Welcome to the Fabege conference call. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now, I will hand the conference over to the speakers, CEO Stefan Dahlbo and CFO Åsa Bergström. Please go ahead.
Welcome to Fabege's presentation for the Q3 2023. As usual, we will finish up with a question and answer session, and also, as usual, it's possible to submit questions by email to ir@fabege.se, and you can do that during the question and answer session. On the first slide, we see a short summary of Fabege today. As you know, we're still focused on the Stockholm area, and especially in times like this, I think that is a really strength. Have a local focus with also local property management, and we do all that internally with our own staff. The summary for the first nine months is that we increased the rental income and also the operating surplus. But on the other hand, we all know that also the interest cost increased.
Despite that, we were able to just have a small, slightly lower, slightly lower management profit, and I think that also show the strength in the daily work that is done by our organization. We will come back to the negative value changes in the property portfolios, just, we have, as I said, we will tell you more, more about later. The net letting, during the Q3, the negative will a little bit more than SEK 20 million. That will mean that for the first three months, we have a negative net letting. In the first nine months, we have a negative net letting of -SEK 3 million. We will tell you more about that later on, too, also. But I like will right now just also say that, in August, we are...
We announced that the letter we have signed for Nöten 4, that was with Saab. The work on that to translating the letter of intent into a lease agreement is well underway, and we now estimate where we will be announced or it will be completed, and we will also at that time announce more details, and that will be during the fourth quarter of this year. They will move in during the second half of 2025, but more about later, later. We had an increased occupancy rate and, and... With that said, I also like to change to Åsa, who will report our results and financing in more detail. So please go ahead, Åsa.
Thank you, Stefan. Increased rental income and improved net operating income almost cover, but not completely the increase in interest expenses. However, during both the second and the third quarters, individually, we reported a higher profit from property management, compared to the previous year. Increased yield requirements in the property portfolio have continued to put pressure on property values. Rental income amounted to SEK 2.5 billion, corresponding to an increase of 12% in an identical portfolio. The increase in income was mainly due to the index-linked increase that entered into effect at year-end, higher parking revenue and positive net letting during the period, of which Convendum's move into Bocken 39 was the largest. This was partly offset by a negative effect after the Swedish Tax Agency's relocation from Nöten 4 on end of March 2022.
Other income, SEK 11 million, refers to Fabege's share of the electricity support that was paid out during the quarter. Increased operating expenses were mainly due to acquired and completed properties, which entered into operation and higher costs for snow clearance. The surplus ratio came in at 75%. The Bostads gross profit amounted to SEK 23 million, as six projects were completed and where final recognition occurred during this period, and central administration costs came in at -SEK 81 million. Interest expenses increased compared to the previous year, which was due to a slightly increased loan volume and higher average interest rate. The average interest rate increased from 2.39% at year-end to 3.16% at the turn of the quarter, gradually impacted by higher market interest rates.
The result in associated companies amounted to SEK 31 million, of which -SEK 54 million related to the period's capital contribution to Arenabolaget , +SEK 75 million related to income recognition in the Haga Norra residential project, and SEK 10 million related to contributions from the Bostads co-owned projects. We therefore reported profit from property management of SEK 1.1 billion, which is almost the same figure as in the previous year. Improved net operating income has, as stated, almost offset the increased interest expenses. Unrealized changes in value amounted to -SEK 5.4 billion, and I will come back to this very soon. The surplus value in the derivatives portfolio decreased by SEK 115 million, and last, the tax expense, which only related to deferred tax, was positive and amounted to +SEK 829 million.
The increased market interest rates have continued to have an impact on yield requirements and valuations. There were still only a few transactions carried out in our market. During the quarter, we have independently valued approximately 55% of our portfolio. The rest of the properties have been valued internally. The average yield requirement in our portfolio increased by a further 8 basis points in the quarter to 4.25%. The inflation assumptions are the same as the previous quarter, in other words, 6%. The average yield requirement is now back at a level equivalent to what we reported at mid-year 2018. Total unrealized changes in value amounted to -SEK 5.4 billion, and the changes in value in Q3 were almost exclusively due to increased yield requirements.
Simulation shows that we can withstand further write-downs of just over 15% based on today's market valuation without breaching our internal targets, and the margin is even higher in relation to the covenants in our bank agreement. Reported equity decreased during the quarter and amounted to SEK 131 per share, and the EPRA NRV amounted to SEK 157 per share. The loan-to-value ratio increased to 42%, and the equity/asset ratio decreased to 47%. However, both key ratios continue to demonstrate a very strong balance sheet. The interest coverage ratio, as expected, has decreased in line with increased interest expenses and amounted to 2.5. Financing continues to remain in focus in the current market climate.
The commercial paper market is functioning well, and the banks continue to show that they have more capital to lend to the sector and to provide again. The bond market is still volatile but has become stronger during the autumn. During the year, we have repaid bond maturities of SEK 2 billion in total. In February, we carried out a smaller issue of SEK 250 million. After that, the market was quiet until September, when we issued SEK 700 million in a 2-year bond at a margin of 202 basis points. The indications from the banks show that the spreads are slightly lower today, and now in October, we issued another SEK 300 million in a 3-year bond at a margin of 212 basis points. During the year, we have secured SEK 2.9 billion in new bank facilities, also paid out.
In connection with the sale of Orion and Glädjen, we redeemed a temporary bank loan, which will be taken out again, however. Refinancings up to and including Q3 2024 are ready with binding term sheets. In October, we received the payment for the sale of Orion and Glädjen. In addition, new bank facilities of SEK 2.6 billion have been agreed upon. Adjusted for this, unutilized facilities amount to just over SEK 8 billion, including the backup facility for outstanding commercial paper. So we feel secure in having the capacity to meet upcoming bond maturities during next year. We have worked for many years to spread our loan maturities. The slide here shows how the maturity profile looks. The strategy of long-term fixed-rate periods is unchanged, and we aim for a distribution of our loan stock among several funding sources.
The short-term funding via commercial paper, the green bar in the chart, is fully covered by backup facilities. As stated, we have facilities in place to cover the bond maturities in 2024 if required. However, we would still prefer to continue to be active in the bond market. 60% of the loan portfolio is fixed, mainly based on long-term maturities and mostly through straightforward interest rate swaps, supplemented by some fixed-rate bonds. Just over 40% of the current loan portfolio is matched by fixed-rate terms beyond 2025. During the spring and autumn, we have entered into callable interest rate swaps with the aim of reducing our interest expense. In the longer term, we aim to replace maturities with new long-term fixed-rate periods. The high proportion of fixed-rate terms today give us protection against rising market interest rates.
In the short term, the higher market interest rates will thus have a more limited effect on our interest expenses. For a rolling twelve-month period ahead, an increase in the market interest rate will generate an increased interest expense of approximately SEK 133 million, all else unchanged. Then back to Stefan.
So thank you, Åsa. As we said, we think this is a strong result from the daily work or the daily operation. But we are in a very challenging market. It's no surprise for any of us, I think. It's only a little bit more than 1.5 years since we left the pandemic, or the most of the pandemic situation. But also that was the same time when Russia invaded Ukraine. It was the same time when the rapid surge and sharp rise started in inflation, when they started to increase the interest rates very quickly. And now we also have the situation in the Middle East. So, of course, it's challenging times. And in Sweden, it's mainly been seen in the transaction market.
The transaction markets right now is, we see very few transactions in the whole market. There's still a very good demand for logistics and light industrials, but in many other markets and segments, it's relatively low volumes right now. We can say that in the CBD or in the most central parts of Stockholm, if there will be a good amount, if there would be anything for sale. During the summer, we announced that we had signed an agreement with NREP to sell their properties, Orion 7 in Sundbyberg and Glädjen 12 in Stadshagen. NREP has been acquiring both properties for about SEK 3.4 billion, which also is consistent with the valuation we had.
The properties were taken over on October 12, so now they are in the portfolio of NREP. When talking about the rental growth—the rent development in Stockholm, I think, still is very strong and both demand and level of the rents in the CBD, in the CBD of Stockholm. We have seen some contracts signed in both our own and in some colleagues, competitors' portfolio on very good levels and also at some, I think, historical record levels. In the inner city, still a little bit more, still strong, but not that as strong as it was in the beginning of before the summer.
We see it takes a little bit more longer, even it continue to take long time for decisions, and we see a little bit less demand after summer, we have to say. In Solna, in our Arenastaden , still good, good demand, but we're going Solna Business Park, we have, we have a lot of activities. But in some part of Stockholm, we see more challenging times. And we think if we look at the JLL's property clock, in, we think we are, definitely actually declining rental growth. We are no growth any longer for the most of the Stockholm area. But on the other hand, we have a lot of help with 11% indexation last year.
So it's not that. It's not surprise because we think that the indexation or the helped us to come up to very good levels. But we don't see any big downturn in the rents neither. So it's just okay market, but less, I will say less activity after the summer. And that's also what we see and seen in the rent in our portfolio. The vacancies are still very low in the CBD, growing a little bit in the city. In some of the suburbs, it's on a relatively stable levels. For example, that's the same in Solna, Sundbyberg, but in other parts like Söderort, it's continue to increase.
What we're working a lot with, as you know, it's a flexible solutions. We think that the demand for more flexibility is part of the modern to be modern and also to what we can or what the tenants are looking for. We have also launched a couple of new concepts during 2023. For example, the moving offices called WAW, where for four, five years, we had to work away from work for our existing tenants, that they can have and give the opportunity for the employees to sit in other parts of Stockholm if they need to, during some hours or so, maybe a day.
We also have some co-working areas in some of, in some of our locations, and we will start a dog care, sort of, product called VOV for within the next month. All of this is to be more flexible, also get better margins at the end, and also better to able to attract the tenants for, for longer time. The net letting for the September had all said was negative, and for the first nine months, it at minus SEK 3 million. We have, in the, in the CBD, we still have positive in some, and, and part of this is that we had one tenant that got some, we had have discussions with to help them to decrease the area because they have financial problems.
So financial challenges, so we have that, but large part of the Q3 is actually from one of them who work on that situation. But as we said, also for the rest of the year, we are positive since we also have the discussion over the contract we will write with about Nöten 4 . Next slide, please. This you have seen before, and we think it's important to have it in the presentation every time, but we have a very pretty few customer tenants. We have very large tenants for representing 40%-24% of the rental land, but they are very stable, long-term contracts with stable Swedish companies, mainly Swedish companies.
In the renegotiations, well, since we got the 11% from the first of January, we have said over the year that we expect the renegotiations to be at about current agreement, continue the current contracts, and that's also on unchanged terms. So we're just extending them, and that's also what we see for most of the contracts. It's also important to see that we have continued to develop the occupancy rate in a positive way. We are right now at 91%. The goal is, as you probably remember, 95%, but it will take some years for us, a couple of years, to come there, to go there.
Also used to show you the forecast for the rental development in the existing lease portfolio and from what we know today for the next four quarters. As you can see here, we, because since we have sold two properties to NREP, it will decrease about SEK 811 million or SEK 810 million for the next four quarters, but they will also have to stress that this is before any indexation. So this is without indexation, and this is from what we know today. We continue for the next two slides, we'll see on the project portfolio.
As we said, it's as you know, we have this year said we will invest about SEK 2.9 billion, and for the first nine months, it was a little bit less than SEK 2.2 billion. So we're following the plan. When we see the project portfolio is, well, for you, well-known names, we will continue to work with the existing projects. We are not right now starting any big new ones. We would hope we will do so during the winter, especially in Haga Norra, to continue to develop that area. But we still have problems with the challenging building costs.
They've been coming down a little bit, but when the raw material came down, the cost for labor and the cost of some other, some of the other products came up instead, especially and was because of - in some parts, because of this Swedish krona. We in this... We here we also see that the Nöten 4 that we've been updated, when we can announce more about the details, well, the agreement we, we and we'll solve. So this is will be updated for the in the next quarter. So Nöten 4 is more about is the figures, the same figures as we said before. Talk a little about the residentials. We are continuing to with the projects we have running since before, they are running as expected.
We have completed six projects during the period. We are continuing to sell apartments in both our project in Solna and in our JV with Bonava in Haga Norra. In Haga Norra, we have only five apartments left out of 418. So, it's continuing to be a very successful project, and that's also why we're looking forward to hopefully start the next project neighbor to the first one. Åsa, please tell us a little bit about the sustainability work and what we're doing right now.
Yes, some sustainability news from Fabege, and I think we have a lot to be proud of. As we mentioned earlier, we have a goal of reaching an energy consumption of 70 kWh per sq m by 2025. In 2022, we were at 73, and now we have come one step closer with an average annual consumption of 72 kWh per sq m. Our solar cell installations currently produce 1.98 kWh per sq m in the management portfolio, and we are currently planning for a number of future installations. And some more news during the quarter, our office project in Haga Norra, Ackordet Ett or Ackordet 1, reaches BREEAM-SE Outstanding. Our highest level of certification in our portfolio.
The project is also nominated for the Brilliant Building of the Year, an award that the project Poolen won last year. A few words about our recycling strategy as well. Our goal is that 20% of materials in projects must be recycled, and an important part of that is our recycling hub, which you can see in the photos on the right-hand side in this slide. The recycling hub is enables smart and cost-effective recycling, which has attracted a lot of interest, not only in the real estate sector, but also from, for example, politicians and other stakeholders. We are on a journey, and for me, is clearly a company at the forefront here. Last but not least, we have the GRESB result for the year.
In this year's benchmark, we land on index 93 in the management portfolio and 98 in the product portfolio. A top position among listed companies in Northern Europe and something that we are really proud of. And then finally, back to Stefan, who will say a few words about our social initiatives relating to sustainability.
We will continue to do the work close to the society in the areas where we are active, and especially in Solna and Flemingsberg. It's a lot about activities, both in for finding more works, doing activities, but in the leisure time, in the schools, and everything to do, to work with the areas, to go to the more safe, to go also, and yeah, that pleasant surroundings, you can, you can say. At the end, of course, it is we are, we are sure this will, this will increase cost, and we will be able to have higher rents in the areas, and it will also mean lower yields at the end. So it's a win-win situation, and that's what we think. So what has to be well?
So, before going over to the, to the questions, I would like to summarize it with challenging times, but we are standing stable. We have a lot of activities going on. It's both on all the side, and also, that we would hope to be able to tell you more about in the next months. So, with that, please, questions.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. Please state your name and company. Please go ahead.
Hi, it's Jonathan Kownator from Goldman Sachs. Thank you very much for the call. Three questions, if I may. So, on disposal process, do you, do you have more disposals that you want to work on currently? And, and do you see other buyers and NREP that are out there that could be interested? Second question, please. How are your discussions going on with ratings agencies at this stage? Are they expecting, you know, to change rating at all? Any color that you can provide would be helpful there. And just on the development program, you, you pointed out to higher cost. If we look at the yield on cost on the program, right now, it's about 4%. Would you start new development, or should we consider that for now, the development is, is, is on pause? Thanks.
At least during the winter. If I take the first question also, we have as in the part of our DNA and part of our business, that is, from time to time, we sell some of the properties we think we can't develop, or we can't add some more value on. And of course, there can be some of the other ones we have that we can do in the future. Now, we sold to NREP the Glädjen and Orion in 2020. We sold the DN building in here and also another building in Stockholm. And if we, I think we will do that from time to time. The demand in the market, in the inner city, at the CBD, it's very good.
In general, you can say there is quite a lot of money in the market, but it's NREP has been having a lot of new funds. There are some other fund managers that also are looking for have got new money into the funds. We have also the pension managers or the pension companies that have quite a lot of liquidity to continue to buy by real estate. We know that they are looking for potential objects, but they are very picky right now. They like to be in the best locations, and the best location is there is a in the CBD, for example.
It's quite. I think if anything is for sale, it will be a lot of potential buyers for that. On the other hand, I think it's difficult to talk generally about the market because it's very, but big, big, about area for area or, or at least city per city. It's still a different market, markets in, in the whole of Sweden. So, but Stockholm is good, and Stockholm we could, I think that we could see future demand, at least in the, in the areas where we are. But also the second question.
Mm. Yes, the second question about, contacts with the rating agency, Moody's. We are in contact with Moody's, but there is no information from Moody's on any rating activities so far. I think, we got, the negative outlook on the Baa2 rating, approximately one year ago, November last year. So there will probably be some more activities from Moody's, before, before year-end. But, for us, there is no new information at this moment.
Okay, thank you. So just to follow up on disposal, just from strategic perspective, I mean, would you consider at all selling any CBD property assets, or, or, or are they strategic for you, and, and, and obviously, you know, you may want to hang on to, to, to those? How do you think about that?
What, what kind of assets did you say? We didn't hear.
So CBD assets.
CBD assets.
Mm.
Yeah, most of it is for, I think, long, really long term. We still see potential for adding value long term in the most of the CBD portfolio.
Sorry, you were far away from the mic at the beginning. You said you can or you cannot see long-term potential?
We can see.
Just, just confirming that.
Long, long, long potential.
Exactly. I thought that would be the answer, but sorry, I didn't-
In most of it, it doesn't say that there can be some smaller ones or so-
Okay.
Of course, can discuss, but most of it we see a long, very long potential.
Okay, that, that's very clear. Thank you. And just so... Sorry, the third question you may start, you may have started first, but I couldn't hear the answer for some strange reason, so.
The third question was?
That was on development, essentially. I mean, obviously-
On development.
You're pointing out to the increased cost-
Yeah.
The yield on cost has become a bit lower at this stage.
Yeah. You can say we are looking to start some projects in Haga Norra, for example, where we can see we continue to develop that area.
Okay.
We hope that we will, during the winter, be able to, for example, announce that we continue residential. We have now sold in the first project, 400, we have 5 apartments left from the 418, so we see a good demand there. It's still a little bit too high cost for the building, but we hope we will be able to find out a way to how to start them-
Okay.
with a good, yeah, in a good way. Yeah.
So the Haga Norra, that's office, right, I assume, and that, that would be on a speculative basis, or are you waiting for pre-let to be able to start that?
On the residential part, which is mainly now, we will finish the first part of commercial, but then the residential will be on speculation, but we think we have a good margin and good-
Okay.
-with the-
So that's, that's residential.
I think it's we talk about the residential market in Sweden for and for the construction developers. I think you have to take some risk. You can't sell everything.
Of course. Yeah, on residential it makes sense.
It's more back to a normal business, otherwise-
Mm-hmm.
in my way to see it.
Okay. Very clear. Very helpful. Thank you.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. Please state your name and company. Please go ahead.
Hi, good morning. This is John Vuong from Kempen. Thank you for taking my questions. Just on the LOI of Saab, I understand you cannot give more details on the lease as of yet.
Uh, sorry.
Provide a bit more co-
Sorry, you from Kempen, you have to speak louder because we can't hear you.
Ah! Can you hear me now?
Yes.
Yeah. So sorry, so just on the LOI with Saab, I understand you cannot give more details on the lease. But could you provide a bit more color on what is causing the delay there in the timeline?
It's of course a complex agreement since it's the business they have. You cannot probably understand all the security questions that we are discussing. So it's, I think it's no big. It's a large building, so it's more the complexity that many questions that we have to like to solve before or when signing the contract. So we hope we are planning to announce it, as we said, during the Q4.
Okay. Thank you. And on the customer leaving, could you provide a bit more color on... On that one, in which region was this tenant that said-
It was, it was a tenant. Yeah, it was a tenant in Hammarby. And as we said, I think that's, we have said also in the Swedish presentation, that it's, it's a prime, the net negative net letting in this quarter was primarily to that we did that settlement with the customer. And they have. It's more of the, their business develop, the development of that business that had to, they have to do some. So we took that area back and prolonged the contract on the, or the rest of the area with them, and we took this area back, and we think it will be a good deal in the, at the end for us.
Okay. And I think in an English press release, you also mentioned something of a settlement. Is that the cash settlement or is that the prolonging of the other lease?
They prolong the other lease and pay a little bit more rent for that one. And then we take the part of the area back or most of the area back to be able to let it out to new tenants. And we think that would be good for us. Best way of certainly losing, taking care of this situation.
Okay, thank you. And, do you see any risk with other tenants that could be giving back space?
Not among the larger, they were not giving back. It was an agreement on the where they also cost them or something. We have in some of the larger with some of the larger tenants, they have also some flexibility in the contract when they long term. But we, we don't have any, we don't—I don't see any big risks in it.
Okay, thank you. That's it from my side.
There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.
You are, as usual, always welcome to call Åsa, Peter, or myself to ask further questions or have discussions. Thank you very much for joining us this morning. Have a nice day. It's snowing in Stockholm, first day for the year, so have a nice day. Bye.