Kmc Properties ASA

OSE:KMCP

Earnings Call Transcript 2022-Q2

[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. And Kristoffer and I wish to welcome you to this KMC Properties Q2 2022 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 and with the constitution of approximately 377,000 square meters in Q2 2022.

We have long-term lease agreements with solid counterparties. 95% of our rental income is 100% CPI adjusted. We have low operational expenses due to mainly triple net bare house lease contracts. And our two 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 and net yield of 6.4%, a WAULT of approximately 10 years and the group net loan-to-value of approximately 50%.

KMC Properties delivers accretive growth. We have completed and committed investments for lessees in our current portfolio of approximately NOK 48 million in 2022 at an average yield of 7.5% approximately. We have completed and committed investments in greenfield projects of approximately NOK 180 million in 2022 at a yield on cost of approximately 7.1%. And we have completed acquisitions of NOK 180 million in the first half of 2022 at a yield on cost of approximately 7.6%.

Contemplated acquisitions of NOK 1,365 million in first half of 2022 with weighted our gross yields of 6.6%, of which the BEWI transaction, I will be getting back to that, amounts to NOK 970 million. KMC has an ambitious growth strategy. And the company has a strategic target of reaching NOK 8 billion by year-end 2024, 1 year ahead of previous growth plan in which we are very pleased. We see this planned growth well within reach in our sector.

We have committed and completed investments in 2022 at NOK 1,783 million year-to-date. For 2023 and 2024, committed pipeline amount to NOK 1,410,000,000 and NOK 360 million, respectively. KMC Properties keep our focus on assets we know well, important infrastructure and business-critical properties for our lessees.

KMC Properties has a solid customer base of market-leading companies with long track records. And here is some information of our four largest tenants. The largest one is the listed company, BEWI ASA. BEWI ASA is one of the leading packaging and insulation providers in Europe. The second one is the Nordic seafood group, Insula, whose majority is owned by Kverva. Our #3 is Grøntvedt Pelagic. You could see a picture of their production facility at Page #2 in this presentation. And Grøntvedt Pelagic is one of the world's leading pelagic companies established as far back as in the 1830s. Then we have PSW, our tenant in two different locations, at Mongstad and at Ågotnes, both outside Bergen. PSW has traditionally been a supplier to the oil industry, but is now transforming into new green industries.

Here is a short overview of KMC's highlights for the second quarter. As I mentioned, we are very pleased to have announced that we have entered into an agreement with BEWI for a transformative acquisition of a property portfolio consisting of up to 24 properties and a land plot for approximately NOK 2 billion. We have invested about NOK 30.7 million in development of existing properties, and we have continued our sales process of our office building in Moscow. And yesterday, we completed the acquisition of two properties in Denmark for approximately NOK 151 million.

The acquisition of the BEWI portfolio will be a step-changing acquisition for KMC Properties. And the acquisition is 100% in line with our strategy to follow existing tenants in new locations throughout Europe. We continue to focus on properties we know well, business-critical properties for our tenants in sectors we know well. This transaction will be solidifying KMC Properties' position to accelerate value creation going forward.

Their transaction will make a shift in the company's position in many ways, including a stronger market position, major economics of scale with financial and operational synergies, strengthening of KMC's credit quality and access to debt capital, a reinforced position regarding share-based settlement and a very strong cash flow situation.

KMC Properties is delivering on acquisitions. This year, we have already finished two acquisitions of approximately NOK 190 million, one in Sweden and one in Norway, both with good yields and in line with our strategy. And as I said a bit earlier here, yesterday we completed the acquisition of two properties in Denmark for approximately NOK 200 million with very solid tenants, long-term triple net lease agreements and at good yields. And we are also in discussion of acquiring an industrial property in Norway with a solid tenant and a long-term lease agreement. We hope to close this transaction in Q3, Q4 2022.

And now Kristoffer, I leave the word to you.

[Kristoffer Holmen, executive]

Thank you so much, Liv. Yes. Over to the growth strategy. KMC Properties has three pillars for growth investments in the current portfolio, which we call the CapEx projects; investments in new facilities for new and existing tenants, as we call the greenfield projects; and acquisitions in collaboration with both current and new tenants.

The growth initiatives in 2022. You can see in the table to the right, you see our current investment projects are adding up to approximately NOK 3.6 billion with a weighted average gross yield of 6.7% and a weighted average WAULT of 16.4 years, of which approximately NOK 1.8 million have and will be invested in 2022.

The initiatives are divided into the three investment types that I just mentioned, investments in the current portfolio of approximately NOK 50 million, greenfield projects of approximately NOK 950 million and acquisitions of approximately NOK 2.6 billion, of which the BEWI transaction, as Liv mentioned earlier, amounts to NOK 2 billion.

On this slide, you see the estimated financial figures after all investments are completed. And as you can see, we expect significant improvements creating a platform with a larger and better potential for further growth. We estimate that the gross asset value will increase from NOK 4.1 billion today to approximately NOK 7.4 billion after completing investments, and we expect the gross yield to be stable during the investment period. The WAULT will have a significant improvement from 10 years to 13 years.

We expect the net operating income to increase from NOK 264 million to NOK 476 million. And we expect a low increase in operational costs since all new contracts are triple net payouts. And this results in a significant improvement in the EBITDA yield from 5.6% today to 5.9% after completing investments. This is on a run rate basis.

Over to the financials. Here, you see the current gross asset value. The figures for Q2 2022 does not include the value of the office building in Moscow since this is held for sale. Currently, the gross asset value is approximately NOK 4.1 billion. And the change in value since Q1 is mainly due to currency translations. The net yield is stable at 6.4%, and Norway is still by far our most important market.

Over to the P&L. As mentioned, the Russian properties is classified as held for sale, so the financial figures are excluded. So if we start with the rental income, we had a 32% increase in rental income from Q2 2021 to Q2 2022, and this is due to new investments and CPI adjustment. Property-related expenses are still very low due to the -- mainly due to the portfolio having mainly triple net warehouse contracts. Operational expenses are significantly down since Q2 2021, and we expect -- and we experienced that the organization is settling in and improving cost effectiveness.

The net fair value adjustment for the portfolio came in at NOK 8 million in the period. And we had a net financial income of NOK 32.8 million in the period due to positive currency translations and fair value adjustments on our interest rate swaps. The interest expense in Q2 amounted to NOK 27.8 million. Tax expense in Q2 was NOK 23.5 million, of which NOK 9 million is tax payable and remaining NOK 14.5 million is change in deferred tax.

Over to the run rate figures. The figures for Q1 and Q2 2022 does not include the income costs in Russia, however, figures from the previous periods do. The increase from Q1 2022 is mainly due to additional rental income from CapEx projects. Operational costs are stable, as you can see. And a part of the company's investment strategy is to have a portfolio that allows a small and cost-efficient organization. Given the current investment pipeline, with triple net warehouse contracts, we expect the rental income to grow significantly, but with just a relatively small operational cost increase. Realized financial expenses are up due to increased interest rates.

On this slide, you see the run rate bridge from gross rental income to income from property management. And on the next slide, you see the bridge from reported rental income in Q2 to the corresponding run rate rental income. And the difference is due to rental income from new investments.

This graph shows contractual gross rental income, less estimate interest expenses in the loan period, which has a maturity date in December 2023. And as you can see, the cash flow is still very solid.

The balance sheet at period end, consists mainly of the property portfolio at NOK 4.1 billion, cash at NOK 136 million, fair value of the interest and currency rate swaps at NOK 162 million, interest-bearing debt at NOK 2.36 billion, deferred tax liabilities at NOK 166 million and land lease liabilities at NOK 18.3 million. And at the end of June, the group had NOK 524 million in bank loans and a bundle of NOK 1.85 billion. And we did not utilize the credit facility in Q2.

Okay, Liv over to you.

[Liv Malvik, executive]

Yes. Thank you, Kristoffer. We will end this presentation by trying to summarize very short the essence of KMC Properties. KMC Properties deliver on high growth ambitions and has expertise and experience in purchase and development of properties within our segments.

KMC Properties is making accretive acquisitions at good yields. We have built a strong organization during the last 18 months and now has a stable cost base, which is dimensioned to take on a much larger portfolio. KMC Properties focus is long-term triple net contracts with solid tenants in attractive industries KMC Properties knows well.

KMC Properties has strong revenue growth and is meeting reduced financial margins. KMC Properties has built a solid foundation for continued attractive returns in the years to come. Thank you.

[Unknown Attendee]

With that, we'll start the Q&A. We have received some questions through the webcast. We will start with a question from Simen Mortensen. What is the reason for the NOK 9 million payable tax in Q2?

[Kristoffer Holmen, executive]

It's due to payable tax in the subsidiaries outside Norway. So we have -- we're in a position where there's tax payable.

[Unknown Attendee]

Okay. And another question from also Simen. The bond matures in 1.3 years. How are you now looking at the refinancing of this bond given the current market conditions?

[Kristoffer Holmen, executive]

Well, we have a call option in June 2023 at 101%. So obviously, we are looking into that. And obviously, started to prepare for the refinancing of the bond. And it may come as a big surprise, but we are definitely looking into refinancing through bank loans, but also bonds if the market is there, obviously.

[Unknown Attendee]

Then another question from Simen is that in the report, it is stated that the Russian asset is under a sales process and not up for sale. So does this mean that you have received bids on the assets and are in a process of selling the Moscow assets?

[Kristoffer Holmen, executive]

Yes, I can answer that maybe. Yes, we are in a sale process and the process is going well. We have received bids on the Russian property. But the market in Russia is -- there's a huge geopolitical risk in Russia overall. So we'll just have to wait and see the final results of that process. But for now, the process is going well, and we still believe that we will sell the property and receive payment for it.

[Unknown Attendee]

Okay. Then we have one question from Jonas Andersson. What is the cost of debt for the BEWI acquisition, bond or bank?

[Kristoffer Holmen, executive]

For now, we're committed to acquire Norwegian, Swedish properties in the BEWI portfolio, and they are financed with the bank loan.

[Unknown Attendee]

And how large part will be BEWI of the portfolio following that transaction?

[Kristoffer Holmen, executive]

Well, at the moment, the current portfolio is at NOK 4.1 billion. And after completing the whole transaction with BEWI, which amounts to NOK 2 billion, that will be 50% of the current portfolio. So it's quite a large share of the current and future portfolio as well. But at the same time, we -- as we mentioned, we have a quite large investment pipeline, which amounts to NOK 3.3 billion -- or NOK 3.2 billion, of which BEWI is portfolio is approximately NOK 2 billion.

And -- but the remaining pipeline is mostly other tenants. So the final -- BEWI's final share of the rental income will be, yes, between 50% and 60% in the short term. But we believe that going forward, we will attract several new tenants and yes, pushing the BEWI's share down quite a lot actually. And that's obviously also a major goal to diversify the tenant base.

[Unknown Attendee]

Good. Thank you. As of now, we don't have any more questions. So maybe we'll give it a few seconds. [Operator Instructions] Otherwise, we will conclude the presentation, but we'll give it -- I think we will conclude now and thank you for the questions, and thank you for watching the webcast.

[Kristoffer Holmen, executive]

Thank you so much.

[Liv Malvik, executive]

Thank you.