Overview -- We believe Belgium-based property investment company Cofinimmo has put a fairly modest level of equity support behind its strategy of portfolio transformation, which leaves it exposed to the timing and terms of asset disposals. -- The operating performance of Cofinimmo's core assets remains stable, but we are concerned about downside risks from the company's acquisitive financial policy. -- We are therefore revising the outlook on Cofinimmo to negative from stable and affirming our 'BBB/A-2' long- and short-term ratings. -- The negative outlook reflects risks of higher leverage from an active disposal and acquisition program. Rating Action On Nov. 13, 2012, Standard & Poor's Ratings Services revised its outlook on Belgium-based property investment company Cofinimmo S.A./N.V. to negative from stable. At the same time we affirmed our 'BBB/A-2' long and short-term corporate credit ratings on the company. Rationale The outlook revision reflects our projections that Cofinimmo's capital structure is likely to be more leveraged over the next 12 months than we consider consistent with a 'BBB' rating. We view our adjusted loan-to-value and debt-to-EBITDA ratios of 57% and 11.8%for Cofinimmo on June 30, 2012, as high for the rating. The level is higher than we forecast because Cofinimmo did not compensate for acquisitions it made in the first nine months of 2012 by making timely asset disposals. That said, Cofinimmo has an established track record of selling assets and might successfully deliver on its disposal targets over the next 12 months. We believe the company's strategy of portfolio transformation, although gradually achieving a lower-risk operating profile for its income-generating property portfolio-around EUR59 million invested in healthcare assets this year so far--has so far been backed with only modest levels of equity support. Our calculation of Cofinimmo's debt protection metrics includes EUR52 million in mandatory convertible bonds issued in December 2011, which we view as debt-like instruments under our criteria (see "Hybrid Capital Handbook: September 2008 Edition," published on Sept. 15, 2008), and 50% of the preferred shares until they convert to common. We acknowledge that there is a seasonal peak in Belgian real estate investment trusts' (REIT) debt requirements in June owing to the large dividend payment in May, and that timing factors contributed to the past three quarters' weaker debt metrics. We also understand that Cofinimmo's use of equity measures such as the option of paying dividends in shares and the continuous sale of treasury shares will likely lead to a decrease of our loan-to-value ratio to approximately 55% by Dec. 31, 2012. However, we believe that these deleveraging measures are still exposed to equity market conditions over the next 12 months. On the expenditure side, Cofinimmo remains committed to a more than EUR190 million mix of dividend and planned capital expenditure (capex) in 2013. As a result, we anticipate that our adjusted loan-to-value ratio should remain at or higher than 55% over the next 12 months, which is weak for the current rating level. Although historically successful in managing its portfolio of investment properties, Cofinimmo remains reliant on operating conditions in the Brussels office rental market continuing to stabilize. Additionally, it depends on continuous acceptance of its strategic priorities by equity investors to help fund the acquisitions it targets in its more operationally stable sub segments of healthcare, distribution property networks, and public and private partnerships. Cofinimmo has a track record of an average EUR230 million per year in disposals of assets and lease receivables over the past six years. This release of capital has helped it to diversify away from a very concentrated dependence on the Belgian office market. That said, we believe that this capacity to generate liquidity from disposals might be more constrained in the Brussels office market, where investments fell significantly over first nine months of 2012, especially in peripheral districts. We continue to assess Cofinimmo's business risk profile as "strong," as our criteria define the term. We still take a positive view of Cofinimmo's diversification strategy into the healthcare segment, whose assets provide long-term cash flow visibility and support the company's revenue stability. We believe the expansion into healthcare offsets the currently subdued Belgian office market, where vacancies remain high. Under our base-case operating scenario we anticipate that Cofinimmo should continue to record low rental income growth on a like-for-like basis over the next two years, with EBITDA between EUR160 million and EUR170 million, as rental demand in Belgium's office market remains subdued. We expect flat rental value growth owing to our view that yields from Brussels' office market won't fall until the end of 2013. This is based on our assumption that the increase in committed projects in 2013 could constrain the current absorption of the excess supply of office properties. Liquidity We classify Cofinimmo's liquidity as "adequate" under our criteria. We expect liquidity sources to meet funding needs by more than 1.2x in the next 12 months. As of Sept. 30, 2012, we estimated that liquidity needs over the next 12 months mainly consisted of: -- EUR400 million in debt maturities; -- EUR352 million outstanding under the EUR400 million commercial paper program; -- About EUR90 million in investments, mostly acquisitions and developments of nursing homes; and -- About EUR100 million in dividends subject to a partial payment offered in shares. Supporting liquidity as of Sept. 30, 2012, were the following: -- EUR751 million in undrawn committed credit lines; -- About EUR120 million of incoming funds from operations (FFO); and -- Proceeds from the sale of treasury shares, which should not exceed 1,200,000 shares. We remain cautious about the decreasing headroom between Cofinimmo's reported loan-to-value ratio of 52.16% as of Sept. 30, 2012, and the corresponding unadjusted financial covenant of 57.5%, including a six-month cure period at a 60% loan-to-value ratio. Although this covenant concerns 32% of Cofinimmo's total debt we note it has not yet recovered an adequate position in the absence of deleveraging measures. Still, we believe the company's fairly good standing in the market will allow it to refinance its short-term maturities and maintain adequate liquidity. Outlook The negative outlook reflects our view that Cofinimmo's ability to reduce its debt and release capital from asset disposals will remain highly dependent on volatile factors such as the office property market and equity markets. We believe the company's leverage is likely to be too high for the range that we consider commensurate with the current rating over the short term, due to the timing of disposals and investment commitments scheduled over the next six months. We might take a negative rating action if Cofinimmo accepted a continuing timing lag between disposals of properties and/or treasury shares and debt reduction or investment into income-generating assets. If Cofinimmo's loan-to-value ratio remained at or above 55% over the next 12 months, it would signal, in our view, the company's preference for a permanently weaker capital structure than was previously the case. We view deteriorating demand in the Brussels office market as the primary operating risk to Cofinimmo's ability to strengthen its debt protection metrics. We might revise the outlook to stable, if the company's capital structure improved significantly without divesting from core assets such that our adjusted loan-to-value ratio ranges moved sustainably into the 50% to 55% range over the next 12 months. We believe that Cofinimmo's portfolio of assets gives it the ability to improve its capital structure, depending on the exact execution of the current capital release and reinvestment plans. Related Criteria And Research -- 2008 Corporate Criteria: Analytical Methodology, April 15, 2008 -- Key Credit Factors: Global Criteria For Rating Real Estate Companies, June 21, 2011 -- Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Sept. 28, 2011 Ratings List Ratings Affirmed; CreditWatch/Outlook Action To From Cofinimmo S.A./N.V. Corporate Credit Rating BBB/Negative/A-2 BBB/Stable/A-2 Ratings Affirmed Cofinimmo S.A./N.V. Senior Unsecured BBB Commercial Paper A-2 Cofinimmo Luxembourg S.A.* Senior Unsecured BBB *Guaranteed by Cofinimmo S.A./N.V.