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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 Reports 2019. [Operator Instructions] I will now hand the floor to our speakers, Arvid Liepe, CFO; and Ulrika Hallengren, CEO. Please begin.
Thank you. The theme for Q1 is high tempo and high performance and some records, of course, as a tribute -- sorry. We increased our rental income to SEK 718 million. The operating surplus increased to SEK 500 million. And income from property management increased to SEK 406 million, up 25% as a result from good performance, open property management and reduced financing costs. The result for the period amounts to SEK 311 million. As always, the net letting is a good measurement on how things are going. The net letting at SEK 17 million is a good level, and that is satisfying, but even better is that the new leases during this period summarized to a new record level, SEK 96 million. That is a proof that the market is active and that our offers are competitive. We have, for example, new leases with the City of Malmö, they are expanding; MilDef in Helsingborg, they are expanding; Macrobond in Dockan, they are expanding; Altran in Nyhamnen, they are expanding, but also, a new tenant for us, which, of course, is even better. Also, terminations are at a high level, but we have expected most of them and they give us an opportunity to improve both our product and price level in the next step. One example is, this quarter, is Massive, owned by Ubisoft here in Malmö, they are leaving [ Spanavan 15 ] in February 2020 because of heavy expansion. The French owner of Ubisoft also prefer the own -- to own their own property, so they are moving to an entire block, to Eden 1 here in Malmö. As long as our tenant are expanding their business and they stay in our region, we think that is a good signal about the market situation. If things are going well in Malmö, it's a good opportunity also for Wihlborgs. We now have a possibility to offer 5,000 square meters in the city center in a building with an interesting history, and we can offer this to a new tenant. Page 4 shows the net letting in a historical perspective, with both new leases, terminations and the net letting as the black line. It can also be worth mentioning that several of the terminations are under discussion for new leases. So they might come back at the positive side next quarter. Looking into Page 5. The rental growth for the entire property stock is up 9.6% compared to Q1 2018, and also, that is a satisfying number. But even more important is to look at the rental growth in like-for-like portfolio since that's a good way to evaluate if we are successful. We have mentioned this before, but we have an overall goal to beat the index with 1%. We had a good level in Q4 2018, and also, during this period, we have reached as high as 4.1% at rental value and 4% at rental income. That means that we have been successful, both in new rent levels and in reducing vacancies.Page 6. We also continue to have very low vacancy in offices, especially in Malmö and Helsingborg. 96% occupancy rate is very high. In Lund, we have more areas to work with, and we see that as a good opportunity for us. To create value, you need something to work with.Going to Page 7, our portfolio in industrial and warehousing is also -- are continuing at a good level, but extra worth mentioning is Helsingborg, the largest market for us in industrial. And we here have an occupancy rate at 92%, and that is also a high level. The overall portfolio has an occupancy rate of 93%, excluding land and projects, and a running yield at 5.4%. Page 9, changes in market value. We have, during this period, made acquisitions for SEK 1.410 billion in Lund, Helsingborg and Malmö. We have invested SEK 406 million, a new record for 1 quarter, and sold 2 properties in Copenhagen for SEK 310 million. The value changes of SEK 73 million comes from new leases and high rents, and together with a currency translation of SEK 114 million, we end Q1 at a market value of SEK 43.839 billion. So the curve at Page 10 for increased value in portfolio continues in the right direction. Page 11 shows square meters and market value in our 4 regions in the end of Q1. We have increased the volume in Lund, which now represents 21% of the value, but Malmö continued to be our largest market, with 43% of the value. Page 12, a list of our customers, the largest ones. Sony Mobile is new on the list of largest customers. Skåne Regional Council is the largest, and Danske Bank is #2 on the list. Together, these 10 tenants represent 21% of rental income, and that is the same level as governmental tenants represent altogether. Over to you, Arvid.
Thank you very much, and good morning, everyone. Turning to Page 13, looking at our income statement. I think it's worthwhile repeating and pointing out that rental income grew by 7% in the first quarter versus the first quarter 2018. And operating surplus increased slightly more at plus 9%. And income from property management up a full 25% partly driven by the operating surplus, of course, but also the reduced financing costs and as a result, among other things, are the restructuring of the interest rate derivatives portfolio, which we concluded in Q4. We have, during the first quarter, a positive value chain just from our properties amounting to SEK 73 million, and that is driven by signing contracts for new projects and increased rents. And the valuation yield is virtually unchanged during the quarter. Interest rates during the quarter have moved downwards, which has affected the value of our derivatives portfolio, which shows a negative effect of SEK 81 million during the quarter. So pretax profits, SEK 398 million, and profit for the period, SEK 311 million. Moving to the next slide on the balance sheet. I think that the numbers worthwhile pointing out is that versus 12 months previously, the value of our investment properties has increased by SEK 4.4 billion. And at the same time, equity has grown by almost SEK 2 billion. Borrowings increased by just over SEK 3 billion. And we had a decreased deficit value in the interest rate derivatives portfolio by approximately SEK 800 million. So I think those are the most important numbers to point out on the balance sheet. Moving to the next slide. Key figures on Slide 15. The numbers which I just referred to translates into an equity/assets ratio of 35.2%. Leverage, our LTV now stands at 55.8. And the interest cover ratio has never been as high before at 6x, of course, driven by the reduced financing costs. We're not going through all the different numbers. Also worthwhile mentioning, I think that the EPRA net asset value per share now stands at almost SEK 126. And on the next slide, Slide 16, you can see the development of EPRA net asset value per share from 2009 and onwards. And the average growth in that time perspective still stands at 18%, adjusted for dividend. Looking at our financing on Slide 17. The proportion of financing from bank loans has increased somewhat, now stands at 54%, driven partly by using bank financing for one of the major -- or the larger acquisition that we concluded in Q1. The bond markets represent approximately 20% of our financing, and the Danish mortgage system, 27%, currently. On Slide 18, you can see the historic developments of our financial ratios, which we set our targets for ourselves, regarding. Equity/assets ratio remains reasonably stable. Loan-to-value has gone up slightly with the recent acquisitions. But particularly, of course, notable on the lower-hand left side of the slide is the interest cover, which has increased substantially over the quarter. Moving to Slide 19. Looking at our borrowings in relation to operating surplus, it remains at around 11x, which we still feel is a reasonable level. And we follow this quite closely since we, as for many years, have a strong focus on increasing the operating surplus. That is -- the best credit insurance we can have is having a good cash flow. Looking at the loan portfolio on Slide 20. You can see the details when it comes to interest maturities and loan maturities. The average fixed interest period now stands at 3.1 years, slightly downwards versus year-end '18. The average loan maturity is now over 6 years at 6.1 years. And on the next slide, Slide 21, you can see the historic development of the average loan maturity and the average fixed interest period. With that, I'd like to hand over back to you, Ulrika.
Thank you. So let's talk about acquisitions and divestments. We made an acquisition in February, where we completed our portfolio in Nya Vattentornet, now with numbers 2 and 4. That was, in total, 49,000 square meters and a rental value of SEK 105 million. Together with the acquisition we made in October, at Page 24, we see the whole Nya Vattentornet. We have now added on 71,000 square meters in the eastern part of Ideon. A good quality and diversity in different kind of areas gives us opportunity to offer flexible areas to our customers. In Copenhagen, we have sold 2 properties at Glentevej for a value of SEK 310 million. This is an area expected to be developed into housing, and since it isn't our core business, we prefer to focus on developing properties that create increased property management income. After end Q1, we have made a large acquisition in Helsingborg when we bought Hermes 10 and 16 from Alecta, in total, 51,000 square meters with a rental value of SEK 95 million. One of the largest tenants is Lund University, with a campus in Helsingborg. The property are almost fully let, but we focus on some changes coming up, and that gives us opportunities still with offering our new project in Oceanhamnen as a possibility for our new tenants and also gives us a larger portfolio to work within the city center of Helsingborg. The vacancy is very low, and we need areas to work with so that we can offer flexibility for our customers also in Helsingborg. Yesterday, we made an agreement in the divestment of Landsdomaren 6 in Lund. We have developed this property for the Skåne Regional Council during 2010 to 2013, and it's a part of Skåne University Hospital. Transactions done, SEK 1.4 billion, and the yield just [ above ] 4%. These 2 transactions means that we have sold 27,500 square meters for SEK 1.4 billion. We have bought 51,000 square meters for SEK 1.255 million, and we gain rent value of approximately SEK 30 million. Together with greater opportunities for us in the [ third ] development of Hermes 10 and 16, this is a good example of how we can create value in our portfolio. Let us now talk a bit more on ongoing investments. At Page 29, you can see that during this quarter, we have also invested at a record level, SEK 406 million. We have SEK 2.466 billion value in ongoing projects and SEK 1.151 billion remains to invest. We will keep a good tempo in the investments, but it's too aggressive to calculate with this level in every quarter during 2019. The largest project going on, it was started in the north, Page 30. In Helsingborg, we have Ursula 1 or Prisma. It's heading up from the ground, a very attractive modern office in the very best location, a great interest from both large and small tenants. We have signed our first lease here, and it's at the right rent level. Some weeks ahead, I hope that we can inform a bit more about that and also about the new interesting collaboration that we see great opportunities in, in Helsingborg. Terminalen 1, Helsingborg Central station, is in the start block for refurbishment, an important investment that will increase the [ attractivity ] in city center even more. And on Page 32, we see the court of Helsingborg. They have moved in to the new building, and we continue with the refurbishment of the other building. The whole project will be finished in September, and then we will have a 20-year lease ahead of us. At Musköten 20, where our tenant, MilDef, will expand their business, we have got the building permission and planning for a formal start at the site, the 4th of June. Page 34 moves up to Malmö in Hyllie, where we are about to finish our [ first ] project, Gimle 1, the Customs of Sweden and Ferrero, moved in the 1st of April, and now remains only the last [ adjustments ] for the rest of the tenants during a few more months. We are [ all thankful for ] production with Bure 2 or Origo. This is the only larger project we can offer the market in Malmö today. And the first lease is signed, and we are positive about the possibility that we, before the summer, can sign the rest of the building with 1 larger tenant. At Medeon in Malmö, we have started this new project by -- together with the [ Ingles Party in Malmö ] and the organization of Medeon, we're digging -- dig down a time capsule for the possibility to show the future what we today think is important. This project will add on 4,000 square meters for a possible expansion in the med tech business. Negotiations is going on. These new premises will give us the opportunity to also increase rent level in the whole area. [ Yield to cost ], also here, at the project is about 6%. In the Dockan area, we are working for the completion for the police education at Malmö University. They will move in, in August, and we have now signed additional 1,700 square meters during Q1. The investment is fully let. At Elefanten 40, we have started a refurbishment project for the Municipality of Malmö. They will rent 8,200 square meters and moving in, in the 1st of November 2019. The yield on investment is approximately 6% also here. At Stenåldern 7, we are building a new building for voestalpine weldCare. Investment, SEK 78 million, a 15-year lease, and yield, approximately 6.5%.In Lund, we continue with the project Raffinaderiet 5, a sports and fitness center. We look forward to completion late this year, and also, will make the surroundings even more attractive. The discussions with possible tenants continues. And finally, let's give you a short update in future investments. We start and learn with the project, Space. We see a good possibility of that the needed commitments regarding a guarantee for the lease can be signed, and that the project can start late 2019 or early 2020. It's a building with a combined tree structure, and inside, there is a hotel for material researchers at MAX IV and laboratory [ at ] ESS. Page 43. At Ideon Square in Lund, the plans for further building continues. The possibilities are great, but as we have said before, we first will find the right tenants. Page 44, in the center of Lund, we completed Posthornet Phase 1 in 2018. We now have an agreement with the Municipality of Lund, and they will start the planning process of changing the planning commission from residential into offices. We hope that this might give us at least 10,000 square meters offices in the city center. So a bit more positive even from the end of 2018. Page 45. Last quarter, I was convinced that we finally got the right name for this spot. I was wrong. The name of the block is decided to be for Pulpeten 5, but still, we are planning for approximately 20,000 square meters in 1 or 2 buildings. And we have bought the land area. It's a good spot in Hyllie, and the discussion with possible tenants continue in a positive direction. Page 46, last and likely the greatest possibilities in a long-term perspective, Nyhamnen. We are part of developing a planning commission in the first [ path ] closest to the sea, and we can develop at least 10,000 square meters office in this first area. And the work continues both here and in the other 3 areas of our specific interest in Nyhamnen.So let's summarize. We have strong growth and profitability. Income from property management, up 25%. Rental market is still strong. Gross letting at record of SEK 96 million. Several new and ongoing projects will continue to future growth. Investments at all-time high. We keep on the work with optimizing the portfolio by acquisitions and divestments. And we thereby strengthen our market position with properties where we can add value. Thank you, and we are now ready for questions.
[Operator Instructions] Our first question comes from the line of Erik Granström of Carnegie.
I have a few questions. And I would like start off with your like-for-like growth on the rental side. It was a rather strong 4% in Q1. Could you give us the breakdown a little bit of what is driving the like-for-like? And also, if there are any differences in the different regions, Malmö versus Lund versus Helsingborg and Copenhagen?
I am not comfortable in breaking down the details with -- in decimals, but obviously, you have index as a basis. But we do see rent increases, basically, in all our market. But I would claim that the best development has been shown in Malmö. I think something to bear in mind also is that we've actually had a surprisingly good like-for-like rental value development in the Industrial/Warehousing segment.
Okay. And is there -- is this sort of the rate that you would expect to land this year at? Or is there anything in Q1 in particular that we'll need to take into account?
Of course, the volume was high in Q1 and this is a proof that we can keep the rent levels at a new and a good level. And we think that is, we can still get the same level during the rest of '19. We don't see any changes coming up. But you, of course, you never know where the market exactly go on the decimals.
All right, fair enough. And then I would like to move on to your net leasing figures. As you pointed out, both new leases as well as terminations were on absolute rather high levels for a Q1 and the net leasing was a positive figure, which is obviously pleasing. But is this sort of a -- is there a new trend in the activity in general? Would you say that you have both a lot of new leases going on, but also terminations? Or was there any sort of one-off situation? You mentioned Massive in Q1.
Yes, Massive, we have known for a very long time, of course, several years actually because they have had a great growth during a long period. So I would say that during Q1, we just have a few -- I think we have 1 or 2 surprises for us and that's a very low number of square meters, maybe 2,000 square meters that we weren't really aware of that they were coming up on the termination side. So this is -- I think we can't expect that we could be at this high level during every quarter. We have some large new leases in this period, but we also have good opportunities for new leases in the future. So I'm positive for the future as well, but the level this quarter is high.
Okay, and then I have 2 more...
I think -- I mean we keep on seeing a good activity level among our tenants. And we see -- we keep seeing tenants growing and having changed needs, so to speak, so -- but if that will materialize in exactly which numbers for the net letting in the coming quarter is tricky to forecast.
But of course, it's important to mention that the activity is driven by growth. So of course, we think that it's very positive.
Yes, understood. I have 2 more questions. And the first one is regarding your investment page. You mentioned that the plus SEK 400 million in Q1 was perhaps a little bit on the high side and we shouldn't do a sort of a yearly rate on that. But would you expect you to be able to reach the SEK 1.2 billion that you had last year or is that stretching it as well?
I think it's likely that we'll be at, what, SEK 1.2 billion level somewhere.
Yes.
Okay. And then final question regards to the divestment of Landsdomaren in Lund. Have you taken any sort of revaluation effects of that divestment already in Q1? Or do you expect to do something in terms of revaluation due to the divestment in Q2?
As we do follow IFRS, we, of course, have the obligation to have a market value on each property every quarter, that means -- I mean we will make a book profit on the sale of Landsdomaren, but it is not a huge book profit on it.
Our next question comes from the line of Andres Toome of Street Advisors (sic) [ Green Street Advisors ].
I have a follow-up on the like-for-like. I appreciate that you can't give the breakdown. However, perhaps you can give an indication on what kind of re-leasing spreads Wihlborgs has achieved for renegotiated leases in Q1? And how does that compare with what you have achieved in 2018?
I think that the re-leasing spreads are not huge. I mean it's rather that we see a gradual increase in the rents. And I think you can't really compare our rental markets to -- well, if you look at Sweden, with the Stockholm market, where you have much greater volatility in market rents not leased in CBD. So and I think looking at the overall like-for-like figure, I think is very relevant. But I think you should be a bit careful with dissecting the number because it's -- I'm not quite sure you can draw very firm conclusions by the different parts of it.
Okay, very well. And -- but if you look ahead, which office markets in Wihlborgs' portfolio do you see performing the best, so with the best rent outlook? And conversely, which with the weakest rent outlook on a relative basis?
Malmö and Helsingborg performing the best, but we also have opportunities in Lund, but not with so much higher rent levels. I think it's definitely Malmö and Helsingborg that have the greatest opportunities on that side.
Our next question comes from the line of Tobias Kaj of ABG.
Yes, I would like also to follow up regarding your like-for-like growth, but put it in perspective to your valuations because you have more than 4% like-for-like growth and only 3.2% value uplifts in the prior 12 months and that includes development gains. So it's probably more like 2% on a like-for-like basis or 2% to 2.5%. Does that mean that you see higher yield requirements in some segments? And if so, in which segments?
I think the exercise you're doing is relevant, but also a little bit theoretical. I think the -- basically, we see stable valuation yields in our markets, and as I think we stated during the presentation, we have during the quarter -- I mean basically, obviously, we go through each and every of our properties. But generally speaking, we've not made any yield requirement changes during the quarter. During 2018, that was largely true as well, although in some market segments, we probably had some yield requirement decreases. I think we had that for a few of the properties on the Copenhagen market, for example.
Okay. And one question regarding your divestment. You're right that [ Helsingborg ] acquisition, given [ financial yield ] of 5.5% fully leased, which implies roughly SEK 450 per square meter in operating expenses. If you assume the same cost in Landsdomaren, that implies a net financial yield of some 3.75%. Is that a fair assumption, would you say?
I think you have a lower cost in Landsdomaren.
Yes. So we calculate the yield to be approximately, just about 4% in Landsdomaren.
Okay. And your yield fully leased in Lund is 6%, but you're still saying that this will have a minor impact on your valuation. Is that because the yields in, for example, in Ideon is clearly higher than 6% fully leased?
Well, the properties which we acquired in Lund are not fully leased.
No, but I mean, on a fully leased basis, is the yield then clearly higher than 6% in Ideon in general?
No. I mean you're talking about the valuation yield at Ideon, right?
Yes.
Yes. No, it's -- it is generally not higher than that.
Okay. How does the average get to 6% then?
I'm not following you completely. I mean what we acquired in Lund, Nya Vattentornet 2, 3 and 4, fully let, we expect them to yield approximately 6%, given the price that we paid, right?
Yes, but I'm just referring to your Slide 6, where you say that for your office properties in Lund, fully leased, the yield is 6%, and now you're divesting 16% of that at 4% yield, and then some parts has to be significantly above 6%. So the question is, which parts have yield...
And then we made certain gain as well on the divestment.
The next question comes from the line of Albin Sandberg of Kepler Cheuvreux.
I have 3 questions, please. On the Lund sale, just thinking of the timing of it and so on. And I wonder, do you feel that you were forced to do that in order to finance the high development portfolio that you have? Or was it simply that you found that the timing of the divestment was better now than you have seen previously?
No, we weren't forced to do the divestment, but we think it was a good time. But if we should ever sell Landsdomaren 6 now, was the right time to do it, you can say. The interest has been great from -- during long time, but we think that this was the right time for us.
Yes. And also then a follow-up on the potential valuation change that -- oh, sorry, valuation gain that you would record in Q2. You'd had those discussions for a long time. Do you feel that you have written off the value of these assets more than others, thanks to these discussions? Or does it follow your overall kind of valuation method?
As I think I stated previously, we will make a book value, but it's not going to be a huge book value gain on the sales because as we -- as Ulrika said, I mean we've seen interest in -- from other parties in this asset before. So gradually, the value has been increased, of course.
Yes, okay. And then I had 2 financial questions. First one was it's not by much, but still, average cost of finance has dropped a little bit quarter-on-quarter. I just wonder if you could comment on what the key drivers are there, just because some peers have shown the other way around.
Yes, I think the change was from 1.40 to 1.36.
Exactly.
So in that sense, I would say that there are no major drivers because the change is so small.
Yes, no, I just wondered because the other guys...
I mean we basically -- I mean continuously, we are renegotiating bank agreements and we have roll -- have also during the quarter, been somewhat active in the bond market. But I mean that there are no major changes either when it comes to the bond spreads that we're paying or the margins that we're paying to the banks.
And the STIBOR increase that we have noted obviously hasn't impacted you as much as some of your peers, so...
It's had a little bit of impact, but we still have, is it 1 or 2 bank agreements, where we have a STIBOR floor at 0 or so, so that we have not had an effect for those bank agreements.
Yes. And then the final question I have is on the pay tax, or maybe the actual tax line. Now we have -- that we have seen 1 quarter with the new tax law coming in, and it seems that it is actually a bit lower year-on-year, but at least you haven't seen any tangible impact from that. And is that the expectations for the rest of the year as well?
That's correct. We don't expect the new tax legislation to have any major impact on paid taxes for 2019.
And our next question comes from the line of Niclas Hoglund of [ Nordea ].
Niclas Hoglund here. Two questions from my side, for me. Firstly, if we have a sort of follow-up on the sort of termination question that we started on with. You're talking about that the terminations is mainly driven by growth. But do you see any other trends, like these terminations, the tenants are moving into newer buildings? Or you're seeing that the tenants are moving because of renegotiating rent levels? Are there any other trends that you want to share with us on that note?
It is the diversity, of course. Not everybody is moving to new buildings, but I think that a trend might be that the companies are looking into better areas to give their employees an even better standard for their environment. That could be a trend. We think that it's important for many of our tenants that they have really good environment for their tenants. And -- but otherwise, I wouldn't say that it's -- I see any larger trends moving to certain -- very -- changing in any way, no.
You're talking about opportunities to sort of find new homes for these tenants in your project. But what about the risk? Are you foreseeing have investments in order to sort of fill up the vacancies? Or is it more or less the same kind of trend you have seen in the past, with no difference there?
Of course we see room for improvement in some of the areas, but those investments are also connected to the possibility of a higher rent level. So it's all connected -- a very direct connection between those.
Yes. And then my second question was related to yields. I won't go into the sort of long discussion on Lund, but for me at least, around 4% yield on Landsdomaren 6, shouldn't that send any further implications to the portfolio in the sort of community service type of properties that you also have in the portfolio? 21% of rent is related to government tenants. Do you see any sort of a spillover effect, not only to sort of the book effect, is the second point?
All right. I don't want to make any far-reaching -- or go into far-reaching conclusions based on that. But of course, you're right, this is -- now this is transactional evidence in the market. The transaction we made is not theoretical, it has actually happened. But of course, the assets that we're selling is, of course, not a standard asset. So I think I mean be a little bit careful in drawing conclusions when it comes to any office building in Lund, if I put it that way.
[ Landsdomaren 6 ] has a very -- a long lease, a bit lower index, it's affected by different things. But -- so you can compare it with all the other assets.
[Operator Instructions] Okay, there seems to be no further questions coming through, so I'll hand back to our speakers for their closing comments.
So thank you for today. And if you have any further questions, please contact us directly by telephone or email, we'll be happy to answer.
Thank you very much. Bye.