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HEIBOS/HEIMST 2Q23: Plan A
Mary Pollock, CFA – Senior Analyst - European IG and HY Real Estate
EXECUTIVE SUMMARY
- Liquidity is a focus point, though management was clear that 2023-2024 bond maturities would be covered by new secured financing. Existing cash and RCF resources covered short term debt at 2Q23 and management’s color on the banking market was reassuring. Management is also considering asset sales and a potential equity raise, as it looks to reduce leverage and manage ICR deterioration.
- Heimstaden Bostad loosened two targets within in financial policy at 2Q23 results, which was in line with our expectations. HB has realigned the policy so it matches S&P’s targets for HB to maintain its mid-BBB rating. Management was clear ICR deterioration will result in them breaching the new limit near term, which is the primary motivator for HB to raise cash via asset sales or a capital increase.
- The portfolio was written down a further -2.1% in the quarter, bringing the decline LTM to around -11.3%. HB’s average yield is now up to 3.41% which is up c. 50 bp LTM. Management hesitantly indicated the pace of yield expansion has slowed, at least in some markets. Our base case is for further pressure on valuations in 2H23.
- HB’s 20% stake in Kojamo was a focus point on the results call. Management did not indicate they are considering exiting their position near term. This stake is a positive for the credit in our view, given its potential as a liquidity lever (SEK 4.7 bn value as we go to press). Heimstaden and HB are looking to privatizations to execute asset sales near term, though we are uncertain as to the pace and scale of these especially at the HB level. The value of the Iceland portfolio, which is on the block at the Heimstaden level, was SEK 6 bn as of 2Q23.
- On the operations front, results remained very strong in 2Q23. Lfl rental income growth was solid at 5.6% YoY, in particular versus some of HB’s residential peers in Germany and Finland. Occupancy is very high and underlying market fundamentals are strong.
RELATIVE VALUE
There were no major surprises in Heimstaden Bostad’s (HEIBOS, NR/BBB ▼ /BBB ▼) and holdco Heimstaden AB’s (HEIMST, NR/NR/BB+ ▼) 2Q23 results. Operating performance remained solid and HB continues to tread water by relying on the banking market to raise further secured debt. Portfolio yields continued to push wider resulting in further write-downs to valuations. HB has been proactive reevaluating its portfolio, which is down by around -11% LTM. We see scope for further decline. Its average yield requirement is still low at 3.41%. However, like its Residential peers, its low yields also reflect the defensiveness of its property portfolio. The fundamentals which underpin the attractiveness of this asset class long term are unchanged in our view. We also view HB’s scale and geographic diversity as an advantage with regards to raising secured debt and executing asset sales, as its diversity allows it to consider a range of possible counter-parties and assets to pledge as collateral or consider for disposal. This is most notable versus its German residential counterparts.
The focus remains on the balance sheet. HB’s liquidity is better than peers (most notably SBB). It is reliant, however, on material additional secured funding. Its color on the banking market was reassuring. We expect it will be able to raise the secured debt it needs to cover short term debt. The 2H24 bond maturities (in particular EUR 1.2 bn 0.25% Oct-24s) are notable, however. We are reassured that asset sales and a potential equity raise are now explicitly options on the table for HB. Though both come with execution risk, there are different options across markets and HB has some time to determine the best course of actions. We also view a sale of the Kojamo stake as an important consideration, even if it’s not the company’s plan A to sell the stake in the short term.
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