Heimstaden Bostad - work in progress
All,
Please find our preliminary analysis on Heimstaden Bostad here.
The analysis is still a work in progress but we wanted to share the work done to date on the name. It is too early in our analysis for us to come to a concrete view on the name as we still have significant outstanding questions and are awaiting a call with management.
Outstanding Issues:
- What is the correct maturity profile - and what is the discrepancy in the reported numbers? There are two sets of maturity profiles, and it isn’t clear why they differ from each other. The discrepancy may refer to interest maturity profile, but if that is the case, the Company have a significant cushion from rising interest rates.
- The partnership with Allianz is fully consolidated on Heimstaden Bostad's accounts. However, we are not aware of what the LTV is at this entity, if there is secured borrowings at this entity and what are the broad terms of the partnership.
- Although Heimstaden Bostad quote a figure of SEK 128bn of cumulative equity injections from equity partners, including Allianz and Heimstaden AB, a portion of this is from reinvested dividends. Clarity is required on the split between asset contribution, reinvested dividends and cash.
- What are the governing principles concerning dividend policy and the different types of shares? We have modelled a continuation of a dividend policy, albeit at a lower level, while the Company spoke on the Q2 call that it was unlikely that ordinary dividends would be paid in H2 23.
- We have not yet done our legal analysis on the name, which we will focus on next week.
Background:
- Heimstaden Bostad is a Swedish property Company, with c. SEK 340bn of real estate assets, financed with c.SEK 110bn secured debt (32% LTV), SEK 85bn of unsecured BBB-rated bonds (55% LTV) and c. SEK 40bn of Hybrid perpetual bonds (68% LTV). The equity is unlisted, but held, via preference and ordinary shares, majority by Heimstaden AB, and other long-term investors including Alecta (5th largest pension fund), Folksam (insurance), Swedish Pension Agency and Ericsson.
- The assets, primarily residential assets, are split across the Nordics and Central Europe - Sweden (28%), Germany (26%) and Denmark (21%) are the largest three, combined at 75%, with each of the rest, Netherlands, Czech Republic, Norway, Finland, UK and Poland all below 10% individually.
- Heimstaden AB also has outstanding debt, both secured and unsecured. Heimstaden AB holds directly some Icelandic and Swedish properties. The Icelandic assets were acquired in Q3 2021, mainly in Reykjavik, which Heimstaden AB value of SEK 5.5bn. The minor Swedish Portfolio, totalling SEK 848m as at Dec 22, consists of Swedish headquarters in Malmo and a school in the city of Eskilstuna.
- However, despite announcing the sale of the Icelandic assets, to private investors on a home-by-home basis, Heimstaden AB requires dividends to be funnelled up from Heimstaden Bostad in order to pay coupon.
- Heimstaden AB holds a Group Management Contract with Heimstaden Bostad for the managment of the properties. The Group Management Agreement outlines the operational structure and Heimstaden AB's responsibilities. The contract has recently been extended to 2047, with a management fee of 0.2% of fair value of investment properties and paid quarterly
The issue:
- In a rising rate environment, rental income from the owned residential properties have not increased sufficiently to cover the increase cost of financing. This in turn has reduced the accessibility of the unsecured market, forcing Heimstaden Bostad to increase its secured borrowings.
- Rental income in Sweden and Germany, two of its three main markets, are 100% regulated with rental increases above a threshold level difficult to push through, despite the wider higher inflation. There is potential for clawback, via further rental increases in these markets, even if inflation declines.
- With rental income lagging, and some downward pressure on NAV from higher rates, LTV and interest coverage ratios guidance from S&P to maintain investment grade status are coming under pressure.
- Heimstaden Bostad do not have a large future CAPEX requirement with c. SEK 5bn in the next 18 months and SEK 7bn in total by the end of FY27. This compares favourably to the c. SEK 340bn of overall assets in the portfolio.
Options Available to the Company:
- Option 1 - Muddle through:
In our model we have assumed no asset sale nor no equity injection. Base case scenario, we have refinanced upcoming maturities with secured debt at 4.5% all in rate.
In this scenario, LTV at the secured level increases to c.40% with unsecured at 55%. LTV is based on a yield of 4.75%.
However, interest coverage ratio will deteriorate, falling below 1.8x in FY25. At this level, Heimstaden Bostad is likely to be downgraded to BB. Any refinancing at the unsecured level will exasperate the interest coverage ratio.
- Option 2 - Asset Sales:
Although Hemistaden AB are in the process of selling its Icelandic portfolio, we don’t see any quick portfolio sale at the Heimstaden Bostad entity. The Company acknowledges the difficulty in doing large-scale divestments, and we don’t envisage any major asset sales in the short to medium term. There is always potential for some sales to tenants, but the quantity is likely to remain small.
- Option 3 - Equity injection:
On the Q2 conference call, Heimstaden Bostad talked constructively about potential equity raises from its equity partners. Heimstaden Bostad has some well-capitalised shareholders who will have an economic interest in maintaining the status quo at Heimstaden Bostad. The only concern in relation to an equity raise is the dilution impact for the management company and controlling shareholder, Heimstaden AB.
Any equity raise may be in the form of a tender for the Hybrid bonds. There are some rating considerations for any large-scale sub-par tenders but the Company have alluded to tenders being equity accretive.
We will continue to do further work in the coming days on this name, but we wanted to share you our latest version.
Happy to discuss.
Tomás
E: tmannion@sarria.co.uk
T: +44 20 3744 7009
www.sarria.co.uk