Good earnings in a recovering market
The year 2020, due to covid-19, is a year like no other. We can, however, see that Klövern’s business is long-term, stable and is delivering good results completely according to plan in a market which is now recovering. We are favoured by our contracted rental income and also by the composition of our tenants, who have generally succeeded in dealing with the current market conditions without too great an impact.
Klövern’s earnings for the first nine months of the year are in line with our expectations. Earnings were positively affected by efficient property management. For a comparable portfolio, both income and the operating surplus were on the same level as the corresponding period in 2019.
Profit from property management amounted to SEK 982 million and after positive changes in value of properties of SEK 818 million, profit before tax was SEK 1,661 million. The return on equity during the past 12 months amounted to 13 per cent.
It is gratifying to see that a number of macroeconomic indicators now show that the economy is recovering. This is, of course, taking place from the second quarter’s depressed levels but everything indicates that the sharp drop in business activity during the spring is now behind us. We can also see that the market is recovering by higher demand in the rental and transaction markets and by improving financing prospects in the capital market. We can also note that our tenants are to an increasing extent back in their offices.
Net moving-in reflects the slowdown in the first half
In total, external net moving-in amounted to SEK –46 million during the third quarter, which is a direct effect of the slowdown of the letting market in the first half of the year. The single largest explanation for the negative net moving-in is a hotel vacation which has had an impact of SEK –16 million. However, from October onwards, the hotel is operating again. Despite a weaker business climate during the spring, we have also welcomed a number of new tenants during the third quarter such as the Municipality of Kalmar, Linköping University and the Swedish Transport Administration.
Project development creates value
Project development has a key role in our business model and also positions Klövern as a long-term urban developer. On 30 September, development properties accounted for 16 per cent of our total property value and during the first nine months of the year investments amounted to SEK 1,710 million. The ongoing projects are expected to have a big positive effect on net-moving in during the coming two years.
Our two largest ongoing commercial projects, both in New York, are continuing according to plan and are expected to be completed in the second quarter of 2021 and the first quarter of 2022, respectively. The residential market has continued to be stable in recent months, which is gratifying. In October, construction was started of the first phase – consisting of 60 apartments – of the Nacka Strand 1 project.
In total, project development, including development of building rights, contributed to increases in value of properties of SEK 246 million during the first three quarters of 2020.
Increased financial strength
During 2020, we placed particular emphasis on securing good long-term financing and on further reinforcing our financial strength. During the second quarter, Klövern refinanced SEK 5 billion in existing bank loans and secured bonds. We also obtained new loans and credit decisions for new loans of over SEK 4 billion. In June, Klövern subsequently obtained an investment grade rating (BBB- with stable outlook) from Scope Ratings which is positive for future financing.
With a view to making use of the opportunities that we see for continued value creation by refinement and development of the building rights portfolio, selective acquisitions and to maintain a balance between equity and debt, Klövern’s board resolved at the beginning of October, subject to approval at an Extraordinary General Meeting on 13 November 2020, to carry out a fully covered rights issue of approximately SEK 2 billion with preferential rights for existing holders of ordinary shares. In October, we also announced that SEK 2 billion of green bonds, with maturity in 2024, had been issued.
The financial key figures – for example equity ratio, leverage and interest coverage ratio – will be further strengthened by these measures.
Focused property portfolio
Through persistent effort over many years, we have in accordance with our strategy focused the property portfolio on the growth locations and markets where we wish to be longterm owners. In October, we have taken possession of a couple of smaller, but strategically important acquisitions at Fiskhamnen in Gothenburg and at Uppsala Business Park.
At the end of the third quarter, the total value of the property portfolio was SEK 57 billion, of which the foreign portfolio in Copenhagen and New York accounted for 16 per cent.
A close dialogue with tenants
Klövern’s tenants have, in general, been affected to a relatively small extent by the pandemic. A limited part of the customer base, not least in the hotel, restaurant and fairs sectors, has for natural reasons faced greater challenges. We have a very close dialogue with the tenants who have requested some form of rent relief and an assessment has been made in each particular case whether there are prerequisites, for, for example, discounts and respite in combination with the rental assistance provided by the government. A number of tenants have at an early stage been offered the possibility of paying rents on a monthly basis instead of quarterly.
Adjusted for the tenants who pay on a monthly basis, the rental payments received by Klövern and those assessed as secure totalled as at 19 October 2020 98 per cent of the invoiced rents for the fourth quarter. At the corresponding time in 2019, 99 per cent of the rents had been received.
In summary, it can be noted that we deliver good earnings despite conditions in 2020 being special and challenging. The development of the pandemic in recent weeks in Europe may affect the pace of the economic recovery.
But with a reservation for this uncertainty factor, I still look forward to a good conclusion to this peculiar year.
Rutger Arnhult, CEO Klövern