Wallenstam AB
STO:WALL B

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Wallenstam AB
STO:WALL B
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Price: 46.96 SEK -1.26% Market Closed
Market Cap: 30.9B SEK
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Earnings Call Analysis

Q3-2023 Analysis
Wallenstam AB

Stable Financials Amidst Higher Expenses

In a period of global uncertainty, Wallenstam maintains solid financials with a good property portfolio and steady demand. Net operating income (NOI) rose by SEK 79 million with a 5% growth compared to last year, despite pressures from increased energy costs which have been offset in the income statement. Net income from property management saw a decrease by SEK 165 million due to administrative expenses and a significant rise in financial expenditures caused by higher market interest rates, reflecting an average rate increase of 300 basis points. Strategic hedging of interest rates has buffered some of the impacts, with no derivatives maturing until 2025. Key financial ratios remain strong, with an LTV of 46%, an equity ratio of 46%, and interest coverage at 2.9x. Demand is growing, evidenced by their own housing queue, with interest in both residential and commercial spaces. The company completed several construction projects during the quarter, including schools and apartments, adding value to their holdings.

Navigating a Turbulent Global Climate: Wallenstam's Resilience in Q3 2023

In the challenging and turbulent times of the third quarter of 2023, Wallenstam showcased its commitment to financial stability and efficient asset management. Despite identifying the quarter as a consolidation period, the company focused on enhancing efficiency in future projects, particularly those required in its operational regions, underlining an uneasiness pertaining to the halting of new construction starts. The company's efforts in project efficiency aimed to strengthen its position for when new constructions ramp up once more.

Property Portfolio and Occupancy: A Robust Foundation

Wallenstam's real estate footprint remained strong, with an impressive overall occupancy rate of 96%. The portfolio is balanced between residential and commercial spaces, despite minor shifts due to project completions, such as two new schools in Kallebäck. Additionally, the company is making headway on several urban development projects, suggesting a strategic focus on long-term growth and community building.

Construction Updates: Progress and Patience

The construction progress of Wallenstam's ongoing projects underscored a phased completion approach, with first occupancies slated for as far ahead as 2025. The company has some 150 apartments left to complete in one of its developments. These timelines reflect a cautious approach to development but may also indicate a careful consideration of market demands and project efficiency.

Financial Performance: Growth Amidst Rising Costs

Wallenstam reported positive trends in its core business, with net operating income increasing by roughly SEK 80 million. Rental income saw a notable increase thanks to completed projects, contributing SEK 91 million to the growth. On the downside, operating expenses also rose, driven chiefly by significant hikes in electricity prices, yet the company's self-sufficiency in renewable energy helped balance this impact on the net.

A Tale of Two Headwinds: Administrative and Financial Expenses

The company faced increased administrative expenses, mainly resulting from a shift to existing property maintenance over new construction. The most significant financial headwind was heightened interest expenses due to an uptick in the average market interest rate, doubling from the previous year and leading to an overall decrease in income from property management by SEK 165 million.

Interest Rate Hedging: Wallenstam's Protective Measures

In response to rising market interest rates, Wallenstam has hedged a significant portion of its interest rate exposure through derivatives, covering nearly 60% of its total loan volume. The company's average fixed interest rate term stands at 37 months, providing a measure of security against further rate hikes.

Constructions, Completions, and Transfers: A Period of Transition

During Q3 2023, Wallenstam completed several new rental apartments and transferred properties as part of deals with other housing companies. This transactional activity reflects an ongoing effort to optimize the company's property portfolio for market demands.

Balance Sheet and Investment: Stability in Valuation and Financing

Wallenstam reported a substantial investment property value, with significant ongoing investment in construction and energy savings. Although interest-bearing liabilities increased, the company's bank financing strategy was adjusted for resilience, reducing reliance on capital markets and demonstrating a prudent financial approach.

Key Ratios and Financial Strength: Holding Steady in Stormy Seas

Key financial metrics such as the NOI, surplus ratio, and interest coverage ratio suggest a stable financial standing, despite external pressures such as high energy costs. The company's loan-to-value (LTV) and equity ratios of 46% indicate a robust balance between debt and equity, a reassuring sign for investors looking for prudent capital management.

Summary: Poised for Future Growth

In summation, Wallenstam positions itself conservatively yet optimistically, highlighting its strong financing through traditional bank loans, a protective interest rate hedging strategy, and confidence in high demand for both residential and commercial properties. With no immediate debt maturities until 2025 and no need to defend a rating, Wallenstam continues to focus on what it perceives as best for its business and stakeholders.

Earnings Call Transcript

Earnings Call Transcript
2023-Q3

from 0
S
Susann Linde
executive

Good morning, and welcome to the presentation of the third quarter of 2023. My name is Susann Linde, CFO and Head of Investor Relations here at Wallenstam.

So turn to next page. The headline of this report is good position in a turbulent global climate. During this quarter, there hasn't been so much activity, more of a consolidation quarter, you can say. But we work with our existing properties, but we are also focused on working with our future projects to make them even more efficient so we can start the construction of them of more apartments which is needed in the regions where we are. But even in good times, we are focused on our financial stability and also improved it. That is to say, we are well equipped, both regarding the financial position as well as our property holdings. And therefore, we feel that we have a good position in these troubled times.

So now turn to next page, Page 3. The most common question I have received lately is when does the restaurant open at Birger Jarlsgatan 64. Maybe some of you don't know what restaurant it is or what property it is. It's our office -- where we have our office in Stockholm in the CBD area of Stockholm where we have rearranged the property so that we have moved our reception and our office spaces up 1 floor to make room for a restaurant in the entrance level. We think it's a fantastic location and it will be -- and it will create a place to socialize and live outside the property, and it will open in November. Among other things, this is what I think we do good, we find areas to develop in order to have nice meeting places for people. So maybe you are a guest here after we have opened this restaurant.

So now turn to next page. You may all know where we are and have our properties. And as I said at the beginning, we feel that we have a good property holdings that is in the right locations, and it shows in these times. We are in regions where we see a good demand for our premises. We have properties in attractive residential locations and also attractive commercial locations, mainly in CBD Gothenburg. The overall occupancy rate is 96%.

Next page. Half of our rental value comes from residentials and about 60% of our market value. This is not significantly different from the previous quarter. What has happened here is that we have completed 2 schools in Kallebäck that are public used properties. So it went up 1 percentage point up to -- from 2% to 3%.

Now turn to next page. We haven't got any starts this quarter. So in total, we have 1,163 apartments under construction right now and also some commercial areas here in Gothenburg. This means that we have also completed some constructions. So we have a net reduction of 75 apartments. And I will talk about 3 of the ongoing projects and where we are in the construction process right now.

So we turn to next page and start in Gothenburg in our biggest urban development project right now, Kallebäcks Terrasser, Kvarter 6 it's totally 4 buildings of almost 300 apartments, where the first building is standing there with both roof and Windows. So now just inside work left. You can see it on the left picture here and to the left side in that picture, this property -- building, which is almost completed, just inside. And the second building right in front of us, there, we are working with windows and roofs, and it will be completed outside soon. And the other 2, we have started to assemble the frame, which you can see in the middle of the left photo. So the first occupation will start in 2025, and it will be the entrance to this urban development project.

Now turning to Page 8. Then we go to Stockholm and our project Nacka Grace, which we started last year, where assembly of the frame is in progress, where we are roughly halfway there in terms of time. The assembly will last until the spring of next year. We have made efforts in the project to improve its climate impact. The efforts so far have concerned our choice to work with climate improved concrete. The occupation will take place in stages, starting in the second half of 2024 and the property expected to be fully completed the first half of 2025, and it consists of 169 apartments and 12 commercial premises. Quite a beautiful property, I think.

So now turn to next page. Also in Nacka, but now our second urban development project in Stockholm, it's Kvarter 1 here in Ă„lta. The assembly of the frame is underway where approximately 70% of the frame is assembled and will continue until February next year. At the same time, exterior roof work and the side work with installation of windows are ongoing, which will continue in parallel with the interior work until summer 2024. Occupation will take place in stages starting in November 2024. The project consists of 191 apartments and 12 premises in the form of restaurants, health center, florist, hairdresser, et cetera.

Next slide. Like we said before, we have our own housing queue and it shows that the demand has grown during the last year. Now we have almost 270,000 unique applicants. Here on the graph, you can see all of our 3 cities. And with this in mind, it feels sad not to have more starts of new apartments. Like I said, we work a lot with our future projects now to make that possible because Sweden needs apartments. Now turn to next page. So now we are going to our income statement and start with the first part, the net operating income. It has increased by almost SEK 80 million and our core business is going well. And I will show you the details on next page, like I always do.

Now turn to next page, Page 12. And if we start with the rental income, it increased by about 9% compared to the previous year, which is SEK 174 million. Our new construction and large projects that has been completed has a positive impact of SEK 91 million. The acquisitions and sales have a negative impact on rental income of SEK 39 million. In the comparable holdings, it is up SEK 111 million. The base rent has increased by 3.3% for residential and 9.1% for commercials. In the commercial part, we recognized an occupancy rate of 91% and where the biggest part of our holding, Gothenburg, has 93%. The surrender rate for commercial properties, which reflects how large proportion of the consumable leases, which are extended amounted to 89%. And our focus is, of course, to have satisfied tenants that want to stay with us.

During this quarter, we received electricity support from the government of total SEK 20 million. Of this, we have recognized as a rental income, the part that we have given to our tenants as electricity support of total SEK 9 million. We have given 3 million as a support to our tenants this year, which means a net of SEK 6 million this year. Hopefully, you understand that. The rest of the support is recognized as other income of SEK 11 million. Our operating expenses increased by SEK 95 million. And if you want to sum it up, it is mainly due to higher electricity prices of SEK 68 million, almost 70% of the total increase. And in total, we are self-sufficient in renewable energy, and we will see further down in the income statement that this is met on the total when we include our wind power operation. So in total, it's 0. Otherwise, it can be said that it is mainly tariff increases and cost inflation that has affected our comparable holdings. So in total an NOI of SEK 79 million better than last year.

Now turn to next page. And now our complete new construction. We have completed 67 rental apartments during this quarter and also 2 schools, which we can see on next page. So turn to Page 14. We have completed these 2 schools in our urban development project in Kallebäck of total 7,000 square meters. And here is the place for 700 children and it's lovely to go here and see all the children at the schools. It's -- it gives the area some living area with all the children.

Now turn to next page. We have also completed 80 new apartments here on Lantmätaregatan in Gothenburg. We have converted commercial premises into apartments. This property was included in the deal with Ikano Bostad, and they took over it now at the end of September. In total, it's 37 apartments in this property.

Now turn to next page. Then we are going up to Uppsala, where we have completed the rest of the total 98 apartments in Bersån. It was 33 apartments this quarter. This property is also part of a deal, and that is ASPER will take over this property in this fourth quarter this year. And to the right, we have completed 16 more apartments in this property Kompositören, where we have around 150 apartments left to complete.

Now turn to next page. So we go further down in the income statement, and we are coming to the income from property management that has decreased by SEK 165 million. As I said, even in the last quarter, the administrative expenses, which have increased mainly because of less capitalized administration on new construction. We work more in the existing properties because of less new constructions. So we work, for example, with some energy-saving projects and so on. But the main reason to lower income from property management is higher financial expenses, which is higher by SEK 230 million. The market interest rate has increased a lot. The STIBOR has increased by almost 300 basis points on average compared to the same period last year. We have an average interest rate on closing day of 3.14% and during the period of 2.76% which is double the previous year, and we also have a high debt of SEK 700 million compared to the previous year at the same period. It's an average SEK 700 million higher debt.

But it could have been more interest rate because we have hedged a lot of the interest and more about that on next page. We hedge our interest rate by interest rate derivatives, and we have a volume of total SEK 16 billion in interest rate derivatives which means that we have hedged almost 60% of the total loan volume, and we did it at a good level of the interest rate. And the first interest rate derivative will mature in 2025, which you can see here on the graph. If the interest rates change by 50 basis points, it will affect us by approximately SEK 63 million on a yearly basis.

Now turn to next page. And I forgot to say that it's just 1 month more than 3 years average fixed interest rate terms. So it's 37 months. So the net operating income from wind power is SEK 144 million, which you can see here in the line other income and other expenses. But if we adjust for the profit of selling 30 wind turbines last year and the last production of them this year, our existing wind turbines is SEK 72 million better than last year. And in other income for this quarter, it is included by SEK 11 million from electricity support, like I said, when I talked about rental income because the part that we didn't recognize as a rental income, it comes here in other income. So in total, it's SEK 20 million.

Now turn to next page, Page 20. And now we come to the value changes. The total value changes in investment properties is SEK 810 million. And this quarter, SEK 199 million. We have not adjusted the yield requirement this quarter. And this quarter, we have written down some future constructions. So that's why we have this SEK 199 million. In total, we have on average the average yield requirement of 3.5% in the residential and 4.5% in the commercials. So in total, we have a profit after tax of SEK 42 million.

And on next page, I will talk a little bit about our balance sheet. Page 21. We have a value of investment properties of SEK 63 billion and you can see to the right that it's just SEK 58 billion that are in operation and the rest SEK 5 billion is under construction on land for future projects. So it's SEK 58 billion that gives us a cash flow. And the investment volume during the year, we can see on next page, we have invested SEK 1.9 billion in construction this 9 months, and it's almost on the same level as last year. And here in the graph, we compare with the full year. So this 9 months, we compare to 12 months for 2022 and 2021 and so on. So -- but it's also in some new construction, but also energy-saving projects in these investments.

Now turn to Page 23. Our interest-bearing liabilities amounted to SEK 29 billion and it is SEK 700 million more on average compared to the same period last year. And how are we financed. We go to next page. What we did during the quarter is to further increase bank loans and decrease against the capital market, as you can see in the table to the left. Like I said last quarter, the banks feel positive and a good partner to us, where we grew with SEK 400 million this third quarter, just more than SEK 400 million to be exact SEK 434 million. SEK 460 million of the bonds matured during the quarter. So now we just have SEK 334 million left, which will mature next year. So we are mainly financed by traditional bank loans and it's 97% of our total volume.

So now we go to next page, 25 and talk about some key ratios, some of them you have seen before in this presentation. The NOI is up 5% compared last year and are affected negatively by higher energy prices. But on the last line in the income statement, the effect is 0. The surplus ratio are also negatively affected by higher energy prices and is recognized at 75%. The interest rate is on closing day, 3.14%, and it gives us an interest coverage ratio of rolling 12 months of 2.9x. We keep our strong financial position with an LTV of 46% and an equity ratio of 46%. We haven't bought any shares back during this quarter, which means a total volume of repurchased shares of SEK 1.5 million. The equity per share and the NAV per share are on the same level as year-end 2022.

So now turn to next page, 26. So to summarize, we are mainly financed by banks, traditional bank loans. We have hedged almost 60% of our loans by interest rate derivatives. We have no maturities until 2025 of interest rate derivatives, we don't have a rating to defend. So everything we do, we do because we want it for our own sake and what is best for our business. We have a high demand of our product of both residential and commercials. And finally, as I said in the beginning, a good position, both financial and where we have our properties and the quality of our properties.

So with this slide, it was all from me today. And please contact me if you have any questions, and you can also click on the envelope, envelope on this side to write some questions and also to attend to the Swedish call which are set at the same time as this. So there, we will have a Swedish Q&A session. So thank you for listening, and have a nice day. Bye.