Download High earnings growth on low interest rates

Report update  11 November 2009
Credit Quality: BBB+ Stable
Vasakronan Real Estate, Sweden
High earnings growth on low interest rates
 Net operating income fell by 2% in Q3 (vs. pro-forma Q3 2008)
Ratings
Long-term
Outlook
S&P:
n.r.
-
Moodys:
n.r.
-
Fitch:
n.r.
-
 Underlying earnings increased 19% y-o-y (vs. pro-forma Q3 2008)
Short-term
 Stable property values took loan-to-value to 56% (57% in Q2 2009)
Largest property owner in Sweden
Vasakronan is the largest property owner in Sweden, with a property value of SEK
72.8bn. Commercial properties in Stockholm account for 62% of the portfolio
value. The loan-to-value is 56% and the net interest coverage ratio is 2.8x YTD.
Company data
Web address:
www.vasakronan.se
Performance update Q3 2009
The net operating income declined by 2% despite contribution from index,
versus pro-forma Q3 2008. However, the average interest rate fell to 3.0%
(4.9%) and income from property management increased by 19%.
Vasakronan is Sweden's largest real estate company,
with a property portfolio market value of SEK 72.8bn at
the end of 2008. Vasakronan’s property holdings are
largely focused on commercial office spaces (approx.
72% of total market value) and four main growth areas:
Stockholm, Uppsala, Gothenburg and Öresund (Malmö
and Lund). Stockholm properties are dominant with 64%
of the total holdings. The number of employees is
approximately 465.
Our credit assessment
Our view of Vasakronan’s credit profile corresponds to a BBB+ rating. Rent levels
seem to stabilising and low interest rates enable strong underlying earnings. Thus,
we believe the downside risk of further property valuation is limited.
CEO: Fredrik Wirdenius
CFO: Christer Nerlich
Tel: +46 8 566 20 500
Treasurer: Björn Lindström
Tel: +46 8 782 03 70
Analysts:Tobias Kaj, +46 8 701 80 16, [email protected]
Astrid Edström, +46 8 701 44 22, [email protected]
Anders Holmlund, +46 8 701 85 29, [email protected]
Interest rate fixing – debt portfolio end Q3 2009
SEKm
Maturity within
Interest rate Share %
1yr
26,286
2.2
62%
1-2yr
3,342
4.0
8%
2-3yr
4,445
4.2
10%
3-4yr
2,894
4.5
7%
4-5yr
2,298
4.8
5%
5-6yr
953
4.7
2%
>7 yr
Total
2,141
4.3
5%
42,359
3.0
100
Source: Company reports
Financial Calendar
Q4 Report:
February 11, 2010
Key Figures
Key ratios Vasakronan (SEK m)
Rental revenues
Q3 2009
Q3 2008
Q3 08 proforma
2008
1,454
1,033
1,447
3,937
Operating profit (EBIT)
741
764
1,252
-110
Net financial items
-322
-290
-446
-1,103
Cash flow from operations
Equity
493
1,139
n/a
1,373
26,286
32,813
29,206
27,288
Net debt
41,087
43,386
38,403
39,505
Property value
72,849
77,095
74,319
74,252
Total assets
81,592
78,790
89,087
81,550
Net debt/Equity, x
1.6
1.3
1.3
1.4
Loan-to-value, %
56.4
56.3
47.1
53.2
Equity ratio, %
33
37
36
33
Net Interest coverage ratio (EBITDA), x
3.2
2.5
2.3
2.2
Return on equity %
4.5
1.1
8.6
-1.7
Debt/EBITDA, x
10.3
15.0
9.7
17.0
Net debt/Market value of properties, % (LTV)
56.4
56.3
51.7
53.2
Total debt/Total capital, %
53.8
49.8
48.3
51.2
8
8
n/a
8
Vacancy rate, %
Sources: Company accounts, Handelsbanken Capital Markets
For full disclaimer and definitions, please refer to the end of this report.
P&L
Income Statement (SEK m)
Getting closer to value
trough, only 0.4% value
drop in Q3
Q3 2009
Q3 2008
Q3 08 proforma
2008
2007
2006
1,454
1,033
1,447
3,937
2,805
3,343
Operating expenses
-184
-128
-175
-690
-578
-611
Maintenance, tenance adaptations
-127
-94
-106
-409
-301
-363
Net turnover (Rental income)
Net operating income up
40% in Q3 as a result of a
larger portfolio, 2% drop vs.
pro forma Q3 2008
Property tax
-135
-92
-134
-240
-194
-160
Operating income (driftnetto)
1,008
719
1,032
2,598
1,732
2,209
-20
-20
-28
-160
-72
-61
Central administration
Other operating expenses
Other operating income
-25
34
2
31
0
0
EBITDA (bef. gains on properties)
963
733
1,006
2,469
1,660
2,148
Gains on properties
Income from property
management up 63% in
Q3 as a result of a larger
portfolio and low interest
rates, 19% growth vs. pro
forma Q3 2008
0
62
4
4
-19
18
269
EBITDA (after gains on properties)
1,025
737
1,010
2,450
1,678
2,417
Unrealized change in property values
-284
27
242
-2,560
3,550
3,722
EBIT
741
764
1,252
-110
5,228
5,870
Interest income
5
10
13
55
22
17
Interest expense
-327
-300
-459
-1,158
-578
-564
Net interest expense
-322
-290
-446
-1,103
-556
-547
24
-43
-69
-323
-3
0
-298
-333
-515
-1,426
-559
-547
Unrealized change in financial instruments
Financial net
EBT
443
431
737
-1,536
4,669
5,323
Tax
-117
-120
-214
1,133
-1,374
-1,220
Net income
332
294
523
-433
3,295
4,103
Source: Company accounts
Balance sheet
The acquisition of
Vasakronan nearly doubled
the property value
Balance sheet (SEK m)
Goodwill and intangible assets
Properties
Q3 2009
2,008
2,007
2,006
2,005
2,493
3,470
24
24
24
0
72,849
74,252
39,611
35,269
32,163
29,466
Inventories
Financial fixed assets
Total fixed assets
Current assets
Equity ratio up to 33% in
Q3 from 32% in Q2, as
underlying earnings
exceeded write-downs
Cash and cash equivalents
Total current assets
Total assets
2,004
61
49
24
21
25
29
1,236
807
187
91
102
257
76,639
78,578
39,846
35,405
32,314
29,752
879
776
156
360
367
454
1,272
2,238
35
898
693
1,105
2,151
3,014
191
1,258
1,060
1,559
78,790
81,592
40,037
36,663
33,374
31,311
Total shareholders' equity
26,286
27,288
19,342
17,785
15,366
14,237
Interest bearing debt
42,359
41,743
14,020
13,179
13,403
13,073
Other liabilitites
10,145
12,561
6,675
5,699
4,606
4,001
Total liabilities
52,504
54,304
20,695
18,878
18,009
17,074
Total liabiliteis and equity
78,790
81,592
40,037
36,663
33,374
31,311
Source: Company accounts, Handelsbanken Capital Markets
Breakdown – market value by region and per category, Q3 2009
Öresund
9%
Strong focus on
Stockholm – 64% of
market value and 63% of
rental income
Residential
8%
Other
5%
Gothenburg
16%
Retail
15%
Uppsala
11%
Stockholm
64%
Office
72%
Sources: Company data, Handelsbanken Capital Markets
2 Vasakronan Real Estate, Sweden
11 November 2009
Q3 review
As expected, Vasakronan (n.r/n.r) delivered a strong report yesterday and underlying earnings (excl. all
value revisions) increased by 19% vs. pro forma Q3 2008. The Real Estate sector is late cyclical and we will
probably see a further increase in vacancies. However, the development has so far exceeded last year’s
apprehensive forecast of the market. Rental revenues were a notch below Q2, but are still up 3% y-o-y in a
like-for-like portfolio. Value revisions were small and the equity-to-asset ratio improved to 33% (from 32% in
Q2). In our view, Vasakronan’s combined business and financial profile corresponds to a BBB+ credit rating.
The outlook is changed from negative to stable based on a less gloomy economic outlook.
62% of portfolio
value in commercial
properties in
Stockholm
Low interest rates behind strong underlying earnings growth
With a property value of SEK 72.8bn, Vasakronan is one of the largest property owners in
Sweden. Commercial properties in Stockholm account for 62% of the portfolio and it also has
commercial properties in Gothenburg, Uppsala and the Öresund region. Eight percent of the
portfolio is residential properties with very low revenue risk, as rents in Sweden are regulated.
Minor growth in
rental revenues but
net operating income
is down 2% vs pro
forma Q3 2008
Pro forma rental income was more of less flat y-o-y, at SEK 1,454m (SEK 1,447m pro
forma Q3 2008). As the labour market has been stronger than expected (or feared) in the
last 3-6 months, we do not expect any major drop in future rent levels. However, we still
anticipate some pressure on rental revenues because of the slight increase in vacancies and
divestment of SEK 602m YTD. Property expenses are increasing slightly faster than
revenues and net operating income declined to SEK 1,008m vs. SEK 1,032m pro forma Q3
2008. Falling interest rates contributed to 19% growth in underlying earnings (excl. all
value revisions) vs. pro forma Q3 2008. Net earnings for the period were SEK 332m vs.
SEK -1,090m in Q2.
Low interest rates
improved ICR to 3.2x
(2.8x excl capital
gains)
The drop in interest rates has contributed to the improved interest coverage ratio (ICR) of
3.2x in Q3 (or 2.8x excl. capital gains) vs. 2.2x for FY 2008. The average interest rate in
Q3 was 3.0% (4.7% in Q4 2008). The share of the portfolio with interest fixing below one
year increased to 62% (vs. 61% in Q2 and 58% in Q1) and the equity ratio recovered to
33% in Q3 (32% in Q2 and 33% in Q4 2008).
Vacancy rate at 8%,
unchanged YTD
Loan-to-value is
56.4% and we see
limited downside risk
of further property
valuations
Loan-to-value did not continue to increase (56% in Q3)
The second derivatives for value revisions have improved. In Q3, the value drop was only
SEK 284m or 0.4%. Also, the value is down 4.5% YTD. We believe it is too early to say
that values have reached a trough, but the risk of a 5%+ value drop from the current level is
limited. Overall vacancy rates remained unchanged vs. 8% year-end. Therefore, we see
limited risk of the current loan-to-value of 56.4% (56.6% in Q2) increasing above 60% if
no major acquisitions are made.
Creditworthiness
In our view, Vasakronan is a BBB+ credit. It relies on bank financing, capital markets and
has issued SEK 15.1bn in the bond market this year. This has increased the ratio of market
financing to 66% from 46% in 2008. The liquidity profile is sound, with cash and
committed credit lines covering 128% of the maturities in the coming year. Loan-to-value
is 56.4% and we see limited downside risk of further property valuations. The interest
coverage ratio increased to 2.8x from 2.6x in Q2 because of lower interest rates. However,
we still see some cash flow risk because of increasing interest rates and a further drop in the
rental market.
Overall, our opinion on Vasakronan’s rating reflects its position in its core markets and strong
property portfolio. The rating is supported by strong and stable indirect state ownership via
AP 1-4, including change of control clauses in the MTN and the CP-programme. We believe
the owners would provide support if the company encounters financial distress.
Handelsbanken Capital Markets
3
Research Disclaimers
Handelsbanken Capital Markets, a division of Svenska Handelsbanken AB (publ) (collectively referred to herein as ‘SHB’) is responsible for the preparation of research reports.
All research reports are prepared from trade and statistical services and other information which SHB considers to be reliable.
SHB does not represent that such information is true, accurate or complete and it should not be relied upon as such.
In no event will SHB or any of its affiliates, their officers, directors or employees be liable to any person for any direct, indirect, special or consequential damages arising out of any use of the
information contained in the research reports, including without limitation any lost profits even if SHB is expressly advised of the possibility or likelihood of such damages.
No independent verification exercise has been undertaken in respect of this information.
Any opinions expressed are the opinions of employees of SHB and its affiliates and reflect their judgment at this date and are subject to change.
The information in the research reports does not constitute a personal recommendation or investment advice.
Reliance should not be placed on reviews or opinions expressed when taking investment or strategic decisions.
SHB, its affiliates, their clients, officers, directors or employees own or have positions in securities mentioned in research reports.
SHB and/or its affiliates provide investment banking and non-investment banking financial services, including corporate banking services; and, securities advice to issuers of securities mentioned
in research reports.
This document does not constitute or form part of any offer for sale or subscription of or solicitation of any offer to buy or subscribe for any securities nor shall it or any part of it form the basis of or
be relied on in connection with any contract or commitment whatsoever.
Past performance may not be repeated and should not be seen as an indication of future performance.
The value of investments and the income from them may go down as well as up and investors may forfeit all principal originally invested. Investors are not guaranteed to make profits on
investments and may lose money. Exchange rates may cause the value of overseas investments and the income arising from them to rise or fall.
This research product will be updated on a regular basis.
The distribution of this document in certain jurisdictions may be restricted by law and persons into whose possession this document comes should inform themselves about, and observe, any such
restrictions.
No part of SHB research reports may be reproduced or distributed to any other person without the prior written consent of SHB. Research reports are distributed in the UK by SHB.
SHB is authorised by the Swedish Financial Supervisory Authority (Finansinspektionen), and regulated by the Financial Services Authority for the conduct of UK business. In the United Kingdom,
the research reports are directed only at intermediate customers and market counterparties (as defined in the rules of the FSA) and the investments or services to which they relate are available
only to such persons. The research reports must not be relied upon or acted on by private customers.
UK customers should note that SHB does not participate in the UK Financial Services Compensation Scheme and UK customers will not be protected by that scheme. This does not exclude or
restrict any duty or liability that SHB has to its customers under the regulatory system in the United Kingdom.
SHB employees, including analysts, receive compensation that is generated by overall firm profitability.
The views contained in SHB research reports accurately reflect the personal views of the respective analysts, and no part of analysts’ compensation is directly or indirectly related to specific
recommendations or views expressed within research reports.
For specific analyst certification, please contact Robert Gärtner +45 33418613.
In the United Kingdom SHB is regulated by the FSA but recipients should note that neither the UK Financial Services Compensation Scheme not the rules of the FSA made under the UK Financial
Services and Markets Act 2000 for the protection of private customers apply to this research report.
When Distributed in the United States
Important Third-Party Research Disclosures:
Research reports are prepared by SHB for information purposes only. SHB and its employees are not subject to the NASD’s research analyst conflict rules. SHB research reports are intended for
distribution in the United States solely to “major U.S. institutional investors,” as defined in Rule 15a-6 under the Securities Exchange Act of 1934. Each major U.S. institutional investor that
receives a copy of research report by its acceptance hereof represents and agrees that it shall not distribute or provide research reports to any other person. Reports regarding fixed-income
products are prepared by SHB and distributed by SHB to major U.S. institutional investors under Rule 15a-6(a)(2). Any U.S. person receiving these research reports that desires to effect
transactions in any fixed-income product discussed within the research reports should call or write SHB. Reports regarding equity products are prepared by SHB and distributed in the United
States by Handelsbanken Markets Securities Inc. (“HMSI”) under Rule 15a-6(a)(2). Any U.S. person receiving these research reports that desires to effect transactions in any equity product
discussed within the research reports should call or write HMSI.
HMSI is a NASD Member, telephone number (+212-326-5153).
For company-specific disclosure texts, please consult the Handelsbanken Capital Markets website: www.handelsbanken.com/research.
Those wishing to see the disclosure text who do not have the access to the website, please contact Robert Gärtner on tel +45 33418613.
Please be advised of the following important research disclosure statements:
SHB is regulated in Sweden by the Swedish Financial Supervisory Authority, in Norway by the Financial Supervisory Authority of Norway, In Finland by the Financial Supervision of Finland and in
Denmark by the Danish Financial Supervisory Authority.
SHB has recently had, currently has, or will be seeking corporate finance assignments with the subject company.
According to the Bank’s Ethical Guidelines for the Handelsbanken Group, the board and all employees of the Bank must observe high standards of ethics in carrying out their responsibilities at the
Bank, as well as other assignments. The Bank has also adopted guidelines to ensure the integrity and independence of research analysts and the research department, as well as to identify,
eliminate, avoid, deal with, or make public actual or potential conflicts of interests relating to analysts or the Bank. As part of its control of conflicts of interests, the Bank has introduced restrictions
(“Chinese walls”) in communication between the Research department and other departments of the Bank. In addition, in the Bank’s organisational structure, the Research department is kept
separate from the Corporate Finance department and other departments with similar remits. The guidelines also include regulations for how payments, bonuses and salaries may be paid out to
analysts, what marketing activities an analyst may participate in, how analysts are to handle their own securities transactions and those of closely related persons, etc. In addition, there are
restrictions in communications between analysts and the subject company. For full information on the Bank’s ethical guidelines and guidelines on conflicts of interests relating to analysts, please
see the Bank’s website www.handelsbanken.com/About the bank/IR/Corporate social responsibility/Ethical guidelines or Guidelines for research.
Svenska Handelsbanken AB (publ)
Stockholm
Copenhagen
Helsinki
Oslo
London
New York
Blasieholmstorg 11
SE-106 70 Stockholm
Tel. +46 8 701 10 00
Fax. +46 8 611 11 80
Amaliegade 3,
Box 1032
DK-1007 København K
Tel. +45 33 41 8200
Fax. +45 33 14 1734
Aleksanterinkatu 11
FI-00100 Helsinki
Tel. +358 10 444 11
Fax. +358 10 444 2578
Rådhusgaten 27,
Postboks 332 Sentrum
NO-0101 Oslo
Tel. +47 22 94 0700
Fax. +47 2233 6915
Trinity Tower,
9 Thomas More Street
London GB-E1W 1GE
Tel. +44 207 578 8668
Fax. +44 207 578 8090
Handelsbanken Markets
Securities inc.
875 Third Avenue, 4 th floor
New York, NY 10022-7218
Tel. +1 212 446 4700
Fax. +1 212 326 2730
NASD, SIPC