Kmc Properties ASA

OSE:KMCP

Earnings Call Transcript 2023-Q4

[Liv Malvik, executive]

Welcome to our Fourth Quarter and Full Year Presentation. My name is Liv Malvik, and I'm the CEO of KMC Properties. With me today, I have our CFO, Kristoffer Holmen, who will take you through the financials. 2023 has been a truly transformative year for KMC Properties, and we believe we have created a solid platform for continued long-term growth. I will come back to that, but first, let me take you through some of the highlights from the fourth quarter.

In the fourth quarter 2023, we completed the acquisition of 2 properties for a total transaction value of NOK 209 million. We raised new equity and brought on board the new Nordic strategic investor, Nordika. And we sold off low-WAULT Swedish property at book value. Our yield ended at 7.3%, our contractual lengths or WAULT remained high at 11.4 years and the vacancy rate low at 1.8%. We have a loan-to-value of 55.9% and completed the last part of the large debt refinancing with a listing of NOK 900 million bonds in December.

In the first half of the year, we secured a large NOK 2.1 billion debt refinancing at improved terms, 1 of 2 transformative events that defined 2023. The other transformative event was the agreement to acquire 7 properties, representing the last part of the large transaction with BEWI ASA announced in 2022. On our books, the gross asset value increased from NOK 5.4 billion to NOK 6.2 billion year-over-year and on a pro forma basis to NOK 6.6 billion.

In summary, we have grown our property portfolio with value-accretive transactions while lowering all-in -- while lowering our all-in interest rate. Let's have a look at the large property transaction with BEWI. We entered into the agreement to acquire properties for a total value of NOK 2 billion with BEWI after a competitive process in 2022. The first NOK 950 million part was completed the same year. The second phase of the transaction was completed in the first half of 2023 for a total transaction value of approximately NOK 350 million. The final phase was agreed in September 2023. Two of the properties in this last phase were acquired in the fourth quarter for NOK 209 million, and the remaining 5 properties will be phased in during the first half of 2024.

The total transaction value ended at NOK 1.9 billion, with a gross yield of 7.3% and WAULT of 16.7 years. Including the full BEWI transaction, we now own a total of 71 units. 50 units are not build to [ suit ] on specific purpose. In other words, these are flexible square meters that can serve different purposes. 43 of these units are located in industrial clusters, meaning that there is a high likelihood of alternative use. In total, the flexible units represent 70% of our overall gross asset value, representing the lowest risk assets in our portfolio. The remaining 30% of our gross asset value are 21 units built on industry critical or tenant critical locations. This suggests that alternative use will remain within the existing industry or within the existing tenant.

In total, 56 of the 71 units are located in industrial clusters, increasing the likelihood of alternative use. Our high-quality assets and tenants was a key enabler for the transformation of our capital structure at improved terms, which brings us to the other transformative event. During 2023, we drastically improved our capital structure through a major refinancing and the financing of new acquisitions. Bank debt will, after completion of the BEWI transaction represent approximately 70% of the company's overall debt compared to 40% only 1 year ago. As a reference, when we established our company in 2020, 100% of the interest-bearing debt was a bond loan.

The restructuring has lowered our interest margin from 3.59% in Q4 2022 to 3.21% in Q4 2023. Financing of the last 5 properties in the BEWI transaction will draw on further bank debt, bringing the overall interest margin down to 3.12%. This is in line with our initial guiding disclosed in the first half of 2023. We are very pleased with what we have accomplished in our capital markets defined by rising inflation and interest rates. The new capital structure and the increased portfolio value puts us in a unique position for further growth in the Northern Europe.

We now have a broader foothold and a diversified tenant base exposed to a variety of end markets. We have a broader access to capital through our new strategic investor as well as a wider range of Nordic banks. And we have good traction on bank financing in Finland and continue to work strategically towards Continental European lenders. Our strong position in the combination with changing market conditions gives us access to attractive opportunities. Observe transactions in across the Nordics are currently settled at approximately 7% to 8% yields.

Compared to our current debt structure in the respective markets, we see a favorable yield gap. The yield gap is the difference between the cost of debt and the property yield, which indicates an equity return potential, positive for our shareholders. We are closely monitoring the market and are ready to act upon attractive opportunities, which fits into our strategy and vision of becoming the preferred real estate partner for logistics and industrial companies. Now over to Kristoffer, who will take you through the financials and more details on the fourth quarter.

[Kristoffer Holmen, executive]

Thank you, Liv. Yes. Let's start with looking at the P&L. In the fourth quarter, our rental income increased 34% compared to the same period last year. 7.5% of the top line growth came from CPI adjustments, the rest came from value accretive investments, all with a weighted average gross yield of 8.1%. Due to flat operating expenses, the EBITDA has increased 44% year-over-year, showcasing an improved utilization of our platform.

Despite increased -- despite significant increased floating interest rates, interest expenses are up only 19% compared to Q4 2022, due to the refinancing in July, where we managed to reduce the overall interest margin and new bank loans at very favorable terms. This resulted in an impressive 106% increase in our net income for Property Management year-on-year. Net profit was NOK 6 million, which is primarily explained by unrealized costs, and we have built a bridge to explain these items. We had a negative fair value adjustment on currency and interest rate swaps of NOK 47 million. The losses were due to falling forward interest rate curves.

In addition, we had amortized loan costs at NOK 7 million. However, we had a positive FX effect of NOK 1 million and a positive fair value adjustment on our investment properties of NOK 45 million. Total fair value adjustment on our real estate portfolio in 2023 was minus 2.2%, which is modest compared to the adjustments made by many other real estate companies, which underlines the strength of logistics and light industry portfolios in today's market.

All in all, these items resulted in net profit before tax of NOK 27 million. The annualized run rate at year-end 2023 shows the contractual rent link of the next 12 months and related estimated costs based on completed agreements. The change in rental income since Q3 is NOK 19.5 million from new investments in the quarter, CPI adjustments of NOK 70 million and currency effects of NOK 2.5 million. Property expenses and operational expenses are almost flat, and the net realized financials is affected by new swap agreements and new interest-bearing debt at favorable terms, including a bank loan from Nordea in Denmark. Hence, the net income for Property Management increased by 20% since Q3 despite a 9% increase in rental income in the same period. If you look at the pro forma figures at year-end 2023, you see the run rate once the final part of the BEWI property acquisition has been completed, which is likely to happen during the first half of 2024. Here also, the net income from property management is estimated to increase by an impressive 17% from Q4, even though the rental income increases by only 8%.

And this is due to an improved utilization of the organization and improved financial terms on new interest-bearing debt. Net income for Property Management after tax, representing net cash earnings is stable at NOK 0.37 per share in the last 12 months. And here, you see the bridge from this figure to the adjusted EPRA earnings per share, which was at NOK 0.25 per share. So over to more details on our debt. In the table, you see our interest-bearing debt at the end of Q3, Q4 and Q4, given completion of the BEWI Property portfolio acquisition, the pro forma figures. The floating interests have continued to increase. However, margins are gradually going down due to additional bank financing at very good terms.

And we have also refinanced the shareholder loan with a revolving credit facility in [indiscernible]. In addition, some interest rate swaps have matured, and we have entered new swap agreements, fixing the interest rate on SEK 175 million and NOK 135 million in late December. The overall hedging ratio at year-end was 45%. Hence, the all-in interest rate, including swap agreements, was at 6.29% at year-end, and we estimate it to be 6.2% once we complete the BEWI portfolio acquisition. This created 100 basis points yield gap at year-end, which will increase to 120 basis points once the mention acquisition is completed. This again improves the return to our shareholders.

And if you look at the debt maturity profile on the next slide, you see that the weighted average debt maturity is extended by the BEWI transaction and that there is only bank loans maturing in the next [ few ] years, which we believe will be rolled. Hence, KMC Properties as a healthy maturity profile. Our current EPRA LTV is 55.6%. However, we estimated to increase to 57.4% after the completion of the BEWI portfolio acquisition due to additional interest-bearing debts.

But if we analyze our interest coverage ratio, you see that we have a comfortable headroom to our covenants going forward, given the current forward interest rates. Since KMC Properties got listed in December 2020, the company has been challenged by the macroeconomic turmoil. However, the strong portfolio and platform have demonstrated resilience and our earnings per share is now back to previous levels before the inflation and interest rates spiked and is expected to improve significantly once the interest rates are coming down. The adjusted net asset value per share is at NOK 7.6 at year-end compared to the current share price of approximately NOK 6.6 per share.

Over to you, Liv.

[Liv Malvik, executive]

Thank you, Kristoffer. We have built KMC properties on a clear strategy with 4 focus areas that has proven its robustness through changing market conditions. Through acquisitions, we have established a strong track record and know-how and built a diversified asset base. Through capital optimization, we over the past year, have done significant efforts to strengthen our structure and access to capital. In addition, we continue to execute on our CapEx and greenfield strategy, bringing us closer to our tenants. At the beginning of 2023, KMC Properties hired a full-time employee to assess the development opportunities in the current portfolio. This work has resulted in concrete projects enrolling significant investments, which are now being discussed with current and potential tenants.

We believe several of these projects will be agreed upon during first half of 2024 at highly accretive terms. In combination with a lean organization with modest increases in operating costs, we are ready to continue our growth. I will end this presentation as I started it. We have created a robust platform, and we are fully committed to reaching our NOK 8 billion gross asset value target at the end of the year. To summarize, we are a lean organization with modest increases in operational costs. We have a robust property portfolio with strong tenants. We have reduced interest margins through the debt refinancing and financing of the BEWI transaction. We have access to a wide range of long-term equity and debt financing, and we are closely monitoring attractive acquisition opportunities. With that, let's move to the Q&A.

[Operator]

When will we see a dividend policy published, is it set for 2025 or tied to the NOK 8 billion target?

[Kristoffer Holmen, executive]

Well, as we also written in the interim report, once the company has sufficient liquidity, the Board intends to pay our dividend in accordance to the dividend policy, which is a dividend between amounted to 30% to 50% of our cash -- net cash earnings.

[Operator]

And the question from Simen Mortensen. What is the status of the potential salmon slaughterhouse development?

[Liv Malvik, executive]

The status is that KMC properties and Slakteriet, the slaughterhouse is still in dialogue due to rising interest rates and rising costs -- overall costs. The slaughterhouse as has seen it necessary to do some more [ projecting ] due to the building. But if KMC is still interested and we are still in dialogue with the slaughterhouse and if we do this cooperation on the right terms for KMC, we will be glad to build this slaughterhouse for Slakteriet.

[Operator]

And the question from [ Neel Kleiven ]. Do you expect the BEWI transaction to be finalized in Q1 or Q2?

[Liv Malvik, executive]

Q2. Some of the properties may be Q1, some in Q1 and some in Q2. Yes.

Okay. No more questions.

[Kristoffer Holmen, executive]

Yes. Thank you for listening in.

[Liv Malvik, executive]

Thank you for listening in.