Magnolia Bostad Key data - Nordea Markets...Magnolia Bostad 12 December 2017 Marketing material commissioned by Magnolia Bostad 4 Source: Company data and Nordea Markets Source: Company

Commissioned research Construction and Real Estate | Sweden 12 December 2017

Marketing material commissioned by Magnolia Bostad 1

Magnolia Bostad Waiting for the blooming season

Low counterparty risks

Magnolia has limited counterparty risk since it divests its rental units to strong financial partners and secures production costs prior to project starts. Building rights portfolio and agreements add strength Substantial investment in the building rights portfolio and securing development rights (options), together with framework agreements with customers, should underpin the short‐term outlook on volume and earnings. Volatile profit accounting and uncertain long-term outlook Magnolia’s profit accounting is front‐heavy compared with peers and tied to signed contracts rather than ongoing production due to its lower operational and financial risk, although this elevates volatility and makes earnings more sensitive to sold units on a quarterly basis. Valuation Differences in risk, exposure and accounting among peers make it difficult to justify a plain comparison of multiples. In addition, valuation multiples trade on very different levels and using peer multiples yields meaningless ranges for Magnolia Bostad’s fair value. We base our fair value on a combination of scenarios in a DCF framework. Adding sensitivity to our base case as well as accounting for possible downside scenarios, we reach a range of fair value from SEK 47 to 97 per share.

Key data

Absolute and relative performance

Source: FactSet and Bloomberg

Valuation approach

Source: Nordea Markets

Source: Company data and Nordea Markets

Country Sweden Bloomberg MAG SS Reuters MAGNO.ST Share price 55.50 Free float 24.6% Market cap (m) SEK 2,099 Website magnoliabostad.se Next report date 22 February 2018

50

70

90

110

130

Dec 16 Mar 17 Jun 17 Sep 17 Dec 17

OMX Stockholm PI Magnolia

-1M -6M -12M YTD Absolute -16% -37% -42% -42% Relative -16% -34% -51% -51%

SEK47

SEK97

30 50 70 90 110

Mul

ti-sc

enar

io D

CF

Summary table - key figures

SEKm 2015 2016 2017E 2018E 2019E 2020E 2021E

Net sales 876 1010 1511 1634 1736 1848 1990

- growth n.m. 15% 50% 8% 6% 6% 8%

EBIT 205 355 286 499 524 555 601

- margin 40.8% 35.2% 18.9% 30.5% 30.2% 30.0% 30.2%

EPS 8.07 5.86 3.55 9.11 9.42 10.18 11.51

- growth n.m. -27% -40% 157% 3% 8% 13%

DPS 1.00 1.75 1.75 2.28 2.36 2.55 2.88

P/E 22.2 16.4 15.9 6.2 6.0 5.5 4.9

EV/EBIT 11.1 13.5 13.9 7.4 6.7 6.0 5.3

EV/Sales 4.5 4.7 2.6 2.3 2.0 1.8 1.6

RoE 61.8% 28.9% 15.0% 32.2% 26.5% 23.7% 22.4%

Div. yield 1.2% 1.8% 3.1% 4.0% 4.2% 4.5% 5.1%

FCF yield -4.7% -3.4% -27.8% 15.2% 12.8% 12.5% 13.0%

ND/EBITDA 1.8 2.8 5.8 2.8 2.3 1.8 1.4

Magnolia Bostad 12 December 2017


Table of contents

Factors to consider when investing in Magnolia Bostad ................................................................... 3

Valuation ........................................................................................................................................... 7

Company overview ......................................................................................................................... 11

Project portfolio ............................................................................................................................... 20

Macro outlook ................................................................................................................................. 24

The Swedish residential real estate market .................................................................................... 25

Peers ............................................................................................................................................... 37

Historical financials ......................................................................................................................... 43

Estimates ........................................................................................................................................ 49

Risk factors ..................................................................................................................................... 53

Reported numbers and forecasts .................................................................................................... 56

Disclaimer ....................................................................................................................................... 62



Factors to consider when investing in Magnolia Bostad

Magnolia Bostad develops and divests mainly rental apartments to reliable financial institutions with mitigated development risks as it secures construction costs with the divestment. One key uncertainty is related to the timing and quantity of divestments, partly due to a profit accounting method that appears front-end-heavy compared with peers but comes with lower risks. Delayed cash flow compared with earnings could hold back growth and is a matter of concern currently. The probability and possibility to convert rental apartments to tenant-owned projects will likely remain low and be less profitable given the poor sentiment to tenant-owned prices and demand. However it is important to point out that projects are almost always started out as rental projects with potential of conversion as a sign of demand with unchanged low financial and development risks for Magnolia. Conversion of cash from old projects and delivery in line with the outlook of divesting 3,000 units annually implies an attractive earnings outlook and potential to fair value.

Rental business model Divesting projects for construction; currently has a portfolio of ~16,257 units

Magnolia develops rental apartments to divest to financially strong institutions while

securing construction costs, which helps to limit both financial and development risks.

The company has successfully found a niche which was previously held by construction

companies and internal development organisations of the institutions. The company

holds building rights and development options to produce ~16,257 apartments currently,

which has grown from 11,190 units in 2016. This improves transparency regarding

potential volumes and supports the company’s target to divest and start 3,000 units

annually, assuming demand remains unchanged.

The company has also become known for selling rights in close conjunction with purchase

Historically, the company also has been successful in delivering “Magnolia” projects,

divesting units in close connection with the acquisition of building rights while still

delivering 10% profit margins. As only a part of development costs go on Magnolia’s

books, 10% on the entire development might correspond to 20‐35% EBIT margin in

Magnolia’s books.

The company aims to convert 25% of rentals to tenant-owned, though probably slowed by current sentiment

In addition to rental apartment development, recent strong pricing trends have

suggested that there is an opportunity to convert some apartments to tenant‐owned, late

in the production process. The company targets potential of 25% conversion with

substantially higher profitability. Unfortunately, the cool‐down of the tenant‐owned

market in Sweden during the last six to nine months will likely limit these conversions

over the coming years and we only include long‐term conversions of up to 7% in our

estimates.

Diversification in hotels and care under way

The company aims to diversify the business by developing both care housing and hotels.

The portfolio has currently a few projects relating to hotels and a substantial number of

projects with care housing.



Source: Company data and Nordea Markets Source: Company data and Nordea Markets

Sensitivity to volume and profit/unit should be considered as it provides both an upside and downside to our estimates and might be positively correlated

The rental model is sensitive, on both the up and down side, to volumes and profit per unit that Magnolia can achieve. If yields are rising, all else equal, real estate prices would drop. In this atmosphere, it could be hard for Magnolia to keep a) its ~10% margin and b) the sales price on which the margin is applied. In other words, both prices and the margin on those prices could come under pressure. Magnolia has an advantage in this market situation, however, as demand for tenant‐owned decreases, it could be reasonable to assume that demand for rentals increases (ie Magnolia’s main exposure). Lower demand in general could lead to decreased costs for construction and land, allowing Magnolia to defend its margin, despite decreasing sales prices. In any case, we find studying the sensitivity of profit per unit and volumes to be vital in these market conditions. Below is a sensitivity analysis for our 2019 EPS estimates (our base case estimate is in bold).

Source: Nordea Markets and company data

Front-end-heavy profit accounting Profit accounting is front-end heavy and volatile between quarters, but might be reasonable as construction occurs after sale, outside the Magnolia group with lower counterparty risk

Magnolia profit accounts when it has signed a contract to divest rental units (to

financially strong institutions) and has secured construction/development costs for the

project. This profit accounting stands out as front‐end‐heavy compared with other

residential development peers that mainly use percentage‐of‐completion adjusted for the

sales rate in projects. The profit accounting method elevates volatility between quarters

but since the financial counterparty risk is lower and all costs are matched, we believe it

should be seen as a timing risk rather than an execution risk. The accounting method

also implies that there is a substantial delay between the reported earnings contribution

and actual cash flow from a project, which elevates the perceived financial risk on the

balance sheet when the company starts projects.

Estimated split of building rights, number of units Vision of future production mix

Care19%

Residential75%

Hotel6%

Rental apartments

67%

Rental. converted to tenant-owned

23%

Direct tenant-owned10%

EPS '19 sensitivity

Number of NDA MAG NDA/MAG half Portfolio

2800 3000 1500 2115

270 270 270 405

50 200 50 300

NDA MAG NDA/MAG half Portfolio

0.12 6.5 8.0 3.2 4.3

0.13 7.2 8.9 3.6 4.9

0.14 8.0 9.7 4.1 5.4

0.15 8.7 10.6 4.5 5.9

0.16 9.4 11.4 5.0 6.5

0.17 10.1 12.3 5.4 7.0

0.18 10.9 13.1 5.9 7.6

Residentials

Care

Hotels

Gro

ss

pro

fit

pe

r u

nit

, S

EK

m

“NDA” is based on our 2019 volume estimates, “MAG” is based on Magnolia’s communicated volume potential, “NDA/MAG half” are NDA estimates but half MAG for residential developments, “Portfolio” is based on the building rights portfolio part to be sold in 2019.




Reliable investors and strategic purchase agreements with Slättö Slättö agreement constitutes ~7,000 units divested over the next 3-4 years, while investors in rental projects currently under construction are also institutional and reliable

The strategic purchase agreements create solid fundamentals for earnings base of at

roughly 7,000 divested apartments in 13 projects over the next 3‐4 years. The deal is

worth SEK ~7‐14bn. Rental apartments already sold have been sold to institutional

investors that we find reliable in terms of expected future cash flow. The strong market

for rental apartments has supported strong growth for Magnolia and although the

purchase agreements should limit downside risks, rising yield requirements and a too‐

high supply of rental units could come under pressure, especially in the light of the

currently hesitant tenant‐owned market and prices. On a positive note, however,

declining tenant‐owned volumes might stabilise cost inflation and open up for lower

production costs, which could compensate for higher yield requirement from

institutional investors.


Pending changes to taxes already partly discounted in transactions Changes to tax deductibility possibly affecting future yields, but more or less priced in by the market

There are several pending proposals for corporate taxes related to both interest deductibility, gains tax from divestments (Packaging) and lower overall corporate tax rate (20% from today’s 22%). All in all, these changes might imply that Magnolia needs to carry a higher part of the deferred tax generated in the developments and or create volatility in the transaction market with higher yield requirements. The market has already adapted to most of these changes and it is partly mitigated by a lower corporate tax rate and higher tax deductible depreciations. We assume that tax will start to be paid in 2019, reaching 8% in 2020 with 10% as the long‐term tax rate.

Accumulated accounting of Cash flow (per quarter) percent of total Accumulated accounting of EBIT (per quarter) percent of total

-150%

-100%

-50%

0%

50%

100%

1 2 3 4 5 6

Magnolia - Converted Magnolia - Rental

POCxSold ratio Completed contracts

0%

20%

40%

60%

80%

100%

1 2 3 4 5 6



Investors and number of units¹, sold² & under construction Split of the current rights portfolio, number of units

1. Total number as of Q3 '17 is 4,626 units.

2. For TO associations, 4 units where unsold as of Q3 '17.

TO association

4%

Alecta13%

Heimstaden7%

SEB23%

Slättö22%

SPP23%

Viva3%

Viva Bostad5%

Slättö agreement

51%

No contracted

investor49%



Proven business model to be tested in a tougher environment Magnolia has a successful history in mainly the rental space, but we now see rental development at historically high levels and problems facing tenant-owned developers

Magnolia has successfully found a niche to develop and divest rental apartments,

meeting pent up demand for residential rental properties. The strong market for

residential apartments has come under pressure though, due to an increased supply of

both rental apartments and especially tenant‐owned apartments – foremost in the

secondary market – which has led to higher lead times to divest projects and lower

prices of primarily tenant‐owned apartments. The key question mark for Magnolia is

connected to the stability of its business model based on record‐high volumes and

whether demand will remain high when interest rates normalise. Structural divestment

agreements create a base volume and reduce downside risks, and the company’s ability

to find attractive building rights and capture scale advantages related to construction

costs should also partly compensate for higher yield requirements.

Valuation Peers multiples are too dispersed in the market

A peer‐based valuation using multiples seems to be an unreliable approach given the broad range of peers’ multiples in the current market environment. Furthermore, differences in risk, exposure and accounting among peers make it difficult to justify a plain comparison using multiples alone.

We rely on several DCF scenarios…

Instead, we rely on a multi‐scenario DCF approach. Adding sensitivity to our base case,we reach a range of SEK 74 to 121, where we accept the mid‐point of SEK 97 per share as the upper boundary to our fair value range.

…accounting for several possible views on the company’s future, yielding a range of SEK 47 to SEK 97 per share

We also simulate one, in our view quite extreme, non‐going concern scenario where the current building rights portfolio is being sold off and the company closed down afterwards, reaching a value of SEK 34 per share. Furthermore, we simulate a scenario where Magnolia reaches half of its communicated potential within residential development, leading to a SEK 60 per share valuation. We find the former scenario (“project portfolio”) too extreme for the lowest fair value, while the latter (“50% scenario”) is too high for the lowest fair value. We therefore take the mid‐point of SEK 47 per share as the lower bound of our multi‐scenario DCF value, arriving at a fair value of SEK 47 to SEK 97 per share.

Source: Thomson Reuters and Nordea Markets

Risk factors See “Risk factors” on page 53

We believe one should consider operational, financial and regulatory risks such as taxation, ownership structure, key personnel, financing capabilities, volume and demand risk. For a more comprehensive list, see “Risk factors” on page 53.

Valuation approach

30

19

8

0

74

34

47

92

63

101

76

121

60

97

56

0 50 100 150

P/E 17-19E - Broad

P/E 17-19E - Narrow

EV/EBIT 17-19E - Broad

EV/EBIT 17-19E - Narrow

DCF

Project portfolio+ 50%scenario

NDA fair value

Shareprice



Valuation

We argue that the valuation of Magnolia fundamentally will be related to a DCF-based approach based to some extent on the building rights portfolio. The different financial risk among peers and timing from divestments makes P/E and EV/EBIT valuation approaches very sensitive to volume assumptions, which could be delayed or pulled forward between years. Valuation for residential development peers focused on the tenant-owned market has come under pressure following delayed selling processes and lower prices in the secondary market. Our multi-scenario DCF arrives at a fair value of SEK 47 to 97 per share.

DCF-based approach Our valuation approach is primarily based on a DCF framework

One of the most common ways to value the attractiveness of an investment opportunity is the discounted cash flow (DCF) method. A DCF model discounts all available cash flows for equity, bond and non‐equity holders at the weighted average cost of capital (WACC). In other words, WACC represents a blended cost of capital for all invested capital in the company. In fundamental terms, a DCF framework is built on three parts:

Discounting the company’s free cash flow at WACC.

Identifying the value of debt and other non‐equity claims on the enterprise value.

Deducting all claims to determine the value of the common equity. The fair value per share is then simply calculated by dividing the equity value by the number of outstanding shares.

Among academics and practitioners, DCF valuation is commonly considered the best way to capture the underlying fundamental drivers of a company such as cost of capital, growth rates, reinvestment rates etc. If applied correctly, it represents the best way to approximate the true intrinsic value of a company. The main appeal of a DCF framework compared with other valuation methodologies is that it also focuses on streams of cash rather than accounting earnings. Its main disadvantage is its relative sensitivity to changes in input values.

Multi-scenario DCF at SEK 47-97/share with WACC of 8.7%; drivers are longer surplus period, margins and units sold/converted

We value Magnolia with a multi‐scenario DCF approach and arrive at SEK 47‐97. We assume a WACC of 8.7%. Margin development in the estimate period, project divestments higher than our estimates, delayed divestments process and successful investments of building rights (prolonged surplus period) will act as important value drivers to our fundamental DCF model.

Standard DCF Growth of 7% and margin of 29% until 2022

Margins slowly contracting to 12.7% where WACC=ROIC

This scenario uses Nordea Markets’ estimates, a growth rate of 7% and an average

margin of 29% until 2022, when growth continues at 2.5% per year. Our standard DCF

model assumes that WACC=ROIC after ~30 years, which implies a 12.7% margin. As we

question the ability for Magnolia to keep pricing power in the longer term, we assume

that margins will gradually shift to 12.7% during this 30 year period.

Our standard scenario is allowed a ±1 pp sensitivity and reach SEK 97 as mid-point

When allowing a sensitivity of ±1 pp for our WACC assumption, ±1 pp for sales growth

and ±1 pp for EBIT margin change, we find that the DCF value of our standard scenario

varies from SEK 74 to 121 – with the mid‐point of 97. We will use this midpoint as an

upper point of our multi‐scenario DCF range as there are other more pessimistic

scenarios that will contribute to the lower bound.



Source: Nordea Markets Source: Nordea Markets

Other scenarios We find a lower boundary for our multi-scenario DCF with…

To find a suitable lower boundary of the multi‐DCF range, a non‐going concern scenario, and a scenario where residential development only reaches half of Magnolia’s goal, ie 1,500 units per year.

Non‐going concern scenario (project portfolio only): If the current portfolio is finalised and then the company is shut down, our DCF arrives at a value of SEK 34 per share.

…the mid point of non-going concern scenario and a 50% residential scenario, SEK 47 per share is used as lower boundary for multi-scenario DCF

50% scenario: If we use Nordea Markets’ estimates for all parts of the business but

instead assume that residential developments will reach a volume of half of the potential

that Magnolia has communicated, ie ~1500 per year by 2018E and kept flat going forward, a DCF reaches SEK 59 per share.

We find the former scenario (“project portfolio”) to be too extreme for the lowest fair value, while the latter (“50% scenario”) is too high for a lowest fair value. We therefore take the mid‐point of SEK 47 per share as the lower bound of our multi‐scenario DCF value.

Sensitivity to volume and profit/unit should be considered as it provides both an upside and downside to our estimates and might be positively correlated

Magnolia’s model is sensitive, on both the up‐ and downside, to volumes and profit per unit that Magnolia can achieve. If yields are rising, all else equal, real estate prices would drop. In this atmosphere, it could be hard for Magnolia to keep a) its ~10% margin and b) the sales price on which the margin is applied. In other words, both prices and the margin on those prices could come under pressure. Magnolia has an advantage in this market situation, however, as demand for tenant‐owned decreases, it could be reasonable to assume that demand for rentals increases (ie Magnolia’s main exposure). Lower demand in general could lead to decreased costs for construction and land, allowing Magnolia to defend its margin, despite decreasing sales prices. In any case, we find studying the sensitivity of profit per unit and volumes to be vital in these market conditions. Below is a sensitivity analysis for our 2019 EPS estimates (our base case estimate is in bold).

DCF value breakdown, SEKm, SEK per share

DCF value Value Per share

NPV FCFF 3,606 to 5,875 95.3 to 155.3

(Net debt) -790 to -1,287 -20.9 to -34.0

Time value 259 to 422 6.8 to 11.1

Market value of associates 0 0.0

(Market value of minorities) -277 to -451 -7.3 to -11.9

Surplus values 0 0.0

(Market value preference shares) 0 0.0

Share based adjustments 0 0.0

Other adjustments 0 0.0

DCF Value 2,798 to 4,558 74.0 to 120.5

WACC components and assumptions

WACC components

Risk-free interest rate 1.5%

Market risk premium 5.5%

Forward looking equity beta 1.3 to 1.7

Cost of equity 8.8% to 10.8%

Cost of debt 4.0% to 6.0%

Tax-rate used in WACC 10.0%

Equity weight 80.0%

WACC 7.7% to 9.7%

Sensitivity: WACC and EBIT margin, SEK

6.7% 7.7% 8.7% 9.7% 10.7%+2.0pp 123.7 126.3 103.4 86.1 72.4

EBIT marg. +1.0pp 150.0 119.9 98.4 82.0 69.1change 141.5 113.5 93.4 78.0 65.8

-1.0pp 133.0 107.1 88.4 74.0 62.5

-2.0pp 124.5 100.7 83.4 69.9 59.2

Sensitivity: WACC and Sales growth, SEK

6.7% 7.7% 8.7% 9.7% 10.7%+2.0pp 165.0 128.7 103.5 85.0 70.7

Sales gr. +1.0pp 152.3 120.5 98.1 81.3 68.1change 141.5 113.5 93.4 78.0 65.8

-1.0pp 132.2 107.4 89.2 75.1 63.8

-2.0pp 124.3 102.2 85.6 72.5 61.9

Sensitivity: Sales growth and EBIT margin, SEK

-2.0pp -1.0pp +1.0pp +2.0pp+2.0pp 93.5 98.1 103.4 109.5 116.5

EBIT margin +1.0pp 89.5 93.7 98.4 103.8 110.0change 85.6 89.2 93.4 98.1 103.5

-1.0pp 81.7 84.8 88.4 92.4 97.0

-2.0pp 77.7 80.4 83.4 86.7 90.5

WACC

WACC

Sales growth change



Source: Nordea Markets and company data.

Multiple-based approach EV/EBIT and P/E multiples can usually be used for relative valuation

EV/EBIT is neutral to a companyʹs financial gearing. It captures the operationsʹ capital intensity to the extent that depreciation levels approximately correspond to sustainable capex levels.

P/E is often used to compare companies and to consider the differences in tax rates and financing costs. However, it is biased towards lower multiples for companies with high financial gearing. We believe that certain adjustments should be applied when using P/E in order to appropriately value the company.



EPS '19 sensitivity

Number of NDA MAG NDA/MAG half Portfolio

2800 3000 1500 2115

270 270 270 405

50 200 50 300

NDA MAG NDA/MAG half Portfolio

0.12 6.5 8.0 3.2 4.3

0.13 7.2 8.9 3.6 4.9

0.14 8.0 9.7 4.1 5.4

0.15 8.7 10.6 4.5 5.9

0.16 9.4 11.4 5.0 6.5

0.17 10.1 12.3 5.4 7.0

0.18 10.9 13.1 5.9 7.6

Residentials

Care

Hotels

Gro

ss p

rofi

t p

er u

nit

, S

EK

m

“NDA” is based on our 2019 volume estimates, “MAG” is based on Magnolia’s communicated volume potential, “NDA/MAG half” are NDA estimates but half MAG for residential developments, “Portfolio” is based on the building rights portfolio part to be sold in 2019.

Detailed peer valuation and multiples

Reuters consensus Price Mcap Returns P/E (recurring) EV/EBIT Div yieldCountry SEK SEKm 1m 3m YTD 2016 2017E 2018E 2019E 2016 2017E 2018E 2019E 2016 2017E

ConstructionSkanska AB SE 182.70 72,794 0% 0% -15% 13.5 13.6 15.2 14.8 10.9 11.6 11.5 11.1 4.4% 4.7%NCC AB SE 174.70 18,861 -1% -15% -22% 13.8 14.0 12.7 11.5 11.7 10.9 9.8 8.8 4.1% 5.0%Peab AB SE 74.90 19,520 -5% -14% 4% 13.4 11.4 12.3 12.1 11.6 10.1 10.2 9.9 3.9% 5.1%Yit Oyj FI 61.65 7,844 0% -12% -18% 21.5 11.1 11.3 9.4 26.8 14.0 8.7 7.0 3.7% 3.9%Veidekke ASA NO 86.52 11,568 -5% -18% -31% 10.6 10.6 8.3 7.9 10.3 9.9 7.8 7.5 5.8% 6.0%NRC Group ASA NO 57.00 2,413 -6% 3% -18% 21.1 22.3 14.2 11.4 16.3 15.0 10.8 8.9 0.5% 1.9%SERNEKE Group SE 98.75 1,759 -7% -21% -6% 7.3 5.8 5.2 4.4 3.4 3.1 0.7%

DevelopmentJM AB SE 200.00 14,212 -2% -17% -24% 10.2 7.0 8.5 9.8 6.4 5.1 5.7 6.4 4.5% 5.7%Bonava AB (publ) SE 119.70 12,910 6% -9% -15% 13.3 9.8 11.1 11.2 12.2 9.4 10.5 10.6 3.2% 4.0%Oscar Properties SE 33.40 1,432 -6% -46% -56% 3.8 1.9 4.0 5.5 14.1 5.8 10.7 12.9 0.9% 0.4%Besqab AB (publ) SE 121.25 1,873 -5% -11% -39% 9.4 6.0 4.5%Magnolia Bostad AB SE 56.25 2,118 -15% -24% -42% 6.3 8.5 4.6 4.2 8.4 9.6 6.4 5.9 2.9% 3.6%Tobin Properties AB SE 26.50 382 -15% -46% -68% 3.7 6.4 2.0 1.1 18.2 26.1 7.7 5.0 3.7%SSM Holding AB (publ) SE 25.10 985 -25% -41% 5.8 6.2 5.6 6.4 6.2 5.7 7.0%

Median Construction 15,215 -3% -13% -18% 13.7 12.5 12.5 11.4 11.6 11.3 10.0 8.8 4.0% 4.8%Median Development 1,996 -5% -21% -40% 7.9 6.7 5.4 5.6 10.3 7.9 7.1 6.2 3.2% 3.7%Median Construction & Development 7,844 -5% -15% -22% 11.9 9.8 8.5 9.4 11.6 9.9 8.7 7.5 3.9% 4.0%

Peer valuation

Peer multiple summary 2017E 2018E 2019E 2017E 2018E 2019EMedian Construction & Development 9.8 8.5 9.4 9.9 8.7 7.5 -High 22.3 15.2 14.8 26.1 11.5 12.9 -Low 1.9 2.0 1.1 4.4 3.4 3.1 Median Development 6.7 5.4 5.6 7.9 7.1 6.2 -High 9.8 11.1 11.2 26.1 10.7 12.9 -Low 1.9 2.0 1.1 5.1 5.7 5.0

Magnolia NDA 15.9 6.2 6.0 13.9 7.4 6.7

Magnolia Reuters 9.2 4.7 3.9 8.0 5.1 4.0

Estimate NDA vs Reuters -42% -25% -34% -32% -21% -24%

P/E EV/EBIT



Issues with multiples and peer valuation

We argue that there are several issues with using a peer valuation for Magnolia, relating to accounting differences, lower risk and different exposure…

… in any case, the multiple range is so wide that it quickly becomes a useless metric

We argue that there are several issues with using a peer/multiples valuation for Magnolia Bostad at the moment. Some of these issues include:

Lag in accounting: Even if we see that different accounting practices can be justified for Magnolia Bostad and many of its peers, we still consider it a factor necessary to take into account. Compared to peers, Magnolia Bostad recognises profits earlier compared to cash flows (in a stable market). Therefore, Magnolia Bostad’s P/E or EV/EBIT for 2018 should perhaps be compared to 2019 equivalents for peers. In a stable market, this calls for a discount in multiples compared to peers.

Lower risk: Magnolia could arguably constitute a lower risk in development, for example, versus some peers such as Tobin and Oscar Properties. This would, all else equal, justify a premium in multiples compared to peers.

Exposure and market condition: Magnolia Bostad has much more exposure to rentals than tenant-owned apartments. Even if this should affect future expected profits, especially in a market condition where tenant-owned exposure is and perhaps should be penalised, the justified multiples could differ between Magnolia and peers due to exposure.

Range of peer multiples in the current environment: We can adjust for the three factors above, but in the current environment the range of multiples is so wide that using peer multiples implies such a wide range of a fair value for Magnolia Bostad that it quickly becomes a useless metric. In a different real estate environment, where dispersion is smaller, peer multiples make more sense.

Fair value range We use multi-scenario DCF, yielding SEK 47-97 per share and use peers as a point of reference only

As we do not consider peer multiples valuation as a reliable way to value Magnolia, we use our multi‐scenario DCF range as a fair value range, ie SEK 47‐97.

As a point of reference, we also include peer valuations in the schematic valuation chart below. With peer valuations, we use a broad universe (Construction and Development) and a narrow universe (Development); see the table in the previous subsection. Since the dispersion is so high, we use medians for every time period and then use max and min numbers out of the estimate time periods to arrive at a range of multiples which are then applied to Nordea Markets’ estimates to arrive at implied price for Magnolia.


Valuation approach

30

19

8

0

74

34

47

92

63

101

76

121

60

97

56

0 50 100 150

P/E 17-19E - Broad

P/E 17-19E - Narrow

EV/EBIT 17-19E - Broad

EV/EBIT 17-19E - Narrow

DCF

Project portfolio+ 50%scenario

NDA fair value

Shareprice



Company overview

Magnolia Bostad, founded in 2009 by Fredrik Holmström and Andreas Rutili, is a Swedish residential developer of rental and tenant-owned apartments, care facilities and hotels in attractive locations within growth areas. There has been rapid growth in the project portfolio since its creation. Magnolia Bostad builds attractive and modern homes with smart functions and appealing design; the company has also expanded into care and hotel real estate. According to the company, the business relies on attractive building rights, experienced management and solid finances.

Highlights Develops new housing that is efficient and functional

The company develops new housing that is efficient, attractive and functional. Key focus is on the creation of a modern home that offers clever living space, appealing architecture and a comfortable environment. In this way, the company hopes to produce long‐lasting buildings that will serve many future generations.

Operates exclusively in Sweden

Magnolia Bostad operates exclusively in Sweden and most of the building rights under construction and pending projects are for Greater Stockholm. Magnolia Bostad has 75 employees as of Q3 2017 and aims to start production on 3,000 apartments each year from 2018. Furthermore, the company strives to develop 90% rental and 10% tenant‐owned apartments of the 15,848 estimated building rights in the end of Q3 2017.

Combines internal knowledge with external expertise

To leverage its expertise, Magnolia Bostad operates through specialised units and collaborates with external experts in conducting market analyses. For instance, the transaction department analyses and acquires new projects with support from internal and external expertise. Another unit is the communications department, which specialises in marketing, sales and the visualisation aspect of projects.

Partnership with long-term institutional owners

The business is conducted together with investing partners and these partnerships havehistorically been implemented with long‐term institutional investors such as Alecta, SPP, Slättö and SEB Domestica II/III. Furthermore, the company aims to continue establishing long‐term relationships with other partners with solid market reputations. When it comes to the building process, Magnolia Bostad collaborates with construction companies in turnkey contracts. This means that a fixed price is negotiated with the contractor and limits the risk of increasing production costs.

LTM EBIT of SEK 188m

In 2016, Magnolia Bostad reported EBIT of SEK 355m on net sales of SEK 1,010m, while in the last 12 months ending September 2017, the equivalent numbers were SEK 188m and SEK 1,178m, respectively. Net sales are largely generated through the sale of project properties that are to be developed by Magnolia Bostad.

Left: The development of 1,800 apartments in the Senapsfabriken project, Uppsala. Middle: The development of 90 tenant-owned

apartments in Sollentuna Centrum, Stockholm. Right: Drawings of 129 rental units in Limhamn, Malmö. Source: Company data



Company history Listed in 2015; currently trades on Nasdaq First North Premier

The company was founded in 2009 by Fredrik Holmström and Andreas Rutili. Theirvision was to create modern homes with appealing design and a high degree of functionality. Both of the founders are members of the board; Fredrik Holmström currently holds the position as the chairman of the board and is also the majority shareholder. Magnolia Bostad went public in June 2015; it is listed on Nasdaq First North Premier and is, as of January 2016, included in the Nasdaq First North’s index, First North 25. Prior to the initial public offering, Fredrik Lidjan was CEO and had established the Rental Apartments business area.

The first residential project was acquired on Lidingö, Stockholm

Magnolia Bostad has primarily focused on real estate development projects in the suburbs of the main cities in Sweden; it acquired the first residential project on Lidingö in Stockholm. The company has completed two projects outside Sweden during its lifetime, both in Norefjell, Norway.

The company has expanded the project portfolio geographically over the years

Since 2011, new projects are only undertaken in Sweden and over the years, the company has expanded its business from mainly focusing on Stockholm and Uppsala (2013) to developing properties in cities such as Norrköping, Gothenburg, Helsingborg and Malmö (2014) as well as Karlstad, Örebro, Norrtälje and Lund (2015). In 2016, the portfolio expanded even further and included projects in Södertälje, Eskilstuna and Sundsvall.


Business model Business model based on securing cost coverage at an early stage of the project

Magnolia Bostad aims to reduce the risks associated with the residential market by regarding the entire value chain, all the way from the initiation of a project to final delivery to the end customer. The company’s business model is based on securing cost coverage at the beginning of a project and it has three approaches to achieve this. The first is to build rental apartments with a long‐term partner, the second to convert a portion of these rental apartments to tenant‐owned apartments and the third (and smallest) is to build tenant‐owned apartments directly for the end customer. Note that Magnolia has a contractual agreement with the housing company (co‐op company), not the individuals.

Strives to develop 90% in the rental apartment model and 10% in tenant-owned apartment model

Although all building rights are bought with the intention to sell rental apartments, strong demand in recent years has opened up for alternative development, eg tenant‐owned apartments which would add very attractive risk‐adjusted profitability. Magnolia Bostad strives to have 90% rental apartments and 10% tenant‐owned apartments for its development projects. This will vary between the years, however, depending on the current demand, economic situation and other factors affecting the housing market. Looking at the sold apartments in production, the company had 96% in rental model and 4% in the tenant‐owned model as of Q3 2017.

Key events for Magnolia bostad

Year Event

2009 Founded by Fredrik Holmström and Andreas Rutili

2014 Projects in Malmö, Gothenburg, Helsingborg, etc

2015 Fredrik Lidjan becomes CEO

2015 Projects in Karlstad, Örebro, Norrtälje, Lund

2015 Listed on Nasdaq First North Permier

2016 Included in First North 25

2016 Projects in Södertälje, Eskiltuna and Sundsvall

2016 Agreement with Slättö to produce ~7,000 units

2017 Agreement with Consto to produce ~2,000 units



Use of turnkey contracts to set a fixed production cost

In order to enhance quality, reduce risks and establish efficient production, Magnolia Bostad works with construction companies in turnkey contracts. This means that a fixed price is negotiated with the contractor and limits the risk of increasing production costs. Long‐term collaboration with contractors provides the company with a deeper understanding of the building process.

Rental apartment model

Needs a binding agreement with the buyer before the start of the project to secure financing

When applying the rental model, Magnolia Bostad needs a binding agreement with the final property owner before the project starts to secure forward financing throughout the building process. Even though the company often forward financing to cover costs, the profit part of payments is not paid until after completion of the project. The profit in itself is recognised earlier, however.

Aims to convert 25% of the rental apartments into tenant-owned apartments

Together with its partner, the property owner, Magnolia Bostad strives to convert approximately 25% of the rental apartment into tenant‐owned apartments. Additional profit related to the conversion of apartments is shared between Magnolia Bostad and its partner, which we will refer to as the “indirect tenant‐owned model”. The partner is usually a long‐term institutional owner who has been brought in during the early stages of the project to ensure that expectations are met.

Looking to develop hotels and care facilities

To diversify its business, the company aims to sell one or two hotels and four care housing projects each year under the rental apartment model.


Tenant-owned apartment model

Tenant-owned model requires achieving sales target before starting the project and recognising profits, ie more capital-intensive

The tenant‐owned apartment model is built on the existing agreement with institutional investors in cases where Magnolia and the investor argue that there is demand for tenant‐owned conversion. This development could be seen as more traditional and covers the purchase of land, development, production and finally the sale of the apartments to the end customer. These projects usually result in higher profit margins but are also more capital‐intensive than the rental model.

Business process The first step of any potential project is a deep analysis of the market

Magnolia Bostad’s business process starts with an analysis of factors such as demand, rent levels and housing prices before an acquisition of building rights. The analysis is conducted internally and in collaboration with external experts. The company benefits from an extensive network of real estate agents, contractors, municipalities and credit institutions when considering potential projects. Moreover, the company focuses on making early drawings and valuations of projects in order to support the decision‐making process and allow the company to act swiftly in the acquisition process.

Sold apartments in production, distribution Sept 2017 Vision of future production mix

Estimated production start and category

Rental units96%

Tenant-owned

4%

Rental apartments

67%

Rental. converted to tenant-owned

23%

Direct tenant-owned10%



Strives to incorporate flexibility in the local planning process

During product development, Magnolia Bostad strives to incorporate flexibility in the local planning process to produce the best possible project. This is done by attempting to tailor the project to fit the local conditions and the end customer’s needs according to the concepts of modern, space‐efficient and functional homes.

Production starts when local planning, a buyer, contractor and forward financing is in place

After the company has found a buyer, secured forward financing, signed a contractorand local planning is in place, the production development can start. The company does not have its own building operations but instead outsources production using turnkey contracts to secure fixed production costs.

Proactive approach to resolving potential errors in the project

To reduce the risk of additional work and costs, Magnolia Bostad assists in identifying and resolving potential errors at an early stage of the project. The operational follow‐up is done in collaboration with the buyer and in the case of tenant‐owned apartments, the tenant‐owner association is also involved in the process.

Contracts and customers Reducing risk through… In an effort to reduce the company’s operational risk, Magnolia Bostad has secured

major contracts on both the buy side and construction side of the business.

…contracts with one of the more successful contractors, amounting to SEK ~2bn…

On 6 October 2017, the company announced that about ten projects of ~2,000 apartments in total had been contracted to Consto1, a construction company that has built several projects for Magnolia Bostad. According to Magnolia Bostad, work performed under previous Consto contracts has been qualitative and Consto has operated under a fixed price to arrange the entire turnkey construction. This contract means that Magnolia Bostad has not only ensured the selling of a significant part of its portfolio, but also hold contractual agreement on input prices for a substantial part of the underlying construction work ahead.

…and contracts with property investors totalling at least SEK 7bn

On the buy side, Magnolia Bostad entered into a contract with Slättö2 on 25 November 2016, which lasts until 2020. The current version of the agreement covers Slättö’s purchase of 7,000 apartments, most of which are to be located in the Stockholm, Östersund and Uppsala regions. The contract totals ~450,000 m² in 13 projects, and the building permits of all but one of the projects have already been acquired3 by Magnolia Bostad. The purchase amount is a minimum of SEK 7bn and might reach as high as SEK 14bn. Slättö and Magnolia Bostad aim to convert 25% of the apartments to tenant‐owned and for Slättö to keep the rest as rental apartments. The profit from the tenant‐owned conversion will be shared equally between the two parties. This means that Magnolia Bostad has reduced the risk of not being able to sell a rather significant part of its portfolio as ~47% of the area of the current portfolio, including projects in production, is attributable to the Slättö agreement. When these building rights receive the zoning and building rights approvals, Slättö will acquire these units.

1 Consto A/S is a Norwegian‐Swedish construction company with turnover of NOK 4.0bn (2016) and has expanded into Sweden

via acquisition of Byggbolaget I Värmland during 2017. The company expects to reach

SEK 1.5bn in turnover in Sweden (2017).

2 Slättö is a non‐listed property company, which is backed by European pension capital, according to Magnolia.

3 Conditional to the outcome from zoning and building rights approvals.



Other frequent customers/investors are stable institutions

In addition to Slättö and tenant‐owner associations, Magnolia Bostad frequently sellsprojects to SPP, which is managed by Storebrand, and aims to almost double its portfolio to SEK ~13bn. It also sells projects to SEB Trygg Liv, with roughly one‐tenth of the Swedish life insurance market; Alecta, with almost 12% of the life insurance market; Viva Bostad; and Heimstaden, which is one of Sweden’s biggest real estate owners with preferential stock trading on First North Stockholm. We consider most of these investors to be financially strong companies and can be relied upon to keep their commitments and generate agreed‐upon cash flows. It is crucial for Magnolia to sell to strong partnering institutions as the profits of the projects are paid upon completion.

Co-investors and corporate structure The corporate structure is characterised by project companies and co-ownership with future owners and CEO

Magnolia Bostad’s corporate structure is characterised by project companies, where most of the new projects are set up in separate companies. For some of these subsidiaries and companies, Magnolia Bostad has co‐ownership with future owners of projects, Magnolia Bostad’s own CEO, as well as other investors. This is a way of diversifying investments, aligning interests with both buyers and management of the company and also a way of gradually transferring ownership to the buyer. However, on the negative side, minority interest needs to be adjusted in earnings and cash flows, and the structure of the company stands out as more complex compared with direct ownership of shares or options.

The CEO started the business area Rental Apartments; he was initially paid on a commission basis but later got to co-invest in rental apartments

CEO Fredrik Lidjan started as a consultant in 2013 and established the business area called Rental Apartments. Instead of receiving a fixed compensation, Fredrik Lidjan received 12% of the profit from the rental apartment projects. When the company went public and Fredrik Lidjan stepped up as the CEO of Magnolia Bostad in 2015, his company, Fredrik Lidjan AB, made a deal with Magnolia Bostad regarding future collaborations in development projects of rental apartments. Fredrik Lidjan AB invested at market conditions and received a 10% ownership in the development projects of rental apartments. The agreement also included tenant‐owned apartments with certain conditions, and 24% ownership of future development projects of hotels and was initially set to remain until February 2019.

The CEO holds 8% ownership of all future development projects of apartments until the end of 2022

However, the deal was recently changed and Fredrik Lidjan AB now has the opportunity to invest and receive 8% ownership of all future developing projects of apartments until the end of 2022 and all future developments of hotels until the end of 2021. The agreement is part of the structural changes of some of the group’s holding companies and the economic benefit for Fredrik Lidjan AB before and after the structural changes is judged to be equivalent by the company’s external advisor. Note that already started projects as of October 2017 still follow the 10% rule.

Clas Hjorth owns 16% of the hotel business

Clas Hjorth, head of the hotel business, will also co‐invest and holds a 16% share in the hotel business.

Revenue compared with cash flows Revenue is recognised on a contract basis, while cash flows occur partly on sale and partly at completion

Packaging projects in companies minimise taxes and means that construction costs and matching sales are not in Magnolia’s group books

It is important to understand how Magnolia Bostad recognises net sales. When construction contract, purchase contract and local planning are all in place, the company recognises revenues and costs in the period that these milestones are being met. Changes in estimates in coming period will affect the P&L in those periods, thus future profit may not be matched by current cash flow estimates.

The methodology for selling projects is to sell them packaged in a company. Since company sales are not taxed in Sweden, Magnolia pays minimal taxes. Further, as the project is outside of the Magnolia group, future project’s sales to the buyer and costs to the contractor never enter Magnolia group’s accounting. Magnolia estimates that the cash flow it receives at sale covers all past, current and future costs, while the estimated profit part of the sale is paid at project completion, which is usually two and a half to three years later.



In contrast, the tenant-owned model uses percentage of sales to recognise profits

However, in the direct tenant‐owned model, which constitutes a smaller portion of sales, has revenue and profits recognised as a percentage of sales given that a sales target of, let’s say, 70% of the apartments has been reached.

Revenue from project management agreements is recognised gradually based on the degree of completion in the projects. Project management is invoiced on an ongoing basis during the projects.

Targets As of 2016, the company has financial, operational and sustainability targets.

Financial targets

Return on equity of at least 30%

Equity/asset ratio of at least 30%

Operational targets

Possibility of starting production on 3,000 apartments/year as of 2018

Develop one to two hotels and four care facilities projects

Sustainability target

Meet the requirements for environmental certification corresponding to the Sweden Green Building Council’s Silver4 certification or the Swan Ecolabel on all of the company’s projects.

Executive management and board of directors Fredrik Lidjan has been the CEO since the company went public in 2015

Magnolia Bostad has a rather extensive management team consisting of eight members and a board of directors with six members. Fredrik Lidjan has been the CEO since the company went public in 2015 and was previously responsible for rental apartment development within Magnolia Bostad.

Fredrik Holmström is the chairman of the board, founder and indirectly the majority shareholder with a position of 21,321,837 shares in Magnolia Bostad. Andreas Rutili is also a founder and was CEO of Magnolia Bostad in 2009‐15. He also holds a substantial ownership in the company with 2,938,565 shares.

4 Swedish equivalent is “Miljöbyggnad silver”, according to Sweden Green Building Council.











Shareholders The chairman of the board and founder owns the majority of the shares

The chairman of the board and founder, Fredrik Holmström, is the majority shareholder with a holding corresponding to 56.38% of the votes and capital of Magnolia Bostad. The other founder, Andreas Rutili, is the third‐largest owner and controls 7.76% of the votes and capital. Several pension funds and mutual funds are also among the largest shareholders. The ten largest owners control more than 90% of the votes and capital.


Aiming to get listed at the main Nasdaq list in Stockholm

The company is aiming for the main list on Nasdaq Stockholm rather than First North Premier. The company seems likely to push for a list change sometime during 2018, following the Q1 report.

Shareholder structure as of 30 September 2017Shareholder Number of share Votes CapitalF.Holmström Fastigheter 21,323,837 56.4% 56.4%Danica Pension¹ 3,170,841 8.4% 8.4%Länsförsäkringarfondförvaltning AB 2,485,908 6.6% 6.6%Nordnet Pensionsförsäkring AB 1,493,166 4.0% 4.0%Svolder Aktiebolag 1,394,009 3.7% 3.7%Dahlin, Martin 803,593 2.1% 2.1%Försäkringsaktiebolaget, Avanza Pension 619,596 1.6% 1.6%Swedbank Robur Fonder 464,734 1.2% 1.2%

Cliens Sverige Fokus 378,317 1.0% 1.0%Cliens Sverige 340,000 0.9% 0.9%Others 5,348,282 14.1% 14.1%Total 37,822,283 100.0% 100.0%1. Danica Pension includes Andreas Rutili's ownership stake of ~7.76%



Project portfolio

In the end of Q3 2017, the portfolio of unsold projects amounted to building rights for 15,848 estimated units, with some geographical dispersion. The lion’s share, 96%, is currently rental apartments and the remaining 4% tenant-owned. The vision is for the split to be 90% and 10%, while the company aims for 25% of units started off as rental to be converted to tenant-owned. A detailed list of projects in the portfolio can be found in the appendix.

Project portfolio of 15,848 estimated building rights

At the end of Q3 2017, the portfolio consisted of 15,848 estimated building rights spread over 51 projects. All cities in the portfolio follow the strategy of having favourable demographic conditions.

Focus on attractive locations in growth areas

As the company expanded the portfolio to new cities, the portfolio distribution changed. Still, the main part of the estimated building rights is concentrated in Greater Stockholm. 11% of the portfolio is related to the “Other” segment, which mainly relates to Sundsvall, Örebro, Eskilstuna and Motala. The portfolio therefore reflects the company’s strategy of focusing on attractive locations in growth areas, which is also relevant outside of Greater Stockholm and Östersund/Gothenburg.

Mainly develops rental units

Looking at sold apartments in production, the company almost exclusively develops rental units as only 4% of the units under production are tenant‐owned apartments. This is largely in line with the stated strategy of developing 90% rental units, 10% tenant‐owned apartments and converting 25% of the rental units to tenant‐owned apartments over time.


Local planning for 12% of the project portfolio

The company has building rights and sold projects in production that adds up to a total gross area of 1,063,690 m² at the end of Q3 2017. Unsold pending projects account for the larger part of this gross area. Only 12% of the estimated building rights, ie estimated number of apartments (or 13% of estimated gross area) of the upcoming projects, have local planning permission in force. This could be considered as quite in line with the goal of having five years of development in the rights portfolio.


Building rights in the portfolio, distribution Sept 2017 Sold apartments in production, distribution Sept 2017

Historical development of the project portfolio Estimated production start and category

Greater Stockholm

57%

Uppsala8%

The Östersund region and

Gothenburg24%

Other11%

Rental units96%

Tenant-owned

4%

Historical split of total gross area (m²) Estimated building rights, distribution September 2017

Local planning in

place12%

Lacks local planning

88%

0

200,000

400,000

600,000

800,000

1,000,000

1,200,000

Q42015

Q12016

Q22016

Q32016

Q42016

Q12017

Q22017

Q32017

Pending projects Sold projects in production



Rapid growth in building rights – 223% total increase since 2015

The project portfolio has experienced rapid growth since Magnolia Bostad went public in 2015. The company had 4,903 building rights at the end of 2015, compared with 15,848 building rights as of Q3 2017, corresponding to a 223% increase over that period of time. Furthermore, as Magnolia Bostad has acquired building rights, the conversion of these rights into sold projects in production has increased. However, the number of building rights has increased faster than the pace at which apartments in production are sold, which has allowed the company to reach its goal of having five years of development in building rights in its portfolio.

44% of the pending projects do not have a set starting date

Looking ahead, the estimated production start of pending projects is mostly distributed between 2017 and 2020. However, 44% of the pending projects do not have a set starting date, which we find reasonable given that, again, about five years of production is in the portfolio.

Combines residential properties with hotels and student/care housing

The company’s focus is on residential properties, as highlighted by the high number of these properties among the acquired building rights. There are also some building rights for hotels and care or student housing, which is in line with the company’s strategy from 2016.


A sample of development properties and building permits

Senapsfabriken

Located in central Uppsala

Built in three stages

Standard in line with tenant‐owned apartments


Historical development of the project portfolio Estimated production start and category

0

2,000

4,000

6,000

8,000

Q4 2017 2018 2019 2020 No date

Nu

mb

er o

f u

nit

s

Residential Care Hotel

0

4,000

8,000

12,000

16,000

20,000

Q4 2015Q1 2016Q2 2016Q3 2016Q4 2016Q1 2017Q2 2017Q3 2017

Nu

mb

er o

f ap

artm

ents

Estimated building rights Sold apartments in production



Sländan

Located in central Södertälje

Built in three phases

The first building (illustrated below to the left) as rental apartments and the second includes 73 tenant‐owned apartments


Torgkvarteren

Located between the train station and town centre in Bålsta

Space for offices and stores on ground floor

Magnolia Bostad is developing residential apartments, a grocery store and a new commuter station


Nätverket

Being built in the new residential area of “Hagby äng och kullar”

The development will probably include space for a restaurant

Covers three blocks located next to an open, green area




Södra Häggviks Gårdar About 1,500 apartments

Planned start of first phase for 2020


Detailed project list See appendix for details A specification of all the projects in the portfolio can be found in the appendix.



Macro outlook

The growth outlook has improved somewhat in Sweden and prospects for growth remain solid. We find it particularly interesting that employment levels are improving. We note that Sweden's macroeconomic strength bodes well for gradually improving rental growth in areas where the population is growing (regional growth cities and main city locations).

Nordea Markets estimates GDP growth in Sweden at 3.3% for 2017 and 2.1% in 2019

Inflation reaching ~2% in Sweden…

…and unemployment rate declining

Source: Nordea Economic Outlook September 2017

GDP growth expected to exceed 2% until 2019


We expect slow changes to monetary policy rates


Macroeconomic expectations

2015 2016 2017E 2018E 2019EGDP growth

Sweden 3.8% 2.9% 3.3% 2.6% 2.1%Norway 1.4% 1.0% 1.9% 2.6% 2.0%Euro area 1.9% 1.7% 2.1% 1.8% 1.6%

InflationSweden 0.0% 1.0% 1.8% 1.6% 2.2%Norway 2.2% 3.6% 1.9% 1.0% 1.2%Euro area 0.0% 0.2% 1.6% 1.4% 1.5%

Unemployment rateSweden 7.4% 6.9% 6.7% 6.5% 6.4%Norway 4.4% 4.7% 4.3% 4.0% 3.8%

GDP growth forecasts

0%

1%

2%

3%

4%

2015 2016 2017E 2018E 2019E

Sweden Norway Euro area

Monetary policy and yield expectations

1/9/17 3M 30/6/18 31/12/18 31/12/19Monetary policy rates

Sweden -0.50% -0.50% -0.50% -0.25% 0.25%Norway 0.50% 0.50% 0.50% 0.50% 0.75%US 1.25% 1.25% 1.75% 2.25% 3.00%

10-year government benchmark yieldsSweden 0.61% 0.80% 1.25% 1.50% 2.00%Norway 1.56% 1.85% 1.95% 2.15% 2.75%US 2.13% 2.50% 3.05% 3.40% 3.70%

Exchange rates vs SEKEUR/SEK 9.490 9.400 9.250 9.150 9.000USD/SEK 7.960 8.030 7.710 7.260 7.140



The Swedish residential real estate market

Since Magnolia Bostad exclusively operates in Sweden, factors primarily related to the Swedish market are likely to have the largest impact on the company’s business. The Swedish real estate market has experienced a solid positive trend after the financial crisis in 2008-09. Until recently, the market has been characterised by prices, transaction volumes and new development projects being at historically high levels, though uncertainty has increased and statistics have slid especially for tenant-owned apartments, which poses uncertainty as well as opportunity for Magnolia Bostad.

We start off by describing the market historically and move onto the recent down-turn in sentiment on residential real estate

In our analysis of the Swedish residential real estate market, we start off with a description of the past few years of the Swedish residential real estate market as a whole and, to some extent, the impact it has on Magnolia specifically. Then we discuss the more recent downturn in sentiment in residential real estate, which has so far had a greater effect on tenant‐owned housing than rental. Alongside this, we also discuss the pros and cons for Magnolia in the current market environment.

Population and employment Population growth has been increasing, which could be a driver for real estate demand

Growth in the population, all else equal, could be a driver of real estate demand. The Swedish population has experienced a higher average yearly growth rate since 2000 than in the three preceding decades. The population has increased sharply during the current decade, with a CAGR of 0.86% since 2010.

Employment expected to rise

Another driver of real estate demand is the level of employment. Sweden’s unemployment levels have been quite stable since 2005, at roughly 6‐8% and reaching 7.3% during Q2 2017. Nordea Markets expects the unemployment rate to decrease by 50 bp from 2016 to 2019.

Source: Statistics Sweden Note: Based on people who work or are looking for employment,

aged 15-74

Source: Statistics Sweden.

Breaking down population growth Stockholm county’s population has shown a CAGR of ~1.6% historically, while other areas reached similar growth in 2016

When we break down population growth into areas that we deem important for Magnolia Bostad – namely, the counties of Stockholm, Uppsala, Gothenburg and Scania – we see that population growth from 2012 has been higher on average in the Stockholm area, with a CAGR of ~1.6%. Growth in Gothenburg, Scania and Uppsala counties has increased since 2011, reaching similar growth figures as Stockholm in 2016.

Historical population growth in Sweden Unemployment rate in Sweden 2006 - Q2 2017

0.0%

0.2%

0.4%

0.6%

0.8%

1.0%

1.2%

1.4%

1.6%

8.0

8.5

9.0

9.5

10.0

1976 1986 1996 2006 2016

Mil

lio

ns

of

peo

ple

Population growth Population

0%

2%

4%

6%

8%

10%



Source: Statistics Sweden and Nordea Markets

Both population growth and household growth matter for housing demand

The effect on housing demand, which might intuitively be assumed to come from an increase in population, could to some extent be countered or exacerbated by living patterns of the population. In particular, if the average number of people in a household changes, then the number of households might not follow the growth of the population. Both population growth and growth in the number of households are important in order to understand housing demand.

In populated areas bigger households are becoming more common, which could indicate underlying demand for housing, although perhaps at lower price levels

We split household growth into single or dual households on the one hand and bigger households on the other. We see that the growth of single and dual households has increased in Stockholm, Uppsala, Gothenburg and Scania counties during the past few years. During this time, the growth rate of bigger households in Stockholm has come down, but we found no clear pattern for other counties.

In total, household growth in Stockholm reached roughly the same level as population growth in 2016 and all counties have seen an increase in population that exceeds the growth in households, suggesting that people in more populated areas are living in more and more compact circumstances. This could be an indication of either a supply mismatch at current price levels or underlying demand for more housing at lower price levels in these counties – areas which are targeted by Magnolia Bostad.

Source: Statistics Sweden and Nordea Markets Source: Statistics Sweden and Nordea Markets

Total population growth of focus areas

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

2012 2013 2014 2015 2016

Stockholm area Uppsala area Gothenburg area Scania

Growth of single and dual households Growth of bigger households

-1%

0%

1%

2%

3%

Stockholm county Uppsala countyGothenburg county Scania county

0%

1%

2%

3%

Stockholm county Uppsala countyGothenburg county Scania county



Growth in bigger households has been higher in Stockholm

All areas in focus for Magnolia seem to have experienced an increase in household growth from 2012, with Uppsala and Stockholm exhibiting higher growth rates


Consumer confidence Consumer confidence has been high in Sweden recently, and this is an indication of the underlying sentiment in the market

Consumer confidence estimates consumers’ perception of their economic situation as well as the more overarching economic landscape. High consumer confidence should translate into higher activity in consumer‐dependent sectors and we find it an indicative factor of activity on the residential housing markets. Consumer confidence in general and housing in particular could affect market conditions and hence Magnolia Bostad’s operations. Since 2012, consumer confidence in Sweden has been below or around the norm of 100, though higher levels have been recorded during the past year, with levels in the range of 100‐105.

Consumer confidence was volatile during the financial crisis…

…higher than the mean during the last year

Source: National Institute for Economic Research through Thomson Reuters

Transaction volume and historical price developments Transaction volumes at historically high levels

In 2016, the transaction volume in the Swedish real estate market reached an all‐time

high of SEK 200bn, according to Newsec Property Outlook Autumn 2017. During H1

2017, the market experienced slightly lower activity with SEK 82bn, compared with

SEK 94bn for H1 2016.

Residential properties is the most popular segment

Based on the transaction volume, the most popular segment was residential properties,

with a 31% market share of the Swedish real estate market. The interest in the Swedish

real estate market is also coming from abroad, with foreign investors as net buyers

Growth of households (total)

0.0%

0.5%

1.0%

1.5%

2.0%

2.5%

Stockholm county Uppsala county

Gothenburg county Scania county

Historical consumer confidence in Sweden

65

75

85

95

105

115

125

Q1 2000 Q1 2002 Q1 2004 Q1 2006 Q1 2008 Q1 2010 Q1 2012 Q1 2014 Q1 2016

Sweden, LHS (Last=102.2, AVG=101.0)



during the three latest quarters up to Q2 2017; something that has not happened since

the financial crisis in 2008‐09.

Positive price trends for tenant-owned apartments

According to Nasdaq OMX Valueguard‐KTH Housing Index (HOX), prices on tenant‐

owned properties and houses have shown a positive trend for several years. Also, prices

were affected during the financial crisis in 2008‐09, by a down‐turn of some 7‐14%. As

the graph below displays, tenant‐owned apartments in Gothenburg have experienced

the largest price appreciation up until Q3 2017.

Source: Newsec and Nordea Markets Note: Time axis not to scale

Source: Valueguard and Nordea Markets

Demand for housing More municipalities reporting housing shortages, while the number of started housing projects has been considerably high, with completions obviously lagging

According to a survey presented in May 2017 by Boverket, 255 out of 290 municipalities

reported that there was a housing shortage. Despite the sharp increase in the number of

completed and started housing development since 2012, the number of municipalities

reporting a housing shortage actually increased by 15 municipalities compared with the

previous year. Still, the number of apartments has increased significantly in the past year

and the large initiation of new apartments will convert into a considerable upswing in

the number of completed apartments in the coming years. The lag between the start and

completion of a project can affect the perceived shortage of housing.

Shortage of housing and urbanisation are likely to lift the demand for new development projects

Also, as the trend of urbanisation continues, one could argue that larger but fewer

municipalities will in fact experience a shortage of housing. Either way, housing

shortages and urbanisation could act as safety nets in growth areas – which are

Magnolia’s focus. However, as we have mentioned, supply has also seen a considerable

upswing.

Investments in new development has risen sharply since 2012

Investments in housing, especially new developments, has risen sharply since 2012.

According to the Swedish Construction Federation, the immense need for new

development housing will convert into a continuation of high investment levels in 2018.

Transaction volume property market Valueguard Housing Index (HOX) for tenant-owned properties

0

100

200

300

400

HOX Flat Sweden HOX Flat Stockholm

HOX Flat Gothenburg HOX Flat Malmö

0

5

10

15

20

25

2010 2011 2012 2013 2014 2015 2016 2017E

EU

Rb

n



Source: Swedish Construction Federation and Nordea Markets Source: Statistics Sweden, Swedish Construction Federation and Nordea Markets

Major rental investors 55% of the major rental investors are non-municipal

Among the top players we list on the Swedish rental investment and management scene, non‐municipal investors account for 55% of apartments. Rikshem and HSB are the largest two, both being non‐municipal, while the largest municipal‐owned are those located in the greater Gothenburg and Stockholm areas.

The company is dependent on its relevance to different types of rental investors

The success of Magnolia Bostad’s current strategy is dependent on the ability to sell and deliver rental projects to this market. Profitability is thus dependent on the investment appetite and financing opportunities in this market as well as Magnolia’s relevance to these players. Historically, Magnolia has sold to non‐municipal investors, but the possibility to sell to municipal companies as well could provide upside.

Source: Fastighetvärlden and Nordea Markets

Investments in housing Number of started and completed apartments in new housing

0

50

100

150

200

250

300

SE

Kb

n

Housing New development

0

10,000

20,000

30,000

40,000

50,000

60,000

70,000

2002 2004 2006 2008 2010 2012 2014 2016

Started apartments Completed apartments

Top 20 non-municipal rental investors in SwedenInvestor Type ApartmentsRikshem Non-municipal 28,000HSB Non-municipal 27,000Poseidon Municipal 26,840Svenska Bostäder Municipal 26,088Stockholmshem Municipal 26,000Bostadsbolaget Municipal 24,000Willhem Non-municipal 22,800Stena Fastigheter Non-municipal 22,800MKB Municipal 22,500Heimstaden Non-municipal 19,400Familjebostäder GBG Municipal 18,500Stångastaden Municipal 18,500Akelius Non-municipal 17,300D. Carnegie & Co Non-municipal 16,400Uppsalahem Municipal 15,000Balder Non-municipal 13,000Viktoria Park Non-municipal 12,800Helsingborgshem Municipal 12,000SKB Non-municipal 7,900Förvaltaren Municipal 7,826Wallenstam Non-municipal 7,600Lundbergs Non-municipal 7,000Ikano Bostad Non-municipal 5,900SBB Non-municipal 5,300Einar Mattsson Non-municipal 5,200Skandia Fastigheter Non-municipal 5,000Riksbyggen Non-municipal 4,700M2 Gruppen Non-municipal 4,700Folksam fastigheter Non-municipal 3,900CA Fastigheter Non-municipal 3,600Sum 437,554

Non-municipal 240,300Municipal 197,254



Started rental and tenant-owned properties More tenant-owned than rental properties being started

During the past 15 years, the difference between the number of started rental and tenant‐owned properties has been substantial. Demand for tenant‐owned properties appears to historically have been higher than for rental properties. This is the case for Sweden in general and Stockholm in particular. However, demand for tenant‐owned properties has been even stronger in Stockholm as the relative gap to rental properties is larger than for Sweden.


Historically high levels of started properties in Sweden

The five‐year CAGR for started rental properties in Sweden is 25.4%, compared withstarted tenant‐owned properties at a five‐year CAGR of 17.8%. Still, in absolute measures, there were more tenant‐owned properties started in Stockholm, Gothenburg and Malmö as of 2016 (with the outlook for 2017 quite uncertain), especially for tenant‐owned apartments. Between 2012 and 2016, started properties in Sweden increased rapidly and rose to historically high levels, both for tenant‐owned and rental properties.

Cyclicality in rental starts

The cycle of starts in Sweden seems to be more pronounced in the rental space than for total housing. This could mean that Magnolia’s future cash flows, which are very dependent on current starts, could be impacted greatly by a large downturn in the economy as a whole, or on the real estate scene in particular.


Distribution of started housing, Sweden Distribution of started housing, Stockholm

0

5,000

10,000

15,000

20,000

25,000

30,000

Tenant-owned Rental

0

2,000

4,000

6,000

8,000

10,000

12,000

Tenant-owned Rental

Rental and total starts in Sweden

-

5,000

10,000

15,000

20,000

25,000

30,000

-

20,000

40,000

60,000

80,000

100,000

120,000

50 53 56 59 62 65 68 71 74 77 80 83 86 89 92 95 98 01 04 07 10 13 16

Ren

tal s

tart

s

To

tal

star

ts

Started units Sweden (LH Scale) Rentals (RH Scale)




Magnolia is gaining market share in the rental space

Magnolia Bostad’s market share in rental apartments rose from 9.2% in 2015 to 10.7% in 2016, looking at starts and across Sweden. The company’s market share in tenant‐owned apartments declined, while the overall market share, ie the sum of rental and tenant‐owned starts, rose slightly from 4.2% to 4.5%.

High rental market share could protect it from bearish sentiment in tenant-owned space, bolstering credibility among municipalities, investors and contractors

Magnolia develops a significant portion of Swedish rental units, which we believe could affect the company in several ways: building trust and leveraging positive reputation with municipalities could become easier than if Magnolia had a smaller market share. Also, it could help the company to be a trustworthy partner to investors and contractors on larger projects. And, if economic sentiment is such that investments in tenant‐owned apartments are seeing a decline and capital is withdrawn, it is obviously beneficial to have higher exposure to the rental segment.

However, growth outlook could be slightly lower and protection against rental downturn limited

However, its fairly high market share offers less protection against a downturn in general market sentiment in the rental space – even if it could be argued that Magnolia has a niche in the market. It is therefore vital to have a reasonable discussion about past and future growth and to what extent (and for how long) Magnolia can outgrow the rental market.


Completed rental and tenant-owned properties Similar levels of completed rental and tenant-owned properties in Sweden

The number of completed tenant‐owned and rental apartments in Sweden has followed similar positive trends since 2005. At the end of 2016, the number of completed tenant‐owned properties barely surpassed rental properties in Sweden.

Distribution of started rental properties, greater cities Distribution of started tenant-owned properties, greater cities

0

1,000

2,000

3,000

4,000

5,000

6,000

Stockholm Gothenburg Malmö

0

2,000

4,000

6,000

8,000

10,000

12,000

Stockholm Gothenburg Malmö

Magnolia market share in unit starts, 2015-2016

0%

2%

4%

6%

8%

10%

12%

2015 2016

Rental Tenant-owned Total



More completed tenant-owned properties in Stockholm

The development of completed properties in Stockholm has historically followed a positive trend but there are some deviations between the numbers of completed tenant‐owned and of rental apartments. Since 2011, the completion of tenant‐owned properties has clearly exceeded that of rental properties. This can be explained by historically higher demand for tenant‐owned properties in Stockholm and is illustrated in the number of started projects in the period.


Zooming in on the allocation between completed tenant‐owned and rental properties in the larger cities of Sweden, the distributions differ somewhat even though the overall trend is positive for all cities when considering the CAGR for the past five years.

Rental properties more common outside the largest cities

Completed rental properties in Sweden are mainly related to areas outside the largest cities. These areas have also experienced the highest CAGR of 32.3% during the past five years.

Tenant-owned properties more popular in the largest cities

Tenant‐owned properties are more popular in the largest cities and Greater Stockholm constitutes more than 40% of all completed tenant‐owned properties in 2016. Except for Greater Malmö, all cities in the chart have experienced strong growth in tenant‐owned properties with CAGRs of at least 15% during the past five years. The overall trend is that tenant‐owned properties are more popular in the largest cities and rental properties are more common outside the largest cities.


Building costs and rent levels Increasing production costs and higher rents in newly developed apartments

Not only have prices, volumes and investments in the Swedish real estate market

increased up to H1 2017, but also building costs and rent levels. Total production cost

per square metre for newly developed rental apartments has more than doubled over the

past 20 years until 2016. Larger cities tend to have higher production costs than more

remote cities, partly due the lack of and high competition for land in larger cities.

Distribution of completed housing, Sweden Distribution of completed housing, Stockholm

0

4,000

8,000

12,000

16,000

20,000

Tenant-owned Rental

0

2,000

4,000

6,000

8,000

Tenant-owned Rental

Completed rental properties, Sweden Completed tenant-owned properties, Sweden

0

4,000

8,000

12,000

16,000

20,000

Sweden except Sthlm, Gbg, Malmö Greater Malmö

Greater Gothenburg Greater Stockholm

0

4,000

8,000

12,000

16,000

20,000

Sweden except Sthlm, Gbg, Malmö Greater Malmö

Greater Gothenburg Greater Stockholm



Increasing costs can, to some extent, also be explained by a shortage of manpower

because of high market activity.

Rent levels are not set by the market and do not necessarily reflect demand

Annual rent per square metre in newly developed apartments has also increased

significantly in the period. Larger cities such as Stockholm and Gothenburg have

experienced higher increases in rent per square metre than cities such as Malmö. The

trend in rent levels does not necessarily provide a good overview of demand, as rents are

not set by the market. Instead, some quality factors, such as equipment and common

spaces, are used to determine utility‐based rents (bruksvärdeshyra) in the Swedish

regulated residential market.




Annual rent/m² in newly developed apartments Total production cost/m² for newly developed rental apartments

0

500

1,000

1,500

2,000

2,500

1997 2000 2003 2006 2009 2012 2015

Greater Stockholm Greater Gothenburg Greater Malmö

0

5,000

10,000

15,000

20,000

25,000

30,000

35,000

1994 1997 2000 2003 2006 2009 2012 2015

Sweden Larger city areas

Larger cities - Land costs (SEK per m²) Larger cities - Production costs (SEK per m²)

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

45,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Pro

d. c

ost

s p

er s

qm

(S

EK

)

Rental Tenant owned

-

2,000

4,000

6,000

8,000

10,000

12,000

14,000

16,000

18,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

Lan

d c

ost

per

sq

m (

SE

K)

Rental Tenant owned

Larger cities - Toal costs (SEK per m²)

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

2011

2012

2013

2014

2015

2016

To

tal

cost

per

sq

m (

SE

K)

Rental Tenant owned




Market for hotels and care housing Recruitments and acquisitions within Hotels and Care housing

We find it positive that the company diversifies the business

Magnolia Bostad aims to diversify the business by entering the markets for hotels and care housing. The rights portfolio was expanded through an acquisition of Svenska Vårdbostäder AB during 2017. Even if the number of units in the rights portfolio attributable to these new markets is limited, there are quite a few projects in at least Care housing. We find it positive that Magnolia Bostad diversifies the business, especially considering the current slightly bearish sentiment in the real estate sector. We believe that Care housing is more similar than hotels to the current version of the rental model. Magnolia has recruited expertise within Hotels and made acquisitions in Care housing.

Expectations and underlying changes Slow tightening of monetary policy and stricter regulations are likely to cool down the property market

The Swedish economy continues to be very strong, though a more bearish sentiment has

been witnessed in residential real estate and in the tenant‐owned space in particular.

However, as a slow tightening of monetary policy takes place, the economy is likely to

cool down. Expectations that the European Central Bank (ECB) will start hiking interest

rates in 2018 and raising it further in 2019 will probably force the Riksbank to follow suit

and tighten Swedish monetary policy. In addition to a tighter monetary policy,

discussions about regulations and taxes related to buying and selling housing have

resurfaced. As stated before, we expect slow changes to monetary policy rates.

Banks have become less willing to lend money for new development projects

Some regulations relating to sharper lending requirements and instalments on

mortgages have already been put in place and discussions about removing the ability to

postpone the capital gain tax are getting more intense. Banks have also become less

willing to lend money for property investments. Hence, residential developers are seeing

increased interest rates. This is a greater problem for developers whose capital structures

are more sensitive to increase interest rates, ie those that are heavily leveraged, but it

could affect others as well.

The market for tenant-owned apartments stagnated during Q3, forcing some developers to build rental apartments

During Q3 2017, prices on tenant‐owned apartments stagnated in Stockholm as supply

escalated during the quarter. In combination with stricter lending requirements for

households, some new development companies are struggling to secure sales of new

tenant‐owned apartments. This is apparent in the case of Wallenstam, which is

developing 90 apartments in Solberga, south of Stockholm, and had to convert the

planned tenant‐owned apartments into rental units due to uncertainties in the market.

Another developer that focuses on high‐end tenant‐owned apartments, Oscar Properties,

recently started to offer interest‐free loans on the down payment in an attempt to attract

buyers.

To conclude, the Swedish real estate market has experienced a tremendous upswing with many factors contributing to strong market conditions for several years. However, some clouds are starting to appear as the market has become overwhelmed by new

Larger cities - Total costs tenant-owned (SEK per m²) Larger cities - Total costs rental (SEK per m²)

0%2%4%6%8%10%12%14%16%18%

-

5,000

10,000

15,000

20,000

25,000

30,000

35,000

40,000

Building right Construction costs

% Land out or total costs

0%

5%

10%

15%

20%

25%

30%

35%

-

10,000

20,000

30,000

40,000

50,000

60,000

70,000

Building right Construction costs

% Land out of total costs



development housing and consumers have been hit by tougher lending requirements. Consequently, Magnolia Bostad operates in a market that has been growing but more uncertainty among buyers is beginning to influence the business environment. This means that its ambition of producing 3,000 apartments a year could become considerably challenging in the short term.

Downside for Magnolia Bostad in current market conditions Being long in Magnolia Bostad implies an indirect bet on at least volume risk, cost risk and rental risk to which the company is exposed

Magnolia Bostad is exposed to relatively little price risk on apartments it has already sold, as prices are basically locked in at sale and most of the customers are cash‐strong institutions that can be assumed to fulfil their commitments. However, an investment in Magnolia Bostad does indirectly entail certain risks related to the Swedish real estate market:

Volume risk: The portfolio binds up capital for Magnolia Bostad, and the selling of rights in the portfolio is very much the life blood of the company. Negative market sentiment could seriously delay Magnolia Bostad’s sales of rental and tenant‐owned apartments.

Cost risk: Cost risk is to some extent mitigated by using turnkey contracts with contractors. However, not all aspects of costs associated with development are taken on by the contractor, and hence Magnolia Bostad might be exposed to costincreases or decreases.

Rental risk: Magnolia Bostad offers guarantees for many of its projects, usually in the form of the buyer being guaranteed tenants for the first year or so. Magnolia reimburses the buyer for missing rent at a certain level for a certain time. Even if Magnolia Bostad makes provisions for rent guarantees, some of its historical returns are attributable to the guarantees not being realised. Future earnings may therefore be lower than historical levels if market conditions are such that guarantees are realised to a greater extent than previously.

Margin risk on future projects: If economic sentiment for the residential real estate sector – and rental properties in particular – declines, then Magnolia Bostad runs the risk of not being able to maintain the prices it has previously had. This effect could be offset by a decline in costs for land and construction as demand decreases. If not, however, margins could contract for some time, with a negative impact on earnings and future expected cash flows.

Increased competition in the rental space: With the space for tenant‐owned apartments contracting, firms that already own building rights

The case for Magnolia in a declining residential real estate market

There are also reasons to believe that Magnolia can gain from the current market sentiment

It is also possible to make the case forMagnolia in a declining residential real estate market – especially as a developer of mainly rental apartments. Some factors that could play in Magnolia Bostad’s favour are:

Decreasing construction costs: If the market for tenant‐owned apartments sees a downturn, it could lead to a decrease in demand and price of construction.

Rights allotments: Magnolia and other rental developers could see less com‐petitive bidding from tenant‐owned developers.

Personnel: Magnolia could attract more talent to the company.

Substitution: A drop in demand for tenant‐owned apartments but equal demand for housing in general could increase demand for rental apartments.



Geographic dispersion: Magnolia has a ~40% exposure outside Stockholm and this could act as a buffer for the company given that much of the turmoil surrounding real estate sentiment is centred around Stockholm,

Rights bargains: It is possible for Magnolia to acquire rights from other smaller or highly leveraged tenant‐owned developers for bargain or even distressed prices. We find this unlikely unless the pricing is very low as Magnolia has mentioned that its portfolio is almost at an optimal size.

The outstanding bond of Magnolia has good maturity match with future cash flows owing to the completion of projects which are backed by buyers that we find reliable. We believe Magnolia has the ability to run the business in a way that the bond can be redeemed without a lot of complications.



Peers

Magnolia Bostad has a unique niche of developing and divesting rental residential properties to financially strong institutions operating exclusively in Sweden. Low operational and financial risks are key focus points since the company always divests its projects and secures its costs before starting the projects, which is also relevant in tenant-owned projects in which Magnolia will get compensated on the upside, without taking any development risks. Among listed peers, there are some companies with similarly sized operations, albeit with a differing mix of development and rental properties. It should be clear that most or all of the development peers also have higher counterparty and development risks in their operations. The purpose of this section is to provide an overview of companies with similar business models, highlight differences in accounting methods and analyse the overall trends among peers.

Description of peer companies Most peers are, in contrast to Magnolia targeted towards tenant-owned apartments, carry development risk in business-to-consumer transactions

We argue that there are no good direct peers to Magnolia with regards to the business to business rental divestment model from own development rights/land. The closest peer to Magnolia is Bonava, which aims to sell 30% of its units to institutional investors and use subcontractors in its Nordic operations. Most of its investor sales are related to Germany, where it also carries most of the construction risks. Most of the peers below are business‐to‐consumer operations (tenant‐owned development) or internal development of rental apartments where these peers have substantially higher risks related to both market/price and costs.

Listed peers Bonava has the most conservative profit accounting and develop rental properties

Few peers have the same exposure to rental properties as Magnolia Bostad

Bonava is a real estate developer that originates from NCC and operates in eight countries. Sweden is the largest market, followed by Germany, Denmark and Norway, Finland, Russia and Estonia and Latvia. The company develops both tenant‐owned and rental apartments. The company accounts for profit when projects are completed and handed over to customers, rather than when units are under construction. This is the most conservative accounting method among peers, and means that earnings are generated with a lag when the company is growing.

ALM Equity is a real estate development company with focus on Greater Stockholm. The company acquires, plans, develops and sells properties in the mid‐range segment. ALM Equity mainly develops tenant‐owned apartments, even though it plans to develop both tenant‐owned and rental apartments. The company uses the percentage of completion method when accounting for profit, adjusting for the sales ratio.

Most peers operate largely in Sweden in general and Stockholm in particular

Besqab develops residential and care housing in Stockholm and Uppsala. Its residential business consists of tenant‐owned, rental and ownership apartments. The majority of the company’s customers are aged between 26 and 39 years. The company uses the percentage of completion method when accounting for profit, adjusting for the sales ratio.

JM is a Nordic developer of real estate housing with an emphasis on growing cities in Sweden, Norway and Finland. The majority of units under production are tenant‐owned apartments and only 5% are rental. The company uses the percentage of completion method when accounting for profit, adjusting for the sales ratio. In addition, it maintainsa conservative margin assumption on a project until 60% of the project has been finalised.



Oscar Properties develop more exclusive tenant-owned apartments

Oscar Properties develops tenant‐owned apartments in the high‐end segment in attractive locations in Stockholm. The company strives to develop unique housing with famous architects. The company uses the percentage of completion method when accounting for profit (development operations), adjusting for the sales ratio. Property management properties (office for rents), however, are market valued on a quarterly basis.

Peab is an integrated construction and development company (among the top three construction companies in Sweden) with residential development in Sweden, Norway and Finland. The company also develops residential rental properties, although it normally only constructs residential rental units for third parties. The company uses the percentage of completion method when accounting for profit (without adjusting for the sales rate).

Skanska is an integrated construction and development company (among the top three construction companies in the Nordics) with residential development in Sweden, Norway, Finland and Poland/Czech Republic. The company also operates under the brand Bo Klok which it owns together with Ikea, targeting affordable housing projects (tenant‐owned). The company also develops rental apartments, but mainly develops tenant‐owned projects. Skanska accounts for profit in its segment reporting when it signspurchase agreements, which is normally 18 months prior to completion. The company combines this front‐end loaded profit accounting with a more cautious assumption for margins until 75% of a project has been finalised, thereby smoothing the earnings contribution slightly. In addition to the segment reporting, the company also publishes an IAS‐based reported P&L which is based on completed contracts accounting.

SSM strives to develop 60% tenant‐owned, 30% rental and 10% student apartments. The company operates in Greater Stockholm and the customers are usually aged between 20 and 44 years old. The company uses the percentage of completion method when accounting for profit, adjusting for the sales ratio.

Tobin and Oscar Properties’ mix is very different to Magnolia Bostad

Tobin predominantly operates in Greater Stockholm and Uppsala. Together with architects and consultants, the company develops tenant‐owned apartments. Most customers belong at the upper end of the mid‐priced segment. The company uses an alternative percentage of completion method, in which it revalues building rights or land at market value when detail zoning is in place and then most of the development gains when the co-op structure has been created. The remaining construction’s profits will then gradually be recognised based on the production ratio rather than the sales ratio. This method will likely be sensitive to changes in project gains, prices and sales rate. The business model and risk are not comparable with Magnolia.

Veidekke is a fully‐integrated Nordic construction company (among the top five in Sweden). The company operates in Norway, Sweden and Finland with major residential development operations in Sweden and in Stockholm. The company uses the percentage of completion method when accounting for profit, adjusting for the sales ratio.

Wallenstam is among the largest listed real estate companies in Sweden with SEK 39.7bn of properties under management, 44% of which is Residential properties. The company also has 2,349 residential units under construction as of Q3 2017 (of which 85% is residential rental properties). Wallenstam develops residential rental properties for its own property management, although it is worth pointing out that it has also sold residential rental properties, but a very limited amount of these divestments have been newbuild properties. Since Wallenstam is classified as a real estate company, it profit accounts using fair value assessment of its properties (and projects) every quarter, which is included in its pre‐tax profits as unrealised value changes. When the company develops tenant‐owned apartments, revaluation is linked to percentage of completion while when the company develops rental apartments for own management, most of the development revaluation will come towards the end of the completion period.



Non-listed peers Einar Mattson is a private company that owns, operates and develops properties in the

Greater Stockholm area. The company owns 5,200 completed units under property management and manages an additional 13,500 units for external clients. The company has four ongoing tenant‐owned projects with 752 units under production and five additional planned tenant‐owned projects with approximately 605 units. The company also has four ongoing rental projects with approximately 575 units under production andan additional five planned projects with approximately 630 units. In total, the company has approximately 1,330 units in production, ~43% of which are rental projects.

Ikano Bostad is a private company that manages and owns approximately 6,000 units. The company also develops both tenant‐owned and rental properties and today has 1,650 units in production (undisclosed split).

Other non‐listed peers: Järntorget, Rikshem, Åke Sundvall, Familjebostäder, Svenska Bostäder, Stockholmshem, Småa, Folkhem, Lindbäcks and others.

Accounting principles When comparing earnings, sales and cash flow between companies, it is important to

keep in mind that all of the peers apply different accounting methods to Magnolia but

also to put the profits in relation with the risks. Since Magnolia divest its properties in

connection with unit start earnings will be recorded very early in the process, but since

the company take no development risks, very limited part of Sales will be recorded,

boosting margins in connection with divestments. If the properties will be sold to

tenants, Magnolia will get additional compensation (above rental property divestment

model) very late in the projects but with very small contribution to sales hence boosting

margins further.

Profits are usually recognised as percentage of completion or in combination with sales ratio in the projects.

The most commonly used accounting method is the percentage of completion (POC)

method but with an adjustment for the sales rates of the projects. Among the peers, this

is the most commonly used accounting rule which reflects earnings related to invested

capital in the project but excludes apartments not sold. JM uses this accounting method

but with a conservative margin assumption until 60% of a project has been finalised, and

most of the smaller developers use this method. Skanska, Peab and Bonava are

exceptions and all apply different methods. Skanska uses the contract method whereby it

accounts for all of the profit related to signed contracts, although it applies some caution

towards the margin early on in a project. Peab uses straight POC without adjusting for

the sales rate, while Bonava uses completed project accounting – the most conservative

method of accounting on all parameters – generating earnings and cash flow when a

project has been finalised.

The charts provide an example of profit accounting

We have created a simple example below in which we illustrate the aggregated timing of

sales, EBIT and cash flow. Our theoretical case is based on total project price of 1,000,

200 of which is production costs allocated to land or building rights. The project should

materialise in 20% EBIT margin for tenant‐owned projects and 10% margin for rental

development. Production time is expected to be six quarters (18 month) and the sales

ratio is assumed to be 50% at production starts and then linear up to 100% during the

remainder of the project. It is worth mentioning that accumulated accounting of sales in

Magnolia (both rental and tenant‐owned) will be well below 1,000 recorded by its peers,

since Magnolia’s books will not carry any development costs other than land costs. We

have compared Magnolia’s percentage of accumulated sales with its peers to illustrate

this fact.



Source: Company data and Nordea Markets (all graphs above)

Peer positioning

Magnolia Bostad has a unique niche

Based on the mix of tenant‐owned and rental units and its strategy to build affordable or exclusive properties, it appears that Magnolia Bostad operates in a unique niche. Many property developers tend to focus on developing fairly exclusive tenant‐owned properties and this concentration in the market is probably a result of a long period with favourable market conditions.

Magnolia Bostad has experienced rapid growth and high profitability

Magnolia Bostad´s position as one of few listed developers of rental properties has enabled the company to grow and gain market share rapidly. Compared with peers, the company has also experienced high profitability. SSM has 20‐30% rental units under development but is far from Magnolia Bostad´s exposure of over 90% rental units. JM and Bonava have 5‐10% rental units in their portfolios (but aim to develop 30% of its units for the rental market in Sweden), whereas Oscar Properties exclusively develops tenant‐owned properties. We illustrate Magnolia Bostad’s unique position in the market in the chart below.

Accumulated accounting of Sales (per quarter) Accumulated accounting of EBIT (per quarter)

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Trend towards rather exclusive tenant-owned properties

Source: Nordea Markets. Company logotypes.

Historical performance and financial position Most companies have experienced positive but volatile sales growth

The historical sales growth among peer companies is very volatile, with larger companies such as JM and Bonava experiencing a more stable growth rate than the smaller companies. However, the trend is very positive as the median sales growth has varied between 10% and 77% during 2014‐16. Owing to extreme volatility in some years, the median rather than the average figure is more representative.

Higher EBIT margins for peers that secure construction costs due to lower reported sales.

EBIT margins are more stable among peers, except for Tobin, which experienced extreme volatility due to negative EBIT numbers for two years. Smaller peers that offer products in a specific niche or segment have experienced higher EBIT margins than larger companies that embrace the entire value chain and have a construction team of their own. During the current period, Magnolia Bostad has outperformed all of its peers in terms of EBIT margin.

Rapid growth and high profitability are usually coupled with high leverage

The companies with the highest EBIT margins, such as SSM and Oscar Properties, also have the highest leverage. The debt/equity ratio is also very high for Magnolia Bostad. It appears that most companies that have experienced rapid growth have also been able to keep or improve high EBIT margins but at the cost of increasing debt.

Source: Company data and Nordea Markets. Note difference in accounting between peers, see subsection “Accounting practices” above.

Peer comparison of historical performance

2014 2015 2016 9m '17 2014 2015 2016 9m '17 2014 2015 2016 9m '17ALM Equity 146% 90% -15% 123% 19% 14% 15% 14% 0.5 0.5 0.5 0.5Besqab 24% 64% -14% 116% 12% 20% 23% 16% 0.3 0.2 0.1 0.1Bonava n.a. n.a. 3% 22% n.a. 11% 12% 13% n.a. 0.3 0.3 0.3JM 13% -2% 10% 9% 13% 11% 13% 14% 0.2 0.2 0.2 0.1Magnolia Bostad -2% 523% 15% 141% 34% 23% 35% 14% 0.6 0.5 0.5 0.6Oscar Properties 79% 141% 95% 79% 24% 20% 20% 29% 0.6 0.4 0.5 0.5Peab 25% -7% 5% 28% 5% 6% 9% 9% n.a. n.a. n.a. n.a.Skanska 4% 29% 8% 16% 7% 10% 16% 18% n.a. n.a. n.a. n.a.SSM 141% -15% 85% 4% 17% 29% 29% 41% 0.6 0.5 0.5 0.3Tobin 52% 170% 711% 5% -338% -263% 56% 107% 0.1 0.4 0.5 0.5

Average 53% 110% 90% 54% -23% -12% 23% 27% 0.4 0.4 0.4 0.4

Median 25% 64% 9% 25% 13% 12% 18% 15% 0.5 0.4 0.5 0.4Min -2% -15% -15% 4% -338% -263% 9% 9% 0.1 0.2 0.1 0.1Max 146% 523% 711% 141% 34% 29% 56% 107% 0.6 0.5 0.5 0.6

EBIT margin Debt/AssetsSales growth



Most companies have a positive CAGR in building rights

The rapid sales growth can be understood by considering the changes in the portfolios of building rights. All companies have experienced a positive CAGR in building rights, where Bonava’s CAGR is close to zero.

Magnolia Bostad has a 106% CAGR in units under development

The companies that have experienced the highest sales growth are also the ones that have the highest CAGR in units under development. Once again, Magnolia Bostad has outperformed most companies with a CAGR in units under development of 106%.

Source: Company data, peer data and Nordea Markets

Magnolia Bostad has outperformed on almost all levels

Based on the analysis above, we suggest that Magnolia Bostad appears to have been successful versus peers. It has outperformed most companies in terms of sales growth and EBIT margins as well as growing the portfolio of building rights and converting rights into units under development. It should be noted, however, that the company has a comparatively high leverage position.

The relationship between risk and accounting principles Non-conservative accounting coupled with less risk as…

Although Magnolia has the most aggressive accounting practice among its peers, we believe that this could be justified as the risk Magnolia takes on with its started project is much lower than that of its peers owing to among other things:

…sales are B2B … Exposure to rental apartments in business‐to‐business rather than business‐to‐consumer transactions.

…to strong institutions…

Buyers are strong institutions, usually associated with pension capital and similar, and we find it less likely that they would not deliver on their part of the contract than for, let’s say, a consumer not to deliver on theirs.

…with fixed price contracting…

Development risk is minimised as contractors are taken in with fixed‐price contracts.

…and actually sold off at revenue recognition

Projects are generally packaged in a separate company and sold off to the investor, meaning that when Magnolia Bostad recognises revenue and profits, the project and – we would argue – a lot of the risk are outside of the Magnolia group.

Peer comparison of building rights

2014 2015 2016 9m '17 CAGR 2014 2015 2016 9m '17 CAGR

ALM Equity 3,805 5,056 5,090 9,362 39% 454 515 840 1,473 53%

Besqab 2,100 300 3,000 3,500 20% 439 639 776 892 29%

Bonava 31,300 29,100 28,000 31,500 0% 7,687 8,778 9,113 9,861 9%

JM 29,400 31,100 32,500 34,800 6% 6,375 7,212 7,984 7,739 7%

Magnolia Bostad 3,534 4,720 11,190 15,848 73% 631 2,258 3,945 4,626 106%

Oscar Properties 2,700 2,360 3,824 3,951 15% 469 843 1,047 1,116 37%

Peab 29,100 28,600 28,400 31,000 2% 4,034 4,043 4,381 5,327 11%

Skanska 24,150 25,200 24,900 26,840 4% 4,748 4,329 6,955 8,006 21%

SSM 1,752 2,337 5,255 6,423 60% 813 1,287 1,479 1,414 22%

Tobin 408 1,657 2,500 2,544 94% 194 421 406 417 32%

Average 12,825 13,043 14,466 16,577 31% 2,584 3,033 3,693 4,087 33%

Sum 128,249 130,430 144,659 165,768 10% 25,844 30,325 36,926 40,871 18%

% Magnolia Bostad 3% 4% 8% 10% 2% 7% 11% 11%

Median 3,670 4,888 8,223 12,605 18% 722 1,773 2,712 3,050 26%

Min 408 300 2,500 2,544 0% 194 421 406 417 7%

Max 31,300 31,100 32,500 34,800 94% 7,687 8,778 9,113 9,861 106%

Building rights Units under development



Historical financials

Magnolia Bostad experienced rapid growth in net sales between 2013 and LTM ending September 2017, with a CAGR of 75%. During the same period, the company increased adjusted EBIT at a CAGR of 146%. These growth figures are mainly driven by acquisitions and gradual conversions of building rights into projects under development. This has resulted in negative free cash flows and increased borrowings over time, swelling the company’s net debt position and increasing interest expenses.

Operational Net sales at a CAGR of 75% between 2013 and LTM

Magnolia Bostad has increased net sales at a CAGR of 75% between 2013 and LTM ending September 2017. Net sales are mainly related to the process of selling and developing project properties. However, when a property is acquired, an assessment is made whether the property should be regarded a development property or investment property. In both cases, Magnolia Bostad might generate rental income, which contributes to net sales.

Swift expansion of the product portfolio since Q3 2016

The increase in net sales also shows the company’s historical ability to secure sales and thus convert building rights into properties under development. The gap between building rights and apartments under production has been fairly stable until Q3 2016 when the company expanded their portfolio of building rights rapidly. Over time, however, we expect most of these building rights to be converted into apartments under construction and to further increase net sales. Since Magnolia Bostad to a greater extent recognises revenue before – rather than during – construction, revenue is likely to remain volatile on a quarterly basis. Conversely, cash flows will be smoother during the construction process.

Sold projects are outside the Magnolia group

As projects are sold off they usually do not constitute a part of the Magnolia group anymore, and hence revenues and costs for construction post sale does not affect the books of the Magnolia group.


Building rights and apartments under production Magnolia Bostad reported net sales

Net sales per employee and average number of employees Magnolia Bostad adjusted EBIT

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Sales related to project properties is the main driver of growth in net sales


The number of employees has increased from seven in 2013 to 75 in Q3 2017

As Magnolia Bostad has increased its top line and expanded its portfolio of building rights, the number of employees has followed the same trend and increased considerably, from seven in 2013 to 75 in Q3 2017. On the other hand, net sales per employee have been kept at similar levels since 2013.

EBIT margins are moving between 15% and 35%

The rapid growth in net sales has also boosted EBIT. Between 2013 and LTM ending in September 2017, the adjusted EBIT CAGR was 73% following a decline in EBIT during the last 12 months. This trend could be explained by a smaller number of sold projects in Q4 2016 as well as Q1 and Q3 2017. Adjusted EBIT margins have moved between 15% and 35% on an annual basis. Adjustments to EBIT are mainly related to a considerable revaluation during a transition of a previous associated company to subsidiary in 2015.


Cost structure Cost base mainly constitutes production expenses

A higher number of projects under developments and growth in net sales have also led to an overall cost increase. The largest part of the cost base is related to the production process. Production expenses have increased by a CAGR of 77% between 2013 and 2016 – which should be compared to the CAGR in net sales over the same period of 92%.

Magnolia Bostad net sales split

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Increased borrowing has resulted in higher interest expenses

Since acquisitions of building rights are financed almost exclusively by borrowings, the company’s net debt position has increased and is visible in the increase in interest expenses. Between 2013 and LTM, interest expenses saw a CAGR of 104%.

Profit or loss from participation in associated companies and joint ventures are primarily related to the associated company Kanikenäsvarvet Bostad HB, which Magnolia Bostad jointly owns with Slättö.


Central administration mainly consists of personnel costs

Central administration consists primarily of personnel costs, even though some personnel costs are capitalised in production expenses, and has increased gradually when the company has grown from seven employees in 2013 to 75 employees in Q3 2017. Central administration has increased by 67% in CAGR between 2013 and LTM.

Other external costs relate to operating leases and auditing

Other external costs include, among other things, operating leases, which are largely related to commercial rental premises, fees and cost reimbursement for auditing. Other external costs surged from 2013 to 2015 and fell slightly in 2016.


Operational costs back at high levels in relation to sales

In relation to sales, most cost categories are quite stable over time. Production expenses have been hovering between 50% and 70% of sales. Total annual operational costs in relation to sales were highest, at 83%, in 2013 and lowest, at 65%, in 2016. Meanwhile LTM has been close to 2013 levels, at 84% ofoperational costs.

Production expenses Interest expenses

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Source: Company data and Nordea Markets. LTM is the last 12 months ending in September 2017, and is partly an approximation.

Financial position Higher borrowing at a CAGR of 100% from 2013 to 2016

The swift expansion of the project portfolio has increased borrowings at a CAGR of 100% between 2013 and 2016. The increasing in net debt also shows that the company needs to increase borrowing as long as acquisitions of building rights remain at historically high levels.

Lower equity ratio due to increased borrowing

The increased use of borrowing has also affected the equity ratio. The amount of equity in relation to assets has dropped to 30% in Q3 2017 from 51% in 2013, demonstrating the company’s growth strategy.


Cash flows Negative free cash flows during the past four years

Magnolia Bostad has reported positive and significantly higher cash flows between 2013 and 2016. However, the free cash flows over the same period are negative and provide a better measure of the company’s underlying business. Positive cash flows are largely related to additional borrowings and a share issue in 2015.

Cost category in relation to sales

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Profit and revenue recognition Unusual revenue recognition

Magnolia Bostad’s approach to revenue recognition might appear as the least conservative of its peer group when considering only the timing of profit accounting while disregarding the lower operational and market risk model in Magnolia Bostad’s business model.

The group recognises revenues from rental apartments when:

A binding agreement has been entered into with the buyer of the property

There is local planning

A binding turnkey contract has been entered into with a contractor

Risk that earnings are not being matched by cash flows in coming periods

As the project progresses and estimates for the outcomes of projects change, the profits and losses in the period are affected by the change in estimated outcomes. This means that if costs escalate or buyers cannot pay, projects for which profit has already been recognised could force the company to revise already recognised profits. If the economic sentiment in the construction sector, the real estate sector or in Sweden in general turns bearish, there is a risk that some parts of Magnolia Bostad’s historical profits are attributable to projects that are partly unpaid and may therefore revert to losses. However, Magnolia Bostad actively manages counterparty risk by working with solid partners and fixed prices, hence price risk of started projects is largely mitigated, in our view.

Revenue recognition similar for tenant-owned apartments

For tenant‐owned apartments, the group recognises revenue and – in essence – profit in a similar manner as for rental properties, with the exception that the contract of purchase is entered into with a tenant‐owner association. If sales are gradual, then a sales target of say 70% must be reached, after which profits are recognised as a percentage of sales.

Although constituting a small part of profits, revenue from project managementagreements is recognised by the degree of completion, while rental income is recognised in the period for which it is attributable.

Revenue from project management agreements is recognised gradually based on the degree of completion in the projects. Project management is invoiced on an ongoing basis during the projects.

Conclusions The company’s approach of recognising revenue is based on its business model and

althogh it might stand out as front‐end loaded compared with other real estate developers, this is fully related to the lower financial and operation risks since the company already have sold all units while securing all costs. Other competitors, such as JM, apply the percentage of completion (POC) method, adjusting for the sales ratio

Free cash flows Cash flows

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and assuming conservative margins up until 60% of apartments are sold, which means that the level of revenue that has been recognised depends on how much of the project has been completed. Project costs are used as a measure when deciding on the degree of completion. JM does not have contractual agreements with subcontractors for each project, although it operates with frame agreement on a group level.

The number of started projects is reflected in net sales

Magnolia Bostad’s approach of revenue recognition affects the financial statements in different ways. In the short term, the number of started projects under development can be noted in the income statement. However, if the company is unable to start any further projects due to unfavourable market conditions, net sales will drop significantly.

Current growth rate and acquisitions of building rights will likely result in negative free cash flows

Looking at the company’s cash flows, the effect is reversed. As long as Magnolia Bostad keeps growing and acquiring building rights in a similar pace, free cash flows will likely continue to stay negative and additional borrowings will be needed. On the other hand, if Magnolia Bostad stops acquiring building rights and does not initiate further projects, it will most likely experience positive free cash flows for some time, owing to inflows of receivables from buyers of previously sold projects.



Estimates

We believe that Magnolia can reach the goal of selling 3,000 units per year by 2021. We use profitability on the gross profit level and estimate that absolute gross profit will increase by ~87% over from 2017 to 2020. We estimate the lag of cash flows to gross profits of ~2.5 years and believe that the indirect tenant-owned model will be a relatively slow starter. With the move towards hotels and care housing, we believe that Magnolia can sell hotels and care units totalling around 100 rooms and 300 units, respectively, by 2020.

We expect 2,200 residential units per year to be reached by end-2018

When it comes to the traditional models, ie rental and direct tenant‐owned apartments,

we estimate ~1,645 units sold units during 2017, meaning 641 in Q4. In 2018, we believe

this number will reach some 2,200 units, while the goal of 3,000 would be reached by

2021.

We deem gross profit per unit a better proxy for profitability of sales, as net sales and

gross margins are heavily impacted by the nature of the rights being sold, ie whether

they are options or actual land booked on Magnolia Bostad’s group balance sheet. Gross

profit per unit is estimated to go from SEK 0.14m up to SEK 0.16m by 2019/20 from

where it is projected to grow by 2‐2.5% per year. As a point of reference, in 9M 2017,

gross profit per unit is SEK ~0.15m in our estimates5.


We further believe that the indirect tenant-owned model will struggle in the current environment and project a 7% conversion rate by 2019

On top of sales from traditional models, ie the rental and direct tenant‐owned models,

we add projected sales and profit from the indirect tenant‐owned model. In this model,

units are converted from rental apartments to tenant‐owned apartments. The company’s

goal is a conversion rate of some 25%, although we believe that due to the current

sentiment in the Swedish residential housing market, this will be hard to achieve in the

short and medium term. Hence, we estimate conversions will reach slightly below 150 by

2020. Even if the indirect tenant‐owned apartment conversion is unsuccessful, Magnolia

aims to always have at least a 10% margin in the rental model.

5 Total gross profit for 9M 2017 is already reported. However, to back‐track the gross profit attributable to selling development

projects, some assumptions must be made at least on rental income, which is only reported on an annual basis.

Sold units and gross profit per unit in traditional models Sold units and gross profit/unit in traditional models, rolling 12 m

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Gross profit of conversion an additional 50%-100% of rental development

We estimate that a conversion will yield, on average, an additional kick‐back amounting

to 50% of the gross profit already received from selling it as a rental apartment. The low

number is due to the current market sentiment in tenant‐owned properties in Sweden,

and we project that the gross profit beyond 2020 will be in line with the gross profit

already received from the rental development.


In addition to the conversion model and tradition residential model, we have also

projected sales in:

Care housing: Gross profit per unit is twice as high as that of residential

developments. We estimate 198 units sold during Q4 2017, which is half of what

Magnolia has aimed for in their portfolio planning. We see both upside potential

and downside risk to this number. We see a boost in 2019 with some 600 units

sold.

Hotels: We assume a 1.5x absolute gross profit in relation to that of traditional

residential units. We see some chance of a hotel sale in 2018, but 2019 is more

likely.

Project management: Project management income makes up 4‐6% of sales in

our medium‐term forecasts.

Rental income: Rental income is projected to make up 2‐4% of sales in the

medium term. Rental income has been assumed to have 70‐80% gross profit

margin.


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Care housing Hotels



Sales are then estimated as an effect of gross profit estimates, though we deem estimates to be volatile

Even though we do not consider sales to be a good indicator for the progress of

Magnolia Bostad’s business, and also consider them quite unpredictable. Sales vary

greatly depending on the type of project sold – if the building rights are options or if

they are booked on Magnolia’s balance sheet. As this is not transparent, we estimate

sales as a function of gross profit with a margin of ~30‐35%. The gross margin is much

higher in the indirect tenant‐owned model, but we estimate that this is only a small part

of the business. The first and third quarters are smaller, while the second and fourth

quarters tend to be stronger.

Source: Company data and Nordea Markets Source: Nordea Markets

Operational expenditure to gross profit will remain below 15% and then decrease beyond 2018

Operational expenditures in relation to gross profit have increased lately as Magnolia

has among other things ramped up personnel and acquisitions in the rights portfolio. We

estimate that it will remain in the <15% territory and gradually decrease, owing to

operational leverage. We therefore expect the EBIT margin to increase at a higher rate

than gross margin, while being more sensitive to seasonality.

Source: Company data and Nordea Markets Source: Nordea Markets

Portfolio expected to have around 15,000 units

We expect Magnolia to aim for a rights portfolio size of about 15,000 units. This means

that units sold will on average be slightly above rights acquired for some time. As a best

guess, we expect sold units and acquired rights to be in line with each other from mid‐

2019 on.

We then project receivables and tied-up capital in the rights portfolio going forward

Another important aspect when valuing Magnolia Bostad is the binding of capital in the

rights portfolio as well as in receivables – as the company is only paid for the profit part

of projects after they have been completed, which usually takes some 2.5 to three years

(we assume closer to 2.5 years). As the number of sold units increases, so does profit.

Cash flow matching that profit, however, is tied up on the balance sheet as receivables

for around 2.5 years. As the number of sold units increases, we see an increase in

receivables. The opposite is the case for units already sold for which profit has not yet

been paid, as this is expected be paid during the following ~2.5 years. We estimate that a

Net sales over quarters Gross profit and margin

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total of SEK 1.2bn is unpaid, SEK ~450m of which will be paid to Magnolia in the coming

12 months. As we estimate the profitability of past projects to have been slightly higher

than for the imminent projects, we expect capital tie‐up to decrease during 2018 and then

increase to SEK ~1.6bn in 2021.


Below are our detailed estimates for Magnolia Bostad’s future operations.


Development of rights portfolio Capital in rights portfolio and receivables for uncompleted projects

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Detailed estimates

Q1 Q2 Q3 Q4E Q1E Q2E Q3E Q4E Q1E Q2E Q3E Q4E 2017E 2018E 2019E 2020ENet sales 71 790 193 457 195 444 357 639 208 546 428 554 1,511 1,634 1,736 1,848

% y/y growth -66.2% 82.0% -20.3% 268.8% 174.1% -43.8% 84.8% 39.8% 6.7% 23.0% 20.1% -13.3% 49.6% 8.1% 6.2% 6.5%

Gross profit 26 136 19 154 69 149 123 217 76 186 145 186 335 559 593 626% of sales 36.6% 17.2% 9.8% 33.6% 35.5% 33.6% 34.5% 34.0% 36.7% 34.0% 33.9% 33.6% 22.1% 34.2% 34.2% 33.9%

Operating profit 14 126 7 139 53 136 109 201 60 168 127 169 286 499 524 555% of sales 19.7% 15.9% 3.6% 30.3% 27.1% 30.7% 30.4% 31.5% 28.8% 30.8% 29.6% 30.5% 18.9% 30.5% 30.2% 30.0%

% of gr. profit 53.8% 92.6% 36.8% 90.2% 76.4% 91.3% 88.2% 92.5% 78.5% 90.7% 87.6% 90.8% 85.3% 89.2% 88.4% 88.6%

Net profit -9 101 -22 109 22 105 80 172 30 136 93 131 179 379 390 421% of sales -12.7% 12.8% -11.4% 23.8% 11.3% 23.7% 22.4% 26.9% 14.6% 24.9% 21.7% 23.6% 11.8% 23.2% 22.5% 22.8%

% of gr. profit -34.6% 74.3% -115.8% 70.9% 31.9% 70.6% 65.0% 79.0% 39.7% 73.1% 64.2% 70.1% 53.5% 67.9% 65.7% 67.2%

Sold units 130 650 224 839 312 845 634 1,036 331 1,010 766 1,014 1,843 2,827 3,120 3,195Rights portfolio 11,830 16,170 15,848 15,418 15,706 15,461 15,477 15,091 15,460 15,602 15,602 15,727 15,418 15,091 15,727 16,102

Receivables 1,200 1,233 1,181 1,208 1,210 1,294 1,236 1,286 1,294 1,344 1,233 1,294 1,344 1,455Value of portf. 1,453 905 1,326 1,290 1,314 1,294 1,295 1,263 1,294 1,305 1,305 1,316 1,290 1,263 1,316 1,347

2017 2018 2019 Years



Risk factors

This section highlights the main risk factors for Magnolia Bostad and primarily covers operational, financial and regulatory risks. These risk factors are assessed in terms of their effect on the company’s operations, financial performance and financial condition. The following is not an exhaustive list, but rather an overview of some of the key risk factors for the company as we see it.

Macroeconomic factors The real estate market is cyclical and affected by macroeconomic factors

Magnolia Bostad operates in the cyclical real estate market. Hence, general

macroeconomic factors, such as GDP development, population growth and level of

production of new housing heavily impact the company. Since the project portfolio is

concentrated to some strategic areas, 57% in Greater Stockholm, regional development

could have a substantial impact on the company’s operations and financial performance.

A downturn in the economy is likely to have an adverse effect on the Swedish housing

market and thus impact the company’s operations. One example could be if the

company planned to develop a real estate project but the current market conditions

mean that the company is unable to sell the apartments and it ends up postponing the

start of the project.

Competition Domestic and foreign competitors may put pressure on profitability

The Swedish market for real estate development is relatively fragmented and highly

competitive. Competition may increase further as competitors develop their strategies

and strengthen their financial position. Furthermore, strong price performance on the

real estate market may attract new competitors and put pressure on profitability. Foreign

competitors could also enter the market to a larger extent, further increasing the

competition.

There could be considerable risk for Magnolia Bostad to be left out by buyers or contractors

In Magnolia Bostad’s case, there is a risk of new competitors entering the market as well as a risk that some suppliers or buyers expand their market scope and develop the properties themselves. Magnolia Bostad’s business model is to combine a buyer of a property, a contractor of the same property and a municipality that allows for the construction to commence. It is possible that a contractor or a real estate management company could do what Magnolia Bostad is doing today, leaving out Magnolia Bostad from the business or pressuring its margins.

Changes in interest rates Interest expenses a large part of total costs

The company’s interest rate expenses constitute a large part of its total costs. Changes in

interest rates would therefore have a significant impact on the financial performance of

the company. Additionally, interest rates across Europe, and especially in Sweden,

remain at historically low levels and have probably boosted activity and spending in real

estate development projects.

Yield requirements on rental units and interest rates tend to correlate, and although

there are still attractive yield gaps between headline rates and yield requirements

(approximately 3% today), prices on rental units might come under pressure and/or

demand deteriorates when rates increase. Since rents for the rental properties are

regulated, CPI adjustments are delayed and hence returns (yields) would come under

pressure if rates are up driven by inflation. In 2017 and 2018, the rental adjustment on

average was 0.7% (SABO estimate for 2018), below the general CPI adjustments for

commercial real estate properties (+1.2% in 2017 and +1.7% in 2018).



Historically low levels of interest rates are likely to increase over time

However, even though the Riksbank expects interest rates to remain at similar levels in

the future, interest rates are likely to approach normalised levels over time. This would

have a negative impact on borrowing costs and probably dampen activity in the

industry. Thus, changes in interest rates would affect the company’s financial

performance and financial situation. Also, since Magnolia Bostad has issued bonds with

floating rates, the company is directly exposed to changes in interest rates.

Financing risk Developing properties require financing options in order to secure profitability

Development projects require favourable financing options in order to secure

profitability. If financing cannot be obtained, extended or expanded, the company may

risk losing promising acquisitions of building rights. Strong overall economic

development and low interest rates have probably led to a currently promising financing

market for the company. However, there is still a risk that the company has, due to

costly financing, overpaid for its building rights and may therefore not be able to fully

realise the expected return on a project.

Counterparty risk Most units are sold before production starts but counterparty risk still exists

Properties developed as rental apartments are sold before production starts and tenant‐

owned apartments must have binding agreements to specific sales targets before

production starts. For instance, a sales target can be defined as securing the sale of 75%

of the project. In both cases, the buyer provides funding on an ongoing basis throughout

the process. Nevertheless, there is still a risk that Magnolia Bostad will not get paid as

agreed upon, as the company still faces counterparty risk.

Dependence on key customers – 71% of sales to top-three customers

Even if the probability of a buyer failing to pay might be quite low as Magnolia Bostad

attempts to target financially strong investors, the impact can be significant as the

majority of Magnolia Bostad’s sales are to its top‐three customers. In 2016, sales to these

three parties constituted 71% of totals group sales, while all other customers represented

less than 10% of total sales each.

Counterparty risk both to buyer and contractor

However, the buyer is not the only counterparty in Magnolia Bostad’s operations. Since

the company outsources the production process to contractors using turnkey contracts,

additional counterparty risk exists. This could result in a situation where Magnolia

Bostad needs to find another buyer or new contractors if any of the counterparties

becomes insolvent during the development of the project. Alternatively, the company

could cancel an ongoing project if any of the counterparties fail the ongoing funding.

Volumes and demand

When we combine macroeconomic risks, changes in interest rates, financing risks, and

counterparty risks, there is a clear risk also that demand for Magnolia’s projects (both

rental and tenant‐owned) will correlate with and exaggerate the cyclical swings in the

company.

Legal, tax and political risks

Changes in building codes, taxes and other regulations affect operations

Changes in regulations, tax rules or development restrictions could have an adverse

effect on Magnolia Bostad. Strong price performance in the Swedish housing market

may cause political action, changing the nature of business. This could include political

initiatives to try to cool down the real estate market by raising taxes on residential

properties. Also, changes in building codes, building rights and security rules will

probably have an effect on Magnolia Bostad’s business.



Changes to customer purchasing power will also affect operations

Changes affecting the household economy, such as taxes or amortisation rules, would

reasonably affect the housing market since the customers’ purchasing power is likely to

be affected. All in all, any changes to the end customers’ capability or willingness to pay

for housing may impact Mangold Bostad’s possibility to develop and sell real estate.

Key personnel The company is reliant on the experience and knowledge of some key personnel. Since

Magnolia Bostad has experienced rapid growth in terms of building rights in the

portfolio and strives to further gain market shares, keeping and recruiting new

personnel is essential for additional growth.

Ownership structure and conflict of interest

Founder and Chairman Fredrik Holmström is vital to Magnolia Bostad

Fredrik Holmström, one of the founders and current chairman of the board, is the

majority shareholder of Magnolia Bostad and controls more than 50% of the

votes/capital. Therefore, he is a vital part of the company. Potential sell‐offs or changes in

his position will likely have an impact on the company’s long‐term performance.

CEO and co-investor Fredrik Lidjan also very important to the company

Since the CEO, Fredrik Lidjan, is a co‐investor of future development projects of rental

apartments and Fredrik Lidjan and Clas Hjorth, responsible for hotel constructions, are

co‐investors to future developments of hotel projects, a potential conflict of interest may

arise in the future. For instance, short‐term profit maximisation from projects may not

align with long‐term value creation for Magnolia Bostad.

Risks associated with the business model Price trends and overall activity in the market will affect demand for property development

The company’s business model is mainly new real estate development projects and a key

requirement for any of its project is profitability. A development project that is

unprofitable will simply not be implemented. One factor affecting profitability is the

company’s ability to sell residential properties. For instance, if there is a risk that the

company is unable to meet the market’s demand, Magnolia Bostad will probably

struggle when trying to secure a deal to sell residential. Price trends and the activity in

the real estate market are some factors affecting market demand.

Since activity in the Swedish housing market has increased, Magnolia Bostad may suffer

from a shortage of resources. This could cause longer delivery times and increase

building costs. If increased building costs cannot be balanced out with higher income,

the company will suffer from lower profitability.

Some risks are inherent in the production process

As the company develops real estate projects, it faces risks related to the production

process. Such risks could include defect assembly, environmental aspects or construction

problems. Some of this risk is managed through fixed production costs in turnkey

contracts. Also, the company experiences risk before and after the development process.

Unexpected costs related to acquisitions or problems with selling can impact the

company’s operations and financial position.



Reported numbers and forecasts


Income statementSEKm 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022ENet revenue 4 144 141 876 1,010 1,511 1,634 1,736 1,848 1,990 2,116 Revenue growth n.m. -2.1% 523.1% 15.4% 49.6% 8.1% 6.2% 6.5% 7.6% 6.3% EBITDA -8 25 49 367 357 287 505 530 561 607 651

Depreciation and impairments PPE -2 0 0 0 0 -2 -6 -6 -6 -6 -6

EBITA -10 25 49 367 357 286 499 524 555 601 645

Amortisation and impairments -1 -1 -1 -10 -2 0 0 0 0 0 0 EBIT -11 24 47 357 355 286 499 524 555 601 645

of which associates 0 0 -1 0 15 -7 -4 -4 -4 -4 -4

Associates excl. from EBIT 0 0 0 0 0 0 0 0 0 0 0

Net financials -0 -3 -17 -50 -89 -107 -119 -120 -97 -83 -65

Pre-Tax Profit -12 21 30 307 266 179 379 405 457 518 581

Reported taxes -0 0 -1 -0 0 0 0 -15 -37 -41 -46

Net profit from cont. operations -12 21 29 307 266 179 379 390 421 476 534

Discontinued operations 0 0 0 0 0 0 0 0 0 0 0

Minority interest 0 0 0 -19 -43 -45 -34 -34 -36 -41 -47

Net profit to equity -12 21 29 288 223 134 345 356 385 435 487

EPS -0.38 0.66 0.90 8.07 5.86 3.55 9.11 9.42 10.18 11.51 12.87

DPS 0.00 0.00 0.00 1.00 1.75 1.75 2.28 2.36 2.55 2.88 3.22

of which ordinary 0.00 0.00 0.00 1.00 1.75 1.75 2.28 2.36 2.55 2.88 3.22

of which extraordinary 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00 0.00

Profit margin in percent EBITDA -221.7% 17.2% 34.7% 41.9% 35.3% 19.0% 30.9% 30.5% 30.3% 30.5% 30.8% EBITA -275.2% 17.2% 34.7% 41.9% 35.3% 18.9% 30.5% 30.2% 30.0% 30.2% 30.5% EBIT -303.0% 16.5% 33.7% 40.8% 35.2% 18.9% 30.5% 30.2% 30.0% 30.2% 30.5%

Adjusted earnings

EBITDA (adj.) -8 25 49 214 357 287 505 530 561 607 651

EBITA (adj.) -10 25 49 214 357 286 499 524 555 601 645

EBIT (adj.) -11 24 47 205 355 286 499 524 555 601 645

EPS (adj.) -0.38 0.66 0.90 3.79 5.86 3.55 9.11 9.42 10.18 11.51 12.87

Adjusted profit margins in percent

EBITDA (adj.) -221.7% 17.2% 34.7% 24.5% 35.3% 19.0% 30.9% 30.5% 30.3% 30.5% 30.8%

EBITA (adj.) -275.2% 17.2% 34.7% 24.5% 35.3% 18.9% 30.5% 30.2% 30.0% 30.2% 30.5%

EBIT (adj.) -303.0% 16.5% 33.7% 23.4% 35.2% 18.9% 30.5% 30.2% 30.0% 30.2% 30.5%

Performance metrics

CAGR last 5 years

Net revenue n.a. n.a. n.a. n.a. 303.9% 80.1% 84.7% 18.7% 16.3% 7.1% 6.7%

EBITDA n.a. n.a. n.a. n.a. n.a. 84.7% 79.4% 9.6% 12.0% 20.6% 6.6%

EBIT n.a. n.a. n.a. n.a. n.a. 86.3% 80.2% 10.1% 11.8% 20.4% 6.7%

EPS n.a. n.a. n.a. n.a. n.a. 52.5% 78.4% 3.9% 14.8% 34.2% 9.0%

DPS n.a. n.a. n.a. n.a. n.a. n.a. n.a. 23.9% 9.8% 13.2% 9.0%

Average EBIT margin n.a. 8.3% 20.7% 35.8% 35.5% 29.0% 29.9% 29.9% 28.7% 28.3% 30.3%

Average EBITDA margin n.a. 11.0% 22.6% 37.1% 36.3% 29.4% 30.2% 30.2% 28.9% 28.6% 30.6%




Valuation ratios - adjusted earnings

SEKm 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

P/E (adj.) 0.0 0.0 0.0 22.2 16.4 15.6 6.1 5.9 5.4 4.8 4.3

EV/EBITDA (adj.) n.m. 5.1 9.4 18.4 13.4 13.7 7.2 6.5 5.9 5.1 4.4

EV/EBITA (adj.) n.m. 5.1 9.4 18.4 13.4 13.7 7.3 6.6 5.9 5.2 4.4

EV/EBIT (adj.) n.m. 5.3 9.7 19.3 13.5 13.7 7.3 6.6 5.9 5.2 4.4

Valuation ratios/reported earnings

P/E 0.0 0.0 0.0 10.4 16.4 15.6 6.1 5.9 5.4 4.8 4.3

EV/Sales 16.0 0.9 3.3 4.5 4.7 2.6 2.2 2.0 1.8 1.6 1.3

EV/EBITDA n.m. 5.1 9.4 10.8 13.4 13.7 7.2 6.5 5.9 5.1 4.4

EV/EBITA n.m. 5.1 9.4 10.8 13.4 13.7 7.3 6.6 5.9 5.2 4.4

EV/EBIT n.m. 5.3 9.7 11.1 13.5 13.7 7.3 6.6 5.9 5.2 4.4

Dividend yield (ord.) n.a. n.a. n.a. 1.2% 1.8% 3.2% 4.1% 4.3% 4.6% 5.2% 5.8%

FCF yield n.a. n.a. n.a. -4.7% -3% -28.3% 15.5% 13.0% 12.8% 13.2% 18.3%

Payout ratio n.a. 0.0% -24.4% -20.5% -13.2% -29.7% -49.3% -25.0% -25.0% -25.0% -25.0%




Balance sheet

SEKm 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

Intangible assets 8 7 14 7 6 8 9 9 9 10 10

of which R&D 0 0 0 0 0 0 0 0 0 0 0

of which other intangibles 0 0 8 1 0 2 3 3 3 4 4

of which goodwill 8 7 6 6 6 6 6 6 6 6 6

Tangible assets 125 0 0 0 1 9 9 9 9 9 9

Shares associates 24 31 63 26 139 132 128 124 120 116 112

Interest bearing assets 0 0 0 0 0 0 0 0 0 0 0

Deferred tax assets 0 0 0 0 0 0 0 0 0 0 0

Other non-int. bearing assets 0 0 0 0 0 0 0 0 0 0 0

Other non-current assets 31 46 46 310 437 874 891 969 995 1049 1110

Total non-current assets 189 84 124 343 583 1023 1036 1111 1133 1183 1242

Inventory 20 210 433 1143 1164 1294 1267 1320 1351 1466 1498

Accounts receivable 48 52 198 208 496 692 736 708 793 815 856

Other current assets 3 0 1 2 5 7 8 9 9 10 10

Cash and bank 20 23 37 193 507 371 616 850 528 308 582

Total current assets 90 285 669 1546 2172 2364 2627 2887 2681 2599 2946

Assets held for sale 0 0 0 0 0 0 0 0 0 0 0

Total assets 279 370 792 1889 2755 3387 3663 3998 3815 3782 4188

Shareholders equity 169 190 253 678 862 930 1208 1479 1775 2114 2492

of which preferred stock 0 0 0 0 0 0 0 0 0 0 0

of which Equity of hyb. debt 0 0 0 0 0 0 0 0 0 0 0

Minority interest 0 0 0 93 136 181 170 170 172 177 183

Total Equity 169 190 253 771 998 1111 1379 1648 1946 2291 2675

Deferred tax 0 0 0 2 2 2 2 2 2 2 2

Long term int. bearing debt 75 146 494 731 1268 1614 1663 1163 763 763 763

Pension provisions 0 0 0 0 0 0 0 0 0 0 0

Other long-term provisions 0 0 0 0 0 0 0 0 0 0 0

Other long-term liabilities 0 4 0 110 91 10 11 12 13 14 14

Convertible debt 0 0 0 0 0 0 0 0 0 0 0

Shareholder debt 0 0 0 0 0 0 0 0 0 0 0

Hybrid debt 0 0 0 0 0 0 0 0 0 0 0

Total non-curr. liabilities 75 150 495 843 1361 1626 1676 1177 778 779 779

Short-term provisions 0 0 0 0 0 0 0 0 0 0 0

Accounts payable 3 6 15 14 38 57 61 65 70 75 80

Other current liabilities 26 21 29 131 121 181 196 208 221 238 253

Short term interest bearing debt 6 2 0 130 237 412 351 900 800 400 400

Total current liabilities 35 30 44 275 396 650 608 1173 1091 713 733

Liab.for assets held for sale 0 0 0 0 0 0 0 0 0 0 0

Total liabilities and equity 279 370 792 1889 2755 3387 3663 3998 3815 3782 4188

Balance sheet and debt metrics

Net debt 61 125 457 668 998 1,655 1,398 1,213 1,035 855 581

Working capital 41 235 587 1,208 1,506 1,755 1,754 1,763 1,862 1,978 2,031

Invested capital 230 319 711 1,551 2,089 2,778 2,790 2,875 2,996 3,162 3,273

Capital employed 244 340 748 1,614 2,359 2,737 3,055 2,825 2,724 3,069 3,455

ROE -14.1% 11.4% 13.2% 62% 28.9% 15.0% 32.2% 26.5% 23.7% 22.4% 21.1%

ROIC -10.1% 8.5% 8.7% 31.1% 19.0% 11.3% 17.5% 17.6% 17.3% 17.9% 18.4%

ROCE -4.7% 7.0% 6.3% 22.1% 15.1% 10.4% 16.3% 18.6% 20.4% 19.6% 18.7%

Net debt/EBITDA -7.2 5.1 9.4 1.8 2.8 5.8 2.8 2.3 1.8 1.4 0.9

Interest coverage -4.3 4.3 2.7 7.8 4.2 2.8 n.m. n.m. n.m. n.m. n.m.

Equity ratio 60.7% 51.4% 32.0% 35.9% 31.3% 27.5% 33.0% 37.0% 46.5% 55.9% 59.5%

Net gearing 35.9% 66% 180.3% n.m. 100.0% 149.0% 101.4% 73.6% 53.2% 37.3% 21.7%




Cash flow statement

SEKm 2012 2013 2014 2015 2016 2017E 2018E 2019E 2020E 2021E 2022E

EBITDA (adj.) for associates -8 25 50 367 342 294 509 534 565 611 655

Paid taxes 0 0 4 1 -4 0 0 -15 -37 -41 -46

Net financials 0 -3 -18 -49 -89 -107 -119 -120 -97 -83 -65

Change in Provisions 0 0 0 0 0 0 0 0 0 0 0

Change in other LT non-IB -31 -10 -4 -154 -146 -518 -16 -78 -25 -53 -61

Cash flow to/from associates 0 0 0 0 0 0 0 0 0 0 0

Dividends paid to minorities 0 0 0 0 0 0 -45 -34 -34 -36 -41

Other adj. to reconcile to cash flow 40 -21 6 -254 -194 0 0 0 0 0 0

Funds from operations (FFO) 0 -10 38 -90 -91 -330 328 288 372 398 442

Change in NWC 0 -36 -267 -60 68 -249 2 -10 -99 -116 -53

Cash flow from op. (CFO) 0 -47 -229 -150 -23 -580 330 278 273 282 390

Capital Expenditure 0 -22 -15 0 -100 -12 -6 -6 -6 -6 -6

Free Cash Flow before A&D 0 -68 -244 -150 -123 -591 323 271 267 276 383

Proceeds from sale of assets 0 0 0 0 0 0 0 0 0 0 0

Acquisitions 0 0 0 0 0 0 0 0 0 0 0

Free cash flow 0 -68 -244 -150 -123 -591 323 271 267 276 383

Dividends paid 0 0 -5 -6 -38 -66 -66 -86 -89 -96 -109

Equity issues / buybacks 0 0 0 181 0 0 0 0 0 0 0

Net change in debt 0 71 263 131 474 521 -12 49 -500 -400 0

Other financing adjustments 0 0 0 0 0 0 0 0 0 0 0

Other non-cash adjustments 20 0 0 0 0 0 0 0 0 0 0

Change in cash 20 3 14 156 314 -136 245 234 -322 -221 274

Cash flow metrics

Capex/D&A 0% 2314% 1060% 74% 6348% 773% 107% 107% 107% 107% 107%

Capex/Sales 0.0% 15.4% 10.6% 0.8% 9.9% 0.8% 0.4% 0.4% 0.3% 0.3% 0.3%

Key information

Share price year end (current) 0.0 0.0 0.0 84.0 96.3 55.3 55.3 55.3 55.3 55.3 55.3

Market cap 0 0 0 3191 3656 2090 2090 2090 2090 2090 2090

Enterprise value 61 125 457 3952 4790 3926 3658 3472 3296 3122 2854

Diluted no. of shares, year-end (m) 31.3 31.3 33.3 38.0 38.0 37.8 37.8 37.8 37.8 37.8 37.8



Appendix: Project portfolio

Magnolia Bostad has 4,626 apartments under production and building permits for another ~16,257 apartments. Slättö is the designated buyer of ~47% of the gross area of all permits and projects. The projects under development include Senapsfabriken with approximately 1,000 apartments in central Uppsala and Sländan, with both tenant-owned apartments and rental apartments in central Södertälje.

Type of ownership: RU=Rental unit,TO=Tenant-owned



Sold Projects In Production

Project Municipality Type Apartments

Gross area

(m²)

Units

unsold Start Completion

Magnolia

share Buyer

Lumen Trapphuset1 Sollentuna TO 90 4,750 0 2015 2017 100% TO association

Slipen Karlstad RU 216 12,300 0 2015 2018 90% Slättö

Maria Forum Helsingborg RU 292 12,500 0 2015 2018 90% Alecta

Bryggeriet Helsingborg RU 327 14,700 0 2015 2019 90% Alecta

NybyLilium, phase1 Uppsala RU 300 14,000 0 2015 2019 90% SEB

Kalkstenen Malmö RU 129 5,100 0 2015 2018 90% SPP

Cementfabriken Malmö RU 144 7,100 0 2015 2018 90% SPP

Varvet Karlstad TO 92 6,100 0 2016 2018 90% TO association

Segelflygaren Örebro RU 210 10,000 0 2016 2018 90% Slättö

Maria Mosaik Helsingborg RU 345 16,000 0 2016 2019 90% SPP

Senapsfabriken, phase 1 Uppsala RU 455 19,400 0 2016 2019 76% SEB

Tegelslagaren Vallentuna RU 155 6,150 0 2016 2019 90% SEB

Tegelmästaren Vallentuna RU 160 5,950 0 2016 2019 90% SEB

Sländan,phase1 Södertälje RU 445 19,000 0 2016 2019 90% SPP

Gjuteriet, phase 1 Eskilstuna RU 262 13,900 0 2016 2019 90% Slättö

Varvet Townhouse Karlstad TO 4 700 4 2017 2018 90% TO association

Sländan,phase 2 Södertälje RU 130 5,300 0 2017 2019 90% Viva

Senapsfabriken, phase 2 S Uppsala RU 325 13,900 0 2017 2020 90% Heimstaden

Fyren, phase 1 Nynäshamn RU 220 10,500 0 2017 2020 90% Viva Bostad

Senapsfabriken, phase 2 N Uppsala RU 325 13,100 0 2017 2021 90% Slättö

Sum 4,626 210,450

Slättö sum 1,013 49,300

Conversions In Sold Rental Apartment Projects

Project City TO:sOf which sold to

end customerBuyer

Slipen Bryggan Karlstad Karlstad 64 64 Slättö

Gjuteriet, phase 1:1 Eskilstuna 49 49 Slättö

Gjuteriet, phase 1:2 Eskilstuna 49 35 Slättö

Sum 162 148




Pending Projects Not Sold

Project Municipality Type Apartments

Gross area

(m²)

Local

Plan

Estimated

production start

Estimated

completion

Magnolia

share Buyer

Terra Nova Visby C 60 3,780 x 2017 2017 90%

Täljöviken Stockholm C 55 4,850 x 2017 2018 92%

Partilleport Göteborg C 55 7,930 x 2017 2018 46%

Allarp Laholm Helsingborg C 55 3,700 x 2017 2018 46%

Fasanen Burlöv R 275 12,670 x 2017 2019 90%

Sportflygaren Örebro R 130 7,500 x 2017 2019 90% Slättö agreement

Visborg Visby C 55 3,570 x 2017 2019 92%

Nyponrosen 2 Helsingborg C 125 8,360 x 2017 2019 46%

Fyren, phase 2 Nynäshamn R 236 11,600 x 2017 2020 90%

Lilium, phase 2 Uppsala R 110 5,200 x 2018 2019 90%

Konstnären Uppsala R 112 5,200 x 2018 2019 90%

Gyllehemmet1 Borlänge C 55 4,540 2018 2019 92%

Gyllehemmet2 Borlänge C 110 5,950 2018 2019 92%

Österhagen Stockholm C 70 5,040 2018 2019 90%

Erstavik Stockholm C 70 5,180 2018 2019 46%

Mesta Eskilstuna C 55 3,570 2018 2019 92%

Nätverket, phase 1 Åkersberga R 150 4,450 2018 2020 90% Slättö agreement

Norrbacka Sigtuna R 180 11,500 2018 2020 90%

Ångloket Knivsta R 250 14,000 2018 2020 90%

Hagby Park Åkersberga R 160 10,500 2018 2020 90% Slättö agreement

Sländan, phase 3 Södertälje R 200 10,000 2018 2020 90%

Hasseludden Stockholm C 60 4,300 2018 2020 92%

Ophelias brygga Helsingborg R 125 7,500 x 2018 2020 90%

Lommarstranden Norrtälje R 200 11,000 2018 2020 90% Slättö agreement

Gjuteriet, phase 2 Eskilstuna R 100 5,800 x 2018 2020 90%

Slipsen, phase 1 Lund R 195 9,900 2018 2020 90% Slättö agreement

NorrtäljeHamn phase 1 Norrtälje Hamn R 145 7,500 x 2018 2022 90% Slättö agreement

Torgkvarteren, phase 1 Bålsta R 220 11,000 2018 2022 90%

Mejeriet, phase 1 Helsingborg R 230 10,400 2019 2022 90% Slättö agreement

Frihamnen Göteborg H 300 12,000 2019 2021 60%

Frihamnen Göteborg R 150 8,000 2019 2021 90%

Nätverket, phase 2 Åkersberga R 150 4,450 2019 2021 90% Slättö agreement

Norra kajen, phase 1 Sundsvall R 200 10,000 2019 2022 90%

Norrtälje Hamn, phase 2 Norrtälje Hamn R 145 7,500 x 2019 2022 90% Slättö agreement

Torgkvarteren, phase 2 Bålsta R 220 11,000 2019 2023 90%Slipsen, phase 2 Lund R 195 9,900 2019 2023 90% Slättö agreement

Mejeriet, phase 2 Helsingborg R 230 10,400 2020 2023 90%

Norra kajen, phase 2 Sundsvall R 675 35,000 2019 2022 90%

Norrtälje Hamn, phase 3 NorrtäljeHamn R 150 7,600 x 2019 2022 90% Slättö agreement

Slipsen, phase 3 Lund R 200 9,900 2020 2024 90% Slättö agreement

Mejeriet, phase 3 Helsingborg R 240 10,400 2020 2024 90%

Södra Häggviks Gårdar Sollentuna R 1,500 94,000 2020 tbd 90% Slättö agreement

Skärholmen 2:1 Skärholmen R 85 tbd tbd tbd 92%

Skarpnäcks gård 1:1 Skarpnäck R 50 tbd tbd tbd 92%

Liljeholmen 1:5/Årsta 1:1 Årstaberg R 220 tbd tbd tbd 92%Mossen Motala C 54 tbd tbd 2019 92%

Bredängshöjden Stockholm R 700 35,000 tbd tbd 90% Slättö agreement

Orminge Centrum Nacka R 250 17,000 tbd tbd 90%

Instrumentet3) Stockholm R 100 4,700 tbd tbd 90%

Senapsfabriken, phase 3 Uppsala R 700 29,000 tbd tbd 90% Slättö agreement

Upplands Väsby InfraCity Upplands Väsby R 600 30,000 2020 2023 90%

Skogskarlen Solna R 200 17,400 tbd tbd 90%

Bunkeflostrand Malmö R/C 1,300 58,500 tbd tbd 90% Slättö agreement

Kvarnsjödal Botkyrka R/C 2,000 130,000 tbd tbd 90% Slättö agreement

Vårby Bryggor Huddinge R/C/H 1,800 85,000 tbd tbd 90%

Sum 16,257 853,240

Slättö sum 8,250 447,100

With local planning 1,933 110,260

Category: R = Residential, C = Care, H = Hotel



Disclaimer

Nordea Markets is the commercial name for Nordea’s international capital markets operation.

The information provided herein is intended for background information only and for the sole use of the intended

recipient. The views and other information provided herein are the current views of Nordea Markets as of the date

of this document and are subject to change without notice. This notice is not an exhaustive description of the

described product or the risks related to it, and it should not be relied on as such, nor is it a substitute for the

judgement of the recipient.

The information provided herein is not intended to constitute and does not constitute investment advice nor is the

information intended as an offer or solicitation for the purchase or sale of any financial instrument. The

information contained herein has no regard to the specific investment objectives, the financial situation or

particular needs of any particular recipient. Relevant and specific professional advice should always be obtained

before making any investment or credit decision

The document has not been prepared in accordance with legal requirements designed to promote the

independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination.

Conflict of interest

Readers of this document should note that Nordea Markets has received remuneration from the company

mentioned in this document for the production of the marketing material. The remuneration is predetermined and

is not dependent on the content.

It is important to note that past performance is not indicative of future results.

Nordea Markets is not and does not purport to be an adviser as to legal, taxation, accounting or regulatory matters

in any jurisdiction.

This document may not be reproduced, distributed or published for any purpose without the prior written

consent from Nordea Markets.

Nordea Bank AB (publ), Company registration number/VAT number 516406‐0120/SE663000019501. The board is

domiciled in Stockholm, Sweden.

Issuer review

This report has been reviewed, for the purpose of verification of fact or sequence of facts, by the issuer of the

relevant financial instruments mentioned in the report prior to publication. The review has led to changes of facts

in the report.

Completion date: 12 December 2017, 09:32 CET

Documents

Magnolia Bostad Key data - Nordea Markets...Magnolia Bostad 12 December 2017 Marketing material commissioned by Magnolia Bostad 4 Source: Company data and Nordea Markets Source: Company