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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Ladies and gentlemen, welcome to the Wihlborgs Fastigheter AB Q1 Report 2018. Today, I'm pleased to present Mr. Anders Jarl, CEO; Arvid Liepe, CFO; and Ulrika Hallengren. [Operator Instructions] I will now hand over to Anders Jarl. Please begin your meeting, sir.
Thank you very much and welcome everyone to this my last interim report as the CEO and as you've probably already seen on the figures, it's another very strong report. Looking at the first slide here we have showing that the rental income is up by 22%. There is a slight change in our way of the accounting here, and I'll come back to that in 2 more slides. Operating surplus is up 19% and the property management is up 25%. And the result, as you see here, is close to SEK 4 per share. Next slide shows the same figures, but more in short. So SEK 668 million is the rental income compared to SEK 549 million last year. And the net income is also, as I said before, 19% and 25% up for the property management. As you see here, the valuation uplift for the properties is only SEK 46 million, and that is because we do -- 100% of our assets are externally valued in December. So we don't tend to have too much changes in the valuations for 3 months later. The derivatives is SEK 17 million. That gives us a pretax profit of SEK 388 million. On Slide #4 shows a little bit more of our changes in our accounting. Up until last year, we have not included the rental supplement for our Danish portfolio because that's the normal way of presenting the figures in the Danish market. But since we are doing it in the Swedish portfolio, the Swedish way of reporting, therefore, we have as for the 1st of January this year now including the rental supplements for Denmark as well. On this chart, you have both the new way of accounting and the old way of accounting, so to say. So if we should exclude the rental supplements in the Danish market as we've done before, the rental income would come in SEK 20 million lower. Also the cost, of course, SEK 20 million lower. So rental income would then be SEK 648 million instead of SEK 668 million. And last year's figures were SEK 541 million and there the supplements were only SEK 8 million, but that is, of course, because our portfolio has been growing quite substantially in the Danish market.I also should put up here that our winter cost, we had a winter in March down here, which we normally don't have, and that cost another SEK 7 million extra this year compared to last year. So that's also something you have to take into account on the cost side. Going over to the next slide, #5, shows our rental market. Another positive net letting. We have a very strong letting market and especially in Malmo, and this is something that we feel is continuing also into Q2. Slide 6 is our historical chart as we always show where the gross and net figures. You have those. Going over to Slide #7 where we show the rental growth. First, the total stock where you see we have a growth of about 20%. Rental value is up 19.9%, and rental income is up close to 22%. But the next slide -- the bottom one here shows the like-for-like portfolio. And as we haven't sold anything over the year, it's actually the same figures for the 2017 figures.What you can see on the bottom here is that the vacancy last year was SEK 202 million, which is the difference between SEK 2,391 million and SEK 2,189 million. That same figure now is SEK 164 million meaning that the vacancies actually dropped with SEK 40 million or that is 20%. Or if we calculate it the other way, the occupancy rate has actually increased from 91.6% to 93.4% on the exact same assets. And this means that the rental income has actually increased by 5.3%, which is a very strong figure. And then next slide shows our portfolio. First, the office ones, where we now have SEK 31.6 billion in offices, which are yielding -- with occupancy rate of 94% and which is yielding 5.2% running yield. The same industrial portfolio where we have SEK 5.8 billion with a running yield of 7.2%. And if you add these together, we have SEK 37.2 billion -- SEK 37.4 billion, sorry, in properties which are yielding 5.5%. And then on top of that, we have about SEK 2 billion in developments.Next Slide #11, we have all our largest tenants -- 10 largest tenants and they still stand for 21% as there's no changes here from the year-end. And the governmental tenants also stands for the 20% as they did before. The changes on the values for the properties we see on Slide #12 where we started off the year with SEK 38.6 billion. We have bought some assets for SEK 149 million, we have invested in our portfolio SEK 282 million and we had the value changes of plus SEK 46 million. And then the Danish kroner is doing very strong compared to the Swedish one meaning that the value of our Danish properties has gone up with SEK 307 million only because of the currency. Next slide shows the historical portfolio value. And the next Slide #14, we have the map where we see the percentage of our assets we have. There's no big changes here. We have 45% in Malmo, 17% in Lund, 20% in Helsingborg and 18% in Copenhagen. And with that, I hand over to Arvid to go more into details with the figures.
Thank you very much, Anders. So moving to Slide 15, we can have a look at the consolidated balance sheet. And I think what's worthwhile pointing out among these details is that the investment properties compared to 12 months previously has increased in value by SEK 6.2 billion up to SEK 39.4 billion. And at the same time, equity has grown by SEK 2.2 billion to SEK 13.9 billion and our borrowings have increased by SEK 3.5 billion to SEK 21.1 billion. Applying those numbers to calculate some key ratios on Slide 16. Our equity assets ratio now stands at 34.7%. The LTV has increased slightly to 53.7% compared to 12 months previously, but then you should, of course, bear in mind that we made this large acquisition during Q3 in Denmark in 2017. The interest cover ratio is, as far as I can see, the strongest number we probably ever reported at 3.6x. And the surplus ratio at 69%, as Andres mentioned, is affected by the new accounting method of the Danish rental supplements, but also to some extent by increased winter costs during Q1 '18. If you take out the increased winter costs amounting to some SEK 7 million, you actually arrive at a similar surplus ratio as the first quarter '17. Looking per share, I think it's worthwhile noting that the EPRA net asset value now stands at SEK 233, which is 17% up versus 12 months previously. Moving to Slide 17, you can see the historical growth in EPRA net asset value. So, we continue to show a steady growth also in the beginning of this year. On Slide 18 you see the sources of financing for us, no large change versus the previous quarter. Bank loans account for a bit less than half of our funding and almost a third of the funding is in the Danish mortgage system and the bond market then accounts for almost 1/4 of our financing. On Slide 19, you see the historical development of our financial ratios. The LTV is well below the target of being below 60% and given the current market environment, we think it's correct and prudent to be in the range between 50% and 55%. And as you can see, the loan-to-value ratio is close to the lows over the period going back all the way to 2012. The equity assets ratio is also strong in a historical perspective at almost 35%. And I already commented on the interest cover ratio. Moving to Slide 20, we also like when it comes to looking at financial stability to look at our borrowings in relation to the operating surplus and we see a slight decrease in that ratio, it now stands at 10.9x. And we think it's important to follow that number in combination with looking at the loan-to-value. On Slide 21, you have the details of our loan portfolio and I won't go through all the numbers. One can note though that the average interest rate is slightly down compared to the quarter previously and the average fixed interest period now stands at 4 years and the average loan maturity at 6 years. The historical numbers for the loan maturity and the fixed interest periods you can find on Slide 22, but I don't think I need to comment further on that. On Slide 23, you can also see our interest rate sensitivity. It looks very similar to the last quarter, but it's worthwhile noting that a 3% increase in market interest rates would basically affect our average interest rate by 1 percentage point. So, we think we have a fair resistance to potential market interest rate increases. I'll stop there and hand over the world -- word to Ulrika.
Thank you. So of course, projects and developments is still an important part for us in the growth of the company and let's go to the investments we have in progress, to begin with. We have during the first quarter invested SEK 282 million and still we have SEK 699 million to invest in the projects already decided. Let's go through the projects going on, the largest ones. In Helsingborg, we have Polisen. It's a new building and a total refurbishment of the old building for the court of Helsingborg. After finishing this project, we have a 20-year lease on the whole building. We actually have a small part where we also have an extended possibility for the court. Next page is here in Docka, Kranen 9. New building for Tyrens completing the existing office, fully let to Tyrens and also a green restaurant in the bottom floor. We also have the possibility here to open up some space so you can see soon actually creating a gate to the harbor and making a good environment for the whole Dockan area. The next page is our first project in Hyllie, Dungen, where the largest tenant there is the customer of Sweden. It will be finished in the first quarter 2019 and we think it's a very good project in Hyllie. We are also in Sunnana making the first service center for MAN in Sweden. After finishing this project, we have a 20-year lease and also where the tenant has a larger interest in maintenance than a usual tenant actually. So, there's a very good profit on that front. Back to Hyllie, we have Origa, Bure. A good project in Hyllie also, which will be finished in the late 2019. A good possibility for both large companies and small ones. We think it's a good project there. We see good possibilities that it will be fully let when we have ended the project. And the last one -- last example is from Lund where we have this Raffinaderiet 5 right beside the railway. A quite small object, but very suitable for small companies. And also here, we are totally convinced that it will be fully let with completion. And then we go to our investment in pipeline starting in the north. In Helsingborg where we have Prisma in the Oceanhamnen, 11,000 square meters. We are still calculating on that one and trying to get the best technical solutions and also setting down the numbers of the investment. We have a preliminary date for start in 2 months, but no decisions made yet. In Lund, we continue with the swimming plan for the employer where we won't have the possibility to expand with about 20,000 square meters in the future, but we will do this in a very responsible way. I think that the first start can be here in at least 1 or 2 years. So, it's a project for the future and we will do it in smaller parts I think. And then we go back to Hyllie again, the last picture on coming projects. The next project is also right beside the railway. We have approximately 20,000 square meters possible in the first project there. And the last picture in our presentation is the summary, where we can end up with. Our growth during this period is driven by acquisitions, but also by high rents, reduced vacancy and new developments. We see very strong cash flow growth, strong balance sheet maintained and we are convinced that the growth will continue during 2019. That was the whole of our presentation and we are now ready for questions.
[Operator Instructions] Our first question comes from Erik Granstrom from Carnegie.
I had a few questions, but I just wanted to start off with the accounting method and just so that going forward I have a little more clarity of how to look at this. You mentioned that according to the old accounting method, the effect is about SEK 20 million on rental income in Q1, whereas it was about SEK 8 million a year ago. Could you give us some sort of guidance as to is this going to be stable over the rest of the year? Do you expect about this figure every quarter? Or does Q1 tend to be sort of heavy in terms of supplements for the Danish operations?
No, I would expect that number to be fairly representative for the quarters.
Okay, good. So overall, we should expect that on a sort of a running basis as well?
Yes.
All right. Good. My next question was regarding your investments going forward. If -- last year, you made a number of acquisitions. And I was just wondering what is your strategy for -- perhaps for this year and going forward. Do you still think that the transactions market is interesting enough for you to be active in terms of acquisitions? Or do you feel that it's more prudent to move investments towards pure projects and maintenance in existing projects? And what do you see in terms of capacity for investments for 2018 and '19?
We are, of course, still following the market, what's happening and all that. And as we've always been, we are more interested in doing our own developments than acquisitions. But if we see good acquisition opportunities, of course, we will take them. As we say, we have a strong balance. We have a strong cash flow coming in as well. So if we should keep the same figures as we have today, I would say that we have about SEK 2 billion, SEK 2.5 billion in our opportunities. And if that SEK 1 billion or SEK 1.5 billion goes for developments, then, of course, there is another SEK 1 billion or SEK 1.5 billion also for acquisition. So -- and we are looking at this, but it's not that we said we have this figure, we have to spend this money. It's only if we find interesting opportunities. And we have -- opportunity that has been in the market on the Swedish side we believe has been on the too expensive side. That's why we have more looked into the Danish market where we have found a good portfolio last year and there are still a few more on the market, but of course, it has to be good on prices and so on.
Okay. My final question then is regarding the rental market. I mean you were talking about the fact that like-for-like growth was more than 5% year-over-year in the quarter, which is obviously a strong figure very much due to the fact that you've managed to reduce vacancies. But could you say something about sort of how the rental market has developed in your portfolio in general? Do you feel that price or rents are still rather stable or are they sort of pushing north?
They're more upwards than downwards, but maybe not straight north; more east, northeast.
East, northeast. I will include that in my model. Thank you very much and also thanks Anders for all these years. That's all I had for today. Thanks.
Our next question comes from Tobias Kaj from ABG.
Congratulations to a strong start of the year. I would also like to start the question regarding the rental income and you mentioned the strong growth year-over-year. But if we only look sequentially compared to Q4, you have not really added that much in terms of property value but still, even if you adjust for the SEK 20 million due to the accounting changes, it's an essential increase of more than 6%. Can you guide us what's explaining that 6% increase?
You compare that to the Q4 number, right?
Yes.
I mean if you split out the increase in rental income, I mean, the largest effect is acquisitions and that is -- basically, the analysis we did was basically comparing to Q1 '17, but some factors are definitely relevant for comparing to Q4 as well. The second largest effect is that we have managed to reduce vacancies. We've had some effect from the Danish kroner and we've had new developments coming onstream so to speak and you've had some rent increases as well. But apart from the acquisition, the reduced vacancy is the largest effect.
Okay. And the rental increase from CPI revisions, are they larger or smaller in Denmark compared to Sweden?
Approximately the same or a touch lower.
Okay. Then a question regarding the financial net, which increased SEK 10 million sequentially in Q4, but then decreased with the same amount in Q1. What should we expect for coming quarter? Was Q1 a normal level or was it unusually low?
I think Q1 is a normal level and something to base projections upon.
Okay. And then regarding your property values, you mentioned that you made external valuation only a few months ago so you don't really see any reason to make any changes in your property value. But we had a big divestment that Skanska made in Central Malmo in the quarter. Can you mention anything regarding that transaction compared to the values you have in similar locations? Was that transaction in line with your values? Is that how we should read it given that you didn't make any value changes?
Our opinion is that, that deal was done on a very high level, meaning that, that is -- was more expensive than we believe and the market is, so to say. Does that answer your question?
Yes. But can you give some indication of how big is the deviation of the price reduction inflection compared to the values you have in your books?
I would say -- I mean, it's difficult to say what is in the books and compare because it's a totally different type of assets. That deal was done something around 4.25%, maybe a bit below 4.25% on the net yield. We believe that the true value should be about 0.25% higher than the transaction was done at. So maybe that gives you guidance that -- I would say that it is about that range below our valuation as well.
Okay. And the final question from me regarding investments in development. You have an ambition of a bit more than SEK 1 billion which you did last year. Do you feel confident that you will be able to do that this year as well even though you only have SEK 700 million left to invest in the ongoing projects and everything will not be this year?
We will end up with about SEK 1 billion this year as well.
[Operator Instructions] Thank you. There appear to be no further questions. I return the conference back to you, sir.
Okay. Then we will end -- finish here. And if you have any questions, of course, you're always welcome to give us a call, any of us, Ulrika, Arvid or me. So goodbye and thank you.
Thank you. Ladies and gentlemen, this does conclude today's conference call. Thank you very much for attending. You may now disconnect your lines.