Earnings Call: Q1 2018

Apr 24, 2018

Summary

Property-management income rose 14% and NOI increased 13%, supported by new-build completions and strong letting. Q1 investment was SEK 700m, with annual spending of SEK 3bn expected in 2018 and 2019.

Thank you very much. Yes, welcome to our Q1 report for 2018. Let's go to page 2 and start with a quick look from some figures of the first quarter. The income from property management has increased by 14%, and this is because of a lot of things, but the main part from this is the new construction completion, which boost this income from property management in a good way. We also recognize a surplus ratio of 73%, and it is a little bit better compared to last year, despite a colder climate. So we can see signs of a more efficient property holding. The EPRA NAV per share recognized to SEK 77.5 per share, and now the share price is around SEK 1 below that, so we have a discount in the share right now. The loan-to-value ratio recognized to 44%, so we keep our stable position regarding the financial position and are ready for some more investments in our new constructions. Now turn to page 3. What has happened this first quarter then? The most important thing is that we still create value. We work with our new construction and our existing properties in a good way. So that is the most important thing, that the operation is going well. If I should talk about some important events during this first quarter. We issued a bond for SEK 400 million in January, a 2-year bond at a fixed interest rate of 0.68%. We also received a prize, World in Property Award, for our comprehensive environmental work. This is given to a company or a project which makes an extraordinary impression in the Swedish property market. We have also completed the rent negotiation with the tenants association here in Gothenburg, and the result was 1.14% on average in our residential apartments here in Gothenburg. We have also completed around 350 rental apartments and started around 500 apartments this first quarter. So turn to page 4. Some words about the tax proposal given from the government. As you all may know, the deductibility of interest costs will be at a level of 30% of EBITDA. For 2017, without any changes at all, that would have affected the deferred tax by 10%, SEK 60 million. It is just the deferred tax, not the cash flow tax. Also a reduction of corporate tax in 2 steps, first 21.4% in 2019, and then 1 step more down to 20.6% in 2021. This deferred tax will be affected positively by around SEK 260 million. It is by just 1 single adjustment of the tax. So let us go on to page 5, and talk a little bit about the apartments which were completed during this first quarter. It is 1 in Stockholm. It is 2 in Stockholm, sorry. Turn to page 6. The first is our project in Barkarbystaden, Järfälla, Tavernan. It is our second project here in Järfälla. It is 205 rental apartments, and it is completely occupied this first quarter. We started the occupation in Q3 last year, so it is gradually occupied during this period of time. Page 7. The project Grönskan is now fully occupied as well and completed of 148 rental apartments. This is in the area Solberga and in Stockholm. To the right in this picture, you can see Orangeriet, as you may all know, because of the switch from the co-ops there into rentals as well. This area is a very popular area, and there are many people who are interested to live there. Now, page 8. We have also started two constructions this first quarter, and here there is one in Stockholm and one in Gothenburg. Page 9, thank you. The first is Trollesunds Gårdar in Bandhagen in Stockholm, along Trollesundsvägen. We have started seven buildings. Of this 158 apartments. They will be completed in 2020. Now turning to page 10. One project in Gothenburg, it is along Mölndalsvägen, of 337 apartments. It is closeness to the city, and there will be a very nice project. This will be completed in 2021. Now turning to page 11. Let us focus a little bit on our existing properties. The market looks great. We have low vacancy in the commercials. We have our commercials in the city center of Gothenburg, and we have a record low vacancy rate of 3.5%. This is also a challenge for our letter to find if the tenants would like to grow their operations, it is harder to find new premises for them. We also work all the time to optimize the operation in our property holdings, and it is a lot to do and to have cost control in every expense we have. So, we work a lot with that. We own a lot of properties in the CBD area, which means that we own clusters so we can decide what kind of shops or if there will be a cultural center or a modern area. So that is an advantage now when we have these e-commerce and retail questions. It is a good opportunity for us to decide which kind of shops there will be, and we also ask the tenants if we have free premises beside their shop. What kind of shop do you want beside your own operation, so it can be a good mix together. So it is very important to have this closeness and also to have this opportunity that we can decide by ourselves. On this picture in the middle, you can see our refurbished block in Sturefors. It is the back street to the avenue, Lars Kaggsgatan where we have refurbished a lot of properties as well. This project, we will grow the office premises with around 2,000 square meters. It is new premises. Now turn to page 12. Talk a little bit about the financial information, and we start with page 13. The income from property management has increased by 14%, and I will talk more about the net operating income on next page, so we can focus on the next line, management cost and administrative expenses. It is at the same level as the year before. So we are at the same level. The financial expenses are SEK 13 million higher compared last year, and the main reason is that the average interest-bearing liabilities are SEK 2.6 billion higher compared to last year. But the interest rates are 12 basis points lower compared to last year, 1.88 during this first quarter. Now let us focus on the net operating income on next page 14. The NOI has increased by 13%, and the rental income has increased by 13%. SEK 53 million. The main part, 66%, is from the new construction, which has come in in our new management. It is SEK 37 million. This year, this period, we completed 353 apartments, but we have also moved in occupied new constructions at the end of 2017 that affect this figure. We have also a successful letting. As I said, it is a very good market and the main part from this is because we get higher rents in the commercials, and we also have a low vacancy rate. The operating expenses are SEK 13 million higher compared to last year. The main reason is that we have a bigger property holdings with 110,000 square meters because of the new construction which were completed during this first quarter. That affect the operating expenses by SEK 6.5 million. We have also had a colder climate, as you all have felt, I guess. It affect the operating expenses by SEK 5 million. So in total, SEK 13 million and the net operating income increased by SEK 40 million. Now turn to page 15. Here is a graph of the income from property management per square meters. Since 2014, it has increased by almost 30%. This is our strategy, like I said before, to switch older, non-efficient properties into new, more efficient properties. Also work with our existing properties to optimize those. Now turning to page 16. The income from natural energy is at the same level as last year, but it is because of many things. The production has been lower. It has not been windy like last year. So we have a production of 21 gigawatt hours less compared to last year. But the energy prices have been higher. So it is a zero-sum game in total, but it is because of different things. We have not sold any properties this first quarter. We have sold a few apartments to co-ops. That is the realized profit we have, amounts to SEK 3 million. Now turn to page 17. The unrealized value changes in our properties mainly consists of our new construction. The other from the existing properties, SEK 33 million, is just from a higher NOI. So we have no changes of yield requirements at all this first quarter. So the main part is from our own work with our new constructions. Now turn to page 18. We have invested SEK 700 million in our properties this first quarter. We had acquisitions of SEK 249 million, and it is two pieces of land and also our office in Uppsala, which we took over during this first quarter. We were moved in already in Q2 of 2017, but now we have taken over the whole property. We have a construction investment of SEK 450 million this first quarter. Now turn to page 19. As you all may know, we have all our properties in the growing regions, Gothenburg and Stockholm. In Stockholm, it is 36%, and in Stockholm, I also take into account Uppsala, and in Gothenburg, it is 64%. As I said, we have not changed our yield on rather commercials or residentials. It is 4.8% in commercials and 3.2% in residentials. Now turn to page 20. I always said that we have a strong financial position, and we keep on to that. We have an equity assets ratio of 44%, as well as loan-to-value on the same level. We have an average interest rate on closing day of 1.90%, 1.88% during the whole period. We have an interest maturity on average 34 months. We secure or fix our rent interest rates by swaps. We have around SEK 10 billion in swaps right now. Regarding how we are financed, it looks like it always does. The bank loans, it is the main part of 77%. We also are on the commercial markets with bonds, 12%, the commercial papers, 11%. If we go on to page 21, we can see how this has changed during the last three years. On this figure, you see the bank loans, the commercial papers, and the bonds. We have grown regarding the commercial market and capital market, sorry. The bonds have grown and also the commercial papers. We have grown all the total volume of the interest-bearing liabilities. The distribution are almost the same during the last years. Now turning to page 22. This is the first quarter of the last year of the business plan. We have three quarters left. Our goal is to create a value growth of 10% annually on the net asset value growth. For this rolling 12 months, we recognize 11.9%. It looks good for the future. Now turning to page 23. This will be a short summary because I think it is one important thing regarding this report. That is that we have a stable and value-creating operation. Behind all those figures, there are a lot of work. It is not a self-playing piano or what you say in English, because our employees work hard to create this value. We are very proud to report these figures, and we look bright on the future. Now if we turn to page 24, I am ready for some questions. Ladies and gentlemen, if you have a question for the speaker, please press 01 on your telephone keypad. We have a question from Albin Sandberg. Please go ahead. Your line is now open. Yes. Hi there. I have three questions. The first one is on the tax, as Susann you said about the deferred tax, but no impacts on the cash tax. Is that also your estimate going forward? I heard you not so good, but if that is right, your question was if it will be like that in the future as well, if we have just deferred tax, not the cash tax affect the cash flow. That is right. The answer to that is that we are forced to adjust us to this new environment that we are going, that is deductibility of interest cost. So it is because it is a problem. These future losses, it is the way of how we handle those, which is very important because it can be a lower interest cost or we can at the best case it will also be more cash flow. But would you say that it is not a material movement of the paid tax in the, let us say in the next 1-2, 3 years? I can't really hear you too well. I'll try with the next question. That's on the new starts. I wonder if it's possible to break down for the rest of the year. How much of the starts will be dependent on planning permissions and how much is market related? It felt like you started up quite a bit in Q1. Yes. I can say that we start everything we can. Some of the projects are slow to start because we wait for the zoning plan and also permission to build. Okay. We do not have any co-op projects that we do not start because we start it as rentals instead. Is that the case? Okay, thank you. My final question is on the comment you are making on the retail side. Yes. You are seeing a potential different use of some of the assets in terms of cafes and stuff like that. From a rent perspective, is that neutral or is it negative or positive? No, we get high rents of all our premises right now. It is a good market and as you see in our figures, it is going very well. It is also the mixture of every, it is not just the cafes because that can also make us do better business with the offices, for example, because they need cafes and restaurants in the area. Okay, great. It's a good mixture. Yes. Thank you. Those were my questions. Thank you. Thank you. The next question is from Erik Granström. Your line is now open. Good morning. Thank you. I have a few questions. The first question is regarding your investment capacity. You mentioned that you invested for about SEK 700 million in Q1. Could you give us some sort of guidance on what you expect to invest in total for 2018 and perhaps also what you are looking for in 2019? Thank you. I can say it is around SEK 3 billion annually, and it will be both for 2018 and 2019, maybe some SEK 100 million more 2019 compared to 2018. Okay. That basically means that you do expect the pace to pick up rather substantially for the remaining of the quarters this year? Yes. Okay, good. I would like to ask you about the operating surplus margin in Q1. It was basically strengthened a little bit compared to last year. I assume that that is because rent increases, but also an improved portfolio. Did you see any effects of a harsh winter in Q1 or was that really not a factor this year? I said in my presentation that the operating expenses were affected by SEK 5 million, almost SEK 6 million because of colder climate. The main reason why it increases for every quarter is mainly because of the new construction, which is completed. So that gives a good boost into the NOI. Okay, my apologies. I did not hear that in the presentation. My bad. Finally, my question was on the yield requirements. You mentioned you did not change yield requirements in Q1. However, we have seen that the direct market has definitely shown yield compression in some of the deals that have been made. What is your thinking in terms of yields in Q1? Is it simply the fact that you do not really like to change yield requirements in Q1 and that we should expect something to happen in Q2? Or is it simply that you do not feel that there is no yield requirement for your properties? It is a good property market, but we think that it was three months since we changed last time, and we think three months it is a short time. So we do not usually change our yield requirements this first quarter. Okay, thank you. Fair enough. Thank you. That is all I had. The next question is from Tobias Kaj, ABG. Your line is now open. Please go ahead, sir. No, sorry, I was muted, but I hope you can hear me now. Yes. Some of my questions have already been asked, but I have a couple of questions. First of all, regarding your new production, can you give us an indication of the average rent per square meter for rental apartments? It is around 2,000, you can say, because it is different from Gothenburg, Stockholm, and Uppsala, but on average, 2,000 per square meters. Okay, thank you. Have you seen any problem with leasing out the apartment in any of your projects? Or have you been required to lower your rent levels in any of your projects, or do you feel that the demand is solid on those levels? Yeah, we see a huge demand. Like I said before, probably that we have our own queue for just new constructions in Stockholm, Uppsala. There in that queue, we have around 35,000 interested. So we see a huge demand for the rentals at those levels. Okay, thank you. Finally, regarding office rents in Gothenburg, can you give some color on that? Have rents continued to increase in the first quarter, or do you feel a stabilization in the market? It has increased during this first quarter. In our existing property holding, it's around 6% in the commercials. So we see that it's a huge demand, which also affect the rents. Okay. Thank you for taking my questions. Yes. Thank you. There are currently no further questions. I remind you that if you want to ask a question, you will have to press 01 on your telephone keypad now. If there are no further questions, I will hand back to the speaker. Yes, Simon sent me some questions here on the email. "How will the new tax law impact our operations and strategy going forward, long and short term? Will consider lowering LTVs." My answer to that question is that we are now going to sit down and look at how our structure is. Maybe we will do some internal changes, but we will keep on to our operation as we have planned. We will make no changes, but we will make internal structures to adjust our operation to this new law. The second question, "How do you consider effect of a risk of a massive potential increase on new build in Gothenburg into 2020?" My answer to that is that we focus on what we have planned to do and regarding risk about I do not know if this is just residentials, but probably. Is it commercials? We just build at the moment residentials here in Gothenburg, but we plan to start some commercials. We think that it is the demand for commercials as well. We do not think that it is a risk for us, and we build in the city center of Gothenburg, where there are always a demand for offices. There were no further questions here on the email. If you do not have any more questions, I thank you for listening, and hope you have a lovely day. Thank you.