EURm EURm Investment Research 1 September 2009 Vasakronan Update after Q2 09 report Vasakronan is the largest property company in Sweden with a property portfolio of about SEK73bn. The bulk of the properties are based in Stockholm and commercial real estate is by far the most important segment with 92% of the market cap of the total portfolio. Vasakronan is jointly owned by the state-owned Swedish pension funds AP 1-4. Company profile Vasakronan is the largest Swedish property company with a total property portfolio worth some SEK73bn at the end of Q2 09. The portfolio is based in Sweden s larger cities with Stockholm accounting for 65% of the total portfolio. Commercial real estate (offices and retailers, hotels, etc.) constitutes 92% of the portfolio whereas residential property accounts for 8%. Market value by region (Q2 09) Market value by segments (Q2 09) Facts Sector: Property management Corporate ticker: FASTIG Equity ticker: NA Market cap: Not listed Ratings: S&P rating: NR Moody's rating: NR Fitch rating: NR Uppsala 11% Öresund 9% Residential property 8% Retailers 15% Other 5% Profitability 5,000 100% Göteborg 16% Stockholm 63% Offices 72% 4,000 3,000 2,000 80% 60% 40% 1,000 20% 0 0% 2007 2008 Rental income EBITDA EBITDA margin The current structure of the company was formed after AP Fastigheter, on 3 July 2008, bought all the shares of Vasakronan from the Swedish Government. With the merger, Vasakronan became one of the largest property management companies in Europe. It is the strategy of the company to concentrate on growth markets in Sweden (Stockholm, Gothenburg and the Malmö/Öresund region) and own properties that provide a stable return over time. Vasakronan employs some 606 people, including the subsidiary Vasakronan Service Partner (a company offering facility management solutions). Business profile Strong ownership The old Vasakronan was owned by the Swedish Government, but last year it was sold off to the state-owned pension funds AP1, AP2, AP3 and AP4. Thus the state ownership is now indirect although the company does not benefit from explicit state guarantees (note that the MTN as well as the CP programme and bank financing have a change of control covenant more on this below). The AP foundations are long-term investors and we therefore consider it likely that they will stand behind Vasakronan in difficult times and, for example, participate in a capital increase should the need arise. Each of the funds own 25% of Vasakronan through the holding company AP Fastigheter Holding. Credit metrics 50,000 18.0 16.0 40,000 14.0 12.0 30,000 10.0 20,000 8.0 6.0 10,000 4.0 2.0 0 0.0 2007 2008 Net debt Equity Net debt/ebitda Senior Analyst Henrik Arnt +45 45128504 henrik.arnt@danskebank.dk Danske Markets may act as an arranger in connection with offerings of debt instruments by Vasakronan. Danske Markets is a division of Danske Bank A/S. See the disclaimer at the back of the report.
Macroeconomic fundamentals are challenging The small open Swedish economy is by nature very cyclical due to its heavy reliance on export-oriented heavy industry. The current downturn in the global economy is consequently affecting Sweden relatively severely. Danske Markets expects the Swedish economy to contract by 6.1% this year and to only experience a modest 1.1% growth in 2010. On the back of this, the unemployment rate is expected to reach 10% this year and 12% in 2010. The sharp increase in layoffs is likely to reduce the demand for office space and will thus put downward pressure on rental prices within commercial real estate. The Gothenburg area in particular is likely to be negatively affected by the massive number of layoffs in the car industry (Gothenburg accounts for 15% of Vasakronan s property exposure). Swedish BNP growth (y/y) Swedish unemployment rate % 6.0 4.0 2.0 0.0-2.0-4.0-6.0-8.0 2004 2005 2006 2007 2008 2009E2010E % 14.0 12.0 10.0 8.0 6.0 4.0 2.0 0.0 2004 2005 2006 2007 2008 2009E 2010E Source: Danske Markets Source: Danske Markets According to a report by Jones Lang & LaSalle, rents are now falling in Stockholm while they are still holding up reasonably well in Gothenburg and Malmö. It is expected that rents will contract further in 2009 and generally the outlook for Swedish commercial real estate is currently rather gloomy. In the greater Stockholm area, some new supply will be finished during 2009 and 2010 (a total of 385,000 sq m compared with the current stock of 10.9m sq m). Consequently, Jones Lang & LaSalle expects vacancy rates to modestly increase to about 11% (currently the market vacancy rate is about 10% whereas Vasakronan s vacancy rate is about 8%). In our view, the risk to this estimate is probably on the downside, as our macro forecast is more downbeat. Heavy exposure toward commercial real estate, but diversified client base Commercial real estate constitutes some 92% of Vasakronan s property portfolio whereas residential real estate accounts for a modest 8%. We therefore view the property portfolio as somewhat concentrated in a market that is rather cyclical. However, the client base of Vasakronan is quite diverse and 27% of the tenants are from the public sector, which is more stable. The 10 largest tenants account for 20% of the rental income and the customer base is therefore well diversified. The single largest tenant is Swedish bank SEB, which accounts for 3% of the rental income. Vacancy rate Distribution of tenants (2008) 12% 10% 8% Other 26% Public sector 26% 6% 4% 2% 0% 2007 2008 Financials 10% Consumer goods 16% Services 22% 2 1 September 2009
The commercial real estate portfolio of Vasakronan has an average contract period of 4.5 years and 7% and 19% of the commercial real estate contracts are up for renegotiations in 2009 and 2010 respectively. Short-term visibility is therefore relatively good. In terms of sensitivity to changing rents Vasakronan calculates that a 1% change in rent income will cause an income change of SEK58m, whereas a 1% change in the vacancy rate will change income by SEK60m. During 2008 the LTV on the property portfolio increased to 53% (2007: 35%) mostly as a result of the (old) Vasakronan transaction and lower property prices. Financial profile Q2 numbers affected by lower property values Vasakronan recorded EBITDA of SEK 902m in Q2 09 compared with SEK 465m in Q2 08 and SEK 914m in Q1 09. The net result, however, was negatively affected by a lower value (unrealised) of the company s property portfolio of SEK2.1bn. Consequently, Vasakronan suffered a net loss for the quarter of SEK1.1bn compared with a profit of SEK248m a year earlier. The results are affected by the merger between Vasakronan and AP Fastigheter during 2008. Following the merger credit metrics have weakened somewhat. EBITDA to net interest expense has fallen from 3.1x in Q2 08 to 2.8x in Q2 09 (company target: >1.9x) and the solidity has been reduced to 32% from 44% a year earlier. Compared to Q1 09, the interest rate coverage is a little higher in Q2, which can be attributed to the changes in the funding strategy (see below). Net debt to EBITDA was 16x in 2008, but note that this ratio does not take into account earnings in the old Vasakronan prior to the merger. Looking instead at the annualised Q2 09 numbers, net debt to EBITDA was 11.4x, which we still consider somewhat high. Note that as contracts are typically negotiated for three- to five-year periods EBITDA is not affected materially until late in the cycle, where a large part of the contacts have been renegotiated (e.g. the contracts that are renegotiated right now were initially negotiated some three to five years ago and current rents are still higher than back then resulting in better EBITDA short term). Consequently, the worst years for Vasakronan are not going to coincide with the sluggish Swedish economy and are still a few years away. Funding strategy Vasakronan aims at having a diverse funding base and the company relies both on bank loans as well as the capital markets (bonds and certificates). The bank loans as well as the MTN and CP programmes contain a change of control clause that will be triggered if at least 51% of the shares are not owned directly or indirectly by the AP1-AP4 funds. At the end of Q2 09 secured and unsecured bank loans constituted 45% of the total funding of SEK45bn. In addition, at the end of Q2 09 Vasakronan had committed facilities of SEK11.9bn. However, the vast majority of these will expire within a year. Banks have tightened lending standards considerably during the financial crisis and Vasakronan, as well as other companies, therefore faces tougher (i.e. more expensive) bank (re)financing conditions. It should be noted, however, that it is the loan spreads that are up. Lower general market yields are working in the other direction and the all-in financing costs are in fact lower. The average tenor of the funding was 2.5 years at the end of Q2 09 (2007: 2.9 years. 2008: 2.3 years). SEK9.0bn is due within a year and is covered by committed facilities and cash. In terms of interest rate sensitivity the exposure is even more pronounced as 61% of the debt is with short-term interest rates (< 1 year) and the average sensitivity is 1.6 years (by end Q2 09). The exposure to the short end of the yield curve is because Vasakronan has changed its funding policy in order to take advantage of the expected interest rate development and the current shape of the yield curve. The company s policy 3 1 September 2009
is that the average interest rate sensitivity on the funding side should lie in the interval 0.9-2.3 years. Despite the substantial savings this strategy provides in the current yield environment we also point to the risk it brings as Vasakronan becomes more vulnerable to interest rate fluctuations. Danske Markets expects the short-term Swedish interest rates to remain at very low levels during the next 12 months and in the short term we are therefore not overly concerned about Vasakronan s changed interest rate sensitivity policy. However, we would like to stress that signs of an uptake in Swedish short-term interest rates e.g. on the back of higher inflation expectations would be clearly negative for Vasakronan. The company calculates that a 1 percentage point increase in the yield curve would cost the company SEK92m over the next year. Interest rate sensitivity (end-q209) Debt maturity profile (end-q209) 70% 60% 50% 40% 30% 20% 10% 0% SEK m 16,000 14,000 12,000 10,000 8,000 6,000 4,000 2,000 0-1 1-2 2-3 3-4 4-5 5-6 >7 year - 0-1 1-2 2-3 3-4 4-5 5-6 >7year Key credit considerations Overall, the recent results from Vasakronan reflect the challenging macroeconomic conditions. We still believe that the outlook for commercial real estate companies is somewhat dark over the next few years as the economic crisis will increase pressure on rents as well as property valuations. The relatively modest number of contracts that are up for renegotiation this year is somewhat mitigating this factor and the short-term visibility is therefore good in our view. On a longer horizon, Vasakronan is likely to benefit from the recent merger as cost synergies are realised and the stronger competitive position is exploited. On a standalone basis we view Vasakronan as a BBB company. The challenging outlook for commercial real estate may put credit metrics and thereby the rating under pressure. However, we consider the ownership structure of the company to be significantly positive from a credit perspective as we believe it is highly likely that the state-owned pension funds will support the company should it be necessary. Combined with the change of control clause in the bonds and CP programme (and the bank loans for that matter) it makes us comfortable with the name despite our view that the operating environment is set for further difficulties going forward. 4 1 September 2009
Table 1. Financial data Key figures (SEKm) 2007 2008 Q2 08 Q1 09 Q2 09 Rental income 2,805 3,937 731 1,463 1,466 Operating costs -1,073-1,339-250 -509-508 Operating income 1,732 2,598 481 954 958 Other income 0 31 0-1 12 Administration expenses -72-160 -16-39 -68 EBITDA 1,660 2,469 465 914 902 Realised value changes in property portfolio 18-19 11 3 2 Unrealised value changes in property portfolio 3,550-2,560 4-926 -2,098 EBIT 5,228-110 480-9 -1,194 Net interest expenses & derivatives -559-1,426-152 -383-270 Pre-tax profit 4,669-1,536 328-392 -1,464 Tax -1,374 1,133-80 103 385 Net profit 3,295-433 248-289 -1,090 Balance sheet 2007 2008 Q2 08 Q1 09 Q2 09 Goodwill 24 3,370 24 3,370 3,370 Other intangibles 0 100 0 100 100 Tangible assets 39,635 74,301 41,277 73,981 72,601 Financial assets 187 807 456 814 1,110 Total non-current assets 39,846 78,578 41,757 78,265 77,181 Cash and cash equivalents 35 2,238 549 682 3,856 Other current assets 156 776 343 880 803 Total current assets 191 3,014 892 1,562 4,659 Total assets 40,037 81,592 42,649 79,827 81,840 Long term interest bearing debt 9,622 31,356 17,775 30,423 35,879 Other long term liabilities 5,080 8,910 6,229 8,842 8,558 Long-term liabilities 14,702 40,266 24,004 39,265 44,437 Short term interest bearing debt 4,398 10,387 0 10,568 9,037 Other short term liabilities 1,595 3,651 0 3,054 2,436 Short term liabilities 5,993 14,038 0 13,622 11,473 Total liabilities 20,695 54,304 24,004 52,887 55,910 Shareholders equity 19,342 27,288 18,645 26,940 25,930 Total liabilities and shareholders equity 40,037 81,592 42,649 79,827 81,840 Cash flow 2007 2008 Q2 08 Q1 09 Q2 09 FFO 1,140 1,373 311 363 607 Changes in working capital -63 269-369 -562 432 Operating cash flow 1,077 1,642-58 -199 1,039 Capex -819-1,815-287 -607-761 Acquisitions & disposals 38-19,658-1,059 2 44 Cash flow after investments 296-19,831-1,404-804 322 Dividends paid -2,000-5,000-2,000 0-1,073 Debt financing 841 13,034 2,161-752 3,925 Shareholder contribution 0 14,000 0 0 0 Cash flow from financing activities -1,159 22,034 161-752 2,852 Cash flow during the period 841 654 178 307 141 Key ratios 2007 2008 Q2 08 Q1 09 Q2 09 Total interest bearing debt 14,020 41,743 17,775 40,991 44,916 Net debt 13,985 39,505 17,226 40,309 41,060 EBITDA-margin 59% 63% 64% 62% 62% Solidity 48% 33% 44% 34% 32% ROAE 0% -2% 1% -1% -4% Gearing 72% 145% 92% 150% 158% EBITDA/net interest exp 3.0 2.2 3.1 2.5 2.8 FFO/net debt* 8% 3% 7% 4% 6% Net debt/ebitda* 8.4 16.0 9.3 11.0 11.4 Vacancy rate, % 10% 8% 10% 8% 8% Source: Company reports & Danske Markets Annualised with respect to quarters 5 1 September 2009
Fixed Income Credit Research Head of Credit Research Thomas Thøgersen Grønkjær +45 45 12 85 02 thomas.groenkjaer TMT, Utilities & Energy Financials Pulp & Paper Industrials Jakob Magnussen +45 45 12 85 03 jakob.magnussen Thomas Hovard +45 45 12 85 05 thomas.hovard Peter Tind Larsen +45 45 12 85 08 peter.tind.larsen Peter Tind Larsen +45 45 12 85 08 peter.tind.larsen Henrik Arnt +45 45 12 85 04 henrik.arnt Jakob Magnussen +45 45 12 85 03 jakob.magnussen email addresses end @danskebank.com 6 1 September 2009
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