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

[Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Thank you, and welcome to this presentation of Wihlborgs' first half report 2024. Curiosity, knowledge and grit, important factors for sustainable business. I'm very proud being a part of Wihlborgs and that our strategy for long-term stability and growth seems to work. We change a bit every day, trying to avoid drama, planning a long time ahead to be prepared also when changes come, and most of all, we really love our core business. To be there for our tenants, knowing our products really well, improving techniques and finding new and more efficient solution along the way, and also important, working in close relation with our municipalities to contribute and improve the cities. That is why we call as a relation and region builder. Let's go to our report, and we start with a summary of Q2. A new record in operating surplus for 1 quarter, SEK 764 million, since focusing on cash flow and cost control in operation. This has a meaning for us. Net letting, positive at quite high numbers. The demand for good quality and good location continues, higher financing costs an ECR at 2.5x and a project volume gains a good potential for growth. Results for the first half '24, rental income increased by 7% to SEK 2.072 billion. and rents increased more since service costs decreased. The operating surplus increased by 7% to SEK 1.482 billion and income from property management amounted to SEK 804 million affected by higher financial costs. The result for the period amounts to SEK 688 million corresponding to SEK 2.27 per share, and EPRA NAV has increased by 2%, a SEK 88.72 per share adjusted for paid dividend. A comparison of the rental income first half '22 -- '23 and first half '24. Indexation, plus SEK 88 million; one-off from Q1, SEK 20 million; acquisition, plus SEK 6 million; property tax has increased in Denmark and gives extra income of SEK 5 million; currency effect, plus SEK 3 million; supplemental billing and income from canteens decreased by SEK 12 million; and completed projects, new leases and renegotiations, plus SEK 27 million. We have signed new leases for the last quarter of SEK 94 million, SEK 270 million in the period. The positive net letting for the quarter is SEK 21 million and SEK 50 million for the period. The high activity continues in all our 4 cities, and I'm very grateful to the whole organization that work hard, listen to our customers and find really good solutions. Also last quarter, we have succeeded to switch tenants in the same area, almost from one day to the next. But even if we always have discussion, this is not the normal procedure. We have just started July, but I feel positive also for the fall. Some of our new tenants that we have signed during Q2 on this side. And as always, a widespread of many tenants in many sectors contribute to a growing market. Here, we have schools, consultants, logistics, tech companies and the governmental sector represented. Here we have the net letting in a historical perspective, letting in light green, terminations in light blue and dark blue stacks are the net letting. Now 37 positive quarters in a row, and even if we don't hit new records in volume, the net letting of SEK 21 million is a good level. No promises ahead, but we do everything we can every single day to continue. We love our core operation, and this is the heart of the core. And the list of our 10 largest tenants in alphabetic order, strong customers, and they contribute with 20% of rental income. 7 out of 10 are governmental tenants. The rental income from public tenants is in total 23%, and they contribute to long-term stability in our cash flow. Rental value as of 1st of July is SEK 4.490 billion per year and rental income, SEK 4.102 billion, plus 5%. And A good part is, of course, indexation. And let's remember that indexation in Denmark and Sweden have been quite different during '23, approximately 1% in Denmark and 6.5% in Sweden. In Sweden, the indexation is made once a year with October CPI as a base. But in Denmark, the indexation is made all year round depending on when the lease was signed. So low inflation in Denmark affect these figures. Looking at like-for-like figures comparing the properties we owned a year ago with updated figures. We can see that the rental value is up 6% and rental income is up 5.3%. If we just look at offices in Sweden, rental value is up 6.7% in like-for-like. Let's look at changes in the market value of our properties. We started the year with SEK 55,872 million in accordance with our 100% external valuation. Acquisition adds on SEK 201 million; investments, SEK 1.040 billion; divestment, minus SEK 4 million; changes in valuation, minus SEK 31 million. And together with currency translation of SEK 107 million, that's summarized to SEK 57.159 billion. The value of the portfolio has developed, as you can see on this slide, since 2005, without raising any new equity with investments, new leases and a few transactions we have also during the last years with rapidly higher yield requirements, being able to increase the value somewhat. Valuation is interesting, but most of all, it's interesting to measure how we actually perform in relation to these values. These figures, the running yields, show how we actually perform. So this is not the valuation yield. For the whole portfolio, the occupancy rate is 93%, excluding project [indiscernible] and with an operating surplus of SEK 3.91 billion, that gives a running yield of 5.7%. Fully let, the portfolio would give a running yield of 6.3%. Good earnings capacity in relation to the value of the portfolio. In the office portfolio, the market value now is SEK 46.5 billion and overall the occupancy rate is 93%. 96% in Malmo, high level; 91% in Helsingborg and 92% in Copenhagen. When we add new projects to the market or buy vacancy, that can affect the figures downwards a bit but we have kept the numbers at good levels despite that. In the best days, we can improve it, except in Malmo, but we see positive changes over time, not at least in loans where the improvement has been ongoing for some years. The operating surplus from offices summarized to SEK 2.6 billion and a running yield of 5.6%, 6.1% fully let. This brings stability and resilience. The demand for logistics and production continues to be good. The occupancy 94% in Malmö; 85% in Helsingborg, a bit lower, mainly according to changes between tenants; 98% in Lund and 97% in Copenhagen. 90% occupancy rate as a whole with a running yield of 6.7%, 7.6% fully let. A total value of SEK 7.371 billion. High flexibility and changes at a faster pace is especially important for logistics in the segment. Production seems to be more persistent and focused on high quality. Development, our total portfolio running yield 5.7%, brings stability, not at least since the portfolio overall have a high quality and good locations, but a quick increase of the running yield since 2021. ESG performance at this slide, we continue with our certification program. Now 85% of the Swedish office portfolio is approved. Energy savings are also highest interest, and we continue to improve here as well. The carbon dioxide figures are at low levels for Scope 1 and 2, but affected by a breakdown in the cooling machine at one of our district cooling suppliers. This proves how important it is that we continue to influence their production methods as well. Other sustainability actions, I would like to point out is Blackhornet 1, first in Sweden with a new [indiscernible] for Miljöbyggnad 4.0, which also includes parameters in line with the EU taxonomy. And we have Level Gold here. We start our first larger battery storage in Lund, a way to also contribute to balancing the electric supply system. We have new requirements for procurement of solar cells, which includes demands for people and production methods. Will give us some headache for some time, I guess, but the only way to go. Continue our work with climate adoption, especially heavy rain and raising water levels, now also with a more scientific method. And our [indiscernible] in everywhere we can, saving a lot of energy. Lately, we have also found methods together with our energy suppliers to improve the business model for this. And this will improve the economic numbers further. A catalog of our value and properties in our 4 cities: 40% of the value in Malmö, 22% in Helsinborg; 16% in Lund and 22% in Copenhagen. Last time, I mentioned the massive ongoing infrastructure investment in Denmark and the construction of the [indiscernible], which are ongoing. And this time, I would like to comment a bit on how the commuting possibilities in the Swedish part of the Öresund region contribute to making it easier for people to actually meet easier to get to work, easier to choose where to live and still have several interesting job possibilities close by. The wide connected areas in this picture show how far you can live from city center and commute in less than 30 minutes. All our 4 cities are connected in this pattern, and I'm totally convinced that this increases the attractiveness of actually working at work. Together with your colleagues and on the next level, I'm totally convinced that this affects the productivity, interaction and innovation in companies and also in the region. It's fun to work together, but it must be reasonable, easy to meet. And time for financials. Over to you, Arvid.

Yes. Thank you very much, Ulrika, and good morning, everyone. We can see that rental income increased by 7% to SEK 1.032 billion, and operating surplus increased by 6% to SEK 764 million, and as Ulrika mentioned, that is actually a record number for an individual quarter when it comes to operating surplus. Income from property management amounted to SEK 460 million, which is minus 6%, affected by higher financing costs, and we'll get back to that in a few slides. With small positive value changes in -- regarding our properties in the quarter, plus SEK 28 million, valuation yields are basically flat. And then we'll see what happens with valuation yields going forward. And it is, of course, interesting to watch what central banks will do to the rates during the second half of the year and how that may affect valuation yields. We had a profit for the period amounting to SEK 350 million. Looking at the balance sheet. Investment properties versus 12 months previously increased in value by SEK 0.5 billion to SEK 57.2 billion. Equity decreased by approximately SEK 1 billion. And then you shall, of course, remember that we paid approximately SEK 1 billion in dividends during Q2. And then the same time perspective, our borrowings increased by SEK 1.1 billion. Translating that into key ratios, you can see the equity ratio now stands at 37.6% and the LTV at 51.8%. The LTV has, of course, been affected by the dividend payment, and that affects -- corresponds to basically 1 point or approximately 1.7 percentage points on the LTV number, can be worthwhile keeping in mind. The interest cover ratio multiple is now 2.5x. The EPRA NRV, as Ulrika mentioned, increased 2% versus 12 months previously, adjusted for dividends and now stands at SEK 88.74. On the next slide, you can see the historic development of EPRA NRV. And since 2009, we still have an average annual growth rate of 15% in this number adjusted for dividends, of course. The historic development of our financial ratios is visible on this slide. Equity assets ratio at 38%, the LTV at 52% and interest cover ratio at 2.5. And we also, on the next slide have a financial metric we've been talking about for several years now, which we feel is relevant for showing our financial stability. Net debt in relation to EBITDA stands at 10.2x, which is the same as last quarter. And as you can see on the graph, actually a slight improvement over the past couple of years, which I think is positive given what the world has looked like in that period of time. Looking at our financing, we still have approximately half of our financing from bilateral bank agreements with the Nordic banks. Approximately 40% of the financing from the Danish [indiscernible] mortgage system and now 10% from the bond market. As you are aware, the bond market has improved significantly over the past 6 to 9 months. We issued a bond a few weeks back, a 3.25-year bond with a margin of 123 basis points. And that's, of course, a huge improvement over a 9-month period and quite competitive now versus secured bank financing. Bank financing has also improved over the past 6 to 9 months. And looking at the next slide, you can see the details of our loan portfolio. The average interest rate, excluding costs for credit facilities is 4.05. That is slightly up during the quarter or versus a quarter ago. We've had an effect of lower STIBOR, which has affected this number by approximately minus 10 basis points. At the same time, we've had interest rate swaps at very attractive levels expiring, which has affected this number upwards by approximately 10 basis points. And we've also had an upward effect partly from increased debt, but also renegotiated bank agreements which have slightly higher margin than the previous agreements had. And to put that into perspective, you can say that the agreements we have renegotiated the last time we had those contracts or bank facilities was approximately 3 years ago. So the world looked slightly different at that point in time. Going forward, you can bear in mind that we still have some advantageous interest rate swaps which will expire, as you can see in the table in our report. We have, of course, expectations of further central bank rate cuts during the second half, which will improve the situation. And you can also bear in mind that you have some new regulatory changes regarding capital requirements in the Danish [indiscernible] mortgage system, which may affect those margins slightly upwards. Looking at interest rates sensitivity. You have the graph showing that on this slide. And the conclusion from the slide is basically that the underlying interest rate STIBOR/CIBOR, can increase by 1.5 percentage points, and we would still be at an interest cover ratio of 2x, which is our stated targets. The underlying rate could actually increase as much as 5 percentage points, and we would still meet our bank covenants of 1.5x interest cover ratio. The fixed interest period and the loan maturity on the next slide. Fixed interest period now stands at 2.5 years and the loan maturity at 5.9 years. And last of the financial slides, we track our available funds, that is unutilized credit facilities plus liquid funds, which at the end of June stands at SEK 2.8 billion. And with that, I hand the word back to you, Ulrika.

Thank you. Acquisition and transaction. The transaction market is there and possibilities arise, but no reason for us to get wild. When the right opportunity is there, we can act. And during Q2, we have acquired land for our project Caldic at Galoppen, and we have also acquired this property, Värdshuset 2 in Malmö, not the largest ever seen, but a good possibility for us, almost 4,000 square meters at best location in Hyllie, actually on top of the train station. Property value, SEK 180.5 million, and it includes some vacancy and a very poor energy classification. Here, we know that we can add knowledge and improve value by that. And an update on our investment in progress and a quick overview of our largest projects. During the first half of the year, we have invested SEK 1.040 billion, and it remains SEK 3.130 billion to invest in improved projects. We have quite quickly been able to improve yield on costs in our projects and adjusting to higher yield requirements, and the volume that we have been able to continue with the last year gives a solid foundation for our growth. This is the kind of possibilities that stabilities and good cash flow gives. We got the opportunity to buy land from the Municipality of Malmo at Galoppen, and here we will build a facility for Caldic, approximately 10,00 square meters production, logistics and office. Total investment, SEK 264 million and completion in Q3 '25, and yield on cost 7%. Another new project is Kranen 4, a rising star in our portfolio, showing possibilities in the most unexpected places, almost down for the count in an area waiting for a new zoning plan. And the most likely thing was that these premises would be demolished. Instead, we will be able to transform the building for the police education of Malmo University. We invest SEK 106 million, 10 years lease and yield on cost of 11%. Completion in Q3 '25. Börshuset 1 in Malmö is also under transformation but at another level. We knew this was good when we started. An iconic building right beside the train station, 6,000 square meters offices, restaurants and co-working at absolute top rents in Malmö's perspective. Approximately 60% pre-let and completion in Q4 '25. Our largest ongoing project is Bläckhornet 1 in Hyllie, the one I mentioned with the Miljöbyggnad 4 certification. It follows the schedule well, first completion of the mobility hub later this year and for the office completion starts in Q4 '25, Yield on cost, 6.2%. Posthornet 1, Phase 2, a new build office at 10,100 square meters in the center -- right beside the center station in Lund. Investment of SEK 448 million includes the value of the land, SEK 374 million excluding land. Completion with start Q1 '26 and yield on cost 6.5%, Ongoing discussion for at least 5,000 square meters. In Öresund, Copenhagen, we invest for a new school for NTT, 25 years' lease, 11,600 square meters and investment, SEK 390 million. The building process has started well and completion is expected to end '25. The facility from the [indiscernible] 20-year lease [indiscernible] in Helsinborg will be completed in Q3 this year. Investment, SEK 420 million or SEK 370 million excluding cost for land. And also, that includes a new shelter and a considerable amount of environmental decontamination. We also continue our project Rausgård in Helsingborg with a yield on cost of 7.1%. At Sunnanå 12:54, we build 17,000 square meters logistic, 100% pre-let at 15 years lease with completion in Q3 '25. Yield on cost, 6.4%. And Bilrutan 5 included in our Helsingborg portfolio, here we will complete a facility for [indiscernible] later this year at an efficient time schedule with a 15 years lease and the yield on cost, including value of the land is 6.7%. Here, we can add on some extra volume to increase the value further. That was some of the ongoing portfolio, and let's also mention something about future investments. [indiscernible] in Malmö, where we have signed an agreement with the University of Malmo after a public procurement act to create a project together, approximately 15,000 square meters. Now the architectural competition is completed and we can continue with the zoning plan. Time schedule indicates a possible project completion in Q2 '27, but it's a bit early to say. Four possible projects in Lund and Helsingborg. 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 Malmö in the area of Nyhamnen and Dockan continues to have high attention from us, not any new pictures on this side, but actually, there are things going on at Hamnen and [indiscernible]. Promises or action from the municipality, time will tell. And our summary again. A new record in operating surplus for one quarter, SEK 764 million. Net letting positive at quite high numbers, demand for good quality in good location continues, higher financing costs but ECR at 2.5x and our project volume gives a good potential for growth. And with that, we are open for questions.

[Operator Instructions] The next question comes from John Vuong from Van Lanschot Kempen.

I'm just looking at the net letting chart. Both new leases and terminations screen much more normalized compared to the outliers we saw the past 2 quarters. Are we back to a more normal operating environment? Or is it still possible we could still see large numbers going either way in the coming quarters?

I think it's hard to say what normal is, of course, as usual. I think that we will continue to see new demands, and we think that is a good thing. We don't see any drama in this. And I think that we have -- most of all, it's important for us that we know that we have the organization that can handle both high numbers and more of a -- what we saw back in the days, a normal level. I know that we have started Q3 very well. So it's hard to say what a new normal level is, but I don't see any drama going on today.

Okay. That's fair. And just on the battery storage investments, Is this a test pilot that you're doing in Lund? Or could -- do you see scope to roll this out in more projects? And could you perhaps talk about the economics of this battery storage?

We have 2 projects ongoing on the battery storage. We think it's -- I mean, the business model is working well. Of course, hard to predict how many years will you get this economical upside. So we kind of calculate that in a quite shorter time perspective. I think it's both a good -- I mean, depending on the situation, after 10 years or so. But I think it's a good business opportunity. But most of all, it's also a contribution to balance the electric system. So it's a bit of both. Especially on premises where we have solar cells, I think it's a good combination in that.

Okay. And then just by the sounds of it, you could do this, more projects that you're also placing solar cells on in the future?

Exactly. That's the best combination, when we have larger solar cells panels. And so we both have the production side and the storage side at the same property.

The next question comes from Lars Norrby from SEB.

My question, you showed an interesting chart, the one about commuting time. So just let me ask you, linked to that one, thinking about office properties. And we've seen cases of -- several cases of companies and entities downsizing office space per employee at least in Stockholm. So let me ask you, in the areas that you operate, what's your picture on that? Do you see examples of that? And if so, is that related to remote working? Or what's the reason?

We see examples of both, I would say. So we have mentioned examples before, especially for larger international companies that's making the decision elsewhere that they have decided to decrease number of square meters per employee. But we also see examples of growth, of course. And I think I mentioned this before, but the latest trend is that we don't focus on downsizing the areas. It's more of a quality you need and adding on actually areas for more focused work, more single rooms, more -- I mean, you need some space for people to feel really comfortable. So it's more about how can we perform the best workplace for our employees since it's still a struggle about finding the best competence and the best employees. That's the main driver, I would say. So high quality, good location. Of course, you try to be efficient, but you have to add on also areas for more focused work where you need some space actually. So we see a bit of both.

Okay. And just hanging on to, say, demand in the market. Obviously, you're reporting once again good, I would say, net letting numbers. At the same time, I think you point out that the economic conditions are -- have remained weak. And let me ask, is it still the case that negotiations, if anything, take time? Are we still in that mode? Or is there any kind of change in either direction?

I think things takes longer time today than I did several years back. But it's also something good with that because you work more with the product, and it's really high focus on our product actually. So our tenants want to be sure that they make the right decisions. I think that also affects the quality of the product, and the best thing for us is that they are very satisfied when they move to us. And yes, patience is always a tricky one, of course. But yes, maybe things take a bit of a longer time today. You are more into processes also. You need all kind of decisions, and many international companies have a long list of process that they have to go through before they can make the final decision. So that's a part of it. But it's worth mentioning that we have a wide sector of many different businesses in our region. And I think that is the main reason why we can work well with our letting.

Final question from my side regarding growth, Q2 growth. Obviously, CPI indexation in Sweden has propelled your revenues quite a lot over the past 3 years or so. And now it seems like CPI is slowing down, obviously. So you will not get that effect to the same extent going forward probably. But then there is project development and then there's acquisitions, 2 potential avenues of growth. We've seen, I think you made some acquisitions during the year, a couple of acquisitions. Will that only be a small part of your future growth? Or will it very much be down to product development?

Depending on what comes up. Our own projects, we can use where and when and the quality and how flexible we make it. So that is the best product for us. But when we find the right opportunities also for acquisition, that could be a good part for growth. But it has to be the right product and the right location. And the example now from Q2 when we bought Värdshuset in Malmö, that's a good example. No one can doubt that the location is right. It was the good product with another kind of product than the other one we have in the area. But most of all, we can contribute and improve the building. So today, it's a lot of vacancy and the energy consumption is in the sky. And we know that we can fix that. So that kind of acquisition is perfect for us. But I'd like to think that we also ahead of us will have a combination. But our own portfolio is, of course, very important. We can't run that on our own. The acquisition is more from time to time. We don't -- are the only ones that make a decision on that side.

The next question comes from Eleanor Frew from Barclays.

Just one question from me. So thinking about your average cost of debt given the various impacts that you described in the presentation, Arvid, do you have a sense of where and when your average interest rate will peak?