Investment Research 29 April 2016 Heimstaden 16: Stable quarter with continued transactions Heimstaden showed a stable operating performance in despite continued intense transaction activity. Leverage increased slightly. with a net LTV of 55% at end-march (58% if also treating 50% of preference shares as debt). In Q2, leverage should increase further as an acquisition of apartments in Copenhagen is consolidated. Still, we expect the company to adhere to its stipulated financial policy with a targeted (net) loan-tovalue below 65%. We maintain our view of Heimstaden as a BB credit, with its bonds one notch lower at BB-. For investors seeking exposure to the more stable residential property segment, we believe that Heimstaden s 2019 bond in SEK could be of interest, especially when considering the company s long debt maturity structure. Stable rental income and earnings in Heimstaden s rental income was stable at SEK186m in ( SEK187) as property acquisitions were offset by divestments. The occupancy rate on the residential property portfolio remained high at 99.6% (Q4 99.6%). In, Heimstaden acquired an apartment portfolio in Copenhagen for DKK1.4bn, which was consolidated from March, and a further property portfolio in Copenhagen is due to be consolidated in Q2. At the same time, Heimstaden divested its remaining share in CORHEI to Castellum in March. Slight increase in leverage but still at moderate level Heimstaden s funds from operations rose to SEK49m ( SEK33m), while operating cash flow after working capital changes rose to SEK58m ( SEK28m). Acquisitions and investments amounted to SEK1.8bn, with disposals of SEK555m.. Total debt rose slightly from SEK6.8bn in Q4 to SEK8.4bn in, with cash of SEK1.2bn. With total property values of SEK13bn at end- (end-q4 SEK11.1bn), the net loan-to-value ratio rose from 54% at end-q4 to 55% at end-march (gross LTV 64%) or 58% when also including 50% of preference shares in debt (rating agency methodology). Overview (SEKm) SEKm Q2 Q3 Q4 16 Rental income 187 189 179 164 186 EBITDA 82 112 99 54 72 Net interest expenses -46-40 -32-29 -27 Net income 175 858 5 527 182 CFO 28-13 53 111 58 Investment properties 10,973 10,010 10,649 11,3 13,039 Total debt 5,504 6,604 6,707 6,822 8,405 Net debt 5,307 5,119 5,687 6,039 7,190 Equity 3,654 5,205 5,355 5,864 6,033 Ratios Q2 Q3 Q4 16 LTM EBITDA margin 54% 57% 55% 48% 47% LTM EBITDA interest coverage (x) 1.7 1.8 2.1 2.0 2.1 Gross LTV 50% 66% 63% 61% 64% Debt/LTM EBITDA (x) 25.0 18.5 19.2 18.4 19.7 Note: Properties for divestment excluded from debt and property value FACTS Sector: Real estate Corporate ticker: HEIMST Equity value: SEK6bn Market cap: Not listed Ratings: Rating agencies: Not rated Danske Bank Markets: Issuer rating BB / S Senior unsecured: BB- / S Analysts: Louis Landeman louis.landeman@danskebank.com +46 8 568 80517 Pegah Ahmarinejad pahm@danskebank.com +48 8 568 80593 Profitability SEKm 200 180 160 0 120 100 80 60 40 20 0 Net debt and equity SEKm 8,000 7,000 6,000 5,000 4,000 3,000 2,000 1,000 0 Q2 Q3 Q4 Q2 Q3 Q4 16 80% 70% 60% 50% 40% 30% 20% 10% 0% Rental income EBITDA EBITDA margin Q2 Q3 Q4 Q2 Q3 Q4 16 Net debt Equity Net debt / EBITDA 11.2x 10.8x 10.4x This document is intended for institutional investors and is not subject to all the independence and disclosure standards applicable to debt research reports prepared for retail investors. Important disclosures and certifications are contained from page 4 of this report. www.danskeresearch.com
Our view Heimstaden showed a stable operating performance in, despite continued intense transaction activity. The company s leverage increased slightly, with a net LTV of 55% at end-march (58% if treating 50% of preference shares as debt). In Q2, leverage should increase somewhat further as an acquisition of an apartment portfolio in Copenhagen is consolidated. Still, we expect the company to adhere to its stipulated financial policy, with a targeted (net) loan-to-value below 65%. We maintain our view of Heimstaden as a BB credit, with its bonds one notch lower at BB-. Heimstaden s 2019 SEK bond appears fairly valued relative to sector peers with similar credit quality. However, for investors seeking exposure to the more stable residential property segment, we believe the bond could be of interest, especially when considering Heimstaden s long debt maturity structure, with a high share of debt maturing after the bond (more than 50% of debt having a maturity of more than four years as of end-march). Forecasts SEKm 2012 2013 20 20 2016E Rental income 803 647 471 719 813 EBITDA 398 286 220 3 372 Net interest expenses -323-249 -4-7 -0 CFO 55 27 55 179 192 Investment property 10,719 7,042 10,378 11,3 13,254 Total debt 6623 3724 6426 6822 8322 Equity 3359 3213 3480 5864 6242 EBITDA margin 49% 43% 45% 44% 46% LTV gross 62% 53% 62% 61% 63% LTM EBITDA interest cov. (x) 1.2 1.1 1.3 1.8 2.5 Debt/LTM EBITDA (x) 16.6 13.0 29.2 21.7 22.4 Total debt/total capital 66% 54% 65% 54% 57% estimates Peer pricing Source: Bloomberg, Danske Bank Markets 2 29 April 2016 www.danskeresearch.com
Fixed Income Credit Research Thomas Hovard Head of Credit Research +45 45 12 85 05 hova@danskebank.com Henrik René Andresen Credit Portfolios +45 45 13 33 27 hena@danskebank.com Pegah Ahmarinejad Real Estate +46 8 568 80593 pahm@danskebank.com Knut-Ivar Bakken Fish farming +47 85 40 70 74 knb@danskebank.com Gabriel Bergin Strategy, +46 8 568 80602 gabe@danskebank.com Brian Børsting +45 45 12 85 19 brbr@danskebank.com Bendik Engebretsen +47 85 40 69 bee@danskebank.com Lars Holm Financials +45 45 12 80 41 laho@danskebank.com Anders Torgrim Holte Oil and Gas E&P +47 8540 5784 aholt@danskebank.com Katrine Jensen Financials +45 45 12 80 56 katri@danskebank.com Louis Landeman TMT, +46 8 568 80524 llan@danskebank.com Jakob Magnussen Utilities, Energy +45 45 12 85 03 jakja@danskebank.com Øyvind Mossige Oil services +47 85 40 54 91 omss@danskebank.com Niklas Ripa High Yield, +45 45 12 80 47 niri@danskebank.com Bjørn Kristian Røed Shipping +47 85 40 70 72 bred@danskebank.com Mads Rosendal, Pulp & Paper +46 8 568 80594 madro@danskebank.com Sondre Dale Stormyr Offshore rigs +47 85 40 70 70 sost@danskebank.com Haseeb Syed +47 85 40 54 19 hsy@danskebank.com Find the latest Credit Research Danske Bank Markets: http://www.danskebank.com/danskemarketsresearch Bloomberg: DNSK<GO> 3 29 April 2016 www.danskeresearch.com
Disclosures This research report has been prepared by Danske Bank Markets, a division of Danske Bank A/S ( Danske Bank ). The authors of the research report are Louis Landeman, Analyst and Pegah Ahmarinejad, Analyst. Analyst certification Each research analyst responsible for the content of this research report certifies that the views expressed in the research report accurately reflect the research analyst s personal view about the financial instruments and issuers covered by the research report. Each responsible research analyst further certifies that no part of the compensation of the research analyst was, is or will be, directly or indirectly, related to the specific recommendations expressed in the research report. Regulation Danske Bank is authorised and subject to regulation by the Danish Financial Supervisory Authority and is subject to the rules and regulation of the relevant regulators in all other jurisdictions where it conducts business. Danske Bank is subject to limited regulation by the Financial Conduct Authority and the Prudential Regulation Authority (UK). Details on the extent of the regulation by the Financial Conduct Authority and the Prudential Regulation Authority are available from Danske Bank on request. The research reports of Danske Bank are prepared in accordance with the Danish Society of Financial Analysts rules of ethics and the recommendations of the Danish Securities Dealers Association. Conflicts of interest Danske Bank has established procedures to prevent conflicts of interest and to ensure the provision of highquality research based on research objectivity and independence. These procedures are documented in Danske Bank s research policies. Employees within Danske Bank s Research Departments have been instructed that any request that might impair the objectivity and independence of research shall be referred to Research Management and the Compliance Department. Danske Bank s Research Departments are organised independently from and do not report to other business areas within Danske Bank. Research analysts are remunerated in part based on the overall profitability of Danske Bank, which includes investment banking revenues, but do not receive bonuses or other remuneration linked to specific corporate finance or debt capital transactions. Danske Bank, its affiliates, subsidiaries and staff may perform services for or solicit business from Heimstaden and may hold long or short positions in, or otherwise be interested in, the financial instruments mentioned in this research report. The Equity and Corporate Bonds analysts of Danske Bank and undertakings with which the Equity and Corporate Bonds analysts have close links are, however, not permitted to invest in financial instruments that are covered by the relevant Equity or Corporate Bonds analyst or the research sector to which the analyst is linked. Danske Bank, its affiliates and subsidiaries are engaged in commercial banking, securities underwriting, dealing, trading, brokerage, investment management, investment banking, custody and other financial services activities, may be a lender to Heimstaden and have whatever rights are available to a creditor under applicable law and the applicable loan and credit agreements. At any time, Danske Bank, its affiliates and subsidiaries may have credit or other information regarding Heimstaden that is not available to or may not be used by the personnel responsible for the preparation of this report, which might affect the analysis and opinions expressed in this research report. As an investment bank, Danske Bank, its affiliates and subsidiaries provide a variety of financial services, including investment banking services. It is possible that Danske Bank and/or its affiliates and/or its subsidiaries might seek to become engaged to provide such services to Heimstaden in the next three months. Danske Bank has made no agreement with Heimstaden to write this research report. No parts of this research report have been disclosed to Heimstaden. No recommendations or opinions have been disclosed to Heimstaden and no amendments have accordingly been made to the same before dissemination of the research report. Financial models and/or methodology used in this research report Calculations and presentations in this research report are based on standard econometric tools and methodology as well as publicly available statistics for each individual security, issuer and/or country. Documentation can be obtained from the authors on request. Risk warning Major risks connected with recommendations or opinions in this research report, including a sensitivity analysis of relevant assumptions, are stated throughout the text. Expected updates This research report will be updated on a quarterly basis after Heimstaden s quarterly results statements. See the front page of this research report for the date of first publication. 4 29 April 2016 www.danskeresearch.com
Recommendation structure Investment recommendations are based on the expected development in the credit profile as well as relative value compared with the sector and peers. As at 31 March 2016 Danske Bank Markets had investment recommendations on 54 corporate bond issuers. The distribution of recommendations is represented in the distribution of recommendations column below. The proportion of issuers corresponding to each of the recommendation categories above to which Danske Bank provided investment banking services in the previous 12 months ending 31 March 2016 is shown below. Rating Anticipated performance Time horizon Distribution of recommendations Investment banking relationships Overweight Outperformance relative to peer group 3 months 24% 46% Marketweight Performance in line with peer group 3 months 54% 34% Underweight Underperformance relative to peer group 3 months 22% 25% Changes in recommendation within past 12 months: Date New recommendation Old recommendation Not rated General disclaimer This research has been prepared by Danske Bank Markets (a division of Danske Bank A/S). It is provided for informational purposes only. It does not constitute or form part of, and shall under no circumstances be considered as, an offer to sell or a solicitation of an offer to purchase or sell any relevant financial instruments (i.e. financial instruments mentioned herein or other financial instruments of any issuer mentioned herein and/or options, warrants, rights or other interests with respect to any such financial instruments) ( Relevant Financial Instruments ). The research report has been prepared independently and solely on the basis of publicly available information that Danske Bank considers to be reliable. While reasonable care has been taken to ensure that its contents are not untrue or misleading, no representation is made as to its accuracy or completeness and Danske Bank, its affiliates and subsidiaries accept no liability whatsoever for any direct or consequential loss, including without limitation any loss of profits, arising from reliance on this research report. The opinions expressed herein are the opinions of the research analysts responsible for the research report and reflect their judgement as of the date hereof. These opinions are subject to change and Danske Bank does not undertake to notify any recipient of this research report of any such change nor of any other changes related to the information provided in this research report. This research report is not intended for, and may not be redistributed to, retail customers in the United Kingdom or the United States. This research report is protected by copyright and is intended solely for the designated addressee. It may not be reproduced or distributed, in whole or in part, by any recipient for any purpose without Danske Bank s prior written consent. Disclaimer related to distribution in the United States This research report was created by Danske Bank A/S and is distributed in the United States by Danske Markets Inc., a U.S. registered broker-dealer and subsidiary of Danske Bank A/S, pursuant to SEC Rule a-6 and related interpretations issued by the U.S. Securities and Exchange Commission. The research report is intended for distribution in the United States solely to U.S. institutional investors as defined in SEC Rule a-6. Danske Markets Inc. accepts responsibility for this research report in connection with distribution in the United States solely to U.S. institutional investors. Danske Bank is not subject to U.S. rules with regard to the preparation of research reports and the independence of research analysts. In addition, the research analysts of Danske Bank who have prepared this research report are not registered or qualified as research analysts with the NYSE or FINRA but satisfy the applicable requirements of a non-u.s. jurisdiction. Any U.S. investor recipient of this research report who wishes to purchase or sell any Relevant Financial Instrument may do so only by contacting Danske Markets Inc. directly and should be aware that investing in non- U.S. financial instruments may entail certain risks. Financial instruments of non-u.s. issuers may not be registered with the U.S. Securities and Exchange Commission and may not be subject to the reporting and auditing standards of the U.S. Securities and Exchange Commission. 5 29 April 2016 www.danskeresearch.com