Nordic Real Estate 1Q: In the Land of the Blind

Mary Pollock, CFA – Senior Analyst - European IG and HY Real Estate

  • SBB’s liquidity position is weaker than peers, but Heimstaden Bostad’s and Balder’s are far from strong. SBB has the resources in place for the coming quarters, but we expect it will need to have executed on one if its liquidity levers ahead of its bond maturities in 1Q24 (SEK 6.5 bn). Raising more secured debt (either at the EduCo level or at other assets) is an important option to buy SBB time, though it comes with further negatives (higher debt levels, interest costs).
  • Interest costs have increased materially over the last five quarters and the outlook for ICRs is for further decline. Debt funded cash burn, unhedged debt, refinancing of short-term debt and coupon step-ups at SBB are all driving up interest costs. We expect SBB’s ICR to potentially fall below 2x in the next twelve months and for HB’s to approach 2x.
  • Balder stands out as having yet to take any meaningful write-down to its property portfolio. Since 1H22, for the portfolios of HB, Castellum and Kojamo revaluations have resulted in declines of around 9-10%, while SBB is down by around 5%. We are worried that Balder is setting itself up for a severe step-change at 1H23/YE23 or when the transaction market comes back to life.
  • Lkl rental income growth was solid in 1Q23 and the outlook for growth in 2023 is encouraging. Growth was strongest for Castellum, SBB and Akelius in 1Q23 (all >9%), while Balder and HB both saw Lkl growth come in around the 5% level. We expect rental income growth at Balder and HB will continue to lag peers given their exposure to regulated residential markets.

In the wake of S&P’s downgrade of SBB and 1Q23 results, we review the major Nordic players. Since we relaunched coverage of SBB, HB and Balder, our view has been that although the outlook for SBB is dire, it is not so much worse than peers that its bonds merit the relative discount in yields, not least given the numerous steps it has taken to try and improve its financial position. However, those steps were clearly not enough to buy more time at S&P. We agree with S&P that its liquidity position is stretched. We continue to think its access to the secured market is a key lever to buy it time, but new debt raised to refinance and fund cash burn will drive interest costs higher, weakening ICRs and weighing on cash flow. Asset sales (e.g. disposals, minority stake sales) will decrease portfolio value, and potentially result in broader portfolio write-downs. SBB needs an equity injection in our view, though management are yet to fully commit to cutting the dividend.

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