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

*Improved gross profit in all business areas.
*Negative change in value of investment properties of 2,5 percent.
*Updated operational goal regarding the number of construction starts during 2023.

A message from the CEO

Uncertain economic conditions continue to affect society as a whole, including the property and construction sectors. The challenges this gives rise to need to be addressed throughout society, by everyone from private individuals to businesses, politicians and other decision makers. In the housing sector, construction starts continued to decline as a result of the general uncertainty and a transaction market where buyers and sellers are still not finding each other fully. However, I am able to conclude that prices of building rights have settled at a lower level than previously while building costs stabilized, which means that it is still possible to find business opportunities at attractive levels for K-Fastigheter. We are therefore continuing to start construction on new projects, and acquired a further two building rights for a total of nearly 200 apartments in Eskilstuna and Ale municipality in the first quarter. We are seeing that prices of building rights in locations and with pricing levels that were previously not a good fit with K-Fastigheter, are now being priced at levels that are reasonable for us. We plan to continue to actively add to our land bank as the right opportunities arise.

As I said in the Year-end Report, market conditions have increased the direct return requirement on our properties, which has led to lower valuations. Since the peak in the second quarter 2022, the direct return requirement in our valuations increased by 0.4 - 0.5 percentage points, which means that the market value of our properties fell by a total of approximately 5 percent. This applies to existing properties as well as ongoing construction projects, which are all valued on a quarterly basis by external parties. The fact that we still increased the Group’s total property value to nearly SEK 13.6 million at the end of the first quarter evidences our self-sufficient and cost-effective growth capacity, where we continuously acquire new building rights, start new construction and build new rental apartments, which continues to satisfy both the company’s internal as well as our banks’ return requirements. Overall, since the end of the first half 2022, we have generated value growth in new construction of some SEK 360 million factoring in lower market valuations, to be compared to the lower total market values of some SEK 375 million for completed investment properties at the end of the first half 2022. This illustrates the resilience of our business model even in such turbulent times as over the past 12 months.

However, a changing market climate brings with it new conditions, and given the higher interest rates and because projects with a lower loan-to-value ratio require more equity, we have decided to revise our goal of 1,300 construction starts in 2023 to 1,000. The goal beyond 2023 will be set later in the year. I consider that this level of construction starts represents an aggressive approach given the current market conditions, which really proves that K-Fastigheter has a strong business model that controls the entire value chain from project development through prefab, construction and on to management. I believe that our business model makes us better equipped to withstand the toughening market conditions than many other sector operators. The projects now being started have an internal minimum yield on cost of 5.7 percent, with several started projects are closer to 6 percent. By a lower loan-to-value ratio, we ensure a satisfactory yield on debt on construction starts which, in turn, ensures continued future financing.

At present, our production-to-value ratio (PTV) is 73.6 percent. PTV is coming under pressure because the market value of our properties has decreased since summer 2022, as well as from increased development costs, mainly in the form of higher interest rates on building credits. I am proud that we have successfully offset last year’s cost increases through efficiency gains, and the cost of projects where we assume total responsibility for production (including sales tax) in 2022 only increased by SEK 90/m2 produced living area. This means I am convinced that we will maintain a low PTV and remain one of the market’s most costefficient developers of new rental apartments in Sweden almost regardless of market developments looking ahead.

In the first quarter, our construction organization handed over a total of 125 apartments to the management organization. Our housing portfolio comprised a total of 3,833 apartments at the end of the quarter, with a further 1,986 apartments currently in production. At the end of 2023, our management portfolio will comprise some 5,000 apartments in line with previously announced targets. Since our IPO in fall 2019, when we first communicated this target, this represents growth of 220 percent or 3,438 new apartments.

Our rental income for the quarter increased by 44 percent in year-on-year terms. At the same time, gross profit from property management increased by as much as 47 percent despite the fact that rental increases for 2023 will not feed through until in the second quarter, and that costs for electricity, heating and water in the period were significantly higher than in the first quarter 2022. The surplus ratio also increased in the quarter, despite management-related central expenses being distributed over the property administration from the third quarter 2022 onwards. This suggests that our high rate of completion is gradually starting to feed through to profit.

This year’s rent increases mean that from April onwards we will increase rents including heating and water by some 4.9 percent, and rents excluding heating and water by some 3.5 percent. The rent increases necessary to fully offset increased costs, in particular higher interest rate expenses, will need to be implemented in multiple steps over time. This means that compared to owneroccupier housing, tenants in rental apartments have maintained more of their purchasing power despite the rent increases, and rental properties will remain competitive even in a potential recession.

Both the construction and prefab operations returned positive results in the first quarter, with construction operations positively affected by high activity in intra-Group projects, and prefab operations experiencing high activity levels and strong order books for the remainder of the year, largely because of a growing proportion of intra-Group construction. We have also realigned production, with a lower rate of external housing production and an increase in properties for warehousing/logistics, industry and infrastructure. This includes deliveries to DSV’s large logistics facility in Landskrona. In the first quarter 2023, K-Prefab presented gross profit close to SEK 23.8 million, compared to SEK 11.3 million in the corresponding quarter of the previous year.

There is substantial demand for new housing in Sweden. Rental housing has many advantages and is a natural part of the mix of title formats available. My conviction is that in the long term it is wise to invest in and own rental apartments, and thus play a part in social developments.

- Jacob Karlsson, May 2023

Financial ratios for the period 1 January–31 March 2023
(corresponding period in 2022)

• Rental income: SEK 114.4 million (79.3)
• Profit from property management: SEK 32.1 million (26.0)
• Profit for the period: SEK -195.8 million (328.2)
• Net investments in investment properties: SEK 726.2 million (707.4)
• Investment properties: SEK 13,596.1 million (10,552.9)
• Long-term net asset value (NAV): SEK 5,575.2 million (5,225.7)
• Number of apartments under management: 3,833 (3,050)
• Number of construction starts, apartments: 53 (244)
• Number of apartments under construction: 1,986 (1,880)
• Number of apartments under project development: 4,058 (5,347)
• Interest coverage ratio, R12m: 1.9 multiple (1.9)
• Equity/assets ratio: 31.8% (31 Dec 2022: 33.9)
• Debt-to-equity ratio: 58.1% (52.9)
• Profit from property management per share: SEK 0.15 per share (0.12)
• Long-term net asset value (NAV) per share: SEK 25.89 per share (24.27)
• Growth in profit from property management per share: 23.3% (33.6)
• Growth in long-term net asset value (NAV) per share: -3.3% (5.0)
• Earnings per share*: SEK -0.91 per share (1.52)
  
  * There are no potential shares (e.g. convertibles in the company, and accordingly no dilution effect).

A complete Interim report January–March 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 May 2^nd, 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 3,830 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 13.6 billion, with an annual rental value of about SEK 504 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