I en värld av makroekonomisk osäkerhet - En scenarioanalys kring ränte- och inflationsförändringars inverkan på ett fastighetsbolags fria kassaflöde

Abstract

Title: Valuing Real Estate FCFE and interest coverage under macroeconomic uncertainty with scenario analysis

Authors: Marcus Ewerstrand, Jakob Mattsson

Advisor: Gert Sandahl

Background and problem: After the collapse in the Swedish economy in the beginning of the 1990-ties, the company Secerum was launched. Securums objective was to handle unsecured credits from Nordbanken by transferring a large portfolio of properties and to setup a number of companies who would be in charge for the prospects of these assets. One company that was established during this remarkable period was Castellum, in the year of 1994. After a successful process of raising capital to its development of corporate strategies and formation of several affiliated companies which operates locally, Castellum was publish on the Stockholm stock exchange 1997/1998. Now, thirteen years later after its establishment, the credit crunch in the US. and the turmoil on the financial markets has made a severe impact of the largest banks in both the US. and Europe. In Sweden, the central bank tries to deal with higher inflation at the same time as they project a downturn in the economy. Therefore, when the macroeconomic uncertainty is great, in general it makes the real estate businesses exposed to financial disturbances. If the interest and inflation rate change it may result in financial losses and lower profitability. The free cash flow to equity holders (FCFE) and the interest coverage ratio for creditors may decline as the company cannot maintain the high growth rate in cash flow and the required rate of return.

Purpose: Our purpose with this bachelor thesis is to describe and present know-how for the macroeconomic uncertainty in interest and inflation rate that affects the free cash flow to equity (FCFE) and interest coverage for creditors of a real estate company.

Method: First the shareholders’ required rate of return for Castellums stock is calculated by the Capital asset pricing model (CAPM). Then we use it to discount the free cash flow to equity. After this stage we show by processing different scenarios how changes in interest and inflation rate may affect the free cash flow to equity and interest coverage ratio for creditors. Moreover, in order to capture the insights of the company with its outlook of threats and possibilities together with risk management, an interview with the chief financial officer of Castellum, Anette Engström is carried out.

Conclusions: Interest rate changes have a larger effect on the FCFE and an even greater impact on interest rate payments than inflation rate changes. Interest rate changes at one percent result in +/- 10% change in FCFE. Same interest rate change results in a decrease of interest rate coverage ratio with approximately 40%. Our findings suggest that the interest rate levels which have been tested thoroughly by using different scenarios, does not result into any problem for the real estate company when it comes to the payment of creditors. Finally, the study show that the interest rate coverage can be hold even at substantially higher interest rates levels although the shareholders’ required rate of return can be hard to fulfill in periods where the macroeconomic conditions are unfavorable.