Research Update: City Of Bremen-Based Gewoba Aktiengesellschaft Wohnen und Bauen Assigned 'A/A-1' Ratings; Outlook Stable
July 27, 2020
Overview PRIMARY CREDIT ANALYST
- Majority-owned by the German city-state of Bremen, Gewoba Aktiengesellschaft Wohnen und Michael Stroschein Bauen (Gewoba) is the largest provider of affordable housing within the state and controls more Frankfurt than 42,000 residential units (49) 69-33-999-251 michael.stroschein - The company's ongoing refurbishment and construction activities imply a net external financing @spglobal.com need for each year of our 2020-2024 forecast horizon, despite underlying solid profitability. SECONDARY CONTACT
- We are assigning our 'A/A-1' long- and short-term issuer credit ratings to Gewoba. Sabine Daehn - The stable outlook reflects our view that, although absolute financial liabilities will rise Frankfurt (49) 69-33-999-244 substantially, Gewoba's profitability, interest coverage, and relative indebtedness will not sabine.daehn change materially. @spglobal.com
RESEARCH CONTRIBUTOR
Michelle Bozem Rating Action Frankfurt michelle.bozem On July 27, 2020, S&P Global Ratings assigned its 'A/A-1' long- and short-term issuer credit @spglobal.com ratings to Bremen-based Gewoba Aktiengesellschaft Wohnen und Bauen (Gewoba). The outlook is ADDITIONAL CONTACT stable. EMEA Sovereign and IPF SovereignIPF @spglobal.com Rationale
Gewoba owns and manages over 42,000 affordable residential units in northwestern Germany. These are predominantly situated within the city of Bremen, with a fraction in the nearby towns of Bremerhaven and Oldenburg. During our 2020-2024 forecast horizon, we expect Gewoba to continue an already ongoing multiyear program of refurbishing aged bathrooms and related technical installations in its flats, improve the thermal insulation of buildings where practical, and construct several new multifamily dwellings at attractive locations within Bremen. These activities will require additional external funding and hence push up debt, but also increase rental revenue
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commensurately. We therefore anticipate Gewoba's solid profitability and favorable interest coverage will remain broadly stable, and its debt relative to EBITDA will only increase moderately.
We view Gewoba as a public housing entity under our criteria framework, despite its incorporation as a regular joint stock company. Our assessment is based on the city of Bremen holding a 75.1% majority stake, Gewoba's responsible rent-setting principles and practices, and its mission--codified in the articles of association--to provide adequate housing to large parts of society, expressly referencing families, the elderly, and other vulnerable people in need of support.
Gewoba is predominantly focused on making affordable rental housing available within the demographically stable city-state of Bremen, and it does not engage in property sales to any meaningful degree. We estimate that Bremen's population has increased with average annual growth of about 0.8% over the past five years. The demographic trend, local social-economic indicators that partially lag those of Germany's more affluent regions, and a relatively strained rental market in Bremen provide a stable backdrop for Gewoba's business activities. The company's typical rental flat is a two-bedroom, about 60-square-meter (sqm) apartment. At year-end 2019, the average rent per sqm charged by Gewoba across its entire portfolio was €6.08, while the local committee of valuation experts estimates the average value for the city of Bremen at €7.23 per sqm for 2019. Only about 50 residual flats owned by Gewoba are still earmarked for privatization, mostly for a lack of strategic fit with the overall portfolio. Nontraditional activities of Gewoba comprise a small utility subsidiary, which provides metering services as well as a limited volume of self-produced heat and electricity to its parent's assets.
Gewoba's asset quality and operational performance are a clear rating strength. Often built in the 1950s and 1960s, we estimate the portfolio's average age at about 55 years. However, we understand the properties are well maintained and calculate that the company invested about €40 per sqm into maintenance, repairs, and modernization during 2019. Last year, it achieved a low vacancy rate of 0.92%, and its rental payment arrears amounted to only 0.82% of total rent receivables.
In our view, Gewoba's experienced management has developed a generally comprehensive and coherent strategy that is well aligned with market conditions in its main area of operation. Planning is performed at a detailed level and, we believe, based on realistic assumptions. Risk management has been formalized in policies and processes that aim to quantify identified risk events. From a strategy perspective, we note that the sub-portfolio of about 1,300 flats in Oldenburg, 50 kilometers away from its home base in Bremen and situated in another state, could be considered an opportunistic deviation from Gewoba's Bremen-focused mission. Additionally, we believe that the territorial exclave of Bremerhaven, with its much more challenging socio-economic structure and relative oversupply of housing, constitutes a more difficult operating environment than the more prosperous city of Bremen itself.
Our assessment of Gewoba's enterprise profile is supported by the general resilience and low industry risk profile of the public and social housing sector.
We expect Gewoba to continue displaying solid earnings and reach S&P Global Ratings-adjusted EBITDA-margins averaging 34% over our 2020-2024 forecast horizon. The small dip in our forecast for 2020 EBITDA largely reflects our conservative assumptions on possible implications of the COVID-19 pandemic, while the observable spike in 2020 predicted revenue is caused by the annual settlement of utility bills with tenants for 2019, which was delayed into the current year for a number of properties. Looking ahead, we believe that Gewoba's various construction and modernization activities will slightly augment profitability. To safeguard performance, the company requires its capital expenditure (capex) projects to exceed, on average, a fixed hurdle rate. Outlays for modernization--but not for maintenance--can be recouped from Gewoba's tenants over a number of years, according to German tenancy law. Gewoba actively manages
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ongoing rental agreements and, when justified, feasible, and socially responsible, increases rents for current tenants toward a target level that it has determined for each individual unit.
Despite an anticipated 50% rise in outstanding debt by 2024, we predict Gewoba's debt to EBITDA multiplier will only increase toward about 10x. The company's capex program includes, next to modernizations, an assumed increase in the number of rental units by about 2,000 to above 44,000 in 2024. Together, this implies a rise in Gewoba's outstanding total debt, adjusted primarily to reflect financial liabilities of two unconsolidated subsidiaries, to about €1.2 billion by 2024, from just above €800 million at year-end 2019. However, since we expect rental income to increase commensurately, we assume Gewoba's debt to EBITDA multiplier will only moderately exceed its 2019 value of 8.2x over our forecast horizon, and its EBITDA interest coverage ratio will settle close to the current value of 7.6x. As in the past, financing will likely be provided by a variety of commercial and promotional banks on attractive terms and generally secured against Gewoba's real estate assets. In addition, we understand that Gewoba is currently negotiating a €170 million borrowing facility with the European Investment Bank (EIB).
Gewoba's financial policies are supportive to our ratings. We view the transparency and disclosure of the organization as positive, along with the conservative management of its debt stock, documented, for example, by reasonably long maturities, a diversified group of lenders, and predominantly fixed-rate borrowing. However, in our view, the size of the company's reserves implies a higher willingness to rely on prompt and uninterrupted availability of new bank funding compared with international peers.
We believe that there is a moderately high likelihood that Gewoba, as a government-related entity (GRE), would receive timely and sufficient extraordinary support from its majority shareholder, the city of Bremen. We assess the link between Gewoba and Bremen as strong. This is demonstrated, for example, by the head of the state government's department in charge of housing and urban development being the chairwoman of Gewoba's supervisory board and further government officials and state parliamentarians being ordinary members. With Gewoba effectively helping Bremen address its constitutional mandate to provide inhabitants with adequate housing, we consider its role important, as defined in our GRE criteria. However, our overall assessment of government support currently does not cause the issuer credit ratings on Gewoba to differ from the stand-alone credit profile (SACP).
Liquidity
We view Gewoba's liquidity position at the end of first-half 2020 as adequate, with liquidity sources covering uses by about 1.1x over the next 12 months, according to our calculation approach. That said, we understand that management is currently negotiating further committed facilities not only with EIB, but also with commercial lenders, which could improve our liquidity assessment going forward.
Our liquidity sources calculation includes:
- Forecast of cash generated from continuing operation of €86 million.
- Cash and liquid investments of €10 million.
- The undrawn, available portion of committed credit lines of €68 million.
- Contractually committed but not yet (fully) disbursed funds under long-term mortgage loan agreements of €70 million.
Our liquidity uses calculation includes:
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- Expected capex of about €150 million;
- Debt service obligations totaling €59 million.
- Projected negative working capital changes of €4.5 million.
We consider Gewoba's access to external liquidity as satisfactory.
Outlook
The stable outlook on Gewoba reflects our expectation that the company will continue to expand organically, rather than by large acquisitions. Although its absolute indebtedness will increase substantially due to capex, we expect earnings to rise commensurately. This should allow Gewoba to maintain profitability, debt, and interest coverage indicators in line with our base case.
Upside scenario
An upgrade would depend on Gewoba maintaining adjusted debt to EBITDA comfortably below 10x on a sustainable basis while at the same time strengthening its liquidity position.
Downside scenario
Pressure on the ratings could stem from a weakening of the company's liquidity position, or from a deterioration of its adjusted EBITDA relative to revenue and debt in such a way that it materially weakened both profitability and debt-service coverage metrics.
Key Statistics
Table 1
Gewoba Aktiengesellschaft Wohnen und Bauen Key Statistics
--Year ended Dec. 31--
(Mil. €) 2018a 2019a 2020e 2021bc 2022bc
Number of units owned or managed 41,615 42,016 42,393 42,787 43,347
Revenue§† 278.6 272.5 323.0 309.4 319.6
EBITDA† 94.8 100.0 96.8 104.6 113.1
EBITDA/revenue†(%) 34.0 36.7 30.0 33.8 35.4
Capital expense† 96.8 127.4 140.3 183.7 179.6
Debt† 726.6 817.7 888.4 1,003.3 1,107.7
Debt/EBITDA†(x) 7.7 8.2 9.2 9.6 9.8
Interest expense† 16.0 13.1 10.1 11.8 13.6
EBITDA/interest coverage† (x) 5.9 7.6 9.6 8.9 8.3
Cash and liquid assets 12.5 24.8 8.4 8.7 8.3
§2019/2020 revenue affected by a partial delay in annual settlement of utilities from 2019 into 2020. †Adjusted for contribution from unconsolidated subsidiaries Gewoba Energie and Gewoba Wohnen. a--Actual. e--Estimate. bc--Base case reflects S&P Global Ratings' expectations of the most likely scenario. N.A.--Not available.
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Ratings Score Snapshot
Table 2
Gewoba Aktiengesellschaft Wohnen und Bauen Ratings Score Snapshot
Industry Risk 2
Economic fundamentals and market dependencies 3
Strategy and management 3
Asset quality and operational performance 1
Enterprise profile 2
Financial performance 3
Debt profile 2
Liquidity 4
Financial policies 2
Financial profile 3
S&P Global Ratings bases its ratings on non-profit social housing providers on the eight main rating factors listed in the table above. S&P Global Ratings' "Methodology For Rating Public And Nonprofit Social Housing Providers," published on Dec. 17, 2014, summarizes how the eight factors are combined to derive each social housing provider's stand-alone credit profile and issuer credit rating. For social housing providers generating more than a third of its consolidated revenues from open market sales, we also refer to the "Key Credit Factors For The Homebuilder And Real Estate Developer Industry."
Related Criteria
- General Criteria: Methodology For Linking Long-Term And Short-Term Ratings, April 7, 2017
- General Criteria: Rating Government-Related Entities: Methodology And Assumptions, March 25, 2015
- Criteria | Governments | General: Methodology For Rating Public And Nonprofit Social Housing Providers, Dec. 17, 2014
- General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
- General Criteria: Use Of CreditWatch And Outlooks, Sept. 14, 2009
Related Research
- Global Social Housing Ratings Score Snapshot: July 2020, July 14, 2020
- Global Social Housing Ratings Risk Indicators: July 2020, July 14, 2020
Ratings List
New Rating
Gewoba
Issuer Credit Rating A/Stable/A-1
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Certain terms used in this report, particularly certain adjectives used to express our view on rating relevant factors, have specific meanings ascribed to them in our criteria, and should therefore be read in conjunction with such criteria. Please see Ratings Criteria at www.standardandpoors.com for further information. A description of each of S&P Global Ratings' rating categories is contained in "S&P Global Ratings Definitions" at https://www.standardandpoors.com/en_US/web/guest/article/-/view/sourceId/504352 Complete ratings information is available to subscribers of RatingsDirect at www.capitaliq.com. All ratings affected by this rating action can be found on S&P Global Ratings' public website at www.standardandpoors.com. Use the Ratings search box located in the left column. Alternatively, call one of the following S&P Global Ratings numbers: Client Support Europe (44) 20-7176-7176; London Press Office (44) 20-7176-3605; Paris (33) 1-4420-6708; Frankfurt (49) 69-33-999-225; Stockholm (46) 8-440-5914; or Moscow 7 (495) 783-4009.
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