Public Housing Provider Gewoba Aktiengesellschaft Wohnen und Bauen Affirmed At 'A/A-1'; Outlook Stable
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Research Update:
Public Housing Provider Gewoba Aktiengesellschaft
Wohnen und Bauen Affirmed At 'A/A-1'; Outlook
Stable
July 30, 2021
Overview
PRIMARY CREDIT ANALYST
- We expect Gewoba Aktiengesellschaft Wohnen und Bauen (Gewoba), the city of Bremen's Michael Stroschein
dominant public housing provider, to continue displaying strong profitability and interest Frankfurt
coverage, as well as a strong, recently augmented liquidity position. + 49 693 399 9251
michael.stroschein
- Although significant refurbishment and construction activities will require meaningful net new @spglobal.com
borrowing over the next few years, we expect the overall debt burden to remain relatively low.
SECONDARY CONTACT
- Gewoba operates in a generally supportive environment, but the discount from market rent is Stefan Keitel
relatively modest in an international comparison and a minority of its stock is located in an area Frankfurt
with weaker market dynamics. + 49 693 399 9254
stefan.keitel
- We affirmed our 'A/A-1' long- and short-term issuer credit ratings on Gewoba. The outlook is @spglobal.com
stable.
ADDITIONAL CONTACT
EMEA Sovereign and IPF
SovereignIPF
Rating Action @spglobal.com
On July 30, 2021, S&P Global Ratings affirmed its 'A/A-1' long- and short-term issuer credit
ratings on Gewoba Aktiengesellschaft Wohnen und Bauen (Gewoba), the leading public housing
provider in the city-state of Bremen. The outlook remains stable.
Outlook
The stable outlook on Gewoba balances the forecast increase in absolute indebtedness due to
spending on new development and modernization with anticipated rising earnings. This should
enable Gewoba to maintain broadly stable indicators of profitability, relative indebtedness, and
interest coverage.
www.spglobal.com/ratingsdirect July 30, 2021 1Research Update: Public Housing Provider Gewoba Aktiengesellschaft Wohnen und Bauen Affirmed At 'A/A-1'; Outlook Stable Upside scenario An upgrade could result from improving market dependencies for the company, on the back of a strong social-economic performance in its area of operation. Alternatively, Gewoba sustaining non-sales adjusted debt to EBITDA comfortably below 10x while maintaining at least strong liquidity and profitability could also lead to a positive rating action. Downside scenario Pressure on the ratings could stem from any material deterioration in Gewoba's operating environment that is not sufficiently addressed by management. A downgrade could also occur if Gewoba's profitability or liquidity position deteriorates markedly. Rationale Gewoba's resilient performance during 2020 upholds its creditworthiness in line with the 'A/A-1' ratings. In particular, we note the company's EBITDA margin well in the 30%-range and a notable improvement in the company's liquidity position. The latter stems from a new loan facility signed with the European Investment Bank (EIB) and an additional expansion of commercial bank credit lines. The ratings are further underpinned by Gewoba's almost exclusive focus on traditional letting activities, clear leading position in the affordable end of Bremen's housing market, and a sufficiently supportive regulatory environment for German public housing providers. We expect that the increase in indebtedness from capital expenditure (capex) over the coming years will be offset by a commensurate increase in revenue, such that indicators of profitability and debt affordability will not deteriorate markedly. Gewoba owns and manages over 42,300 affordable residential housing units, predominantly located in the northwestern German city of Bremen, with a smaller fraction of the portfolio situated in the nearby towns of Bremerhaven and Oldenburg. We view Gewoba as a public housing entity, despite its incorporation as a regular joint stock company. Our assessment is based on Bremen's 75.1% majority stake in Gewoba, as well as the company'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 socially disadvantaged groups. Due to its narrow focus on traditional letting business at the affordable end of the housing market, we assess the inherent industry risk of Gewoba's operations as low. The company is not engaged in potentially more risky development-for-sales activities. We view as relatively minor the relevance of commercial tenants, sales of existing assets, and auxiliary activities, including a small utility subsidiary that provides metering services and small volumes of self-produced heat and electricity. The regulatory framework for Gewoba's operations is broadly supportive, in our opinion. While there is no national regulator for German public housing operators, the entities are usually subjected to the close and direct supervision of their public sector owners. Rent adjustment mechanisms are clearly codified in the German civil code and, absent a voluntary agreement on rent restraint, allow housing providers to adjust their pricing within the legally prescribed limits. Promotional banks augment market funding, particularly for housing companies that commit to building rent-restricted units reserved for low-income tenants. Market dependencies are a softer factor in our assessment of Gewoba. The company is the main housing provider in the city-state of Bremen and controls about 15% of the total local housing www.spglobal.com/ratingsdirect July 30, 2021 2
Research Update: Public Housing Provider Gewoba Aktiengesellschaft Wohnen und Bauen Affirmed At 'A/A-1'; Outlook Stable stock. No local competitor matches it in size. However, we consider the territorial exclave of Bremerhaven, where about 20% of the company's assets are located, a more challenging operating environment, due to a weaker socio-economic structure and poorer market dynamics. In our view, Gewoba's units are competitively priced, although the discount to general market rent levels is limited, similar to German peers. Gewoba charged an average rent of €6.22 per square meter (sqm) and month as per end-December 2020 across its portfolio. We conservatively estimate the market rent in its area of operation, weighted by Gewoba's number of units in the three different locations, at about €7.23 per sqm and month. A low portfolio vacancy rate of 1.08% in 2020, which we consider on par with its market segment, but more favorable than the 2.7% estimated void rate across the entire city-state of Bremen, points to good operational efficiency. In our view, Gewoba's experienced management has developed a comprehensive and coherent strategy that is well aligned with local market conditions. Planning is realistic and then executed with attention to detail, in our view. Risk management has been formalized in policies and processes that aim to quantify identified risk events. A written financing strategy exists, but compared to international peers, it is less prescriptive and allows a lower minimum liquidity reserve. 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. One of Gewoba's two long-serving management board members will retire this year. The already appointed successor has led another, albeit significantly smaller, public housing entity for many years. We expect Gewoba to continue displaying solid earnings and retain S&P Global Ratings-adjusted EBITDA margin well within the 30%-range over our forecast horizon. The COVID-19 pandemic had no visible financial effect on Gewoba in 2020 and the company posted slightly better results than we had anticipated. We understand that a very small, COVID-19-related increase in arrears during 2020 proved temporary and has almost been fully remedied. Additional revenue from newly built units being occupied, the amortization of modernization expenditure through increases of the in-place rent--which is allowed under German tenancy law--and general rent adjustments to market developments should help Gewoba moderately expand revenue and EBITDA in the coming fiscal years. Any observable volatility in our revenue calculations is primarily due to fluctuations in the share of annual utility bill settlements that happen prior to year-end. As this is a pass-through item, it has, however, no bearing on EBITDA. The anticipated revenue expansion should enable Gewoba to keep its debt-to-non-sales adjusted EBITDA multiplier from significantly exceeding 10x, despite an expected increase in adjusted total debt to about €1.2 billion by 2025. The additional net borrowing will finance the planned increase in the number of units owned by Gewoba to about 44,000 by then, next to modernization expenditure. We anticipate that Gewoba will continue to source most funds through its existing, well-diversified pool of banks on attractive terms and generally secured against its real estate assets. Gewoba has additionally signed a, currently undrawn, €170 million loan facility with EIB, and we understand it to consider capital market-based funding, possibly through the issuance of a Schuldschein-loan. Thanks to the cost-effective mix of secured funding and promotional lending, predominantly at fixed rate, we do not expect Gewoba's non-sales adjusted EBITDA-interest-coverage ratio to fall below the very strong level of 8x over our forecast horizon. 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-state 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 www.spglobal.com/ratingsdirect July 30, 2021 3
Research Update: Public Housing Provider Gewoba Aktiengesellschaft Wohnen und Bauen Affirmed At 'A/A-1'; Outlook Stable
effectively helping Bremen address its constitutional mandate to provide adequate housing, we
consider its role important. However, at this time, our overall assessment of government support
does not bolster our view of Gewoba's stand-alone credit quality
Liquidity
We assess Gewoba's liquidity position as strong, supported by measures the company has
recently implemented to improve its available liquidity sources. In addition to signing the EIB loan
facility, the company increased its volume of committed bank credit lines to now €111 million. We
calculate that liquidity sources cover uses by about 1.45x over the 12 months started July 1, 2021.
However, we note that Gewoba's plan to begin utilizing the EIB facility from the second half of
2021 could introduce volatility in the coverage ratio, which we weigh into our assessment.
Our estimate of Gewoba's liquidity sources includes:
- Forecast cash generated from continuing operation of €102 million.
- Cash and liquid investments of €9 million.
- The, so far undrawn, EIB loan facility of €170 million.
- Gewoba's committed revolving credit lines with commercial banks of €111 million.
- Contractually committed but not yet (fully) disbursed funds under long-term mortgage loan
agreements of €25 million.
- Other cash inflow (working capital changes, asset sales, joint ventures dividends) amounting to
€6.4 million.
Our liquidity uses calculation includes:
- Expected capex of about €152 million.
- Debt service obligations, including interest, under long-term mortgage loan agreements
totaling €63 million.
- Outstanding short-term borrowings of €78 million.
We evaluate Gewoba's access to external liquidity, provided primarily via crisis-proven mortgage
lending by its diversified pool of commercial, mortgage, and promotional banks, as strong (see
"Methodology For Rating Public And Nonprofit Social Housing Providers," published June 1, 2021,
on RatingsDirect).
Key Statistics
Table 1
Gewoba Aktiengesellschaft Wohnen und Bauen -- Key Statistics
--Year ends December 31--
Mil. € 2019a 2020a 2021e 2022bc 2023bc
Number of units owned 40,216 42,325 42,387 42,644 43,247
Adjusted operating revenue† 272.5 298.4 317.5 311.7 319.2
Adjusted EBITDA† 100.0 105.9 100.8 106.4 111.0
Non-sales adjusted EBITDA† 98.1 105.0 100.5 105.7 111.4
www.spglobal.com/ratingsdirect July 30, 2021 4Research Update: Public Housing Provider Gewoba Aktiengesellschaft Wohnen und Bauen Affirmed At 'A/A-1'; Outlook Stable
Table 1
Gewoba Aktiengesellschaft Wohnen und Bauen -- Key Statistics (cont.)
--Year ends December 31--
Mil. € 2019a 2020a 2021e 2022bc 2023bc
Capital expense† 127.4 121.0 133.4 169.5 139.2
Debt† 817.7 860.7 936.1 1037.4 1105.9
Interest expense† 13.1 11.7 9.6 10.9 12.4
Adjusted EBITDA/adjusted operating 36.7 35.5 31.7 34.1 34.8
revenue (%)
Debt/non-sales adjusted EBITDA (x) 8.3 8.2 9.3 9.8 9.9
Non-sales adjusted EBITDA/interest 7.5 8.9 10.4 9.7 9.0
coverage(x)
†Adjusted for contribution from subsidiaries Gewoba Energie and Gewoba Wohnen. a--Actual. e--Estimate. bc--Base case reflects S&P Global
Ratings' expectations of the most likely scenario.
Ratings Score Snapshot
Table 2
Gewoba Aktiengesellschaft Wohnen und Bauen -- Ratings Score Snapshot
Enterprise risk profile 3
Industry risk 2
Regulatory framework 3
Market dependencies 4
Management and Governance 2
Financial risk profile 3
Financial performance 3
Debt profile 2
Liquidity 3
S&P Global Ratings bases its ratings on non-profit social housing providers on the seven main rating factors listed in the table above. S&P
Global Ratings' "Methodology For Rating Public And Nonprofit Social Housing Providers," published on June 1, 2021, summarizes how the seven
factors are combined to derive each social housing provider's stand-alone credit profile and issuer credit rating.
Related Criteria
- Criteria | Governments | General: Methodology For Rating Public And Nonprofit Social Housing
Providers, June 1, 2021
- 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
- General Criteria: Principles Of Credit Ratings, Feb. 16, 2011
- General Criteria: Stand-Alone Credit Profiles: One Component Of A Rating, Oct. 1, 2010
www.spglobal.com/ratingsdirect July 30, 2021 5Research Update: Public Housing Provider Gewoba Aktiengesellschaft Wohnen und Bauen Affirmed At 'A/A-1'; Outlook Stable
Related Research
- Global Regulatory Framework Report Card For Public And Nonprofit Social Housing Providers
Published, June 8, 2021
- Global Social Housing Ratings Score Snapshot: December 2020, Dec. 10, 2020
- Global Social Housing Ratings Risk Indicators: December 2020, Dec. 10, 2020
- ESG Industry Report Card: Public And Nonprofit Social Housing Providers Outside The U.S., Aug.
4, 2020
Ratings List
Ratings Affirmed
Gewoba
Issuer Credit Rating A/Stable/A-1
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
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www.spglobal.com/ratingsdirect July 30, 2021 6Research Update: Public Housing Provider Gewoba Aktiengesellschaft Wohnen und Bauen Affirmed At 'A/A-1'; Outlook Stable
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