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Rating Action:

Moody's upgrades Kungsleden to Baa3 from Ba1; outlook stable

20 Jun 2019

NOTE: On September 19, 2019, the press release was corrected as follows: The following was added to the beginning of the third paragraph of the REGULATORY DISCLOSURES section: “With reference to the withdrawal of the rating of Kungsleden AB: ” Revised release follows.

NOTE: On September 12, 2019, the press release was corrected as follows: The following sentence was added as the third paragraph of the REGULATORY DISCLOSURES section: “The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.” Revised release follows.

Stockholm, June 20, 2019 -- Moody's Investors Service ("Moody's") has today upgraded Swedish real estate company Kungsleden AB (Kungsleden), assigning a long-term issuer rating of Baa3. Concurrently, Moody's has withdrawn Kungsleden's corporate family rating (CFR) of Ba1 following its upgrade to Baa3, as per the rating agency's practice for corporates with investment grade ratings. The outlook on the rating has been changed to stable from positive.

"The upgrade to Baa3 reflects Kungsleden's continued focus on improving asset quality through acqusitions and redevelopment of properies, increasing exposure towards its four focus cities that are benefitting from a currently positive economic environment and strong property fundamentals. The re-building of its portfolio has been done while maintaining a fairly conservative financial profile, exemplified by a Moody's adjusted debt/asset ratio below 50% and interest cover above 4x" says Maria Gillholm, a Moody's Vice President -- Senior Credit Officer, and lead analyst for Kungsleden. She continued saying that "Kungsleden's successfull strategy execution over the last years provides comfort that credit metrics will continue to gradually strengthen over the next quarters while we believe that robust financial policies will help protect its credit profile also in a potential softening of the real estate cycle".

RATINGS RATIONALE

Kungsleden's Baa3 rating primarily reflects the improving quality and geographical diversification of its commercial property portfolio, which was valued at SEK35.4 billion as of 31 March 2019. The company's properties are increasingly concentrated in clusters in attractive inner-city locations and good secondary locations in or around growing Swedish cities, which together account for about 50% of the country's population. Properties in Stockholm County make up the largest share of the portfolio's value at 47% while the Stockholm inner-city location is 18%. The company has continued divesting of noncore assets and the company's strategy of focusing exclusively on the four growth markets of Stockholm, Göteborg, Malmö and Västerås is credit positive. Kungsleden's controlled development programme and few high quality acquisitions will continue to gradually enhance its portfolio, while a good weighted average lease maturity of 4.1 years, which has increased from 3.9 years as of December 2017, provides rental income visibility. The company has also executed its refinancing plan faster than we expected. Thus, its unencumbered assets increased to 32.1% as of 31 March 2019 from 2% in September 2017. Another credit strength is Kungsleden's strong fixed charge coverage of 4.2x. We expect leverage, as measured by total debt/gross assets, to improve towards 45% from its current level of 48% over the next 12-18 months.

Counterbalancing these strengths are (1) the office portfolio being mostly located in secondary locations of Sweden's largest cities, which account for 66% of rental value; (2) the company's exposure to industrial/warehouse properties (22%), although they have relatively long leases and creditworthy counterparties such as ABB Ltd. (A2 negative); (3) the moderately high vacancy rate of 7.2% excluding development properties (8.8% including development properties), especially in view of the mature stage of the property cycle; (4) some tenant concentration and (5) a high net debt/EBITDA of 11.2x as of March 2019.

RATING OUTLOOK

The stable outlook reflects our expectation the company will continue to gradually improve its effective leverage, as measured in terms of gross debt to assets closer towards 45% over the next coming 18 months, while continuing to expand its pool of unencumbered assets to the upper end of 35-40% when refinancing bank debt. The stable outlook also incorporates our expectation that Kungsleden will continue to generate stable cash flow that will support gradually declining net debt/EBITDA; increase occupancy levels and continue to rebalance the portfolio toward large, well-located high quality office properties while following a balanced growth strategy. In addition, the outlook reflects the good macroeconomic environment in Sweden as well as favourable occupier and investment markets.

FACTORS THAT COULD LEAD TO AN UPGRADE

» Any rating upgrade is predicated on the company expanding and enhancing the size and quality of its real estate portfolio, while sustaining leverage well below 45%, as measured by Moody's-adjusted gross debt/assets, and observing financial policies that support the lower leverage.

» Sustaining a well spread debt maturity profile and refinancing secured borrowing with senior unsecured lending, leading to an increase in unencumbered assets to closer towards 50%

FACTORS THAT COULD LEAD TO A DOWNGRADE

Downward pressure could occur if:

» The company's operating performance deteriorates or property market fundamentals weaken sharply without being

counterbalanced by lower leverage

»Gross debt/total assets rises to around or above 50% on a sustained basis or EBITDA/fixed charge coverage drops below 3.5x on a sustained basis

» Liquidity weakens or reliance on short-term debt increases

» Market fundamentals weaken, resulting in falling rents and/or asset values

The principal methodology used in these ratings was REITs and Other Commercial Real Estate Firms published in September 2018. Please see the Rating Methodologies page on www.moodys.com for a copy of this methodology.

REGULATORY DISCLOSURES

For ratings issued on a program, series or category/class of debt, this announcement provides certain regulatory disclosures in relation to each rating of a subsequently issued bond or note of the same series or category/class of debt or pursuant to a program for which the ratings are derived exclusively from existing ratings in accordance with Moody's rating practices. For ratings issued on a support provider, this announcement provides certain regulatory disclosures in relation to the credit rating action on the support provider and in relation to each particular credit rating action for securities that derive their credit ratings from the support provider's credit rating. For provisional ratings, this announcement provides certain regulatory disclosures in relation to the provisional rating assigned, and in relation to a definitive rating that may be assigned subsequent to the final issuance of the debt, in each case where the transaction structure and terms have not changed prior to the assignment of the definitive rating in a manner that would have affected the rating. For further information please see the ratings tab on the issuer/entity page for the respective issuer on www.moodys.com.

For any affected securities or rated entities receiving direct credit support from the primary entity(ies) of this credit rating action, and whose ratings may change as a result of this credit rating action, the associated regulatory disclosures will be those of the guarantor entity. Exceptions to this approach exist for the following disclosures, if applicable to jurisdiction: Ancillary Services, Disclosure to rated entity, Disclosure from rated entity.

With reference to the withdrawal of the rating of Kungsleden AB: The rating has been disclosed to the rated entity or its designated agent(s) and issued with no amendment resulting from that disclosure.

Regulatory disclosures contained in this press release apply to the credit rating and, if applicable, the related rating outlook or rating review.

Please see www.moodys.com for any updates on changes to the lead rating analyst and to the Moody's legal entity that has issued the rating.

Please see the ratings tab on the issuer/entity page on www.moodys.com for additional regulatory disclosures for each credit rating.

Maria Gillholm
VP - Senior Credit Officer
Corporate Finance Group
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Matthias Hellstern
MD - Corporate Finance
Corporate Finance Group
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

Releasing Office:
Moody's Investors Service (Nordics) AB
Norrlandsgatan 20
Stockholm 111 43
Sweden
JOURNALISTS: 44 20 7772 5456
Client Service: 44 20 7772 5454

No Related Data.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.

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