Nordic Credit Rating said today that it had affirmed its 'BB' long-term issuer rating on Sweden-based property manager Stenhus Fastigheter i Norden AB (publ) (Stenhus Fastigheter). The outlook is negative. The 'N4' short-term issuer rating and the 'BB-' issue rating on the company's senior unsecured debt were also affirmed.
Rating rationale
The long-term issuer rating reflects Stenhus Fastigheter's brief operating history, high growth rates and limited covenant headroom. It also reflects the company's high-yielding property portfolio, often in non-central locations, and our expectation that interest coverage will weaken due to higher financing costs.
The weaknesses are partly offset by Stenhus Fastigheter's exceptionally long lease terms, strong profitability and high occupancy. The company's primary geographic focus, the Mälardalen region (including Stockholm), has strong economic fundamentals, which we view as a credit strength. We take a positive view of Stenhus Fastigheter's 21% exposure to public-sector tenants, which provide stability, while the high-yielding assets in the portfolio generate relatively strong cash flows. Furthermore, Stenhus Fastigheter's recent portfolio growth has resulted in greater revenue diversity, which we regard positively.
We have revised our assessment of Stenhus Fastigheter's operating efficiency to reflect improved operating margins as the company continues to achieve synergies with the consolidation of its 2022 acquisition of Randviken Fastigheter AB (publ).
We have lowered our assessment of the company's financial ratios to reflect continued pressure on its interest coverage ratio. In our base-case forecast, we expect the ratio to weaken towards 1.8x before improving marginally in 2025. We see a continued risk that interest coverage could weaken more than we currently expect, despite the mitigating effect of the completion of development projects and inflation-linked rental contracts.
Negative outlook
The negative outlook reflects our expectation that Stenhus Fastigheter's net interest coverage will weaken through 2024. In our base-case projection, we expect net interest coverage to remain above covenant levels, but that headroom will become limited in the remainder of 2023 and 2024. We see a risk that covenant headroom could diminish faster than we currently expect, despite the mitigating effect of the completion of development projects and inflation-linked rental contracts. Our forecast assumes improvements in margins as the company finalises the integration of Randviken. We also expect the company to continue to focus on its currently targeted property subsectors and regions.
We could lower the rating to reflect an impending or actual covenant breach or a deterioration in credit metrics (net loan to value above 60% or net interest coverage below 1.5x over a protracted period). We could also lower the rating to reflect deteriorating market fundamentals that adversely affect profitability.
We could revise the outlook to stable to reflect increased or stable covenant headroom and a visible improvement in net interest coverage or a continued adequate liquidity position.
Related publications
(i) The Swedish real estate sector– waiting for sunshine after the rain, 27 Sep. 2023.
(ii) Decoding Swedish real estate in an uncertain market environment, 29 Aug. 2023.
Rating list | To | From |
---|---|---|
Long-term issuer credit rating: | BB | BB |
Outlook: | Negative | Negative |
Short-term issuer credit rating: | N4 | N4 |
Senior unsecured issue rating: | BB- | BB- |
Contacts:
Yun Zhou, analyst, +46732324378, yun.zhou@nordiccreditrating.com
Gustav Nilsson, analyst, +46735420446, gustav.nilsson@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 Rating Principles published on 24 May 2022 and NCR's Group and Government Support Rating Methodology published on 18 Feb. 2022. For the full regulatory disclaimer please see the rating report.