Nordic Credit Rating (NCR) said today that it had revised the outlook on its 'BBB' long-term issuer rating on Sweden-based property manager Heba Fastighets AB (publ) to stable from negative. The long-term rating was affirmed, as were the 'BBB' senior unsecured issue rating and the 'N3' short-term issuer rating.
Rating rationale
The outlook revision reflects our view that the Heba's financial ratios have improved as a result of action taken by the company last year to strengthen its balance sheet. In 2023, Heba sold properties amounting to SEK 2bn, which it largely used for repayment of debt. In early 2024, the company acquired two community service properties in the Stockholm region, which we expect will improve cash flow generation relative to the lower yielding residential portfolio. Our updated forecast points to improved NCR-adjusted EBITDA to net interest (net interest coverage) as a result of deleveraging, restructuring of the company's swap portfolio, and revision of its near-term dividend policy. We believe these actions will enable Heba to maintain NCR-adjusted net interest coverage above 2.2x over a protracted period against our previous estimates of below 2.0x.
The long-term issuer rating reflects Heba's long and stable history of managing residential rental properties in Stockholm, Sweden's highest-demand housing market. We expect the company's business risk profile to remain strong and believe it has taken adequate measures to support its financial risk profile. The rating also reflects paused project development due to currently challenging and unclear economic conditions and the company's historically moderate financial risk appetite.
The rating is constrained by Heba's sensitivity to high interest rates, as a result of which we expect interest coverage to decrease, though stabilise, through our forecast period due to low cash flow generation relative to debt. This interest-rate sensitivity is aggravated by limitations on raising rents in Sweden's regulated market, although rental growth has been somewhat above historical levels in recent years. The rating is also constrained by Heba's exposure to property development and commitments to joint ventures, which we expect will remain part of the company's core strategy.
Constrictive capital markets and higher lending margins have forced Heba to increase its levels of secured bank financing at the expense of unsecured borrowing. As of 31 Dec. 2023, gross secured loan to value (LTV) was 33%. We currently expect gross secured LTV to approach 38% by end-2025 given the likelihood that some properties will decline in value through 2024. Should the company further increase the proportion of secured financing or property values decline by more than our current expectations, resulting in secured gross LTV above 40% over a protracted period, our view of recovery prospects for senior unsecured bondholders could be negatively affected.
Stable outlook
The outlook is stable, reflecting action taken by Heba to strengthen its balance sheet in 2023. It also reflects our expectations that Heba's interest coverage ratio and property values will decline through 2024 before stabilising over the remainder of our forecast period (through 2026). We assume that Heba will not further increase its exposure to community service properties with private tenants. We also believe that the company will start new development projects only if market conditions allow it to maintain its current financial risk profile.
We could raise the rating to reflect a commitment to reduced financial risk (NCR-adjusted interest coverage above 3.5x), primarily driven by a sustained improvement in cash flow generation (net debt/EBITDA below 9.0x over a protracted period); together with an unchanged business risk profile and reduced exposure to in-house and joint venture development projects. We could lower the rating to reflect an NCR-adjusted interest coverage ratio below 2.2x, or net LTV above 50% over an extended period. We could also lower the rating to reflect increased tenant concentrations, particularly private counterparties, or significant issues with joint venture partners, affecting one-off payments and financial commitments.
| Rating list | To | From |
|---|---|---|
| Long-term issuer credit rating: | BBB | BBB |
| Outlook: | Stable | Negative |
| Short-term issuer credit rating: | N3 | N3 |
| Senior unsecured issue rating: | BBB | BBB |
Contacts:
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@nordiccreditrating.com
Yun Zhou, analyst, +46732324378, yun.zhou@nordiccreditrating.com
Elisabeth Adebäck, analyst, +46700442775, elisabeth.adeback@nordiccreditrating.com
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 8 May 2023, NCR's Group and Government Support Rating Methodology published on 14 Feb. 2024 and NCR's Rating Principles published on 14 Feb. 2024. For the full regulatory disclaimer please see the rating report.