S&P Global Ratings has assigned Stoneweg European REIT (SERT) an investment-grade “BBB-” long-term issuer credit rating with a “stable outlook,” citing the REIT’s robust portfolio quality, strong cash flow visibility, and proactive management strategies. The recognition underscores SERT’s strategic pivots and operational resilience amid challenging market conditions.
Portfolio Quality and Resilience
As of the end of 2024, SERT’s portfolio comprises 105 assets spread across 10 European countries, primarily in key gateway cities. The REIT has strategically focused on logistics and industrial properties, which now account for 55% of its portfolio. These properties are strategically positioned near major distribution hubs or are optimized for last-mile logistics. The remaining 43% consists of office buildings, predominantly “good-quality assets,” according to S&P.
The REIT’s high occupancy rates—95% for logistics and industrial properties and 90% for office buildings—reflect the soundness of its portfolio. Office buildings in the Netherlands and Italy, which make up 31% of the portfolio, have consistently shown positive rent reversions and stable valuations.
Strategic Moves Drive Stability
S&P’s report highlights the REIT’s shift towards logistics and industrial assets since 2022, alongside divestments of non-core properties, as pivotal to maintaining stable valuations. Despite rising interest rates and structural changes in office demand, SERT’s portfolio valuation decline was limited to 3.5% between June 2022 and December 2023, compared to an average 8.8% decline for other S&P-rated REITs in Europe, the Middle East, and Africa.
The REIT’s proactive approach also includes a focus on rental reversions, which have remained positive since its inception in 2017, achieving 2.3% in the first nine months of FY2024.
Market Challenges and Mitigation
While S&P acknowledges a subdued office leasing environment due to work-from-home trends, the REIT’s long lease maturity profile (weighted average lease expiry of 4.4 years) and tenant retention rate of 88% provide a buffer. The report notes that SERT’s offices in strategic locations are likely to see positive rent reversions over the next 24 months, though weaker markets like Poland and Finland may face negative trends.
The REIT’s modest portfolio size of EUR2.2 billion (S$3.1 billion) and EBITDA margins of 56%-57% (based on gross revenue) or 70%-72% (net rental income) are seen as areas for improvement compared to peers like Argan S.A. and AXA Core Europe Fund.
Financial Outlook
SERT is expected to maintain stable credit metrics through 2025 and 2026, with sufficient financial buffers to absorb higher borrowing costs. However, refinancing challenges loom as the REIT’s EUR450 million notes, due in November 2025, carry a current coupon of 2.125%, which will likely increase. S&P projects an EBITDA interest coverage ratio of 2.6-2.8 times for FY2025-FY2026, down from 3.2 times in FY2024.
The agency also expects SERT to maintain organic rental growth of 1%-2% annually, supported by inflation-linked lease adjustments and rental step-ups, partially offsetting weaker office demand in select markets. Asset sales planned for 2025-2026 are expected to have minimal revenue impact, as these contribute just 2% of total revenue.
Proactive Debt Management
To enhance its financial profile, SERT plans to refinance early and extend its weighted average debt maturity beyond the current 2.9 years. This aligns with S&P’s expectations for stronger flexibility in the real estate sector.
A Strategic Path Forward
“S&P Global Ratings’ ‘stable outlook’ reflects SERT’s sound portfolio quality and good cash flow visibility over the next 12-24 months,” said Simon Garing, CEO of the REIT manager. He credited the REIT’s resilience to strategic measures such as increasing logistics exposure, divesting non-core assets, and responsible capital management.
With a strong focus on growth in logistics and industrial properties, alongside proactive financial and portfolio management, SERT appears well-positioned to navigate market challenges while capitalizing on opportunities for long-term value creation.
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