K-Fast Holding AB (Publ): Interim report January-September 2022

Financial ratios for the period 1 January–30 September 2022
(corresponding period in 2021, unless otherwise stated)

• Rental income: SEK 275.1 million (190.7)
• Profit from property management: SEK 103.6 million (74.4)
• Profit for the period: SEK 813.2 million (682.6)
• Net investments in investment properties: SEK 1,874.4 million (1,160.2)
• Investment properties: SEK 12,122.6 million (31 Dec 2021: 9,603.7)
• Long-term net asset value (NAV): SEK 5,667.4 million (31 Dec 2021: 4,976.1)
• Number of apartments under management: 3,452 (2,448)
• Number of construction starts, apartments: 706 (535)
• Number of apartments under construction: 1,976 (1,634)
• Number of apartments under project development: 4,785 (5,723)
• Interest coverage ratio, R12m: 2.6 multiple (31 Dec 2021: 3.4)
• Equity/assets ratio: 35.3% (31 Dec 2021: 36.9)
• Debt-to-equity ratio: 54.1% (31 Dec 2021: 51.8)
• Profit from property management per share: SEK 0.48 per share (0.35)
• Long-term net asset value (NAV) per share: SEK 26.32 per share (21.19)
• Growth in profit from property management per share: 39.2% (25.9)
• Growth in long-term net asset value (NAV) per share: 13.9% (24.6)
• Earnings per share*: SEK 3.78 per share (3.17)
  
  * There are no potential shares (e.g. convertibles in the company, and accordingly no dilution effect).

A message from the CEO

In less than a year, the situation has changed dramatically. We have soaring inflation with accompanying interest rate rises, increased energy costs and a full-scale war almost on our doorstep. A changed situation calls for a dynamic, agile organization that can swiftly adapt to the new conditions it faces.

In light of the changed situation, I would like to begin by talking about how we are working on our credit and derivatives portfolio. Since 2019, we have hedged the majority of our credit portfolio using interest rate derivatives. As our interest rate derivatives were entered into at far lower interest rates than those in effect today, at the end of the third quarter our derivatives portfolio had a market value of over SEK 400 million. Thanks to this market value we have restructured, and will continue to restructure, parts of our derivatives portfolio to increase the degree of hedging at interest rates quite a bit below current market interest rates. As a result, our hedging has increased from 63 to 70 percent during the third quarter, even though our credit portfolio relating to completed investment properties has increased by 3 percent in absolute terms. Our interest sensitivity in the event of a one percentage point rise in interest rates has decreased to an additional cost of SEK 17.4 million, compared to  SEK 20.9 million at the beginning of the third quarter, and our average interest rate has increased by just 0.44 percentage points to 2.29 percent over the first nine months of the year, even though the underlying market interest rate has increased by 1.78 percentage points.

K-Fastigheter’s credit portfolio consists of conventional bank loans with a dozen or so Nordic banks with which we have good, long-term relationships and our credit portfolio is spread across the various banks. Having good working relationships with several banks is particularly important in turbulent times when banks are generally more restrictive, especially towards new customers. We have also chosen not to obtain financing through bonds with the associated refinancing risk that arises at times when the capital market is not functioning effectively. In short, we are financed through equity and conventional bank loans, which is why I am confident about facing this difficult market climate.

The attractiveness of rental properties has decreased dramatically on the financial markets this year. I have come to the conclusion that investors are afraid it will not be possible to index rent to the extent required to compensate for rising costs. In the shorter term, rent increases for residential properties are unlikely to be able to fully keep pace with inflation. In the longer term, however, it is likely that rent increases will compensate for inflation. Between 2012 and 2021, the average rent increase for residential properties in Sweden was 16 percent, excluding rent increases caused by rises in standards of living. Underlying inflation over the same period was 10 percent. By studying historical inflation and rent increases in both the short term and slightly longer term, we can see that it is realistic for inflation to be fully compensated for over a period of four to five years.

I am confident that over time property is a safe, inflation-adjusted tangible asset, given that it generates strong cash flows to offset interest and operating costs. Demand for rental apartments often has a negative correlation with the business cycle, which is clearly evident from the increased demand and record-low vacancy level. Our financial occupancy rate has increased during the financial year and totaled 98 percent at the end of the third quarter. Our rental value is growing fast, by as much as 32 percent since the year-end and 45 percent year-on-year. The increase in rental income can mainly be attributed to a faster completion rate with the number of apartments under management increasing by 27 percent since the year-end and 41 percent at an annualized rate. Furthermore, completing construction projects currently in progress alone will increase the rental value by 65 percent compared with the end of the third quarter.

84 percent of our property portfolio was built in or after 2010 and the majority of the properties are far newer. The rent for approximately 30 percent of our property portfolio excludes heating and hot water, and where we are responsible for heating and hot water, district heating is the sole energy source. The price increase for district heating for 2023 is around 2-6 percent, except for in Malmö, where Eon has warned that prices may increase by as much as 20 percent. We have had photovoltaic panels fitted in all of our new Lateral Low-Rise apartments and Apartment Blocks where construction began in or after 2021. The capacity of the panels is forecast to equal or exceed the electricity paid for by the property owner.

The market value of our completed investment properties, all of which were valued externally in quarter three, fell slightly at the end of the quarter due to higher return requirements. Thanks to our unique business model, we can offset the negative change in value of our completed investment properties with the gradually accumulated value change in our projects in progress, where the total change in value in the project is the difference between the expected market value and costs. 20 percent of the total value change in the projects in progress is recognized when the building permit has gained legal force and a turnkey contract has been signed, while the remaining 80 percent is recognized gradually during construction in relation to the costs incurred. The expected market values of our projects in progress also decreased slightly during the third quarter. Nevertheless, we reported an average PTV (production to value) of 70.7 percent for our proprietary ongoing projects at the end of the quarter, where PTV is the relationship between total cost and expected market value. The average direct return for our 1,976 apartments in production is 5.7 percent in relation to the total cost.

There has been a high level of activity within the Project Development business area where we received planning permission during the third quarter for two projects encompassing 161 apartments, and where we are currently actively working on applications for planning permission for almost 1,300 apartments. Work on the projects that received planning permission in the third quarter has already begun in the Construction business area. During the first three quarters of the year, projects encompassing 729 apartments were completed and handed over. This is a fast pace and we intend to continue starting new projects because we have been very successful in compensating for the cost increases in the Construction and Prefab business areas through efficiencies and volume. We have seen prices for most of our raw materials and input goods rise considerably, but on the whole we have managed to mitigate these increases, largely thanks to our cross-functional approach. For example, we are actively striving to optimize the formula for concrete and optimize material consumption in all stages of production in order to reduce in absolute terms the amount of material per square meter of lettable area produced. Looking to the future, we intend to achieve a direct return in relation to total costs that corresponds to the current return. I am tremendously proud of my fantastic employees who have extraordinarily managed to deliver production cost levels that have only marginally affected the total production cost at a time when the Construction Cost Index for Buildings has risen by 14.6 percent (September 2021 to September 2022). This would not have been possible without having control over the entire production chain.

The Prefab business area looks set to deliver record sales for the full-year. Gross profit at the end of the third quarter amounted to SEK 38 million and has been adversely impacted this year by increased costs for materials, primarily for steel and cement, and by a lower profit margin on internal projects compared to external projects. This is the first year that we have been able to fully manufacture internal projects within our own prefab operation. We have a satisfactory activity level ahead of the forthcoming year with secure order books worth almost SEK 1,000 million compared with sales of SEK 1,030 million for 2021 and SEK 878 million for 2020. At K-Prefab we are working towards our goal of halving our carbon footprint within five years and in three years we have succeeded in reducing our emissions by 35 percent. As part of our work to reach this goal, and to reduce our electricity costs, 2,500 square meters of photovoltaic panels on our factory outside Hässleholm went into operation in the third quarter. The total electricity consumption for our prefab operation is 5 MWH, and our goal is to cover 30-50 percent of this need through our own photovoltaic panels.

I have the utmost respect for the prevailing market conditions, which require a great deal of humility. Having said that, I am confident about navigating the prevailing conditions and in time emerging in a new normal situation in an even stronger position.

- Jacob Karlsson, November 2022

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

A presentation of the earnings and operations will 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 November 10^th, 2022, 11 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 3,450 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 12.1 billion, with an annual rental value of about SEK 430 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