Earnings Call: Q3 2020

Oct 23, 2020

Good morning, and warm welcome to this web presentation of the year's Q3 results for 2020. My name is Knut Drost. I'm the CEO of the company. Later, you will also meet Rolf Larsson, our CFO. With an humble approach for the current situation, I'm confident saying that the power of our actions have been decisive for the strong result of the Q3. We will guide you through the results and the effects of the actions we've been taking. We will discuss the effects of the COVID-nineteen, our position as market leader in a market that shows stability and strength and how we will reach our growth target and create shareholder value. If you have any questions, please send an e mail. You will find our contact details in the end of this presentation. Now turn to Page 2. The result for the Q3 is strong. We are coming from a spring summer with great uncertainty what to expect going into the autumn. So far, the development has exceeded the expectation we had at our last presentation. Looking at the most significant events of the quarter, we have been very active in continuing our tenant dialogue, which has led to increasing businesses and more prospects for new developments, investments and leases. The net letting of Q3 is SEK 13,000,000 and SEK 42,000,000 for 2020 so far. It's a strong result and it shows the potential of our market. For example, we signed a great lease office contract with Teleth IV in our in one of our central mixed use properties. 10 year lease contract of 3,800 square meters with a yearly rental level of approximately SEK 9,000,000. As the market leader in our markets, I would say that we are in a great position to create more attractive office leases, where the demand for a good location with access to urban service will increase. More about that later. Our market has shown good recovery since the turmoil in March April. The turnover is picking up for retailers and restaurants, and our office tenants are almost back at normal levels in terms of occupancy. We believe that the differences between major cities and our regional cities serve us well in the current situation. Our surplus ratio continues to increase and was 68% for the period. Now I will hand over to Rolf, who will present the results more in detail, and then I will return to discuss the effects of the pandemic, ongoing trends and how we will be able to create shareholder value. Rolf? Thank you, Knut. We can move to Page 4. As Knut said, we delivered strong result for the Q3. We still see higher rental levels for offices, lower operating costs in our property management and continued good return on our investments. We hear positive tones from our tenants in the most segments, but there is still some uncertainty regarding some companies that currently belong to the most exposed sectors. Rental discounts for the Q3 are back at normal levels. Income from property management increased by 1% compared to the same period last year. If we exclude COVID effects, the increase was 4%. Like for like rental income decreased by 0.7%. Excluding COVID effects, rental income increased by 2.3% due to indexation, renegotiations and new lettings. Our net lettings for the period was strong, as Knut said, and amounted to EUR 42,000,000 Demand for qualitative offices in central locations remains high. For the Q3, net letting amounted to SEK 13,000,000. Our operating surplus increased by 3%, resulting in a surplus ratio of 68%. And the surplus ratio for the Q3 was 72%, which is the highest ever. Net financial items are higher due to highest EIBER and lower share of capital market financing. Property revaluations amounted to SEK 12,000,000 in the 3rd quarter, which means that unrealized changes in value for the period amounted to minus SEK130 1,000,000 Profit after tax is lower compared to last year, which is mainly explained by lower unrealized changes in value. Continue to Page 5. If we go on and look at the development of our cash flow in the form of earnings per share and our management efficiency measured as surplus ratio, we can see that the upward trend for both measures continues. We have achieved this by making the right transactions. We have acquired properties in central locations and sold non priority locations. We have increased the quality of our portfolio through investments, which has led to higher rental levels and lower vacancies. And we have reduced our financial costs. Go to Page 6. The property portfolio is well diversified in terms of segments and geography. We have concentrated our portfolio to cities with strong growth. And our exposure to industries that currently belong to the most exposed is relatively limited. We have a low tenant concentration risk. Our 10 largest tenants, of which 7 are tax financed, account for 16% of our total rental income. And 31% of our total rental income comes from tax financed operations. And our average lease term for commercial premises has increased to 4 years. Continue to Page 7. The market value of our properties amounted to €23,800,000,000 an increase of €900,000,000 since the turn of the year. The change is due to investments. As I said before, unrealized chances in value amounted to minus €130,000,000 The value was positively affected by lettings and investments in primarily offices and higher rental levels than expected for residential, while adjustment of yield and long term market rents for certain retail has affected the value negatively, and the average valuation yield was 5.8%. The trend of increasing investments continues. On the right side, you can see some of our larger projects. We currently have more than 100,000 square meters under construction with an investment volume of about SEK 2,800,000,000. The positive cash flow will affect cash flow effect will mainly come during 20222023. And all our ongoing investments are proceeding according to plan. In addition, we have about 100,000 square meters in existing or possible building rights in central location with an estimated investment volume of just over SEK 2,000,000,000. Move to page 9. As you can see, our net debt to EBITDA is stable and amounts to about 11 times over time. This is clearly below the average for the listed Swedish real estate companies and again shows our strong cash flow. Our loan to value ratio at the end of the period was 55.2 percent, which is still far below our covenant levels. During the Q1, we have refinanced SEK 5,100,000,000 of bank loans, and we have increased existing credit limits by €600,000,000 to, among other things, finance ongoing projects. During the Q2, we have refined bond maturities of SEK 800,000,000 through new bank loans, And we have no further loan maturities in 2020. And we can see that the capital markets is beginning to function again. We have issued certificates for SEK1 1,000,000,000 during the second and the third quarter. And the corporate bond market is starting to work again. Prices have stabilized at levels considerably lower than in Q2. Our average annual interest rate was 1.2%. Thanks to a strong cash flow and an interest coverage rate of around 6 times, we continue to choose a short interest rate fixing. We, like many others, continue to see low interest rates in the foreseeable future. Overall, we have a strong financial position. In addition to existing loans, we have liquid funds, unutilized overdraft facilities and unutilized credit facilities available corresponding to SEK 700,000,000. Continued to Page 10. We report the EPRA key figures according to the new standards. EPRA NRV increased by 6% to SEK 75.7 per share. The interest coverage ratio remains strong and amounts to 6x. The growth in income from property management per share, rolling 12 months, amounts to 1.6%. The change is mainly a result of temporary rental discounts as a result of COVID-nineteen and higher financial costs. And then I will hand it over to Knut again. Thank you, Rolf. Let's go to Page 12. The effects of the pandemic on our business have been fairly limited looking at the result for the Q3. However, it has taken a lot of focus and we need to be humble and careful to reduce the risk of spreading the infection. Looking at actual effects. Rent payment for the Q4, which is paid in advance, are at normal levels. We have been giving minor discounts for Q4 in regard to COVID-nineteen related issues. We have settled 99% of the rental income for the Q3. We have received SEK 15,000,000 from the government related support scheme out of discounts amounting to SEK 33,000,000. Let's go to Page 13. The recovery from April has been far better than we expected and at the end of the last quarter. There was a lot of uncertainty ranging from how restrictions were to be prolonged or new ones implemented to how our tenants' rent payment capacity would develop. We have seen the footfall increase in our cities, both on the streets as well as in the restaurants and in the retail stores. Turnover has increased and the outlook has grown more and more positive every month since June. Office tenants in the private sector are reporting almost normal occupancy at their premises. Government related office tenants, however, are still at a work from home mode, following the more strict and general recommendation from the public health authority. I believe that the characteristics of a city play a central role in why people are more reluctant to come back to the office in the major cities. I'll get back to that later. The transaction market has also recovered. Looking at yield levels, we are experiencing the same levels pre corona for offices and residentials and even lower yields for community service properties. Let's go to Page 14. We are not only We are not only well diversified real estate company looking at the portfolio, we also have a great diversification in our value creation. We have a target of growing the income from property management by per share by 10% per year on average over the 3 year period. We will reach our target by contribution from all three sections: property management, project development and transactions. We start with property management. We have a target for lower vacancies for the coming years. We have very good tractions in our new letting but need to improve the turnover in the portfolio. A percentage point in reduced vacancy gives about SEK 20,000,000 in additional income. Renegotiation has a great potential. 60% of our lease contracts are up for renegotiation next year, and we are especially office rents have been on the rise last couple of years. Project developments. We have 6 ongoing projects with a total CapEx of SEK2.2 billion. The first to be finalized is residential in Ostrachund, where occupation is ongoing as we speak. It will give a cash flow of approximately SEK7 1,000,000 on yearly basis. The majority of the cash flow from these projects will affect the results in 2022. We are focusing on how to activate our building rights. We have approximately 100 1,000 square meters of building rights, and we are exploring possibilities to create value by divesting or by starting constructions. Transactions. Increased activity within transaction will help us reach our growth target By acquiring good yielding properties within offices, residentials and with government related tenants, we can maintain our high yield gap in the portfolio. The focus will not only be in the CBD location, we will focus on finding locations that are attractive for us and the tenants. By divesting properties with limited potential or outside our core expertise, we will add resources to minimize vacancies. Our goal is to be net biased for the years to come. Let's go to Page 15. The demand for offices and residentials has increased subsequently since April. Together with community service properties, these segments have the most high potential in our market. Also taking into consideration that the existing trends like urbanization, polarization, sustainability and demand for urban service. It is still difficult to predict the effects of COVID-nineteen at the microeconomic development. However, again, we believe that our markets have the right potential of growing due to existing trends. We hope we have been giving you a positive outlook of our market that we strongly believe we lost. We are active in regional cities with different characteristics compared to the major cities. The density of people, especially among people commuting is less and the infrastructure is different. For example, there's limited traffic jam and easy to commute. Our ten cities will benefit from these qualities where people can work remote from headquarters in major cities around the world. Digitalization can further increase the demand for residential for satellite offices for co working hubs, something that we are already act on since we are the full service property owner able to capitalize on this demand. The design and the location of offices are important parts of brand and will be even more important with the younger generations. To be able to attract the right talents and competence, your office needs to be appealing. The entrance, the quality, the location, the surroundings with urban service, for example, are getting more and more important. I don't believe that work from home will decrease the demand for office area. However, it will change towards more area for socializing and less working station, higher degree of flexibility and higher quality. If working from home would be out would outcompete the offices, I would deem that as a failure, both for ourselves as the provider of office space, but also for all employees. Building a long term company culture as well as providing your employees with the right ergonomically conditions will be extremely challenging with the home office solution. Physical retail in a location will still be attractive in the future, but the less attractive retail areas will be converted into something else. This can increase the demand of remaining areas keeping rental levels high. The urbanization and shared economy trends are making it more attractive to live in the city. You benefit from the urban service and you don't need to commute for work or school. Younger generation are more reluctant to have a car. And with today's technology of carpooling, you can access these services very easy. More residential in the city center will contribute to a safer city, something that is of major importance for city to be attractive. With our high degree of activity and decisiveness and our unique position, I see great conditions for our for us to continue to deliver shareholder value. To summarize this presentation, I would like to highlight a strong result with a net lease of SEK 13,000,000 for the quarter and SEK 42,000,000 for the period. We are on a stable market with increasing demand of offices, residentials and urban service. The demand of high profile offices is increasing, both because of the possibilities to create growth and a strong brand. Looking ahead, we expect the growth rate to pick up and we see many opportunities to create long term value for our cities, tenants and our shareholders. Thank you very much for listening. We have come to the end of the presentation. Thank you very much.