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

Hello, and welcome to Wihlborgs Fastigheter AB Q2 Report 2021. Today, I'm pleased to present Arvid Liepe, CFO; and Ulrika Hallengren, CEO. [Operator Instructions] I'll now hand over to the speakers. Please begin.

Thank you. So welcome to the presentation of Wihlborgs' first half 2021. We start with a summary. We have seen a high activity in the market, especially since March, and we have been able to sign leases for SEK 86 million during Q2, which is a high level, especially since that number is the sum of many new leases. I would say that, that is also a sign that the activity is high in many sectors. Rent levels continued to develop in a positive direction, not at a high speed, but still in the right direction. We are still affected by our large divestment from December and still a bit higher vacancy, but improving. Earnings in relation to debt remained strong, and our solid balance sheet and liquidity position means that we also are ready for investment possibilities. I'm really proud of our organization. We really have been focusing on preparation for the period after the pandemic. And now, when we see opportunities, we are totally prepared to take advantage of that. We are ready for business. Continue to Page 3 with a summary of figures for the first half 2021. Rental income is affected by divestments as mentioned, but also some current effects that continued also during Q2. The income summarized to SEK 1.477 billion, the operating surplus to SEK 1.046 billion and income from property management amounts to SEK 859 million. The net amounts -- the net result amounts to SEK 1.007 billion, which corresponds to SEK 6.55 per share and EPRA NRV increased to SEK 154.48 or by 5% adjusted for dividends. Page 4. We have had a high level of new leases, SEK 86 million in the quarter and SEK 142 million for the period. Our net letting are SEK 36 million for Q2 and SEK 45 million for the period. And important to note, we have higher rents in the new leases than in terminations. We announced a new lease to a governmental tenant in Lund last week and it's worth mentioning that, that lease was signed in July after the end of the second quarter. We see as a potential that the activity of the last quarter will continue, of course, a bit of a slowdown now a few weeks in the summer, but we have several good discussions in all our cities. And of course, we will see terminations as well during this period, but terminations can also give new opportunities as long as we are active and are close to our customers. The net letting in a historical perspective at Page 5. Positive figures for the last 25 quarters and that's not a guarantee that we will never be below 0, but overall, we have a good stability in our market. Lettings in light blue and terminations in dark. The black line is the net letting. Page 6 and the list of our large -- 10 largest tenants. The rental income from public tenants continued to be high, 24%, but as I also say every quarter it's a wide diversity across many sectors in our region that is the strength that brings stability. Page 7. Rental value is SEK 3.287 billion per year and rental income, SEK 2.968 billion after our divestments. And looking at the like-for-like figures, we can see that the rental value is just slightly up, plus 0.3%, but this will continue up as long as tenants have new needs and that is exactly what's happening right now. The rental income is affected by higher vacancies than last year, but we already can see improvements here as well. Page 8, a summary of our office portfolio. The market value is SEK 39.224 billion, and overall, the occupancy rate is 91%. One of our new tenants moved in, for example, in Terminalen 1 and Ursula 1 in Helsingborg, these figures will improve. And the operating surplus from offices summarized to SEK 1.881 billion and the running yield at 4.8%. Page 9. The demand for Logistics/Production continues, and here, the occupancy is very high, especially in Malmö at almost, impossible, 97%, temporarily down in Helsingborg and 92% occupancy rate at the whole with a running yield at 6.5% and a total value of SEK 5.998 billion. Demand continues to be strong throughout this sector in all our cities. And for the entire property stock, Page 10. The occupancy rate is 91%, excluding Projects/Land an operating surplus of SEK 2.272 billion which gives us a running yield of 5%, excluding Projects/Land. Page 11, changes in market value of our portfolio. We started the year with SEK 46.072 billion in accordance with our external valuation, which we do once a year with 100% of the stock at the same time. We have made acquisitions for SEK 182 million. We have invested SEK 453 million. We had changes in valuations of SEK 284 million, half come from new leases and half from lower yields in some properties, for example, Hermes in Helsingborg. Together with the currency translation of SEK 65 million, that summarized a property value of SEK 47.056 billion. Page 12. Even though the property value has increased at a slower pace during 2020, and so far, in '21 due to our large industrial divestment in 2020, the total value is still moving upwards. But there is more to come when we continue our investments, of course. A catalog of our value of properties in our 4 cities on Page 13. 42% of the value is in Malmö, 23% in Helsingborg, 17% in Lund and 18% in Copenhagen. These cities belong to the same region, but they also have differences that contribute and interact with the whole. All of these cities have noticed the rising number of discussions on leases with -- last quarter. But maybe Lund is a bit special. The cluster of companies working with the best engineers is growing in Lund. We have been waiting for the time when also larger areas will be attractive in Lund and now we see that seems to be the time. And we are ready with [ the program ], for example. We have also signed leases in a new area in Lund, Science Village, but I'll come back to that when we look at our projects. And what about the future? How will we work in the future. Page 15. Is working from home the future? We and many others have tried to figure out what is happening and how our needs will change. To be ready for change, of course, but also to be ready to help our customers to be the best possible employer. Some have noticed the high efficiency in certain types of tasks performed from home and high efficiency is, of course, a good thing. But we also see measurements of lower creativity, logic gaps within the companies, harder for people to cooperate, and not the least, a digital overload that maybe not contribute to high productivity. The time spent in meetings, sending and taking care of e-mails and have many digital documents have increased massively. And I'm not sure that you do your best deals in your mailbox. Page 16. We will see the changes in needs and many companies will work in a more flexible way. In this situation, flexible premises will, of course, be an advantage. And we also see expanding demand for upgrading the work spaces to be even more attractive for the employees. A common place for work would doubtless play a very important part in the connecting people. That place can offer collaboration and creative environment. And the office will continue to be a place to create the culture in the company and to share and gain knowledge. And over to Arvid Liepe for more figures.

Thank you very much, Ulrika. Moving on to Slide 18, looking at the income statement for the second quarter. You can see that the rental income amounted to SEK 739 million. Operating surplus was SEK 537 million, corresponding to a surplus ratio of 73%. You should bear in mind that the operating surplus has been affected by divestments of -- having an effect of minus SEK 16 million and also currency effects of minus SEK 5 million in that number. Income from property management amounted to SEK 443 million. And included in that is the financial net of SEK 76 million for the quarter. The change in the value of our properties was plus SEK 210 million in the quarter, that has affected both by lower yield requirements for certain properties but also improved expected operating surplus driven by the net lettings. We had a positive change in the value of derivatives of SEK 16 million and the profit for the period amounted to SEK 529 million. On the next slide, Page 19, you can see a bridge between the first half rental income in 2020 to the first half rental income 2021. And I think it's interesting to note here that divestments had a negative effect of SEK 45 million for the first half of the year. We actually had a slight positive comparison when it comes to COVID discounts. The COVID discounts 2020 in the spring was slightly larger than in 2021. We had a negative currency effect of SEK 15 million and lower service income, also, of course, largely driven by pandemic and its effects of minus SEK 18 million with larger vacancies having an effect of SEK 39 million. And then we had positive effects on the rental income coming from lettings from projects and from indexation of SEK 40 million. And that then amounts to the SEK 1.477 billion in rental income for the first half of 2021. On Slide 20, you can see the balance sheet development over a 12-month period. Our property value has increased by approximately SEK 0.7 billion on a 12-month basis. And at the same time, our borrowings decreased by SEK 1.1 billion and equity increased by SEK 1.7 billion compared to the same period 12 months previously. Translating the balance sheet into key figures on Slide 21, you can see that our equity/assets ratio now stands at 40.5% and the leverage is 49.6%, slightly higher than in Q1. But as you remember, we have, of course, paid a dividend during May of SEK 807 million. Our interest cover ratio is 6.5x, continues to be very strong. You have a few per-share numbers at the bottom of the slide. The EPRA NRV, as Ulrika mentioned, now stands at SEK 154.48, which in a 12-month perspective, is up 12% adjusted for the dividend paid. On Slide 22, you can see the historic development of EPRA NRV, and since 2009, the average annual growth has actually been 17% adjusted for dividends. Moving to Slide 23. You can see the historic development of our financial ratios for which we have set different targets. Our LTV, we have a target of being at a maximum of 60% and we're now, since a few quarters below, 50%. The equity/assets ratio has gradually gone up, and it's now also, over the past few quarters, above 40%. And the interest cover ratio has since beginning 2019 been at very strong levels, above 6x. On Slide 24, you have another metric which we feel is very important to look at when you try to judge our financial position and the stability of that. Net debt in relation to EBITDA now stands at 11.1x, and that is slightly better than the average over the past few years. But as you can see on the slide, in the long-term perspective, the ratio has been basically between 10x and 11x for many years. On Slide 25, you can see our -- the split of our sources of financing. Almost half of the financing comes from bilateral bank loans. We borrowed -- 36% of our loans come from the Danish mortgage loan system and 18% from the bond market both via SFF, Svensk FastighetsFinansiering, and via our own MTN program. On Slide 26, you have the details of our loan portfolio. The average interest rate in the portfolio is now 1.28% and we have an average fixed interest period of 3.2 years and then average loan maturity of 6.2 years. On the next slide, Slide 27, you see the historic development of the loan maturity and the fixed interest period. And as you can see, the loan maturity has been around 6 years over the past few years, actually. And the fixed interest period used to be quite high, but that is now very many years ago. And over the past few years, we've been at between 3 and 4 years in average fixed interest period. Moving to Slide 28, you see the historic development of available funds, that is our unutilized credit facilities plus liquid funds at each quarter end. And as Ulrika touched upon before, our liquidity position is strong with over SEK 3 billion in available capacity at present. So I'll end the number crunching there and hand back the words to you, Ulrika.

Thank you. So let's say a few words about sustainability, Page 30. We have been focusing for many years on investing in sustainable new properties with the highest certification levels when we invest. But of course, also improving in things that really matters: reduce energy consumption, invest in solar cells, and not at least, to replace bad refrigerants with sustainable gases. Now we also have an efficient method for certification of existing properties and we think that worked very well, and we continue that work in a higher speed. But it's important that we all are aware of the largest climate impact our industry have is in Scope 3. And until we have figured that one out, we cannot ever be satisfied with the sustainability work that we do. So we will step up on that one and do the best we can to also improve the whole industry in that part. Let's go to acquisitions and divestment, Page 32. We have only major -- minor acquisition during the second quarter as we acquired Naboland 3 in Dockan area. Here, we will have the opportunity to build approximately 8,000 square meters of offices. And investments in progress, Page 34. We have during the first half 2021 invested SEK 453 million in ongoing projects, and it remains SEK 1.486 billion to invest in already improved projects. Overall, the projects continue according to plan in a good way. We are well protected, especially in the larger projects, against higher prices of material. We see indications of a slowdown in price increases during the autumn. But it's also an interesting fact that we actually, in our markets, see a good correlation between construction costs and rent level. When prices goes up, the rent goes up. And who knows, if the price of materials gets even more aggressive, the whole industry might use energy and engineers more, calculate more and then use less materials. So that could actually be a good thing for the climate. Page 35. Kvartetten at Pulpeten 5 in Hyllie with 16,000 square meters lettable floor area, it's now moving up from the ground. We have -- we can offer great efficiency, a [ warm inner ] core, the highest sustainable [indiscernible] both in zero carbon dioxide footprint, environmental classification and also a WELL classification. This is the right product definitely. We have now signed the first leases and we have made offers for more than half of the lettable area. But there is a long time before this project finished in Q2 2023 and we have no other vacancy in this area. Page 36 in Kranen 2 in Dockan. We continue with our project for the Regional Council of Skåne and Malmö University. In total, we invest SEK 237 million fully let and long leases. This will be completed in Q4 '21. Page 37. At Hindbygården 7, we are doing a project for the Beckhoff Automation, a state-of-art office and a good transport location in Malmö. Completion in Q3 2022. Page 38. At Sunnanå 12:54, we have just completed 2 projects, one for Regional Council of Skåne and one for Veho Bil. And Page 39, in Raffinaderiet 3 in Lund, we continue with this conversion project. The old tenants have moved and preparation and planning for the building phase continues. We have started to sign the first leases and the investment will give us 5,800 square meters modern offices with this interesting industrial touch and right beside Central Station. Page 40. This is a new project. We have decided to start this project in the new area, Science Village in Lund. It's located just right -- just in the middle between the research facilities, Max IV and ESS. We won this competition of land here in 2015. And now we have been redesigning this project and waiting for the right timing, and now is the time. We have signed 50% of the area with the company in the food tech sector. There will be both labs and research and offices. We have -- they have also asked for option for the rest of the area, but there is no decision made yet. We will invest SEK 244 million, and we will also have an option to buy more land in this area. I, more or less, lived my life up here in this area during 5 years when we built Max IV and it's really satisfying that we now can continue with more investment for companies in the private sector in this area. Page 41. We have also decided to start a project Huggjärnet 13 in Helsingborg. It will be a facility for multi-tenant in logistics, and we build this project in 2 spaces. And something about the future investments, Page 43, Bläckhornet 1 in Malmö. This is a project that we call Vista. This might be our next large project put in production. Procurement is ongoing, and we are planning for the possibility to start the first phase with 400 parking spaces and a great sports hub in 2021. It's a unique opportunity to offer both good parking and direct access to the train station for both for Pulpeten 5 and Bläckhornet 1. Page 44, 4 possible projects in our 3 Swedish cities. Posthornet 1 is just beside Raffinaderiet and it will provide the city center with larger areas than Raffinaderiet. Ideontorget. It's just beside the tram station in the Ideon area. Polisen 7 in Helsingborg. And a bit of -- the last picture is a bit of a redesign of Plåtförädlingen 15 and 18 where we now can offer up to 22,000 square meters gross floor area in logistics. Page 45, and since there is some extra focus on logistics, I would like to mention a few other possibilities that we work with. We have Rausgård 21 in Helsingborg. Interesting area for a combination of office and logistics. We can both build and refurbish here approximately 20,000 square meters. Grustaget 1, also in Helsingborg, also here approximately 20,000 square meters. Bilrutan 5 in Landskrona, 14,000 square meters logistic with up to 20 meters after the ceiling and just beside the highway. In Sunnanå, where we have built for Regional Council of Skåne and Veho Bill, we can add on 17,000 square meters logistic or production. So we have possibilities in all cities and in both offices and logistics. Page 46, of course, Nyhamnen. This was actually an area for logistics in the old days, but now it will be in the city center. And this picture and this land area will follow us for many years. We have just have to get used to that. Page 47, Smörkajen is one of the first possible projects there. The zoning plan continues, but in a bit of a slow pace at the moment. We work in several parts of the Nyhamnen with zoning plans. But here in Smörkajen, we will be able to produce at least 10,000 to 13,000 square meters of offices in this first project. And Page 48 is Kranen 1 just at the entrance to the Dockan area from Nyhamnen and our application for planning permission is still being processed. Next slide, 49, to summarize. We see high activity in the market, strong net letting, rent levels positive, earnings in relation to debt is strong and we can continue to be ready for further investments. We will continue to invest, focus on our earnings capacity and we will do so with continued stability. So now we're open for questions.

[Operator Instructions] Our first question comes from the line of Erik Granström from Carnegie.

I have a few questions. If we perhaps could start with a comment made in the report about the vacancy rate. You state that you expect it to gradually decrease throughout -- in coming quarters, but that the bulk of it will happen in 2022. Could you give us some indication of what you expect vacancy rates to be at the end of 2022, given what you already know at this point?

I think when you look at the vacancy rates, we currently -- if you exclude projects in Lund, we're at 91%. We were down at 90%. In the long-term perspective, 93% is a high number. So I mean we're really talking about decimals here. We would expect from the current levels that we'll move in the right direction of -- as of the end of this year. But you'll see a longer effect of the deals that we're signing in 2022. I don't want to put a specific number as a year-end occupancy because we don't give forecasts, as you well know, but moving in the right direction from the current 91%.

And we will improve also during 2021. I'm sure that we -- but in some leases, we have to do some refurbishments first and then they will be in early 2022 and moving up.

Okay. And in terms of net letting, it was obviously another quarter with positive figure. But you also mentioned that new leases carry higher rents than terminated one or old leases. Could you tell us something about how much renegotiated rents are up on average in the portfolio?

Of course, it's always to tricky to compare different services with each other. But they are up, not in a dramatic way, but they are definitely moving in the right direction. So I would say that we -- I think I mentioned a figure last quarter and -- but it's not easy to compare overall because it's not the same thing in those talks. But definitely, we can add on some extra quality, but we can also increase the rent levels as a base. But it's not dramatically, of course, but definitely good.

Okay. But it still means that you expect like-for-like rental value to trend upwards going forward driven by...

Yes.

Okay. All right. Fair enough. Could you tell us something about your ability to acquire? You mentioned a rather small acquisition now here in Q2, but what is the outlook for acquisitions going forward in your view? What are you seeing in the direct market?

We are ready and we're looking into every possibility. But sometimes, it's not so much to acquire at the moment and we try to be -- continue to be careful about what we buy because we want it to be sustainable over time. But there will be possibilities, of course. And we are looking into something that can be interesting. But you never know. It's hard to give a prognosis about when you can acquire the right thing.

Okay. And investment volumes, they have been sort of a little bit sluggish lately. I mean the pandemic is obviously a reason for that. But what could you tell us about sort of the outlook for investments in projects going forward? You had a number of potential projects in the presentation. What's the time frame of those, so to speak? When do you think that those can be started? Are those 2022 projects or are we talking 2025?

I would say that it's possible that we can start Vista in the end of 2021. And I think that a few of the other projects can be started in 2022 definitely. So I think that we have just started Pulpeten and Kunskapen 1 in Lund. We'll start now in the -- I think the production phase would start early 2022. So I think that we keep filling out the portfolio in a good way.

Okay. And the activity in the rental market from your tenants, have you seen a change in the ability to sign sort of longer leases in new projects versus renegotiations of, let's say, 3- to 4-year leases?

As the activity is really high and they -- I don't really get the question actually. Once again, Erik, please.

Yes, sorry. I mean the difference in sort of if clients or tenants -- potential tenants are more likely to do renegotiations of shorter contracts meaning existing contracts for, let's say, 3 to 4 years versus the demand for actually signing new leases when you talk to tenants that are looking at maybe 5- to 10-year leases in new projects, if there's a difference there or if the increased activity basically means that all types of discussions, no matter how long the leases are, is increasing?

I would say that the -- it's pretty much -- we can keep the times for the leases as before. We have, of course, more discussion on flexibility, but that is more of can we have a part of the surface in another type, can we have the possibility to add on surfaces during the lease time and such. So the flexibility need can be provided in different ways. It doesn't mean that the time of the leases will be shorter. So we sold it that way. I don't feel that the tenants are afraid for the times in the leases that we want them to have.

Okay. Okay. That's interesting. Those were my questions today.

And the next question comes from the line of Stefan Andersson from SEB.

A few questions from me then. Going back to vacancies there. See if I try to just see your view on the market. The 9% that you have, I guess, it's fairly equal to the market vacancy in your region. It seems like the prices are not -- it's not enough -- it's not high enough to have any pressure on price. Is there a level where actually you couldn't drive rents up any longer. If you were at 12% or 13%, what's your experience there? If you come down to a tight market like 4%, 5%, then 5%, 6% and then of course, probably starts moving up rather quickly. But what's your view on that?

I would say that you have to go much lower than 90% before you can feel the pressure on the price because it's also depending on -- it's not on the price and it's, of course, location and quality and you don't see that in the figures of the vacancy. So the vacancy for the overall market is -- included a lot of properties that maybe isn't the attractive -- the most attractive ones. But I would say that the product that we offer -- the competition on that one isn't too hard. So it's more about finding the right product for the right client more than a discussion on the price.

And then a question on -- I mean it's very difficult, of course, to understand what type of needs we will have in the future and you look -- I heard your comments and it's very similar to what everyone is saying. I would say that more flexibility, but still a need to meet and so on. I fully agree. But do you see -- I mean, this flexibility question, do you think that it actually will increase or decrease or not affect the total need of space in the office segment?

We see that the clients choose to do in a bit of different ways. But I would say that we wouldn't -- I don't expect the needs to go down in any way. The needs would be a bit different, but I think that most of that would be that we add on quality, which is a good thing. But of course, we will see companies that use to try to have less area and -- but we also see the opposite. So I think this will be a period when different companies try to figure out their best way of doing things. But we have to be aware that we are in a market that the lack of the best employees is a competition. It's a competition on that one. And then you have to offer a really good environment for your employees. And I think that is an important factor when you also try to figure out what our product -- how that is best performs.

Yes. I noticed on some releases that have come out lately, but the Stockholm-related more, I would say, that the public sector has been rather keen to reduce their spaces maybe being already on rather large spaces. I don't know if you see any of those tendencies at all between different segments?

We see different decisions. We have -- and sometimes it depends on if the decision is made of the company in this area or is it made in an international perspective. So the decisions can be made in different directions, of course. But we see a bit of both. And I think we will be in a kind of a test period for at least a year when companies try to figure out what they have to offer their employees to be the most attractive ones.

Connected to this then...

As long as we are active and close to our tenants, we are certain that we can provide them with what they need.

Yes. And connected to that then, when you look at your pipeline of projects in the office space, I mean, have -- in the last year, have you changed any views on when to push the button to start the project or what level of free rent you want to have done and preleased it on? Or do you -- have you changed your ways, in any way, due to that?

We always have to be very close to the market and we decide from case to case what is the right thing to do. We decided to start -- put the Pulpeten 5 without any signed leases, for example, because we are totally certain that, that product will be 100% right for the market and we have no vacancy in that area. Now we started this industrial project in Helsingborg also without any signed leases. But that's also because we know that, that project is very attractive. In other cases, we have patience and wait for example, Kunskapen 1. We would never start that project without the any tenant. And even though it's 50% less, but we also have good discussions for the rest of that project. So it's really depending on the situation. And of course, in times when things are changing, you have to be even closer to the market. So we're trying to do that.

Yes. Good. On the discount side for COVID. Looking ahead now, are you -- you have very small ones, but are they fading out now as you go into Q3 and Q4?

They are fading out, yes.

And then a question on your 2 projects in Malmö, I think it was 2 that you planned to have finalized in the fourth quarter. Are those up and running? And I think they were fully let, if I remember correctly. Are they contributing throughout the fourth quarter? Or should I be more cautious and then have them then contributing in Q1 2021 for as well?

It's the Kranen 2 projects you're referring to, right?

Yes.

I think they will be finished in October, November or something.

October, November, yes. So a good effect in Q4, but not 100%.

Perfect. Sorry, but coming back to the rents again, there was one thing I forgot there. Again, looking at the Stockholm inner city, we get the comments that prices are held steady and so on. But then on the other hand, we also get some comments that instead of reducing price or discounts are offered and they could be rather long, a couple of years, in some cases, just wanted to -- I don't think you had the same situation in your markets. But just to double check, do you see steel prices are held up that you have to give more discounts to get the tenants in? Or is that something we see more up here?

No. I would say it's the same situation as always. Sometimes you can get some discounts for support on a moving period, but no large discounts.

And the next question comes from the line of [ Stefan Bulow ] from Nordea.

Yes. I have 3 questions, starting off with one on the NOI margin. The NOI margin of [ 72% ] was a bit weaker than our typical Q2 quarter. So I'm wondering if there are any particular items in the Q2 real estate costs that are elevated?

You have some additional costs for heating and snow also in Q2, as we saw in Q1 as well. So that if you look at Q2, isolated, that has had a bit of an effect on the operating surplus ratio for the quarter.

Okay. Regarding net letting, are there any large contracts affecting the net letting figure?

No. I think we have one larger signings is at SEK 8 million and some of SEK 3 million. But the big amount is from the widespread and many factors. So that is actually a very good trend, I think. And it's the same thing on the termination side. We have a view about -- I think we have 2 over SEK 5 million. But otherwise, it's very low activity on the termination side.

Okay. And one question on the transaction market. Can you guide us what you see on the transaction market for offices in your market, both in terms of transaction volumes and yields compared to pre-COVID?

I would say the volume is low. And I think the yields also is maybe a bit lower than before.

Okay. Great. That was my question.

And we have one more question from the line of Victor Krueger from ABG.

I didn't quite catch out to cancel the question. [ Stefan ] just had his first question there. So I'm good.

And as there are no further questions, I'll hand it back for any closing remarks.

Okay. Thank you, everybody, for listening in. If you have additional questions, you know where to reach us. And I'll just take the opportunity to wish you all a nice summer.

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.