Wihlborgs Fastigheter AB (publ) (WIHL) Earnings Call Transcript & Summary

Good morning. And welcome to this Wihlborgs Q4 2019 presentation. My name is Erik Granström. I work at Carnegie, and I will be responsible for the Q&A session that we will have after the presentation, but with us today, from the company we have Ulrika Hallengren, CEO; and Arvid Liepe, CFO. And they will start off the presentation. I will return, and then we will take questions from the floor. We also have a telephone conference where we will try to answer any questions that might arrive. But with that, Ulrika, please go ahead.

Thank you. The core of Wihlborgs' business is increased growth at a stable foundation. For the full year 2019, we increased our rental income by 11% to SEK 2.983 billion. The operating surplus increased by 10% to SEK 2.140 billion, and income from property management increased by 26% to SEK 1.775 billion. The net result amounts to SEK 2.923 billion, which correspond to SEK 19.02 per share. And the Board proposed a dividend of SEK 4.5 per share. I was proud and said last quarter that the first 9 months were the second best ever, but now we see that we could do even better. The net letting for the year is the strongest in our history, plus SEK 95 million. And Q4 had also strong numbers with SEK 55 million in new leases and a positive net of SEK 20 million. We had really good figures in 2018 but even better in 2019. Let's keep that direction. We set a record, and then we break it. Page 4 shows net letting in a historical perspective, with both new leases, terminations and the net letting as the black line. Malmö and Copenhagen have the strongest contribution to these figures, but we have good potential in all our 4 cities. Page 5 is a list of our 10 largest customers in alphabetic order. Not much is new at the list or in the proportion that these large and solid customers contribute with, 20% of the total rental income, but as said before, stability is a part of the success. Page 6, when we look at rental growth. The figures are positive with an increasement of 9.8% of the rental value during the year, but even more important is, as usual, to look at the rental growth in like-for-like portfolio. Our goal is to achieve 1% above index. And index was 1.6% during the year, so 3.7% rental value growth is a strong figure. It comes from all the hard work that the property management team does every single day. Page 7. We also keep the really high figures at occupancy rate for offices. Malmö and Helsingborg stay on very high levels, but we also see increases in Copenhagen and Lund. The operating surplus from offices summarize to SEK 1.908 billion. And the trend is mostly the same in logistics, up to 90% in Copenhagen and very high level in Malmö with 95% occupancy rate. In total, that leaves us with 93% for the entire property stock and a running yield of 5.1%. Page 10, changes in market value of our properties. We started the year with SEK 45.146 billion (sic) [ SEK 42.146 billion ] and this year have been very active. We have never sold and achieved as much as we did this year, and we have never invested as much as we did this year. And that, of course, gives effect: plus SEK 2.881 billion in acquisitions, SEK 1.659 billion in investments. And we have sold properties for SEK 2.764 billion and have changed valuation of SEK 1.479 billion. Together with some currency translation of SEK 118 million, that summarized a property value of SEK 45.519 billion. And we can also see that the trend of our development increase, and this is not a fashion trend. This is a trend in a really long-term perspective. We keep the focus in our region. 43% of the value is in Malmö, 18% in Copenhagen, 22% in Helsingborg and 17% in Lund. These cities have differences and give them their own identity, but they are part of a greater region that strengthen the possibilities together. Page 13 is a latest data of employment growth in our cities. And as we can see in the figures, we have strong figures, but especially in Lund we can also see this 3.5% growth between 2017 and '18, very positive one. And we also have an example. We got figures from IKEA and companies connected to them just a few days ago. They have grown the number of employees in Malmö with 1,400 persons since 2017, and they have done that without negative effect on the other cities where they are situated. So over to you, Arvid.

Okay. Thank you very much, Ulrika. On this slide, you see the details of the Q4 P&L. Rental income increased by 11% to SEK 765 million. You had a similar increase, 10%, of the operating surplus, amounting to SEK 525 million. And you had an income from property management up a full 28% to SEK 456 million. Elaborating a little bit on that, you should bear in mind that the increase in income from property management is partly affected by the fact that we, a bit more than a year ago, basically did a reset of our interest rate derivatives portfolio, which has brought down financial costs during 2019. You also have an effect from a changed accounting policy in the Q4 report when it relates to the part-owned company ML4, Fastighets AB ML4, which we own 50% of together with Peab. The company owns the research facility, the MAX IV Laboratory, in Lund. Previously, we have accounted for that as a long-term financial holding, but now we account for it as a joint venture, so you get in the Q4 numbers a positive effect of SEK 34 million from our participation in that joint venture. Since it is a changed accounting policy, the number SEK 34 million is not representative of the years coming -- going forward. So I would assume that for 2020, 2021 we will have a positive contribution from the participation in ML4 of about SEK 8 million to SEK 9 million yearly. And that basically comes from the actual operation in ML4. We had positive changes in the valuations of just over SEK 1 billion in Q4. And as you surely recall, we have an external appraiser valuing all our properties as of end calendar year. We also had positive changes in the value of derivatives, SEK 285 million, giving us a pretax profit in the quarter of 1.7 -- or actually SEK 1.8 billion and a profit after tax of SEK 1.5 billion. Looking at the balance sheet. The value of our investment properties versus 12 months previously has grown by approximately 8% to SEK 45.5 billion. At the same time, equity has grown by 15% to SEK 17.9 billion, and our borrowings have increased by just under 4% to SEK 23.6 billion. That gives us the key numbers of an equity-assets ratio now at 38.4%. And the LTV is down to 51.9% as of year-end, and the interest cover ratio multiple is a very strong 6.2x. EPRA net asset value per share has increased from SEK 122 to SEK 140 per share over this 12 months period. As Ulrika mentioned, the Board will propose to the AGM an increase of the dividend to SEK 4.50 per share. And that means that, since we were spun off in -- and took our present shape and form in 2005, we have increased the dividend to shareholders each and every year. EPRA net asset value per share has shown an increase, as you can see on the graph here, an average increase if you adjusted for dividend, of 18% per year since 2009. Looking at the historical development of the financial ratios. The equity-assets ratio has actually never been as high as currently at over 38%. The LTV has actually never been as low as below 52%. And the interest cover ratio has now for a few quarters been just above 6x. Thinking about financial stability, we think it's very relevant to look at the net debt-to-EBITDA. Previously, we have been looking at gross debt in relation to operating surplus. This basically is the same number but adjusted to what more people around us use. So we've reformulated the graph to net debt in relation to EBITDA. It stands at between 11x and 12x currently, which we feel is a stable level to continue to grow from. Looking at our financing. Our interest-bearing debts of SEK 23.6 billion come to -- almost half comes from bank loans, bilateral bank loans, primarily from Swedish banks. Almost 1/4, 24%, comes from the bond market; and 30%, we borrow in the Danish mortgage system. The details of the loan portfolio can be found on Slide 22. We have an average interest rate in the portfolio now 1.26%. And the average fixed interest period now stands at 3.5 years, and the average loan maturity is 5.7 years. The historical development of the loan maturity and the -- this actually says loan maturity on both graphs on Slide 23, which is a mistake. The one to the right is the average interest maturity and nothing else. In any case, you can see that the average loan maturity has been around 6 years for the past few years, while the average interest maturity has gone down slightly over the past few years. About a year ago, we started implementing a new -- our new financial policy when it comes to interest rate risk management, and we follow that. And I expect the average interest maturity to be around this level, 3.5 years, plus/minus a bit, going forward. With that, I'll hand the word back to you, Ulrika.

So let's talk a bit about our acquisitions and divestments and, of course, our project portfolio. We have during the quarter sold Gängtappen 1 to Länshem in Malmö; and also some housing in Denmark, Munkeengen; and actually also a small school in Copenhagen. And we have bought Banemarksvej 50 in Copenhagen, an office that we bought quite cheap but we see some potentials for the future. And a short walk-through of our projects. We have ongoing investments. We have invested over SEK 1.6 billion in 2019, which is a record level. We have decided projects in SEK 1.585 billion. We have invested SEK 640 million of them, so it remains SEK 945 million. Our business model is -- consists both of income from property management but also profit from our project portfolio. And during 2019, we have SEK 618 million from that profit that comes from our projects. One of the largest projects ongoing right now is Ursula 1 or Prisma in Helsingborg, a very -- quite spectacular and very -- and a very good spot in Helsingborg, a lot of attention for that. We invest just above SEK 400 million. HETCH is one of our tenants there, but we also see that we now have reached new levels above SEK 3,000 per square meter at the latest signed leases in this house. And we have sharp discussions on every surface in the -- in this building. We also invested in Terminalen 1, Helsingborg Central station, a very intensive phase at the moment, a big work in place where also 30,000 people walk through this building area every day, but it's very -- following to plan and everything is going fine. So we're looking forward to late this year when the project will be finished. In Helsingborg, we also invest in Musköten 20 for our tenant MilDef. They expand from the almost -- I think they have something between 2,500 area square meter today. And we'll achieve 4,400 square meter here, but they are already demanding for more area, so it's a very good and successful tenant. In Malmö, we invest in Forskaren 1 at Medeon Science Park, a very expansive area with focus on biomedical research and similar companies. Also these projects will be finished this year. And we also invest in Stenåldern 7 for voestalpine. Maybe not so fancy on this picture, but I assure you it will be fancy once it's finished also later this year. In Sunnanå, we started a few years ago with a property for MAN. And we have continued with Veho Bil. And the foundation has just started, and we are waiting for the building permission for the whole building here. And we continue in Sunnanå with also this facility for region of Skåne (sic) [ Region Skåne ], a logistics center that we earlier have communicated that it would be situated in Segevång, but the right spot will be Sunnanå. So Sunnanå is attractive in many ways. And of course, focus on 2019 is interesting, but more interesting is to look into the future. Hyllie is the most expensive area at the moment. We have 2 properties there, Pulpeten 5 and Bläckhornet 1, totally -- approximately 40,000 square meters. Pulpeten 1 (sic) [ 5 ] is the earliest one that we can start. We have applied for building permission but haven't started the project yet. For approximately 20,000 square meters, possible to share, but we hopefully can do it in one piece. And Bläckhornet 1, both parking house and offices, in total 20,000 square meters. And the other focus area is, of course, Nyhamnen, the most attractive area in the future Malmö, yes. We are the largest private property owner in the area today and we will do everything we can to keep that level up. The first project for us in new building will be Hamnen 16-something. We are not sure about the property name yet, but it will come. The zoning plan is ongoing and everything is following the time schedule, something between, I think, 10,000 square meter lettable area at least in this project. And we also have applied for planning permission at Kranen 1, at a property that we own. That will be the -- a new entrance building to the Dockan area just beside Nyhamnen. In Lund, the southern plan for Posthornet 1 Phase 2 will be approved in a few months. We -- yes, according to plan. We have possibility for 12,000 square meter here in the city center, just beside the railway station and a very attractive location in Lund. We have been very successful with the Phase 1 building, and now it's time for the next phase. In Lund, we also have the -- some planning ongoing for Ideontorget. And we have good discussions with possible tenants there, so when we have a new lease, we can start -- we count on that we can start with this project. And this picture, you have seen it for many years actually. It's a hotel that is planned at the Science Village area between the research facilities MAX IV and ESS. Hopefully, we get the leases signed this spring so we can start that project as well. In Helsingborg, we have just finished Polisen 5 with a court for Helsingborg city. And now we have the possibility for these higher buildings at Polisen 7, so we will keep up, start the tempo go up also on that one. And in Helsingborg we also have Plåtförädlingen 15, where the building permission is set and we just can start the project when we have the right tenant. And finally, some few words about sustainable business. We have strengthened our organization and so that we can focus even more on the whole ESG area. I think the governance questions are very important for us to walk through the whole organization. And by doing those things, we can be more prepared for the future demands both from the financial side but also from our tenants, of course. So if we summarize. We see a healthy demand and regional growth. It's the best annual net letting ever, income from property management up 26%. And we see several projects completed but also more in pipeline, and continued commitment to develop the Öresund region. And as said before, we think that it's -- of course, I'm proud to present the good results for 2019, but it's the future that counts. So we are fully focused to look forward. And I also like that sign over there: "Get things done." That's what counts for us. Thank you.

Thank you very much. That is an interesting sign, absolutely.

And you were also talking a little bit about the fact that you focus on setting records and then you break it. That was your sort of comment regarding net leasing. Is that the focus for 2020 as well when it comes to the rest of it? You set a record in terms of investments in '19. Will you break that record now in 2020 then?

I don't think that we can break every record every year. And I think that the high investment under 2019 might be a bit difficult for us to reach 2020. It's important for us that the investment we do are also in very responsible circumstances. So we will start the possible future projects that we now have when we have the right tenants with us. And I see great possibilities that we can invest a lot during 2020, but we don't decide everything regarding our tenants' time schedules. So no promises that we'll break that record.

Okay. I wasn't expecting one either. I figured I had to ask. Before we go into the details, I would just want to sort of stay with your financial targets a little bit. You're focusing on having an LTV below 60%. Now Arvid, it's getting close to 50%. Isn't this a level that is too low? What are we going to expect here? Is it going to continue to decrease, which is going to make return on equity more difficult? Or should we look at Wihlborgs becoming more aggressive? What's your view?

I think that's -- given the market circumstances that we've seen over the past few years, I think it's natural that we as well as many other Swedish property companies have gradually decreased the LTV levels. Yield requirements and the valuations have, over the past few years, in this interest rate environment that we live in come down. So from that perspective, I think the decrease in LTV is fairly natural. And I think we're already a year -- or a year or 2 ago said that we basically wanted our LTV to gradually move downwards. At the same time, I think it's important for us, as we have shown over the past 15 months or maybe 18 months, that when opportunities arise for strategically important and right acquisitions, that we should have the possibility to seize those opportunities. In -- we bought Nya Vattentornet 3, I believe it was, in October 2018; Nya Vattentornet 2 and 4 in February '19; and Hermes 10 and 16 in, I believe it was, April '19. And we were able to do that without being forced to make any divestments or to raise external capital from shareholders, for example. And I think that is -- of course, it's a strength to be able to be in that position that we can seize those opportunities when they arise. And so from that perspective, I think you should expect the LTV to remain. And as we make more money, it may gradually decrease from current levels even, but we want to be prepared if the right opportunities come up.

Okay. And then on the next financial target, you have return on equity that is supposed to be more than 6% above the risk-free interest rate. Isn't that getting way too easy in this kind of environment? I believe you're at 18% now. And you can argue that the risk-free rate is not even 0, so you're obviously beating that target, but isn't it a little bit too easy at this point?

All right, I think everybody probably in this room has been surprised when it comes to the interest rate environment and how that has evolved over the past 5 to 10 years. With the Riksbank's recent comments and actions, the assumption now is rather that the interest rate is going to remain low for maybe even longer than people thought 6 months ago. At the same time, I think if you look at the return on equity target, that is of course also -- or the outcome is affected by revaluations also, which is not cash. The primary focus when we run the business is really to generate more cash than we did last year. And that's going to remain our focus. If the interest rate environment would change, it may change the property valuations and thereby also the return on equity that we achieve. We're happy to exceed the target, yes. I don't foresee changing the objective in the short term. We'll see in time.

Okay. And then you were already talking a little bit about property -- or income from property management or at least sort of the cash flow situation; and how you're focusing on that, which is understandable. 24% uplift, if we adjust for JVs, in 2019. What's your outlook for 2020? Do you think that you can continue to show growth in this area as well?

Yes, our objective is clearly to grow income from property management every year. We don't make any forecasts. You have a good guidance if you look at the table of our properties in our quarterly reports because they -- that basically gives you a lot of detail on the action -- on the operating surplus. The very strong increase in income from property management in 2019, as I mentioned, is of course driven by a lower financial net. With the current interest rates derivatives portfolio that we have amounting to a bit over SEK 12 billion in nominal value, I would presume that the average interest rate is going to remain around current levels for the coming, well, year or 2, but when it comes to interest rates, I guess that anybody in this room has -- probably has got as good a guess as my guess.

I wouldn't be too sure about that, but that might be true. Regarding the rental market then, obviously a very strong net leasing in 2019, SEK 95 million. You were talking about the fact that Copenhagen is picking up a little bit this year versus last year. I assume also that, that means you're getting a little bit helped by the Danish krone in terms of reported net leasing, but how -- what is going to drive net leasing for 2020? Do you still expect rental uplifts in terms of renegotiations? Or is it -- this going to be driven by your projects portfolio for new leases?

I think what it -- we will see contribution from both side, but of course, new leases are the best way in our markets to set new levels in the rental market. Talking about the region, as I said, both Malmö and Copenhagen has been strong contributors to our net letting, but we see contribution from all our cities, so -- and the growth in Lund is good. And we have some vacancies there that we can work with, which is also a possibility for us. So we are positive about the future also on the future in letting.

And you were also giving some details regarding some of the latest leases that you've done in the past few months. You've made leases in Helsingborg. And you were talking about sort of top rents above SEK 3,000 now. You've also made leases then in Malmö and Copenhagen. Could you say something about the levels that you've reached in those kind of contracts? And just to get a general idea of where new leases are moving in Malmö and Copenhagen as well.

I will say that, if you offer the best possible product in the best possible location, you can also achieve better rents, of course. And we see that both in Helsingborg and Malmö. The rent level in Copenhagen is a bit more a factor, and you could say it's more stable over time. It's more flat in Copenhagen, and we don't see any big changes in that.

Okay, but then if we assume that -- you do have like a project in Hyllie that you would like to start this year. I assume that entails finding a tenant first before you start the project. What kind of rents are we looking for in Hyllie then?

I would say that, if you look at some kind of for the whole house, it would still be around SEK 2,700. So it's not any top record for the whole block, yes, but the best thing for us has been to start with a level. And then you get better and better rent levels when the project continues. So I don't think that we will end the projects in that level actually.

Okay, interesting. Starting at SEK 2,700 and moving upwards is -- that's the message, okay. Your vacancy rate now, 7%, is rather low, which is obviously comforting, but isn't it also a risk that you're losing tenants to competitors if you don't have enough to offer? Have you noticed anything like that? Or...

We saw that a few years ago and actually last -- since we didn't have anything to offer right beside the central station in Malmö. So of course, it's very important for us that we always have something new to offer. So now, for example, we are doing a project in Slagthuset, where we can offer really good spaces in the city center in Malmö. And then we always like to be able to offer something that's suitable for possible tenants, but when we have very low vacancy, it's not possible. So we have to balance on that line and -- but also be prepared to start new projects all the time.

And I also think that we have a good project -- pipeline of projects which are not yet started, with Pulpeten in Hyllie, Slagthuset which we're refurbishing in Malmö. You have Posthornet in Lund and Ideontorget Zenit in Lund. And you have the slightly higher building at Polisen in Helsingborg. So we have potential projects to -- which may be started when we find the right tenants in basically all -- on the 3 Swedish cities.

And to offer a new tenant a new possibility. Or a tenant, when they have new demands, it's not only according to offer new spaces. It can also be suitable if we move around tenants. And since we have a good volume in every spot where we are, so we have that possibility. And that's a very important factor for us in -- while we do that puzzle. So that's one way how we can contribute to our tenants' needs.

Okay. And you also talked about the fact that you managed to get a like-for-like of just above 3% for 2019. You had a little bit of help of some indexation. I assume that we will get that this year as well, hopefully, but you have almost 20% that could be renegotiated if in fact that bodes true of your rental value. What are your sort of plans for that? Should we expect you to be able to do that on average? What kind of rent uptick should we expect for purely renegotiations in general?

I will say that, regarding renegotiations, it's the same history as before. We don't go in hard and set a new level of rents without contributing with something new to our customer in our market. We see often that changing needs are there, so we can contribute with some changes or some new services and then we can raise the rent a bit, but we are not very hard on those, yes, renegotiations. Otherwise, it's no -- it's not as -- it's forced in our market.

We do have a lot low -- or much lower volatility in the rents than you do, for example, here in Stockholm.

Right. And also regarding some of your projects that are ongoing. You're completing Ursula and Terminalen at the end of this year. You still have a little bit of vacant space to fill up. It sounded during the presentation that you weren't really worried about that fact, but maybe we are as outsiders. Could you tell us something about sort of the work that is going into filling these buildings out and what you expect in terms of these contracts throughout the year?

We expect that both these projects will be filled when they are finished. And I'm fully confident about that. And if -- you might be a bit worried. That's okay, of course, but we have very good discussions. And I think the very -- also very high activities in these projects, so -- and the market is there.

Okay. And you also reported that a little more than SEK 600 million was sort of the return that you had on your projects for this year or the contribution from that. Could you say something about the sort of profitability in terms of that, the return on investment or return on invested capital in terms of these projects? I know it's a mix of all types of investments, but in terms of new project investments, what kind of targets are you looking for? And are you meeting those targets?

You can say that for the -- when we take investment decisions, we would normally require a return on invested capital of approximately 6%. It could be plus/minus a little bit.

And a bit higher, of course, if it's logistic and/or industrial. And we reached that target, so...

Okay. And I assume that that's yield on costs that you're looking at, at 6%.

Yes, yes.

Yes, yes.

Okay, yes, yes. Otherwise, the ROIC sounded a little low to me, but yes, okay. Absolutely. And in terms of the valuation then in portfolio, we noticed there's a rather big step in terms of what happened to the values. And you talked about yield compression a little bit. I assume that, that happened in Q4 because your average running yield came down 10 basis points...

Yes, yes, that's right.

But what's the mix between the different areas? Because it seems like logistics went up and offices were unchanged. And I assume this is due to decimals, but could you tell us a little bit of where was yield compression taking place?

I will say primarily, we're -- in offices -- and you can say that, of our value increases during the year of SEK 1.4 billion, SEK 1.5 billion, a bit over SEK 600 million was projects. And the rest is fairly evenly split between yield compression and improved operating surplus, but we -- up until Q3, when we did the internal valuations during 2019, we were a bit -- apparently a bit cautious when it comes to yield compressions. But as I mentioned, end calendar year, an external appraiser looks at all of our properties. And they have in certain cases applied a lower yield.

Okay. And then speaking of the property market and the fact that you also have properties or projects, hopefully, coming online this year, what could you say about something about competition in terms of the overall supply for Malmö and Helsingborg and Lund and perhaps not as much Copenhagen but the Swedish side of things versus what we saw in 2019?

I think that many was a bit worried, when we went into 2019, what would happen to possible oversupply, but we haven't seen that. We still have a very high occupancy rate. And we don't see any large changes in moving change or anything like that. Of course, you have to build the right product, and you have to offer the market the right thing. And if you do that and you do that in a responsible way. And I think many of the developers in Malmö are also acting in that responsible way, so I don't see that as a problem at all.

Okay. And I figured I might as well see if there are any questions from the floor before we move on. Yes, Tobias?

Tobias Kaj from ABG. I would like to start to ask regarding your net letting. And you have some competitors with larger focus in Stockholm that has already reported net letting, and they had a very strong net letting until mid-, late 2018 but a net -- negative net letting in 2019. Do you think there is a risk that your regions is just lagging a year or so behind the development in Stockholm and that you will see falling net letting for this year?

If our market is ahead or behind Stockholm, I don't have the answer on that one, but I recall that I, in Q3, said that we don't see in attendance that our tenants read those reports about a slowing-down market. We see still a good demand and the growth in region are good, so I'm not worried about that, but of course we don't know what happens. And we are prepared whatever comes. If I should talk something about any trend we can see, I think IKEA is a good example on that. We might see that it's a bit more common that tenants are putting more people at this -- at the same spot that have higher density. And I think that's a good thing because that also means that you will have a great number of people at the same spot. And that will increase the possibilities in finding new ideas and so on, so I think it's a good thing for the market. We have also seen during many years that the uptake in the market has been much higher than we expected it to be. And I think that could be actually one of the risks also, that we that are into our market and should know it best or -- that we are also a bit slow in understanding the changes, seeing the possibilities that are actually there. That could also be a risk, that you don't see all the possibilities. And I think that we have actually been a bit surprised over how strong the growth has been, but we are also cautious and responsible, when we start new projects, to be aware that, yes, we will fill this with tenants as well.

And you had a very strong 2019. However, if you look at occupancy rate for your office segment, it declined slightly in all 4 regions. What's the reason for that? And is it a risk that more developments will continue to reduce the occupancy rate in the existing portfolio?

I will say that the occupancy rate for our -- for offices in Malmö and offices in Helsingborg is at a very good level. And you should also bear in mind that in Lund the acquisitions that we've made have basically added vacancy. So with -- the Nya Vattentornet 2 and 4, which we acquired, had a high vacancy rate, which for us it basically is an opportunity, but momentarily, of course, it reduces the occupancy rate in the office portfolio in Lund.

So we have both vacancy. And that, of course, affects in the figures, but we see that as our future possibilities. So...