On 2 Sep 2019, Nordic Credit Rating (NCR) assigned its 'BB-' long-term and 'N-2' short-term issuer credit ratings to Offentliga Hus i Norden AB (publ) (Offentliga Hus), a Swedish real-estate management company focused on leasing to public-sector entities. The outlook is stable.
"Offentliga Hus has a diversified property portfolio with a high share of government or government-related tenants on long-term contracts. However, the company's growth targets are ambitious, and we view future financing as uncertain given already high leverage levels" said Mille O. Fjeldstad, credit analyst at NCR and primary analyst for Offentliga Hus.
Rating rationale
Our 'BB-' long-term rating on Sweden-based public service property provider Offentliga Hus i Norden AB (publ) (Offentliga Hus) reflects the company's strong property portfolio and long-term contracts averaging over 5 years. Offentliga Hus' tenants are mostly highly creditworthy and include government bodies and municipalities (67% of the company's rental income comes from public-sector tenants and a further 19% from private-sector tenants typically within the health and care segment and indirectly linked with government funding). The rating further reflects the company's geographically diverse portfolio, stable operating efficiency and 4% vacancy ratio.
Offsetting these strengths are Offentliga Hus' relatively high level of secured debt and corresponding interest expense. The company had an adjusted net interest coverage ratio of 1.6x, a loan-to-value (LTV) ratio of 61% and a debt-to-EBITDA ratio of 20x as of 30 Jun. 2019. The rating includes a one-notch downward adjustment to reflect uncertainty about the financing of Offentliga Hus' ambitious growth plans, given the company's history of expansion and the owners' aim to conduct an initial public offering in the next few years.
Outlook
The stable outlook on Offentliga Hus reflects our view that the company will maintain a stable mix of properties and tenants, despite its ambitious expansion plans. We further expect the company to proactively refinance its upcoming debt maturities and continue to fund its new investments in line with its LTV target of 60%. The outlook further reflects the stable economic outlook for the community service sector in Sweden.
Potential positive rating drivers:
- A sustainable increase in net interest coverage to increase headroom within the company's bond covenants
- Clear growth strategy with stable and sustainable financing
- Focus on tier 1 quality properties with desirable LTV level
Potential negative rating drivers:
- Any corrosion in financial metrics
- A deterioration in the macroeconomic environment could affect revenues, property values and covenant headroom
- Breaching covenants could have a multi-notch negative impact on the rating if liquidity is compromised
For the methodology and regulatory disclaimer please see the rating report which can be downloaded at nordiccreditrating.com/ratings-research/research.
Contact details:
Mille O. Fjeldstad, Credit Analyst, +47 99 03 89 16, mille.fjeldstad@nordiccreditrating.com
Michael Andersson, Chief Rating Officer, +46 732 32 43 22, michael.andersson@nordiccreditrating.com