Wihlborgs Fastigheter AB
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Earnings Call Transcript

Earnings Call Transcript
2022-Q1

from 0
Operator

Welcome to the Wihlborgs Fastigheter webcast for teleconference Q1 2022. [Operator Instructions] Today, I am pleased to present Ulrika Hallengren, CEO; and Arvid Liepe, CFO.

I will now hand over to the speakers. Please, begin.

U
Ulrika Hallengren
executive

Thank you. Welcome to the presentation of Wihlborgs Q1 report 2022, and we will start with some figures. SEK 467 million, that's SEK 467 million, actually, our highest income from property management in one quarter ever. And that's a 12% increase in property management compared to 21% and that we achieved without any large transaction supporting that increase. We continued to focus on our strong cash flow. Together in changes of valuation, our total profit from the period is SEK 816 million. 7.3, that's our actually interest coverage ratio, a really strong figure with not at least now when discussions of higher interest rates is all over the place.

So strong cash flow [ be on ] that figure again. SEK 28 million in positive net letting for the first quarter, also strong figure, but also a very good trend with plus 5.7% in increased rental income in like-for-like portfolio. We keep up a good tempo in new leases, and the rents continued to grow in a good way. 5.7% is probably also a record. Not scientific at all. But during this period, signed leases was up 19% higher level than termination, and we have seen that trend for some time now.

The grit, the determination and the commitment from our organization pays off and we have just started.

So now let's get back to some standard presentation mode, a summary of Q1 '22. As mentioned, we see continued strong net letting and that continues also here in the start of Q2. No slowdown in sight, at least not for the moment. Increasing rental income and profits and high focus both on income and costs. Rising rents, both for new leases and like-for-like investments pays off and always gives us a strong balance sheet and a very good interest coverage ratio, as mentioned. We have very high resilience to increasing interest rates. And finally, tenant demand supports our project development, one of our favorite activities.

Results for the first quarter '22. Rental income increased by 8% to SEK 795 million, the operating surplus increased 9% to SEK 557 million, and income from property management increased by 12% to SEK 467 million. The result for the period amounts to SEK 816 million, as mentioned, which corresponds to SEK 5.31 per share, and EPRA NRV increased to SEK 177.04 [ from SEK 107.65 ].

A comparison between rental income in Q1 '22 and Q1 '21, we have seen this picture during the COVID period as well. We have plus SEK 10 million from divestment, SEK 13 million -- acquisitions, of course; SEK 13 million from index; SEK 5 million from currency effects; income from cantines in Denmark, plus SEK 5 million; lower vacancy plus SEK 8 million; and other increase from new leases and higher rents, excluding indexation, plus SEK 16 million. Now we see that service income from cantines is moving up, but there is still more to do before we see breakeven, so more improvements is to expect.

Net letting, we have signed new leases for SEK 53 million and have a positive net letting for the period of SEK 28 million. A good start of the year. And as we have seen many quarters before, it's in the large number of many growing tenants that builds these figures.

Here are some of new tenants that we have signed during Q1 '22, a mix of different segments and as usual, a good contribution from all our regions. And here, we have the net letting in a historical perspective, 28 positive quarters in a row and only 1 quarter with a negative number for over 14 years, actually. Letting in light blue and termination in dark. The black line is the net letting.

The number of new leases is 121 this first quarter. And I usually -- as I usually say, there is no guarantee that we will never be below 0, but I see many positive signals further on. Yesterday, we reported a new lease with Nederman in Helsingborg.

So Q2 has also started in a very good way.

A list of our 10 largest tenants in alphabetic order, they contribute with 21% of our rental income. And also rental income from public tenants continue to be high, 24%. And I keep mentioning that it's a wide diversity across many sector in a region that is the strength that brings stability over time. It's almost a mantra for us.

Rental value is now SEK 3.465 billion per year and rental income, SEK 3.168 billion, plus 7%, partly as a result of our successful project portfolio. And looking at like-for-like figures, we can see that rental value is up 4.3%, and rental income is up 5.7%, a really high level and again beating our ambition to exceed index by at least 1 percentage point. And vacancy will improve further during the year when tenants move in. Let us remind us that we, during '21, had a record high net letting at SEK 150 million and all those premises are not occupied yet. Plus 7% of rental income from the whole property stock is also a positive signal of our growth.

A summary of our office portfolio. The market value is now SEK 41.125 billion, and overall, the occupancy rate is 92%. It's 93% in Malmo, 90% in Helsingborg, 91% in Lund and 92% in Copenhagen. And as I said, these figures will continue to improve when our new tenants move in. But it's also a good thing that we have continued positive net letting but still have space to work with. That's a good way how to create value.

The operating surplus from offices summarized to SEK 2.023 billion and a running yield of 4.9%. And once again, let us remind us that running yield is not the same thing as valuation yield. Maybe you can say that we actually perform better in our portfolio than our appraisers' expectations. But the valuation methods, there are calculation models for future vacancy. And in reality, we work with our properties so that the vacancy should decrease rather than increase. When our vacancy increase in the property stock, it's usually because we have bought something with vacancy or emptied a property to create vacancy for development.

The demand for logistics and production continues to be high. Occupancy 98% in Malmo, 91% in Helsingborg and 94% occupancy rate as a whole with a running yield of 6.3% and a total value of SEK 6.492 billion. For the entire property stock, the occupancy rate is 92%, excluding project demand and operating surplus of SEK 2.431 billion, which gives us a running yield of 5.1%, excluding project and land. Total value of the portfolio of SEK 50.618 billion.

We can see changes in market value. We started the year with SEK 50.033 billion in accordance with our external valuation, which once a year values 100% of the stock at the same time. That's in Q4, and we have no acquisitions during the first quarter, but we have invested SEK 270 million in our project.

We have divested a small piece of land in Helsingborg of SEK 1 million and changes in valuation amounts to SEK 221 million. The increase in value in Q1 comes from new leases and increased rents, but the largest part comes from a bit higher expectation of inflationary to '22, 2.9% instead of 2.1%, and that affects rent expectations for '23. Together with currency translation of SEK 95 million, that summarized a property value of SEK 50.618 billion.

The value of our properties has developed, as you can see on this slide, since 2005, a bit flat to 2020 due to the large divestment in the north harbor in Malmo but now back on track, and we continue to be ready for further transaction possibilities at the right price, of course, and at the right location.

A catalog of our value of properties in our 4 cities, 42% of the value in Malmo, 23% in Helsingborg, 17% in Lund and 18% in Copenhagen. These cities are the main cities in the Oresund region, and together, they create a good mixture of possible development and attractiveness for living, education and work.

And over to you, Arvid, for financials.

A
Arvid Liepe
executive

Thank you very much, Ulrika, and good morning, everybody. Let's start with talking a bit about the interest rate environment. I think that is a topic on everybody's minds these days. I want to highlight a few factors, which I think are important to monitor in this environment. First of all, the primary financial risk that we have to manage is access to capital. The current interest rate environment primarily is about the underlying interest rate and the interest rate hedging that we have the possibility to undertake. But you shouldn't forget that we also have to monitor the loan margins, what we have to pay to banks or bondholders. And in this environment, with increasing inflation, increasing inflation expectations, we've seen bank margins remain reasonably stable, while bond margins have actually gone up quite significantly.

Lastly, I want to highlight the cash flow generation capacity because if you generate a good cash flow, that is how you can actually pay your bills. Looking at the graphs on the right-hand side of the slide, you can see our sensitivity to increased market rates. And if you look at a 2% increase immediately in STIBOR, that would increase our average interest rate by 0.9%. And with such an increase, a 2% increase in STIBOR, our interest cover ratio would still be at pretty healthy 4.4x. So I think that is worthwhile bearing in mind in this -- at this particular point in time where interest rates are volatile.

Moving to the income statement. Ulrika has basically been through most of the numbers on the quarterly income statement. What I can mention though on this slide is that due to rising interest rates or rising swap rates, we have a positive value change in our interest rate derivatives portfolio of SEK 340 million. That is, I would claim, the highest number ever. And we actually have a positive value on all our interest rate derivatives on the balance sheet currently, which we've never had before. Pretax profit of just over SEK 1 billion for the quarter and profit for the period of SEK 816 million.

Looking at the balance sheet. You can see that versus 12 months previously, our investment property value has increased by SEK 3.9 billion. At the same time, equity has gone up SEK 2.9 billion, despite us paying SEK 800 million in dividends during that period. And loans in the 12-month period has increased by SEK 0.5 billion. So I would claim that we have a healthy growth in equity.

Translating the balance sheet into key figures.

We have an equity asset ratio of 43.6% and an LTV currently standing at 45.8%. And as Ulrika mentioned, we've never had an interest cover ratio as strong as 7.3x before. The EPRA NRV stands at SEK 177 per share, and that is up 17% adjusted for dividends versus 12 months previously. Against the backdrop of our earnings and our balance sheet, the proposal from the Board to today's AGM is a dividend of SEK 6 per share. And if that decision is taken, that would mean that we've had 16 years of rising dividends.

Looking at the historic development of EPRA NRV, we had a 17% growth in the 12-month period. We also have an average annual growth of 17% since 2009. The financial ratios have actually never been stronger. You see a 5-year historic development here for equity assets ratio gradually increasing, our LTV gradually decreasing and our interest cover ratio being reasonably flat over the past few years, but even a touch stronger over the past couple of quarters. Looking at financial stability, we like the metric net debt-to-EBITDA. We've seen a strengthening of this metric over the past 3-year period roughly, and it now stands at 10.5x.

The mix of financing sources has changed slightly, but not much. We still have about half of our loans from bilateral bank agreements with Nordic banks, a bit over 1/3 of the financing in the Danish mortgage loan system and now 15% of our finance income from the bond market. Summing up the details of our loan portfolio. You can see that our average interest rate now stands at 1.23%. We had an average fixed interest period of 2.8 years and an average loan maturity of 6.3 years.

The historic development of the loan maturity and the fixed interest period, you can see in this graph, also in a 5-year perspective. And I can just say that the interest rate period and the loan maturity profiles, they follow the financial risk management policy that we set in place early 2019, as we were quite comfortable working with that financial risk policy -- risk management policy. Lastly, I want to show also the available funds, which over the past quarter had remained stable at approximately SEK 2.5 billion, and that is summing up unused credit facilities and liquid banks.

So with that, I'll hand back the word to you, Ulrika.

U
Ulrika Hallengren
executive

So thank you. I know that many of you, most of all, would like to talk interest rates and possible interest rate increase, an important factor in sustainable business, of course. But let's also talk about the long-term impact we have on other sustainability areas. Since the last report, another 6 properties have been approved and classified as Miljobyggnad. New production at Level Gold for offices, silver, sometimes when we new build logistics and production and the older stock according to Miljobyggnad normally at Level Silver, which is really good.

Our overall goal is about 80% of our Swedish office building areas will be classified at end of '22. And the prognosis today is that we will at least be very close to that goal, 77%. We have had a high temp book since the classification method, Miljobyggnad iDrift was approved in late 2020. But we and the whole sector have more improvements to do, not at least in Scope 3, the part where we develop, build and refurbish. In Pulpeten 5 in Hyllie, one of our largest ongoing project we have worked with the certification method called non-CO2 zero carbon dioxide, a method to measure and reduce climate impact for a building's whole life cycle, including the construction phase.

We have in that project found really good ways of how to choose materials and how to use them. The calculation methods are also improving. And based on our experience from that project, we have decided to also set a goal for the highest carbon dioxide equivalent per square meters in all our new construction projects. We set it as a new standard for us. We know that it's possible, that it gives us good results. And now we need to make sure that we use that experience whenever possible.

And we also want to increase knowledge and cautious decisions about the -- conscious decisions about the refurbishment project and the choices we and our customers make there. Therefore, we will now in '22 test a model, we will put a price on carbon dioxide impact, so that the calculations will be charged with a cost. This will make it possible to steer investments and decisions towards more sustainable construction methods. We will try this during '22 and then evaluate the model.

So let's go to investments in progress. We have, during Q1, invested SEK 270 million in ongoing projects and it remains SEK 2.274 billion to invest in approved projects as [ improved ] in 21st of March that when we had projects for over SEK 2.9 billion ongoing and this figure has -- is even higher today. Overall, the projects generally meet both schedule and budget forecast despite a troubled world with the war in Ukraine and the high energy prices. This is, of course, an issue on high topic and we follow it with care, and we are, of course, ready for action if needed.

A quick review of our largest project, the largest one, up to now is Pulpeten 5 in Hyllie, the project we call Kvartetten. After we signed the lease with Trygg-Hansa, we have increased the investment to SEK 804 million according to surcharge for VAT. We get cost coverage in higher rent, so the return on investment will remain at 6%, but with a larger investment value. The project includes 16,000 square meters lettable floor area and the highest certification standard with Miljobyggnad Gold well and non-CO2. 85% pre-let at the moment and completion in Q2 '23. We are also in the starting phase for the next project in Hyllie, Blackhornet 1, the project we call VISTA.

We have no other vacancy in the area and project then is almost filled up. So the timing for this project is good. The project will include a large mobility hub with 400 parking spaces, although the block is right beside the train station, parking is still a very important sales factor. And on top of the mobility hub, there will be 16,600 square meters office [ and ] restaurant. Contractor procurement is ongoing and we estimate completion in Q1 '25, but the mobility hub will probably be ready earlier that.

At Hindbygarden 7, we are doing a project fully let to Beckhoff Automation, a state-of-the-art office at a good transportation location in Malmo region in Q3 '22. Raffinaderiet 3 in Lund, we continue with our conversion project right beside the railway station. Rents at new top levels in Lund, over SEK 3,000 per square meter and also some high demands than in the early stage. Completion starts in Q4 '22, investment volume raised to SEK 170 million and yield on cost approximately 6%. 5,800 square meters modern offices with an industrial touch at not least a very good indicator and a start for the next project right beside this one. And that project is Posthornet 1, Phase 2, a new build office at 9,900 square meters in the very city center. We invest SEK 448 million and completion in Q4 '22 -- '24, 2024.

And let's go to the area between the research facilities, MAX IV and ESS, Science Village. We have started our project space where Oatly will be the main tenant with the research and development team. And we have more building rights just beside this one. We invest SEK 244 million, and the building will be completed in Q3 '23. A structure where also wood is a part of the picture. In Helsingborg, we have started a multi-tenancy project at Huggjarnet 13, 40% pre-let until March. We build this project in 2 phases and first one expects to be completed in Q2 '23.

At Snarskogen 5, also in Helsinborg, we build a factory for DOKA, 2,200 square meters, less than SEK 60 million and completion in Q1 '23. A large ongoing portfolio, but let's also mention something about future investment. Yesterday, we announced a new lease with Nederman in Helsinborg, 25,000 square meters at the Rausgard 21. Signed now in April, we invest SEK 420 million, including band and completion in Q1 '24, and the lease is 20 years, a really long-term investments that also gives a good boost to the surroundings of this building.

Here, we have 4 possible projects in our 3 Swedish cities. Vetskapen 1, it's just beside Kunskapen 1 at Science Village area. We have Ideontorget where we can build approximately 16,000 square meters, just beside the tram station. Polisen 7, its offices in the city center Helsingborg and Naboland 3, here in Dockan, in Malmo, we can offer 8,000 square meters gross full area. Zoning plans are approved for all these projects and we can start them when we have the right customer.

And a few other possibilities from the Industrial and Logistics segment, Platforadlingen 15 and 18, 22,000 square meters in Helsingborg, Grustaget 1, 20,000 square meters also in Helsingborg, Bilrutan 5 in Helsingborg, in Landskrona, 14,000 square meters logistic right beside the highway between Malmo and Helsingborg, zoning plan that will allow us to build 20-meter high building is expected to be approved strongly. And in Sunnana, Malmo, where we have building rights, we have built there for Region Council of Skane and [ Riobel ], and we can add on 17,000 square meters of logistic or production.

The planning of Hamnen continues, but the municipality still struggles with the overall infrastructure planning. However, we can continue our design and planning for projects in line with ongoing zoning plans. For example, Smorkajen, a design for 13,000 square meter, Kranen 15 just at the entrance to the Dockan area from Hamnen. The zoning plan is about to be started and we can also start the architecture competition. And together with JM and Peab, we also continue our joint venture for new zoning plans in the Dockan area, workspaces, school and housing in a good mixture. Vasterbro, in Lund, the work with the zoning plan continues and we can develop approximately 7,000 square meters in this area. And finally, an example of city development in Copenhagen, up in Ejby Industrivej 41, we continue our plan for new structure. And at this large area, very close to the new tram station, [indiscernible] we can develop something like 100,000 square meters, housing, schools and workplaces.

So let's summarize Q1 once again. Continued strong net letting, increasing rent income and profit and rising rents, both for new leases and like-for-like and our strong balance sheet and super strong interest cover ratio of 7.3% gives resilience to increasing interest rates. Tenant demand supporting continued project development.

And by that, we are open for questions.

Operator

[Operator Instructions] Currently, we have one question in the queue. It's from the line of Markus Henriksson at ABG.

M
Markus Henriksson
analyst

A few question from me. First off, the like-for-like rental income growth of 5.7% year-over-year, do we have any one-offs in that figure? I think you stated very nicely what's driving the figure, but any one-offs?

A
Arvid Liepe
executive

No significant one-offs which affect the like-for-like comparison.

M
Markus Henriksson
analyst

All right. Then also we start to see a pickup in the service income in Denmark. Do you expect that to increase further in the coming quarters relative to Q1?

U
Ulrika Hallengren
executive

Yes, we expect that if nothing else happens. There, the figures continued to improve.

M
Markus Henriksson
analyst

All right. Then also a bit on the -- on how you're navigating now for external growth given the current environment. Have you entered the sort of wait-and-see mode? Or do you intend to try to be a net buyer as you said in last quarter?

U
Ulrika Hallengren
executive

Net buyer definitely. But of course, as mentioned, right price and right location is the -- on top priority.

M
Markus Henriksson
analyst

And do you see any interesting transactions that were sale in Malmo or any of your other regions currently?

U
Ulrika Hallengren
executive

Not any -- those have been done that we think that we have missed out or something like that. But we see something on the table at the moment that might be interesting.

M
Markus Henriksson
analyst

Last question. Could you give us a bit -- a few rental levels for the net leases you've done recently in Central, say, Helsingborg, Lund and Malmo? What kind of rents are you aiming -- are you getting?

U
Ulrika Hallengren
executive

I would say that both logistics and production, the rent goes up a bit, especially in the cities. So that's -- but of course, it's hard to predict any exact numbers, but they're going up in a good way. And it's interesting to see that we in all our cities now signed leases at close to SEK 3,000 per square meter or above that for some leases.

M
Markus Henriksson
analyst

Would that be for projects in Hyllie?

U
Ulrika Hallengren
executive

No, not only, not been -- we see that both in City Central of Lund and Helsingborg, actually. But it's also important to bear in mind that that's not the average new level for every new signed level in offices. But right location and the right tenant. So that's -- it's a good level.

M
Markus Henriksson
analyst

That's very clear. Just wanted to get a sense of the kind of top spot rents we see currently.

Operator

[Operator Instructions] Okay. There seems to be no further questions coming through from the phone lines, so I'll hand back -- and just as I say that, a question has come through. It's from Markus Henriksson from ABG.

M
Markus Henriksson
analyst

Just one extra on the financing situation. You highlighted a lot in the report. But how are you navigating currently? What are the banks saying to you in your current discussions? How is the Danish mortgage system functioning at the moment? And you usually have good insight in the financing market. So anything you could give us, that would be very helpful.

A
Arvid Liepe
executive

Okay. Regarding bilateral bank agreements, I would say that margins are stable or moving slightly upwards. But we're talking on the order of magnitude of maybe 10 basis points or something over the past say, 3- to 4-month period. Access to capital in the Nordic banking system for us is still very good. So the banks don't signal any hesitations when it comes to supplying us with additional financing for the event that we would have such needs.

The Danish real mortgage system continues to function in a good way. We have in one of our [ relations there ] has seen a slight uptick in margin over the past few months, also in the order of magnitude of 5 basis points to 10 basis points. And I think that is worthwhile keeping in mind if you compare it with the volatility in the bond market. And the tilt in the bond market, you can find external information on in another way. So I don't really have to put numbers there, I believe. But so access to capital is good from the banking system and from the real mortgage system in Denmark. We still have access to capital via the bond market as well, but the market has been quite a lot more volatile.

Operator

[Operator Instructions]

A
Arvid Liepe
executive

We have a question from -- which has come in via the webcast via mail here. And it's regarding if we've seen raised investment costs, cost inflation or Scope and if we can offset such raised costs by higher rents?

U
Ulrika Hallengren
executive

Yes, I would say that when we are close to the market, we can follow higher cost for production also with higher rents. But we have to follow that cost increasement very closely and we do that. We see expectation of higher costs, but we haven't -- we are secured in our project ongoing. And I think that we have very good discussions also with responsible construction companies today that keeps the costs down. So I have no worries, but of course, we have -- we pay that question high attention. So?

Operator

Okay. And there are no further questions from the phone line side.

U
Ulrika Hallengren
executive

Okay. So thank you then. And if you have any further questions, please come back to us in some other channels and we try to answer your questions, of course. Thanks for today.

A
Arvid Liepe
executive

Thank you very much, everybody.

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