Earnings Call: Q4 2020

Feb 12, 2021

And welcome to the Dios Fastigator Year End of Report 2020. Good morning, and warm welcome to this web presentation of the year's year end results for question. My name is Klut Thorsten, I'm the CEO. And together with me today, I have Roald Larsen, our CFO. I can probably start this presentation by stating that the results for this extraordinary year is very good. In this presentation, we will give you a brief introduction of the year, guide you through the results and some of the major events during the year. We will enlighten the effects of COVID-nineteen, our position as market leader in a market that shows stability and strength, and how we will reach our growth target and continue to create shareholder value. If you have any questions, there will be a Q and A session in the end of this presentation. Listen for instruction how to ask questions. If you are listening on replay, you can always reach out to us if you have questions. Contact details are at the end of this presentation and on our website. Let's go to Page 2. The U. S. Is the market leading real estate company in 10 growing cities in Sweden. We own, manage and develop both commercial and residential properties with a concentration towards the central parts of the city. We describe our market as a 15 minute cities, where you can reach work, home and any amenity within a 15 minute distance, walking, biking, riding a car, where we offer premises for offices, urban service and residential. Our key strength is our local teams with close tenant relationships and great market knowledge, closely tightened with our market leading position. We have an average valuation yield of our portfolio of approximately 6%, which generates great cash flow, And we target to pay approximately 50% of our cash flow in dividend. Our vision is to create the most inspiring cities in Sweden. Let's go to Page 3. 2020 has been extraordinary in many ways and we all have our own experience, both in our private And in our professional life, for the year, I can say that we have managed the challenges in very good way, which we show in our key figures for the year. We are still in a world with great uncertainty and we need to be humble and continue to take our responsibility. To highlight some of the key figures, I'll start with The net letting of SEK 51,000,000 for the full year. It is a good heat map of the market and our tenant offer. Our cities differ from the major cities around the world, With lower density of people and commuting is easier. In the Q4, the net letting amounted to SEK 9,000,000 with, for example, new lease contracts signed with the police authority in Ljubljom and Kvnskopskolan in Jablend. Our surplus ratio is the strongest ever for a full year and was 66%. We managed to meet the lost revenues related to discounts and bankruptcy with lower property management costs. The Board proposes a dividend for 2020 of SEK 3.30 per share divided into 2 equally payments of SEK1.65. The distribution date for the dividend will be the 20th April and the 4th November. Let's turn to Page 4. To address some of the major events in 2020, it's natural to start with COVID-nineteen. 2nd wave of COVID-nineteen pandemic hit us in the beginning of November. Compared to March April, we and our tenants was better prepared. Our market has shown good resilience and our diversified tenant base with 31% of rental income from government credit related businesses has proven to meet current situation well. We see tenants in some parts of restaurants, cafes and retail struggling somewhat. We are very active and close to our tenants, which has proven to be a key factor to manage this situation. The effect on our results for the Q4 is fairly limited. We have settled 99% of the rental receivables for Q4. RAS payment for the Q1 2021, which is paid in advance, for Q1 regarding COVID-nineteen related issues. We have received SEK 16,000,000 from the government related support scheme out of discount amounting to SEK 33,000,000. The lease agreement we signed with question. Tele2, this fall is so much more than just a good lease contract. It set the start of a retail to office conversion that we will have in many more cities for years to come. We will rebuild existing B location, Typical second and third floor retail into a location for offices. This is possible in our cities because of similar rental levels for these two segments, which isn't the case in prime areas in major cities. We both increased our operating surplus due to lower costs and more efficient use of areas and we get higher property value. We introduced the 15 minute city as a concept for all our cities. Throughout this year, our markets and cities have been less affected of macroeconomic development. We believe our cities are in perfect spot and will meet an increased demand from both businesses and households, Who will take advantage of all the 15 minutes Citic can offer. I will come back to that this later in this presentation. Now I will hand over to Rolf, who will present the results in more detail. Rolf? Thank you, Knut. We can move to Page 5. As Knut said, we delivered strong results for the full year. We still see higher rental levels for offices, lower operating costs in our property management and continued good return on our investments. We're operating in a strong and stable market. We hear positive tones from many of our tenants and demand for qualitative offices in sensor locations remains high. We have done and are doing several lettings at very good rental levels, which shows in our strong net lettings, Which amounted to €51,000,000 for the full year. There is still some uncertainty regarding some companies that currently belong to the most exposed sectors, which includes certain retail, cafes and restaurants. For this type of premises, we can see opportunities to convert B and C locations to other types of premises with good return and value growth. For example, as Knut said, we're converting 3,800 square meters of retail space on the 2nd floor in the city of Montezoneswaltz into a high quality and modern office, Hotel 2. Reduced retail space in less attractive locations also leads to increased demand and rental levels for retail in A locations. If we go ahead and look at the income statement. Income from property management increased by 1% Compared to last year. If we exclude COVID effects, the increase was 2%. Like for like rental income increased 1.8% due to indexation, renegotiations and new lettings. Our operating surplus increased by 30%, resulting in a surplus rate of 66, question, which is the highest ever. Net financial costs are higher due to higher interest bearing debt and higher average LIBOR. The property value uplift amounted to SEK 198,000,000. Continue to Page 6. If we go on and look at the development of our cash flow in the form of earnings per share and our management efficiency to measure the surplus ratio. We can see that the upward trend for both measures continues. We have achieved this by making the right transaction. We have acquired high yielding properties in central locations and sold non priority locations. We have increased the quality of our properties through investment, which has led to high rent levels and lower vacancies. And we have reduced our financial costs over the year. Turn to Page 7. The property portfolio is well diversified in terms of segment and geography. We have concentrated our portfolio to see this with strong growth. We have a low tenant concentration risk. Our 10 largest tenants, of which 7 are tax financed, account for 17% of our total rental income. And 31% of our rental income comes from tax finance operations. Our exposure to industries that currently belong to the most exposed is relatively limited. We have received 97% of rents for the Q1 this year, which is in line with previous years. The average lease term for commercial premises has increased during the year and amounts to 3.9 years. Continue to Page 8. The market value of our properties amounted to SEK 24,500,000,000, An increase of SEK1.6 billion since the turn of the year. SEK198,000,000 is due to property value uplift and the rest to investment. The value was positively affected by yield adjustments and lettings 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. The average valuation yield was 5.7%. Turn to Page 9. Here are some examples of transactions we have made during the year. We have acquired high yielding properties in central locations, containing mainly office and residential. And we have sold properties in non priority locations containing mainly industrial premises. Go to Page 10. 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 €2,600,000,000 The positive cash flow effect will mainly come during 2022 in 2023. And all our ongoing projects are proceeding according to plan. In addition, we have about 150,000 square meters in existing or possible building rights in central locations. 60% refers to residential. Turn to Page 11. Here are some examples of our major ongoing projects, Both newbuilds and major reconstructions. And we do not start any projects, except housing, until they are fully let. More than 60% of the rental income from our ongoing larger projects come from tax finance operations. Go to Page 12. During the Q4, we Completed production of 80 fiber partners in Ostrusernen, all of which are left. The investment volume amounted to 1 100 and 7,000,000 with a development profit of 12%. Move to Page 13. As you can see, our net debt to EBITDA is stable and amounts to about 11 times over time. This again shows our strong cash flow. Our loan to value rate at the end of the period was 54.3%, which is far below our covenant level. Our interest bearing liabilities amounted to 13,200,000,000 81% are bank loans, 14% certificates and the rest are covered bonds. During the Q4, we extended our fixed interest rates through rate swaps totaling 3,500,000,000 The average annual interest rate at the end of the period was 1.2%. In 2021, we will refinance 18% of our outstanding loans corresponding to SEK 2,400,000,000. We can see that the capital market is functioning again with falling margins as a result, which applies to both certificates and bonds. And we see opportunities to increase the share of capital markets financing during the year. 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 600,000,000. Continue to Page 14. We report the EPRA key figures according to the new standards. EPRA NRV increased by 9% to $79,700,000 per share. The interest coverage ratio remains strong and amounts to 6 times. The growth in income from property management per share amounts to 0.8%. The change is mainly a result of temporary rental discounts because of COVID-nineteen and higher financial costs. And then I will hand it over to Knut again. Thank you, Rolf. I will now cover some points about our strong market and extend the reasoning around our 15 minute cities and explain how we should reach our growth target. Let's turn to Page 15. Like the first wave of COVID-nineteen, this second wave has so far affected our market less question. Compared to, for example, Stockholm and major cities. People have been able to live their life in a more normal way and have kept their job. The Swedish community are relatively used to remote work. Looking at data comparing Sweden with other European countries Before COVID, shows that 35% of the Swedish employees partly accomplished their work remotely. And this figure is even greater for our cities. Offices are, therefore, adapted to people partly working remote. I think this is one reason why we see the office market continue showing high demand. We define our 10 cities as 15 minute cities. You have all your need within 15 minutes from your home and all services are easy to access. We have actively chosen these cities not out of the 50 minutes criteria, But out of the requirements you see on the slide, growth and of course ambition to grow It's a key component for the future. We invest and expand our offering in places we believe will benefit most of the current trends. Before the pandemic, we saw people and businesses moving to our cities to change their way of life. This is something we already see accelerating as we think reaction to the pandemic. If you can do part of your work remotely from a co working place or some other location and then benefit from all positive Features like more affordable housing, less crowdedness, nature around the corner and probably less stressful life. Why not move to one of our cities? You will have good infrastructure both for traveling, but also IT infrastructure And accessibility to all service needed school, preschool, restaurants, grocery stores and so forth within 50 minutes from your home. With more companies offer their employees to work remotely, With more developed technology and the increasing importance of a more sustainable lifestyle, our cities are in a good place for the future. As evidenced for the strong market we are referring to, we see increased activity in the transaction market with new players entering our market. This has led to lower property yields. We are seeing residential properties being sold below 4% in yield and offices around 5%. This gives us comfort in lowering our property yields in the portfolio and increasing our property values. We had an unrealized gain in property values by €329,000,000 in Q4. Let's turn to Page 16. We are not only a very diversified real estate company looking at the portfolio, but we also have great diversification in our value creation. We repeat our target of growing the income from property manager We will reach our target by contribution from all three parts. 1st of all, property management. We target lower vacancies for coming years. We have very good tractions in our new leasing, but need to improve the turnover in the portfolio. A percentage point in reduced vacancies give €20,000,000 in additional income. Renegotiation has great potential. 16% of our lease contracts or up for renegotiation next year. And especially, the office rents have been on the right last couple of years. Another part is project development. We have several ongoing larger projects. The total CapEx of the 6th largest ongoing project is SEK 2,200,000,000. We just finalized the residential in Notesund, as Ralf mentioned, with very good return. The majority of the cash flow from these projects will come in 2022, and we see a total contribution from the major projects of approximately SEK 130,000,000 by the end of 2023. We have more focus how to activate our building rights. We have approximately 150,000 square meters building rights Rights unused or in our stages, and we are exploring possibilities to create value by starting construction or by divesting. With the great value in creating new building rights, we target to establish 30,000 new square meters of building rights question each year. The third part is transactions. Increased activity within transaction will help us reach Our growth target. By acquiring high yielding properties within offices, residential and with government related tenants, we can maintain our yield gap in the portfolio. The focus will not only be in the CBD location, but we will also focusing on finding locations that are attractive for our tenants. By divesting properties, We with limited potential or outside or prioritized location with free capital. Our goal is to be net biased. Let's go to Page 17. With the vaccine, it feels like we are on the right path, even though a lot of uncertainty remains. Question. We are living closely to our tenants, trying to assist in different ways and to capture new challenges they are facing. The government has released a new rent rebate package for Texas that has been most affected. It's difficult to predict how this can or will affect the Earth at this stage. But fair to say Is that I will probably not reach the same amount as the previous stimulus package in Q2. The market and demand for offices and residential has increased since lows in April. And we are convinced together with community service properties that these segments have most potential going forward on the back of the The ongoing and reinforced trends like urbanization, polarization, sustainability and demand for urban service. Attractive areas for one segment into very attractive areas for another segment, like the Tele2 case I described earlier. We are active in 15 minute cities. The density of people, especially within local transportation and commuting is less. Infrastructure is different. For example, there is limited traffic jamming and it's relatively easy to find parking lots. I'm convinced that our 10 cities can benefit from these qualities in the long run, where people can, using a digital solution, work more remote towards the headquarters in the major cities around the world. I'm also confident The need for people meeting at the office at a regular basis will be of great importance. The role of the office As a brand and culture carrying a meeting place will be strengthened. Digitalization can further increase the demand for satellite Offices and for co working hubs, something that we already have noticed. We are the full service property owner able to capitalize on this demand. We see more interest from other real estate companies, from foreign capital and pension funds to enter our market. This will affect the competition and yield levels. With our local pattern market knowledge, we are in a very good position to finding new business opportunity. 2020 was a year that will go into the history books. I'm proud to note that our drive and energy were crucial to the achievement of a strong result for the year. We repeat our growth target of 10% to 10% growth in income from property management. We have high ambitions and I'm determined that we will do what it takes to reach our target. This will mean more transactions, increased activity within property management and reduced costs. It might bring the LTV somewhat higher for short periods of time, but our long term target is still below 55%. With our high degree of activity and our unique position, it's a great question. This takes us to the end of this presentation. Thank you for listening. We are now ready for questions. Thank you. There'll be a brief pause while any questions are being registered. There are currently no questions from the audio line, so I'll hand over for the web Q and A. Yes. There's one question from the web Q and A. I'll read the question. We talked you talked about the balance between investment financing and dividend. Today's announcement regarding dividend per share, At the level, do you see this sustainable, both in absolute and relative terms? Hi, Rolf here. Yes, we believe that's sustainable. We are a dividend company, And our goal is to be a dividend company even in the future and deliver high yield No further questions from the web Q and A. If there are no further questions at all, I'll hand back over to our speakers for a conclusion. Yes. There's one other question from the web Q and A. When you're using your 50 minute cities criteria, is there a new city that could be of interest above your 10 cities today? Well, a good question. We are always, of course, looking at new markets. But as for now, We are satisfied with our 10 cities and 10 markets, and we have a lot to do. And we see Prosperous times in those ten cities. So just for now, we are not looking into another city, but We are always interested in new businesses. So thank you for the question. We'll see in the future. Thank you. Another question has come in in the web Q and A. Deferred tax was pretty high. Should we expect it to be permanent? Well, it depends on how the market values of the properties are Evaluating in the future. So It depends. I think it's a normal level. Thank you. No further If there are no further questions, then Thank you for attending this conference call. I'll hand back over to the speakers for any final remarks. Well, thank you very much for listening to our presentation. And I hope you