Scope Ratings GmbH (Scope) monitors and reviews its credit ratings on an ongoing basis and at least annually, or every six months in the case of sovereigns, sub-sovereigns and supranational organisations.

Scope performs monitoring reviews to determine whether material changes and/or changes in macroeconomic or financial market conditions could have an impact on the credit ratings. Scope considers all available and relevant information when undertaking the monitoring review.

Monitoring reviews are conducted by performing a peer comparison, benchmarking against the rating-change drivers, and/or reviewing the credit ratings’ performance over time, as deemed appropriate by the Lead Analyst or Analytical Team Head, in addition to an assessment of all aspects of the relevant methodology/ies, including key rating assumptions and model(s). Scope publicly announces the completion of each monitoring review on its website.

Scope completed the monitoring review for Appeninn Holding Nyrt, (B/Stable issuer rating; B- senior unsecured debt rating), on 28 February 2022.

This monitoring note does not constitute a credit rating action, nor does it indicate the likelihood that Scope will conduct a credit rating action in the short term. Information about the latest credit rating action connected with this monitoring note along with the associated rating history can be found on www.scoperatings.com.

Key rating factors

Appeninn’s shift in strategy in late-2020 was reflected in Scope’s rating action in April 2021. The strategy focuses on i) strengthening the existing buy-and-hold commercial real estate (CRE) portfolio in Budapest through the selective disposal of non-core properties and the acquisition of class A buildings; ii) developing a hotel/leisure exposure in the Hungarian areas of Balaton, Tokaj and Lepence; and thereafter iii) operating and managing the tourism assets besides selling some developed apartments and land.

In terms of the strategy’s execution during 2021, the company disposed of the Montevideo commercial real estate building in September but is yet to acquire a class A building. Occupancy in its CRE portfolio improved over 2021 from 89% to 90% as of H1 2021, and latest indications for the full year point at a further increase.

Appeninn progressed well during 2021 in developing its tourism exposure; nevertheless, construction was delayed at both Balaton and Tokaj developments. The delays are within Scope’s base case scenario and therefore not critical, but significant further delays could cause a further lag in revenue inflows and as mentioned in Scope’s Outlook drivers in the April 2021 rating action, weaken liquidity.

The company successfully refinanced its loan facilities with Erste and Erste&MFB amounting to EUR 24.2m during 2021, shifting maturities from 2025/26 to an even spread over the next 20 years.

Scope view’s Appeninn’s business risk profile as unchanged. It continues to be driven by i) the company’s small overall size, resulting in cash flow volatility; ii) its limited geographic diversification with the sole exposure to Hungary, concentrated on Budapest and still only exposed to the domestic market of Hungary through its tourist exposure going forward; and iii) high tenant concentration. Further drivers are i) Appeninn’s asset quality, currently exposed to the second-tier market of Budapest with new developments in C locations; ii) a low weighted average unexpired lease term; iii) moderate occupancy on its CRE exposure due to Covid-19; and iv) the aged assets that Scope considers to require more maintenance. Appeninn’s profitability, as measured by its Scope-adjusted EBITDA margin, has been rather volatile, averaging 65% for 2016-2020. Margin pressures from rising operating costs in 2020 continued into 2021. In addition, the company’s development activities will result in revenues lagging behind related costs, taking EBITDA margins down to around 20%.

Scope has also maintained its view on Appeninn’s financial risk profile but foresees that the strategy will have an adverse effect. The expanded tourism exposure will add costs to a largely unchanged revenue-generating CRE portfolio, which will lower Scope-adjusted EBITDA interest coverage to around 1x. Scope forecasts weaker cash flows for FY 2021 and FY 2022, with funds from operations turning negative from historically positive levels and free operating cash flows, already significantly negative due to previous growth efforts, falling even more to around -EUR 60m.

Leverage as measured by the loan/value ratio has improved over the last five years to 35% from 54%. Scope expects the ratio to remain in the 40%-50% area as significant state grants will offset the increasing debt. Leverage as measured by Scope-adjusted debt/EBITDA is moving from 15x at present up to 42x, a function of the debt-funded tourism developments. Appeninn is hardly capable of bearing this rise in leverage, as demonstrated by its interest coverage.

Appeninn’s liquidity is adequate, despite cash flows and unrestricted cash being insufficient to cover the limited short-term debt. This is because all developments are pre-funded through state grants and construction loans, meaning a liquidity issue is unlikely to arise from contracts that need to be fulfilled.

Scope’s monitoring review is based on the company’s latest published financial data (2021 half-year financial reports published on 30 September 2021), related presentations, and strategy in place during 2021 and focussed only on this one.

The methodologies applicable for the reviewed ratings and/or rating Outlook (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Real Estate Corporates, 25 January 2022;) are available on https://www.scoperatings.com/#!methodology/list.
This monitoring note is issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. (is issued by Scope Ratings UK Limited at 52 Grosvenor Gardens, London, SW1W 0AU, +44 207 8245180
Lead analyst Thomas Faeh, Executive Director

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