Earnings Call: Q4 2016

Feb 22, 2017

Summary

Property management income rose 9% and unrealized property gains reached SEK 3.5bn, including SEK 1.2bn from new construction. Net asset value grew 23%; year-end LTV was 43%, with nearly 2,000 apartments under construction.

Good afternoon, and thank you for listening on my presentation of 2016. I'm Susann Linde, CFO and Head on Investor Relations here at Wallenstam. I'm very pleased to sit here today and make a presentation of our good results of 2016. Now turn to page 2. First, a short summary of Wallenstam the company. We have in total SEK 37 billion in property value, and they are located in the growing regions, Stockholm and Gothenburg. We have 7,500 apartments and 1,000 commercial customers. We have a rental income of SEK 1.6 billion. At the year-end, we have almost 2,000 apartments under construction, and we are since 2013, self-sufficient in renewable energy. Now turning to page 3. First, I will highlight some important events from the fourth quarter. We have started five new constructions of 461 apartments. We also made four divestments of properties and one acquisition of a commercial property and acquisitions of land. We were also honored of the prize, the Swedish Renewable Energy Award because our self-sufficient in renewable energy. Now turning to page 4. We have completed some new construction during the year of 550 apartments, which affect the result of 2016. Now turning to page 5 to see which constructions I talk about, and begin with Stockholm. First one to the left is Månspinnaren in Norra Djurgårdsstaden, which we completed in the second quarter of 2016. To the right, you have a kindergarten in the same area as Månspinnaren. Down to the left, we have Följa Berg in Nacka of 122 apartments, which were occupied in the first quarter of 2016. Now turning to page 6 and move on to Gothenburg and Helsingborg. On the left, you have Vågmästaren in Kvillebäcken in Gothenburg, where we had an urban development project for many years. This is the last phase here of in total 450 apartments, and it were occupied in the first quarter of 2016. To the right, we have Stallbacken in Mölndal, where we completed at the end of 2016, and they started to move in in 130 apartments. Down to the left, we have Vildvinet in Helsingborg of 52 apartments. This property will be taken over by Willhem in the near future. Now turning to page 7, and talk a little bit about our new construction starts in 2016. During the fourth quarter, we started about 460 new apartments. It has been very intensive fourth quarter. Now turning to page 8. Finally, we started our project in Umami in Sundbyberg, Hallonbergen of 147 rental apartments. To the right, we have the co-op project that we started in the first quarter 2016 of 170 co-ops. It's in Solberga in Stockholm. Now turning to page 9. Again, I will talk about Stallbacken. We have completed some properties there, and we have also started some new construction there. On these two pictures, you can see a total 170 rental apartments that we have started at the end of 2016. In total, we will build 580 apartments here in this area. Now turning to page 10. We also started some co-ops in Stallbacken. You can see that on the left picture. It's 133 co-ops. To the right, it's Helsingborg of 17 terrace houses for right of ownership. We will sell them when they are completed in the second quarter 2017. Now turning to page 11. We have also started some new construction in attractive locations in Gothenburg. To the left, you have Forskare in Gothenburg. It is on the Transgatan in Gothenburg of 36 small apartments. To the right, it is Ulvsbergatan in Gothenburg. We received a land allocation from the city where we started 115 rental apartments. Now turning to page 12. We also work with our existing properties, and this is one example. It is Vasagatan 33 in Gothenburg, in the center of Gothenburg, where we converted older commercial premises into co-op apartments instead. Now turning to page 13. This in total means that we have around 2,000 apartments under new construction, and we will keep 75% of these properties in our own management in the future. The rest of them we will sell. Now turning to page 14. Let us move on to the financial information and start on the next page, 15, and start to talk about the income from property management, which has increased by 9% compared to last year. The main reasons are the new construction. They have come into operation. We have also accepted for letting operations, and we also work with our efficient property management. Now turning to page 16, and talk about the net operating income, which has increased by 4%. If you just take the comparable holding included the new construction, it has increased by 7%. Start to talk about the rental income. The new construction comes in with SEK 61 million and the next SEK 40 million is because of our successful letting operations, our negotiations with our commercial tenants, which has got us a lot of rental income. We have also been affected by our renovation projects. For example, on the Avenyn where we empty the houses because we have to renovate the property. When it comes into operation again, it will give us a more efficient net operating income afterwards. We have also sold 11 properties during the year, which means we have SEK 43 million less rental incomes from those properties. This together means that we increase the rental incomes with SEK 58 million in total. The operating expenses has been mainly been affected by the new property taxation, which means we get SEK 9 million in higher operating expenses. These expenses we invoice, so we get higher rental incomes with SEK 9 million as well. Because of the colder climate and more snow, we have increased operating expenses of around SEK 5 million. We also work to get more satisfied tenants, which means that we increase our property maintenance, so it affects the operating expenses with around SEK 2 million or SEK 1 million. This together amounts SEK 50 million higher operating expenses. Now turning to page 17. If you look on the distribution of the rental incomes, you can see that more than 40% of the rental income comes from the residentials. Around 45% comes from the retails and offices. We think this is a stable foundation combined with our new construction. Now turning to page 18. The income from natural energy has been affected by the low energy certificate prices. Maybe you have read the media last weeks about the record low prices in energy certificates, which also affects our profit in renewable energy. And if we look at the realized changes in value because of our realization of investment projects, we got SEK 170 million in profit from these investment properties. We sold 11 properties this year, and we sold it 20% above the valuation. Now turning to page 19. The sellings that we did last year or 2016, meant that we recognized surplus value of 107% if you take it to the acquisition and investment cost that we have. Well, guess what we have invested in those properties. It is 107% above that. So we make good investments, we think. Now turning to page 20. Here now we come to our unrealized value changes. As you know, we have a good property market with high activity, and that also affects our valuation. We got SEK 3.5 billion in unrealized value changes this year, but I would like to highlight the new construction part, which recognized to SEK 1.2 billion, and this value is something that we create by ourselves, and we are very satisfied with that. We are also affected by the unrealized changes in the derivatives, which affect the result with minus SEK 130 million this year. Now turning to page 21. Here is a graph on the unrealized changes from our new construction, and in 2016, it is SEK 1.2 billion. You can see here that it increases for every year. In the future, when we do more investments, this will increase as well. Now turning to page 22. We create a value growth, like I said, and here in this graph you can see the completed new constructions in 2016. We recognized a surplus value of 45% compared to the investment cost. Now turning to page 23. The total assets amounts to SEK 39.5 billion, and the main part is our investment properties and our ongoing projects of co-ops and properties for sale. As I said before, our assets are located in the growing regions, Stockholm and Gothenburg. Now turning to page 24. Our equity has increased by around 18% this year, and it has also been affected by the deficits in derivatives. It is SEK 130 million this year. So the total deficit in derivatives is around SEK 1 billion now in the balance sheet, and it will come back when they mature. Now turning to page 25. A little bit about our financing. You can see here on the picture that we have 24% on the capital market, and that has increased compared to last year. We think this is a good distribution of the financing. We have 75% in bank loans. Now turning to page 26. Like I always talk about, we have a strong financial position, and it has been even stronger this year. We have an equity per assets ratio of 45% and an LTV of 43%. So we think this is very good for the future investment. Now turning to page 27. We have one goal in our business plan, and that is to get a value growth of on average 10% annually. For 2016, we recognized 23% in net asset value growth. On average, those three first year in the business plan, it recognized 16% in value growth. Now turning to page 28. Yes, because of this good result, the board proposed a dividend increase of 13% up to SEK 1.70 per share. That means it is a direct yield of 2.4% approximately. Now turning to page 29. And some key ratios. I have talked about the main part. The surplus ratio amounts to 73%, and the average interest rate amounts to 1.97, so under 2% for this year on the closing day. Now turning to page 30. A short summary, we have a strong financial position. We are ready for our future investment programs. We have the properties on the right places. We have them in the growing regions, Stockholm and Gothenburg. We also create our own value, both from the new construction with a high surplus value as well as our efficient property management. We think bright about the future. Now turning to page 31. I am now ready, and I am ready for some questions from you. Thank you. Thank you. Ladies and gentlemen, if you have a question for the speaker, please press 01 on your telephone keypad and you will enter a queue. Please hold for the first question. Ladies and gentlemen, as a reminder, if you do wish to ask an audio question, please press 01 on your telephone keypad now. Our first question comes from the line of Albin Sandberg from Handelsbanken. Please go ahead. Your line is open. Yes. Hi. Maybe you said so, but just so that I got it right, the completed negotiation with the tenant organization, would you say that it relates to both 2016 and 2017? Is that yet to come then, the 2016 impact from those higher rents? You mean the Gothenburg negotiation? Yeah, exactly. Of 1.3? Yes, it will come now during 2017. Yes. Yeah. Could you give some guidance on how much we are talking about as a kind of a catch up for 2016? Yes, it is together with the 2016. It is both for 2016 and 2017. Yeah. It is a negotiation for both of the years. Okay. It is from now 2017. I just wonder if we could get some help to understand how much more will come in 2017, which is related to 2016. It is 1.3 from the total Gothenburg. Yeah. That in millions? In millions. Yeah, it's percent. Yes, 1.3% and maybe, yes, it's some millions. Okay. I wonder on the kind of sensitivity analysis on the wind power. Obviously, no write-downs in this quarter. Do you feel happy with that? Is that based on the current spot prices or are you taking more of a midterm view on those? Yeah. You can say that the valuation is in long term and not because it's quite a volatile market, the energy market. So, we have taken into account the lower energy certificate prices, and we don't need to make a write-down. Okay. My final question is on the starts now going into 2017. Obviously, a quite high activity quarter in Q4 if we compare to the first nine months in 2016. Was Q4 unusually high or is that kind of the new base that you're expecting to deliver from? Like I said before, we start as fast as we can when we get the planning process and the city is ready to get us started, we start. It depends on the planning process, I can say. But would you say Q4 was in line with your expectations or just to get a feel on how close are we on the lead times? Were there any plans you got in Q4 and then you were able to start in Q4 as well, or is it more visibility than that? You can say that we have those 7,500 that we have reported before. We have that as a guideline now as well, and they can come in quarter one and quarter two and quarter three. It can differ with one or two months or something like that because of the planning process. And now we are almost two months into the first quarter. What is your feel on the first quarter in terms of start status? You will see that, Albin. I cannot say that, sorry. Yeah. Okay. Thank you. Thank you. Thank you. Ladies and gentlemen, as another reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. Our next question comes from the line of Niclas Höglund from Nordea. Please go ahead. Your line is open. Yes, good afternoon. Just a couple of questions, if I may. Firstly, on the value changes in the quarter. If we start out with the value changes in the ongoing production of rental units, could you help me to understand a little bit on the, we are seeing a clear step up here, while the number of units up until the third quarter were quite stable. Have you taken a view on the underlying yields on the new builds? Have you seen lower costs in the projects or what has been the key drivers for the value changes on the new build? Maybe a reflection also on the strong starts that you are posing in the quarter. If you already have seen some value lifts on the starts in the fourth quarter, although, you have not built so much yet. Hello. Yes. I can say that when we ramp up the investments, the valuation, the surplus value, which will also increase. The more properties that we have under construction, the more value growth. Did I answer your question? No, I just wanted to get a better feeling on the key drivers in this quarter. Was it linked to more starts? Was it linked to even lower yield assumptions, or was it just down to very successful production? Yes, it's the latest one, the successful production, because we don't start a production unless we can't get a surplus value that we think is enough. Like I said before, we can start more than we have done. But when I get a question, why don't you start more? We can buy building rights, but it's too expensive. If we should have done that, we couldn't have recognized such a surplus value like we do. We have a very successful cost control, I think. Okay. Then also on value change, maybe I missed out on that. Did you mention anything on your rental renegotiations? Because you're talking very favorably about the renovation and the rental negotiation as part of the value drivers. Do you have any numbers to give us here? You mean the negotiation with the commercial tenants or? Exactly, yes. Yes. That's a very difficult question to answer because if we invest in commercial premises, we can get a higher rental income, but it also has an investment in the background. So, in the comparable holding, the negotiations with the commercial tenants, it's successful, and it's a good market. Okay. If we turn it around a little bit. When you look at the valuation of your commercial property portfolio on the assumption on rental growth, market rental growth from you and your valuators, how much has that contributed to your uplift in the year or in the quarter? You can see that when you see the value changes in 2.3 billion, it's in the comparable holding, but it's maybe half of that and the other half is from our efficient management. Okay. Fair enough. Thank you very much. Thank you. Thank you. Ladies and gentlemen, if you have any final questions, please press 01 on your telephone keypad now. As there appear to be no further questions, I will return the conference to you, Susanne. Yes, I got a question here from Simen Mortensen, DNB. He wants me to comment on the yield in net asset value. "How do you think about the rising swap rates in Q4 2016?" Okay. I just need to read this email. Maybe he wants me to I do not really understand the question. Can you hear? Maybe I need to come back because I do not understand what his question is. Yes. I say thank you if you do not have any more questions. Thank you.