Nyfosa AB: a recovery

Key financial metrics

Company overview

• Nyfosa AB is a Swedish commercial real estate landlord.

• Nyfosa generates revenue by leasing out their commercial property portfolio.

The portfolio consists of:

• 44% Office

• 16% Warehouse

• 16% Retail

• 24% Other

Geographically, Nyfosa is based entirely in Scandinavia, primarily in Sweden.

Thesis overview

NYF is trading at depressed P/TBV multiples (~22% below long-term median) due to paper losses on their property portfolio (real estate value fluctuation due to interest rate hike cycle).

The graph above shows how P/TBV (price to tangible book value) oscillates around a median point of ~1x.

What drives these oscillations is twofold: 1) Economic sentiment 2) Interest rates. The P/TBV premium deteriorated in 2020 due to housing market pessimism driven by lockdowns, while the most recent deterioration is due to the interest rate hike cycle.

Nyfosa is currently trading at a ~22% discount to median historical P/TBV, even though the rate hike cycle in Sweden has been paused by the Riksbank. This has shrunk from a ~40% discount just a few weeks ago. The continuation of mean reversion to long-term median P/TBV in the event of stabilizing / falling interest rates will be driven by shifting market sentiment around European housing. This sentiment shift will be driven by the calmer inflation prints and recovering mortgage volumes across Europe.

This discount is unjustified in the long-term.

• NYF is a fundamentally strong business in terms of operating income and FCF conversion (15% YoY NOI growth for FY23E, 27% FY23E FCF conversion).

• Paper losses are dissipating due to a stabilizing Swedish property market driven by a pause in rate hikes and subsiding European inflation.

The graph above displays Sweden’s house price index (HPI) – a proxy for real estate values. As early as July this year, it has already begun stabilizing as interest rate hikes have incrementally slowed and been put on hold.

Sweden interest rates:

The graphs above visualize the divergence between NYF’s fundamental operating performance and their quarterly net income.

This is driven by the ‘Unrealized changes in value’ (paper losses) line item.

These quarterly mark-to-market price fluctuations are not a long-term concern for the company.

As property prices continue to stabilize, this line item will go from materially negative to neutral/positive. This will allow NYF’s strong fundamental NOI performance to drive net income performance without being overshadowed by these paper losses.

Interest rate cuts to drive further upside with property value recovery in the long-term:

• Riksbank rate cuts are expected to occur in mid-2024 by the market.

• Even if cuts occur in 2025/56, they are still likely to occur due to Europe’s economic stagnation.

• The cuts may not immediately affect property prices, but they will affect market sentiment and flow into a P/TBV ratio recovery.

Summary

Stabilizing inflation, stalling rate hikes -> shifting market sentiment + paper loss recovery -> EPS recovery + P/TBV multiple recovery -> 6% base case IRR.

Company analysis

Management:

• All board members and senior executives have over 10 years of industry experience. This means that they have all experienced cycles in the industry, better equipping them to respond to the current downturn and future cycles.

• Only one of seven board members holds a material shareholding.

• All senior executives hold a material shareholding ($400k – $1.6m). This is through an incentive program where execs are granted warrants to align incentives with shareholders.

Business:

NYF is consistently profitable due to the simple unit economics of being a landlord.

NYF’s net income margin fluctuates greatly (49% in 2022 vs 26% in 2026E) depending on fluctuations in property values.

I conservatively assume a completely neutral change in the Swedish property market for 2024, followed by gradual recovery in 2025-26 as interest rate cuts begin to affect market prices.

Balance sheet:

• NYF is at 9.3x net debt / EBITDA. This is lower leverage than 12.2x in 2021. NYF has been deleveraging since the higher-rate regime took hold.

• 9.3x net debt / EBITDA is significant on an absolute basis, and will limit NYF’s ability to drive inorganic growth / leveraged property acquisitions in the future. However, the thesis does not depend on NYF driving massive net income growth. Rather, it relies on net income recovering to less than 50% of its 2021 level.

Industry:

The Swedish commercial real estate industry as a whole is not attractive or unattractive, it is really a neutral.

This is because it suffers from low single-digit growth rates, however it boasts 10%+ median net income margins and a stable legal/regulatory environment as well as robust (90%+) median occupancy rates, even through the pandemic.

Interest rate sensitivity:

There is a moderately strong (r=-0.53) negative linear relationship between Nyfosa’s P/TBV ratio and interest rates.

Valuation

NYF has a marginally higher 3y revenue CAGR than the median of comps. It has a far higher (2.5x+) 2026E net income margin. This means that it is both growing faster and more profitably than its peers. Despite this, it trades at a slight discount to comps due to its exposure to office space. NYF has delivered this superior growth and profitability in spite of exposure to office rentals. I forecast NYF’s occupancy rates to shrink to 90% from their peak at 95% in 2021. Despite this net income growth in the base case still works out to an annualized 28% from 2023-26E driven by subsiding paper losses and strong operating performance.

I assume zero multiple re-rating from 23-26E despite an expected lower rate regime. This is purely to keep valuation assumptions conservative.

I expect a base case IRR of 6% and a bear case / bull case (risk/return ) of 1.9x. This means that although longing NYF may not provide outsized absolute returns, it can deliver compelling risk-adjusted returns.