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Edited Transcript of WIHL.ST earnings conference call or presentation 24-Oct-19 7:00am GMT

Q3 2019 Wihlborgs Fastigheter AB Earnings Call

Malmö Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Wihlborgs Fastigheter AB earnings conference call or presentation Thursday, October 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Arvid Liepe

Wihlborgs Fastigheter AB (publ) - CFO & Secretary

* Ulrika Hallengren

Wihlborgs Fastigheter AB (publ) - CEO

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Conference Call Participants

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* Andres Toome

Green Street Advisors, LLC, Research Division - Research Associate

* Erik Granström

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Niclas Hoglund

Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator

* Philip Hallberg

Danske Bank Markets Equity Research - Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to Wihlborgs Fastigheter AB Q3 Report 2019. (Operator Instructions) Today, I am pleased to present CEO, Ulrika Hallengren; and CFO, Arvid Liepe. Please begin your meeting.

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [2]

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Hello, and welcome to the presentation of Wihlborg's 9 months results 2019. Even if we hear and see signals about a weaker market around us, our customers in our region act if -- as if they don't pay those signals too much attention. They are probably too busy with their business.

We continue to have a very strong net letting. Actually, 2019 is our second best year ever in the net letting first 9 months. We have, during this period, increased our rental income with 11% to SEK 2.218 billion. The operating surplus increased with 10% up to SEK 1.615 billion. And income from property management increased with 25% to SEK 1.318 billion. This continuously strong result comes again from good performance, both in property management and reduced financing costs compared to 2018. The net result for the first 9 months amounts to SEK 1.377 billion.

Page 3. As I just said, we have another quarter with very strong net letting, plus SEK 28 million for the quarter and summarized to SEK 75 million for the first 9 months. The activity is high with many new leases and good levels, but worth mentioning is also that the volume of termination is at the same level as in the third quarter 2018. We don't see any increasement here.

We are active on the market finding new tenants, but we also manage to keep our customers as future customers. And when they have new demands and need to expand, we often see them at both sides in the statistics. We have surveys showing that 88% of our customers are willing to recommend us to others to a high or very high degree.

Page 4 shows the net letting in a historical perspective with both new leases, terminations and the net letting at the black line. Q2 was the fourth best quarter in our history, and now we are very close to that level again. The net letting for the 9 months period is the second best ever. Malmö and Copenhagen have the strongest contribution to these figures at the moment, but we have good potential in all our 4 cities.

An example of how things are going in Lund, it's in the list of our largest customers at Page 5. Axis Communications are back on the list, and they keep up their expansion. We can also see that Danish Building and Property Agency is new on the list, but actually, it's an old customer which now has been summarized under a common name. It's the authority that held together several leases for different governmental tenants in Denmark. The proportion of rents from governmental tenants overall is at the same level as before, 21%.

Page 6. The rent value growth for the entire property stock is up with 14% compared to first 9 months 2018, up to SEK 3.287 billion. Our transactions have contributed here. But also when we measure performance in the like-for-like portfolio, we see a growth at a high level. The highest level ever in rental value for Wihlborgs' growth like-for-like has been 4.1%, and now it's 3.9%. It's a strong result. Our goal is to achieve 1% above index. The growing portfolio in Copenhagen actually keeps these figures down a bit, and that means that the Swedish market performs very well from this point of view.

Looking into our portfolio at Page 7, starting with offices. The vacancy, especially in Malmö and Helsingborg, continues to be very low with 95% and 94% occupancy rate. Actually, in the city center of Helsingborg, the occupancy rate is as high as 97%. In Lund and Copenhagen, the occupancy rate is lower. In Lund, we have actually bought a higher vacancy as a part of our expansion plan. We divested Landsdomaren with 100% occupancy rate and a very high performance in operating surplus ratio and bought Nya Vattentornet 2-4 with a good level of rental income but also higher vacancy and lower surplus ratio. This is a part of our development plan for the area.

In Copenhagen, the occupancy rate will be higher as soon as our new tenants that we have signed new leases with have moved in. 4,000 square meter logistics tenants will be added the 1st November and approximately 6,000 square meters offices in December so that at year-end, we know that the numbers of occupancy rate in Copenhagen will be higher. The operating surplus from offices summarized to SEK 1.874 billion.

Page 8. Also in logistics and production, the occupancy rate is at a high level. 92% and 93% is almost the highest possible level we can expect to achieve, a bit lower in Copenhagen since we work with one of our largest properties there in Abildager. But as just mentioned, one -- that is one of the buildings that will be filled with new tenants the 1st of November.

Page 9. The overall portfolio has an occupancy rate of 92.4%, excluding land and projects, and a running yield at 5.4%.

Page 10, changes in market value. We have, during the first 9 months, made acquisitions for SEK 2.881 billion. We have invested another SEK 377 million this quarter, in total SEK 1.184 billion, and we have sold properties at a value of SEK 1.710 billion. Together with changes in valuation of SEK 456 million and SEK 349 million in currency translation, we now summarize a property value of SEK 45.306 billion.

Page 11. That means that the curve for increased value in our portfolio continues in the right direction as before. Stability and real estate have a special kind of partnership as well as the stability in design is the fundament that was (inaudible). Stability in property development and maintenance is what creates continuity in increased value. The new line in the figure at SEK 45 billion is a result of that stability.

Page 12. The region grows, and we continue our growth almost at the same pace in our 4 cities. No major changes since last quarter, 43%. Our market value is still in Malmö.

And over to you, Arvid.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [3]

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Thank you very much, Ulrika. Good morning, everyone. If we move to Page 13, you find the income statement for the third quarter isolated. Rental income rose by 11% to SEK 743 million. The increase has, of course, been affected by the rather large, both acquisitions and divestments that were made since Q3 2018. Income in the quarter was also negatively affected due to a change in the accruals of the growing service charges in the Danish operations. The total effect of this was some SEK 10 million, and this only affects this quarter.

Operating surplus amounted to SEK 552 million, up 9% versus last year. It's worth noting that the property taxes are now clearly higher than in 2018.

In Q3, we have received the new tax assessment values from the tax authorities, and the new assessments have increased the property tax and for a few properties, even more than we had expected. This effect was about SEK 7 million in the quarter. For Q4, we expect the property tax to go down again to levels in line with Q2.

Income from property management increased to SEK 446 million, up 20%. Net financial costs were SEK 89 million in Q3, down from SEK 118 million in Q3 2018. We recorded positive value changes in the quarter, SEK 179 million, and those are completely driven by our letting activities with no changes in valuation yields. Paid tax in the quarter amounts to SEK 25 million, which is somewhat higher than previously. And as you know, we are in an income tax-paying position in Denmark.

In addition to that, the application of the new limitation on interest rate deductibility in Sweden are still not crystal clear. But these new rules have increased the expected amount of paid tax in the Swedish part of the group. All in all, we have a net result or profit for the period of SEK 450 million.

Looking at the balance sheet on Page 14. We can just -- we're not going through all the details or the numbers. Note that versus 12 months previously, the value of investment properties has increased by SEK 5 billion, while equity has increased by SEK 1.8 billion, and the borrowings have increased by SEK 3.6 billion. So I think those are the most important changes to highlight in the balance sheet.

Looking at Page 15. The balance sheet numbers can be transformed into the key figures and equity ratio, which now stands at 35.3%. Our LTV is 55.1%. And the interest cover ratio, a very strong 6.2x. EPRA net asset value has increased this quarter as well and now stands at SEK 130.23 per share.

On Page 16, you can see the historic developments of the EPRA net asset value per share, and the annual growth since 2009, adjusted for dividend, has been 17%.

On Slide 17, you can see the historic development of a few of the financial ratios. You can see a rising and then stable equity assets ratio now, well in line with the target of being at minimum 30%. The loan-to-value also in a historic perspective is at good levels at 55%. You can, on the bottom left-hand side of the slide, see the very strong increase in the interest cover multiple over the past few quarters.

Looking at financial stability. On Page 18, we also track the ratio of borrowings in relation to operating surplus. And despite the large acquisitions that we've made over the past 9- to 12-month period, this ratio is stable at just over 11x.

Slide 19 shows our sources of financing as of end September. Total debt of SEK 24.9 billion comes approximately half from bilateral bank agreements, 30% from the Danish mortgage loan system and 22% from the capital markets, the bond markets via Svensk FastighetsFinansiering and via our own MTN program.

The details of the loan portfolio, you can find on Slide 20. Worth noting there is that the average interest rate now stands at 1.27%, which we feel is quite favorable. And the average fixed interest period has increased somewhat to now 3.4 years. We have entered into a few new interest rate swaps during the quarter, in line with our financial risk management policy. The average loan maturity now stands at 5.9 years.

And finally, on my slides on Slide 21, you can see the historic development of our average loan maturity and the average fixed interest period. And we are quite comfortable with maintaining those numbers on the current levels.

So with that, I'll hand back the word to you, Ulrika.

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [4]

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Thank you. So let's mention something about our ecosystem and divestments. As reported before, the divestment of Landsdomaren 6 in Lund and the acquisition of Nya Vattentornet has given us further growth possibilities in Lund.

Page 24 -- 23. In August, we made an agreement with Limhamn to divest Gängtappen 1 in Malmö, Page 23, I said. 14,400 square meters offices in Dockan. We have developed this property over 7 years. And now it's totally refurbished and fully let. The price level is at the same as the highest we have seen in the best location in Malmö, approximately between 4% and 4.25% valuation yields. This transaction will be made the 1st of December. And after that, we will have another strong real estate developer in the area. But Limhamn is focusing on housing. So we will complete it rather in a good way.

Page 24. At 1st of July, we acquired Hörkaer 12 and Brydehusvej 30 in Copenhagen from ATP. Hörkaer gives us opportunity to continue to develop the area when we own most of the properties before. The area is planned for more mixed city with both offices and housing, and we can develop this in a more efficient way, the more we own. Brydehusvej is also complete, outclassed in value and will continue to contribute to our business there.

Let's go to investments in progress, Page 26. We have, from January to September, invested SEK 1.184 billion in ongoing projects, and it remains SEK 1.070 billion to invest in already made decisions. We will keep our fiscal tempo investments. That will also complete a couple of large projects now in Q4.

Page 27. Ursula 1 or Prisma, as we call it, is rising to the sky. It will be a spectacular building at a unique spot in Helsingborg. Except from HETCH, a new tech hub with SUP46 and Resurs Bank as partners, we have signed a few more leases and have good discussions ongoing for the rest of the area. This project will be an injection for Helsingborg.

And at Page 28, we have another injection. It's Terminalen 1, Helsingborg's central station. The project is proceeding according to plan, creating more restaurants, service and offices with a modern standard. Also in Helsingborg, Musköten 20 proceed according to plan. Our tenant can follow the production when they cross buy every day. And we are happy to be able to serve Mildef with this modern facility for them, completion late 2020.

In Lund, we continue with our small sugar cube, Raffinaderiet, still some areas to be let, quite small areas, but we have positive discussions with several possible tenants, and we will find the right piece in this small puzzle in a short time.

Page 21 (sic) [Page 31]. Bure 2, Origo in Hyllie, Malmö. Ingka Service will start moving in, in the middle of December at 6,800 square meters. And that's actually the same day as we finish the project.

Page 22 (sic) [Page 32]. At Medeon Science Park in Malmö, we have signed a lease with Galenica who also stays in the existing building with the laboratories and expand with new offices in this new building. This make it possible for them to leave some offices in the other building, and other tenants will need them.

I talked about injections earlier, this is another one. An injection to the important medtech sector, making it possible for the organic growth these companies are in such need of.

Page 33. At Elefanten 40, we invested SEK 57 million in refurbishment project for municipality of Malmö. They will rent 8,200 square meters and move in the 1st of November, 2019. The yield on investment is approximately 6%, as in almost all of our investments at the lowest level. Terminalen in Helsingborg is a bit lower.

And the next slide, 24 (sic) [34], Stenåldern 7 is a bit higher. At Stenåldern 7, we are building a new building for voestalpine weldCare. Investment, SEK 78 million, 15 years lease and yield approximately 6.5%.

And a short update in future investments. You have seen some of this before, but there's also some new ones. In Helsingborg, Page 36, we have building permission for 10,000 square meters logistics Plåtförädlingen 15. When the right customer comes by, we can start immediately. Now this is in Helsingborg, it's attractive, so I don't think we have to wait so long until we can start this project.

After completion of the district court of Helsingborg and since the office project, Prisma, is running so well, we now have the opportunity to continue planning our next possible project in Helsingborg, 6,000 square meters offices right next to the court with a magnificent sight of the city, the harbor and not at least, our property Hermes as we bought in March.

Page 38. In Lund, we finally see the end of the discussion with our possible tenants and the material research facilities, MAX IV Laboratory and ESS regarding our product space. It will be situated at the Science Village area. Now we are very close to find the right time for start of this combined 3-structure project. The new tram in Lund will be running next autumn. And by then, we can please the travelers on the tram with a nice building site in sight.

Page 39. The tram also pass Ideontorget on its way up to the Science Village area. We have good ongoing discussions here as well, and it's possible that the travelers on the tram also can get a good look at this building project as soon as the traffic starts.

Page 40. In the center of Lund, we continue to investigate opportunities from offices in the Posthornet. The zone planning process for Phase 2 is ongoing and positive for the attractivity in the city center, right beside the railway station and the tram, of course. You could almost think that everything of some importance in Lund will be connected to this tram.

Page 41 shows Posthornet 2 from another direction.

Let's go to Malmö, Page 42. In Sunnanå, in the outskirt of Malmö, we have signed a lease with Veho Bil, setting up a new truck center for Mercedes-Benz. We are about to start this project as soon as possible, but we are also planning for further projects around this site.

43. Now [One Vivere] is filled with IKEA, we need to tee up the tempo regarding Pulpeten 5. We always need something attractive to offer the market. We keep on planning this project together with a few large and possible tenants.

Page 44. And of course, what happens in Nyhamnen. The first zone planning area is in this orange circle.

On Page 45, we can see this first project that is in early plan. The zone planning is ongoing, and we will at least be able to produce 10,000 square meters offices here.

Page 46. And we're not lazy in the Dockan area either. We have applied for planning commission for approximately 14,000 square meters of Kranen 1. We think that this would be a worthy entrance between Dockan and Nyhamnen.

And finally, a short notice regarding how the world have paid attention to our region last days. Page 48. This Tuesday -- Monday, United Nation Office for Project Services has started their second global innovation center in the world, and this was placed at the Ideon Science Park in Lund. There will be more centers opening in the world, but UN has identified loans as a place where innovation, power and density is high and the efficiency on how to take actions from innovations also is high. The one new possible export products from Lund is the process method on how to invent and how to scale up the invention. To achieve the 17 global sustainable goals, inventions will be needed, hence, they might come from Lund.

Let's summarize. We see continued strong net letting plus SEK 28 million in Q3. Revenues and profit grow at a good pace. Project investments are being filled up with new tenants, and the project pipeline grows. Regional economic activity is still good. We hear about a slowdown, and we see signs in other markets, but we cannot see it in our market yet.

And up on that [theme], just a short reflection regarding our history and in which country we are raised. Our largest shareholder, Erik Paulsson, has always pointed out that it's important to be ready for changes and challenges. And he has done that by using a Swedish agriculture expression. It's important to collect hay in the barns, and I must say that I think we have had a good harvest. The sun is still shining, but if the winter will get cold, we have hay in the barns, and we are prepared together with our highly skilled employees and together with our customers to face what comes.

Thank you, and we are ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And our first question goes from Philip Hallberg from Danske Bank.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [2]

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So I'd like to start off regarding your net letting of SEK 28 million for this quarter. Can you specify how much is related to Sweden, and how much is related to Denmark?

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [3]

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I would say that Denmark has produced well the last half year, but some of it was the second quarter. And I think that probably 60% of net letting is from Sweden.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [4]

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Sorry. Did you say 60% was from Sweden?

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [5]

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Yes.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [6]

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Okay. And perhaps also if you can touch a bit about the split between filling up vacant spaces and -- compared to filling up new projects. What's the split between those 2?

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [7]

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Once again, sorry?

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [8]

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If you have the net letting if you're filling up vacant spaces or if it's a new project? Or is it just renegotiations?

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [9]

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It's both, of course, but we're not so demanding on negotiations. But for example, we have also let -- it's not a project, but it's a whole house in -- so we thought -- so that is one part of it. Of course, I don't have the exactly figures.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [10]

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I mean I'm thinking a bit loud here without having the detailed numbers. But in this quarter, we've signed the agreement with Galenica which is, of course, related to building a new project. And...

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [11]

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And IKEA, of course.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [12]

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Yes. And -- but we've also signed with this public tenant at Urnes, which is an existing building, which is also quite a large contract. What we've signed in Denmark relates to existing buildings.

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [13]

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All of them, yes.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [14]

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So it's not a majority of new projects. I don't have the exact number off the top of my head.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [15]

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No, it's fine. And going into next year, you have some SEK 650 million or so in maturing contracts, which is roughly SEK 100 million lower compared to what you had for 2019 if I look back in Q3 '18. So what's your view on the level of net letting for 2020 compared to this year?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [16]

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Our ambition is continuously to have a positive net letting. If -- and that is, of course, depending on our ability to develop new properties as well. If we had not developed any new properties, it would basically be impossible to have a positive net letting every quarter. But the project pipeline is good, and we expect, as Ulrika described a few minutes ago, to continue to fill up the project pipeline. So we won't give any specific number, but our definite ambition is to keep on having a positive net letting in every quarter.

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [17]

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And for 2020, we have, for example, Prisma. We have Pulpeten 5 with ongoing discussions, and we have Ideontorget that also could be possible new projects and new leases.

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Philip Hallberg, Danske Bank Markets Equity Research - Analyst [18]

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Okay. And perhaps a detailed question. So your interest expenses increased SEK 10 million quarter-over-quarter in Q3. So while the average interest rate on the net debt is quite stable. So are there any, like, specific refinancing costs or some currency effects in Q3?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [19]

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You have some currency effects in that, of course. And you haven't -- probably a couple of million in refinancing costs, which, however, are -- I mean, they're basically spread out over the terms of the loans. But it's minor items, I will say.

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Operator [20]

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Our next question comes from the line of Andres Toome from Green Street Advisors.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [21]

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I was just wondering could you kindly give us an indication of how much the like-for-like rent is going in Sweden. And how much it's negative in the Danish portfolio? Does plus 5% in Sweden and minus 1% in Denmark sound about right?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [22]

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That's a pretty good guess. I mean we don't split it out. But as Ulrika said in the presentation, the Danish operations are on that number quite a lot slower than in Sweden. And what I can say without being too detailed is that the like-for-like growth, both in rental value and in rental income for offices in Sweden are both above 5%.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [23]

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Okay. And could you also maybe elaborate what's driving the kind of the pickup in like-for-like rent growth versus what you showed in H1, the 2.9%? Is it improving Danish portfolio or even stronger Swedish portfolio?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [24]

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Positive development in Sweden, I would say.

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Andres Toome, Green Street Advisors, LLC, Research Division - Research Associate [25]

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Okay. And maybe just last question from my side. How are you thinking about your leverage and financial risk, given that the kind of economic outlook is softening in Sweden?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [26]

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We feel that having borrowings in relation to operating surplus of 11x is quite okay, and we're quite comfortable with that. We're also, of course, aware that the transactions, the acquisitions that we've made over the past 12 months have increased the LTV. At the same time, we feel that these acquisitions are the right acquisitions for us to make to improve our long-term position in the region, which is and will remain our strategic focus. So -- and if you add to that, that we -- I mean, we have low average interest rates, and signals over the past few months are actually more and more pointing in the direction that interest rates will remain low for a long time. So taking this combined, we are quite comfortable with the financial risk profile in the group as we stand today. Then, of course, our -- I mean we continued to generate a good cash flow, which gradually, of course, strengthens the balance sheet.

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [27]

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And I have checked the figure about the net letting, Sweden and Denmark, and it's actually 70% that comes from Sweden.

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Operator [28]

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Our next question comes from the line of Niclas Hoglund from Nordea.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [29]

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First, a couple of questions from me. Firstly, if we start out a little bit more flavor on the ramp to market, if I may? Could you elaborate on the sort of trend for renegotiation? And we have also seen recently that Newsec is raising their estimates on CBD rents in Malmö. Can you confirm that? Or what's your thoughts on the different parts of the region?

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [30]

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I think the rents will continue to grow in actually the same pace as we have seen the last years. There might be some projects in the city that might not reach the new levels that we think are right. But overall, I think we have -- we will continue this positive trend.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [31]

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Right. And how much development can the market do at this point? I mean will a slowdown in the economy be pretty much relevant right now? But the pipeline is not so big for '19, I guess, or '20. But what's your thoughts? What's the sort of limitation?

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [32]

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I think that the market act according to the demand. As I said that there might be one or a few projects that will have to struggle a bit. We'll be a bit more patient, but I think that's more according to the product than the rent levels or the demand in the market. So as we said before, the projects ongoing. And they are -- the rental -- the prelets are very high. And we have no worries in Malmö for that.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [33]

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If I may add, I think that's -- looking at the Malmö net take-up yearly, our estimate of that has increased over the past few years. A few years back, we used to talk about 30,000 or a bit over 30,000 square meters per year in that take-up. And currently, we're rather saying above 40,000 square meters net take-up per year. And I think that if you also look at the different projects, not necessarily per individual calendar year, but rather like a 3-year moving average or something, I think that the supply coming to the market is quite manageable for the Malmö market to absorb. And that's what we've seen so far as well.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [34]

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Right. A follow-up on that. So if you're thinking that the take-up right now, it's 40,000 and in a slowdown, which I guess will hit Malmö as far as rent, would you argue that the net take-up would rather come down to the 30,000 level again? Or is there further downside?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [35]

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No. I think that's impossible to say. But I think you should bear in mind that -- I mean our whole industry is rather -- I mean we have rather long time frames in most things we do. So you should also -- I mean the same way as you look at the take-up in the 3-year moving average, I think you should also look at the economic activity in a 3-year moving average. So even if we were to see, which we don't see yet, a slowdown in economic activity, I think -- it takes time before it tangibly affects the demand for office space. And then, of course, if a downturn would come, how long will it be? Will it be for a year? Will it be 18 months? Or -- and that, of course, also plays a role. But look, looking historically, the economic pickup after a downturn have often been rather fast.

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [36]

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And we also see a good demand in buildings for schools and education and so on. So it's not only into one sector that our office market is pointing us. We feel comfortable with...

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [37]

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Moving over to the net operating margin. Are you happy with this surplus margin in the quarter? Are there any items standing out, putting pressure on it? Because I was under the impression that margins would rather come up than down.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [38]

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I think if you look at the quarter individually, you have, as I think I mentioned during the presentation, you have one effect on the property tax, which is not an ongoing effect but rather a one-off effect. But you should also -- as I know Ulrika mentioned in the presentation, reflect a bit on the divestments and acquisitions that we've made, where we basically sold lands to a man with a very high operating surplus ratio. And we've acquired properties with potential.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [39]

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Did you quantify the tax hit or one-offs in the quarter?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [40]

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I think the -- what can be characterized as a one-off amount is approximately SEK 7 million in the quarter.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [41]

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Right. And then my final question was on value changes. Normally, you do very limited sort of changes in the portfolio in the third quarter. Would you say that the market has opened up for further yield contraction towards the end of the year? Or are you waiting for a major transaction to go through?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [42]

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We're, of course, always looking at which transactions happen. And we are a much less transaction-intensive market than, for example, the Stockholm market. So the reference points for valuations are a lot fewer. We are currently -- or our external appraisers are currently, of course, already working on the valuations, which shall be applicable by year-end. But it's, of course, too early to tell what their opinion would be. But as all -- I mean we continue with the same process as we have for many years, that is -- that's all our property are being valued by external appraisers as of end calendar year.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [43]

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Right. And do you have a -- I mean we're seeing now that CPI is coming down sharply in Sweden from 2.3% last year down to 1.4% to 1.5% in the recent quarters. What do your appraisers have in their models?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [44]

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I don't -- I can't answer exactly what they have in their models.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [45]

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Okay. You don't see that putting a...

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [46]

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But that, of course, is not -- I mean, it's a gradual change in -- I mean, both the appraisers and ourselves, of course, follow the CPI development gradually. And so I mean, it shouldn't be any huge swings because of that. But I cannot answer exactly what they plug into their models.

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Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [47]

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Yes. We'll see in mid-November as well, I guess.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [48]

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Yes.

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Operator [49]

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(Operator Instructions) Our next question comes from the line of Erik Granström from Carnegie.

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Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [50]

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Most of my questions have already been answered, but I had one follow-up perhaps on what you were talking about, Arvid, and that's specifically about Q4. You mentioned that sort of the property tax situation in Q4 should be more in line with what we saw in Q2. And I was just wondering, does that mean you're looking at an absolute number for Q4 in line with Q2? Or more of a -- the same kind of ratio between property tax and rental income as in Q2?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [51]

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Absolute number of property tax was what I was referring to.

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Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [52]

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Okay. So around SEK 50 million then. And that would mean that it's still going to be up versus what we saw in Q3 if we adjust for the SEK 7 million in extraordinary?

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [53]

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Yes.

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Operator [54]

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And now we have no further questions from the telephone lines. I'll hand back to our speakers.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [55]

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Okay. In that case, I think we should just say thank you very much for listening.

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Ulrika Hallengren, Wihlborgs Fastigheter AB (publ) - CEO [56]

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Yes. Thank you.

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Arvid Liepe, Wihlborgs Fastigheter AB (publ) - CFO & Secretary [57]

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And have a nice day. Bye.