Financial ratios for the period 1 January-30 June 2022
(corresponding period in 2021, unless otherwise stated)
* Rental income: SEK 173.2 million (122.5)
* Profit from property management: SEK 67.3 million (44.6)
* Profit for the period: SEK 697.4 million (371.1)
* Net investments in investment properties: SEK 1,442.4 million (791.0)
* Investment properties: SEK 11,631.6 million (31 Dec 2021: 9,603.7)
* Long-term net asset value (NAV): SEK 5,583.2 million (31 Dec 2021: 4,976.1)
* Number of apartments under management: 3,258 (2,305)
* Number of construction starts, apartments: 545 (456)
* Number of apartments under construction: 2,009 (1,699)
* Number of apartments under project development: 5,273 (5,522)
* Interest coverage ratio, R12m: 3.0 multiple (31 Dec 2021: 3.4)
* Equity/assets ratio: 35.7% (31 Dec 2021: 36.9)
* Debt-to-equity ratio: 53.0% (31 Dec 2021: 51.8)
* Profit from property management per share: SEK 0.31 per share (0.21)
* Long-term net asset value (NAV) per share: SEK 25.93 per share (19.46)
* Growth in profit from property management per share: 51.1% (20.1)
* Growth in long-term net asset value (NAV) per share: 12.2% (14.4)
* Earnings per share*: SEK 3.24 per share (1.72)
* There are no potential shares (e.g. convertibles in the company, and accordingly no dilution effect).
A message from the CEO Jacob Karlsson:
"There is a great deal of uncertainty on the world's stock exchanges where most sectors have performed poorly due to their sensitivity to higher interest rates, sharp rises in inflation and ongoing supply chain challenges. K-Fastigheter, which is classified as a growth company in the property sector, has been punished hard on the stock exchange during the first half of the year. Aside from the weak share price performance, this is a market situation where our business model is highly efficient and our uniqueness stands out.
I have said it many times before, but K-Fastigheter is so much more than a property company. With an infinite investment horizon, minimizing risk is more important than maximizing profit. Quite simply, we strive to generate a maximum risk-adjusted return, regardless of where we are in the economic cycle. A long-term approach is the backbone of our business model, and this has made it easy to resist the temptation of issuing financial instruments that would eat up cash flow and expose us to unnecessary risk at a time when cash flow is increasingly valued. By also avoiding financing through bonds and the accompanying refinancing risk, we are well placed to face the future.
Cost inflation is high, especially for construction-related products, which in many cases has risen far more than average inflation, even though costs for reinforcement bars and timber fell by double-digit percentages in the last weeks of the second quarter. Rising construction costs combined with the abolition of investment support and impending higher interest expenses, make the calculations for a general housing developer less attractive - irrespective of the title format. It should be stressed that K-Fastigheter has never used investment support because, in our opinion, the structure of the previous support did not promote the production of the housing for which we see sustainable long-term demand. Consequently, our upcoming production starts are completely unaffected by the withdrawal of investment support. It is also worth clarifying that no part of our portfolio is subject to rent control after the verdict observed by the market which established that rent under this model may only be increased by half of the annual increase. Our assessment is that over a period of 4-5 years we will always be at least fully compensated for inflation in upcoming rent increases, and this is supported by looking at historical rent increases in relation to inflation.
Share analysts usually focus on industries and companies that have the ability to pass increased costs to the next stage. In contrast, I have personally always been interested in companies and management teams that successfully respond to rising prices with increased efficiency and savings, and can thereby further increase their competitiveness when everyone else is increasing their prices. Thanks to this approach, at K-Fastigheter we have successfully managed to keep production costs at levels equivalent to those we began 2021 with. I would like to say that this has been possible because we own and control the entire ecosystem from Project Development and Construction through to Prefab and Property Management. This puts us in a very favorable position compared to companies that are dependent on external suppliers.
As described above, the conditions for the industry as a whole are far worse when it comes to developing new housing while at the same time the cost pressure from higher interest rates is viewed as a dark cloud on our previously clear horizon. My observation is that building rights, which were previously the hottest thing you could lay your hands on, will soon be the first thing companies want to dispose of, partly because the calculation is no longer as attractive and partly because, as an asset class, building rights do not generate any cash flow to counter rising interest rates. In a classic free market economy, lower demand and greater supply mean prices should find their way down. And this is what I am referring to above, when I say that a favorable situation is around the corner for K-Fastigheter. After all, building rights are our most important asset for future growth. Stagnant or falling prices for building rights coupled with production costs that are resisting cost inflation are factors that bode well for continued good fundamental development. Building rights currently account for a high proportion, up to 20 percent, of our total cost, which means that any fall in prices may reduce our total cost.
I rarely miss an opportunity to mention our internal KPI that we term PTV or "production to value", which describes our total cost in relation to market value, and the PTV for our concept buildings in production amounted to 70 percent at the end of the second quarter. We consider the difference between total cost and market value to be our gross margin in Project Development. As described above, I am confident that we can control the "P", i.e. the production costs, moving forward, which may possibly benefit from lower costs for building rights. However, the future for the "V", which stands for market value, is not clear. It is therefore important that I introduce one of our other truly important KPIs, "yield on cost". This KPI describes the relationship between expected net operating income and total cost, which amounted to 5.6 percent in our 2,009 apartments in production at the end of the second quarter. During the second quarter, we started construction of 301 apartments in four different projects, half of the apartments are located in Ballerup outside of Copenhagen. The average yield on cost for these 301 apartments is also 5.6 percent. This KPI is unaffected by fluctuations in market value and is very important because we will not sell our properties, instead we will invest in stable cash flows. The development of these stable cash flows is relatively simple for K-Fastigheter to forecast as we know when all of our 2,009 apartments in production will be complete and start generating cash flow.
Over the remainder of the year, we will complete one or more projects by the end of each month, and at the end of the second quarter we had 3,258 apartments under management with a rolling rental value of SEK 402.3 million.
Thanks to our unique business model, we are also creating positive cash flows in Prefab and Construction, where K-Prefab accounts for the majority of positive cash flows generated by a continued strong external market with secure order books that span over one year from now and where we expect to end the year with Prefab's highest annual sales to date. On the external market are we currently in the middle of a large and wide-ranging delivery of 5,000 concrete elements for the Stockholm bypass infrastructure project. K-Prefab, which is subject to normal seasonal variations, reported gross profit of SEK 36.5 million for the first half-year. The margin is down slightly due to a higher proportion of internal projects that have been priced at a lower margin than external projects, to reduce the cost.
Despite tougher new market conditions compared with when we introduced our current operational and financial targets, I am confident that we will live up to these targets in both the short and long term. During the first half of the year, we delivered growth in profit from property management of as much as 51 percent and growth in net asset value per share of 12 percent. In addition, we are coming out of the second quarter with a financial letting ratio as high as 97.8 percent and growth in profit of 89 percent.
With a credit portfolio in which all of the long-term financing for completed investment properties is provided by major Swedish and Nordic banks and has an average credit term of 2.5 years, combined with 63 percent of the debt portfolio being hedged and our interest rate sensitivity at the end of the quarter totaling only SEK 20.9 million in the event of a 100 basis point rise in interest rates, we feel secure in the prevailing interest rate situation.
As always, we are maintaining a high tempo in all of our business areas, which are progressing at an even pace. Project Development is currently actively working on planning permission documents and applications for approximately 1,600 apartments, and construction of 545 apartments began during the year. K-Prefab has full order books and looks set to deliver record sales with internal projects accounting for one-third and the external market accounting for two-thirds respectively. The Construction business area is also at an all-time high with as many as 2,009 apartments in production, of which 545 began being constructed during the first half of the year. I would also like to mention here that construction on our first project in the K-Commercial concept began during the quarter. The first project was Kv. Rusthållaren, which covers 17 stories and 8,000 square meters of non-residential floor area in central Hässleholm. The Property Management business area is growing every month now that we have increased the rate of completed projects. The conditions look undeniably good for achieving our goal of 5,000 apartments under management by the end of 2023. Despite strong growth and new market conditions, we have been successful at maintaining or improving our KPIs.
I am convinced that all of our business areas will grow with positive cash flows, even in a market climate with high inflation and normalized interest rates."
- Jacob Karlsson, July 2022