Kmc Properties ASA

OSE:KMCP

Earnings Call Transcript 2022-Q1

[Liv Malvik, executive]

Hello. My name is Liv Malvik, and I am the CEO of KMC Properties. Together with me today, I have the CFO of KMC Properties, Kristoffer Holmen. Kristoffer and I will together take you through this Q1 presentation. This page gives a brief overview of KMC Properties.

KMC Properties is a real estate company focused on owning industrial and logistics properties. We have a portfolio of 46 assets, excluding Russia, primarily in the Nordics with a constitution of approximately 377,000 square meters by the end of Q1 2022.

We have long-term lease agreements with solid counterparties. Our 2 largest tenants are BEWI and Insula, majority owned by the Bekken and Witzøe family, respectively. We have a portfolio value of approximately NOK 4 billion, a net yield of 6.4%, a WAULT of 10.1 years and a group net LTV of approximately 51%. KMC Properties delivers accretive growth. We have completed and committed investments for lessees in our current portfolio of approximately NOK 60 million in 2022 at an average yield of 7.5%.

We have completed and committed investments in greenfield projects of approximately NOK 137 million in 2022 at yield on cost of approximately 7.5%. We have completed acquisitions of NOK 190 million year-to-date 2022 at yield on cost of approximately 7% -- 7.7%. We are actively pursuing concrete acquisitions of NOK 395 million with weighted average gross yield of 7.2%.

Our additional estimated potential growth in 2022 is approximately NOK 359 million. KMC Properties has an ambitious growth strategy and the company has a strategic target of reaching NOK 8 billion by year-end 2025. We see this planned growth well within reach in our sector. We keep our focus on assets we know well, important infrastructure and business-critical properties for our lessees.

Our committed and completed investments year-to-date 2022 is approximately NOK 377 million. And for 2023 and 2024, we have a committed pipeline, which amounts to approximately NOK 375 million and approximately NOK 415 million, respectively, for the 2 years. And if you have a closer look into the blocks in light green, up on the screen, these blocks summarize up to the committed pipeline for the years 2022 to 2024.

KMC Properties has a solid customer base of market-leading companies with long track records. And here is some information about our 4 largest tenants. The largest one is the listed company, BEWI ASA, one of the leading packaging and insulation providers in Europe. The second one is the Nordic seafood group, Insula, who is majority owned by Kverva. The number three3 here is Grøntvedt Pelagic, one of the world's leading pelagic companies established as far back as in the 1830s. And number four, PSW. PSW is our tenant in 2 different locations at Mongstad and at Ågotnes outside of Bergen. PSW has traditionally been a supplier to the oil industry, but is now transforming into new green industries. And this sector is expected to have significant growth in the future.

KMC Properties highlights for the first quarter is acquisition of a meat-processing facility near Narvik in Northern Norway for NOK 100 million at a gross yield of 7.8%. Acquisition of a herring facility in Sweden for SEK 94 million at gross yield of 7.5%. We have invested approximately NOK 22 million in development of existing properties. And we have reclassified our office building in Moscow, Russia, as held for sale, including a write-down of NOK 53.1 million. We will come back to this subject later in our presentation.

I would also like to mention that we this morning announced a conditional agreement for acquisition of 2 properties in Denmark for approximately DKK 155 million. As I have already mentioned, we have completed 2 acquisitions in Q1 2022, both at good yields, one in Northern Norway and one in the West Coast of Sweden. Both these acquisitions bring diversification to our portfolio and are in perfect line with our strategy in businesses we know well.

And now, Kristoffer, I'll leave the word to you to take us through the rest of the presentation.

[Kristoffer Holmen, executive]

Yes. Thank you, Liv. Due to Russia's invasion of Ukraine, the company has accelerated the sale of the property in Moscow and has reclassified it as held for sale in the financial statements. Hence, related figures are presented separately in the financial results and financial position. Even though the value of the property has been reduced from approximately NOK 143 million to -- at the end of 2021 to approximately NOK 75 million at the end of Q1 2022, the property is still attractive.

Currently, the rental income is at RUB 15 million per month. It has a 91% occupancy with solid Russian tenants who are all paying their rents. The Russian subsidiary owning the property has a solid liquidity. The cash deposit at the 8th of May was at RUB 33 million. Since then, the subsidiary has transferred RUB 10 million to KMC Properties. The building has an attractive surrounding area with large development projects, which is due to be completed within a few years; for instance, a large metro station, large apartment buildings and business centers. Hence, we believe the current valuation of approximately NOK 75 million reflects the sale value of the property. However, we emphasize that the value are sensitive to sanctions imposed on our operations in Russia.

Here you see our current gross asset value. The figures for Q1 2022 does not include the value of the office building in Moscow. Currently, the gross asset value is approximately NOK 4 billion and the net yield is 6.4%. And as you can see, 68% of our rental income comes from Norway.

KMC Properties has 3 pillars for growth: first, investments in the current portfolio, which we call CapEx projects; second, investments in new facilities for new and existing tenants, also called greenfield projects; and third, acquisitions in collaboration with both current and new tenants. In the table to the right, you see our current investment projects, adding up to approximately NOK 1.6 billion with a weighted average gross yield of 7.1% and a weighted average WAULT of 16.2 years, of which approximately NOK 720 million have and will be invested in 2022.

The initiatives are divided into the 3 investment pillars that I just mentioned. Investments in the current portfolio, CapEx projects of approximately NOK 60 million. We have greenfield projects amounting to NOK 947 million, and we have acquisitions of NOK 585 million, including investments of approximately NOK 400 million, which are not finally agreed, but in those NOK 400 million, we include the 2 properties that we announced today.

Over to the financials and the P&L. Since the Russian property is classified as held for sale, its figures are presented separately, and hence, they are not included in the P&L for continuing operations. We had a 14% increase in rental income from -- since Q4 2021 and a 30% increase in rental income from Q1 2021, and it's due to new investments and CPI adjustments.

We received additional rental income from the 2 properties that we acquired in Q1, the properties at Narvik in Norway and at Klädesholmen in Sweden. We also received full income from the 2 properties that we acquired in Q4 2021. The properties in Fredrikstad and Ågotnes. In addition, comps income from completed CapEx projects.

Property-related expenses are still low due to mainly triple-net bare house contracts in the portfolio. The operational expenses are affected by new hires, high audit costs in the period and other costs related to financial reporting, including the sustainability report, which is included in the annual report for 2021. That being said, the organization is now set for significant growth. The fair value of the portfolio was stable in Q1. Investments in CapEx was offset by currency translation differences.

The interest expenses were at NOK 26.2 million in the quarter, and tax expenses came in at NOK 19.5 million, of which NOK 0.2 million is tax payable and remaining NOK 19.3 million is change in deferred tax.

Over to the run rate figures. The figures for Q1 2022 does not include income and costs in Russia. However, the figures from previous periods do. The reduction since Q4 2021 is due to reclassification of the Russian property and also currency translation differences. Property-related costs are significantly down due to the exclusion of the costs in Russia.

OpEx is up due to the strengthening of the organization through new hires. Salaries has also been increased, and we also experienced a cost increase. However, as mentioned, the organization is now set for significant growth. There's also a small increase in financial expenses due to increased interest-bearing debt and increased interest rates. Here you see the run rate bridge from gross rental income to income from property management.

And here you see the bridge from the reported rental income in Q1 to the corresponding run rate rental income. This graph shows the contractual gross rental income, less estimated interest expenses in the bond loan period, which has a maturity date in December 2023. And as you can see, the group will have a solid cash flow going forward to cover OpEx and investments.

The balance sheet at the end of the quarter consists mainly of the property portfolio at NOK 4 billion, cash at NOK 124 million, fair value of the interest and currency rate swaps at approximately NOK 160 million, interest-bearing debt at NOK 2.35 billion, deferred tax liabilities at NOK 150 million and land lease liabilities of approximately NOK 19 million.

And at the end of the quarter, the group had NOK 500 million in bank loans and a bond loan of NOK 1.85 billion, and we did not utilize the revolving credit facility in the quarter. We summarize with the following: KMC Properties is delivering on its strategy -- on its growth strategy with the aim of reaching a portfolio of NOK 5 billion by the end of the year and a portfolio of NOK 8 billion by the end of 2025. And we are delivering solid yields and good return. Thank you. So over to the Q&A.

Okay. Thanks so much.