Today Nordic Credit Rating (NCR) affirmed its 'BBB+' long-term issuer rating on Swedish property management company Fastighets AB Stenvalvet (Stenvalvet). The outlook on the rating is stable. NCR also affirmed its 'N-1+' short-term rating on the company and our 'BBB' issue rating on the company's outstanding senior unsecured bond.
"The ratings reflect the company's defensive portfolio and diversified tenant base, where rents are predominantly directly or indirectly linked to public funds", said NCR rating analyst Sean Cotten. "The company has moderate leverage and strong cash flow, but also a relatively short funding profile."
Stenvalvet's properties are mainly used by the community service sector, with 92% of the rental income generated financed directly or indirectly by government funding. Some 68% of the company's rental income comes from public-sector tenants and a further 24% comes typically from private-sector health and care operators in receipt of government funding.
The portfolio consists of 105 diverse properties throughout Sweden, with an average remaining lease term of more than six years, an occupancy rate of about 96%, and stable rental and service revenues. The rating also reflects Stenvalvet's solid financial position with a loan-to-value (LTV) ratio of 42%, including external debt, and an interest coverage ratio of 5.9x over the last 12 months as of 31 Mar. 2020 by NCR's measures. The company's shareholders have provided SEK 2.8bn in shareholder loans, which we consider equity, and constitute a long-term and stable ownership group.
These strengths are somewhat offset by Stenvalvet's relatively short-term financing needs, with 40% of all external debt maturing over the next 12 months. However, the company has increased its cash balance in response to COVID-19 and has available facilities of about SEK 1.7bn to match these needs. About 8% of tenants are purely commercial, mainly operating alongside government-related anchor tenants. Some 23% of the company's properties are used as government and municipal offices, while a large majority of properties are tailor made, such as facilities for the elderly, schools and health care.
The stable outlook reflects our expectation that Stenvalvet will continue to focus on community service properties, with long lease contracts under which rents are funded directly or indirectly by public institutions. We expect Stenvalvet to continue to refinance its short-term debt proactively to reduce the proportion of short-term debt in its overall debt mix. We also expect that the company will retain its moderate leverage (including LTV below 50%) and risk appetite as it grows via development and acquisitions.
Potential positive rating drivers
- Long-term LTV levels below 40% and stable earnings metrics.
- Increased diversification and quality of the property portfolio.
Potential negative rating drivers
- Increased leverage, with long-term LTV above 50%.
- Higher share of non-community service tenants.
- Inability to refinance debt maturities.
The methodology documents used for this rating are NCR's Corporate Rating Methodology published on 14 Aug. 2018 and Rating Principles, published on 16 Sep. 2019. For the full regulatory disclaimer please see the rating report which can be downloaded at nordiccreditrating.com/ratings-research/research.