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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. 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