Wallenstam AB

STO:WALL B

Earnings Call Analysis

Wallenstam's Growth Continues with Increased Revenue and New Projects

In the third quarter of 2024, Wallenstam reported an 11% increase in net operating income (NOI) to SEK 168 million. The company began construction on 170 new apartments across Stockholm and Gothenburg. Revenue from property management rose by 6% to SEK 880 million, bolstered by new rentals and a 4.5% average increase in residential rents. Notably, operational expenses fell by 3% mainly due to a 40% drop in electricity costs. With a stable balance sheet featuring a 46% loan-to-value ratio, Wallenstam remains poised for growth, driven by ongoing urban development and effective tenant management.

Growth and Expansion in Key Markets

During the third quarter of 2024, Wallenstam demonstrated a commitment to growth, particularly in the thriving residential markets of Stockholm and Gothenburg. The company initiated 170 new apartment constructions, signaling a positive outlook on housing demand in these regions. Specifically, the Nacka project includes 169 apartments and showcases the organization's ambition to enhance urban living. Significant future projects are also underway, like a new cultural center in Gothenburg, with completion expected by 2026.

Strong Financial Performance Metrics

The company's financial performance is notable, with a significant increase in rental income. For the first nine months, rental income rose by SEK 151 million, reflecting a robust 7% growth from the previous year. This increase was driven equally by newly completed constructions and existing properties. Additionally, the NOI (Net Operating Income) grew by 11% to SEK 168 million for the same period, underscoring effective management of operating expenses, which decreased by 3%, thanks largely to a 40% decline in electricity prices.

Resilient Rental Operations

Wallenstam's residential holdings are performing exceptionally well, with a full occupancy rate. In contrast, the commercial sector, particularly in Gothenburg, is facing a 6% vacancy rate. Nonetheless, the company is actively working to retain current tenants, achieving a 90% surrender rate. These efforts indicate a strong relational commitment with tenants, and the rental environment holds promise for stability moving forward.

Sustainability Initiatives

The company also highlighted its dedication to sustainability, establishing stringent practices around background checks for tenants and suppliers. The integration of recycling initiatives has already resulted in 28 tons of textiles being diverted from waste this year, indicating proactive engagement in environmental stewardship.

Strategic Financial Management

Wallenstam's financial structure remains solid, with an equity ratio of 45% and a loan-to-value (LTV) of 46%. The total property value stands at approximately SEK 65 billion. Furthermore, the company has not increased its interest-bearing liabilities since the previous quarter, maintaining a stable financial stance. They expanded their overdraft facilities by SEK 400 million, totaling SEK 1.8 billion, which enhances their liquidity and flexibility in capital management.

Insights on Future Earnings and Margins

Guidance points to a continued positive trajectory in rental income, with forecasts indicating an average rent growth of 4.5% for residential properties, driven by successful negotiations with the Tenants' Association. This projection aligns with a previously established two-year rent agreement, providing a reliable revenue stream for the foreseeable future. The commercial base rent is also expected to see a nearly 6% increase, bolstering the overall earnings outlook.

Market Position and Valuations

Despite external market fluctuations, such as interest rates impacting property values and derivatives, Wallenstam’s market position appears resilient. The organization has not adjusted its direct yield requirements, maintaining averages at 4.6% for commercial properties and 3.6% for residential holdings. The net value changes in properties remain stable, suggesting that the company is well-positioned to navigate potential market challenges.

Earnings Call Transcript 2024-Q3

[Susann Linde, executive]

Good morning, and welcome to this Third Quarter Presentation of 2024. My name is Susann Linde, I'm CFO and Head of Investor Relations here at Wallenstam. It has been an eventful quarter, even if it doesn't look like that when you see this slide with just 2 points. We have continued with further starts of new construction this quarter as well. We have started approximately 170 apartments, both in Stockholm and Gothenburg in 2 different projects. It was good that we are finally starting to add additional housing to our 2 growth regions, Stockholm and Gothenburg. And one big thing for us, in the picture, you see 2 happy gentlemen who have just signed an agreement on a property deal. None of you have probably been able to avoid it.

Wallenstam has taken the step into the commercial segment, now also in CBD Stockholm, where residentials, both in Stockholm and Gothenburg, commercials in the CBD in Gothenburg. And now the three-leaf clover is finally becoming a four-leaf clover. It is a unique property that we all recognize the scraper at Sergels Torg. the fifth Hötorget scraper. We will take possession of the property in January next year, and the purchase price is based on an assessed property value of SEK 2.8 billion.

Our vision is to refine and modernize this iconic building both internally and externally and create attractive premises with an amazing views over Central Stockholm. Our property holding looks like it did even in last quarter. We have just completed 28 apartments this quarter, which is the only difference. We have also more apartments under construction than last quarter, but I'll come back to that later. The distribution of the rental value is 50% residential and the other half, commercials.

And if we are to summarize our sustainability work during this quarter, we have developed proper routines around background checks. We have worked with our commercial tenants long time, but this year, intensified the work with our suppliers. We hope that with this work, we will make it more difficult for crime. We are also working with an additional focus on trying to think even more about bringing reuse into our renovation projects and local adoptions, also encouraging new tenants that you don't have to change the premises too much. So far this year, we have received 28 tons of textiles by placing recycle bins for this in 25 properties, which would otherwise have largely ended up as a residual waste.

So -- and let us move to our income statement for this third quarter. We have a good letting operation and stable demand for our premises. The residential holding is fully let, and the commercial holding in Gothenburg has a vacancy rate of 6%. We can notice that it takes longer time until you sign a new contract with a new tenant. And we keep our focus to keep the existing tenants. And now we have a surrender rate at 90%. The NOI for the 3 quarters is up by 11% compared last year, and we received a surplus ratio of 77.1%.

But let us go to the next page and look into more details. As I said, the NOI increased by 11%, SEK 168 million for the first 9 months. The rental income has increased by SEK 151 million, up by 7% compared to last year and half of the increase from the completed new construction and the other half from our comparable holdings. The commercial's base rent has increased by almost 6% and the negotiation with the Tenants' Association about the residential rents ended with a total growth on average for the group of 4.5%. And as I said before, we made a 2-year deal, and there will be almost the same growth next year.

The operating expenses has come down by 3%, net SEK 17 million. The main reason to lower operational expenses is lower electricity price, which has come down by 40% compared last year. The effect, including VAT, is about SEK 54 million lower expenses, but as I have said before, in total for the group, it is a zero-sum game because we are self-sufficient in renewable energy. But the rates and charges for water and sanitation and cleaning are higher like the other quarters and also because of some higher expenses regarding property management, totaled SEK 28 million. And also, the weather-related expenses were higher compared to last year by SEK 3 million. So in total, the NOI is up by SEK 168 million.

We have also had 1 completion, a part of a project during this third quarter. We have partly completed a popular project in Nacka, Nacka Grace, as you can see here on the picture. In September, 28 apartments were completed and occupied. There was a lot of interest in those apartments with over 10,000 interested just after a few hours. And we will successfully complete the rest 148 apartments next going quarters.

If we look at the total income from property management and includes administrative expenses and finance net, we recognized SEK 880 million. It's up by 6% compared to last year. The administrative expenses are on the same level as last year, but the financial net is still some higher compared last year by 24%. But the increase begins to slow down for every quarter because of the decreasing interest rate.

As we exit this quarter, we have an average interest rate of 2.95%. And the main reason of the decrease is because of lower STIBOR, but it's also affected by the fact that we have taken up new interest rate derivatives by a volume of SEK 1.4 billion this quarter, on an average 7.5 years, and we can see it on the next picture.

We have new derivatives 2027 to 2029 by SEK 200 million per year. And besides that, we have new derivatives of SEK 400 million each for the year 2034 and 2035, which means we have extended the average fixed interest rate term to 38 months. And 58% of the loan volume has a fixed interest more than 1 year.

And if we go back to the ordinary income statement because now we report the income from property management as an own note. One of the items I want to comment on is participation in profit losses of associated companies where we have written down a part of the value in Colive and Convendum Stockholm by a total of SEK 152 million, and this quarter by SEK 100 million. And it is for the Stockholm part of Convendum, which has a tough time now and is also under reconstruction since last Friday. But the business in Gothenburg is still working well.

Some words about the value changes. If we start with the change in value of properties, you can say it is basically still. There are just changes in the net income that has affected the value. We haven't changed any direct yield requirements this quarter.

The value of the interest rate derivatives has come down by this quarter by approximately SEK 420 million because of lower long-term interest rates this quarter. That is the reason why the total result after tax for just this quarter is minus. But in total, it is just good for our business if the interest rates are going down.

So in total, for all 3 quarters, we recognized a result of SEK 139 million compare the last year of SEK 42 million.

The balance sheet. Our balance sheet is still stable and we have an equity ratio of 45% and an LTV of 46%. We have a property value of almost SEK 65 billion. And during this quarter, we have invested SEK 400 million approximately in our projects. Properties in operation amounts to SEK 59 billion and property for future construction and under progress is just over SEK 5 billion.

As I said before, we haven't adjusted the direct yield requirements. They are still, on average, 4.6 for the commercial holding and 3.6 for the residential holding. 56% of the property value are residential properties and the rest, commercials.

We have invested SEK 1.6 billion during these 9 months in re and new construction, and it is still lower than you can say, the good years. But now we have started some new construction, and that feels very good.

A total of 169 apartments have we started this third quarter. And I will show you which one on the next page. Here we are in Nacka in Älta Torg. We have a large urban development project here where we already own a large holding or slightly older apartments are now densifying the area with new blocks.

For Tier 1 is under construction. And now we have also started this for Tier 2 in the middle on this page. It's a total of 50 new apartments here, but also a new cultural center, and this project will be ready for occupancy in 2026.

And then we move on to Gothenburg to be more exactly in Mölndal. Here, we have started our project on Åbybergsgatan. It isn't far from the Gothenburg City, but it is in Mölndal. Here, you can see the property, how it will look like when it's completed. This is a project where the first stage consists of 119 apartments. And in total, with all 3 stages, we will construct around 400 apartments here. This project will be ready for occupancy in 2027.

So in total, with the restarts and the completion we had during the year, we now have 1,379 apartments under construction. And now Stockholm has more than Gothenburg. It was a time when Gothenburg had more than Stockholm. But now it looks like it usually does that Stockholm has more projects.

So if we turn to the debt and equity side, we haven't increased our interest-bearing liabilities since the previous quarter. They amount to SEK 30 billion. And as I said before, we have a stable balance sheet with a loan-to-value of 46% and an equity ratio of 45%.

During the quarter, we have expanded overdrafts facilities by approximately SEK 400 million. So now we have a total of SEK 1.8 billion. The distribution between different funding resources is the same as last quarter, where bank loans are still on 95% and the rest for the next 5%.

So that was a short summary of our third quarter. And if you have any questions, please contact me or you can also have some questions in our Swedish live conference call where we ends up with questions, where also Hans will attend to this question and answer time.

So thank you for listening, and have a nice day.