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

Welcome to the Wihlborgs Fastigheter AB Q2 reports 2020. [Operator Instructions] Today, I am pleased to present of Arvid Liepe, CFO; and Ulrika Hallengren, CEO, to begin your meeting.

Thank you. Welcome to the presentation of Wihlborgs' first half 2020. We often talk about stability as one of our important fundaments. And I say it again, stability has a special kind of attractiveness especially if we combine it with some new records from time to time. In this challenging time, we still have new records. Q2 is a record quarter for operating surplus and income from property management. High earnings and high efficiency are the kind of records that suit us well. During first half 2020, we increased our rental income by 5% to SEK 1.548 billion. The operating surplus increased by 6% to SEK 1.125 billion, and income from property management increased by 7% to SEK 934 million. The surplus ratio in Q2 was 74% and 73% for the period. The net results amount to SEK 708 million, which corresponds to SEK 4.61 per share. Of course, both Q1 and Q2 have been affected by the corona pandemic, but we have been able to find a way of working that seems to be sustainable. The number of contracts signed during late Q1 and Q2 is lower than last year, but under the circumstances, still at a quite good level. Page 3. We have, during Q2, signed leases at a value of SEK 49 million, and the net debting was SEK 4 million, SEK 12 million for the period. Especially public tenants and logistic and production have ongoing new demands. The office sector is still active but a little more cautious. And the net letting in historical perspective at Page 4, positive figures in the quarter, in the period and a good volume over time. Page 5. 7 of our 10 largest tenants are from the governmental sector, and that is important in a long-term perspective. 22% of the rental income comes from public tenants. As pointed out many times before, the widespread of many sectors in our region is also a strength in these times. Page 6. Rental value is up to SEK 3.351 billion per year. As usual, it's extra interesting to look at rental growth in like-for-like portfolio to evaluate our performance. 3.6% growth in rental value and 3% of rental income is a good level. Page 7. The occupancy rate is 93% for offices in Malmö and 94% in Helsingborg, lower in loans, and we will continue to see that picture for some time as we create vacancy in both Raffinaderiet and Studentkåren, preparing for large refurbishment and structural changes in tenant clusters. The operating surplus from offices summarize to SEK 1.905 billion and a running yield at 5%. Total value, SEK 38.156 billion. On Page 8, we also see continued high occupancy rate in logistic and production. In total, 93%; a running yield at 7.1%; and a total value of SEK 6.556 billion. For the entire property stock, Page 9, the occupancy rate is 92%; and operating surplus, SEK 2.4 billion; running yield, 5.1%. Page 10. Changes in market value of properties. We have made acquisition for SEK 140 million, invested SEK 585 million. Changes in valuation are SEK 87 million. And together with currency translations of SEK 61 million, that summarized a property value of SEK 46.392 billion. Worth mentioning that in Q1, the currency translation was SEK 504 million, and it's still positive for the period but lower than the end Q1. Page 11. Our positive development continues but at a slower rate according to the situation. And on Page 12, we see the map of our value. Now 43% of the value is in Malmö, 18% in Copenhagen, 22% in Helsingborg and 17% in Lund. Just small changes since the last report. The region keeps up the tempo quite well. We have the possibility to keep a healthy space between people also in the city. It is possible to go to work without using overcrowded public transportation. And I think that is a part of the driving factor so that the tempo in business doesn't go down too much. Many offices have been working with maximum 50% capacity, and other ones have been working 100% from home. IKEA is one of the large employers in Malmö, and they have chosen to work 100% from home. And still, they signed a new lease last Thursday for 250 new employees in Malmö. We weren't their landlord this time, but it's a signal that business will continue. We also see good levels of activity in areas with logistic and production. They have continued their work and have kept a clearly decent activity also in new demands. Of course, we see differences between Sweden and Denmark, more closed in Denmark for a couple of months but now opening up. The border between Sweden and Denmark is closed for tourists. But if you live on one side and work on the other, you have been able to pass. The government support has been more direct to different business in Denmark. And in Sweden, we, as landlords, have been some kind of intermediator. We have chosen to combine a part of our support to tenants with prolonging our contracts, for example. We also see that several customers in development innovation areas have been able to raise large amounts of capital during this period. [ Veho Bil ], Bonesupport, [ Kampalia ] and Spotify are some of these tenants in loans, but we have been -- calculated that they have together raised over SEK 2.6 billion since March 2020. And that's interesting figures regarding our customers. But now our -- Arvid will give you some figures from Wihlborgs.

Thank you very much, Ulrika, and good morning, everyone. Moving to Slide 13, looking at the income statement for Q2 2020, you see that rental income increased by 1 percentage point to SEK 767 million. That figure has been affected by discounts given, and the effect on rental income in Q2 was SEK 11 million. The operating surplus increased by 1 percentage point as well or 1% to SEK 570 million. And income from property management amounted to SEK 474 million. And as Ulrika said, the operating surplus and the income from property management for the quarter has actually never been higher. The value changes in our property portfolio was slightly positive at SEK 28 million. And a similar figure, minus SEK 24 million, was the change in value of our derivatives portfolio. All in all, profit for the period of SEK 364 million. Moving to Slide 14, an update on the rent collection for Q3. We have agreed rent deferrals amounting to SEK 30 million in total, of which SEK 22 million relates to rents in Q2 and SEK 8 million relate to the second half of 2020. The discount, as I mentioned on the previous slide, amounted to SEK 11 million, and that is net of state reimbursements which we estimate at SEK 3 million. And as Ulrika also said, when we have agreed on different types of both deferrals and discounts, those discussions have, in very many cases, also been combined with discussions regarding prolonging contracts with tenants. Rent collection, we're issuing this report very early in the month as you know. But as of 30th of June, 81% of the rents in our Swedish operations due for Q3 had been received. That shall be compared with an average over the past 5 quarters of 72%, so it's actually a better rent collection than we have seen in the past 5 quarters. And we also updated this figure as of Friday, July 3. And as of July 3, 94% of rents for Q3 in Sweden have actually been paid. And the average number over the past 5 quarters as of that date was 82%. So it's a good rent collection. And make sure -- bear in mind that for -- in our Danish operations, rents for Q3 in the very vast majority of the cases, they are due as of tomorrow. So we actually don't know yet if people aren't paying on time in Denmark. Moving to the next slide, Slide 15, and the balance sheet. You can see the balance sheet as of end June versus 12 months previously. The largest changes is an increase in investment properties of SEK 1.9 billion. And on the other side of the balance sheet, that basically corresponds to an increase of equity of SEK 2.0 billion, and borrowings over the same period have actually decreased by SEK 0.3 billion. I think that is a strong development in a 12-month perspective. On the next slide, Slide 16, you can see our key figures. Equity ratio now stands at 37.6% and our LTV at 52.5%. The interest cover ratio continues to be at a very strong level at 6.7x. On the lower part of the slide, you can see a number of values per share. The EPRA net asset value per share now stands at just over SEK 142 per share, and that is up 16% in a 12-month perspective, adjusted for dividends. On the next slide, Slide 17, you can see the historic development of the EPRA net asset value per share which, since 2009, has shown an average growth of 17% adjusted for dividends. On Slide 18, you can see the historical development of our financial ratios. And the -- as I said, the interest cover ratio is very strong at 6.7x. But also, the equity assets ratio and the loan to value are at strong levels in a historical perspective, as shown in the graphs on the slide. Financial stability shall also be viewed, we think, in the perspective of looking at net debt over EBITDA. That ratio has come down slightly since year-end 2019, stands at around 11x. And that ratio has been actually very stable over the past 5 years. And we think that is a -- we're comfortable with the level 11x of net debt to EBITDA. On Slide 20, you see the sources of financing as of end June. Bank loan -- bilateral bank loans from the Nordic banks stand for almost half of our financing as it has for some time. Worth noting that our impression is that capital is available via the banks currently, although we, during this period, have not negotiated any new facilities with the Swedish or Nordic banks. The Danish mortgage system, where we have about 1/3 of our financing, is also very much open for business. We have increased our borrowings slightly during Q2. And it's also interesting to note that margins in the Danish mortgage system remain fairly stable. When we increased our facilities slightly in Q2, margins were up by approximately 10 basis points. The bond market proportion of our financing has come down a little bit, now stands for 20% of our financing. As we're all aware, the capital market or the corporate bond market was struggling a lot during March, but it's worth noting that the market is now functioning a lot better. Towards the end of the quarter, we raised a little bit of new capital via Svensk FastighetsFinansiering, a 2-year bond at 121 basis points, approximately SEK 200 million. That's actually not seen in the half year figures because we settled that as of today, but it is a sign that the capital markets are working and are coming back towards more favorable terms again from a situation a couple of months ago when spreads had actually increased quite a lot. Moving to the next slide, 21, you see the structure of our loans and interest maturities and loan maturities. The average interest rates in our loan portfolio now stands at 1.33%; 1.36% including costs for committed facilities. We have unutilized credit facilities amounting to just over SEK 2.5 billion, which historically is a high number for us, but that gives us comfort in times which are still a bit uncertain. The average fixed interest period now stands at 3.3 years, and the average loan maturity at 5.8 years. And on Slide 22, you can see the historic development of those 2 numbers, and we're quite comfortable with the loan maturity being at almost 6 years. And also the fixed interest period at above 3 years is quite in line with our policy. With that, I'll hand back the word again to you, Ulrika.

Thank you. It's time for the chapter, acquisitions and divestments. We have, during Q2, agreed to sell to Torrdockan 7 in Dockan to JM. Today, it's a parking space, but now the selling plan has been approved with building rights for 170 apartments. We have, together with JM, changed that selling plan from hotel to housing, as not least today, housing feels like a good choice. The ownership will be transferred the 1st of September 2020. And investments in progress, Page 26. We have, from January to June, invested SEK 585 million in ongoing projects, and it remains SEK 914 million to invest in already-made decisions. Overall, we see all the minor effects of the corona in ongoing projects, and it's also a contribution to our region that we can continue with our investments, not at least since we use mainly local suppliers. Page 27. Ursula 1 or Prisma is under completion. We invest SEK 405 million, so that, for example, hedge SUP46, Resurs Bank and KPMG can move into the new modern offices. Some of the possible tenants that we thought we were close to signing in February are waiting, but we have also other ones that seems to be more ready today. Really looking forward to seeing the first tenant in place the 1st of January 2021. Page 28. Next spectacular project in Helsingborg is Terminalen 1, Helsingborg Central station. The glass facade is in place, and we have signed 2 new restaurants last week. We invest SEK 257 million, and that gives us 8,800 square meter modern travel center station with both offices and restaurants. Musköten 20, Page 29, follow the plan. We invest SEK 97 million for our tenant MilDef, with completion late 2020. And going to Lund, Page 30, we now start a commercial project, the Raffinaderiet 3 in Lund. The old tenants are moving out, and we are in full speed planning the building process. We invest SEK 114 million in 5,800 square meter modern offices, with an industrial touch right beside the central station. Yield on cost above 6%, it's an average office -- in an average office project, we expect 6% yield on cost, but here, we can actually achieve a bit higher. Page 31 at Medeon Science Park in Malmö, Forskaren 1 are under production. Completion later this year, and we see this building as the start of a renovation and lift for the whole site of Medeon Science Park. We also invest in the older buildings in the area and are planning for future expansion possibilities in the surroundings. The biotech industry remains highly interesting. Page 32. At Stenåldern 7, we are building a new building for voestalpine weldCare. Investment, SEK 78 million; 15 years lease and yield approximately 6.5%. At Sunnanå 12:54, Page 33, we have 2 projects in full production, one for Regional Council of Skåne, a transport hub; and one facility for Veho Bil. Investment, SEK 96 million plus SEK 58 million; completion, Q1 2021. On Page 34, the project in Kranen 2 keeps coming. Now we invest SEK 137 million for a new lease with Regional Council of Skåne and their in vitro fertilizing clinic. New projects and new babies will be produced in Dockan. Completion, Q3 2021. And I also have 2 examples of projects in the city central of Malmö which are under SEK 50 million. First, Slagthuset 1, Page 35, where we have started a refurbishment for 2 new tenants: Mindpark and Softhouse. Softhouse just won a tender for Skånetrafiken which will give them many years of development assignments, so I guess that they will need more rather than less area in the future. This first phase includes 2,500 square meter, and the building is situated just beside the central station. We invest SEK 27 million (sic) [ SEK 37 million ] in this first phase. The other project is Sparven 15, where Massive Entertainment, Ubisoft, left in April. And here, we started immediately a refurbishment for Fortnox but also transforming this house into a multi-tenant building. We invest SEK 37 million (sic) [ SEK 40 million ]. And a short update on future investments. Page 38, in Helsingborg, the planning continues for our next possible project, 6,000 square meters offices right next to the District Court of Helsingborg. Still in early stage, but the zone plan allows a 16-story office building. And in Helsingborg, we also have Plåtförädlingen 15, Page 39. We already have building permission for 10,000 square meters logistic area. We are ready as soon as the right tenant is ready. In Lund, the approval of the zoning plan for Posthornet 1 Phase 2 is expected any day, 12,000 square meters just beside the central station. On Page 41, our planning for the project Zenit at Ideontorget continues. Also here, the zone plan expects to be established any day. And then we will be able to apply for building permission. Right timing for that will be together with the right tenant. Page 42. In Hyllie, Malmö, Pulpeten 5 is presented at Kvartetten, 20,000 square meters gross floor area, large efficient floors which is attractive especially for larger tenants and still with a nice human scale both at entrances and common areas inside the house. We have good discussions with several potential tenants that looks for larger connected areas. Page 43, Bläckhornet 1, the project that now have got the name Vista. 70 meters from [indiscernible], we can offer parking garage at 4 floors. And above that, we can build another 20,000 square meter offices gross floor area. On Page 44, the work with the zone planning in Hamnen continues. We will at least be able to produce 10,000 square meters office in this first project. Nyhamnen in the city central Malmö has the highest focus in a long-term perspective. Page 45 is Kranen 1, just at the entrance to the Dockan area from Nyhamnen. We have applied for planning permission, but it will take some time for municipality of Malmö to handle this work. So you will probably see this picture for a long time to come, but we also know that with endurance comes reward. And last picture of future projects, we have also started a zone planning process at Kirseberg 31:53. It will give us some 30,000 square meters gross floor area in logistic and production. Let's summarize. Despite a turbulent environment, we continue to deliver stable results. We see positive net lettings also this quarter, record quarter actually for operating surplus and income from property management, and we have continued strong balance sheet and liquidity position. And we continue our commitment to develop the Öresund region. Page 48. Let me also say something regarding facts and possible trends in the current situation. We see, of course, regional differences both in country and also in our region, but with the possibility to keep distance, both at work at -- on the way to work, many things can actually continue in a quite normal way. We also see a good tempo in logistics and production. They can't work from home, so they work at work, and things move on quite well for many of them. Large investments are made in development and innovation. As I mentioned, we have tenants in loans. We have together raised at least SEK 2.6 billion since March. Governmental tenants continue to increase. Unemployment is rising. The travel and tourism industry are affected and [indiscernible]. Some of the common efforts made in hard times is increased investment in education and infrastructure. We expect that to come. And what about need of workspace in future now when so many people have proven that they can work from home? We haven't seen the result of that yet, of course, but it's a possibility that we might travel less. We can meet more in a digital way, but we are really longing for real meetings and routines. When you go to work, meet your colleagues, have a catch-up at the coffee station, it's not seen as the survey moment. That's other things that create quality. Maybe we will, during a long time, also -- will keep the feeling that we want to have a safe distance between people. Space can be a luxury. If 50% of the employees will work from home, the other ones might want more space at office to be able to keep distance. I also know that we and our tenants have the possibility to contribute to a positive development. If unemployment among young people will rise, we can create a better network between these young people and different business platforms. Such networks create inspiration, role models and the desire to learn. Since we are dedicated to this region, we can put some extra effort in this area. We call it [Foreign Language], meet the future. And Page 50, finally, I just want to mention that last week, the Öresund Bridge celebrated 20 years. It's a symbol for connecting people in our region, but most of all, it's an obvious reality for the people who grow up today. Although there are still administrative barriers between the countries, they will not be able to stop the development that have started. People and business flow across the water regardless of any temporary obstacles. And we are open for questions.

[Operator Instructions] Our first question comes from the line of Tobias Kaj of ABG.

Yes. First question is, how big part of your reported rental income in Q2 have you not yet received?

Of the rental income in Q2, that is basically what we should have received on the 31st of March, right?

Yes.

And to be frank, Tobias, I don't have an exact number. The -- as of the 24th of April, if I remember the Q1 report correctly, we had received 96%. And the focus when looking at the -- so it's obviously at least 96%. And the focus we're preparing this report and describing our potential credit risks has been really on what should be paid on the 30th of June.

Yes, but...

As I walked through the credit risking from Q -- at the moment before this Q2 report, I remember that the figures were very low so...

Yes. And the booked customer losses over the first half year were approximately SEK 3 million, which is a fairly normal number also looking at the past 5-year period.

Yes. But for example, you're right that you expect to receive SEK 3 million in government support for discounts. Is that booked as an income? Or will that be booked if you receive those SEK 3 million? And also, you have SEK 22 million in rent deferrals. Is that booked as an income in Q2? Or will it be booked when or if you receive the income?

The deferrals are -- I mean that's basically a balance sheet item. So I mean, if the income shall be booked but we have agreed to be paid later, then the deferred becomes a balance sheet item. The discounts...

But it will be in the P&L as well as an income and then also as an outstanding receivable?

Yes. The discounts that we've approved amounting to SEK 11 million, those relate to income which we otherwise should have received during Q2. It should have been recorded as an income, but we've given discounts, so the rental income has been decreased by those SEK 11 million.

Yes. But not by the SEK 22 million in deferrals?

No, because that's only an issue of when we are going to get paid.

And the main part of the governmental -- the expected governmental support is a condition in our agreement with our tenants. So the SEK 3 million are -- at least the main part are conditional.