peach's, with reduced supply and increased demand, resulting in rental stability. With liquidity, including no dividends, diverted to aid debt requirements, maintenance spend to spur future years' rent increases or to meet ESG requirements may be constrained and weaken the portfolio.
Key Rating Drivers
Stable Rent Increases: FY22's like-for-like in-place rent growth was 4.4% (FY23 target: 3.6%). Fifty percent was attributable to annual increases in in-place rents (uplifts allowed, including the period's CPI-driven increases). Twenty percent was attributable to rent increases upon vacancy reduction (YE22 occupancy: 93.1%), and 30% was due to re-letting at higher rents upon tenant churn.
Peach cannot immediately maximise rents by recent inflation due to Mietspiegel phasing of rent uplifts and tenant affordability considerations. Uplifts closer to market rents are crystallised when units are refurbished upon tenant churn, which is included within Peach's
Fundamentals of Supply & Demand: The market fundamentals of strong demand from housing (including from increased migrants), yet little supply (recently accentuated by German development company insolvencies and granting of building permits), particularly at the affordable level of housing stock, points to strong fundamentals for Peach's asset class.
Non-Prime Portfolio: Peach's portfolio focusses on average quality residential-for-rent units in non-prime, but often large, nationally relevant cities, of which most are located in
The portfolio's average 1H23 in-place rent is
Swiss Development Started: The
High Leverage Persisting: The improvement of Peach's net debt/EBITDA leverage will take longer until 2025 when Fitch forecasts the ratio to settle at around 19.4x, aided by annual 3.0%-4% organic rental growth and the completion of its Swiss development project. However, increased cost of debt puts interest cover under pressure which will remain at or below 1.3x throughout 2023-2024 before improving to 1.4x in 2025.
Focus on End-2025 Debt Maturities: Management is focused on addressing two scheduled key bullet debt maturities in 2025: the
Consistent with other residential-for-rent property companies, the interest coverage ratio at today's higher cost of debt determines lower leverage for companies funding sub-3% net income-yielding residential assets. Fitch has calculated that should Peach's 2025 debt be financed at around 5%, its interest coverage ratio would be 1.4x (or 1.2x at 7%). Fitch-calculated YE22 loan-to-value (LTV) was near-60%.
Refinance Options: The company is investigating various options including asset disposals to increase cash resources to reduce indebtedness, but peers are also looking to sell residential-for-rent units in a dry market. Peach has cancelled the 2022 cash dividend payable in 2023 and
Unencumbered Asset Cover: With the increase in secured debt, and some reduction in the YE22 portfolio valuation, the unencumbered investment property/unsecured debt ratio is 0.9x. At this level of ratio, Peach's unsecured rating is at the same level as its IDR.
Derivation Summary
Fitch-rated residential-for-rent investment property companies D.V.I. Deutsche Vermogens- und
German cities are classified into A-D categories, mainly based on the reach of a city's relevance (international to local). The seven German cities in the 'A' category include Berlin, which is where DVI's assets (
Contrary to other European markets, regional cities in
However, future rent indexation in top cities, especially in
At end-FY24, driven by its high LTV ratio of 57%, we forecast Peach's net debt/EBITDA at around 21x, slightly below
Key Assumptions
Fitch's Key Assumptions within our Rating Case for the Issuer
Annual rental growth of 3.0%-4.0% (higher in 2023, then decreasing) from indexation and re-lettings
We assume around
We assume completion of Peach's Swiss residential-for-sale development in 2025 with net disposal proceeds of
Disposal of 2,000 units in 2024 generating around
Interest costs on euro-denominated variable-rate funded debt rise due to policy rate changes (FY23 policy rate: 4.5%, FY24: 3.75%) and higher cost of new debt generally (FY25 refinancings' all-in: 4.5%).
RATING SENSITIVITIES
Factors that Could, Individually or Collectively, Lead to Positive Rating Action/Upgrade
Net debt/EBITDA below 17x
EBITDA net interest coverage above 1.75x
Vacancies below 7%
Liquidity score above 1.0x, and debt maturities refinanced well in advance and supported by undrawn committed credit facilities
Factors that Could, Individually or Collectively, Lead to Negative Rating Action/Downgrade
Tangible plans in place by
Delays in planned 2024 disposals and lower values realised
Net debt/EBITDA above 19x
EBITDA net interest coverage below 1.5x
Costs for holding vacancies increasing to 5% of rent roll
For the senior unsecured debt rating: the unencumbered assets/unsecured debt ratio declining to less than 1.0x and higher proportions of secured debt
Liquidity and Debt Structure
Focus on Debt Refinancings: During 1H23, Peach repaid upcoming debt maturities with a combination of cash on balance sheet, by tapping secured debt, and by issuing a convertible, and a mandatory convertible, bond. At end-1H23, the remaining
Peach faces two main bulk maturities of
With 91% of fixed-rate debt at end-FY22, Peach's imminent interest rate risk is limited, however the reported average interest costs of 2.7% do not include expensive hybrid debt with a 9.25% margin since the
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
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. Fitch'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 Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
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