Befimmo : 1 July 2020 - Standard & Poor's Report

Befimmo S.A.

Primary Credit Analyst:

Kathleen Allard, Paris + 33 14 420 6657;[e-mail]

Secondary Contact:

Nicole Reinhardt, Frankfurt + 49 693 399 9303;[e-mail]

Table Of Contents

Credit Highlights Outlook

Our Base-Case Scenario Company Description Business Risk Financial Risk Liquidity Covenant Analysis Reconciliation

Ratings Score Snapshot Related Criteria Related Research

WWW.STANDARDANDPOORS.COM/RATINGSDIRECT

Befimmo S.A.

Business Risk: SATISFACTORY

Vulnerable

Financial Risk: INTERMEDIATE

Excellent

Highly leveraged

Minimal

Credit Highlights

Overview

Key strengths

Key risks

Well located office asset portfolio, with over 50% of portfolio gross value-added (GAV) in the Brussels central business district (CBD), where supply and demand dynamics remain supportive.

Large redevelopment pipeline (18% of gross asset value), which will lead to a temporary increase in leverage.

Large public sector tenant base (60% of rental income) and long-term leases (7.0 years on average), supporting rental income stability and predictability.

Social distancing measures to contain COVID-19 may result in rent concessions and case-by-case renegotiations with some of Befimmo's tenants, which could weaken revenue in 2020.

Strong pre-letting activity, with 77% of current committed ongoing projectsConcentration on one market (95% of the portfolio is Belgianalready pre-let, mitigating risk of vacancy inherent in redevelopment projects. offices), whose growth could be affected by the increased prevalence of remote working.

Relatively prudent debt leverage, with adjusted debt-to-debt-plus-equity of 40%-45% and EBITDA-interest-coverage exceeding 4x, although debt-to-EBITDA is high, at close to 10x.

Capital market turmoil and the economic downturn could weigh on cost of debt and heighten refinancing risk.

S&P Global Ratings expects Befimmo's rental income to remain relatively stable in the coming years. Befimmo collected 97% of rents due in second-quarter 2020, as of May 4, 2020, despite COVID-19's impact on economic activity. This compares positively with other rated peers in the office real estate segment and is reflective of Befimmo's high quality tenant base. Still, we expect rent concessions and case-by-case renegotiations with tenants may affect rental income generation for office property owners in 2020. We therefore assume a small contraction in revenue on an organic basis for Befimmo for this year.

The weakened economy and increased remote working could erode the need for traditional office space over the longer ter m. Over the longer term, we anticipate that the pandemic and its aftermath will dampen companies' growth plans and need for additional office space. The cost-cutting and staff reductions that may result from prolonged disruption will exert pressure on office occupancy rates. More generally, office space increasingly has to justify its use as an alternative to working from home; almost to the same extent as shopping centers have to justify the journey to their location, when shoppers can simply buy goods online. In this context, central locations and adjacent services will be key factors (see "How Are Lockdown Measures and Remote Working Affecting European Office Landlords," published May 27, 2020, on RatingsDirect). In this context, we believe Befimmo should benefit from its large proportion of public tenants (60% of revenue) whose need for traditional office space should persist and which tend to sign long averageleases (7.1 years to next break option), and from its investments in co-working that may provide more solutions to meet the needs of corporate tenants, even if we view this activity as more risky.

Befimmo improved its debt-to-debt-plus-equity ratio in 2019, leaving headroom for a debt increase to fund its development pipeline. Following a €69 million private placement, dividends partly paid in shares (24% of the interim dividend for financial year 2019), the €93 million disposal of the Pavillion building, and 4.7% upward revaluation of its portfolio, the company reduced its S&P Global Ratings-adjusted debt-to-debt-plus-equity ratio to 41.1% at year-end 2019, from 44.6% a year earlier. This improvement provides the company with more headroom to maintain its debt to debt-plus-equity below 45% in the coming years and therefore within the threshold for our rating on Befimmo. We expect the company to fund its upcoming development pipeline (14% of portfolio) partially with debt.

Strong pre-leasing characteristics should mitigate the risks associated with its redevelopment pipeline. We acknowledge the company's particularly strong ability to lease its redevelopment projects well in advance, with 77% of its committed ongoing projects already pre-let. This partially shields Befimmo from the risk of future vacancy, and attests to the attractiveness of its projects under redevelopment, which are mainly located in Brussels CBD. Despite a slowdown in letting activity due to social distancing and lockdown measures, we expect leasing activity to resume, at least partly, as office market fundamentals remain sound in Brussels CBD, which historically has had a low supply of prime office space.

Outlook: Stable

The stable outlook continues to reflect Befimmo's stable and predictable rental income from its good-quality office property portfolio and long-term leases with trustworthy tenants. The outlook also reflects our expectation that Befimmo will maintain an EBITDA interest coverage ratio of at least 3.5x and an adjusted debt-to-debt-plus-equity ratio of less than 45% over the next two years.

Downside scenario

We could lower our ratings on Befimmo in the next 24 months if the company's credit metrics were to deteriorate more than anticipated, with debt to debt-plus-equity (S&P Global Ratings-calculated) sustainably exceeding 45%. This could result from lower-than-anticipated asset disposals, higher-than-expected development capital expenditure (capex), or an unexpected decline in valuations.

At the same time, a negative rating action could follow an extended deterioration of Befimmo's portfolio's quality and size, which could result in the EBITDA-interest-coverage ratio decreasing close to 3.5x. This could happen if Befimmo were to sell off more prime assets than anticipated.

We might also consider lowering the rating if the company's business model became riskier, with for example a substantial proportion of revenue coming from co-working spaces management, or if more redevelopment activities drain liquidity.

Credit stress could also come from lower-than-anticipated sources to cover upcoming debt maturities, dividends, and large redevelopment capex in the next 12 months that could deteriorate liquidity.

Upside scenario

An upgrade would depend on Befimmo's ability to improve its adjusted debt-to-debt-plus-equity ratio to near 35% on a sustainable basis, with EBITDA interest coverage remaining comfortably above 3.5x.

An upgrade would also require Befimmo to build a track record of rental growth on a like-for-like basis and a marked change in the company's earnings base, with improved diversification of income streams.

Our Base-Case Scenario

We expect GDP in Belgium will shrink by 7.2% in 2020, due to COVID-19 impacts, before rebounding by 5.2% in 2021. The economic impact is mainly due to a drop in household consumption, which has been severely affected by social distancing measures, in particular lockdowns. This will lead to rising unemployment to about 6.0% in 2020, versus 5.4% in 2019, and lower inflation, which we expect to be about 0.9% in 2020 and 1.4% in 2021.

Assumptions

• • A 0%-5% decline of Befimmo's gross rental income on a like-for-like basis in 2020. A limited rebound, with 1%-2% like-for-like rental income growth in 2021.

• • Stable occupancy, at 94%-95% in 2020, since few leases expire this year (less than 4% of gross rental income) and average lease duration is long at 7.8 years.

• • A slight negative revaluation of the office portfolio in 2020, given lower expected cash flow and market uncertainty.

• • A stable EBITDA margin, reflecting cost containment and prudent risk management.

• • Redevelopment capex of about €150 million per year during 2020-2022 as main projects have resumed (Quatuor: €110 million, delivery 2022; ZIN: €250 million, delivery 2023; Paradis express: €45 million, delivery 2021).

• • No large disposal proceeds in 2020. Small asset sales (€3 million) from the existing Fedimmo portfolio. Disposals of about €80 million in 2021 and €100 million in 2022.

• • Dividends of about €70 million in 2020, corresponding to the minimum legal distribution requirement of B-REIT companies.

Key Metrics
(Mil. €)
EBITDA	116.6	108	95-100
EBITDA margin (%)	81	75.8	70-75
EBITDA interest coverage (x)	6.2	5.6	4.0-4.5
Debt/debt+equity (%, fair value)	44.6	41.1	44-46
Debt to EBITDA (x)	10	10.4	11-13
a-Actual. e--Estimate. f--Forcast.

--Fiscal year ended Dec. 31--

2018a 2019a 2020e	2021f	2022f
100-105	100-105
70-75	70-75
4.0-4.5	4.0-4.5
43-45	43-45
10-12	10-12

Our revised base case anticipates a small drop in like-for-like net rental income for 2020 and a slow recovery in 2021.

We anticipate Befimmo may have to offer rent discounts or even cancellations to some of its weakest tenants. We expect only a mild recovery in 2021 as we expect a slow economic recovery as a result of depressed business and investor confidence.

Planned asset disposals should limit leverage increases from the growing redevelopment pipeline. Although Befimmo has identified potential assets for sale, the company may decide to postpone asset disposals for one year, given current uncertain market conditions. We now expect the company to sell €100 million-€200 million in office assets over 2021-2022 to finance the current committed redevelopment pipeline.

Company Description

Befimmo operates in the office real estate segment, with a focus on Brussels (68.8% of portfolio value) and, to a lesser extent, Luxembourg (5.0%). The company's portfolio consists of more than 100 buildings, with a total value of €2.8 billion as of year-end 2019. It is listed on Euronext Brussels with a market capitalization of about €1.1 billion (as of May 2020). Befimmo has B-REIT status (regulated Belgian Real Estate Investment Trust).

Befimmo's largest shareholders are the insurance companies AXA Belgium SA and Agias, which respectively owned