Sweden-Based Akelius Residential Property Assigned 'BBB-' Rating; Outlook Stable

Transcription

1 Research Update: Sweden-Based Akelius Residential Property Assigned 'BBB-' Rating; Outlook Stable Primary Credit Analyst: Nicole Reinhardt, Frankfurt (49) ; Secondary Contact: Marie-Aude Vialle, London +44 (0) ; Table Of Contents Overview Rating Action Rationale Outlook Ratings Score Snapshot Related Criteria And Research Ratings List JUNE 1,

2 Research Update: Sweden-Based Akelius Residential Property Assigned 'BBB-' Rating; Outlook Stable Overview Sweden-based Akelius Residential Property AB (Akelius) owns and manages a portfolio of about 50,000 units, globally spread over Sweden, Germany, Canada, England, and France. We assess Akelius' business risk profile as strong, based on its good geographic diversity in stable residential real estate markets. We view the financial risk profile as aggressive, based on the company's high adjusted debt, including our treatment of its preference shares as 50% debt in our financial ratios. We are assigning Akelius our 'BBB-' long-term corporate credit rating. The stable outlook reflects our expectation of continued favorable demand for midsize residential apartments in most of Akelius' markets, where new supply remains manageable and economic fundamentals are solid. Rating Action On June 1, 2015, Standard & Poor's Ratings Services assigned its 'BBB-' long-term corporate credit rating to Sweden-based Akelius Residential Property AB (Akelius). The outlook is stable. Rationale The rating is supported by our assessment of Akelius' business risk profile as "strong," recognizing the company's well-diversified property portfolio, with exposure to large and stable real estate markets where demand remains strong and new supply limited. Akelius is one of a few globally diversified residential property companies. Its portfolio of more than 6 billion as of March 31, 2015, is spread across locations and countries where the population is growing and one- to two-person households are increasing, such as Stockholm, Berlin, and London. The portfolio consists largely of prime locations with good infrastructure that are within 10 kilometers (km) to 15 km from city centers. Recently, Akelius has extended its geographic reach with investments in the U.S. We think that Akelius also has broad asset and tenant diversity, with close to 50,000 units. Asset quality appears average to good, thanks to the company's strategy of upgrading newly acquired assets. We estimate that less than 10% of the existing portfolio has renovation needs. We view positively the company's strategy of long-term ownership of residential properties with no development activities. The average apartment size is 65 square meters, which is well in JUNE 1,

3 line with what we observe for other rated residential players in its markets. In our view, Akelius has a positive operational track record with like-for-like rental income growth exceeding 3% and a very strong occupancy rate of about 99%, excluding vacant premises for renovation. In Germany, England, and France (together about 45% of the portfolio), Akelius is able to transfer utility costs to the tenant. However, margins may be slightly more volatile in Akelius' largest operational region, Sweden, where rising utility costs would not fully be covered by tenants. Still, overall profitability would not be diminished, and we expect like-for-like rental income growth will remain above 3% as a result of Akelius' lower-yielding markets and the benefit of its renovation and apartment upgrades. Despite the benefits we see from its global diversity, we believe that Akelius can achieve only limited economies of scale in each of its markets. Its EBITDA margin of about 50% is lower than the 60% average of its rated peers in the residential real estate segment, whose portfolios are more clustered regionally. Although we expect the company's maintenance expenses will remain stable and in line with those of peers, renovation and refurbishment needs are significantly higher and will grow further due to a growing portfolio and Akelius' strategy to acquire assets with upgrade potential. Akelius' "aggressive" financial risk profile is characterized by its debt-to-debt plus equity ratio, including our adjustments for preference shares and a loan to the parent company, of above 60% (63.6% at year-end 2014). We consider the outstanding hybrid loan agreement of 150 million (approximately Swedish krona [SEK] billion) between its subsidiary, Akelius GmbH, and its parent, Akelius Apartments Ltd., as full debt, and include the instrument fully into our coverage and leverage calculation, in line with our criteria for "The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities," published April 29, 2014, on RatingsDirect. Furthermore, we classify the company's preference shares as having "intermediate" equity content, and treat 50% of the principal outstanding and all related payments, including accrued dividends under the preferred stock, as debt and 50% as equity. We view the issuer's ability to repurchase the notes prior to five years after issuance as a weakness for our equity content assessment. Furthermore, payments on the instrument accrue in case of a deferment of the dividend at a higher rate than normal, which we view as a disincentive to defer. That said, we see the repurchase as unlikely, due to Akelius' commitment to retain the instrument as a long-term feature of its capital structure, as well as the high premium the company would need to pay for repurchasing the instrument. Importantly, our view that the preference shares have "intermediate" equity content is supported by a provision in the company's recent bond issuance, which causes a mandatory deferral of dividend payments on the preference shares if certain financial ratios are not met. We understand that the company has committed to keeping hybrid capital, including preference shares, below 15% of total capitalization, our threshold JUNE 1,

4 for assessing equity content of hybrid instruments. We would revise our assessment if this commitment changes or our view of permanence or deferability weakens. In our base case, we assume: Annual like-for-like rental income growth of about 3.0%-3.2% in 2015 and 2016, based on low indexation in most of Akelius' markets, but some stronger renegotiated increases of existing rents, thanks to apartment upgrades and stable occupancy; Slight improvement in the EBITDA margin to about 52%-54% for the next months, thanks to acquisitions supporting rental income growth and some ability of the company to benefit from economies of scale in its operating regions; A positive portfolio revaluation of 3.0%-3.5%, supported by sound demand and limited supply features, in particular in Akelius' strong markets, such as Berlin, Stockholm, London, or Paris; Some asset-rotation activities, including annual acquisitions of up to 1 billion and asset sales of about 300 million- 400 million per year, mostly related to privatization units and the company's clean-up strategy in less favorable districts; and A small increase in capital expenditures, including maintenance, due to an enlarged portfolio size and higher renovation needs on some newly acquired assets that are likely to be upgraded, in line with Akelius' strategy. Based on these assumptions, we arrive at the following credit measures: Adjusted debt-to-debt plus equity ratio of about 63% by the end of 2015, including our adjustments for hybrid capital and preference shares as described above; and Adjusted EBITDA interest coverage to improve marginally to above 1.6x in the next 12 months, thanks to a higher EBITDA base and some benefits from refinancing activities of upcoming maturities; Liquidity We assess Akelius' liquidity as "adequate," supported by our forecast that the company's liquidity sources will exceed its funding needs by just over 1.2x over the next 12 months. We believe that our forecast of positive funds from operations (FFO), undrawn committed credit lines, and the recent issuance of preferred stock and bonds will be sufficient to cover Akelius' debt amortization and upcoming maturities over the next 12 months. Akelius' principal liquidity sources over the 12 months started March 31, 2015, include: Unrestricted cash and cash equivalents of SEK201 million; Our forecast of positive cash FFO of about SEK1.0 billion-sek1.2 billion; About SEK2.6 billion undrawn and committed credit lines maturing in more than 12 months; and SEK3.4 billion of recent issuances in April 2015, including about SEK2.0 billion of new preferred stock and SEK1.4 billion of senior unsecured notes maturing in JUNE 1,

5 Akelius' principal liquidity uses over the 12 months started March 31, 2015, are: About SEK2.92 billion of short-term debt maturities, including amortization from Akelius' bank loans; About SEK500 million of capital expenditures, estimated as required minimum spending for the next 12 months; and Approximately SEK432 million of dividends to preference shareholders. Our assessment of liquidity is also supported by Akelius' positive track record of accessing equity and capital markets and its good relationships with banks globally. We understand that Akelius has some covenants for its existing bond issuances and credit lines. We estimate that the headroom for those covenants is adequate--at more than 10%. Other credit considerations Our 'BBB-' rating on Akelius is one notch above our 'bb+' anchor, due to our positive comparable ratings analysis. This reflects our assessment of the company's "strong" business risk profile at the better end of this category. Compared with other rated peers in the same category, Akelius benefits from a more international portfolio, mostly in very good metropolitan cities. This enables the company to generate like-for-like growth of more than 3% while keeping occupancy levels very high. In our assessment, we consider the company's solid size and geographic diversification. We assess our comparable ratings analysis modifier as "positive," reflecting our forecast of Akelius' credit metrics tending toward the better end of our "aggressive" category, with EBITDA interest coverage improving slowly to 1.6x in 2015 and debt-to-debt plus equity of about 62%-63% over the same period. Due to the company's planned growth strategy and exposure to large metropolitan cities where demand exceeds supply, we consider that there is some potential for further strengthening of credit metrics. This could occur owing to solid portfolio revaluation or acquisitions financed with a favorable amount of common equity. Outlook The stable outlook reflects our expectation of continued favorable demand for midsize residential apartments in most of Akelius' markets where supply remains limited. We expect rental income will grow by approximately 3.0%-3.2% on a like-for-like basis in 2015, thanks to the company's exposure to large metropolitan areas with generous economics. Over the next two years, we forecast that adjusted EBITDA interest coverage will improve marginally to about 1.6x-1.7x and a debt-to-debt-plus-equity ratio of approximately 62%-63%, including our adjustments for hybrid capital and preference shares. JUNE 1,

6 Upside scenario We could raise the rating if Akelius demonstrates stronger improvement in credit metrics than we anticipate in our base case and improves its financial risk profile. This could occur due to lower-than-anticipated cost of debt, stronger portfolio revaluation, or increased economies of scale, resulting in EBITDA interest coverage of above 2x and a lower debt-to-debt-plus-equity ratio of about 55% or below, on a sustainable basis. Downside scenario Conversely, we could lower the rating if Akelius' EBITDA interest coverage remains at 1.5x or below in the next 24 months or its debt-to-debt-plus-equity ratio exceeds 63%. Such a scenario is not part of our central assumptions and would most likely arise from debt-financed acquisitions, the issuance of a substantial amount of preferred stock, which would result in a hybrid capitalization ratio above 15%, or higher spending on renovation and refurbishment costs than we anticipate. Ratings Score Snapshot Corporate Credit Rating: BBB-/Stable/-- Business risk: Strong Country risk: Very low Industry risk: Low Competitive position: Strong Financial risk: Aggressive Cash flow/leverage: Aggressive Anchor: bb+ Modifiers Diversification/Portfolio effect: Neutral (no impact) Capital structure: Neutral (no impact) Liquidity: Adequate (no impact) Financial policy: Neutral (no impact) Management and governance: Fair (no impact) Comparable ratings analysis: Positive (+1 notch) Related Criteria And Research Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014 The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities, April 29, 2014 Corporate Methodology, Nov. 19, JUNE 1,

7 Key Credit Factors For The Real Estate Industry, Nov. 19, 2013 Methodology And Assumptions: Assigning Equity Content To Corporate Entity And North American Insurance Holding Company Hybrid Capital Instruments, April 1, 2013 Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008 Ratings List New Rating Akelius Residential Property AB Corporate Credit Rating BBB-/Stable/-- Additional Contact: Industrial Ratings Europe; Complete ratings information is available to subscribers of RatingsDirect at and at spcapitaliq.com. All ratings affected by this rating action can be found on Standard & Poor's public Web site at Use the Ratings search box located in the left column. Alternatively, call one of the following Standard & Poor's numbers: Client Support Europe (44) ; London Press Office (44) ; Paris (33) ; Frankfurt (49) ; Stockholm (46) ; or Moscow 7 (495) JUNE 1,

8 Copyright 2015 Standard & Poor's Financial Services LLC, a part of McGraw Hill Financial. All rights reserved. No content (including ratings, credit-related analyses and data, valuations, model, software or other application or output therefrom) or any part thereof (Content) may be modified, reverse engineered, reproduced or distributed in any form by any means, or stored in a database or retrieval system, without the prior written permission of Standard & Poor's Financial Services LLC or its affiliates (collectively, S&P). The Content shall not be used for any unlawful or unauthorized purposes. S&P and any third-party providers, as well as their directors, officers, shareholders, employees or agents (collectively S&P Parties) do not guarantee the accuracy, completeness, timeliness or availability of the Content. S&P Parties are not responsible for any errors or omissions (negligent or otherwise), regardless of the cause, for the results obtained from the use of the Content, or for the security or maintenance of any data input by the user. The Content is provided on an "as is" basis. S&P PARTIES DISCLAIM ANY AND ALL EXPRESS OR IMPLIED WARRANTIES, INCLUDING, BUT NOT LIMITED TO, ANY WARRANTIES OF MERCHANTABILITY OR FITNESS FOR A PARTICULAR PURPOSE OR USE, FREEDOM FROM BUGS, SOFTWARE ERRORS OR DEFECTS, THAT THE CONTENT'S FUNCTIONING WILL BE UNINTERRUPTED, OR THAT THE CONTENT WILL OPERATE WITH ANY SOFTWARE OR HARDWARE CONFIGURATION. In no event shall S&P Parties be liable to any party for any direct, indirect, incidental, exemplary, compensatory, punitive, special or consequential damages, costs, expenses, legal fees, or losses (including, without limitation, lost income or lost profits and opportunity costs or losses caused by negligence) in connection with any use of the Content even if advised of the possibility of such damages. Credit-related and other analyses, including ratings, and statements in the Content are statements of opinion as of the date they are expressed and not statements of fact. S&P's opinions, analyses, and rating acknowledgment decisions (described below) are not recommendations to purchase, hold, or sell any securities or to make any investment decisions, and do not address the suitability of any security. S&P assumes no obligation to update the Content following publication in any form or format. The Content should not be relied on and is not a substitute for the skill, judgment and experience of the user, its management, employees, advisors and/or clients when making investment and other business decisions. S&P does not act as a fiduciary or an investment advisor except where registered as such. While S&P has obtained information from sources it believes to be reliable, S&P does not perform an audit and undertakes no duty of due diligence or independent verification of any information it receives. To the extent that regulatory authorities allow a rating agency to acknowledge in one jurisdiction a rating issued in another jurisdiction for certain regulatory purposes, S&P reserves the right to assign, withdraw, or suspend such acknowledgement at any time and in its sole discretion. S&P Parties disclaim any duty whatsoever arising out of the assignment, withdrawal, or suspension of an acknowledgment as well as any liability for any damage alleged to have been suffered on account thereof. S&P keeps certain activities of its business units separate from each other in order to preserve the independence and objectivity of their respective activities. As a result, certain business units of S&P may have information that is not available to other S&P business units. S&P has established policies and procedures to maintain the confidentiality of certain nonpublic information received in connection with each analytical process. S&P may receive compensation for its ratings and certain analyses, normally from issuers or underwriters of securities or from obligors. S&P reserves the right to disseminate its opinions and analyses. S&P's public ratings and analyses are made available on its Web sites, (free of charge), and and (subscription) and (subscription) and may be distributed through other means, including via S&P publications and third-party redistributors. Additional information about our ratings fees is available at JUNE 1,