Wallenstam AB
STO:WALL B
Earnings Call Analysis
Q4-2023 Analysis
Wallenstam AB
Wallenstam's CFO, Susann Linde, began the presentation emphasizing a year marked by high inflation, interest rate hikes, and geopolitical turbulence. Despite these challenges, Wallenstam's financial strength and property attractiveness have been highlighted as sustaining features against such a backdrop. Amidst the turmoil, the company managed to repurchase 1.5 million of its own shares, totaling 3 million shares, and vacated properties in New York and Uppsala as strategic divestitures.
The Board of Wallenstam proposed a SEK 50 per share dividend, split into two payments, with the introduction of Erik Klang to the group as a business strategist from 2024. This decision is timely, considering potential future transactions and strategic shifts in the evolving economic landscape.
Wallenstam owns 208 properties covering 1.4 million square meters valued at SEK 63 billion, with residential making up 55% of the portfolio and maintaining a high occupancy rate of 97%. The company also reported having 1,081 apartments under construction, acknowledging the appeal of their property locations in Stockholm, Uppsala, and Gothenburg.
The net operating income (NOI) increased by 6%, or 10% when excluding the impact of high energy prices, rising to SEK 2 billion for the year. This increment owes much to the SEK 240 million boost in rental income, primarily from newly constructed or completed projects, alongside SEK 151 million from comparable holdings. Counteracting these gains, the company faced SEK 128 million in increased operating expenses due to higher energy costs, property maintenance, taxes, and inflation.
Wallenstam experienced strong leasing activity in Gothenburg's central business district, leading to a 95% occupancy rate there, though Stockholm lagged with 71%. Administrative expenses climbed by SEK 21 million due to nonrecurring costs and changes in organizational structure, while the average interest rate spiked to 3.24%, driving financial expenses up by SEK 300 million. The company also strategically extended its interest rate derivatives maturities to manage future interest rate risks.
Wallenstam faced a SEK 850 million downward revaluation in investment properties, with direct yield requirements rising between 10 to 30 basis points for residential properties and 10 for commercial, influenced by higher NOI, property sales, and completions. An illustrative graph provided historical context for these valuation shifts in relation to interest rates.
On the balance sheet, the company recorded SEK 63 billion in investment properties, with SEK 2.4 billion invested in construction projects, maintaining the same level as the previous year. It was further reported that the company executing well on its financing strategy, which is predominantly reliant on bank loans, and a negligible portion of commercial papers and bonds.
Key ratios reflected a slight dip in the surplus ratio to 73.3% due to energy prices, with an interest cover ratio (ICR) at 2.6 times and both the loan-to-value (LTV) and equity ratios stable at 46%. The equity per share was at SEK 46.4, and the net asset value per share at SEK 56.2, with a declared target of SEK 100 by 2030.
Summarizing 2023, Wallenstam invested SEK 2.4 billion in construction, completed 837 apartments, installed solar cells equivalent to a wind turbine, sold properties worth SEK 500 million, and signed new commercial agreements, suggesting resilience and adaptability in a year fraught with challenges. The company looks forward to 2024 with optimism.
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Hello and welcome to this presentation of the fourth quarter of 2023. My name is Susann Linde, I'm CFO and Head of Investor Relations here at Wallenstam. Yes, it has been here with high inflation and increased interest rate and war, and so many turbulent things. But now the inflation starts to go down and maybe soon even the interest rate. But even in those times, we, as a company, stand strong, both financially and have attractive properties. That's why we have this headline: Financially strong with attractive properties, to our report. Well, what has happened during this fourth quarter? We repurchased some more of our own shares, 1.5 million. So now we have 3 million of our own shares. We have also vacated 2 properties: New York, to an established co-op by the tenants in the property, and it's a property in Stockholm; and then in Uppsala, Kvarngärdet, it's a part of the deal with ASPER from the summer of 2021. The deal was that the property was taken over when it was fully completed because it's a new constructed property. We have also signed a lot of commercial lettings during this quarter, and I will show you more later on. The Board has proposed a dividend of SEK 50 per share, and this will be paid in 2 pieces, the first in May and the second part in November.
And one more event is that Erik Klang will be a new group member from 2024, and he is a business strategist. And in this environment, there may be some transactions, so it will be a good contribution to the group. So now -- from now, we are 6 members, and it's Hans Wallenstam, CFO; and Mathias Aronsson, Vice CEO and Regional Director. And Hans Wallenstam is not CFO, because it's me. He's CEO, of course. And then we have Marina Fritsche, Vice CEO and Regional Director of Gothenburg. And me, Susann Linde. And Elisabeth Vansvik, Communication Director. So Wallenstam today. A short summary of the company. We have 208 properties, with a total area of 1.4 million square meter and a total property value of SEK 63 billion, and 55% are residential properties and the rest commercials. The occupancy rate in total is 97%, and this shows that we have an attractive property holding. And in total, we have 1,081 apartments under construction right now.
So our attractive locations, they are in Stockholm, Uppsala and Gothenburg, the growing regions of Sweden. And the distribution of the rental value is residential, almost 50%, and the rest is commercials. And the main part of half of the rental value from commercials are from offices. In total, it's 28%, and it's almost as the same as last quarter. And our climate targets. It's the first year that we report our climate targets. All 3 of them has a very good outcome. And if we start with scope 1, it is minus 36%. And the reason why is because we have replaced some cooling systems with refrigerants. Scope 2 has decreased by 24% and is a result of our energy efficiency projects, for example, additional insulation, solar cell installations and so on. Scope 3 has an outcome of minus 90%, and this target of minus 55% is very tough. And we do climate calculations earlier than before, so we can change to a more climate smart material. But I think there's a good outcome from all 3 of the targets.
On the EU taxonomy, this is the second year when we report this, but it is on a [ freely ] basis. We are not covered by the EU taxonomy regulation until financial year 2025. But we have increased the green part in all 3 categories, 42% of our turnover is from green properties, and 54% of the investments and 25% of the operating expenses that are included in the taxonomy. And also this is a very good work from us, I think. Then we come to the income statement and start with the NOI, the net operating income, and it has increased by 6%. But if we take the energy price -- because it has been a very high energy price, as you all may know, but we are self-sufficient. And if we don't take that into account, it's an increase of 10%, not 6%. So an NOI of SEK 2 billion for this year.
And here are more details about what has happened in the NOI. And if we start with the rental income, it has increased by SEK 240 million, where half of it comes from the new construction and also large projects, which are completed. And because of the sales and acquisitions, we lost SEK 44 million in rental income. And in the comparable holdings, we have increased by SEK 151 million. And in total, it's 3.3% up for residentials and 9.1% in commercials. The operating expenses has increased by SEK 128 million, where a big part is from higher energy price by SEK 86 million. We have also done more maintenance in our properties, combined with higher taxes and inflation. So in total, we have increased our NOI by SEK 112 million.
We have completed 1 property and 82 apartments in this fourth quarter. So this is not fully completed. It's in Uppsala, Kompositören, where we have 69 apartments left, which will be completed now in this first quarter of '24. So in total, for this total year of 2023, we have completed 837 apartments. As I mentioned in the beginning, we have signed a lot of new agreements during this fourth quarter. And here, you can see some of them. And you can also see that we have a great demand for our commercial premises in Gothenburg CBD. And here are just some of the agreements. With this, we have an occupancy rate in Gothenburg of 95% and in Stockholm, 71%. And in Stockholm, we have just 10% of our total commercial area. We have also extended agreements with many tenants. We have a lot of focus on keeping existing tenants. And of all leases that expired during the year, 90% remained as a tenant.
The administrative expenses has increased by SEK 21 million compared last year, and this year was affected by nonrecurring costs of SEK 10 million for changes aimed at adapting the organization to prevailing market conditions. The average interest rate on closing day is 3.24%, which is 1 percentage unit higher compared to last year, which gives us SEK 300 million higher financial expenses compared to last year. We have also extended our fixed interest period by extending our interest rate derivatives, and it's on [ Page 13 ], you can see that. We extended the volume from 2025 and put them to 2033 instead, which means we have new maturities of interest rate derivatives until 2026. This cost us 5 basis points in the current average interest rate, but it is an insurance for the future. We have almost SEK 16 billion -- we have SEK 16 billion interest rate derivatives and we have secured almost 60% of the total loan volume at a good level of interest rate and an average fixed interest rate term of 40 months.
So in total, the income from property management decreased by just about SEK 200 million. This quarter, we sold Kvarngärdet, which is recognized as development property sales, and it does also include other co-op units that we sold during the year, but Kvarngärdet is the main part. The operating income from energy is around SEK 50 million higher compared to last year if we cleared for the selling of wind turbines that we did last year. The profit before changes in value amounts to SEK 1.2 billion, which is SEK 200 million lower than last year here as well. Then the changes in value, and I'll start with the financial instruments. At closing day, the 10-year swap decreased a lot since the start of the year, which resulted in decreased value of the interest rate derivatives. And in total, the changes in value in financial instruments are minus SEK 916 million. The share price went up by almost SEK 11 during the year, and that affects the value of synthetic options to all our employees by SEK 68 million.
Then the changes in value of investment properties is minus almost SEK 850 million. We have increased the direct yield requirements for a lot of the residential properties by 10 to 30 basis points and commercials by 10 basis points. And we have also written down the market value of the land for future projects, and the value has been positively affected by higher NOI, sold properties and also completed new constructions.
And I made a graph here to visualize examples of our valuation in the last 13 years. And this is just examples. The yellow line is the swap rate, the 10-year swap rate; and the blue line is an example of a CBD commercial property; and the dark blue is a new constructed residential property; and the gray, an older residential property. And you can see our yield requirements here. And as you can see, when the interest rate was falling deep, we didn't decrease our yields so much. That is why we don't increase so much now when the interest rate is going up again. Hopefully, this was a good example and you understand our valuation.
Yes, and the balance sheet. This means that we have an investment property value of SEK 63 billion in our balance sheet. And it's just SEK 58 billion of the value that is investment properties in operation, the rest is ongoing projects or land and our future projects without cash flow. We have invested SEK 2.4 billion during this year in construction, and it's almost on the same level as last year. And this is both in our new construction, but also in existing properties, for example, energy-saving projects and refurbishments. And we have this 1,081 apartments in ongoing construction. So we have started one project this year. And hopefully, we can start more 2024, because you see here that we have a high demand for our product of 280,000 standing people in our own housing queue.
Our interest-bearing liabilities amount to SEK 29 billion, and it's SEK 700 million more on average compared to the same period last year. And our funding sources, we are mainly financed through bank loans, as you all may know, at this moment. And our strategy is that our investment properties will be financed through bank loans. And when we issue some bonds that will finance our wind turbines. And the commercial papers, we use them instead of construction credits for our new construction. So this is how we think that we will finance our operation.
So here on this page, you see how our distribution is in our financing. And as you see, our focus is bank loans, 98%, and we have commercial papers of SEK 373 million. And 1 bond left of SEK 334 million, and this will expire in April 2024.
So to summarize with some key ratios. Surplus ratio, 73.3%, which has decreased if you compare last year, but the main reason is the energy price. And I have talked about the ICR, it's 2.6 times. And the LTV and equity ratio both are 46%, so we think that we have a stable financial situation. And the total repurchase shares are 3 million. And the equity per share is SEK 46.4 per share, and the net asset value per share is SEK 56.2 per share. And we keep the target of 100 until 2030, of course.
The summary of 2023, what have we done? We have invested in SEK 2.4 billion in our construction. We started one project of new construction, 172 rental apartments. We completed 837 apartments. We installed solar cells, 5,460, which means it's like one wind turbine. We also sold properties at the value of SEK 500 million. We signed new commercial agreements of almost 26,000 square meters.
So I think that in this turbulent time that has started, we -- I think that we have done a very good year as a summary of 2023, and we think bright about 2024. So with this, I'm happy to present the first quarter of 2024 next time. Thank you for listening. Goodbye.