Earnings Call: Q3 2016

Nov 8, 2016

Summary

Income from property management rose 10% YoY, while rolling 12-month NAV growth reached 16% against a 10% annual goal. Property value gains offset negative derivative revaluations; construction and operating efficiency remained key drivers.

Thank you. Good morning, everyone, and welcome to the presentation of the third quarter 2016. I am Susann Linde, CFO and Head of Investor Relations here at Wallenstam, and Hans Wallenstam, our CEO, will participate in the question session later on. Let us turn to page two. There has not been one particular important event this third quarter. We keep on working with our business plan to reach a net asset value growth of on average 10% yearly, and we are on track. On this picture, you can see the property Stallbacken in Mölndal, which we completed this quarter of 71 apartments. They moved in in September. We have also started in October, 133 more apartments here in this area, and we will build 580 apartments here in total. The demand of retail and office spaces in the city center of Gothenburg has a strong demand, and we are upgrading and modernizing all of our properties. One example is the Mid Avenue District on Avenyn here in Gothenburg, which we will complete in the middle of 2017. We have already a tenant here of the entire office premises, and it is Convendum which work with office hotels with high service. Now turning to page three. A little bit about our new construction. We have around 1,600 apartments under construction now at the end of September. We will keep the most of them in our own management, except the ones in Helsingborg, and as well as the co-op project Solberga of 170 apartments. Now turning to page four and move on to the financial information. We turn to page five and start to look at the income from property management, which has increased by 10% compared to last year. The residential property holding are full let, and the commercial premises has a vacancy rate of around 6%. We can see a strong demand for the commercials in the center, and that is where we have our commercial properties. The rental income has increased by 3% in the comparable holding and 4% because of the new construction which has come into management. The rental income has been affected by our new property taxation for 2016 with SEK 7 million, and it is because it is for the whole period from January until September, and it has also affected the operating expenses with the same amount of SEK 7 million. Operating expenses has increased by 1%. It is SEK 3 million. If we exclude the property tax of SEK 7 million, it is less compared to last year with around SEK 4 million. That shows that we have a more efficient property holding compared to last year with newer properties as well as more efficient existing properties. We work to make them more efficient all the time. It has also been a colder climate compared to last year, which affects the operating expenses with around SEK 3 million. Due to effective asset management, financial expenses have decreased by SEK 26 million, and the average interest rate for this period is 2.07%. Now turning to page six. We keep the most of our new construction in our own management. That is why the income from property management increased from year-to-year. You can see here on the graph. It will keep on doing that because most of our properties that we build is rental for our further in-house management. Turning to page 7, the income from natural energy management is SEK 50 million lower than last year, and the main reason is that the production is around 20% lower compared to last year. Also the energy certificate market has a lower price, which affects our business. As I mentioned before, we have higher property taxation for our wind turbines, which affects the results with around SEK 3 million. In this income from natural energy, it includes depreciations of SEK 71 million, which means that we have a positive cash flow from this operation. As you can see, last year we had a lot of co-op sales, but in this year, we will only have singular individual co-ops for sale. In 2017-2018, it will be more on this line. During this first period, we have sold six properties, but neither of these in this quarter. We sold properties of an amount of SEK 730 million with overvaluation of 18% and it's 80% over investment cost. Turning to page 8, the development in the value of properties during this period was positively affected by an increase in value generated by our own work, both with ongoing new construction as well as completed new construction, but also that we work to make our existing properties more efficient. Also the market situation itself. We recognized this value growth of SEK 1.9 billion this period, which means a value growth of around 6%. The interest keeps falling, and that also affects the derivatives negatively, which fall SEK 378 million. But that doesn't affect the cash flow. The profit after tax decreases mainly because of the negative effect of the derivatives. Turning to page 9, as I mentioned before, 40% of the value growth comes from our new construction, SEK 700 million. That's something that inspires confidence for our future, that we can create our own value growth no matter of the market. This will keep growing. Turning to page 10, on this graph, you can see our completed new construction, how much surplus value it gives us. In 2016, we have five completed new constructions, and they show together 40% surplus value. This, combined with higher income from property management, is a good contribution to our net asset value growth. Turning to page 11, and start with our assets. The main asset in our operation is our investment properties, and they have a value of around SEK 35 billion. In this SEK 35 billion, we have SEK 3 billion, which aren't cash flow assets because they are ongoing projects and land. During this period, we have invested almost SEK 2 billion in ongoing projects and land. You can see on the line work in progress that we also have development properties constructed for sale. This is the change that we give this quarter, that the one development constructed for sale, in this case, Helsingborg, we recognize on this line. Turning to page 12, the total equity is SEK 16 billion, and it's SEK 1 billion more compared to year-end 2015. In this equity, we have a deficit of derivatives of SEK 1.2 billion, which will come back gradually when they mature. Turning to page 13, despite our huge investments, we keep our strong financial position. We have an equity per assets ratio of 43% and a loan-to-value of 44%. We have a guideline to have at least an equity per assets ratio of 30%, and we are far over that. Now turning to page 14. Our goal. In this business plan until 2018, we have one goal, and it is to achieve a net asset value growth of an average 10% annually, and this rolling 12-month period shows 16%. To the right, you can see how the net asset value has grown during the last 10 years. It has more than doubled. Now turning to page 15. Some of our key ratios, I have mentioned some of them before. If you look at the surplus ratio, it has increased 1.6%, and that despite colder climate as well as the property taxation. That shows that we have a more efficient property holding. Now turning to page 16. Now I will finish with a short summary. We feel confident about our business model and our financial position, and we are well-positioned as a company in relation to the risks on the market. We have a successful management and optimize our properties both in terms of operation as well as rentals. We keep on with our new construction and it creates more value into our business. Now turning to page 17. Thank you for listening. Now we also welcome Hans to participate this questions session. We are now ready for some questions. Ladies and gentlemen, if you have a question for the speakers, please press 01 on your telephone keypad. Please hold until we have the first question. Our first question comes from the line of Mattias Montgomery from ABG. Please go ahead. Your line is open. To the line of Mattias Montgomery from ABG. Your line is now open for your question. Yes. Thank you. In the ongoing projects, what is the number of square meters there or the average number of square meters per apartment? Good morning. It's around 50-55 sq m per unit. Okay, thank you. There were no new development starts in the quarter. Do you expect a massive ramp of production during the coming quarters or will you simply miss the development target? I noticed that you mentioned you only have one target now for this business plan 2018. Yes. You can say that our business goal is to create a net asset value growth of 10%. That's our goal. Then we have guidelines which will help us to reach that goal. This 7,500 units, it just helps to reach those 10%, but it's also that we need to work with our existing properties to make them more efficient and work with every other part in our operations. Your question about started units. The third quarter, it's a quarter that there are not so much activity on the market because July and August is vacation, then you have September. Quarter four, there are more work again with start. We had one start now in beginning of October of 133 apartments here in Gothenburg, and it will be more now in this fourth quarter. Okay, so I guess the level we're seeing now of the number of ongoing production, that's pretty much where you will be for the next one and a half year as well. Is that correct? No. What I said was that this quarter 3, it is not the best quarter of the year. Quarter 4 is much better because then you have more activity on the market as well as the council and because to start a construction, we need a building right. Okay, perfect. I had some issues with the connection in the beginning of the call. Could you repeat what you said about the 7 million in, I think you said one-off in OpEx? Okay. Yes, because of the new property taxation for 2016, we had this single quarter, we recognized SEK 7 million higher rental income as well as higher operating expenses with SEK 7 million. So it is a zero-sum game in total, but it affects the surplus ratio as well as the rental income and operating expenses. Okay, thank you very much. Just one last question. The stalled negotiations in Gothenburg, an eventual solution here, how would that play out? Would you receive a one-off payment or would it be just a higher revised rent for the tenants, or how could it play out? It's not easy to say that because that with some other owners go to the tenant association to the court and see if we get a solution. But I would think it would be a two-year solution for both this year and next year. Okay. Thank you very much. That was all for me. Thank you. Thank you. I remind you that if you would like to ask a question, you will have to press 01 on your telephone keypad now. There will be a further pause whilst any questions are being registered. As there are no further questions registered, I will return the conference back to you guys. Okay, thank you. We don't have any questions on the mail either, so then we thank you for today. Thank you very much. Bye.