Kmc Properties ASA

OSE:KMCP

Earnings Call Analysis

Earnings Call Transcript 2024-Q1

[Liv Malvik, executive]

Welcome to our first quarter 2024 presentation. My name is Liv Malvik and I have been the CEO of KMC Properties for the last 4 years. With me today, I have my favorite CFO of all years and the best wingman ever, our CFO, Kristoffer Holmen, who I have been working closely with since 2020. Together with the rest of the KMC team, we have evolved KMC Properties from a privately owned real estate company to a robust publicly listed real estate group backed by an increasing number of tenants, investors and banking partners. Kristoffer and I have both decided that the time has come for us to pursue other opportunities outside the company. And this presentation is the last time we are presenting the company's progress towards our ambition of becoming the preferred real estate partner for logistics and industrial companies.

I know I speak for both of us when I say that I'm proud of what we have accomplished in our 4-year tenure, closing in on our gross asset value target of NOK 8 billion. We are making steady progress. Announced transactions with BEWI is progressing as planned, with 1 of 5 completed in the first quarter. At the same time, we are building an attractive pipeline of M&A opportunities.

And after the quarter, we acted on one of them. Last week, we finalized an agreement to acquire a Danish property for NOK 200 million. We are always on the move to prepare our -- and position ourselves for new opportunities. As an example, we reset 7 interest swaps generating a cash inflow of NOK 100 million at the end of the first quarter. The capital will be reallocated to finance the announced transaction of the Danish property. Kristoffer will give some more details about this later. In addition, we started to prepare for a potential refinancing of our NOK 900 million bond in 2025 with an ambition to further reduce our interest margin.

Positioning ourselves also includes hitting the brakes when market conditions are changing for the worse. An example of this is our collaboration with Slakteriet AS, where it now is decided that the construction of the salmon processing facility will be delayed with up to 5 years. As we have said also in earlier presentations, KMC's part in this project will depend on the total conditions this case is offering, but we are still positive to the project as such. Our financial performance is a clear reflection of our progress. We increased our rental income by 20%, mainly driven by acquisitions, while our operating expenses remained constant. That resulted in a 22% increase in net income from property management, showcasing our operational leverage.

In other words, the organization's ability to take on more volume. In October 2023, we announced an agreement to purchase 7 properties from BEWI ASA. Two property acquisitions were finalized in the fourth quarter of 2023, 1 in the first quarter of 2024 and the remaining 4 are on track to be completed now in the second quarter of 2024. The total value amounts to NOK 625 million and financing of the transaction was completed in 2023, bringing in Nordica as a new strategic investor in KMC Properties.

The debt side of the transaction is provided by Nordea Denmark at attractive terms. All 7 properties have a vault of 17 years and a combined gross yield of 8.75%. Subsequent to the quarter last week, we came to an agreement to acquire a property located in an industrial cluster in Skjern on the West Coast of Denmark. The property's long-term tenant is Velux, a European leader in manufacturing and development of roof windows. Velux ticks all the boxes as an attractive long-term partner for us, a strong financial track record, operations in an established sector, commitments to local community and the environment and a long-term commitment to the property, reflected in the lease contract with an expired term of 12 years.

The total transaction value is NOK 200 million at a gross yield of 7.5%. We expect to close the transaction in June, which means that we have 5 acquisitions in total to complete in the second quarter. These 5 properties are all reflected in our pro forma figure for the first quarter, adding up to a gross asset value of NOK 6.9 billion. Compared to the first quarter 2021, we have more than doubled our portfolio value, and we are now closer to our year-end target of NOK 8 billion. Through these years, we have had a constant focus on our 4 strategic areas: acquisitions, CapEx, capital optimization, and greenfield projects. Acquisitions have been our growth engine and at the core of operations through this period.

Currently, we see attractive opportunities emerging on the back of the high inflation and interest environment. KMC Properties was established in a zero interest environment. Our strong focus on capital optimization has enabled us to move through the changing macro conditions with limited friction. With increased size and diversification we have enabled and acted on attractive refinancing opportunities, securing our long-term cash flow that now stretches all the way into 2014. Through CapEx, we are working closely with our tenants on investments to yield higher rent and contract extensions in the properties in our portfolio. This is a continuous and iterative process, ensuring long-term commitments from our partners.

Lastly, we are working on development of new facilities at attractive terms for both parties. With rising inflation and interest, the current conditions for building new facilities are not optimal. This is reflected in the postponement of the projects with Slakteriet and limited traction with the strategic focus area at the moment. In the changing conditions, we are acting on value-enhancing opportunities. Currently, we see property transactions in our segment being conducted at 7% to 8% yields across the Nordics. Our capital structure holds some regional differences. And as you can read from the figure in this slide, the most attractive opportunities are currently located in Denmark. This is due to the very favorable lending terms.

This is why we have focused our efforts on the acquisition of the Velux property and why we continue our focus at the left-hand side of this graph. On the right-hand side, you see that the current financing structure in Finland and Europe is unfavorable. This is why we have started to position the company for refinancing of the NOK 900 million bond, currently financing the properties in this region. We are looking at alternative structures and are in the starting phase of this work.

With that, I will leave the word to Kristoffer, who will take us through our financials.

[Kristoffer Holmen, executive]

Thank you so much, Liv. Yes, let's start with the P&L. In the first quarter, our rental income increased 20% compared to the same period last year, 4% of the top line growth came from CPI adjustments. The rest came from value-accretive investments and currency effects. Due to flat operating expenses, the EBITDA has increased 24% year-on-year, again, showcasing an improved utilization of our platform. Interest expenses are up 25% compared to Q1 2023 due to increased interest-bearing debt and significant increased floating interest rates. This resulted in a 22% increase in our net income from property management year-on-year. Profit before tax was at NOK 67 million. The unrealized financials of plus NOK 24 million contains plus NOK 37 million in currency gains, minus NOK 6 million in amortized borrowing costs and minus NOK 7 million in other financial expenses.

In the table to the left, you see the annualized run rate, which shows the contractual rental income in a 12-month period and related estimated costs except tax. The pro forma figures shows the run rate after all final agreements entered before today are completed. And 2 other columns shows the run rate for all investments completed before the end of Q1 2024 and Q4 2023. If you look at completed investments first, you see an increase in rental income from Q4 2023 to Q1 2024 of NOK 21 million, which contains NOK 18 million from completed investments in Q1 and currency effects of NOK 3 million. Property expenses and operational expenses are flat and the net realized financials is affected by resetting of swaps, which I will explain later and additional interest-bearing debt.

The additional interest-bearing debt include financing of the 4 remaining BEWI properties. Hence, at the end of Q1, we had all the liquidity needed to complete the acquisition of these properties, which we believe will happen during Q2. But this resulted in a reduced income from property management due to the higher net realized financials; however, if you look at the pro forma figures at the end of March, which as mentioned, shows the run rate once all final agreements have been completed, including the acquisition of the Danish property that was just announced. You see a significant improvement. We have a 13.3% increase in rental income from Q4 2023 and a 15.1% increase in income from property management despite having reset the swaps, creating a higher for longer return to shareholders.

In the table to the right, you see the estimated timing on completion of the final agreements. We estimate that all acquisitions will be completed by the end of Q3 2024. Let's go to the earnings per share and net income for property management after tax, representing the net cash earnings has increased to NOK 0.39 per share in the last 12 months. You also see the bridge from this figure to the adjusted EPRA earnings per share, which was at NOK 0.17.

Now over to more details on the debt in this table, you see our interest-bearing debt at the end of Q4 2023, Q1 2024, and Q1 2024, given completion of the final agreements entered before today. The pro forma figures. The floating interests are mostly flat, but the margins keep improving due to new bank financing at very good terms. However, the resetting of swaps have increased the overall interest rate, reducing the yield gap, but with all final agreements have been completed partly due to utilization of the NOK 100 million return from the resetting of swaps. The overall earnings per share is estimated to increase compared to Q4 figures. And if you look at the debt maturity profile on the next slide, you see that there is only bank loans maturing in the next 2 years, which we believe will be rolled.

The bundle is maturing in July 2026. However, we have already started the refinancing and hope to complete this in early 2025. Our current EPRA LTV is 52.1%; however, we estimated to increase to 55.1% after we completed all final agreements.

Now over to the resetting of swaps. Here, we have tried to illustrate the rationale behind the resetting of the interest rate swap agreements. The value of the swaps is represented by the reduced interest expenses due to the fixed interest rate being lower than the floating interest rates. This is illustrated in the red columns. When we resetted the swaps, we agreed to higher fixed interest rate increasing the interest expense; however, we received NOK 100 million in return. Of the NOK 100 million, NOK 75 million will be invested in the new Danish property rented by Velux and NOK 25 million will be spent on yielding CapEx projects with approximately the same return as the Velux property. The net cash flow from these investments are illustrated by the gray columns.

As you can see, the aggregated cash flow from the investments are much higher than the aggregated cash flow from the interest rate swaps due to higher and longer return from the investments. And despite increasing interest expenses, we have a comfortable headroom towards our ICR covenants. As you can see on this slide, hence, we are very satisfied with this accretive reallocation of capital. This reallocation also contributed to higher earnings per share. Once the final agreements have been completed, we estimate a NOK 0.51 earnings per share, up from NOK 0.47 earnings per share in Q4 2023 despite higher interest rates.

As announced on Tuesday, I have resigned from my position in KMC Properties to pursue a new opportunity in [indiscernible]. This was a tough decision, given my great colleagues and the strong position that the company is in. I wish the company the best of luck in the future, and I'm certain that the KMC team will keep improving the company's performance. Over to you, Liv.

[Liv Malvik, executive]

I want to start this outlook by taking a look in the rearview mirror. Our history started out over 40 years ago with our 2 largest tenants, BEWI and Insula. The 2 companies, both established stand-alone real estate companies, which merged in 2020 shaping KMC Properties. We listed KMC Properties in December 2020 and are now more than doubled our asset base from NOK 3 billion in December 2020 to NOK 6.8 billion, including the 5 transactions to be conducted in the second quarter.

More than half of that growth come from totally new tenants, diversifying our exposure. Over the same period, we have grown our rental income close to 3x and establish long-term contractual rent stretching all the way to 2040. Back in December 2020, our balance sheet was dominated by a secured bond, a bond which we successfully refinanced last year at improved terms. Now the majority of our debt is with banks, and we are very pleased with both the refinancing and our new debt structure. As a company, we have with our refinancing and expansion, taking a leap forward in shaping a robust real estate company, and I'm confident that the KMC team will bring the company to new heights.

To sum up, we have a strengthened and more diversified North European foothold with strong tenants and a robust capital structure, and we have a broader access to capital through our new strategic investor and a wider range of banks. If we look 12 months into the future, we are expecting to generate more than NOK 0.5 billion rental income, of which 1% will go to direct property-related expenses, 9% is tied up in administrative expenses, 50% in financial costs and remaining 40% or NOK 200 million reflects our net income from property management. Leading the company up to this point has been a lots of work, lots of fun together with all the good people in the KMC, some frustrations and throwbacks, but most of all, a large number of smaller and bigger everyday decisions, which, in the end, sums up to what KMC has become today.

Both Kristoffer and I look forward to seeing the company's continued success. Thank you. Over to Q&A.

[Unknown Executive]

We have a few questions from Christian Nygaard in SpareBank 1 Markets. How much more financing is available in Denmark at 1.08% margin?

[Kristoffer Holmen, executive]

Well, currently, we have 1 bank relationship in Denmark, that's Nordea. And I must say that's a very good relationship, a very strong relationship and they have indicated that they have large capacity. How much is hard to tell, but we see significant excess capacity in Denmark. But I can also add that we've been -- that we have been contacted by other banks in Denmark who are also willing to lend us money on the same type of terms.

[Unknown Executive]

Another question from Christian. How do you expect to refinance the NOK 900 million bond? And what do you expect the margin to be on the refinancing?

[Kristoffer Holmen, executive]

Well, that's a good question. We are in a very initial phase, I would say. We -- as mentioned, we are aiming to refinance the bond in the beginning of 2025. We start off with the bank track. We've initiated processes both in Finland and on the continent. And the signals are positive; however, the banks aren't able to commit before. There's approximately 6 months remaining before we have the first call, so we haven't gotten any committed offers yet, but we see some positive signs. And -- but we also see this -- but bank finance could also be combined with private debt financing, but also another source, which we find very favorable is an unsecured bond issuance. So -- and it's hard to tell where the margin will end. But for now, we estimate above 300 margins to be a bit conservative at this point in time.

[Unknown Executive]

A question from both Njål and Christian. Which geographies are relevant and the target geographies in reaching the NOK 8 billion target? And how do you expect to finance this growth?

[Liv Malvik, executive]

Norway and the Nordics, I will say, is always our main targets for growth. But as we have done with BEWI in Netherlands, Poland, Belgium and Germany, we will grow with our tenants outside of the Nordics. But for transactions, we [ are not ] including existing tenants, it will be in Norway and the Nordics. And as Kristoffer also said, we are finding in Denmark, especially interesting. And as I also said in the presentation because of the favorable financing possibilities, and we also see possibilities, good possibilities in Denmark. So I would say Norway, Nordics, especially Denmark.

[Kristoffer Holmen, executive]

And when it comes to financing, as we've said for some time, we preferred a combination of bank financing and an unsecured bond at the top.

[Unknown Executive]

We got the question with regards to stock price prognosis, and we will not comment on that. We did receive a question from Ole Erik, Tourism, with regards to the recent resignations of management in KMC in such a short time frame. Do these -- do any of these departures have anything in common? Or is it a coincidence?

[Liv Malvik, executive]

It's a coincidence. Audun Aasen, our COO, he will leave the company to pursue his own business to -- managing its own business. Audun has been working in KMC for 7, 8 years, so he has been here for a long period. And he also were managing its own business before entering KMC Properties, and now he will be managing his own business again. And for Kristoffer, I guess he got an offer, he couldn't refuse. So -- and for me, it was the right time now with KMC's positions and what the firm has -- what the company has become. And it's time for me now to make some thoughts of what I will become when I grow up.

[Unknown Executive]

Another question from Njål in ABG. Can you add some details about Slakteriet? Do you have other investment opportunities in the pipeline with potentially higher yield gap?

[Liv Malvik, executive]

We have our -- we have a quite large potential pipeline with opportunities, which we are looking into. And of course, as we also have said earlier, we are only looking into possibilities, acquisitions or greenfield projects, which are accretive for KMC Properties and the existing shareholders. But there's a lot of possibilities in the markets, and we are looking into them.

[Kristoffer Holmen, executive]

I can also add that, obviously, all investments are compared to -- all potential investments are compared to the alternatives, and what we see now is a great market for investments. So obviously, it's a tough competition amongst the different objectives that we're looking at. But we like Slakteriet a lot, but we'll see whether we will end up with the final construction and a final agreement with the tenant.

[Unknown Executive]

We will give it 30 more seconds for additional questions.