Hello, and welcome to KlaraBo's presentation for Q4 2022. My name is Markus Henriksson, and I work as an equity analyst at ABG Sundal Collier. First, we will listen to a presentation from Andreas Morfiadakis and Jenny Appenrodt, the CEO and CFO of KlaraBo. I will return for a Q&A. We'll also have a Q&A from the telephone conference. Also the possibility to send in written questions. Without further ado, I leave over to you, Andreas.
Thank you, Markus, go to next slide. One more please. KlaraBo in brief. KlaraBo is a pure residential property manager and developer that focus on three areas. Firstly, we have identified that approximately 4,100 apartments of our total stock of 6,500 apartments has a refurbishment potential that creates shareholder value through investments that upgrades the apartments that then results with an increase of the rental value, leading to an increase in market value. The second area is that we supply the market with new constructed, cost-efficient rental apartments with reasonable rents. Our product portfolio contains of a potential of 1,500 new rental apartments.
Thirdly, the growth is part of our operations. We always look for opportunities of both buying existing properties as well as building rights across Sweden. At the moment, our investment properties is valued at a market value of SEK 9 billion, where the average rent per square meter for the not renovated stock corresponds to a low SEK 1,026 per square meter and year. We go over to the next slide, please. One key with KlaraBo's business model is the potential of refurbishment of the existing portfolio. We're now entering a period of a more volatile market. We're seeing increasing yields. The left-hand graph is to show the potential of the business model.
The illustrative example shows an apartment receiving a decreased value from SEK 961 thousand- SEK 851 thousand, since the yield increases by 50 basis points. Without KlaraBo's business model, this would mean a write-down of approximately SEK 110 thousand for this specific apartment. By performing the value-add investment in our business model that we for a rolling 12-month period have done 70 apartments per quarter, we can mitigate the write-down and still come out with a higher market value for the apartment than it had initially. By keeping a high real occupancy rate of above 98%, we continue to prove that our business model works even in a more volatile market, and that there is a demand for our products.
This gives us comfort in continuing the value-add work for the remaining 63% of the portfolio that is unrenovated by today. We move over to the next slide. As most of you know, we do have a regulated market in Sweden when it comes to rental apartments. That means that we don't have inflation-covered rents, but instead, we need to negotiate rents with the Union of Tenants each year. This year, the negotiations have of course been somewhat harder, and they have taken a little bit longer time. We have reached agreements of approximately 30% of our portfolio with a weighted average of 4.4% increase. The rent increase so far involves both unrenovated and renovated apartments.
Even though we will not reach the full inflation number, it is important to stress that rents tend to, over time, increase more than the overall inflation. This is something that we believe will continue over time when the inflation reach more reasonable levels again. If we move over to the next slide, let's just talk a little bit about Q4, where we have been increasing revenues with 21% year-over-year, and income from property management with 12%. The surplus ratio remains at the same level as before at 54%, and that is due to the value-add work and the cost control of the property management there.
Changes in value of an investment property sums up to close to SEK 150 million, - SEK 150 million. Valuation shows that an increase of yield with 25 basis points, which decreases market value by approximately SEK 500 million or 5%. By the strong increase this quarter of the rental value, we have a positive effect and a positive effect of the inflation and the valuations. This mitigates the effect of the need of a write-down. Our portfolio is at the moment valued at 18,000 kronor per square meter, and has a net LTV of less than 50%. By only using bank financing and having a strong cash position, we feel that the company has a solid financial position going forward.
Some of the highlights on the next slide for the quarter has thank you has been the high number of refurbishment of the refurbished apartments. We reached an all-time high at 86 apartments this quarter, which gives us an average of 70 apartments per quarter rolling 12-month period. The number does vary between quarters. We are extremely happy that we can continue to have a high re-occupancy rate, even the quarters where we are refurbishing so many apartments as we did during Q4. By proposing no dividend for 2022, we can continue this value add strategy for the coming year us-using the cash on hand. Another highlight for the company during the quarter was that we revised and adopted new sustainability goals.
Goals that are in line with the Paris Agreement and the UN global targets. The goals include areas as climate and energy, circle society, attractive neighborhoods, employees, and sustainable business. The goals will all be presented for the first time in our annual report during the spring. With that, I will leave over to Jenny to talk a little bit more about the numbers for the quarter.
Thank you. Okay, you can move over one slide, please. Good morning, everyone. Revenue amounted to SEK 139.4 million for the quarter, and is up by 3.6% on a like for like basis versus Q4 last year as a result of renovations. With Östersund acquired on September thirtieth, it is now included in the Q4 numbers. Costs on a like for like basis have increased by 1.5% year- on- year, with the majority due to increased electricity costs. We saw all-time high electricity prices in Q4, with continuous high levels of volatility. We have not included any potential electricity subsidy in the reported numbers, even though we, based on what has been communicated, should be eligible for the support.
Other utility costs are mainly in line with quarter four last year on a like for like basis. Financial costs are up versus prior year, both in the quarter and year- to- date. With the main explanations being a general increase in STIBOR 3 months, which accounts for approximately 60% of the increase. New credits in connections to acquisition in Umeå and Östersund, as well as in connection to completion of project portfolios on Motala and Höör. Additional borrowings of SEK 250 million in quarter two as a basis of the value of existing properties.
The changes in value of properties is the net of three components, where a negative contribution, as you heard, of SEK 500 million as a result of a 25 basis point yield increase is offset by a positive contribution of SEK 350 million as a result of increased rental income from refurbishments and general rent increase, less investments in quarter four. The negative effect is also offset by adjusted inflation assumptions, and thereby adjusted discount rates, where the inflation rate used in the last quarter's valuations amounting to 8% has been adjusted to 4% this quarter. The net effect amounts to -SEK 147.7 million for the quarter and -SEK 25.7 million year- to- date. Tax expense is positive for the quarter as a result of the negative changes in value properties.
If we please go to the next page. Here we have the latest current earnings capacity. This is a snapshot as of January first this year, based on the contracted rents as of January the first and budgeted costs for 2023. Sales is up by SEK 8.3 million from quarter three, with the main contributor being higher rental income of business premises due to index adjustments for 2023. Another SEK 2 million comes from the renovation of completed apartments. We have delivered an organic revenue growth of 6% since the beginning of the year. Property expenses are up by 6% versus quarter three, mainly explained by higher utility costs.
The numbers presented includes general index adjustments for utility costs, except electricity, whereby we have based electricity costs on consumption for 2021, multiplied by the average price per region for the period October 21 to October 2022. On the revenue side, however, general rent increase has been included for only 300 out of 6,000 apartments. There is a gap between revenue and cost in the presented numbers. The presented surplus rates there is at 57.3%. If we would assume that the rent increase for 2023 amounts to 4% for the entire pro-property portfolio, and if we therefore adjust rental income by SEK 18 million, the surplus ratio instead goes up to 58.6%. Financial expenses are up by close to SEK 18 million from previous quarter. The entire increase is explained by higher floating interest rates.
The average level of STIBOR 3 months of our debt portfolio is up from 1.75% end of September to 2.5% end of December. With two-third of our debt portfolio now having fixed interest rates, only one-third of future interest rates expense increases will have an effect on our interest cost. The interest coverage ratio has come down to 1.8x , would end at 1.9x if rental revenue is adjusted for the assumed average rent increase of SEK 18 million. Next slide, please. Our interest-bearing financial liabilities amount to close to SEK 4.9 billion have decreased by one quarter of amortization since quarter three. Sorry, that was me. Sorry.
The average credit maturity amounts to 2.5 years, while the average interest rate tenor amounts to 3.4 years. We have, during the quarter, extended our interest rate maturity by one year by entering into three new interest rate swaps for the total amount of SEK 750 million. The tenor runs from six to eight years, with a rapid increase of STIBOR 3 months, the swaps are already cash flow positive, where the floating rate exceeds the fixed rate. The average interest rate margin of our portfolio, excluding STIBOR 3 months, amounts to 1.65%, which is the same level as last quarter. The total average interest rate, including STIBOR 3 months, amounts to 3.3%, up from 3% previous quarter, explained by the higher floating rates.
According to our finance policy, a maximum of 60% of our interest rate maturities are allowed within the next 12 months, we are now at 33%, down from 48% last quarter. On the credit side, a maximum of 30% of the loan stock may expire within a rolling 12-month period, where we are still at 11%, with approximately SEK 550 million up for extension in September this year. As mentioned before, we continuously simulate the development of our main financial ratios and covenants based on increased interest rates, inflation, and also yields, where we simulate the development up until 2026. We use the FRA curves, i.e., forward contracts of STIBOR 3 months, to simulate the interest coverage ratio. Based on the FRA curves from the 7th of February, the headroom has increased compared to previous quarter.
This is mainly a result of our increased hedged level, with only 33% of our debt portfolio being affected by increased floating rates. The simulation shows that we meet all our covenants stipulated by our banks for the entire tested period. We have a reported cash position of SEK 338 million at the end of the quarter, with an LTV ratio of 49.7%, up from 48.8% in Q3. We have, during the quarter, canceled SEK 1 billion out of SEK 1.3 billion of credit facilities, mainly due to prevailing uncertainty in the real estate market, and specifically in the transaction market. The credit facilities were limited in time and primarily intended to be used in transactions when the market was less volatile. We have, however, kept SEK 300 million of the facilities to maintain flexibility.
I hand over to you, Andreas.
Okay. Thank you, Jenny Appenrodt and Vlad. We move over one more page, please. Just to refresh everybody's mind about KlaraBo assets. We started the company in late 2017 and have today just over 6,500 rental apartments under management from Trelleborg in the south to Visby in the east and all the way up to Umeå in the north. Our organization is divided in four regions, where south and east are the biggest set to market value. The average rent for the unrenovated apartments is, as I have mentioned before, at a low level at SEK 1,026 per square meter in a year. This is, of course, the main opportunity in our business model because it gives us opportunity for value-added investments, as we have mentioned before.
If we move on to next page, one operational target that we have is that we want to see the total rental value increase. That the increase in total rental value shall exceed the general rental value increase that we all receive on a yearly basis through negotiations with the Union of Tenants. This is the graph on the left-hand side. As you can see there, the accumulated number for the four years that this business model has been in place, we are up 11.4 percentage points higher than the general increase. This is something that has been possible by possible made by hundreds of activities made by our property management organization on a daily basis. This, of course, increases the property value and strengthens our cash flow.
This is KlaraBo organic growth. Something that we work with every day. If we move over to the project portfolio, and one more page. Thank you. We do know that a large number of Sweden's municipalities have a documented housing deficit. We have developed a cost and production efficient alternative to the market, rental market with our new constructed KlaraBo houses with reasonable rents. We know that our product has been well received by the market, and we would want to continue our production. However, as we have mentioned in Q3, we have been forced to slow down the pace in our portfolio due to the fact that material prices, currency, yields, energy prices, all are pointing in the wrong direction, which makes it difficult to create the shareholder value at this point.
We continue to work with our close to 1,400 apartments in planning phase. We will not construct any new apartments in the near future due to the ongoing circumstances. We are sticking to what we said in Q3. If we would go to the next slide and just take a look a little bit forward, the outlook. We will continue to focus on refining and refurbish our property portfolio that creates long, that creates long-term value. The general rent increase will kick in during Q1 and will so far have a positive effect on valuations since the level reached is higher than estimations in our existing valuations. Hopefully, we will have reached agreement in the remaining 70% of portfolio when it comes to the rent increase during Q1.
We also continue to work with our debt portfolio and will remain with financing exclusively through our banks. Our LTV level is below 50% and have an average interest rate maturity of 3.4 years with 67% of the portfolio fixed. We have reduced the risk of the company dramatically during the year. We are also looking forward to a more stable market condition in the future, hopefully things can open up somewhat for acquisitions later this year or in the beginning of next year. Finally, investment highlights on the next page. Why should you invest in KlaraBo? What sets us out among peers?
First, we would like to say that we do have a proven business model. We have a track record by that shows that we're creating shareholder value through refurbishment, where we have increased the rental value for our partners by over 11.4 percentage points over the general increase the last four years. This is made possible since the average rent level is only at a low level of EUR 1,026 per square meter a year. That creates opportunities when investing with a yield on cost between 7%-8%. Being able to keep a high occupancy rate over that is over 98% despite refurbishing at an all-time high number of apartments during the quarter, we believe that this clearly shows the potential in our portfolio going forward.
Secondly, we also have With a continued demand for the rentals due to the housing shortage, lower construction, new construction going ahead, and lower disposable income for the population, we believe that the demand for our assets will continue to be attractive. Valued at 18,200 per square meter with a proven potential of organic growth and a solid financial position, we do feel comfortable entering 2023, and we'll continue to deliver according to our business plan. With that, we will just stop the presentation and open up for questions. Markus.
Thank you for that, Jenny and Andreas. I'll start off with some questions and then we'll switch focus towards the telephone conference. First off, you have a target to stay below 65% in your LTV ratio. Given current market situation, up to which level are the banks willing to lend to you?
Are we talking about new loans or?
Yeah. Up to which LTV level would the Nordic banks be comfortable lending to a residential company like KlaraBo?
I would say that the discussion that we have, and of course you fill in here, Jenny, but the discussions we have with the banks are very positive. They have not indicated that they have changed the view in KlaraBo's business model. So we don't really have a reason for not expecting that we still can use an LTV level at 65%. In the vaulted market that we are in, we're not really aiming for 65%. At the moment, we think it's better to take care of the balance sheet and try to take down the risk as much as possible.
Very clear. You have so far achieved 4.4% in the negotiation, indexation negotiation. Do you expect historically high indexation also for the next year as there have been this new agreement signed between the tenant association and Fastighetsägarna that they will look at historical costs and the costs during the year of negotiation?
It's, you know, it's a little bit early to start thinking about next year. Of course, we have all reasons to believe that the rent increase for next year will be at a high level as well, as this year, as 2023. But I don't think, hopefully the inflation will go down somewhat during the year. Of course, the argument there would be that the general rent increase then would be lower for 2024 than for 2023.
Thank you. Another question here. Property value changes of minus 1.6% here in Q4 and minus 0.3% for 2022. Could you elaborate a bit on how external appraisers have recent? Do you see any difference in geographies? Any difference between old and new residentials? Anything that could be helpful for us?
Well, we do think that the external valuation show quite. They do show that, I mean, we see that especially new production rental apartments are being hit with the valuations. It's still a variable to market, and I can't say exactly where the yields are going. We do believe that the old investment properties have an advantage over new constructed apartments since there are some. You have the organic growth that we have been through during the presentation. I think we have taken the first step of adjusting the market value, and hopefully we can stay at this level going forward now.
Very clear. Thank you. I'll check if there are any questions on the telephone conference.
Thank you. If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Stefan Andersson from Danske Bank. Please go ahead.
Thank you. Just a couple of questions. First on the rent there, just so we get the estimate right. Are you going to book the actual invoiced rents for Q1? When negotiations are done, whenever they are, there will be a real retroactive billing, of course. Will that come later or will you handle it some other way?
I'm not sure exactly. I heard everything you said, Stefan, but, of course, we won't do anything until the negotiations are done. Hopefully they will be done, most of them at least, will be done during Q1. As soon as we can, they are done before the billing period that we have in the beginning of March, they will start to be included then in our numbers.
Okay, great. You write a little bit about, you know, being a little bit more optimistic or positive, making use of any opportunities that could arise, you know, later during the year. I guess I interpret that as, as, potentially picking up some properties if something came at a, at a good price. Could you maybe elaborate on your thoughts on, buildings versus building rights? Are those equally interesting or is one more interesting than the other?
I would say existing properties are more interesting at the moment than buying building rights, because of course, buying building rights is we need to use quite some bit of cash that we don't get any return on investment at the moment. Since we can't really see that there is a difficult to create shareholder value when it comes to new construction, we want to be focusing on these on existing properties at the moment.
Yeah.
You know, if we're going to be active in the short term in the transaction market, it's going to be with existing properties.
Good. On that topic then, I noticed in your product portfolio, you have a smaller start in 2023, and then you have quite a lot in 2024. I fully understand and respect that, you know, we don't know the outcome of that yet, of course. What do we need to see here? I guess construction prices are coming down slightly. Capacity is opening up in that sphere. You know, do you need to see interest rates coming down in order to start that? If you could elaborate a little bit on what you need to have in place in order to fulfill that project pipeline.
As I mentioned in the presentation, there are too many pyramids that are aiming in or pointing in the wrong direction. Of course, we have noticed, of course, that the material costs have at least stabilized and maybe come down somewhat. When you have increasing yields of maybe between 70-100 basis points, the valuations of new construction is very difficult. We want to see where they end up in the near future before we do take any new decisions when it comes to new construction. I would probably say that especially the yields needs to be set when it comes to new construction.
Yeah.
Before we move on.
I fully understand that. Could there be an opportunity... I'm just listening around to other, you know, competitors to you saying that it's very difficult to start rentals at the moment, but we will start co-ops instead. Could co-ops be something that you could potentially be doing with some of those or is that not really relevant?
At the moment, that's nothing we have been discussing.
Yeah. Okay. Then, on the renovation pace there, is there any reason to think that you couldn't keep that this pace up? Should we even expect it to increase? Is this pace roughly where you hope to be here now for some time?
No, we do hope. When we added Östersund, that definitely gives us more, more of a. Okay, let's start from beginning. It's. We do think that 70 apartments rolling per quarter, rolling 12 months is something that we need to or could be able to keep going forward, at least for 2023, without adding any new existing properties. We do. The stock is big enough to be able to go through that. Are you still there, Stephan? Do we have any further questions from the tele-?
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. There are no more questions on the teleconference at this time. I hand the conference back to the moderator.
I will read out some questions from that have been written in. Here's a question on what's your perspective on higher for longer rates environment and the impact on the yield requirement.
What we do, as I said, we continue to simulate the financial rates and our covenants. The way we do that is that we look at the current FRA curves, which is really what the market believes, how the rates will develop. What we've seen over the last week is basically the interest rates have come up. The way we look at it right now when it comes to interest rate is that we have simulated that the floating interest rates will come up to approximately 3.6%, and thereafter it will go down again.
I mean, as all of us know, there is a risk that that might not be true and that the interest rates will go up even further. That is one of the reasons why we, during quarter four, increased our interest rate tenor to basically cap the risk on the upside, basically in order to protect our interest coverage ratio. We will continue to do that. We are currently looking at even more interest rate swaps to go even further up, to hedge even more. That is something that we certainly take into account. When it comes to the what effect that has on the yield.
Yeah. We already mentioned during the Q3 presentation that we do see that the interest rate development needs to have an impact on the yield requirement, of course. We are seeing it for the first time, basically in during Q4, where we have increased yields with 25 basis points. If that's enough or not, I don't know. Of course, we still don't see any transactions being made in the market. As long as we don't have any transactions in the market, it's very hard to set what the yield requirement is at the moment. We feel quite comfortable with the market value we have in our books.
We think that 18,000 SEK per square meter, as their value to is at a low level. The downside should be quite limited if there is a downside on, when it comes to the market value.
I can also add that when we look at our financial covenants, it is clear that there is a lot of headroom when it comes to the LTV. It has been the interest coverage ratio which is the tight end. That is why, of course, we focus on basically increasing the interest rate tenor.
Perfect. I'll follow up with one last question, given it's going to be one on interest rates again. They have come up significantly, as we have discussed. People should be a lot more willing to live in a rental apartment, now versus one year ago or five years ago. Could it be possible to increase the rents as the demand should or even have increased now, and they should keep on increasing? Or is it a slow-moving sector where it is all about the negotiation and the protection of the tenant?
I mean, for us, it is important to use the negotiation. I mean, that is part of how the market actually works. And we do want to have a collaboration with the Union of Tenants. It's important for us. So we will try and follow them as much as it goes. You can use those negotiations and not increase the rents more than we actually negotiated to. It is a quite slow-moving market and has been in the past. And we do believe that that will also be the case going forward. But as of now, it does show that we will receive over 4% this year.
If we're aiming for that same level next year, we just wait and see.
Perfect. That was all from me. I'll hand back for Jenny and Andreas for any concluding remarks.
Okay. We would just like to thank everybody for for listening and wish you a good day. Thank you.
Thank you.