Earnings Call: Q2 2020

Jul 16, 2020

Hello, and welcome to the interim report, January to June 2020. For the duration of the call, your lines will be on listen only. I will now hand you over to your host, CEO, Erik Selin, to begin today's conference. Thank you. Hi. Thank you, and welcome, everybody. It's me here and also Jester Mortensen, CFO of Valder. So welcome to this update of Q2 for Valder. Starting on Page 2, some comments about COVID. Obviously, we have the closer contact to tenants that are most affected of this, and that is the hotel segment and the city retail. In some cases, we have give them some support to be deferred rental payments or some rebates in some cases. But overall, the situation is quite much better than it was a couple of months ago, obviously. So for this quarter, it seems to be much calmer. On the investment side, we took possession of a couple of properties in Gothenburg and one in Oslo and also some land we're going to build recipes on. And we also divested some development properties in Gothenburg and Denmark. That is projects that we sell to customers, private customers, residential projects, where we have a good margin in Sweden and lower in Denmark because that was the first project there of this concept for Vjeran. And we also completed 400 apartments rentals in Finland and 130 in Denmark. That is also rentals. Moving to Page 3 and look at the Q2 number. The profit from property management was 2% plus, and that is obviously a very low figure and that is affected by lower results from collector. We have the lower rental income from hotels, the variable part. So including that and also the discounts rebates because of COVID, of course. So this combined that's pressure on the increase of the profit from property management, but still a small increase. And from this level, we obviously have potential on those segments that is pressuring us now. The NAV, EUR 355,000,000 is 19% better than last year. Net debt, EUR 48,300,000 came down a bit this quarter because we were not investing that much. And also currencies made the level to go down a bit. And then we have like for like rental growth 1%. It's much lower than last quarter. And the explanation for that mainly is the hotel rents that we don't get the turnover part, and that makes the increase be just 1% for the portfolio. So the big explanation, the difference is the turnover rents in hotel that's actually not we didn't get that now. Page 4, you have these graphs for the long term trend where profit from property management and NAV and nothing special there. We have upward trend. And obviously, my goal is to, over time, increase the cash flow as much as possible without taking any unnecessary risk, and that will, over time, make this company work as much as possible. If we look at Page 5, the earnings capacity, we update this every quarter, as you know. And now June, we are at SEK 4.75 billion and that is up SEK 75 billion from last quarter. On this slide, you can't actually see that. It's kind of stupid slide actually. But if we compare to year end, it's a small increase and compared to last year, 10%. But even in these figures, we are affected by turnover rent and so on. So but still, we are in the increasing territory again. Page 6, we can see the income statement. And we focus, as you know, on profit from property management. And on these 6 months, we are up 4% compared to last year. And then we have much smaller value changes on the property portfolio, and that makes the total net profit for the period to decrease, obviously. But our main focus is always cash flow, and that is up some percent. And we still have some value changes, mainly from projects, realized and unrealized projects. So after all, in this environment, pretty stable, I would say. And looking at Page 7, the balance sheet, nothing special happened there. This quarter, we have lower value on investment properties than after Q1, and that is effect of exchange rates that the Swedish krona strengthened against the euro in particular. And that, of course, makes our balance sheet to shrink a bit if we count it in SEK. So then we have the property value, SEK 1.46,000,000 and last year, SEK 126,000,000. So it's still a good increasing pace. And we also, in this quarter, have a lot of liquidity and cash. We thought it could be a good idea to have extra much liquidity and cash around and maybe that was unnecessary. Let's see that we have a lot of liquidity as you can see in this report and if you read the full report also. And then the portfolio, Page 8, this looks pretty similar every quarter. You have residential 59%, including the project portfolio and then office, retail and other. And other is 14% and of that 14%, 8% is the hotels. So I think this is more or less exactly the same as after Q1 or year end. And geography wise, we have Helsinki Stockholm, Gothenburg, Copenhagen a big part for us, and that will be the same also going forward, if I'm guessing. Looking at financing. You see the structure for debt and for interest maturity. And that is also in line with what we have been presenting the last quarters. And financing overall in this tough period, you could say or perhaps you I guess you already know that we experienced the banking system to be very supportive. So there were actually no problems to take up new bank loans even in the worst days of this crisis. The bond market and CP market is also working. Right now, it's working pretty well actually, but spreads gone up there. And like oil prices, the spreads kind of boom in the beginning and then slowly normalize just depending on what happens in each specific company. So the situation right now is the bond seat market is open and quite strong, higher spread than before COVID, but they are coming down as we see it. And as I said, the banking system is very supportive in all the time. So there are good availability of financing overall. Page 10, you see financing. You can see the net debt to assets and also secured debt out of total debt and also secured debt out of assets. And secure debt out of total debt and assets, that is important figures for our rating. We are rated by S and PBB flat. So that's why it's important to have these figures on a good level and also always present them. And we have actually big headroom if you look at secured assets and so on compared to our rating. So we have very good headroom and that makes us if we want to, we can take secured bank loans without sort of having coming after the rating bridge. Finally, you have a graph over the share and also compared to NAV and cash flow. And this just shows that over time, this will, of course, develop in roughly the same pace. Over time, if the profits from property management increases, it will take the share with it and also the NAD. But obviously, short term swings can be huge as we've seen this quarter, But kind of interesting. And also in our full report that you can read on the net, you have the presentation for the 15 years that we've been active where we can also compare share price and NAV. And they actually have been very tight close to each other over time. But from year to year, quarter to quarter, it could be huge discrepancies. So that was a brief summary from us in the Q2. And if there are We have a question coming from the line of Tobias Kai. Please go ahead. Yes, thank you and good morning. I would like to start to ask you regarding your rental income. I mean, they were flat quarter over quarter despite that you completed quite some few apartments. Did you have any further negative effects in the Q2 compared to in the Q1? Or were some of the apartments completed late in the quarter, so they didn't really contribute to the Q2? Exactly, Tobias. They were completed like in June, and we also had some rental rebates, not in Q1, but in Q2. So the COVID support for tenants is only in Q2 and not in Q1. These are the two things explaining why the rental income doesn't increase. So these are the two factors. And the discounts related to COVID for the Q3 compared to the Q2, can you say anything about that? Yes. If we look right now, it seems to be much less or very little actually. But I mean, we shouldn't be anything can happen, as we all know. But if we look at it just today, it seems to be small discounts, Q3, almost nothing. So automatically, we have an improvement Q3 versus Q2. If nothing new happens, we have some tailwind there. And regarding revenue based incomes from hotels, do you think you will see any improvement in the second half related to that? Or is that more for 2021 to hope for? I think it's better suggested to 'twenty one to the yes. If we are lucky, maybe we see in the last quarter, but I don't know. Yes, I think it's we are more calculating that hotels will have a very tough year all of this year and then next year could be better. We are a bit on the low side there. And I mean the NOI margin improved quite a lot year over year, both in the first quarter and in the second quarter. Is that something that you expect to continue for the second half? And what's the reason for that? I think it will be better than last year since we had a good start and so on. But also part of the improvement can actually be COVID related because when everything sort of is locked down or still, obviously, some cost decrease also. So I don't know exactly how much, but I'm not surprised that the margin was higher. It will it becomes like that. Okay. And regarding the drop in income from JVs, is that only related to collector? Or have you seen negative trends also for real estate holdings? No, no. It's collector related. And your funding expenses increased quite a lot sequentially despite a lower net debt, even if that is related to currency effects. What's the reason for the big increase in expenses on the funding side? It would be sometimes it could be between quarters a bit bumpy for us because we have we count in SEK, but we have a lot of funding in other currencies. And then you sort of book it quarter by quarter what you think the outcome will be. But if you pay once a year, that could be between quarters some big jumps. So I don't know exactly what was the explanation this time, but expected to look on yearly rolling 12 months than quarter in our case. And then also, of course, we have unnecessary much liquidity and that's been an extra cost. I don't know how big, but cost us something. We were a bit too cautious perhaps. So And on the call off the Q1 report, you were quite cautious regarding the outlook for acquisitions, saying that, I mean, sellers are waiting and buyers are waiting. So it's unlikely to see any major activity near term. Do you think that's still the case? Or do you think that the outlook for transactions has improved? My guess is that this will pick up in the autumn or winter. So now it's a totally different feeling in the market. So I think there would be much more opportunities after the summer. That's my guess. And do you think that the opportunities will be open up because sellers are expecting or accepting lower prices, which they didn't until now? Or do you think rather that buyers are accepting kind of old prices? I rather guess that buyer will have to accept old prices to be honest. I know everyone has too much money, and I think it will be quite strong actually. Then, of course, it will be different in different geographies and categories, obviously. But overall, I think it would be stronger than we guessed last quarter. And regarding your revisions in the Q2, it seems like in the segment Other, you had some negative revisions. For apartments, values are down like SEK 1,200,000,000. But is that only related to currencies? Or have you also had some negative value revisions in that segment? You mean property value for apartments? Yes. No, that is very currency related because we have a lot of Denmark and Finnish holdings. So then you it is like this. The P and L, you have the average currency for the quarter when you count the P and L. But if you take balance sheet, it's also the it's always the currency price at the end of the quarter. And have you actually had positive valuations for apartments? Yes, we had 4 completed projects and so on. So we have plus in the resi segment and maybe some minus in other and in other. It's hotel included. There could be some small negatives there. Okay. Thank you very much for taking my questions. Hope you have a great summer. Yes, we will. The next question is coming from the line of Jan Yefelt. Please go ahead. Yes. One question regarding your the last topic we spoke revaluations. And looking at the hotels, the main driver for the lower values in hotel, was it on the cash flow side? Or was it on more like yield coming up? Or could you just give a little bit more flavor on that? No, a very good question. Right now, we are more looking at the cash flow side, which is obviously affected. And we think it's a bit early to have a firm opinion about this because we haven't seen any transactions yet. So that would be much of a guessing game. But you can see that we have less, for example, this is the turnover end. So there you get small minus. Yes. Okay. So maybe yields are coming up a little bit, if you will guess, on hotels. Yes. I think that could be the outcome later on. But it's also, I mean, very much depending on what happens. It's pretty hard to guess exactly, I would say. But if you have to guess up or down, I would also guess a bit higher it is. And if you were to guess on a book for that, then we can buy something for that. Yes. And if we look at the rest side, I've talked to many people that are saying that the interest for residential is huge. And if you could say up or down on yields on the resets, what would you say? No, if you guess, it's down there because I agree it's a very big investor demand for resis, unfortunately. Okay. Maybe these things will net out then. Okay. And second question really relates to your residential projects. Could you give us an update on what is expected to be completed in the second half of the year? I don't know exactly, Harm, but we will have more completion of co ops Q3, Q4, I guess, also. But we book the results when we hand over the key to the new buyers. So this will be a very over time, very uneven development. So it could be quarters with 0 and could be very good quarters. So on a quarterly basis, this will be very mixed results. But over time, this will increase. And I think even more in next year year after, we will have a lot of interesting stuff coming up. And on the rental side, we I don't think we have much more to complete in Finland this year. We have some Danish that will be. And in Sweden, we mainly go for buy to sell. But you could give any number on the No. Remember actually a number exactly for but I guess a couple of 100 perhaps. Okay. Okay. Thanks for taking my questions. Thanks. The next question is coming from the line of Simon Mortensen. Please go ahead. Hi, Erik. One question from my side, which is like Most of the model has been off already. In terms of your hotel exposure, we don't have much details, but Maribel went bankrupt in Norway here yesterday, and they have quite significant amount of hotels in Sweden and Denmark as well. In the year, they did. 1. What kind of yes, finally, Hadley, they eventually went over. How is your exposure to that company? 0. Thank you. That was what I was worrying about then. No fair. Okay, have a good summer. Thank you. Your The next question is coming from the line of Erik Kranzstrom. Please go ahead. Thank you very much. Good morning, gentlemen. I had a few questions as well. I was wondering if you could talk a little bit about your like for like. Eric, you mentioned that in Q2, it was affected by the turnover rents of hotels. But if I remember it correctly, you had just about 3% in Q1 and now it's 1% for the half year. It seems to be that the effect is larger in Q2 than just the turnover from hotels, But is that the only effect on like for like? No. The main or the big part is that. So if I'm guessing, it might have been instead of 3, perhaps 2.5, then hotel take us down to like 1. So because I was I first I thought we must have calculated wrong, then I saw 1%. And then it came to me, Ah, it's the turnover rents for hotel that is coming into this. So that is the big explanation. So actually, considering that turnover ends disappear, it's not that bad anyhow to still have increase. And that will be good for the future because then we will after this, we will have our upward trend, if I'm guessing, and then hopefully hotel comes back. So but that is the big explanation is the turnover rents. Okay. So basically, if we were to exclude turnover rents in the hotel sector, you would have positive like for like in Q2 isolated? Yes, yes. Okay. Good. And then I also wanted to ask you about the fact that you were talking a little bit about investments. What does the investment opportunity look in terms of projects going forward? How is your how is planning working? Has it been affected at all by the current situation? Or do you still expect to follow through with your plans in terms of resi starts, for example? Yes. We will go through with all our resi stars. I delayed some of them intentionally or opportunistic to get better prices. And in some cases, we actually did that. But now we don't delay anymore because now we don't think it's a now we think it's a better decision to start. And otherwise, nothing happened. Construction hasn't been affected by this COVID at all actually. Even in Sweden, I think it's actually been almost easier because there have been no COVID in general in construction workers and then nothing else either because everyone is so careful. And then opportunities haven't been that much that we could have hoped for. But I think if it will come, it can be projects anyhow because it's in general more complicated to finance projects. So maybe we can find something there. But so far not much. So we will I think we will be back on more investing in the autumn or winter again. If nothing new happens, but Okay. And in terms of acquisitions, you're talking about the market seems to be opening up a little bit. Does this mean that we will see bonders start acquiring in Sweden again? Or is it still the case that you think the prices will be very tough to match and that you will probably look outside of Sweden mostly for new acquisitions? I would guess so, but we let's hope that there comes something interesting in the autumn or winter. But I think you're right, it could be better opportunities in other markets than Sweden. But at least we are very well prepared to invest if we find something interesting. Okay. Those are my questions. Thank you very much. Thanks, Erik. There are currently no further questions.