S&P Global Ratings cut ADO Properties SA's long-term issuer credit rating to BB from BBB- and its short-term rating to B from A-3, with a stable outlook.

The German residential real estate company recently wrapped its voluntary public takeover offer of Adler Real Estate AG.

The rating agency said that while the deal boosts ADO's portfolio size and scale, the enhanced scale is counterbalanced by Adler's lower asset quality, with a lower average rent per square meter and higher vacancy rates compared with ADO on a stand-alone basis.

Ratings expects that the merged entity will hit a debt-to-debt-plus-equity ratio of approximately 50% to 52% and an EBITDA interest coverage of 2.1x to 2.3x in the next 12 to 18 months.

"The absence of a clear management and governance structure, limited track record in executing its operational and financial strategy post-transaction, successful integration of the transaction, and a smaller cash flow base to serve its debt compared with peers, further constrain the rating on the combined entity," the rating agency said in a note.

The stable outlook on ADO shows that the merged entity portfolio should continue to benefit from favorable demand trends for German residential property.

Separately, Ratings affirmed Adler's BB issuer credit rating and removed the rating from CreditWatch. The BB+ issue rating on Adler's senior unsecured notes was also affirmed.

The rating agency believes Adler's capital structure and credit metrics may benefit from a potential transfer of its debt to ADO over time, leading to a reduction in Adler's debt burden.

Ratings also expects that Adler will be fully integrated as a core division of the group and will represent a significant part of its total assets and income.

This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings. Descriptions in this news article were not prepared by S&P Global Ratings.