Wallenstam AB

STO:WALL B

Earnings Call Analysis

Wallenstam's Strong Q1 Performance Amid Lower Costs

Wallenstam reported a strong first quarter in 2024, celebrating its 80th anniversary. The net operating income rose by SEK 73 million, marking a 16% increase due to higher rental income and lower electricity costs. Completed construction projects added 251 new apartments, contributing significantly to the revenue. Despite a 6% increase in commercial rent and a 4.5% growth in residential rents, higher financial expenses offset some gains. Investment properties saw an injection of SEK 524 million, although future construction volumes remain lower. Overall, Wallenstam maintained a solid financial footing with a NAV per share of SEK 56.8 and issued SEK 700 million in green bonds.

Financial Performance Overview

In the first quarter of 2024, Wallenstam reported a significant improvement in financial performance with a net operating income (NOI) increase of SEK 73 million, equating to a 16% rise compared to the same period last year. This recovery brings the surplus ratio back to 74.4%, aligning with pre-energy crisis levels. The primary driver behind this growth was primarily from an increase in rental income, which rose by SEK 60 million, with SEK 42 million attributed to completed new constructions, notably 250 apartments.

Residential and Commercial Growth

The company’s rental distribution remains favorable, with 50% of the rental income derived from residential properties and 27% from commercial spaces. The negotiation outcomes with the tenant association have resulted in a residential rent increase of 4.5%, secured through a two-year agreement, indicating stability in rental growth for the upcoming year. Further, commercial base rents witnessed a 6% increase, showcasing resilience in the commercial real estate sector.

Operational Efficiency and Cost Management

Wallenstam successfully reduced its operating expenses by SEK 13 million, largely benefiting from a decrease in electricity prices from SEK 2.5 to 0.90 per kilowatt hour, translating to lower costs amounting to SEK 29 million. Although there were increases in water, sanitation, and cleaning costs, the company has strategically focused on energy-saving projects, which continue to show promise for future cost controls.

Investment and Development Activities

During the quarter, Wallenstam invested SEK 524 million in new constructions and renovations. However, this figure represents a decline of SEK 130 million compared to the previous year, attributed to a lower volume of ongoing projects, now totaling 830 apartments under construction, the lowest in several years. Despite this, the company has plans to initiate new projects, including the eagerly awaited Arstaberg project, which will deliver over 400 apartments, emphasizing its commitment to future growth.

Financial Position and Market Trends

The company's financial health remains robust, with a total property book value of SEK 64 billion. Despite increasing financial expenses by SEK 70 million primarily due to rising interest rates, Wallenstam maintains a healthy interest coverage ratio (ICR) of 2.3x, indicating strong operational capacity to meet financial obligations. The average interest rate stands at 3.7%, consistent with previous quarters, and 56% of the loan volume is at a fixed rate, providing some insulation against market volatility.

Balance Sheet Strength

Wallenstam's equity strengthened by SEK 300 million compared to the previous quarter, bringing the NAV per share to SEK 56.8. The company’s loan-to-value (LTV) ratio is relatively low at 46%, alongside an equity ratio of 45%, signifying a fortified balance sheet positioned well to weather financial challenges and support further investment initiatives.

Outlook and Future Directions

Looking ahead, Wallenstam is optimistic about its development pipeline and expects to maintain its trajectory of growth. The secured rental agreements and the commencement of new projects signal a positively aligned strategy in a competitive real estate market. The management is focusing on energy efficiency and sustainability, which could resonate well in an increasingly environmentally-conscious market landscape.

Earnings Call Transcript 2024-Q1

[Susann Linde, executive]

Good morning, and welcome to the presentation of our first quarter in 2024. My name is Susann Linde, I'm CFO and Head of Investor Relations here at Wallenstam. First, I would like to tell you that we have a new layout structure of our report. So now it's easier for you to read it on the screen. Hope you find it good. I think it's very nice and a good layout. And you can also see up in the corner, our 80 years logotype because this year, we celebrated 80 years as a company and 40 years as a listed company. And we will celebrate this during the whole year in different ways. So Wallenstam today. We have 210 properties at a book-to-value of SEK 64 billion where 56% of the value are in residentials. In total, we have 97% of the area are occupied, and we have 830 apartments under construction so where are we and what kind of properties do we have? It looks almost at the same like last quarter. On the rental value, just about half of it comes from residentials. And on the second place, you find offices 27% of the rental value. And we think this is a good distribution of the property holding then we go to the results for this first quarter. The net operating income has increased by SEK 73 million. It's 16% up since last year, and we are back on the same level of the surplus ratio like before the energy crisis. The surplus ratio ended up of 74.4%. And I will talk more into details on next page. So what has happened this quarter? The rental income has increased by SEK 60 million compared to last year and 2/3 of the increase, SEK 42 million comes from the completed new construction, both the 250 apartments this quarter and also the one which were completed after the first quarter last year. The transactions give us a minus of SEK 5 million. And in the comparable holdings, it is up by SEK 23 million. The commercial base rent has increased by around 6% and the negotiation with the tenant association about the residential rents ended with a total growth on average for the total group of 4.5%. We made a 2-year deal, and there will be almost the same growth next year. The operating expenses has gone down by net SEK 13 million, and the main reason to lower operation expenses is lower electricity price. Last year, we had an electricity price of SEK 2.5 per kilowatt hours. And now we have 90 per kilowatt hours. The effect is SEK 29 million lower expenses. We also work hard with energy-saving projects, but the rates and charges, for example, water and sanitation and cleaning are higher. And also the weather-related expenses were higher compared to last year by SEK 5 million. So in total, the NOI grew by SEK 73 million or by 16%. So the business is going well. Like I said, we completed 251 apartments this quarter, and one of the projects is Kompositören in Uppsala, where we fully completed this property during this quarter. And in total, the property has 185 apartments, but it was the last 69 apartments that we completed this quarter. And in Gothenburg, in our urban development project, we fully completed Kallebäcks Terrasser Block 5. It was the whole project of 182 apartments in 1 quarter. So you can see it here also on the picture. I think it looks nice. Now, we go through the total income from property management, and it is almost on the same level as last year, plus SEK 5 million. The increase in the NOI met by higher financial expenses. They are almost SEK 70 million higher, mainly because of higher 3-month STIBOR than last year and on average, SEK 1 billion in higher interest-bearing liabilities compared to last year. The average interest rate on closing day is 3.7%, and it's almost on the same level as last quarter. We have no new interest rate derivatives during this period. That means that the average fixed interest term is now 37 months, which means 56% of the total loan volume have fixed interest rate. For the 12th rolling month, we report an ICR of 2.3x. Our properties have a book value of SEK 64 billion. And of this, SEK 4 billion is investment in land or ongoing projects and without yield. So the properties in management is SEK 59 billion. So what has happened with the investment properties. This quarter, we have invested SEK 524 million in new and reconstruction. The unrealized value changes in properties amounts to SEK 31 million. The average direct yield requirements are unchanged compared to previous year for both commercials and residentials. So like I said, we invested just about SEK 500 million this quarter, and it's around SEK 130 million lower compared to last year. And here, the comparable graph here is the whole year. So for this 2024, just the first quarter. But it's a little bit lower volume compared to last year at the same time. So you may know right now that we have a lower volume of ongoing projects. So now we have 830 apartments under construction, and it's the lowest volume since many years. But I will come back to the future later. And now I will go through the different projects in what states they are in right now . And I'll start with Kallebäcks, our urban development project here in Gothenburg. Here, we have Kallebäcks Terrasser Block 6. This is the entrance to the total development project here in Kallebäcks, and it's in total 4 houses of 298 apartments, where the buildings have both roof and windows now, so it's only the inside work left. So here on the left, you can see how it looks like right now and to the right, how it will look like when it's ready. So now we work with inner painting, kitchen and so on, and the first people will occupy this in 2025. Then we go to Stockholm, Nacka Grace in Nacka. right now, it's full production here. Virtually all disciplines needed to build a new construction are active at this stage. The frame will be completed at the end of April and work on the roof and facades as well as interior work is underway. A small interesting part that we will get started with on this week in installation and treatment of facade decorations in Stockholm that we have on all facades. We have completed our reference apartment and the first occupancy will take place in September this year, and it will continue until the end of February, March 2025, and this is really a lovely project. And now we go to Älta also in Nacka in our urban development project here. We have one ongoing project of 191 apartments. The frame is up, as you can see here on the picture to the left. And right now, the facade work, roof work and interior work is underway. Inside the interior has begun, and the first stairwell is painted. And this week, [ Partille ] laying and tiles in the bathroom began, and the occupation will start at the end of this year. And the start that we had in May last year, the only start we had last year, it is in Farsta, Ädellövet of a project of 172 apartments. And the apartments are in 4 buildings and are located next to Lake Drevvikens in Farsta, in the Southern Stockholm. The frame assembly is underway and 3 buildings are at the top and the last one will be completed in the summer. Right now, frame assembly for facade work, installation work and interior work are underway in these apartments. The first occupancy is planned for March 2025 and the last at the end of 2025. So this was the projects that we have ongoing right now. And on next page, it's really fun to tell you that we will finally have a start again. We have decided to start this project in Arstaberg during the second quarter. It feels very good to finally start the project again. In total, we will construct just over 400 apartments here. And this is a very attractive area where people want to live, and this is the most important thing before we start the construction. Because of the high rents, the location is very, very important. Like we always say, location, location, location. I think you have heard it before from us. So we will come back to this, but it feels very good to finally have a new start again. And we also recorded our quarter 1 report video from this place. So just going to our website and look at it. So the equity is up by SEK 300 million since last quarter and the NAV per share amounts to SEK 56.8 per share. We have interest rate liabilities of SEK 29.7 billion, and it is SEK 600 million up from last quarter. That gives us an LTV of 4% to 6% and an equity ratio of 45%. So quite a strong balance sheet. We have grown our interest-bearing liabilities, like I said, by SEK 600 million this quarter, and the bond market has started to work again. And during the quarter, we have issued 2 new bonds, green bonds, a total SEK 700 million and reduced this money to refinance the wind turbines. One was with SEK 400 million with a maturity of 1.5 years and the other of SEK 300 million in 2 years, both with a variable interest rate of 3-month STIBOR plus 120 basis points. In April, the older bonds are maturing of SEK 334 million. But like I always say, we are mainly financed by bank loan, and it is 95% of the total financing. So that's how we finance our investment properties. So this was all for today, and I thank you for listening. And if you have any questions, please send an e-mail, and I will try to answer them as quick as possible. So have a nice day, and thank you for listening.