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Rating action

Scope Ratings GmbH (Scope) has today assigned a first-time issuer rating of BBB/Stable to Samhällsbyggnadsbolaget i Norden AB (SBB), along with a senior unsecured debt rating of BBB, a subordinated (hybrid) debt rating of BB+ and a short-term rating of S-2.

Rating rationale

SBB’s business risk profile (assessed at BBB+) is the primary driver of the assigned ratings. It benefits from the company’s exposure to low-risk community service properties (79%) and rent-regulated residential real estate (21%). These are exposed to long-term demographic developments but not to economic cycles. SBB’s large size and dominance within its segment, with Scope-adjusted total assets of SEK 175bn (EUR 17.5bn) and a gross leasable area of 4.9m sqm both as at Q3 2021, enable good access to investment markets as well as diversified sources of funding in its jurisdictions. This is exemplified by the issuance of SEK 132bn of senior unsecured bonds under its EMTN programmes in EUR and SEK in the last three years, hybrid issuances worth SEK 15bn and equity raises of SEK 14bn.

Asset quality is a further driver of SBB’s business risk profile, with properties located mostly in metropolitan and university areas with positive demographics and solid investor demand. This would result in good fungibility and limited haircuts on portfolio values in times of distress. Demographic megatrends, with an aging population and increased welfare spending, bode well for its exposure to nursing homes and health care properties, while its exposure to school buildings benefits from strong expected growth in the age group of 10-19+. These trends result in strong demand and assure that its overall relatively high EPRA occupancy ratio of 94% (as at Q3 2021) will remain stable or grow, while its above-average WAULT of 8.7 years (as at Q3 2021) provide high cash flow visibility. Scope sees SBB’s initiatives within resource management and product innovation, as well as activities on the social front that reduce regulatory and reputational risks, as a further strength of its asset quality.

The business risk profile is somewhat constrained by profitability that is below that of similar-sized peers, with a Scope-adjusted EBITDA margin of 64% for the last twelve months to end-September 2021 and levels of around 65% expected in Scope’s base case going forward. Profitability has naturally been impacted by the company’s tremendous growth since its launch in 2016, and as growth remains the company’s priority, Scope does not foresee an immediate improvement despite high like-for-like rental growth (3.2% in 2020). SBB’s tenant profile is concentrated with the top three tenants accounting for 18.9% and the top 10 tenants accounting for 32%. Its tenant concentration is due to its business nature and partially mitigated by the top 10 having 51% direct exposure to Nordic governments. The remainder are indirectly exposed to government risk through services provided by private companies in elderly, health care and education, whose costs are ultimately born by welfare budgets.

SBB’s financial risk profile (assessed at BBB-) benefits from its strong debt protection as measured by Scope-adjusted EBITDA interest cover of 3.2x in the last twelve months to end-September 2021. Scope forecasts the ratio will remain above 3x through organic and inorganic growth of Scope-adjusted EBITDA and good control over interest expenses via hedging and a fixed interest rate period averaging 4.2 years. The weighted average interest rate stands at 1.1% in Q3 2021, down from 2.5% in 2019. This is despite having reduced dependency on secured financing to total assets to 8% from 26% during the same period. SBB’s strong growth from zero in 2016 to its current SEK 125bn property value (SEK 165bn total assets) has been largely driven by inorganic growth through acquisitions and, more recently, organic growth through investments in its own portfolio and subsequent revaluations. While funds from operations has been positive throughout SBB’s history and has developed in line with Scope-adjusted EBITDA, other cash flow metrics have been mostly negative, impacted by large working capital swings, investments in SBB’s own properties, heavy discretionary acquisition spending to grow its portfolio and significant dividends paid to its shareholders.

SBB’s leverage, as measured by the Scope-adjusted loan/value (LTV) ratio, has fallen to 47% as at Q3 2021 from around 60% in 2017. It has benefitted from significant gains on sold properties, high fair value appreciation, strong like-for-like rental growth, and occasional equity injections. While high for the rating, the ratio has been around 50% for the last two to three years, and Scope finds it encouraging that SBB has implemented a financial policy that should keep its LTV ratio below 50% based on its own calculations going forward. Scope expects the ratio to stabilise at current levels of around 50% but sees a limited chance of deleveraging in the absence of equity injections or significant gains on disposals. The projections factor in continued acquisitions (expected at around net SEK 15bn yearly) and positive like-for-like growth in rents, but with more muted fair value appreciation.

Liquidity is adequate as sources cover uses by about 5.8x in 2021. The company benefits from a large multi-year credit facility (SEK 10bn undrawn), a low secured LTV ratio of 8%, and well-spread maturities with a weighted average of 4.2 years. Furthermore, Scope believes SBB has good access to capital markets and secured lending if needed. Given a low secured LTV ratio and ample unencumbered assets (calculated at over 200% of unsecured debt), these can provide decent headroom to refinance short-term debt if needed.

Rating-change drivers

The Outlook for SBB is Stable and incorporates continued modest organic growth (from a small portion of residential development) paired with strong, mostly inorganic growth through acquisitions within its core markets. Acquisitions are financed through a mix of debt, hybrid debt instruments, internal cash flows and equity, if needed. The agency understands that SBB will adjust the scope as well as the financing mix of pursued growth going forward in line with its financial policy, ultimately keeping its LTV ratio around or below 50% while debt protection remains above 3x going forward.

A negative rating action is possible if the Scope-adjusted LTV ratio moved above 55% or interest coverage moved below 3x on a sustained basis, such as through significant, predominantly debt-funded acquisitions or a severe reduction in the fair value of properties compared to Scope’s base case. The most likely cause would be the acquisition of a leveraged competitor with not enough equity on its own balance sheet to counter the negative consolidation effects, with adverse operating performance being a secondary possible cause.

A positive rating action would require the Scope-adjusted LTV ratio to improve to below 50% on a sustained basis, while keeping interest coverage comfortably above 3x. This could be driven by a lower proportion of debt-funded capex, decreased refinancing needs through stronger-than-anticipated portfolio cash flows, a strong improvement in market sentiment resulting in high fair value appreciation, or a change in the funding mix.

Long-term and short-term debt ratings

SBB had SEK 53bn in senior unsecured debt outstanding as at Q3 2021. Senior unsecured debt benefits from a high unencumbered asset ratio of more than 200% according to Scope’s calculations, providing a large pool of collateral to debt holders.

Hybrid bonds issued by SBB benefit from coupon deferral at the issuer’s discretion, deep contractual subordination and a sufficiently long remaining maturity. As such, Scope grants 50% equity credit for these hybrid debt instruments.

The S-2 short-term rating is supported by better-than-adequate liquidity, very good banking relationships, strong access to diverse funding sources (e.g. SEK 132bn of capital market debt issuances in the last three years) and access to undrawn, committed credit lines with maturities beyond one year.

Stress testing & cash flow analysis
No stress testing was performed. Scope Ratings performed its standard cash flow forecasting for the company.

Methodology
The methodologies used for these Credit Ratings and/or Outlook, (Corporate Rating Methodology, 6 July 2021; Rating Methodology: European Real Estate Corporates, 15 January 2021), are available on https://www.scoperatings.com/#!methodology/list.
Scope Ratings GmbH and Scope Ratings UK Limited apply the same methodologies/models and key rating assumptions for their credit rating services, while Scope Hamburg GmbH’s methodologies/models and key rating assumptions are different from those of Scope Ratings GmbH and Scope Ratings UK Limited.
Information on the meaning of each Credit Rating category, including definitions of default, recoveries, Outlooks and Under Review, can be viewed in ‘Rating Definitions – Credit Ratings, Ancillary and Other Services’, published on https://www.scoperatings.com/#!governance-and-policies/rating-scale. Historical default rates of the entities rated by Scope Ratings can be viewed in the Credit Rating performance report at https://www.scoperatings.com/#governance-and-policies/regulatory-ESMA. Also refer to the central platform (CEREP) of the European Securities and Markets Authority (ESMA): http://cerep.esma.europa.eu/cerep-web/statistics/defaults.xhtml. A comprehensive clarification of Scope Ratings’ definitions of default and Credit Rating notations can be found at https://www.scoperatings.com/#governance-and-policies/rating-scale. Guidance and information on how environmental, social or governance factors (ESG factors) are incorporated into the Credit Rating can be found in the respective sections of the methodologies or guidance documents provided on https://www.scoperatings.com/#!methodology/list.
The Outlook indicates the most likely direction of the Credit Ratings if the Credit Ratings were to change within the next 12 to 18 months.

Solicitation, key sources and quality of information
The Rated Entity and/or its Related Third Parties participated in the Credit Rating process.
The following substantially material sources of information were used to prepare the Credit Ratings: public domain, the Rated Entity and Scope Ratings' internal sources.
Scope Ratings considers the quality of information available to Scope Ratings on the Rated Entity or instrument to be satisfactory. The information and data supporting the Credit Ratings originate from sources Scope Ratings considers to be reliable and accurate. Scope Ratings does not, however, independently verify the reliability and accuracy of the information and data. Prior to the issuance of the Credit Rating action, the Rated Entity was given the opportunity to review the Credit Ratings and/or Outlook and the principal grounds on which the Credit Ratings and/or Outlook are based. Following that review, the Credit Ratings were not amended before being issued.

Regulatory disclosures
These Credit Ratings and/or Outlook are issued by Scope Ratings GmbH, Lennéstraße 5, D-10785 Berlin, Tel +49 30 27891-0. The Credit Ratings and/or Outlook are UK-endorsed.
Lead analyst: Thomas Faeh, Executive Director
Person responsible for approval of the Credit Ratings: Philipp Wass, Executive Director
The Credit Ratings/Outlook were first released by Scope Ratings on 12 November 2021.

Potential conflicts
See www.scoperatings.com under Governance & Policies/EU Regulation/Disclosures for a list of potential conflicts of interest related to the issuance of Credit Ratings.

Conditions of use/exclusion of liability
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