Heimar hf. (HEIMAR) Earnings Call Transcript & Summary

Welcome to the investor presentation for the 6 months financial results of Heimar Real Estate Company in Iceland. For the sake of brevity, I will go rather quickly through the slide deck, and the deck will be readily available on the stock exchange and of course, on our website as well. For further inquiries after the meeting, we are available for meeting and phone calls and all the relevant information are disclosed in the presentation. If we begin on the first slide, revenue growth following substantial investments. We increased the portfolio by roughly 30,000 square meters in the first half of 2025. And we are reporting today a rental income increased by 4.9% year-over-year. That translates into just north of 0.3% real revenue growth on a like-for-like portfolio that is excluding the new investments that we added to the portfolio in the first 6 months. We're reporting an EBITDA of ISK 5.1 billion, increasing by roughly 4.5% over the year. Net profit came in at ISK 1.1 billion. The major investments I mentioned in the beginning is Gróska, 25,000 square meters and Exeter Hotel and adjacent buildings, roughly 5,500 square meters. The revenue increase from these assets is estimated at approximately ISK 1.6 billion on an annual basis from 2026 and onwards. We initiated several share buyback programs this year. A share buyback of ISK 500 million was completed on May 19, and a new program was initiated on July 9, in line with the dividend policy. We have said that share buybacks for the year could amount to up to ISK 2 billion. This year, share capital was increased by ISK 258 million at nominal value to finance the acquisition of Gróska, corresponding to approximately 12.8% of the nominal share capital and the company's market cap stood at nearly ISK 74 billion at the end of the period. I'm going to go very quickly through these slides. In the past few quarters, we have said we will start initiatives. And here, we are reporting that we have finalized them. Two very notable initiatives is in terms of the share buybacks align with the dividend policy. As I said in the previous slide, we have already finalized a ISK 500 million buyback program and launched a new program on July 9, and we have repurchased shares worth around ISK 710 million at the end of the period. We said in an earlier presentation that work is underway on the acquisition of high-quality assets in line with the company's strategy. And I am pleased to announce that Gróska and Exeter Hotel acquisitions are completed and consolidated into the financial accounts of Heimar in June. This calls for a revised earnings guidance for 2025, but bear in mind that these 2 assets are part of our financial accounts for only 1 month in the first half of 2025. And the revised earning guidance for 2025 comes in at ISK 15.2 billion to ISK 15.5 million. That is an increase from ISK 14.4 million to ISK 14.6 million. We also give guidance on the EBITDA for the year. And the new guidance is ISK 10.8 billion to ISK 11.1 billion, which is an increase from ISK 10.3 billion to ISK 10.5 billion as the slide clearly shows. To give even better information, management accounts assume that going forward in the next rolling 12 months, we can expect the rental income in the next 12 months to be roughly around ISK 16.4 billion to ISK 16.6 billion in the rolling next 12 months, but that is not a formal revised earnings guidance, just fuller information for investors looking into the company. We say we are an attractive investment opportunity, and there are exciting times ahead. Our strategy is very clear. We're a reliable and responsible investment opportunity with a resilient revenue base, strengthening sustainable revenues and all of our revenues are inflation linked and tied to long-term leases. Our strategy or the basic line of our strategy is to focus on core areas in the City Center, in Reykjavík City Center and nearby. And we have shown again and again quarter after quarter, clear strategy and strong execution often. We have a moderate LTV ratio, and we see that we are continue to decrease the leverage of the company and the equity ratio, as I will go into in more detail later on, has started to increase as well. We are at the forefront of sustainability and social responsibility. 41% of the company's portfolio is environmentally certified with an even higher share targeted going forward. If you look at the strong performance driven by our core areas, we see that we are reporting a 4.9% rental income increase year-over-year. EBITDA is increasing by 4.5% and we see that EBITDA of rental income comes in at around 71% and the occupancy rate remains extremely high in our portfolio at around 97%. As already discussed, the profit after tax comes in at ISK 1.1 billion and the revaluation of investment property is very low in the quarter. And for the full half year, we are revaluating the investment properties by roughly ISK 1.4 billion. The yield of the investment properties comes in at 5.3% and return on equity around 3.5% with investment properties at the end of the period standing at ISK 219 billion. Leverage ratio just shy of 62%, 61.6% and the equity ratio continues to increase and comes in at 32.2%. If you look at the portfolio of Heimar Real Estate, we have currently 97 assets in the portfolio and rental income from these very well-defined core areas is around 75% of our income. Occupancy rate, as discussed, is high at 97% and around 70% of our square meters are within clearly defined core areas. And the total square meters of the portfolio comes in at 389,000 square meters. We have a varied list of customers with over 410 happy customers. Public entities and listed companies represent roughly 43% of our rental income and our average lease terms is for 6 years, and they're all index-linked, CPI index linked. The proportion of green buildings comes in around 41% and the proportion of green financing on our debt side is around 39%. If you look at these 4 major points in our, what we call deliberate steps toward long-term goals, we say that our strategic investments in the past are paying off. As mentioned, 75% of our rental income comes from core areas. Listed companies stem around 12% of our income, public entities around 31% and environmentally certified buildings are around 41%. That's a very clear asset portfolio strategy. If you look into the financing operations in the first half of '25, we see that rental income is around ISK 7 billion, an increase of 4.9% from the year before. And the operating profit before valuation change is increasing or EBITDA is increasing by 4.5% and comes in just shy of ISK 5.1 billion. Profit for the period, around ISK 1.1 billion. On the right-hand side, you see the quarterly development of rental income, EBITDA, operating cost of investment properties and administrative costs, which we are focusing on, and it's an ever-going task to keep that going down. If you look at the balance sheet, we have a very strong financial position with investment properties and associates at around ISK 223 billion with total assets just shy of ISK 230 billion. And equity comes in just shy of ISK 74 billion. But on the right-hand side, we're telling a broader, more relevant story with the equity ratio is on the climb registers at 32.2% at the end of the 6 months '25. And at the same time, the leverage ratio on our balance sheet continues to decrease and comes in at just shy of 62%, 61.6%. If we look at real revenue growth, as compared to the first 6 months of 2024. As stated before, all of our rental income agreements are CPI index linked and inflation registers for around ISK 300 million in the rental revenue development increase. Increase above inflation is roughly 0.3% and net change in property portfolio is positive of around ISK 21 billion, and that brings us to the headline rental income of ISK 7.2 billion. The key thing to take away from this is that rental income grew by 4.9% year-over-year and price levels increased by 4.4% year-over-year. If you look at the performance of our share and how it's been trading on a price-to-book ratio, we say we are very shareholder focused and the Board of Directors looks at intrinsic value as the benchmark for buybacks. That means that as long as the PPE ratio adjusted for noninterest-bearing deferred tax liability is lower than the market price, we will continue with share buybacks. And if you look at the active buyback programs that we've been working on in the past few quarters, you see that we are currently in an active buyback program that was initiated in the beginning of July. Just briefly, we've been signing a lot of new agreements in most of our buildings. These are the most notable ones. And this is when the new signings will -- the revenue from the new signings will come online into our accounts. As a matter of fact, we see that rising interest rates reduced the change in fair value of our portfolio. Fair value change for the first 6 months of the year amounted to ISK 1.4 billion. At the same time, we've been investing in the portfolio for roughly ISK 23 billion. But we are -- in our evaluation, we are increasing the weighted average cost of capital by 9 basis points from year-end and the weighted average cost of capital comes in at 6.55%. And this is the general consensus among our auditors, our Board, our consultants. So we say the WACC is increasing, and that has the effect on the change in fair value. If you look at the financing profile of the company going forward, we say we have an enviable debt profile. There is no refinancing needed throughout 2026, and we've been expanding several bond series. And the effective average interest rates on indexed loan came in at 3.38% at the end of Q2 '25. In the last presentations, we have informed the market that we're starting to look and make changes in terms of how we look at ancillary revenues. We are with a clear focus on enhanced service and new revenue streams. And we have systematic efforts in place within the company to analyze opportunities and challenges associated with the introduction of ancillary revenues. We see significant opportunity to enhance the experience and service at our properties while enhancing sustainable revenue streams going forward. As a matter of fact, at the beginning of 2025, ancillary revenues were minuscular were around ISK 35 million annualized. And since then, in the first 6 months, they have more than increased to more than ISK 100 million on an annualized basis. This calls for very low investment needs, and we outsource operations. That means that ancillary revenue flows are more efficiently coming into our cash flow going forward. And we are assuming in the ancillary revenue forecast that we're publishing here for the first time on the right-hand side, that ancillary revenues of about ISK 200 million in 2026 and will be reaching up to 3% of total revenues by 2028, and this is a high, low and a base estimate. If we look at how the increased ancillary revenues will flow directly to profit and enhance free cash flow, we see that on the left-hand side, we have EBITDA. Then next to that, in the red column, we have paid interest, but we see major opportunities in growing ancillary revenues in the next coming years. And they, of course, will increase the capital available to be used for payment of debt and installments, investments, dividend payments and share buybacks. So one way of explaining this, we are dealing with third-party contractors in terms of our ancillary revenue. And we have already secured more than ISK 100 million in this year in ancillary revenue, and they will grow by our estimate that we published in the last slide. Also, we own a stake in Klasi, which is of -- which is a development company that we own 1/3 of. And we expect that the asset in Klasi will have a book value of just under ISK 8 billion in value in 2027. That means that we set a 15% return requirement on Klasi' equity, supporting an increase in the book value of Heimar’'s stake to nearly ISK 8 billion by 2027, as is explained in year '25, '26, '27, roughly 50%, 15%, 1-5 annually over the next 3 years. And we say these are realistic expectations that will yield returns for our shareholders. Bringing it all together, on the left-hand side, we have the core operations of the real estate company, but we want to highlight we are also developing a program in terms of ancillary revenues, and we expect that in the next 3 to 4 years, they might yield up to ISK 500 million on an annual basis. And then, of course, our associate company, Klasi, which we expect that the book value of that in our accounts will increase by ISK 700 million to ISK 900 million on an annualized basis going forward. So putting that together, apart from the core operations of the real estate company, we have an estimated ISK 800 million to ISK 1.4 billion impact on annual profit. And we say these are operations on a solid foundation where the whole can be greater than the sum of its parts. A bit about sustainability. We are growing our portfolio in sustainable properties. Gróska 25,000 square meters is now a part of Heimar’'s BREEAM-certified assets and we are finalizing certifications of other large office buildings. And currently, 41% of the company's portfolio is now environmentally certified or just over 160,000 square meters. Just briefly, the development of the portfolio. We finalized the 2 large transactions I mentioned in the beginning of the presentation. And under construction, we have around 14,000 square meter building in one of the key development areas of Reykjavík that is expected to be delivered into the portfolio of Heimar at the beginning of 2027. The same applies for the expansion of a large nursing home that's in the portfolio of Heimar, and we expect completion to be expected in fall 2027, and we're increasing that nursing home by 3,500 square meters, a project that we expect will come into our portfolio late summer or beginning of fall '27. In the last few months, we've been investing heavily in our largest asset, the Smáralind shopping mall, the largest shopping mall in Iceland, around 64,000 square meters. And we are completely renovating the food hall in the shopping mall, and we have high ambitions for the growth of revenue stemming from Smáralind in the next coming years. Again, just a brief recap of our core areas. We own and operate large buildings in the best parts of the metropolitan area and the city center. And I highlight that 96% of all assets that we've added to the portfolio in the last few years are within these core areas and 98% of all sold properties are outside these core areas. So what we take from this, a very clear strategy in our asset portfolio that is depicted in a very good manner in this slide. Just a pictorial overview of some of our largest properties. Smáralind, the largest shopping center, Höfðatorg, one of the largest office towers, Gróska, a new introduction into our asset portfolio, 25,000 square meters, the largest sport and entertainment hall in Iceland and many enviable offices, hotels, et cetera. We operate on a -- on a wide range. We own schools, primary schools and preschools. We own sport facilities, numerous offices and a lot of other assets, including the National Museum Conservation and Research Center, Sóltún nursing home and many other assets that are being leased to the government. Towards the end, a bit about our shareholders. There's been massive changes in the shareholder base of Heimar over the last few quarters. In the first 6 months, there's a new largest shareholder, Omega fasteignir holds around 12.6% of the share capital. And I highlight especially that foreign shareholders hold around 5.5% of the share capital of the company. The market was very volatile and challenging across the market in the first half. Heimar's share price slightly up in the first -- in the quarter of 2025. But we see that Heimar's share is the sixth most liquid share on Nasdaq Iceland with the average daily turnover of around ISK 150 million. This concludes the brief presentation. Further information can be found on our website and on the stock exchange information news system. The Q2 earnings preview will be on October 22. And for those who will tune in then, see you later.