~60-70% below peers on P/EPRA NRV ’22-‘24e
Cost inflation mostly forwarded to tenants
We note that ~half of OP’s property portfolio is located in electricity area SE3, ~half in SE4 and the remaining ~10% in SE1+2. However, due to its commercial exposure and its previous emphasising of handing most property-related costs to tenants, we assume a limited (~2.5% higher opex) effect. Moreover, its commercial exposure should see substantial rental uplifts from inflation-linked indexation and we forecast 6% and 4% in ’23e and ‘24e (3% and 2.5% previously). This positive effect is somewhat mitigated by our moving forward the completion of a ~SEK 1bn industry/logistics acquisition from mid-Q3 to mid-Q4 (announced in May) due to the lack of communication from the company about the completion of this deal.
Estimate cuts due to updated interest rate assumptions
The large cuts to our CEPS estimates come on the back of updated interest rate assumptions in accordance with the Riksbank’s new (September) rate path: We move CEPS from -0.20 to -0.77 in ‘23e and -0.12 to -0.52 in ‘24e. The EPRA NRV estimate changes stem solely from decreased cash earnings.
Potential covenant breaches and hefty NAV discount
With its history as a property manager reaching back to just Q4’20, historical averages are irrelevant, in our view. Compared to similar peers, OP is trading ~60-70% below on P/EPRA NRV in ’22-‘24e. High interest rates and limited investor confidence work against OP as a portfolio expansion, with better lending terms and profitability thus becoming difficult. Another downside factor is the potential covenant breach of its SEK 800m unsecured bond, where we see that NOI (in the reported earnings capacity) needs to improve by 24% in Q3e (from Q2’22) to reach 1.25x ICR and by 49% in Q4e when the ICR requirement moves to 1.50x. Upside factors include that the light industrial segment seems to be ...
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