Wallenstam AB

STO:WALL B

Earnings Call Transcript 2022-Q2

[Susann Linde, executive]

Welcome to this conference call about second quarter 2022. My name is Susann Linde, and I'm CFO here at Wallenstam. And you can also send me some questions. If you have some, please click on the envelope on this slide, and I will answer them later.

Now turn to Page 2. We are in a turbulent world with high inflation, problems with supply chains, and ongoing war. But we, as a company, are well equipped with, among other things, a strong balance sheet as a base. We have been working with it for a long time. We, as a company, always work long term to be able to operate in both good times and bad times.

So now turn to Page 3. We continue to create value, which we can see in our net asset value. During this first half of the year, we created almost SEK 3 per share. So during the business plan, we have created SEK 20.5 per share, which means that we reached our goal. We have also made a split of the share, which means that we have twice as many shares. All key ratios have been recalculated.

Our strategy is also to focus our wind power production in the electricity price zone where we have our properties in electricity price zone 3. That's why we made a sale to Jamtkraft of 3 wind farms in electricity price zone 3 -- 2. During the quarter, we also signed an agreement with Ikano Bostad on the acquisition of a building right close to the city, where we will build approximately 350 apartments in Stockholm.

In the same deal, we agreed on the sale of more than 600 apartments in Gothenburg and Partille. And it's also found that Rebecka Wallestam has joined as a co-opted member of the Board. Rebecka is Hans Wallenstam's daughter, and she works in the company today.

Now turn to Page 4. As everyone probably already knows, we are concentrated in the growth regions of Stockholm and Gothenburg. Half of our portfolio consists of housing and the other half of commercial properties.

Now turn to Page 5. We focus a lot on sustainability work in various forms. We have our 4 climate targets, but now we have also applied for new climate targets to the global climate action partnership, the Science Based Target, which are verified goals. We are also proud of our large recycling project, Östermalmshallen, which has gone from a market hall in Stockholm into a padel hall in Molnlycke. It was inaugurated this second quarter.

In May, together with 40 other property owners, we signed a letter of intent for circular construction where we will work together for, among other things, recycling. And since 2013, we have been self-sufficient in renewable electricity with the help of both wind turbines and solar cells. In 2022, we have installed solar cells on a further 16 properties.

Now turn to Page 6. During this quarter, we completed a total of 262 apartments, and I will show you on next page in which properties. So now turn to Page 7. And we start in Bandhagen in Stockholm, where we have completed all 84 apartments this second quarter. And to the right, we have Flanören project, where we have completed the last 72 apartments out of 156 apartments. So both are fully completed.

Now turn to Page 8. We also completed the second project in Kallebäcks Terrasser, Kvarteret 11, a total of 270 apartments. And during this second quarter, 103 apartments was completed.

Now turn to Page 9, and the results where our management is running well. Our net operating income increases by 10%. This, even though we have had some sales. We will take more of the details on the next page. So go to Page 10. As I said, NOI increases by 10% which corresponds to SEK 83 million. The majority of the increase comes from our new construction. If we start with the rental income where SEK 85 million of increase comes from our new construction, transactions result in a reduction of net SEK 31 million. In the comparable holdings, we have increased revenues by SEK 42 million, which corresponds to an increase of approximately 3.3% in base rent.

As in the previous quarter, we have booked an assessed property tax due to increased assessment values. We passed on a large part of the property tax to the tenant, which is why it is reported as both an income and an expense. We have a total occupancy rate of 97% where residentials are fully let and the commercial holdings amounts to 95%. The operating expenses increased by SEK 80 million, where the majority of the increase is due to completed new construction.

The climate has been better, which has had a positive effect on operating expenses of SEK 5 million. Also, higher electricity prices, for example, compared to the previous year by approximately SEK 3 million. But there, we have an internal hedge in total because we produce our electricity by ourselves.

Now turn to Page 11. And now to my favorite key ratio, surplus ratio, which shows the efficiency of the property holdings. The orange line shows how the surplus ratio increase for every year, but it is harder and harder to increase from this high level. We recognized just over 76% in a rolling 12 months, and if you compare the first half of the year with the previous year, it is 1.5% units up. And the NOI, as I said, is still increasing.

Now turn to Page 12. And then we go further in the income statement and add our administration expenses and net financial items, which will be our income from property management, which increases by 7%. The increase in the administrative expenses is similar to the first quarter, mainly due to an increased number of employees. The financial expenses increased by around SEK 30 million compared to the previous year, which is partly due to higher liabilities and STIBOR levels and the fact that we have made a lot of interest rate hedges, which I will discuss shortly. The average interest rate during the period amounts to 1.3%, which is 9 basis points higher than the previous year. We also have a lower share of capitalized interest of SEK 14 million.

Now turn to Page 13. As I said last quarter, we started to secure a lot of interest rates with the help of 10-year interest rate swaps. And we did this before the interest rates increased too much. In total, we have an average fixed interest term of 4 years. In the short term, this has led to an increase in the interest rate, but it is a long-term insurance. When we exit the period, we have an average interest rate of 1.43%, which is 23 basis points higher than last year.

Now turn to Page 14. And the profit before changes in value recognized at SEK 740 million, which is approximately SEK 130 million higher than the previous year. During the second quarter, we made a deal with Jamtkraft and sold 3 wind farms to them. The profit of just over SEK 60 million is reported among other income.

Now turn to Page 15. And then we go to the value changes. And regarding changes in value of investment properties, the existing portfolio is kept at the same value, but we are gradually reporting the value we create in our new construction, a total of SEK 374 million. Change in value of financial instruments amounts to SEK 1.4 billion, which mainly consists of an effect of rising swap interest rates. The swap rate has tripled since the turn of the year. This post also includes the sale of all SBB shares and also the write-down of other financial investments due to the prevailing market situation.

Now turn to Page 16. Our total property value amounts to SEK 65 billion, which is an increase of SEK 1 billion despite the sales we have made. It's our new construction that accounts for the increase.

Now turn to Page 17. So we have properties recognized to SEK 65 billion and we make an internal valuation of the entire property holdings every quarter, and we have chosen to maintain all direct yield requirements and they amount to an average of 4.4% in the commercial and 3.0% for residential, 2/3 of the properties are residential and 1/3 are commercial.

Now turn to Page 18. We continue to invest in our new construction. During the first half of the year, we invested SEK 1.4 billion in the construction of properties. In addition, we have also acquired properties for SEK 1.3 billion.

Now turn to Page 19. We have started over 300 apartments this quarter. In the picture, you see Kvarteret 6 in our urban development project, Kallebäcks Terrasser in Gothenburg. The block is the gateway to the area with 296 apartments at the future square. I think it's a really nice house, don't you think?

And now turn to Page 20. We also have some smaller starts to the left here in Härryda in Gothenburg, the project Pixbo Sjöterrass, and 8 nice co-ops. And to the right, we are adding 18 apartments to an existing property where we are reconstructing premises into apartments. This property is part of the deal with Ikano and will be vacated in 2023 when these apartments are completed.

So now turn to Page 21. So now we have 1,669 apartments under construction right now, and it is and has been a job to make this flow. In the ongoing projects, we see no delays. And as you can see, we will have a lot of occupations in 2023. And you see that Gothenburg has a lot of ongoing projects right now.

Now turn to Page 22. Our interest-bearing liabilities amount to SEK 28.5 billion, and it's an increase of SEK 1.7 billion during this first half year despite the large investments we have made. The need for new financing has been low, thanks to the sales we have made during this first half year.

And some words about our financing on next page, Page 23. We are mainly financed through bank loans, 85%, and it has been an active choice for a long time even though the capital market has been cheaper. The reason for that choice, we have seen in the market now, in a crisis, that capital market almost completely closes or increases significantly in cost. Again, we think in long term, not just what is the best in the short term.

Now turn to Page 24. A summary of everything I have said through our key ratios. We have a business that is doing well with an increased NOI and an increased surplus ratio. We have a further strengthened balance sheet with a loan-to-value of 43% and an equity ratio of 47%. We have also increased our net asset value by 5% in the first half of the year.

And next page, Page 25. We have previously informed that the Board has decided to start work on a new business plan already this year, 1 year early. The reason was that we were close to achieve our goal. With this quarter, we have passed our target of SEK 20. As I said, work is starting with a new business plan that will be presented during the fourth quarter of this year. So I will come back to that later this year.

And this concludes the presentation. And if you have any questions, please click on the envelope, and I will answer them. And finally, I will also wish you a happy summer. Thank you for listening.