K-Fast Holding AB (Publ): Interim report January-June 2023

*The business model is showing its strength with greater created values in project development and ongoing new production than decreased market values due to falling valuations during the second quarter.
*Established internal project rental organization to meet the wave of new apartments finished during the autumn.
 

Financial ratios for the period 1 January–30 June 2023
(corresponding period in 2022 unless other stated)

• Rental income: SEK 231.5 million (173.2)
• Profit from property management: SEK 65.1 million (67.3)
• Profit for the period: SEK -121.3 million (697.4)
• Net investments in investment properties: SEK 1,279.0 million (1,442.4)
• Investment properties: SEK 14,258.1 million (31 Dec 2022: 13,094.6)
• Long-term net asset value (NAV): SEK 5,636.2 million (31 Dec 2022: 5,768.3)
• Number of apartments under management: 4,002 (3,258)
• Number of construction starts, apartments: 199 (545)
• Number of apartments under construction: 1,962 (2,009)
• Number of apartments under project development: 4,293 (5,273)
• Interest coverage ratio, R12m: 2.0 multiple (3.0)
• Equity/assets ratio: 31.0% (31 Dec 2022: 33.9)
• Debt-to-equity ratio: 58.9% (31 Dec: 55.4)
• Profit from property management per share: SEK 0.30 per share (0.31)
• Long-term net asset value (NAV) per share: SEK 26.17 per share (31 Dec 2022: 26.79)
• Growth in profit from property management per share: -3.3% (51.1)
• Growth in long-term net asset value (NAV) per share: -2.3% (12.2)
• Earnings per share*: SEK -0.68 per share (3.24)
  
  * There are no potential shares (e.g. convertibles in the company, and accordingly no dilution effect).

A message from the CEO

I am able to conclude that K-Fastigheter’s business model stands strong in changing market conditions. Even if some improvements can be seen in the construction and property sector, uncertainty remains due to factors such as inflation and rising interest rates. We have not yet arrived at a new normal for the sector, and forecast construction starts emphasize this. The forecasts suggest some 21,000 housing starts are planned for 2023, although I personally believe the figure will settle at closer to 15,000. Our target of starting construction of 1,000 apartments in 2023 makes us an aggressive market operator looking ahead. Demand for new housing remains strong and rental apartments represent a key part of the housing market. My faith in rental housing and the wisdom of long-term ownership and management of rental properties remains unshakable.

The slowing construction cycle generates both opportunities and challenges for K-Fastigheter as a Group. The challenges mainly relate to the Prefab operations, where around two thirds of sales have been external. Reduced construction means decreased activity in our plants, and even if we can offset this through internal projects in the range of SEK 500 million we will not be able to fully offset the external shortfall in relation to potential production capacity. In 2023, activity levels are positive in the Prefab operations, while there is increased uncertainty ahead of 2024. Against this background, we are gradually adapting our work force to correspond to requisite staffing levels for the volumes we currently expect to produce in the first half of 2024. I can conclude that internal projects are allowing the Prefab operations to manage the weaker construction cycle better than our sector colleagues. This highlights the symbiosis between Group business areas and the strength of our business model.

In other parts of the operations, the cyclical trend gives rise to opportunities. Building rights that were previously not a good fit with K-Fastigheter in terms of cost are now priced at a different level. The acquisition of our first building right in Lund is an example of an opportunity that has opened up as a result of the change in the cyclical trend. In the quarter, we continued to acquire building rights and, in addition to Lund, completed transactions that added two projects in Gothenburg and one in Kävlinge to our portfolio. These are additional to acquisitions in Eskilstuna and Ale earlier in the year. In the quarter, we also announced the signing of a Letter of Intent for a collaboration agreement with Titania. This initial collaboration relates to building rights for 74 rental apartments in Vallentuna outside Stockholm, to be owned through a jointly held company. I hope that this will ultimately lead to further similar collaborations of this kind, and I am also open to partnering with other operators in line with our existing collaboration with Kilenkrysset.

On the construction side, I predict downward price pressure as construction and development assignments fall which, alongside lower costs for building rights, should at least partly offset higher interest rates on construction credits. Overall, I anticipate continued opportunities for K-Fastigheter to acquire building rights and start construction of projects that meet our return requirement. Several of the acquired projects have an estimated yield on cost in excess of 6 percent. We want to maintain a high rate of expansion and see positive potential for achieving this through the aforementioned acquisitions of building rights and new construction starts, and are open to using different methods to achieve this. As a step in this process, we continuously review a range of opportunities aimed at strengthening the Balance Sheet by raising new capital or divesting properties that are not in line with the construction of the Group’s concept buildings, all with the aim of capitalizing on opportunities that arise on the market.

Most of our construction starts in 2023 will occur in the fourth quarter, in line with the completion of a large number of projects this fall. This planning allows us to optimize capacity in the construction organization, allowing new construction starts to begin once a large number of projects have been handed over. In the second quarter our construction organization completed and handed over 169 apartments to the management organization. Our housing portfolio comprised a total of 4,002 apartments at the end of the quarter, with 1,962 apartments currently in production. Our land bank includes 4,293 apartments in various stages of development through the Project Development business area.

Profit from property management during the first six months of the year amounted to SEK 65 million, a decrease of 3 percent year-on-year. Profit from property management i the quarter was positively affected by rent increases in the holding that became effective from 1 April. At the same time, like other property owners, we have not been able to fully offset the cost and interest rate increases, which reduces overall profit. This needs to be compensated for over time and in several stages. I believe that new production of rental apartments is more beneficial for property owners than older holdings, as the properties are more energy efficient and have lower operating costs (excluding interest), and that rent increases are proceeding from a higher starting rent. Profit from property management was also negatively affected by a lower occupancy rate in the quarter plus costs for establishing a proprietary letting organization for new production, something that was previously handled by an external party.

Our financial occupancy rate was 94.5 percent at the end of the quarter. The fact that vacancies increased in the quarter was due to slower letting of new production. This was mainly in locations where we, in line with other operators, have added a large number of new housing units in a short period. Accordingly, this relates to a degree of sluggishness on the market for new production in some locations, and not to any structural problem. From 8 May, we have also been handling letting of new production through our own organization, which I consider favorable for increasing occupancy. I expect our intensive efforts to gradually reduce vacancies over the coming six months, in parallel with the work aimed at letting the apartments to be completed during the fall/winter. Since our own letting organization has fully taken over letting operations from mid-May up until the reporting date, I can conclude that our existing holding generates positive net letting (i.e. more signed than terminated contracts). This will not fully feed through financially until in two to three months’ time.

Since summer 2022, when property values were at their peak, the value of comparable properties in the existing holding and ongoing construction has fallen by some 5 percent, of which approximately 1 percent in the second quarter 2023. This corresponds to SEK 534 million for completed properties since the peak in summer 2022, and SEK 93 million in Q2 2023. All our completed properties and properties under construction are valued by external valuers each quarter. By continuously completing properties, starting new construction and acquiring new building rights, the Group’s overall property value increased despite the lower valuations. At the end of the quarter, total property value amounted to SEK 14.3 billion. This is an additional strength associated with our business model that I want to emphasize. By continuously completing projects, we have created SEK 494 million in unrealized values in ongoing new construction since the end of Q2 2022 - end of Q2 2023 . Accordingly, we have almost fully offset falling valuations by creating value in completed projects. This is a safety feature inherent in our unique business model which ensures that we remain more stable in times when the surrounding world is shaky.

Finally, a few words about our financing: At the end of the quarter, 76 percent of interest-bearing liabilities related to acquisition financing and completed investment and business properties were hedged at an average interest rate of 3.20 percent. The period of fixed interest was 2.9 years, which allows us to securely manage higher interest rates until the new normal for interest rate levels emerges. I feel confident that our business model, in combination with the thoughtful and long-term management of our credit and derivatives portfolio without bond financing, paves the way for continued expansion. 

- Jacob Karlsson, July 2023

A complete Interim report January–June 2023 is attached and published on: k-fastigheter.com/en/investors/financial-reports

A presentation of the earnings and operations will be published on: k-fastigheter.com/en/investors/presentations

For more information, please contact:
Johan Hammarqvist, Head of Investor Relations and Communications
e-mail: johan.hammarqvist@k-fastigheter.se, telephone: +46 (0)10-167 60 99
 

This disclosure contains information that K-Fast Holding AB is obliged to make public pursuant to the EU Market Abuse Regulation (EU nr 596/2014). The information was submitted for publication, through the agency of the contact person, on July 25^th, 2023, 9 AM CET.

As a property company, K-Fastigheter’s objective is to add value for tenants by creating attractive homes with superior comfort. The Group’s operations encompass active property management, project development and proprietary construction operations. To enhance cost efficiency and cut construction times, K-Fastigheter has chosen to work with three concept buildings, developed in-house and constructed for proprietary management. K-Fastigheter provides some 4,000 homes in several locations in the Öresund region, in the province of Småland and in western Sweden, and is assessing new markets as production capacity increases. The Group’s property portfolio has a book value SEK 14,3 billion, with an annual rental value of about SEK 528 million. Since November 2019, the company’s Class B shares have been traded on Nasdaq Stockholm under the (ticker: KFAST B). Read more at k-fastigheter.com