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

[Operator Instructions] Now I will hand the conference over to the speaker, CEO, Ulrika Hallengren, and CFO, Arvid Liepe. Please go ahead.

Thank you, and welcome to the presentation of Wihlborgs Q3 '23. For many years it was said that bumblebees technically could not fly, but they flew anyway. It is now known that bumblebees can fly despite their weight and small wings, thanks to extremely high intensity and a special technique in how they angle their wings. In the same way we can hear experienced people talk about a lot of things they say are impossible, we don't listen to that. Instead, we focus on what we can do every day and then we fly on. I would say that hard work is our intensity and our special technique is to be really close to our tenants. And exactly as the bumblebees, we stay close to the area we are familiar with, the Oresund region. We don't know better than anyone else, how long it will be windy or what the next storm will be like, but we are prepared, focused and ready for what may come. Strong cash flow continue to be our insurers. Financial costs continue up, but at the same time I think we have never had such large amount of new tenant offers under negotiation. I continue to see the light in the tunnel as something positive, and this opinion is based on our result and the activity in our market. Let's go to our report and the summary of Q3. Rental income up 19%, operating surplus up 22%. That means that we also continue to be more efficient in our operation. Higher financial cost but 12 months ICR at 3.2 (sic) [ 3.1 ]. Positive net letting, 34 quarters in a row and quite high level of signed leases for Q3 period. Stable balance sheet. Continued access to liquid funds and by that we can also continue with our investment. Result for the first 9 months '23, rental income increase by 19% to SEK 2.912 billion, operating surplus increased by 22% to SEK 2.104 billion, meaning that our focus on cash flow continues to work. And income from property management amounted to SEK 1.381 billion affected by higher financial costs. The result for the period amounts to SEK 323 million, which corresponds to SEK 1.05 per share. EPRA NRV is now SEK 89.07 per share, plus 3% compared with 1 year ago, adjusted for paid dividend. Lower property value of minus 1.5% affected these figures. A comparison of the rental income, first 9 months '22 and 9 months '23, acquisition plus SEK 119 million, currency effect plus SEK 47 million, indexation plus SEK 176 million. Supplementary billing increased by SEK 53 million and other increase from completed project, new leases and renegotiation plus SEK 91 million. The canteens in Denmark were outsourced from the 1st of March '23, and that gives lower income but also lower costs. We have signed new leases for the last quarter of SEK 62 million, SEK 260 million for the period. And the positive net letting for the quarter is SEK 15 million. High activity rather than the opposite, but we have to work for it and be really active and listen to our customers [Audio Gap] Q3 is a shorter active period due to vacant vacations and normally fewer possible deals. But as said, the activity have been quite high. And when I look ahead of us, many things look positive. There are many sectors with continued needs, defense industry, security, public tenants, education, accountants, lawyers, tech sector and life science are examples of sectors with higher needs. We will also see a few larger changes some years ahead of us SAAB leaving Malmo for Lund. And we expect Danske Bank to reduce in Hoje-Taastrup. But other needs will cover for this and we already have discussions ongoing regarding these areas even if we haven't seen determinations yet. High security and close to railway and good infrastructure are interesting factors for several future tenants. Here are some of our new tenants that we have signed during Q3. As usual, a mix of different segments, toys, defense industry, [ infrastructure competence ] and lawyers, for example. And here we have the net letting in the historical perspective, letting in light green, termination in light blue and dark blue stacks are the net letting. As mentioned, 34 positive quarters in a row and only 1 quarter with a negative number for over 14 years. We will do everything we can to continue like this. But, as always, let's keep in mind that a quarter is quite a short period. Here's the list of our 10 largest tenants in alphabetic order. All these tenants are strong customers and they contribute with 20% of our rental income. 7 out of 10 are governmental tenants. And the rental income from public tenants is 24% in total. They of course contribute to long-term stability in our cash flow. Rental value as of 1st of October, SEK 4.272 billion per year and rental income SEK 3.920 billion, plus 13.6%. A good part is of course indexation and acquisitions, but it's still a good signal of growth, growth both in volume but also in high quality that our tenants are willing to pay for. Let's point out that Sweden have the indexation is made once a year with October's CPI as base, but in Denmark the indexation is made all year round depending on when the lease was signed. That means that we now see in these figures that Denmark already has lower inflation, which is good, but that also contributes a bit less to higher rents. So looking at like-for-like figures, comparing all the properties we owned a year ago with updated figures, we can see that the rental value is up plus 9% and rental income is up 10.2%. That is strong, especially if we consider the lower indexation in Denmark. If we just look at offices in Sweden, rental income is up 12.4%. Occupancy for the whole portfolio is up 1%. Also a good number. Let's look at changes in market value of our properties. We started the year with SEK 55.179 billion, in accordance with our external valuation. We have acquisitions of SEK 134 million invested, SEK 1.298 billion, a small divestment, minus SEK 18 million. Changes in valuation amount to minus SEK 915 million. And together with currency translations of SEK 358 million, that's summarized to SEK 56.036 billion. As an extra assurance, we have this quarter done a total valuation of all our properties by external appraisers, 1 appraiser in Denmark and 1 appraiser in Sweden. And we will do that again at year end. We are confident that our valuation and our methods for that continues to be stable. We started to raise the valuation yield in Q2 last year, and that has continued bit by bit since then. The value of the portfolio has developed, as we can see on this slide, since 2005, without raising any new capital, and last year also, despite higher yield requirements. We have not built our portfolio on the assumption that money is for free. 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 on the following slides. These figures, the running yield show how we actually perform in relation to the valuation, so not the valuation yield. For the whole portfolio, the occupancy rate is 93%, excluding project and land, and with an operating surplus of SEK 2.993 billion, that gives a running yield of 5.6%. In a 12-month perspective, the running yield have grown from 5.1% to 5.6%. Fully let will give a running yield of 6.2%. Good earnings capacity in relation to the value of the portfolio. In the office portfolio, the market value is now SEK 46.475 billion, and overall the occupancy rate is 93%, 96% in Malmo, 91 in Helsingborg and Lund, and 94% in Copenhagen. This is improved numbers compared to year ago except from Lund where we have added 2 new projects, Raffinaderiet and [ Posthornet 1 ], which are not fully occupied yet. The operating surplus from offices summarized to SEK 2.536 billion and a running yield of 5.5%, brings stability and resilience when interest rates goes up. The demand for logistic and production continues to be good. Occupancy 96% in Malmo, 89% in Helsingborg, 98% in Lund, and 96% in Copenhagen. 92% occupancy rate as a whole with a running yield of 6.8% and a total value of SEK 6.696 billion. And this is a catalog of our value and properties in our 4 cities. 40% of the value in Malmo, 22% in Helsingborg and Copenhagen, and 16% in Lund. The labor market in our region continues to be strong even if unemployment in certain segments had increased slightly, and unemployment in Malmo is higher than in Sweden as a whole. Let's remember that this is low in historical perspective. Except from April this year, we have to go back to 2009 to find numbers like this. And it's still an untapped asset for the Danish markets, which has hardly any unemployment at all. Denmark continue its massive infrastructure investments, and I guess an awakening must come in Sweden soon. Denmark has chosen to take the entire investment of the Fehmarn Belt tunnel themselves, but they have included in the calculation that the Swedes will pay 40% of the investment thanks to tunnel fees. If Sweden doesn't start our investment in infrastructure on the Swedish side, we will pay much more than the tunnel fees for this new connection to Germany. The southern part of Sweden will benefit anyway. Acquisitions, as announced before, we have acquired a small property in Copenhagen on the same block as we already have properties, Klædemalet fully let to a school and with a property value of DKK 71.5 million. We have also divested Revolversvarven 11 in Malmo to [ Sun Bay Development ] for their further expansion. And time for financials. Over to you, Arvid.

Thank you very much, Ulrika. Looking at the income statement for the third quarter isolated, we had rental income of SEK 977 million, which is up 15% and actually a record figure for an individual quarter regarding rental income. Operating surplus amounted to SEK 715 million, up 20%, making out an operating surplus ratio of 73.2%, which is a good increase versus the 70% in Q3 2022. Income from Property Management amounted to SEK 433 million, minus 9%, driven by higher interest costs, as you can see in the table in the report. As Ulrika mentioned, we had external appraisers valuing 100% of our properties as of Q3, which resulted in a change in value of properties in the quarter of minus SEK 828 million. All in all, a profit for the period then after these negative value changes of minus SEK 302 million. Looking at the balance sheet on the next slide. You can see that investment properties in a 12-month perspective increased by SEK 1.5 billion to SEK 56 billion in market value. At the same time, equity decreased by SEK 0.3 billion, but that has of course been affected both by the negative value changes of the property values, but also of course of the paid dividend during Q2 this year. Borrowings stands at SEK 28.3 billion, up SEK 1.5 billion versus 12 months previously. On the next slide you could see the key ratios as of end September. The equity assets ratio stands at 39.4% and the LTV at 50.5%. For the 9-month period, the interest cover ratio is 3.0, which we feel is a good level given that STIBOR in 1.5 year has gone from 0% to 4% or just above 4%. EPRA NRV is SEK 89.07, up 3% adjusted for the paid dividend during the year. On the next slide you can see the historic development of EPRA NRV. And in the long-term perspective, since 2009, the annual growth has actually been 16% per year adjusted for dividends. The financial ratios already in the Q2 report, we took a slightly longer perspective on these graphs than we usually do, just to show basically the situation we came from during times when interest rates were not 0%, so to speak. So the interest cover ratio on a rolling 12-month basis, now 3.1 coming down from extremely strong levels of even above 7x. But in the longer-term perspective, an interest cover ratio of 3 is quite stable. And combined with equity assets ratio of about 40% and an LTV of about 50%, we feel we have a stable financial position to continue to build our business from. On the next slide, you see the historic development of the net debt in relation to EBITDA on a rolling 12-month basis. And that ratio continues to improve and now stands at 10.4x. On the next slide you can see the sources of financing for Wihlborgs as of end September. We have repaid SEK 470 million in bond loans during the quarter, reducing the proportion of bond financing to 7% of the total. So, we rely heavily on bilateral bank agreements and the Danish real mortgage system, as you can see on the slide. On the next slide you see the details of our loan portfolio. The average interest rate has gone up. And excluding cost for credit agreements, the average interest rate is now 3.92%, including cost for credit agreements it's 3.96%. You can see in the -- on the right-hand side of the slide, the SEK 350 million in bond maturities, which have actually now been repaid a couple of days ago. And we have additional bond maturities in the beginning of 2024, amounting to SEK 1.150 billion. The average fixed interest period now stands at 2.5 years and the average loan maturity of 5.8 years. During the quarter we have entered into a couple of new interest rate swaps basically following the methodology of our financial risk management policy. On the next slide you can see a description of the interest rate sensitivity. And in the graph you show what happens to our average interest rates if an immediate change of the market rates would occur. And I think it's important for us to conclude that an immediate increase -- with an immediate increase of the underlying interest rate of STIBOR, CIBOR of 2 percentage points. Our ICR would still be at our target level of 2.0x. And as we have mentioned several times before, our bank covenants state that the ICR is not allowed to go below 1.5x. And the same exercise shows that an underlying interest rate increase of 5 percentage points would bring us down to an interest cover ratio of 1.5x. So we feel that we have, despite the increase in STIBOR over the past 18 months, a reasonable stability on the financing side. On the next slide you see the historic development of the average fixed interest period as well as loan maturity. The loan maturity is very stable around 6 years. The fixed interest period was down at 2, but it's now up to 2.5 years, and I expect it to stay around that number going forward. Finally, on the next slide, you can see our available funds. That is unutilized credit facilities plus liquid funds and the historic development over the past 5, 6 years. We now have available funds of approximately SEK 2.5 billion, which we feel is a reasonable situation to be in to cope with coming investments and potentially repaying bond maturities if need be. So with that, I'd like to hand the word back to you, Ulrika.

Thank you. Let's talk about an update on sustainability. We continue with our certification program, adding on properties to this year's list of certified properties. The forecast for the year is 80%, and our goal is that 90% of Swedish offices will be certified until 2025. On the certification program, we are also proud to be a part of developing the new Zero CO2 certification system, NollCO2. After 2 successful large projects in that system, we continue to add on NollCO2 to all new projects where possible. Let's all remember that when it comes to climate impact, you can see on the outside if it's a good or bad choice. Even if you see materials that you know are good materials, that does not mean that the overall product gives the best results. We and the industry must continue to develop calculation methods and improve together. We also continue with energy savings, another 13% reduction on energy consumption for the first 9 months. A part of that is solar cells with -- which during Q3 contributed to 5% of the total consumption. In general, Danish building have a bit less advanced technology than a modern Swedish building. The tenants also have a somewhat greater acceptance for slightly larger temperature variations, and that's good for the climate. But improvements are needed. Here is an example of an energy-saving project at Mileparken in Copenhagen, where we saved a lot of energy through more efficient control. I'm sure that some of you can relate to the '80s and the '90s when the Internet was born or at least grew to something well known. Internet is information in small packages that can be distributed in different ways. In this Alpha project in Lund, our building is first out to try a new technology for how to distribute and control electrons or electricity instead of information. One building can produce energy and other can store it and the third one can be the consumer, finding a way to control these needs and constructing a business model for this by creating a protocol for electrons EP is Jonas Birgersson. This can create smaller micro grids and relieve the larger grids which have capacity problems today. Since it's a simple installation compared to expanding the large networks, the idea is easy to scale up. Very interesting to see what happens with this opportunity. Important, ESG work consists of many things. A few weeks ago we got our result of measuring the satisfaction of our employees, and we break all-time high. Happy people at Wihlborgs proud of the impact we create in our region. So when we are happy, we can take care of our customers in the best possible way. So a great place to work matters in business. Let's go through our investments in progress. First 9 months we have invested SEK 1.298 billion, and it remains SEK 2.192 billion in approved projects. Construction cost continues to improve. Both we and our suppliers need to be on top so that we can get our calculations to work with higher yield requirements. A quick review of some of our projects, the largest ongoing is Blackhornet 1 in Hyllie, and it follows the schedule well. The structure of 2 floors underground is completed. First, we will build 5 floors, mobility hub, and the next step is the office and restaurant above that. We have offers and ongoing discussions with tenants for almost 50% of all offices, and that is a good number this early in the project. Estimated completion for the mobility hub is Q4 '24 and for the office is Q4 '25. In Lund, our Science Village, our project, Space, is under completion. Oatly, the first tenant have moved in now in October. We invest SEK 244 million with completion in this quarter. And now it's also clear that we get the first Zero CO2 certification for a laboratory for this building. Posthornet 1, Phase 2, a new built office of 9,900 square meters right beside the central station in Lund, investment of SEK 448 million, and completion is planned to Q4 '25, but that might be a bit later as we see possibilities for better procurement for the construction phase. That procurement is ongoing as well as offers to new tenants. At Tomaten 1 we built a facility for Impac, 6,400 square meters in the first phase, and we invest SEK 107 million, including buying the land from the municipality. Yield comes to approximately 6.5%. Completion in Q2 '24. And if you're interested in Zero CO2 and new materials, I suggest that you look out for some news around the 8th of November. [indiscernible] and with a 20 years' lease, we are working with a project of 25,000 square meters at Rausgard 21 in Helsingborg, investment SEK 420 million and completion Q3 '24. A long-term investment, and we had a visit at site, together with Nederman's group management a few weeks ago, and they really have a fantastic working environment to look forward to. At Platforadlingen 15 we invest SEK 141 million for Springhill and have room for one more tenant. So 75% pre-let, a short production time with completion now in Q4 '23. And we have started our project for Rollco at Snasrskogen 5, 3,600 square meters, investment SEK 78 million and completion in Q3 '24. The last one in this presentation, Sunnana 12:54, 107 pre-let, 17,000 square meter logistics and completion is planned to Q2 '25. That was some of the ongoing portfolio. Let's also mention something about future investment. Close to next decision, I hope, is Borshuset. We expect building commission the 14th of November. And after that, we can take action both on the last step in the ongoing procurement and continue our discussions with the tenant. We expect a new level of top rent in Malmo for this unique project. We have signed an agreement with the University of Malmo after Public Procurement Act to create a project together at Amphitrite here in Malmo. Size and the sign is to be decided, as well as [indiscernible] plan. First out is a kind of architectural competition together with the municipality. A lease might be ready for signing during 2025 if everything works out well. One of the best places to be in Malmo, so we're happy to get the opportunity to work together with the university again. Here are 4 possible projects in Lund and Helsingborg [indiscernible] Science Village area, Ideontorget, just beside the tram station, Polisen 7 offices in the city center of Helsingborg and Vasterbro in Lund. Here we can develop some 70,000 square meters in the future. Zoning plans are approved for the first 3 projects. And some office possibilities in Malmo in the area of Nyhamnen and Dockan, a combination of ongoing zoning plans. And Naboland is -- have approved zoning plan. And a few other possible projects from the industrial and logistics segment, Tomaten 1, additional 2,500 square meters beside the facility for Impac. Bilrutan 5 in Landskrona. And we have more land in Landskrona, close to Bilrutan where we continue further industrial and logistic project at Orja and Pedalen. And Sunnana we can make room for additional approximately 4,000 square meters here. And here are some examples of what we can call fill-in project on existing land. But when demand increases, we can add on value. So let's summarize Q3 '23 once again, rental income up 19%, operating surplus up 22%, higher financial costs but 12 month ICR at 3.1. Positive net letting, stable balance sheet, continued access to liquid funds, and by that, we can also continue with our investments. And with that, we are open for questions.

[Operator Instructions] The next question comes from Stefan Andersson from Danske Bank A/S [indiscernible].

A couple of questions from me. Maybe I'll start with what I could interpret as a little bit of a guidance on net letting. I got the impression that you expect a little bit of challenging -- more challenging discussions out there. Are you then talking about Q4 specifically or more into 2024?

Sorry, if I wasn't clear about that. I think that we see a good number of new tenants and good leases ahead of us, but also be aware of that a few years ahead we have the larger leases that we have to find solutions for. And as I mentioned, both in Q3 -- Q2 and now in Q3, for example, we know that SAAB will leave Malmo and moving to Lund, a good thing for Lund. And we already have discussions with another tenant, highly interested of a security building. So you have to be aware of what's in a few years ahead of us as well. But I see good potential also for Q4 and for 2024 and so.

Okay. And then a question on rent increases. [ Farbigge ] reported a couple of days ago, and they were relatively clear saying it's becoming more and more challenging to get the index through into the system on spot rents. You have a different situation in the southern part of Sweden versus Stockholm of course with rent levels. So I'm just a little bit curious if we get 6%, 7% here now, do you think the market will follow through on that level? Or will you see challenging challenges there?

I think that follow -- the indexation will pass through. You mentioned we have lower rents in the south part of Sweden, and we often talk about rent levels in correlation to building costs, and we still haven't really coped to keep up the higher cost on the building cost side. So I think the indexation for this year will follow through in a good way. But that is very important of course for the country and for the economy as a whole that we get control over the inflation.

Yes. And then on the surplus ratio, you've done -- you had some headwind up into Q1, I think, on year-on-year comparisons. And then it's been very strong year now for 2 quarters. And I guess energy cost is part of that. Looking at Q4, do you think that maybe the historical pattern before '22 is more relevant when it comes to surplus ratios as energy costs are coming down? Or is it something -- have you done something else that we should be aware about?

I think energy costs of course in a sense a bit tricky to predict because they depend on the weather, and they also, to some extent, depend on spot electricity prices. What you can bear in mind, if you compare to 2022 is of course that we outsourced the Danish canteen operations as of 1st of March this year. They were basically loss-making, thereby deteriorating the surplus ratio. So that is of course one explanation to Q3 this year looking better than Q3 last year.

And when it comes to energy costs, how much have you locked in already?

When it comes to -- I mean energy is different things. If you look at district heating, those prices are normally negotiated on a yearly basis. And we had some price increases for 2023 versus 2022, but not major price increases. When it comes to electricity, there is of course the possibility to hedge electricity costs. And our policy for managing that price risk is that as of October in any given year, approximately 85% of the expected volumes for the coming year should be hedged and approximately 35% to 40% of the expected volumes for the subsequent year after that. And what we want to achieve is of course to even out the electricity costs and reduce the volatility. The hedged price in 2023 has been on a significantly higher level than during 2022. But at the same time, if you make the comparison between Q3 '23 and Q3 '22, you should remember that in Q3 '22, we had extremely high electricity costs due to high consumption and extremely high spot prices. So there are different angles to try to answer the question regarding energy costs, but I hope I gave you some valuable inputs.

Yes, perfect. And then the final one for now at least. Borshuset, very interesting of course and you're very hopeful on rents there. Is it so that you already now have parties that are interested in that as tenants in that building? Or is it more relating to the location and what you hope for it? No. We have one signed lease and definitely high interest on the rest of the product there.

The next question comes from Lars Norrby from SEB.

A couple of questions on valuation. Note that you made 100% external valuations now in the third quarter. Is this a permanent change of your policy, which as I understand is 100% external only at year-end? Or is it a one-off exception just to take into account the uncertainty we have now regarding valuations?

I would say the last one. We haven't decided to do this every quarter. We will do it in year-end as usually. And as soon as we have decided how we will act during 2024, I will let you know.

Very good. And then just a detail. Maybe you already mentioned this, but nevertheless, what kind of inflation assumptions do you have in your valuation? I'm thinking about the CPI for -- in October this year and then going into the following year.

The inflation is approximately 6% in this valuation, but also worth mentioning that they haven't calculated that market rent will follow through the way that we expect them to do actually. So I think they have calculated market rent up 4%.

And going into the following year, what kind of inflation expectations do you have in your valuations?

Let me see.

Hang on a sec. 2024, 3%, and thereafter 2%.

The next question comes from John Vuong from Kempen.

Maybe coming in on to Denmark. With inflation and therefore indexation in Denmark coming down substantially, what are you seeing in when renegotiating leases? And are you still experiencing market rental growth? And maybe as a follow-up on that, how is [indiscernible] developing for your portfolio there?

The rents continue slightly up in Denmark. But as you mentioned, according to lower inflation, we don't expect them to rise quickly in any way. The situation is stable and same thing and trends that we see in Sweden that tenants are interested in good quality and ready to pay for that. And sorry, the next question was -- could you repeat the second question you had, please.

I'm not sure if it was renegotiation levels of rents possibly.