The Swedish Corporate Real Estate Crisis [2022 to ?]

[Dinar]

2 hours ago, Spekulatius said:

@alwaysinvert Thanks for the fantastic background on the Swedish real estate crisis (if it’s even that). Seems quite similar to what is happening in Germany. It’s mostly an issue with valuation and financing due to rising interest rates. Vonovia $VNE.DE  (German real estate co) has a debt to EBITDA of ~16x which seems similar to Castellum 14x. It very high but both have no issue with the asset themselves with virtually all the real estate occupied (Vonovia is at 97.5% occupation) and rising rents, some of which are rent controlled too. VNE also has most financing done via unsecured bonds because they are investment grade.

 

So, what is happening in Sweden plays out in many countries in Europe almost the same way, I think.

Spek, isn't the issue with Vonovia that they cannot push through the energy increases that they have experienced (as much as two months of rent) and also places like Berlin trying to confiscate the property?  There were accounting issues too I believe with Vonovia - capitalizing a bunch of expenses, etc...  Do you like any of the German residential plays?

[Spekulatius]

On 6/3/2023 at 10:30 PM, Dinar said:

Spek, isn't the issue with Vonovia that they cannot push through the energy increases that they have experienced (as much as two months of rent) and also places like Berlin trying to confiscate the property?  There were accounting issues too I believe with Vonovia - capitalizing a bunch of expenses, etc...  Do you like any of the German residential plays?

Yes, Vonovia has a bunch of operational issues. i don’t think the energy issue has played out that badly mostly because of state subsidies. I epxedct this issue to resolve itself since Ng wholesale prices are now back to 2021 level so once those hedges roll off, energy should become much cheaper than even at the start of the Ukraine’s invasion.

 

As for Berlin, there was a referendum in Berlin to have large property companies housing taken over by the city.  60% of the voters agreed to this and now the politicians try to figure out if, how and when they can do something. It won’t be a confiscation, because the property companies will have to be compensated which also begs the question how to pay for this. this is going to tear a whole to dig ire out I think and could end up being a windfall for the property companies as they likely will get compensated reasonably well.

 

Anyways, just reading management transcript does not inspire much confidence in this company and then we have the issue with the horrendous debt as well as the tax leakage for dividends due to withholding for US investors. I think there are easier investment to buy, like US apartment cos that are way less leveraged and much more straightforward.

Edited June 11, 2023 by Spekulatius

[John Hjorth]

Elaboration on what @Spekulatius posted on CRE in Europe more in general :

 

Bloomberg [June 3^rd 2023] : A New Wave of Real Estate Pain Is Coming After European Rout.

[John Hjorth]

We actually alreday have discussion topic for Vonovia in the Investment Ideas forum :

 

 

 

I remember that I back then [2018] cooled a lot after looking at the financing. It reminded me of what has happened to GGP. And now see how Brookfield has fared with x3 averaging down in such stuff [GGP 39% -> GGP 100% -> Taking BPY private]. In that topic there is link to a paper analyzing what went wrong for GGP in the first place.

 

And ref. the information posted by @Spekulatius, has business conditions for Vonovia since worsened materially.

Edited June 4, 2023 by John Hjorth

[SharperDingaan]

17 hours ago, SharperDingaan said:

Agreed, there is nothing like witnessing sheriff auctions; to drive home the importance of always having your downside covered. The upside is that you also become very good at exploiting the positive side of risk, and it has served us very well.

 

Sadly we're already committed to UBS/CS, and will be in there for at least the next year as the various spin-offs go to market. Pretty sure we're going to do very well; if only because the Marx Brothers need to clear the egg of their faces, and can only do it by 'guaranteeing' very successful spin-offs. We have saved tens of thousands of jobs in our banking industry, we have the strongest banks in the entire world, 'swiss finish', etc., etc. ......

 

You might want to keep more cash on hand; check the guaranteed deposit maximums in Sweden, move funds around to get under them; and invest in some long dated puts. When things happen they will happen fast, and most likely over a weekend. Given the chocolate makers poor experience expect to wake up to the Riksbank as a majority partner, and a healthy option gain. Could pay off a mortgage   

 

Take care.

 

SD

 

 

 

Just to make this very clear ...

 

The risk here isn't the bank, it is the sudden transfer in ownership of IB's share of the bank. The strong possibility that it temporarily rocks the market.

I suggest Riksbank as the bank is systemically important, experienced, and well placed to orchestrate a subsequent share sale. Typically the event itself draws a lot of negative press, and a short period of 'phony bank', before greed kicks in. Puts to capture the initial announcement, immediately rolled into long calls right afterward. However, you still need to live while all this takes place; hence staying under deposit insurance caps, and keeping a higher cash balance on hand. Experience.

 

SD

Edited June 4, 2023 by SharperDingaan

[John Hjorth]

Here are screenshots of sheets of The Norwegian Pension fund global holdings of Swedish listed commercial real estate companies :

 

1. Sorted by exposure in NOK :

 

 

2. Sorted by percentage of holding in each separate entity :

 

This is a miniscule exposure, compared to the investment capacity of the fund. It could easily engage here, I think.

 

The fund is materially underinvested in real estate [direct ownership of properties - all outside Norway [not to overheat anything domestic ... - what a luxury constraint, btw.] Naturally somebody must be sitting in Bankplattssen, Oslo, looking to the E/SE about what is going on at and among those obvious poor neighbours, short of cash [at least some them!], that speak exactly as weird as all those filthy rich Norwegians! [, but still a bit different.]

 

- - - o 0 o - - -

 

Supplementary calculation and data :

 

Size of Norwegian Pension Fund Global according to front webpage : NOK 15.4 B T [<-!],

Norwegian population according to World Stats as of today : 5,544,607.

 

Thus every Norwegian newborn child born today is equipped with a pension account - at birth! - of :

 

NOK 15.4 T * [1 / [5,544,607 +1]] = NOK 2,777,473 - and counting!

 

Edited June 4, 2023 by John Hjorth

[John Hjorth]

4 hours ago, SharperDingaan said:

 

Just to make this very clear ...

 

The risk here isn't the bank, it is the sudden transfer in ownership of IB's share of the bank. The strong possibility that it temporarily rocks the market.

I suggest Riksbank as the bank is systemically important, experienced, and well placed to orchestrate a subsequent share sale. Typically the event itself draws a lot of negative press, and a short period of 'phony bank', before greed kicks in. Puts to capture the initial announcement, immediately rolled into long calls right afterward. However, you still need to live while all this takes place; hence staying under deposit insurance caps, and keeping a higher cash balance on hand. Experience.

 

SD

 

When people ask me if I have any money, I grab to the inside of the pockets in my trousers, turning them inside out, not saying anything. In most cases, I'm then left alone for my self. If people then actually proceed - despite that - and ask me what I'm doing [in the meaning : "for a living"], my aswer is simply "nothing".

 

Wikipedia : The Law of Jante.

 

I simply have no real and serious money available, anytime - my experience from 2020 taught me that, as chiseled into a stone. Basically fully invested - all the time. If I had panicked by being down ~35% within a period of approx. a month from late February 2020 to approx. the middle of March 2020 - by selling anything -, I would have screwed up just soo dearly!

 

Our investment bank Nordnet Bank AB is Swedish [listed in Stockholm, btw.] - we are customers in the Danish branch, subject to Danish laws, supervision by both the Swedish and Danish FSA, with both Danish and Swedish "FDIC" coverage [here, in Danish, it's called "indskydergarantiordningen"].

 

So for me, it's actually just a matter of one click to make some cash avaiable, after execution of the selling order the cash is available immidiately. I'm then charged for one or two days days interest related to clearing of [allowed] going above my credit line for margin, which is zero. That's it.

 

I'm not interested in SBB at all as an investment. To me, it's a turd built by an empty suit with a Ph.D. degree. I spend time on this whole complex, and work on it, in the hope to get the opportunity to grab some Swedish CRE with quality, that is mispriced because of the general sentiment, to hold for the long haul. I may fail on this, at least then I've got to know a few interesting companies to engage with on another day, based on the Kjoules I'm spending on it now.

 

- - - o 0 o - - -

 

Yeah, it's frustrating here to be a mere mortal market participant, while having a sense of that a lot is going on behind the curtains in this complex, especially over this weekend. There is nothing to do, other than waiting for some press realease without even knowing from where before market opening here at 9:00 AM tomorrow my local time.

[Spekulatius]

@John Hjorth Maybe you should wait until the crash comes to you in Denmark. I don’t see why it wouldn’t happen there, since echt rising interest rates have an effect everywhere. With real estate , you want to know the terroir so to speak, the closer to home, the better.

 

According to some charts, the household debt in Denmark is one of the largest in Europe so it’s not like there aren’t any potential issues in Denmark.

[realassetsvalue]

As an investor focused on listed real estate, I did some poking around a bunch of these Swedish property company names over the weekend. I tend to be more interested in smaller companies in sectors where the fundamentals are easier to get comfortable with, which I see as being industrial and residential for Sweden as vacancy rates are low, rents are stable and / or rising, and there aren't existential threats on the horizon that you have to get comfortable with. You do have material new supply in each of these sectors, which has to be taken into account...

 

Across the board, the biggest issue for all these cos is that commercial property debt seems to have 3-5 year terms - both bank debt and bonds. This results in a 2-3 year average maturity with most companies seeing material maturities in the next 12 months that will have to be addressed. On the plus side, some of these smaller companies have sensibly eschewed dividends to focus on external growth, which provides for some capacity to delever over time.

 

The question in my mind is how to think about where the opportunities will emerge given (A) the listed sector looks to be significantly over-leveraged and (B) the cross-holdings of these Swedish property tycoons).

 

Focus on babies getting thrown out with the bathwater - smaller listed propcos not tycoon controlled that are selling off as investors flee the sector?

 

Look for consolidators - larger firms that have the capacity to gobble up distressed properties owned by other overleveraged listed propcos?

 

Develop a short-list of cos with good assets but broken balance sheets and be ready to potentially buy opportunistically as they recapitalize their balance sheets (already seeing a number of firms buy back bonds, initiate equity raises )? 

 

Feels like avoiding the battlegrounds - the SBBs, Castellums, Corems, etc. - is worth it for a non-Swedish investor like myself who will always be behind the informational curve...

[John Hjorth]

1 hour ago, Spekulatius said:

@John Hjorth Maybe you should wait until the crash comes to you in Denmark. I don’t see why it wouldn’t happen there, since echt rising interest rates have an effect everywhere. With real estate , you want to know the terroir so to speak, the closer to home, the better.

 

According to some charts, the household debt in Denmark is one of the largest in Europe so it’s not like there aren’t any potential issues in Denmark.

 

@Spekulatius, thanks, 

 

I actually respect the "Church Tower principle" instated here in Denmark for regional banks here in Denmark, projected to Real Estate investments, too [, meaning : "Don't get involved in things you can't see from your local church tower!"] - There is a lot of inner logic and sound reason to it.

 

For me, the case is that Denmark is actually pretty small in that respect, and most of the Danish listed CRE companies have some issues, just not to directly call them crap or sh**cos, that I personally would not touch with a long pole.

 

There is however one - one! - exemption, though. The company name is Jeudan A/S. Website : www.jeudan.dk. And I have owned it for a long time. I have posted a bit about it long time ago here on CoBF, and I sensed no interest at all, so I haven't opened a topic about it here on CoBF, also because there is a language barrier here.

 

Language barrier, untill I actually really checked and tried again today. Attached is a machine translation of the Annual Report 2022 for Jeudan A/S provided for free by using Google Translate, from Danish to English. I have checked the first few pages, It actually looks right to me, a bit to my surprise, I must say. [Awesome!, actually!]

 

Somebody on the other side of Öresund from here could learn a thing or two just by studying what this company has been doing with its financing, just not to say : A lot!

 

The incumbent CFO is not exactly a financial illiterate, I would say. That goes for his now retired predecessor, too. Basically all the financing is based on non-callable [unless default] 30 years long mortage loans on annuity basis with variable interest rates, with several different periods before interest update/renewal/roll-over. On top of that there has been put interest rate swaps in place - close to the rock buttom! - to eliminate I think about 90% of all interest risk on the 30 years non-callable financing for the next 10 years!

 

This company can ride out and endure a vacanacy rate in the area of 50 percent without even having to discussing anything with its banks. Now try to compare that to the margins of safety at its Swedish colleages. There is no comparison.

 

I'm such a happy camper here, with a Berkshire-like return here, without any worries at all. I have never read anything from the company that has disappointed me.

 

It's so easy!, and that is perhaps also an indicator to the direction of the *problem* for me here, which actually is me! I'm simply bored as heck, there is no hurdle for me to just buy more, or in stead of just enjoying the ride, and focusing on somehing else, not in Sweden, and "without hair".

Jeudan AS - Annual Report 2022 - Machine translated by Google Translate from Dansih to English - 20230604.pdf

Edited June 4, 2023 by John Hjorth

[John Hjorth]

Attached is the latest available Annual Report [2021] for Erik Selins personal and private holding company, called Erik Seling Fastigheter AB.

 

In short, it's levered up to the gills.

Erik Selin Fastigheter AB - Annual Report 2021 - 20230603.pdf

[alwaysinvert]

It's unknown exactly how levered Selin is privately, but there aren't any bonds in the structure, which is a major part of the issues that Batljan and Arnhult have. He also previously (?) held 3 million shares in Evolution (+4B)  and got about 700 million from the buyout of SWMA. He also holds about 800 million of Sagax stock which should be quite liquid and which he has cut down in the last few years. There is a bunch of other less liquid holdings, among them the private stake in Collector (+1B), Kfast (1.5B), SLP (700m). His Balder stake is worth 16B at market. There is 7B of short-term debt in the mother company per 2021. All in all, it doesn't seem totally outlandish. 

 

From what I can tell, his issue is Balder and not his holdco.

[John Hjorth]

1 hour ago, alwaysinvert said:

It's unknown exactly how levered Selin is privately, but there aren't any bonds in the structure, which is a major part of the issues that Batljan and Arnhult have. He also previously (?) held 3 million shares in Evolution (+4B)  and got about 700 million from the buyout of SWMA. He also holds about 800 million of Sagax stock which should be quite liquid and which he has cut down in the last few years. There is a bunch of other less liquid holdings, among them the private stake in Collector (+1B), Kfast (1.5B), SLP (700m). His Balder stake is worth 16B at market. There is 7B of short-term debt in the mother company per 2021. All in all, it doesn't seem totally outlandish. 

 

From what I can tell, his issue is Balder and not his holdco.

 

Exactly, gilmour [ @alwaysinvert],

 

Those are some good and material points. It's important to note that the above here uploaded Annual Report for Erik Selins holding company is *history*, because the balance sheet date is now 17 months ago, and likely a lot happens when this is about an entrenant and very transactional guy like these gents. My eyes also caught the enourmous short term bank debt as stated for the time back then. Mr. Selin must have solved it in a for the bank[s] sactisfactory manner, or the company would have been defunct by now - which I can confirm that it isen't. Soon an update on this will be available.

[John Hjorth]

17 hours ago, realassetsvalue said:

As an investor focused on listed real estate, I did some poking around a bunch of these Swedish property company names over the weekend. I tend to be more interested in smaller companies in sectors where the fundamentals are easier to get comfortable with, which I see as being industrial and residential for Sweden as vacancy rates are low, rents are stable and / or rising, and there aren't existential threats on the horizon that you have to get comfortable with. You do have material new supply in each of these sectors, which has to be taken into account...

 

Across the board, the biggest issue for all these cos is that commercial property debt seems to have 3-5 year terms - both bank debt and bonds. This results in a 2-3 year average maturity with most companies seeing material maturities in the next 12 months that will have to be addressed. On the plus side, some of these smaller companies have sensibly eschewed dividends to focus on external growth, which provides for some capacity to delever over time.

 

The question in my mind is how to think about where the opportunities will emerge given (A) the listed sector looks to be significantly over-leveraged and (B) the cross-holdings of these Swedish property tycoons).

 

Focus on babies getting thrown out with the bathwater - smaller listed propcos not tycoon controlled that are selling off as investors flee the sector?

 

Look for consolidators - larger firms that have the capacity to gobble up distressed properties owned by other overleveraged listed propcos?

 

Develop a short-list of cos with good assets but broken balance sheets and be ready to potentially buy opportunistically as they recapitalize their balance sheets (already seeing a number of firms buy back bonds, initiate equity raises )? 

 

Feels like avoiding the battlegrounds - the SBBs, Castellums, Corems, etc. - is worth it for a non-Swedish investor like myself who will always be behind the informational curve...

 

Thank you for a great post here, @realassetsvalue!,

 

It is a very solid basis for discussion of several issues and dimensions in this whole situation that is on my mind and that also I want to discuss. So I will remember it and get back to it in this topic.

 

- - - o 0 o - - -

 

I do not really remember to have read any of your earlier posts here on CoBF, btw, which really puzzles me, considering the number of post of yours. Then I looked at the date of registration, and then I did remember  [!] I was sick like a I don't what in that period of time. I have 7 weeks starting two weeks earlier from whjich actuallly can't remember anything [where at the point in time two weeks earlier we both here in the household buttomed out, my better half panicking because she thought her final hour was approachjing fast!

 

So here also a very belated welcome to CoBF to you, @realassetsvalue! 

[John Hjorth]

The situation for SBB is now tightening :

 

Bloomberg [June 5^th 2023] : A Default Warning From Creditors Preceded SBB CEO’s Exit.

 

Letter sent by law firm Cleary points out covenant breach,

Creditors say open to talks if they conclude by end of June.

[John Hjorth]

Saw this from a guy in Swedish #fintwit - awesome description of the sentiment in Stockholm about this mess! 

 

 

[John Hjorth]

Swedish Affairs World [ June 7^th 2023] : S&P lowers SBB rating once again.

Edited June 7, 2023 by John Hjorth

[alwaysinvert]

Thanks to S&P for informing us all that the barn door is open and the horse left last year

[Luke]

Wrong Thread, my apologies

Edited June 11, 2023 by Luca

[John Hjorth]

Post from @Dinar in the BN topic about SBB :

 

Very short answer here :

 

1. Not interested, and bonds and notes - whatever kind we may talk about - it is not my turf, nor my game, nor my asset class, and it will never be again. I was a bond investor pre GFC, and I have no intention to look back, what so ever.

 

Furthermore :

 

2. I consider SBB as basically flawed by design. The assets of the company are basically long term annuities - inflation adjusted over time, I'll give that - but with some maintenance cost attached to the downside. There is to me no material upside on the assets, it is to me non-existent. Not exactly what I consider a bond to be like, bacuse of the downside. Now look at how great things are going here for SBB, based on the spike in inflation.

 

3. Then there is the issue with dumb leverage on top of that. [Think GGP here]. To invest in these kind of assets with success, patience is needed, and if using leverage, the use af patient debt is needed, on top of that getting the assets at a reasonable price, that is.

 

4. Combine 2. and 3. above, which is actually was has happened, where 2. should provide material upside - isolated. Then look at what happened with the company. Again, the company is flawed, by design.

 

5. Now add the [ab]use [<-?] of IFRS for valuation of properties in the P/L and B/S *pretty actively*, so that some properties are written up in the year of acquisition! [Some work needs to be done on that to chart it, though.] [I will do that, but haven't yet.]

 

6. I certainly take issues with IB, but I'm not going to elaborate on that here, more than what I have already posted in this topic. [Even in a boxing ring there are rules. [You have to go to neutral corner, when your opponent is in the canvas.]]  The behavior of some members of the Swedish Press here is to me so apalling.  If I choose to elaborate on that, it will go into separate topic in about SBB in the Investment Ideas forum, thereby only available for COBF members.

 

Now look at how great things are going here for SBB, based on the spike in inflation. 

 

SBB is to me uninvestable, no matter which financial instrument you look at. The values stated in the reported balance sheets are to me - at least partially - non-existent. What I have done for myself is that I have looked at the Danish properties held by SBB [some of them basically in my backyard, so to say, and I can see just about everything about anything there related financial state, fiknancing, running operations,  liquidity etc. because I have access all the financials of the non-listed SBB subs holding the Danish properties, [recipe : One property - one company] and I can just say, that I would not be willing to own any of those subs, not even on my loo for free.

 

It's to me a giant *POS*, - plain and simple. And thus, it's collapsing. First gradually, then suddenly.

 

- - - o 0 o - - -

 

Part one of Johns adventure into bonds:

 

I was a bond investor pre GFC. I even thought I was good at it!  - Not! To me, at least I thought - It worked very well, - untill it didn't. I was investing in bonds in tax deferred accounts that I de facto really couldn't afford because of basically fairly high income, miniscule savings and too high spending on all kinds of things of *BS* like cars, Italian shoes, silk shirts, expensive ties, suits, *now show me you love me* bling to the GF and I don't know what, investing in these bonds with the use of bank debt. No sweat. Turn a whip-saw so it has its teeths upwards, and hold it in this inverted state by the grib and point it in a 45^o angle up to the right. That is actually a fairly good description of the loan balance over time.

 

- - - o 0 o - - -

 

Part two will be another day here on CoBF from me. Somehow I managed not only to survive these very bad and selfinflicted calamities in a period, but also to get back and get forward.

 

I actually think of this whole situation for SBB as if IB is similar in behavior to me [the "former John", that doesn't really exist any more], back then. So please consider me extremely biased here.

 

- - - o 0 o - - - 

 

@Dinar, can we go to the BN topic - each for ourselves - in the Investment Ideas forum and delete our own SBB related posts there now, - to fix our own mess there, please?

Edited June 11, 2023 by John Hjorth

[John Hjorth]

A bit more here to describe the sentiment in the Swedish part of #fintwit :

 

 

This kind of really morbid and extremely sarcastic humor fits my own personality perfectly!  Mental survival by joking and poking things around - but never forget that is actually also a serious matter! Among Danes i's called "Skæg for sig, og snot for sig", which translates to : "Separate fun from snot", each need their own separate time.

[John Hjorth]

Fastighetvärlden [June 13^th 2023 ] : 29 players to a crisis meeting with the minister.

 

To me personally, we are now at desparation with regard to market sentiment. This reminds me of FEDs crisis meeting with the bosses of the big US banks under the GFC.

 

Duly noted that Erik Selin or another representative for Balder and a representative for SBB are not among the invited. -Signal value?

[John Hjorth]

So much for that :

 

Sweden : So much for that.

[realassetsvalue]

An Ilija Batljan domino has dropped - his HoldCo (Ilija Batljan Invest AB) sold the entirety of its interest in publicly-listed Logistea AB to Slatto, a Swedish real estate private equity manager focused on residential and logistics / industrial real estate. Logistea is a logistics-focused small-cap propco. The shares were sold at SEK 10.79 per share and the shares traded up ~3% - 5% on the news (A and B Shares respectively - differ often as both are pretty illiquid). Sale is subject to an 18 month repurchase option for half of the shares on the part of Ilija Batljan Invest AB.

 

Press release: https://www.ilijabatljaninvest.com/en/forsaljning-av-aktier-i-logistea-ab/

 

Other major Swedish RE interconnected shareholders - M2 (Rutger Arnhult), which has significant debt issues, and Dragfast, which does not - are significant owners of Logistea so there may be more shoes to drop.

[John Hjorth]

The whole complex related to the listed Swedish companies involved in the Swedish CRE market is still evolving day by day. It's impossible for me to keep up by posting in this topic on what's going on in detail.

 

For me, the purpose of this topic is to share, while focusing on long-only investment opportunities for the long term. I'm not anywhere near yet, considerig risks versus price.

 

I have for any purpose already ditched SBB, ref. my post above of June 11^th 2023, but I'm not any longer the only one speculating about accounting fraud related to IFRS accounting for investment properties for SBB :

 

SBB Press Release [June 22^nd 2023] : Comment on the Swedish Financial Supervisory Authority´s investigation of SBB´s application of international accounting standards.

 

- - - o 0 o - - -

 

Likely, my next post in this topic may end up being about Wallenstam AB [WALL B.STO] and its CEO.