Optibase Ltd.
Monitoring Report | June 2020
This credit rating report is a translation of a report that was written in Hebrew for a debt issued in Israel. The
binding version is the one in the origin language.
Contacts:
Hay Riany, CPA
Senior Analyst – Primary Rating Analyst
Hay.riany@midroog.co.il
Orit Teshuva
Team Lead – Secondary Rating Analyst
Orit.teshuva@midroog.co.il
Ran Goldstein, Vice President
Head of Real Estate
Rang@midroog.co.il
Optibase Ltd.
|
Series rating
|
Baa1.il
|
Rating outlook: Stable
|
Midroog affirms the Baa1.il rating with stable outlook for bonds (Series A) issued by Optibase Ltd. (hereinafter: "the Company").
Outstanding bonds rated by Midroog:
|
Bond series
|
ISIN
|
Rating
|
Outlook
|
Maturity
|
|
Series A
|
1136209
|
Baa1.il
|
Stable
|
December 31, 2021
|
Summary of Rating Rationale
|
•
|
The Company's activity is focused in fixed-income real estate (office and commercial) in the USA and in Switzerland, which contributes to stability of the operating environment. These countries are rated
Aaa by Moody's and have strong, stable economies. Note that in recent years, occupancy rates in office properties in the Geneva area decreased to 93%, but are still relatively high. The office property market in the USA shows medium
occupancy rates and an upward trend in rent.
|
|
•
|
The Company's business profile is supported by expected total assets, but weak diversification of operations and short lease durations (two years on average) make a negative impact the rating.
|
|
•
|
The Company has a leverage ratio that is favorable for the rating. As of December 31, 2019, the Company's ratio of net debt to net CAP (after adjustments applied by Midroog) was at 60%. According to
Midroog's base scenario, this ratio is expected to be somewhat eroded due, inter alia, to the sensitivity scenario regarding potential erosion of Company asset valuations over the short term,
and is expected to range between 63%-65% over the short-term. This ratio is still supportive of the Company's financial profile.
|
|
•
|
Fast coverage ratios are supportive of the Company's financial profile, despite the FFO being low for the rating. In 2019, Company's FFO (after adjustments applied by Midroog) amounted to USD 11.4
million, but the ratio of net debt to FFO was 17 years, which is fast relative to the rating. According to Midroog's base scenario, Company's FFO should range between USD 9-11 million over the medium-long term, and the ratio of net debt
to FFO should range between 20-23 years due, inter alia, to potential erosion of Company's revenues due to the impact of the Corona Virus pandemic.
|
|
•
|
Absence of unencumbered assets has negative implications for the Company's financial flexibility. Company's secured debt to investment properties ratio was at 61% as of December 31, 2019. Midroog believes
that this ratio will be somewhat eroded due, inter alia, to the sensitivity scenario to valuation of Company properties and due to sale of the property
portfolio in Germany, and should range between 63%-66%, which is appropriate for the rating.
|
|
•
|
The Company has sufficient liquid balances for bonds service. As of December 31, 2019, the Company had liquid balances amounting to USD 12.6 million, while the outstanding balance of Company's bonds
amounted to only USD 5.8 million.
|
|
•
|
COVID-19 virus spread is shaking world's economy. Many countries, including Switzerland and USA, made significant steps to try and slow down the spread, including social distancing and the closing of
commercial properties. According to company's estimates, virus spread could cause a negative impact on economy and may damage the company's business activity. In addition, possible continuation and worsening of the crisis may lead to a
financial crisis and a recession which may lead to a decrease in real estate demands. Company's activity focuses on office sector, which Midroog believes that is exposed to a decrease in revenues in the short-term. In addition, possible
recession may affect vacancies and rental prices in the medium-long term. For more information, please see a sector comment published on March 2020.1
|
Midroog's base scenario includes, inter alia, annual bonds repayment amounting to USD 2.9 million (ILS 10 million), closing the sale of the property portfolio in Germany, cash flow provided by Company properties and principal and interest
payments with respect to loans pursuant to repayment schedules, including repayment of a shareholder's loan amounting to USD 2.6 million in 2020. Note that expected proceeds from sale of properties in Germany is expected to be used by the company
for ongoing activity, including debt repayments, investments in existing assets and/or taking advantage of possible business opportunities. Midroog's base scenario includes, among other things, a scenario whereby the expected proceeds would be
used for investments in new assets, according to Midroog's assumptions.
In the base scenario, Midroog tested various sensitivity scenarios regarding, inter alia, to erosion in
property valuations, impact of exchange rate fluctuations on Company's debt and equity, as well as the impact to Company's revenues due, inter alia, to the Corona Virus pandemic and in view of potential
departure of a major tenant in the CTN property, as set forth below in this report.
Consequently, the Company's net debt to net CAP ratio should range between 63%-65% over the short-medium term, which is favorable for the rating.
Company FFO should range between USD 9-11 million over the medium-long term, and the ratio of net debt to FFO should range between 20-23 years, which is fast for the rating. Note that these ratios do not account for the Company's results in 2020,
which Midroog believes should be weaker due to the short-term effects of the Corona Virus pandemic.
1 The reports are published on the Midroog website www.midroog.co.il
Adjustments applied by Midroog to financial ratios (hereinafter: "Midroog adjustments") include, inter alia,
adjustment of valuation of Company assets at fair value in accordance with IFRS (in lieu of their presentation at depreciated cost on the Company's reports, prepared in accordance with US GAAP), as well as adding the Company's share of debt and
results of equity- accounted investees.
Rating Outlook
The Stable outlook reflects our assessment that the Company would maintain stability of cash flow from its properties, as well as sufficient liquid
balances for bonds service.
Factors That Could Lead to a Rating Upgrade:
|
•
|
Significant growth in operations and improved property diversification
|
|
•
|
Significant improvement in financial flexibility, with emphasis on scope of unencumbered assets
|
|
•
|
Significant increase in FFO
|
Factors That Could Lead to a Rating Downgrade:
|
•
|
Significant decrease to Company's liquidity
|
|
•
|
Significant erosion of leverage ratios and/or coverage ratios of the Company beyond Midroog's forecasts
|
|
•
|
Material investments associated with higher risk compared to Company's activity
|
Optibase Ltd. – Key Financial Indicators, USD in millions
|
|
|
December 31, 2019
|
December 31, 2018
|
December 31, 2017
|
|
Financial Debt
|
209
|
211
|
219
|
|
Net Financial Debt
|
196
|
197
|
199
|
|
Net Debt to Net CAP
|
60%
|
62%
|
63%
|
|
FFO
|
11.4
|
N/A
|
N/A
|
|
Net Debt to FFO
|
17
|
N/A
|
N/A
|
|
Unencumbered Assets to Total Assets
|
0%
|
0%
|
0%
|
|
*
|
The ratios presented in this table are after adjustments by Midroog and may not be identical to those presented by the Company.
|
Detailed Rating Considerations
Company operations in the rental property market in the USA and in Switzerland support the stability of the Company's operating
environment
The Company has rental properties across three stable economies: Switzerland, USA and Germany, while Midroog believes that the sale of the property
portfolio on Germany would close in the short term.
USA is rated Aaa
by Moody's and has a strong and stable economy. The Corona Virus pandemic has negative effects on anticipated economic performance in the USA in 2020, with expected negative GDP growth at -5.7% and increase in unemployment to 6.8% (compared to
3.8% prior to the crisis).2
The US office
market has posted long-term growth in rent and stable occupancy rates, which have not been high in recent years, ranging between 86%-88%. In particular, the office markets in Chicago and Philadelphia, among the markets in which the Company
operates, saw consistently increasing rents, along with some volatility in occupancy rates which ranged between 88%-90% in the first quarter of 2020. CBRE estimates that occupancy rates should decline in the coming year due, inter alia, to the Corona Virus crisis, down to 85%.
Rent is expected to decrease by 9% over the short term, with gradual recovery expected to the pre- crisis level by the first half of 2022.3
Switzerland is
also rated Aaa by Moody's and has a strong, stable economy. As of April 2020, despite the higher unemployment due, inter alia, to the Corona Virus pandemic, the unemployment rate was at only 3.3% (compared to 2.6% in January 2020). GDP growth is expected to turn negative in 2020, similar to
other countries, and should return to positive territory in 2021 (4.2%), then moderating once again as from 2022 (2.2%).4
The office market in Geneva, Switzerland – where a Company's major property (CTN) is located – has seen growing supply in recent years, which somewhat impacted occupancy rates
and rent. Note, however, that occupancy rates remained high compared to other markets, at 93% in 2019.5
Company's scale is appropriate for the rating. Conversely, weak diversification of operations and short lease durations negatively
impact the Company's business profile
According to Midroog's base scenario, company's total assets (after Midroog's adjustments) is expected to be appropriate for the rating.
2 Source: Moody's
3 Source: CBRE
4 Source: Trading economics
5 Source: JLL
Conversely, the Company has a small number of assets, with the top one accounting for 38% of NOI, and the top three assets accounting for 81% of NOI
(based on Company's share). Closing of the sale of the portfolio in Germany is expected to negatively impact this diversification, while Midroog's base scenario assumes investment of the sale proceeds in new assets.
The Company's business profile is also negatively impacted by short-term leases, of only two years on average, and by exposure to a major tenant
(hereinafter: "the Major Tenant"), which accounts for 11% of revenues attributable to the Company (including company's share in companies accounted for using the equity method, excluding a 4% holding stake in commercial properties in Texas). In
particular, the Major Tenant is expected to leave the property over the short term; concurrently, a legal proceeding is on-going with regard to a lawsuit filed by the Major Tenant against the Company.
Note that extensive geographic diversification, property locations and relatively high occupancy rates (95% on weighted average) somewhat mitigate the
aforementioned risks. However, Midroog estimates that diversification of Company operations is relatively weak, which negatively impacts the business profile.
Chart 1: Asset diversification based on Company's share of NOI as of December 31, 2019
Chart 2: Tenant diversification based on Company share of revenues as of December 31, 2019
Leverage and coverage ratios are favorable for the rating, which supports the financial profile despite FFO being low for the rating
As of December 31, 2019, the Company's net debt to net CAP ratio was at 60% after adjustments applied by Midroog. According to the base scenario, which
includes sensitivity scenarios regarding potential erosion of Company asset valuations, this ratio should range between 63%-65% and should continue to be favorable for the rating.
The Company has FFO which is not appropriate for the rating. Company FFO in 2019 (after adjustments applied by Midroog) amounted to USD 11.4 million.
However, the Company's coverage ratios are fast for the rating and supportive of the financial profile, with a net debt to FFO ratio in 2019 being only 17 years. According to Midroog's base scenario, Company's FFO is expected to experience an
erosion over the short term due, inter alia, to closing the sale of properties in Germany and potential erosion of existing Company's assets due to implications of the Corona Virus pandemic. However,
Midroog believes that a gradual recovery and using sale proceeds to acquire new assets should result in FFO ranging between USD 9-11 million over the medium-long term, with net debt to FFO ratio ranging between 20-23 years. Note that these ratios
do not account for the Company's results in 2020, which Midroog believes will be weaker due to the short-term effects of the Corona Virus pandemic.
Absence of unencumbered properties has negative implications for the Company's financial flexibility. Conversely, liquid balances are
sufficient for bonds service
Limited financial flexibility negatively impacts the Company's financial profile, specifically due to the absence of unencumbered assets. Company's
secured debt to investment properties ratio was at 61% as of December 31, 2019, but should undergo some erosion according to Midroog's base scenario, and should range between 63%-66% over the short-medium term, which is appropriate for the rating.
Note that small holding stakes in properties also limit the Company's financial flexibility, as elaborated below.
As of December 31, 2019, the Company had liquid balances and available credit facilities amounting to USD 16.2 million (excluding the partner's share of
liquidity in the property CTN). These liquid balances are sufficient for needs of un-secured debt, including the bonds, whose balance as of the same date was only USD 5.8 million (NIS 20 million), and a shareholder's loan amounting to USD 2.6
million, which Midroog believes would be repaid in 2020.
Chart 3: Bonds repayment schedule as of December 31, 2019 (NIS in thousands)
Other Rating Considerations
The Company's actual rating of Baa1.il is one notch lower than the rating derived from the rating scorecard of A3.il, due to small scale of operations
and weak property diversification of the Company, along with small holding stakes in properties, which negatively impacts the Company's business profile and financial flexibility beyond what is reflected by the rating scorecard.
Small scope of operations and weak property diversification, along with small holding stakes in properties, which negatively impact
the Company's business profile and its access to liquidity from its properties in case of need, in a way that is not fully reflected by the rating scorecard
The scope of Company operations, and in particular the weak property diversification, negatively impact its business profile. In particular, FFO that is
low for the rating, which may be more sensitive to fluctuations in properties and even in certain lease contracts.
Moreover, the Company has small holding stakes in properties, which may negatively impact its credit repayment capacity. Thus, as of December 31, 2019,
the Company's weighted average holding stake was 51% (excluding a 4% holding stake in commercial properties in Texas). Note that sale of the property portfolio in Germany, which is 100% owned by the Company, should impact the weighted average
holding stake even further. The small holding stakes in properties negatively impact the Company's access to liquidity from these properties due, inter alia, to inability to decide on actions such as
realization, refinancing and/or dividend distributions.
|
|
|
As of December 31, 2019
|
|
Midroog outlook
|
|
Category
|
Parameters
|
Measure[1]
|
Score
|
|
Measure
|
Score
|
|
Operating Environment
|
Area of Activity and Economic
Environment
|
–
|
A.il
|
|
–
|
A.il
|
|
|
Total Assets
(USD in millions)
|
N/A
|
N/A
|
|
325-355
|
Baa.il
|
|
Business Profile
|
Asset Quality, Asset and Tenant
Diversity
|
–
|
Baa.il
|
|
–
|
Baa.il
|
|
|
Net Financial Debt to Net CAP
|
60%
|
A.il
|
|
65%-63%
|
A.il
|
|
|
FFO LTM
(USD in millions)
|
11.4
|
Baa.il
|
|
9-11
|
Baa.il
|
|
|
Net Financial Debt to FFO LTM
|
17
|
A.il
|
|
20-23
|
A.il
|
|
Financial
|
Unencumbered Assets to Total Assets
|
0%
|
Ba.il
|
|
0%
|
Ba.il
|
|
Profile
|
Secured Debt to Investment Properties
|
61%
|
Baa.il
|
|
66%-63%
|
Baa.il
|
|
|
Liquidity and Credit Line Balances to
Unsecured Debt Principal Service for
Representative Two-Year Period
|
110%
|
A.il
|
|
200%-129%
|
Aa.il
|
|
Derived Rating
|
|
|
|
|
|
A3.il
|
|
Actual Rating
|
|
|
|
|
|
Baa1.il
|
|
|
|
|
|
|
|
|
[1] The ratios presented in this table are after Midroog's adjustments and may not be identical to those
presented by the Company. Midroog's forecast includes Midroog assessments with regard to the issuer, in conformity with Midroog's base scenario, rather than the issuer's assessments.
Company's profile
The Company was incorporated and registered in Israel in 1990, named Optibase Advanced Systems (1990) Ltd. In 1993, the Company was renamed Optibase
Ltd. The Company was previously engaged in digital video technologies, and since 2009 has been engaged in the fixed- income real estate business. Currently, the Company is engaged in purchase, holding and management of rental properties of various
types in Switzerland, USA and Germany. The Company is a public company with shares listed on NASDAQ. As of the rating report date, the controlling shareholder of the Company is the Capri Family Fund.
Rating History
Related Reports
Optibase Ltd. – Related reports
Income producing real estate corporate rating – Methodology report, January 2019
Adjustments to financial statements and presentation of key financial ratios for corporate ratings – Methodology
Report, May 2020
Effect of Corona Virus outbreak on real estate market – Special Report – Sector Comment, March 2020
Effect of Corona Virus outbreak on commercial real estate market – Special Report – Sector Comment, March 2020
Table of affinities and holdings
Midroog's rating scales and definitions
These reports are available on the Midroog website at www.midroog.co.il
|
General Information
|
|
|
|
|
|
Rating report date:
|
June 1, 2020
|
|
Most recent rating revision date:
|
June 4, 2019
|
|
Initial rating issue date:
|
May 6, 2015
|
|
Rating initiated by:
|
Optibase Ltd.
|
|
Rating paid for by:
|
Optibase Ltd.
|
Information
from the Issuer
In its ratings, Midroog relies, inter alia, on information received from competent organs of the issuer.
Long-Term Rating Scale
|
Aaa.il
|
Issuers or issues rated Aaa.il are those that, in Midroog judgment, have highest creditworthiness relative to other local issuers.
|
|
Aa.il
|
Issuers or issues rated Aa.il are those that, in Midroog judgment, have very strong creditworthiness relative to other local issuers.
|
|
A.il
|
Issuers or issues rated A.il are those that, in Midroog judgment, have relatively high creditworthiness relative to other local issuers.
|
|
Baa.il
|
Issuers or issues rated Baa.il are those that, in Midroog judgment, have relatively moderate credit risk relative to other local issuers, and could involve certain speculative
characteristics.
|
|
Ba.il
|
Issuers or issues rated Ba.il are those that, in Midroog judgment, have relatively weak creditworthiness relative to other local issuers, and involve speculative characteristics.
|
|
B.il
|
Issuers or issues rated B.il are those that, in Midroog judgment, have relatively very weak creditworthiness relative to other local issuers, and involve significant speculative
characteristics.
|
|
Caa.il
|
Issuers or issues rated Caa.il are those that, in Midroog judgment, have extremely weak creditworthiness relative to other local issuers, and involve very significant speculative
characteristics.
|
|
Ca.il
|
Issuers or issues rated Ca.il are those that, in Midroog judgment, have extremely weak creditworthiness and very near default, with some prospect of recovery of principal and interest.
|
|
C.il
|
Issuers or issues rated C are those that, in Midroog judgment, have the weakest creditworthiness and are usually in a situation of default, with little prospect of recovery of principal and
interest.
|
Note: Midroog appends numeric modifiers 1, 2, and 3 to each rating category from Aa.il to Caa.il. The modifier '1' indicates that the obligation ranks
in the higher end of its rating category, which is denoted by letters. The modifier '2' indicates that it ranks in the middle of its rating category and the modifier '3' indicates that the obligation ranks in the lower end of that category, denoted
by letters.
Copyright © All
rights reserved to Midroog Ltd. (hereinafter: “Midroog”).
This document, including this paragraph, is copyrighted by Midroog, and is protected by copyright and by
intellectual property law. This document may not be copied, or otherwise scanned, amended repackaged, further transmitted, transferred, disseminated, redistributed, duplicated, displayed, translated, resold, or stored for subsequent use for any
such purpose, in whole or in part, in any form or manner or by any means whatsoever, by any person, without advance written consent from Midroog.
Caveat
regarding the limitations of a rating and the risks of relying on a rating, and caveats and reservations in respect to the activity of Midroog Ltd. and
the information appearing on its website
Ratings and/or publications issued by Midroog are or contain Midroog’s subjective opinions about the relative
future credit risk of entities, credit obligations, debts and/or debt-like financial instruments, that apply on the date of their publication, and as long as Midroog has not changed the rating or withdrawn it. Midroog's publications may contain
assessments based on quantitative models of credit risks, as well as related opinions. Ratings and publications by Midroog do not constitute a statement about the accuracy of the facts at the time of the publication or in general. Midroog makes use
of rating scales to issue its opinions, according to definitions detailed in the scale itself. The choice of a symbol to reflect Midroog’s opinion with respect to credit risk reflects solely a relative assessment of that risk. Midroog’s ratings are
issued on a national scale and, as such, are opinions of the relative creditworthiness of issuers and financial obligations within Israel. National scale ratings are not designed to be compared between countries; rather, they address relative
credit risk within a given country.
Midroog defines credit risk as the risk that an entity may fail to meet its contractual financial
obligations on schedule and the estimated financial loss in the event of default. Midroog's ratings do not address any other risk, such as risks relating to liquidity, market value, change in interest rates, and fluctuation in prices or any other
element that influences the capital market.
The ratings and/or publications issued by Midroog do not constitute a recommendation to buy, hold, and/or
sell bonds and/or other financial instruments and/or make any other investment and/or forgo any of these actions.
Nor do the ratings and/or publications issued by Midroog constitute investment advice or financial advice,
nor do they address the appropriateness of any given investment for any specific investor. Midroog issues ratings on the assumption that anybody making use of the information therein and of the ratings will exercise due caution and make his own
assessment (himself and/or through authorized professionals) of the merit of any investment in a financial asset that he is thinking of buying, holding or selling. Every investor should obtain professional advice in respect to his investments, to
the applicable law, and/or to any other professional issue.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR
ANY PARTICULAR PURPOSE OF ANY SUCH RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MIDROOG IN ANY FORM OR MANNER WHATSOEVER.
Midroog’s credit ratings and publications are not intended for use by retail investors and it would be
reckless and inappropriate for retail investors to use Midroog’s credit ratings or publications when making an investment decision. If in doubt you should contact your financial or other professional adviser.
All the information contained in Midroog ratings and/or publications, and on which it relied (hereinafter:
"the Information") was delivered to Midroog by sources (including the rated entity) that it considers credible. Midroog is not responsible for the accuracy of the Information and presents it as provided by the sources. Midroog exercises reasonable
means, to the best of its understanding, so that the Information is of sufficient quality and that it originates from sources Midroog considers to be credible, including information received from independent third parties, if and when appropriate.
However, Midroog does not carry out audits and cannot therefore verify or validate the Information.
The provisions of any Midroog publication other than one expressly stated as a methodology do not constitute
part of any Midroog methodology. Midroog may change its position regarding the content of such publications at any time.
Subject to applicable law, Midroog, its directors, its officers, its employees and/or anybody on its behalf
involved in the rating shall not be held responsible under law, for any damage and/or loss, financial or other, direct, indirect, special, consequential, associated or related, incurred in any way or in connection with the Information or a rating
or a rating process, including not issuing a rating, including if they were advised in advance of the possibility of damage or a loss as said above, including but not confined to (a) any loss of profit in present or future, including the loss of
other investment opportunities; (b) any loss or damage caused consequential to holding, acquisition and/or selling of a financial instrument, whether it is a subject of a rating issued by Midroog or not; (c) any loss or damage caused consequential
to the relevant financial asset, that was caused, inter alia and not exclusively, as a result of or in respect to negligence (except for fraud, a malicious action or any other action for which the law does
not permit exemption from responsibility) by directors, officers, employees and/or anybody acting on Midroog's behalf, whether by action or omission.
Midroog maintains policies and procedures in respect to the independence of the rating and the rating processes.
A rating issued by Midroog may change as a result of changes in the information on which it was based and/or as a result of new
information and/or for any other reason. Updates and/or changes in ratings are presented on Midroog’s website at http://www.midroog.co.il.