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

please go ahead.

Hello, and welcome to the presentation of Wihlborgs Q2 Report 2023. When people talk about the digital revolution, we know it's not here yet. Sorry for the delay. Financial costs continue up, but market rent rise as well. And our remedy for rising interest, as always, spells out strong cash flow. High activity among our tenants contributes to a quite positive picture also ahead of us, and that includes our confidence that our region continues to deliver. If life was a race track, we would focus on the whole shots. There will come other kind of times after this. We have prepared and have a good position on the way into the turn but our goal is to come out even better. Let's go to our report and a summary of Q2. Rental income, up 20%; operating surplus, up 25%, higher financing costs balanced by increased earnings, positive net letting, stable balance sheet, continued access to liquid funds. And by that, we can also continue with our investment. And the result for the first half 2023, rental income increased by 21% to SEK 1.935 billion. The operating surplus increased by 22% to SEK 1.389 billion, and income from property management amounted to SEK 948 million. The result for the period amounts to SEK 625 million, which corresponds to SEK 2.03 per share and EPRA NRV increased to SEK 90.41 per share plus 7% compared with one year ago adjusted for paid dividend Our comparison of the rental income between first half '22 and first half '23. Acquisition, plus SEK 94 million currency effect, plus SEK 27 million, indexation plus SEK 137 million supplementary billing increased by SEK 48 million and other increases from completed projects, new leases and [indiscernible] SEK 32 million. [ The ] canteens in Denmark were outsourced from the 1st of March '23, and that gives lower income, but also lower cost. We have signed new leases for the quarter of SEK 77 million, SEK 154 million for the first half of the year and the positive net letting for the quarter is SEK 14 million, a high activity rather than the opposite. And we see the same signals as last quarter that customers also have done termination, but we are quite sure that they will come back on the positive side when they have decided about their future. We see many examples of new leases in production logistics in Helsingborg, more offices and loan and a mix in [ Malmo ] and Copenhagen. New tenants are, for example, [ Colras ] in Copenhagen, the municipality of Malmö, in Malmo together with a gaming industry and a new head office moving from the western part of Sweden. And I repeat myself from Q1, if I see any trend, it's the demand for high quality and efficiency and no trend that clients are leaving us for others. Last quarter, we have signed leases at new records for us in Malmo, SEK 3,600 per square meter. And if we look a few years ahead, we know that we will see some changes, for example, SAAB, leaving Malmo and moving to Lund but we have already good discussion with a possible new tenant looking for high security building in a good location. Some of our new tenants that we have signed during Q2 on this slide, as usual, a mix of different segments, governmental tenants together with lawyers, banks, the life science sector, and combination of production logistics are especially active in a positive way. Here we have the net letting in a historical perspective, letting in light green, termination in light blue and dark blue stacks are the net letting. Now actually 33 positive quarters in a row and only one quarter with a negative number for over 14 years. We will do everything we can to contribute like this, but always, let's keep in mind that a quarter is quite a short period. Here's the list, our 10 largest tenant in alphabetic order. Trygg-Hansa is new this year. All these tenants are strong customers, and they contribute with 21% of our rental income, 7 out of 10 are governmental tenants. The rental income from public tenants is in total of 24%, and they contribute to a long-term stability in our cash flow. Rental value as of 1st of July is SEK 4.250 billion per year and rental income, SEK 3.905 billion, plus 20.6%. A good part is, of course, indexation and acquisitions, but it's a good signal of growth. Growth, both in volume but also in high quality that our tenants are willing to pay for. And looking at the important like-for-like figures comparing the same properties one year ago, we can see that rental value is up 10.4%, and rental income is up 12.1%. So rental income, again, actually continues to beat our ambition to exceed index by at least 1 percentage point. Partly the strong figure for rental income like-for-like is higher occupancy, plus 1.5%, also a good number.

I believe the presentation slides are not visible on the webcast screen. Is that correct?

How come? So let's see if we can arrange that because, of course, that's important that you can follow in the presentation. But here, we have in this team meetings, we have the right. I actually think that still in [indiscernible] you haven't -- you doesn't show our presentation. You show the report so you're not following the slides in the presentation that we have sent to you. So if you look in the team meeting that we are in, you should see the presentation slides. I will be very grateful with someone at [indiscernible] could contact me and tell me what to do because the presentation, of course, needs this.

Hello. We'll try and fit in the live slides in the presentation instead the ones that we were sent so I'll tell you if they're up.

So I think we should have a short break or what do you want us to do? Okay. So hopefully, you see the right pictures again, and we continue with... We continue with rental value, important picture to show you the rental growth in like-for-like. Rental value is up 10.4%, and rental income is up 12.1% in like-for-like. So rental income, again, beats our ambition to exceed index by at least 1 percentage point. And if we look into changes in market value of properties, we started the year with SEK 55.179 billion in accordance with our external valuation which once a year evaluate 100% of the stock at the same time. We have acquisitions for SEK 20 million, invested SEK 933 million. Changes in valuation amounts to minus SEK 87 million. And together with currency translations of SEK 584 million, that summarized to SEK 56.629 billion. As always, we have a dialogue with our external appraisers also for quarterly valuation. Important to note that the estimate of future market rents is of great importance in valuation calculations and today, there is a good support for good market rents also ahead. We started to raise the valuation yield in Q2 last year and continued in Q3 and Q4. Our market has not been very volatile in the past, and it's not currently either. Therefore, the values continue to be quite stable. The value of the portfolio has developed, as you can see on this slide, since 2005 without raising any new capital at and last year also despite higher yield expectations. But as always, valuation is a kind of calculation method with several assessment parameters. Therefore, it's interesting to measure how well we actually perform in relation to these values and we will see that on the slides. These figures, the running yield shows how we actually perform based on that calculated valuation. So not valuation yield, maybe you can say that we actually perform better in our portfolio than our appraisers expectations. For the whole portfolio, the occupancy rate is 93%, excluding project and land and with an operating surplus of SEK 2.975 billion that gives a running yield of 5.5%. This running yield was 5.1% a year ago and the same figure, 5.1% 9 months ago. It bounced up a bit around year-end as a factor of high indexation but in 12-month perspective, the running yield has grown from 5.1% to 5.5%. Good earnings capacity in relation to the value of the portfolio. In the office portfolio, the market value is now SEK 46.832 billion. And overall, the occupancy rate is 94%. It's 95% in Malmö, 91% in Helsingborg, 92% in Lund and 94% in Copenhagen, improved numbers since a year ago. Improved occupancy rate is a joy, but we don't hesitate to create or buy vacancy where we think that is the right thing to do. It's a part of the growing of a growth strategy and especially a strength when we see support for higher rents and customers' willingness to pay for quality. The operating surplus from offices summarized to SEK 2.580 billion and a running yield of 5.4%. The demand for logistics and production continues to be good. Occupancy, 97% in Malmo, which is a very high level, 89% in Helsingborg, 98% in Lund and 96% in Copenhagen, 92% occupancy rate as a whole, with a running yield of 6.7% and a total value of SEK 6.798 billion. And a catalog over value and properties in our four cities. 40% of the value is in Malmo, 22% in Helsingborg, 16% in Lund and 22% in Copenhagen. The value in Copenhagen is also an effect from a weaker Swedish krona. The labor market in our region continues to be strong. The level of unemployment continues down and domestic immigration to our region is positive. The niche employment continues to increase to record high levels since the first Corona shutdown 3 years ago, more than 250,000 new jobs have now been created in Denmark. At the same time, the weak Swedish krona means that [ Swedish krona's ] economy is supported by the increasing number of [ gains ] who come to Sweden side to shop and tourists. Unlike Sweden, the Danish economy is expected to continue to grow this year in both Sweden and Skane, unemployment continues to fall, even among group that tends to be further from the labor market. In Skane, the unemployment fell to 8.2% in April, and that is now the lowest number since 2009. The demand for new labor continues to be high in many industries, and we also see that passenger traffic at Kastrup Airport continues to increase, now largest airport in the Nordics again [ after Copenhagen ] and also other infrastructure investment increased massively in Denmark. The parties in the Danish Parliament have agreed to invest around EUR 22 billion in the country's infrastructure until 2035. And that is the largest in infrastructure plan ever and will, of course, obviously benefit our entire region. No acquisition during the quarter, but 4th of July, we acquired a property in Copenhagen on the same block as we already have properties, klædemålet fully let to a school and with a property value of DKK 71.5 million. And finally, time for financial. Over to you, Arvid.

Thank you very much, Ulrika. Looking at the income statement for the second quarter isolated. You can see that our rental income amounted to SEK 964 million, 20% up versus the same quarter year previously. Operating surplus was SEK 722 million, up 25%. And thereby, the operating surplus margin amounted to almost 75%, 74.9% in the quarter. Should bear in mind, however, that during the quarter, we have accounted for the state support for electricity costs in the way that operating costs have been decreased by SEK 20 million but at the same time, we've also decreased rental income by SEK 15 million since the largest portion of such costs we pass on to tenants. So the net effect of that state of electricity support is plus SEK 5 million in the quarter. Income from Property Management amounted to SEK 491 million up 2% despite interest costs in the quarter being 3x as high as in Q2 2022. Also here, you should bear in mind that included in the income from property management are a positive effect of SEK 20 million, which is an effect for its realized gain on the sale of a part of the property in one of our joint ventures. We have change in value of properties of minus SEK 59 million, and Ulrika has already touched upon the driving forces behind that. Small positive value change in our derivatives portfolio. And all in all, a profit for the period of SEK 370 million in the quarter. Looking at the balance sheet on the next slide. You could see that in a 12-month perspective, the value of our investment properties has gone up by SEK 4.9 billion. At the same time, equity has gone up by approximately SEK 0.5 billion, and our loans have increased by SEK 3.6 billion in a 12-month perspective. Taking those numbers, computing key figures. We have an equity asset ratio of 39.6%. And an LTV of 50.3%. Looking at the LTV, you can also note that the stronger Danish krone affects our LTV upwards by approximately 0.5 percentage points since we have basically as large loans in Danish krone as we have assets in Danish krone. The interest cover ratio for the 6-month period amounts to 3.2x. And EPRA NRV stands at SEK 90.41, which is 7% up this year previously adjusted for the dividend of SEK 3.1 paid out in May. Looking at the EPRA NRV in a historical perspective, you can see on this graph on Page 22. And since 2009, the annual average growth rate has been 16% adjusted for dividends. On this slide, you can see how the financial ratios have developed in a long-term perspective. We usually show this slide in a 5-year perspective. But we thought this time it's actually interesting, given that we -- the times are changing to also look at this in a slightly longer perspective. So the graphs actually go back to end of 2011. You can see how interest cover ratio on the left-hand side of the slide has gone down from above 7x to 3.7x on a rolling 12-month basis. Historically, this is not an unusual levels. We've been around 3x, as you can see, a number of years back in another interest rate environment that we have had over the past few years. But I think it's also worthwhile keeping in mind that if you go back to 2012, '13, '14, '15, our equity assets ratio was about 30%, and it's now around 40%, and our LTV was around 60% and is now around 50%. So we have a stable financial position going into these changing times as we see currently. On this slide, you can see our net debt in relation to EBITDA on a rolling 12-month basis. And as over the past couple of quarters, the ratio has come down and now stands at 10.6x. Looking at our financing situation. We have total debt of SEK 28.5 billion, 50% come from bilateral bank agreements with Nordic banks, 42% from the Danish mortgage loan system and 8% from the bond market. Looking at the next slide, you can see how our maturities come over the coming few years. The loan maturities of SEK 820 million in 2023 are bond loans falling due in Q3 and Q4, respectively. And given what's or how the bond market works currently, we expect to repay those bonds as they mature. And the average fixed interest period is now 2.5 years, and the average loan maturity is 6 years. Can see how the average interest rate has gone up, particularly in during 2023. And that is, of course, an effect of STIBOR and CIBOR continuing upwards, about 50 basis points during the quarter, but it's also, of course, an effect of interest rate swaps maturing. Those swaps were at very favorable rates and we have entered into new swaps at current market rates, which are significantly higher. On the next slide, you can see our interest rate sensitivity. In the graph on the left-hand side basically shows you that if STIBOR and CIBOR momentarily would increase by 2 percentage points, our average interest rates would momentarily move up by approximately 1.1 percentage points. And the interest cover ratio, of course, comes into increasing focus in today's environment. And looking at the situation as of end Q2 if the underlying interest rate if STIBOR increased by 2 percentage points the way our loan portfolio looks, we would still have an interest cover ratio above our target level of 2x or 2.0x. You can stretch that even to 5% increase in STIBOR momentarily, and our interest cover ratio would still be at 1.5x, which is the covenant that we have in our bank agreements. On the next slide, you can see how the fixed interest period and the loan maturities have developed over the past 5-year period. And I've basically touched upon those numbers before, 2.5 years fixed interest period and 6 years in average loan maturity. And lastly, on my slides looking at available funds, at the end of Q2, we had unutilized credit facilities plus liquid funds amounting to a bit over SEK 2.6 billion and with that, we feel that we stand on firm ground for continuing our operations according to plan. And with that, I hand back the word to you, Ulrika.

And I will shortly mention an update on our sustainability and then I will shorten the project part so that we can come to your questions as soon as possible. But first, an update. We continue with our certification program, adding new projects to this list. This is the certified properties this year. The forecast for the year is 80%, and our goal is that 90% of the Swedish offices will be certified until 2025. On the certification program, we are especially proud to be part of developing the new zero-carbon dioxide certification system. Here, we are one of the first to get a certification according to this system for ready building Pulpeten 5 in Hyllie. But now we also have a new pilot project in the same system with space in Lund for laboratory building. We also continue to develop the way we measure and we learn a lot. Very proud of really low levels of Scope 3 in [indiscernible] , approximately 230 kilograms per square meters in total. And one of the things that we have learned is that it's not possible to see on the outside of a building, if it's good or not so good. We have actually built that building with what you could describe as well-known and traditional technique. We have a steel structure, and we have concrete slabs and still that building will get a lower climate impact than a new modern wood building produced at a top level of what's possible. So that is good to know. You can't see on the outside what the overall product gives. We and the business must continue to learn and do even better on this case. We also continue with energy savings, another 3% reduction in energy consumption in Q2 and a part of that is continued investment in our own innovative reversible heat pump system that saves up to 40% on each building. Our largest problem with that system is what to call it. So we have decided just to call it [ yandesolution ] after the inventor, [indiscernible] . Another important part of sustainability and ESG is, of course, social commitments. In our report, we mentioned a few of them, and here we're mainly focused on how we can support young people to get an education or start new companies and how to stimulate growth in young companies. We do this together with, for example, HETCH in Helsingborg for [indiscernible] and together with the Region Council of Skane for Ideon Navigator Scaleup. And shortly mentioned on the investment. We have made some new groundbreaking ceremonies. And under the first half 2023, we have invested SEK 933 million. Construction cost continues to improve from our point of view, and that helps us to get our calculation together with an even higher yield requirement as we all are aware about. I go through these projects very short. It's good to know that we think that we can also fulfill our project Blackhornet at good construction cost levels. Completion in for the offices end of '25 and in total, at least 5.7% yield on cost. In Posthornet 1 space are under completion in Lund. You have seen this project before. Posthornet 1 , Phase 2. Here, we have maybe a bit of a delay as we see possibilities for new and even better procurement for the construction phase. So maybe completion a bit later than Q4 '25. We continue in Lund with Tomaten for Inpac. It will be completed Q2 '24. And Nederman in Helsingborg, Rausgård 21, everything works out well. So completion in Q3 '24. Huggjärnet 13, the first building is completed, and the tenants have started moving in, and we'll continue with that until Q1 '24 for the second building. And Plåtförädlingen 15, we invest for Spring Hill, a very quick project completion in Q4 '23 and we have completed a building for Snårskogen 5, and now we have started our project for [ Ralco ] at the same property. And the last one, ongoing Sunnanå 12:54 will be completed in Q1 '25. Some projects on ongoing portfolio, and we also continue, of course, with planning for future projects. Maybe I can mention something about Borchuset, it's our goal that, that would be the best possible office in [indiscernible] first tenant is signed, and we have really good discussions with several possible tenants for the rest of the building. So I hope that this project will be that we can take a decision on it in September and possible completion in Q3 '25. Good to know that we have a project ready to start both on the office side, but also for logistics. And we also have possibilities for fill-in project of different kinds. And we also continue in Hamnen. We have a lot of possible projects there. That would be the best area in Malmo in the future. And with summarize Q2 again, rental income up 20% and operating surplus up 25%. Higher financial costs balanced by increased earnings, positive net letting and stable balance sheet. So by that, we are open for questions. And sorry for the delay and some technical issues during this presentation.

[Operator Instructions] The next question comes from Stefan Andersson from Danske Bank.

Few short questions. Surplus ratio is up quite a lot, and you explained SEK 5 million there by the energy and net SEK 5 million on the subsidies on the energy side. Is there something else also supporting or should we -- could we take some of this with us when we look into the coming quarters as well?

If you look at the quarter isolated, you should, of course, also bear in mind that as of 1st of March, we outsourced the Danish canteen operations. Full year '22 numbers for the canteens was they produced an income of SEK 38 million and a loss of SEK 11 million. So of course, looking at Q2 isolated, that also makes a certain difference on the surface ratio.

Remember -- I don't remember what you said, but it continued the last time. Is there a cyclicality? Is there a bigger loss? Was there a bigger loss last year in Q3 during the summer there or.

No. My point is basically that during 2022, the Danish canteens operations were loss-making and they were loss-making all quarters.

And of course, energy cost for the rest of the year are quite hard to predict, but I think that we have them under control. Yes.

Absolutely. Then vacancies, I could be wrong here, but I think it's up a little bit Q-on-Q. I guess we talked about decimals here. That's more a mix effect than anything else, I guess, given your positive net letting.

Yes. If you look at the lease portfolio in the property table, the increase in vacancy is 0.25%, but expressed in whole figures, it moves from 94 to 93.

Yes. And then on valuations there, last question here. Have you seen any -- have you seen any transactions in the market at all? Or is it very slow? Or do you find support there as well? Or have you -- are you more have to work with adjustments there?

No large transaction on the Swedish side. On the Danish side, it's more stable also on the transaction side. So there is some support there. And we also see examples. Of course, we see examples on the Swedish side, maybe some force sellers that might affect something, but we also see examples of biddings above the value we have in our books. So I think that we think that the valuation are stable.

Okay. Good. Actually, one more final question. You signed some new leases here. And just curious to hear, even though I fully understand it's difficult for you to compare things here. But when you look at rents and the indexation, we had almost 11% last year and we're looking at [ by the 6% ] Now. Do you see that negotiations that you follow up with those levels?

Yes, and a bit above. As I mentioned, the highest level we have signed last quarter is at 3,600 in Malmo. And that was, of course, a good location and good offices and good quality, but still the events keep moving in a good direction.

The next question comes from Lars Norrby from SEB.