Standard and Poor`s mars 2016

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Standard and Poor`s mars 2016
Summary:
Akelius Residential Property AB
Primary Credit Analyst:
Nicole Reinhardt, Frankfurt (49) 069 33 999 303; [email protected]
Secondary Contact:
Marie-Aude Vialle, London +44 (0)20 7176 3655; [email protected]
Table Of Contents
Rationale
Outlook
Standard & Poor's Base-Case Scenario
Business Risk
Financial Risk
Liquidity
Other Credit Considerations
Ratings Score Snapshot
Related Criteria And Research
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Summary:
Akelius Residential Property AB
Business Risk: STRONG
CORPORATE CREDIT RATING
Vulnerable
Excellent
bbb-
bb+
bbbBBB-/Stable/A-3
Financial Risk: AGGRESSIVE
Highly leveraged
Minimal
Anchor
Modifiers
Group/Gov't
Rationale
Business Risk: Strong
Financial Risk: Aggressive
• Globally well-diversified income-producing property
portfolio with exposure to large metropolitan areas
where demand outpaces supply and real estate
prices are on a rise.
• Large asset portfolio of approximately Swedish
krona (SEK) 73 billion (approximately €8 billion),
spread across 51,000 apartments with a large tenant
base.
• Strong operational track record, with like-for-like
rental income growth sustainably over 3% as well as
high and stable occupancy rate of about 99%,
excluding vacant premises for renovation needs.
• High debt-to-debt-plus equity ratio of about 60%,
including our adjustments for preference shares and
hybrid loan.
• EBITDA interest coverage of only 1.3x, despite
historical low interest rate environment.
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Summary: Akelius Residential Property AB
Outlook: Stable
Standard & Poor's Ratings Services' outlook on Akelius Residential Property AB is stable. It reflects our expectation
of continued favorable demand for midsize residential apartments in most of Akelius' markets where supply
remains limited. We expect rental income will rise at least 3% on a like-for-like basis in 2016, thanks to the
company's exposure to large metropolitan areas with robust economies. Over the next two years, we forecast that
adjusted EBITDA interest coverage will improve marginally to about 1.5x-1.7x and a debt-to-debt-plus-equity ratio
of approximately 60%, including our adjustments for hybrid capital and preference shares.
Downside scenario
We could lower the rating if Akelius' EBITDA interest coverage does not reach 1.5x or more in the next 12 months
or its debt-to-debt-plus-equity ratio exceeds 63%. Such a scenario is not part of our central assumptions and would
most likely arise from debt-financed acquisitions, the issuance of a substantial amount of preferred stock, which
would result in a hybrid capitalization ratio above 15%, or higher spending on renovation and refurbishment costs
than we anticipate.
Upside scenario
Conversely, we could raise the rating if Akelius demonstrates a stronger-than-anticipated improvement in credit
metrics and strengthens its financial risk profile. This could occur due to lower-than-anticipated cost of debt,
stronger portfolio revaluation, or increased economies of scale, resulting in EBITDA interest coverage of above 2x
and a lower debt-to-debt-plus-equity ratio of about 55% or below, on a sustainable basis.
Standard & Poor's Base-Case Scenario
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Summary: Akelius Residential Property AB
Assumptions
• Annual like-for-like rental income growth of at least
3% in 2016 and 2017, linked to our macroeconomic
expectations in Akelius' main markets with real GDP
growth in 2016 of 2.9% in Sweden and 2% in
Germany, as well as low indexation (1% in Sweden
for 2016 and 1.3% in Germany), but some stronger
renegotiated increases of existing rents, thanks to
apartment upgrades and stable occupancy.
• Slight improvement in the EBITDA margin to about
50%-52% over the next 12-24 months, thanks to
acquisitions supporting rental income growth and
more room to benefit from economies of scale in its
operating regions.
• Some increase in capital expenditures, including
maintenance, due to an enlarged portfolio size and
higher renovation needs on some newly acquired
assets (such as in Canada and the U.S.) that are
likely to be upgraded, in line with Akelius' operating
strategy.
Key Metrics
2015a
2016e
2017e
EBITDA margin (%)
48
50-51
51-52
EBITDA interest coverage (x)
1.3
1.5-1.7 1.6-1.8
Debt to debt and equity (%)
60.3
~60.0
~60.0
a--Actual. e--Estimate.
Business Risk: Strong
The rating is supported by Akelius' large and well-diversified residential property portfolio, with exposure to real estate
markets where demand remains strong and new supply is limited. Akelius is one of a few residential property
companies that are diversified globally. Its portfolio of almost €8 billion as of December 31, 2015, is spread across
locations and countries where the population is growing and one- to two-person households are increasing, such as
Stockholm (18% of total asset value), Berlin (19%), London (7%) and New York (5%). The portfolio consists largely of
assets situated in prime locations with good infrastructure that are within 10 kilometers (km) to 15 km from city
centers. Akelius recently extended its geographic reach with investments in the U.S. (New York, Boston, and
Washington D.C.), currently representing 7% of total portfolio exposure.
In addition, we think that Akelius has broad asset and tenant diversity, with over 50,000 units. Asset quality appears
average, given the company's strategy of upgrading newly acquired assets of lower asset quality. We estimate that
about 10% of the existing portfolio has renovation needs. We view positively the company's strategy of long-term
ownership of residential properties with no development activities. The average apartment size is 65 square meters,
which is well in line with what we observe for other rated residential players in its markets.
In our view, Akelius has a positive operational track record with like-for-like rental income growth steadily exceeding
3% and very strong occupancy rate of about 99%, excluding vacant premises for renovation. In Germany, England,
and France (together about 42% of the portfolio), Akelius is able to transfer utility costs to the tenant. However,
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Summary: Akelius Residential Property AB
compared with the above-mentioned regions, margins may be slightly more volatile in its largest operational region,
Sweden (over 40% of total revenue), where rising utility costs would not fully be covered by tenants. However, taking
into account the declining portfolio share in Sweden, as result of disposals, the overall profitability would not be
diminished. We expect like-for-like rental income growth will remain above 3% as a result of Akelius' index-linked
rental agreements and the benefit of its renovation and apartment upgrades.
We noticed that the company's EBITDA margin of close to 50% is much lower than the 60% average of its rated peers
in the residential real estate segment. This is due to differences in accounting choices and that Akelius includes
overheads received from the tenant, the so called "second rent" (such as heating costs, bin fees, etc.) in its total rental
income while most of the rated peers exclude those costs in their total rental income.
Despite the benefits we see from Akelius' global diversity, we believe that the company can achieve only limited
economies of scale in each of its markets compared with its rated peers in the residential segment who are more
clustered to single countries and regions. Although we expect that the company's maintenance expenses will remain
stable relative to portfolio size, renovation and refurbishment needs are significantly higher than peers and will
increase further along with the portfolio's size and Akelius' strategy to acquire assets with upgrade potential.
Financial Risk: Aggressive
Akelius' financial risk profile, in our view, is characterized by its weak EBITDA interest coverage ratio of 1.3x in 2015,
compared with other rated residential real estate peers. Against our forecast for 2015 the ratio declined slightly, mainly
due to a lower-than-anticipated EBITDA base, stemming from a 20% salary increase to Akelius' staff in 2015 and some
additional costs related to newly entered markets, such as the U.S. Although we believe improvement will take longer
than previously estimated, we still expect the ratio of EBITDA interest coverage to strengthen to 1.5x-1.7x in the next
12-24 months, thanks to rent contribution from recent acquisitions and some further decline in the overall cost of debt.
Furthermore, Akelius' debt leverage is relatively high, with debt-to-debt-plus-equity ratio of approximately 60.0%
(60.3% at year-end 2015) including our adjustments for preference shares and a loan to the parent company. We
consider the outstanding hybrid loan agreement of €150 million (approximately SEK1.365 billion) between its
subsidiary, Akelius GmbH, and its parent, Akelius Apartments Ltd., as full debt, and include the instrument fully into
our coverage and leverage calculation, in line with our criteria for "The Treatment Of Non-Common Equity Financing
In Nonfinancial Corporate Entities," published April 29, 2014, on RatingsDirect.
Furthermore, we still classify the company's preference shares as having intermediate equity content, and treat 50% of
the principal outstanding and all related payments, including accrued dividends under the preferred stock, as debt and
50% as equity (see "Sweden-Based Akelius Residential Property Assigned 'BBB-' Rating; Outlook Stable," published
June 1, 2015).
We understand that the company has committed to keeping hybrid capital, including preference shares, below 15% of
total capitalization, which is our threshold for assessing equity content of hybrid instruments. We would revise our
assessment regarding the equity content of the preference shares if this commitment changes or our view of
permanence or deferability weakens.
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Summary: Akelius Residential Property AB
Liquidity: Adequate
We assess Akelius' liquidity as adequate, supported by our forecast that the company's liquidity sources will exceed its
funding needs by just over 1.2x over the next 12 months.
Our liquidity assessment is also supported by Akelius' positive track record of accessing equity and capital markets as
well as its good relationships with banks globally.
We understand that Akelius has some covenants for its existing bond issuances and credit lines. We estimate that the
headroom for those covenants is adequate--at more than 10%.
Principal Liquidity Sources
Principal Liquidity Uses
Akelius' principal liquidity sources over the 12 months
Akelius' principal liquidity uses for the same period are:
started Dec. 31, 2015, include:
• About SEK3.9 billion of short-term debt maturities,
including amortization from Akelius' bank loans and
drawn commercial paper debt;
• About SEK500 million of capital expenditures,
estimated as required minimum spending for the
next 12 months;
• Approximately SEK475 million of dividends,
including about SEK99 million related to the hybrid
loan and SEK376 million to preference shareholders;
and
• About SEK2.9 billion of contracted portfolio
acquisitions in Boston, Montreal, Hamburg, and
Düsseldorf.
• Unrestricted cash and cash equivalents of close to
SEK600 million, including about SEK360 million of
cash pledged for mortgages which will be used for
debt repayment in the next few months;
• Our forecast of positive cash funds from operations
of about SEK1.1 billion-SEK1.3 billion;
• About SEK4.8 billion of undrawn and committed
credit lines maturing in more than 12 months; and
• SEK2.8 billion of contracted asset sales, including
about SEK2.3 billion of sales in Sweden and the
remaining amount in London and Germany.
Other Credit Considerations
Unlike most peers rated in the same business risk category, Akelius benefits from an international portfolio, mostly in
very good metropolitan cities. This enables the company to minimize its reliance on a single economy and limit the
risk of revenue volatility through property cycles.
Moreover, we expect Akelius' credit metrics to trend toward the higher end of our aggressive financial risk category,
with EBITDA interest coverage improving slowly to 1.5-1.7x in 2016 and debt-to-debt plus equity of about 60% over
the same period.
Therefore, our 'BBB-' rating on the company is one notch above our 'bb+' anchor based on a favorable comparable
rating analysis.
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Summary: Akelius Residential Property AB
Ratings Score Snapshot
Corporate Credit Rating
BBB-/Stable/A-3
Business risk: Strong
• Country risk: Very low
• Industry risk: Low
• Competitive position: Strong
Financial risk: Aggressive
• Cash flow/Leverage: Aggressive
Anchor: bb+
Modifiers
• Diversification/Portfolio effect: Neutral (no impact)
• Capital structure: Neutral (no impact)
• Financial policy: Neutral (no impact)
• Liquidity: Adequate (no impact)
• Management and governance: Fair (no impact)
• Comparable rating analysis: Positive (+1 notch)
Related Criteria And Research
Related Criteria
•
•
•
•
•
Methodology And Assumptions: Liquidity Descriptors For Global Corporate Issuers, Dec. 16, 2014
The Treatment Of Non-Common Equity Financing In Nonfinancial Corporate Entities, April 29, 2014
Corporate Methodology, Nov. 19, 2013
Key Credit Factors For The Real Estate Industry, Nov. 19, 2013
Methodology And Assumptions: Assigning Equity Content To Corporate Entity And North American Insurance
Holding Company Hybrid Capital Instruments, April 1, 2013
• Hybrid Capital Handbook: September 2008 Edition, Sept. 15, 2008
Related Research
• Sweden-Based Akelius Residential Property Assigned 'BBB-' Rating; Outlook Stable, June 1, 2015
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Summary: Akelius Residential Property AB
Business And Financial Risk Matrix
Financial Risk Profile
Business Risk Profile
Minimal
Modest
Intermediate
Significant
Aggressive
Highly leveraged
Excellent
aaa/aa+
aa
a+/a
a-
bbb
bbb-/bb+
aa/aa-
a+/a
a-/bbb+
bbb
bb+
bb
a/a-
bbb+
bbb/bbb-
bbb-/bb+
bb
b+
Strong
Satisfactory
Fair
bbb/bbb-
bbb-
bb+
bb
bb-
b
Weak
bb+
bb+
bb
bb-
b+
b/b-
Vulnerable
bb-
bb-
bb-/b+
b+
b
b-
Additional Contact:
Industrial Ratings Europe; [email protected]
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