Fitch Ratings has revised the Outlook on Akelius Residential Property AB's (Akelius) Long-Term Issuer Default Rating (IDR) to Negative from Stable and affirmed the IDR at 'BBB'.
The senior unsecured rating has been affirmed at 'BBB+'. A full list of ratings is below.
The Negative Outlook reflects the announcement that Akelius proposes to pay an extra class A dividend of EUR1.3 billion by end-December 2023. This will effectively transfer existing financial assets to its parent, Akelius Apartments Limited, which states that it will remit equivalent funds in the form of shareholders' contributions when Akelius's 2024 and some 2025 debt maturities are due.
This constrains Akelius's liquidity ahead of the bulk of its debt maturities in March and November 2024 and February and August 2025. These financial assets were originally intended to reduce Akelius's leverage, and some were monetised to prepay debt in 2023. The rating actions assume Akelius Apartments should remit equivalent funds as debt maturities loom. If not, an Akelius default would put the parent's equity at risk, or cause Akelius to quickly refinance maturing debt at higher cost and not de-leverage. The latter is reflected in the Negative Outlook.
If equivalent funds are remitted as equity contributions, as scheduled, the IDR could remain 'BBB', with net debt/EBITDA around 13x and interest cover (Fitch includes hybrid interest expense at 100%) of around 2.4x in 2026.
Key Rating Drivers
Breach of Akelius's Financial Policy: With the extra dividend likely paid by end-2023, Fitch calculates that Akelius will temporarily breach its financial policy of a loan-to-value (LTV) ratio below 35% at end-2023. Other ratios, keeping net debt/EBITDA below 15x from 2024, and interest cover at least 2x, will depend on scheduled debt maturities being repaid from financial assets remitted. Fitch views end-2023 liquidity as constrained.
Cash versus Financial Assets: Financial assets at end-2022 included investments in covered bonds and senior and subordinated debt instruments, and equity shares. To treat these investments as readily available cash, Fitch discounts the values by set percentages representing their risk profile. Discounting the end-3Q23 EUR2.2 billion financial assets (the former by 30% face value and the equity shares (mainly Castellum AB, a Swedish commercial property company) by 100%) readily available cash was EUR1.1 billion, plus actual cash of EUR0.1 billion.
Fitch understands that most of these 3Q23 financial assets will be transferred, except the (now) EUR645 million Castellum shares. Consequently, Akelius's prospective end-2023 liquidity will be constrained.
North American-Focussed Portfolio: Akelius's 3Q23 residential-for-rent portfolio totalled EUR6.1 billion of properties in 10 cities located in the US (41% of portfolio value), Canada (36%), the UK (London: 16%) and France (Paris: 7%). The portfolio includes several renovation projects, as reflected in 3Q23's high 6.6% vacancy (end-2022: 8.1%). Akelius plans to materially reduce the remaining portfolio's vacancy rate by completing its renovation projects (France, US, Canada), increasing the group's rental income. Reducing the cost of holding vacant units (non-recoverable costs) will increase the group's EBITDA.
Partially Regulated Markets: The shift towards North American residential markets has reduced the group's share of regulated rental income. However, around two-thirds of Akelius's portfolio is subject to some form of rent regulation and one-third of properties have below-market rents. Rental increases are often index-linked for in-place rents and there is protection for existing tenants. This is reflected in the low tenant turnover, which was 25% during 2022 (3Q23: 23%), compared with the higher tenant churn of US peers of around 50%.
Moderate Leverage: Without the financial asset monetisations being remitted back to Akelius to repay its scheduled debt maturities, the group's net debt/EBITDA is above 20x. With proceeds remitted, this falls to 13x in 2025. The 3Q23 loan-to-value (gross debt with hybrids at 50% equity credit/investment property) was 63%.
Interest Cover: Assuming the 2024 and 2025 bulk debt maturities are fully repaid with financial asset monetisations remitted back, Akelius's net interest coverage reduces to around 2.4x in 2026. However, if more debt is refinanced at higher interest rates, the average cost of debt increases to nearer 3% and interest cover falls to 1.2x by 2027 (including hybrids that are re-set in October 2023 and May 2026, respectively, unless they are called).
Derivation Summary
Akelius's portfolio comprises EUR6.1 billion of residential properties in metropolitan cities in Canada, US, UK and France. Fitch expects the portfolio to grow as disposal proceeds are deployed into additional assets. Akelius's portfolio is currently smaller than Heimstaden Bostad AB's (IDR: BBB/Rating Watch Negative, EUR28.5 billion) pan-European portfolio, and Annington Limited's (IDR: BBB/Negative, EUR9.9 billion), but larger than Grainger Plc's (BBB-/Stable, EUR4.3 billion), both of which are in the UK, SCI Lamartine (BBB+/Stable, EUR2.4 billion) in France, and Peach Property Group AG's (BB/Stable, EUR2.6 billion), located mainly in the North Rhine-Westphalia region of Germany.
Akelius's wide geographic diversification, with its US and Canada portfolio, benefits its rating compared with peers.
In all cases, Fitch acknowledges the necessity-based purpose of and demand for this asset class, the stability of rental income in many markets (particularly the regulated-rent markets), the fundamentals of inherent demand as household numbers increase and the lack of supply in many markets. Compared with commercial real estate peers, Fitch recognises these positive fundamentals with higher debt capacity for residential-for-rent assets.
Akelius's higher share of residential units with market-oriented rents compared with purely European peers with units in German, French or Scandinavian regulated markets is reflected in comparatively lower debt capacity within Fitch's rating sensitivities. The majority of Akelius's units, around two-thirds, are nonetheless subject to some form of rent control, which adds stability to its rental income.
Compared with Grainger's plans to develop more private rented residential assets, and Lamartine's forward funded, still under-construction portfolio, Akelius's development exposure is limited and comprise optional low-risk upgrades of its existing assets.
Notwithstanding the low yielding nature of the portfolio, Akelius benefited from the financial assets on its balance sheet boosting liquidity and providing interest income, reducing stress on 2022 and 2023's interest cover. Without the benefit of the financial assets, the prevailing higher interest rates stresses Akelius's interest coverage (similar to the tight interest cover of Heimstaden Bostad AB), more so if existing low-cost debt has to be refinanced.
Key Assumptions
Fitch's Key Assumptions Within Our Rating Case for the Issuer
Rental growth primarily driven by a reduction of vacancy by completing renovation projects during 2023, a modest indexation and rental uplifts on tenant churn.
EBITDA margin improvements driven by lower non-recoverable costs because of improving occupancy rates.
Around EUR200 million capex in 2023 for renovation, energy projects and existing properties, reducing vacancies in specific portfolios.
EUR150 million of property acquisitions in total during 2024-2026.
Participation in Castellum's proposed rights issue at its pro rata share (approximately EUR112 million) occurred in 2Q23.
RATING SENSITIVITIES
Factors that could, individually or collectively, lead to positive rating action/upgrade:
Net debt/rental-derived EBITDA below 14x given the expected portfolio mix
EBITDA net interest cover above 2.5x
Factors that could, individually or collectively, lead to negative rating action/downgrade:
If Fitch believes that Akelius Apartments does not intend to remit monetised financial asset proceeds back to Akelius for its near-term debt maturities
Net debt/rental-derived EBITDA above 16.5x
EBITDA net interest cover below 1.75x
EMEA senior unsecured debt uplift: unencumbered investment property assets/unsecured debt below 2.0x when Akelius's financial assets are remitted back
Liquidity and Debt Structure
Dependent Liquidity: With the planned transfer of Akelius's financial assets (excluding the less liquid Castellum shares) as an extra dividend by end-2023, Fitch forecasts that Akelius will have around EUR30 million readily available cash and some EUR170 million of remaining financial assets which the agency categorises as readily available cash. Its undrawn credit facilities have a short duration so we have not included them in our liquidity profile. Without timely monetisations of the transferred financial assets by Akelius Apartments, Akelius will not have immediate alternative sources to repay its scheduled debt maturities.
The bulk of the debt maturities are the EUR500 million and equivalent EUR75.5 million bonds due March and November 2024, which are expected to be repaid from financial assets proceeds remitted, and EUR600 million and EUR467 million due February and August 2025, some of which will benefit from the remaining financial assets proceeds being remitted.
The 3Q23 average cost of debt (1.6% excluding hybrids; end-2023: 1.2%) is expected to increase as policy rates stay higher for longer and the hybrid coupons are reset. Most of Akelius's investment property assets are unencumbered with limited secured debt. Fitch expects the unencumbered investment property asset cover (calculated on investment property only) to be restored to above 2x when proceeds from its financial assets are deployed. At end-2022, the Canadian portfolio's assets were primarily pledged under secured debt funding.
REFERENCES FOR SUBSTANTIALLY MATERIAL SOURCE CITED AS KEY DRIVER OF RATING
The principal sources of information used in the analysis are described in the Applicable Criteria.
ESG Considerations
Akelius has an ESG Relevance Score of '4' for Governance Structure due to corporate governance as it remains privately held by the Akelius Charitable Foundations and by a small share of public ownership in the form of dividend-focused class D shares with lower voting rights. Ownership concentration and an influential founder have not had a negative impact on its governance record, which remains satisfactory. Transparent quarterly reporting is available. Akelius's board comprises three independent and three dependent members. The score has a negative impact on the credit profile, and is relevant to the ratings in conjunction with other factors.
The highest level of ESG credit relevance is a score of '3', unless otherwise disclosed in this section. A score of '3' means ESG issues are credit-neutral or have only a minimal credit impact on the entity, either due to their nature or the way in which they are being managed by the entity. Fitch's ESG Relevance Scores are not inputs in the rating process; they are an observation on the relevance and materiality of ESG factors in the rating decision. For more information on Fitch's ESG Relevance Scores, visit https://www.fitchratings.com/topics/esg/products#esg-relevance-scores.
AKELIUS RESIDENTIAL PROPERTY AB 
