Scope Ratings has today downgraded the Corporate Issuer Credit Rating (CICR) of S.C.A. Réalités (Réalités) to B+ from BB-. The Outlook on the CICR is Stable.

This rating action follows Scope’s review for a possible downgrade, which was initiated on 31.03.2014. The downgrade is a result of Scope’s application of its final rating methodology for corporates.

The B+ rating is mainly driven by the company’s increasing share in its markets, its steady positive revenue growth and a solid development backlog representing 4.4x of 2013 turnover. It is also driven by Réalités’ low Loan-to-Value of 35% in 2013, which is expected to remain low over the next few years, and its high FFO fixed charge cover of 5.1x. The latter is expected by Scope to remain above 4.0x over the next few years.

Negative rating factors include the company’s relatively small size, its high exposure to the cyclicality of the French real estate market, the execution risk with regards to development activities, its limited geographical diversification and its liquidity situation.

KEY RATING DRIVERS

Exposed to the cyclicality of the French real estate market. The company’s exposure to the cyclicality of the French real estate sector is amplified by the nature of its core operations as a property developer with a time lag between the start and delivery of a project. This risk is, however, partially mitigated by the internal prerequisite of a 40% pre-sales rate.

Small property developer. With total assets of EUR 95m at the end of 2013, Réalités is a relatively small company in the French real estate sector. This small size constrains the company’s opportunities to benefit from economies of scale. This is reflected in the relatively low gross margin of 17% in 2013 (market average of 20-30%). Nevertheless, growth of Réalités is expected which lead to increased economies of scale going forward.

Limited geographic diversification. Réalités’ core markets are situated in western France. The majority of revenues are generated in Nantes (57%), Angers (19%) and Rennes (12%). Nantes shows positive economical prospects and an expected population growth of 100,000 (+16%) over the next 20 years. Scope believes this supports Réalités’ expected future growth.

Increasing share in its core markets, despite contracting demand. Despite a market contraction that showed a decrease in apartment bookings of more than 41% since the last peak in 2010, Réalités’ market share has shown significant growth to 7.5% in 2013 up from 0.3% in 2010. The increased market share provides the company with increased pricing power.

Solid development backlog representing 4.4x of turnover. The company profits from a solid backlog representing 4.4x the 2013 revenues (1,189 units in total). This backlog provides the company with a good visibility of future revenues.

Steady growth in revenues expected going forward. After a change in business strategy in 2010, when Réalités became a sole real estate developer, revenues were boosted at an average annual growth rate of 40% from EUR 17m in 2010 to an expected EUR 70m for 2014. Growth is expected to continue over the next few years, although at decreasing rates.

High FFO fixed charge cover (x). In 2013, the company had an FFO fixed charge cover of 5.1x. This ratio is expected to stay at above 4.0x over the next few years. This provides Scope with confidence in the company’s future capabilities to cover its running financial obligations.

Low Loan-to-Value of 35.5% in 2013. The company exhibits a low level of leverage which is expected to stay solid over the next few years.

Liquidity and Debt Structure. Given their activities as a project developer financing is foremost short-term with 58% (EUR 21m) of debt maturing within 1 year (79% in 2012). EUR 17m of short-term debt is secured debt on the level of its project subsidiaries and should be repaid in line with progress of sales for the relevant projects.

The company exhibited negative liquidity levels in recent years due to an ongoing negative cash flow from operations. This was a result of the expansion process the company experienced beginning in 2010. Scope anticipates a negative liquidity level going forward, driven by further expansion into its core markets.

OUTLOOK

The rating outlook is Stable. It is supported by the Réalités solid growth prospects driven by its development backlog. Scope expects the solid financial trend of the last two years to continue over the next few years.

 

Important information
Information pursuant to Regulation (EC) No 1060/2009 on credit rating agencies, as amended by Regulations (EU) No. 513/2011 and (EU) No. 462/2013

Responsibility
The party responsible for the dissemination of the financial analysis is Scope Ratings AG, Berlin, District Court for Berlin (Charlottenburg) HRB 161306 B, Chief Executive Officer: Florian Schoeller.

The rating analysis has been prepared by Philipp Wass, Lead Analyst
Responsible for approving the rating: Dr. Britta Holt, Committee Chair

Rating history of the S.C.A. Réalités

31.03.2014 Review for possible downgrade BB- No Outlook
03.06.2013 Initial Rating BB- Stable Outlook

Usually a credit rating is accompanied by a rating outlook, which can be Stable, Positive or Negative. The Positive and Negative outlooks would normally refer to a time period of 12-18 months. These outlooks do not necessarily signal that a rating upgrade or downgrade, respectively, will automatically follow. The probability of such a rating outcome, however, would be higher than 50%.

Information on interests and conflicts of interest

The rating was prepared independently by Scope Ratings but for a fee based on a mandate of the rated entity.

As at the time of the analysis, neither Scope Ratings AG nor companies affiliated with it hold any interests in the rated entity or in companies directly or indirectly affiliated to it. Likewise, neither the rated entity nor companies directly or indirectly affiliated with it hold any interests in Scope Ratings AG or any companies affiliated to it. Neither the rating agency, the rating analysts who participated in this rating, nor any other persons who participated in the provision of the rating and/or its approval hold, either directly or indirectly, any shares in the rated entity or in third parties affiliated to it. Notwithstanding this, it is permitted for the above-mentioned persons to hold interests through shares in diversified undertakings for collective investment, including managed funds such as pension funds or life insurance companies, pursuant to EU Rating Regulation (EC) No 1060/2009. Neither Scope Ratings nor companies affiliated with it are involved in the brokering or distribution of capital investment products. In principle, there is a possibility that family relationships may exist between the personnel of Scope Ratings and that of the rated entity. However, no persons for whom a conflict of interests could exist due to family relationships or other close relationships will participate in the preparation or approval of a rating.

Key sources of Information for the rating

Website of the rated entity/issuer, Valuation reports, other opinions, Annual reports/semi-annual reports of the rated entity/issuer, Detailed information provided on request, Annual financial statements, Data provided by external data providers, Interview with the rated entity, External market reports, Press reports / other public information

Scope Ratings considers the quality of the available information on the evaluated company to be satisfactory. Scope ensured as far as possible that the sources are reliable before drawing upon them, but did not verify each item of information specified in the sources independently.

Examination of the press release by the rated entity prior to publication / Modification of the press release after the examination

The rated entity was given the opportunity to examine the press release prior to publication. Following that examination, the press release was modified without impact on the rating.

Methodology

The methodology applicable for this rating is the current Methodology for corporates and their debt instruments, available on www.scoperatings.com. The historical default rates of Scope Ratings can be viewed on the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope’s default rating, definitions of rating notations and further information on the analysis components of a rating can be found in the documents on methodologies on the rating agency’s website.

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