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Luxembourg-Registered Commercial Property Group CPI Assigned #BBB# Preliminary Outlook Stable

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MOSCOW--20 Apr--S&P Global Ratings
MOSCOW (S&P Global Ratings) April 20, 2018--S&P Global Ratings today assigned its 'BBB' preliminary long-term issuer credit rating to CPI Property Group SA. The outlook is stable.

In addition, we assigned our preliminary 'BB+' issue rating to the proposed benchmark size perpetual hybrid bond to be issued by CPI. We also assigned our preliminary 'BBB' issue rating to CPI's senior unsecured debt.

Final ratings will depend on our receipt and satisfactory review of all final transaction documentation of the proposed hybrid bond issuance. Accordingly, the preliminary ratings should not be construed as evidence of final ratings. If S&P Global Ratings does not receive final documentation within a reasonable timeframe, or if final documentation departs from materials reviewed, we reserve the right to withdraw or revise our rating. Potential changes include, but are not limited to, utilization of bond proceeds, maturity, size and conditions of the bonds, financial and other covenants, and security and ranking of the bonds.

Our preliminary rating on CPI reflects our view of the group's relatively large scale and portfolio size compared with rated peers in the commercial real estate segment, and its fair geographic diversification. This makes its revenue stability less vulnerable to asset or tenant rotation. The group owns and manages standing assets with a total value of EUR6.7 billion in 11 countries. CPI is focused on offices (41% of portfolio value) and retail (31%) real estate assets; the remainder are hotel assets (10%) and residential real estate (10%). Its primary focus is the Czech Republic (54% of portfolio value) and Germany (24%, mostly in Berlin). It also operates in Hungary, Poland, Slovakia, Croatia, France, Italy, and Switzerland.

The group's business risk profile is underpinned by its position as the largest retail property owner in the Czech Republic and the largest office property owner in Prague. It manages a portfolio of high quality office and retail assets. CPI enjoys a good degree of geographic and segment diversity, which we believe compares favorably with that of most peers we rate in the same business risk category. Most of the group's tenants are creditworthy multinational companies or regional leaders with triple-net-lease contracts fixed in euros.

CPI reported an occupancy ratio of 93% as of Dec. 31, 2017, which is close to that of most rated peers in the European office and retail market. In the Czech market, we understand that CPI's occupancy is 94%, outperforming the market average of 92%, and it is particularly strong in the Prague office market, at 97.5% occupancy. The relatively low occupancy rate of 89% in the Berlin office market weighs on the group's average, but we take into account recent efforts to improve and, in line with the group's strategy, we expect this ratio will rise further over the next two years.

We estimate that the macroeconomic fundamentals in the majority of CPI's locations are favorable, with positive demand trends for the commercial real estate sector, relatively low unemployment rates, and sound GDP growth. We also understand that obtaining approval for building construction in the Czech Republic is relatively difficult compared both with developing and developed countries. Therefore we believe that risks of substantial new supply coming onto the Czech market are limited.

The top-10 assets represent 18% of total market value, with the largest asset accounting for 3%. The group's average lease term of 3.85 years is slightly below other rated commercial real estate players (five years or longer). Overall, we see limited risk of tenant concentration, as the group's top-10 tenants account just for 19% of its total rents. However, we note higher tenant concentration in some of CPI's individual segments, such as the Czech office segment, where the top-ten tenants account for 53% of total rents.

CPI has material exposure to the office, retail, and hotel property segments, which we view as more volatile and cyclical than residential for example, because they are closely linked to corporate business conditions and consumer confidence.

We note that there is limited development risk in the portfolio, because the share of assets under development will remain less than 10% of the current portfolio value. CPI's retail tenants have a relatively modest occupancy cost (or rent-to-sales ratio) of less than 15%, which somewhat mitigates the risk of increasing rent burden from currency movements (rents are contracted in euros, while some of tenants' revenues are in local currencies, such as Czech koruna).

Our assessment of CPI's financial risk profile is underpinned by its moderate debt leverage, with an adjusted ratio of debt to debt plus equity of 48% and an adjusted EBITDA-to-interest ratio of 2.4x at the end of 2017. We expect these ratios will gradually improve and will be in the range of 44%-47% and 3.0x-3.5x, respectively, in 2018-2019. The group's prudent financial policy is centered on a loan-to-value (LTV) ratio of less than 45%, which corresponds with an S&P Global Ratings-adjusted debt-to-debt-plus-equity ratio below 50%. The average debt maturity is 5.6 years. CPI is 91% owned by Radovan Vitek and is listed on the Frankfurt stock exchange.

The stable outlook on CPI reflects our view that the group should continue to benefit from healthy economic trends in the Czech Republic and Germany, thanks to its quality assets. We also believe its debt to debt and equity will be less than 50% and EBITDA interest coverage higher than 2.4x over the next two years, supported by the group's resilient cash flows and conservative financial policy. We expect CPI will maintain a large liquidity buffer.

We could consider taking a negative rating action if, in particular, CPI's debt to debt plus equity increased above 50% as a result of unexpected asset devaluations or if its EBITDA interest coverage fell below 2.4x. Downward rating pressure might also materialize if we see negative dynamics in its operating performance.

An upgrade would hinge on CPI materially improving its portfolio in terms of size and diversification, while generating like-for-like rental income growth and showing a positive portfolio revaluation. Rating upside might also come from a revision of the group's financial policy to a more conservative one with a debt-to-debt-plus-equity ratio lower than 35%.


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