Heba Fastighets : Earnings and Finance Reports

Q3

Interim Report 1 January- 30 September 2022

The period in brief

Financial performance

Heba is delivering stronger income from property management in the third quarter (+8.7%). In spite of a negative change in value, Heba is reporting profit of SEK 53.8m for the interim period.

The period was characterised by actions in response to changed conditions in the business environment. We have, for example, postponed planned projects and reduced the share of variable interest. We have also reviewed options for further increasing the NOI margin by securing income before costs are incurred.

Property portfolio

Heba took ownership of a property comprising 104 rental apartments in Nyköping in Q3. The new build property was built with investment aid and is fully let. Heba also agreed an additional acquisition of a new build rental property in Nyköping that will close in October 2022.

Heba is currently building 900 apartments under its own management, of which about 230 will be completed in 2022. In addition, 1,100 commonhold apartments are in production through partnerships and alliances.

Nine renovation projects have been in progress in 2022 and seven projects will be completed this year.

Property value

At the end of the period, the property portfolio was valued at SEK 15,428m, as compared to SEK 13,400.2m in the same period in 2021.

Sustainability

Methodical efforts towards establishing a climate-neutral business are in progress through minimisation, improvement and advocacy.

Our sustainability programme to reduce climate impact in line with the Paris Agreement is being assessed by ­Science Based Targets initiative.

A renovation project to minimise climate impact has been initiated as a pilot. This includes kitchens that reduce emissions by 60% compared to previous choices.

The energy target is average energy use of 80 kWh/m2 of heated floor space (Atemp) after degree days correction, a decrease by about 18% (base year 2021).

Interim profit

• Interim profit amounted to SEK 53.8m (859.5), corre- sponding to SEK 0.33 (5.21) per share.
• Income from property management was SEK 185.2m (170.3), an increase of 8.7% over last year.
• Rental income amounted to SEK 372.5m (328.5).
• Net operating income amounted to SEK 265.3m (232.0).
• Change in value of investment properties was SEK -337.6m (813.0).
• Net asset value (NAV) increased by 5.3% to SEK 54.00 per share (51.27).

Key figures

	2022	2021
	Jan-Sep	Jan-Sep
Property-related key figures
Rental income, SEKm	372.5	328.5
Lettable time-weighted area, 000s m2	281.9	259.1
Property yield, %	2.3	2.3
Carrying amount per m2, SEK	52,114	50,922
Financial key figures
Cash flow, SEKm	157.1	165.5
Investments, SEKm	1,098.6	896.2
Average interest rate, %	1.85	0.94
Property management margin, %	49.7	51.8
Loan-to-value (LTV) ratio, %	47.2	45.4
Net LTV, %	46.0	41.9
NOI margin, %	71.2	70.6
Per share data1)
Profit after tax, SEK	0.33	5.21
Dividend, SEK	0.80	0.65
Share price at 30 September, SEK	31.50	63.80
NAV, SEK	54.00	51.27

1. Restated in June 2022 following a 2:1 share split.

Contact person:

Patrik Emanuelsson, CEO

[phone], [e-mail]

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Stable performance under new conditions

2022 is an unusual year in a changing world. We saw a light at the end of the tunnel early in the year as the pandemic subsided. The sense of optimism then has been replaced by an economic slowdown with runaway electricity prices, rising interest rates and high inflation. In times like these, Heba's stable financial position is a solid foundation.

Heba generated income from property management of SEK 185.2m for the first three quarters of the year, an improvement by 9% compared to the same period in 2021. The upturn in income from property management is linked to the full-year effect of the five new properties we acquired this autumn in Vallentuna, Österåker, Enköping and Norrtälje.

Business environment

Developments in the business environment are a consequence of governments and central banks that have provided comprehensive fiscal support and interest rate cuts to prop up growth. The central banks have now done a u-turn in monetary policy, which has gone from stimulating the market with low interest rates to cooling the market by increasing interest levels. Higher inflation and the war in Ukraine that has brought runaway energy prices in its wake are also affecting economic development worldwide.

Adjusting to new conditions

Heba was affected to a minor extent in Q3 by higher interest rates, inflation and electricity prices caused by the geo-

political situation. The new conditions including higher interest rates will, however, affect the company's income from property management to a greater extent in 2023.

We are in it for the long term, and managing the business when the economy is in a downturn comes naturally to us. Based on the stress tests we have performed, we have taken several actions in response to the new business envi- ronment:

• We are completing ongoing new build and renovation projects while postponing other planned projects. This will reduce our need to raise new loans and thus our inter- est expenses over the next three years.
• During the quarter, we focused on lowering our share of borrowing at variable interest rates from 50% to 39% and will continue doing so in future quarters.
• We have reviewed options for further increasing the NOI margin by securing income before costs are incurred.
• We have secured electricity contracts for the next few years that give us significantly lower electricity costs compared to current tariffs.
• We have refinanced loans early and extended our loan commitments.
• We are gaining a new source of income from the sale of ongoing commonhold apartment projects in partnership with Åke Sundvall Byggnads AB.

Combined with our low LTV and long-term interest rate hedges, the actions described above give us the capacity to counteract part of the market interest rate.

Secure financing and stable finances

We have no control over market interest rates, but we can manage our credit margins and cash conversion cycle better. Our lenders regard our assets in residential properties and public buildings in attractive locations as stable collateral. Heba is a small player in the lending market and has had the foresight to establish a long cash conversion cycle for our loans. We are thoroughly prepared to manage future refinancing on the strength of our solid banking rela- tionships, good liquidity and unused credit commitments. We remain secure about our future financing.

We have planned and executed our growth journey by always maintaining tight control and margins in our LTV ratio. Growth while maintaining a strong financial position is an important hallmark of Heba and a prerequisite for the company's long-term and sustainable image. The average rate of interest for our current borrowings is 1.85%. Our available liquidity amounts to SEK 2,370m in the form of unused loan commitments of SEK 1,900m, bank liquidity of SEK 330m and an unused overdraft facility of SEK 140m. This liquidity will cover future refinancing needs, etc., for a long time to come.

Securing growth

We have accelerated our renovation rate and will complete seven renovation projects in 2022 that will increase rental income. We have increased our holdings of public buildings, which provide better rent uplifts than residential rental

HEBA FASTIGHETS AB

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properties. About 20% of rental income is indexed and the majority is generated by public buildings.

The vacancy rate for residential and commercial properties is low at 0.52% , due to having attractive properties in desirable locations, efficient property management and skilled employees. We are better prepared than many other residential property companies on the strength of our LTV ratio of 47% combined with a fixed interest duration of 3.2 years.

The current challenge is that Heba cannot swiftly compensate for increased interest expenses and energy costs through rent uplifts in the residential portfolio. Apart from that challenge, my main concern is how consumers and industry will manage the increased costs and the impending recession. The Swedish government and the Riksbank have a heavy responsibility to manage this situation.

Market value and yield

Uncertainty in the transactions market makes it difficult to pin down yield requirements. Transaction volume has fallen in Sweden this year. Cautiousness prevails in the market and properties are remaining unsold. Heba's orientation towards residential property and public buildings with very low vacancy risk are secure segments from a long-term perspective. Our holdings of attractive properties in desirable locations are what has generated the high property values in our portfolio, along with low property yield.

In spite of this, the market value of our properties decreased in Q3. The previous valuation uplift was replaced in Q3 by negative value growth of 3.3%. The negative change in value for the first nine months is 2.3%. The total market value of the company's properties as at 30 Septem- ber 2022 was SEK 15,428m, as compared to SEK 13,500m as at the same date in 2021. History shows that the market will rebound after isolated years of downturn. The average valuation uplift for rental properties has increased by about 6% annually in recent decades.

New builds and renovation projects

Heba agreed an additional acquisition in Nyköping in

September­ comprising 83 new build rental apartments ­produced with investment aid. The property will be fully let when ownership is transferred to Heba in late October 2022. We will assume ownership in December 2022 of a rental property in Uppsala with 145 apartments. A total of

seven renovation projects were completed in the first three quarters of the year. We have made such good progress with our renovation programme that it will be nearly complete after 2023. Only a few isolated projects remain to be completed after 2025.

Sustainability

We submitted documentation on our sustainability target during the quarter for assessment by Science Based Targets initiative, an important step in showing the seriousness of our work to reduce our climate impact in line with the Paris Agreement. There is no question that we at Heba must work according to scientific guidelines to attain the goals of the Paris Agreement.

Heba's target is to reduce energy use by about 18% to 80 kWh/m2 of heated floor space after degree days correction by 2028 (from the base year of 2021). Energy use for Q3 2022 was 87 kWh/m2

We began a renovation project during the period that will be entirely focused on minimising the climate impact of the project. As an example, we have decided on a new kitchen that reduces emissions by about 60% compared to the previous model. The pilot project is a key component in our continuing effort to learn about climate optimisation and how to update outmoded methods.

Heba is a stable 70-year-old in the market

Conditions in the real estate market have changed dramatically during the period and these new conditions will also affect Heba. We are closely monitoring market develop- ments. At the moment, all property companies are valued on a like-for-like basis, even though their circumstances differ, but this is going to change quickly. Heba is agile, has strong capacity to act as needed and as opportunities arise.

Heba is a stable 70-year-old that will demonstrate its strength as we move through the next few years. With low risk and longevity, Heba is a financially strong company that will remain a force to be reckoned with over the next 70 years as well.

Heba is the long-term choice.

Patrik Emanuelsson

Chief Executive Officer

Financial targets and guidelines

Increased profitability through growth while maintaining financial stability

Our core business is to own, manage and develop

­residential rental properties and public buildings in the Stockholm-Mälaren Region.

Financial targets:

• Increase in income from property management by 10% p.a.
• Long-termLTV ratio below 50%.
• Annual dividend of at least 70% of income from property management adjusted for tax.
• Economic efficiency to increase:
• • Property yield by around 3%
  • NOI margin by around 75%
  • Property management margin by around 50%

HEBA FASTIGHETS AB

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Heba Fastighets AB

OUR VISION

We shall be the best in Sweden at creating safe and attractive homes

and communities.

OUR BUSINESS CONCEPT

Heba is a long-term and experienced property owner that develops, owns and manages residential properties and public buildings in the Stockholm-Mälaren Region. On the strength of our expertise and

commitment,­we offer safe, secure and sustainable homes for people throughout various phases of their lives. We create value for share­ holders and society through satisfied tenants, safer and more ­attractive communities and trustful partnerships.

Our value-add business model

		Value generated
Income from property management

Long-term and efficient management of 72 properties in the Stockholm-­ Mälaren Region.

62 residential rental properties and

10 public buildings

New builds

Land allocations

Acquisitions

New build projects

Built properties

For shareholders Long-term profitability and growth, returns to shareholders

For employees Committed employees

For the environment Resource-efficient and sustainable solutions

Property development

Densification, upgrading and renewal (ROT)

For customers Attractive communities

For society Responsible partners

Contributions to UN SDGs Heba has identified eight global SDGs that guide our ESG and sustainability work

Inputs	•	Borrowed and internal capital	•	Resources - energy, water, building materials	•	Tenant relationships
	•	Expertise, experience	•	Buildings and building rights	•	Partner relationships

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Heba Fastighets AB

Targets

Growth

Heba shall continue to grow in the Stockholm-Mälaren Region with orientation towards residential rental properties and public buildings.

Sustainability

Heba shall be committed to an active sustainability programme that is reflected in everything the company does, in the day-to-day work as well as the company's long-term approach to property development and management. Property management shall be climate-neutral by 2030 and all operations shall be climate-neutral by 2045.

Heba shall have satisfied tenants with a service index on par with or above the median value for privately owned housing companies in large cities.

Heba shall be perceived as an attractive employer that encourages skills development and cooperation among its employees.

Dividends to shareholders

Heba shall distribute an annual dividend equal to at least 70% of income from property management adjusted for tax.

Brand

Heba shall work actively to strengthen the company's brand.

Digitalisation

Heba shall work actively towards expanding digitalisation and further developing IT maturity in the organisation.

Strengths

Attractive properties in desirable locations with potential

With its concentrated holdings of residential rental properties in the Stockholm-Mälaren Region, Heba is in prime position to continue increasing earnings capacity in the existing portfolio by means of efficient management and a total concept for renovations, rebuilds and additions.

Modernisation and maintenance of the properties is ­oriented towards sustainability, with additional focus on saving energy and opportunities to create new residential units in existing buildings. This is also expected to generate rising property values over the long term.

Increased share of new builds and public buildings with higher property yield

Total investment volume for ongoing rental property and senior housing projects is SEK 2.3bn. The projects completed in 2022 and thereafter will generate net operating income of about SEK 108m p.a. The number of geographical areas within the Stockholm-Mälaren Region will increase over time. Demand for public buildings is rising steadily for reasons including the ageing population in Sweden. Heba is targeting an increase in the share of public buildings in the portfolio from 10% to 20% by 2025.

Strong financial position and cost-effective borrowing

Heba has stable underlying cash flow and a solid financial position. The company is listed and has access to more cost-effective financing options than before. These conditions make it possible for Heba to sustain long-term growth without its growth ambitions being limited by the target of long-term LTV below 50%.

Stable dividend level

Heba will achieve growth while maintaining value growth and financial performance that safeguards dividends to shareholders. The company's target is an annual dividend of at least 70% of income from property management adjusted for tax. Over the past five years, the dividend has been 68-73% of income from property management after estimated tax.