Earnings Call: Q3 2020

Oct 20, 2020

Welcome to Fiber Gear's presentation for the Q3 of 2020. We start with a picture of the classic silhouette of the old town of Stockholm, our home city, also where we have all our operations. The 3rd quarter continued to be impacted by COVID-nineteen, but maybe less than we could have expected 3, 4, 5 months ago. During the quarter, we could have continued to focus on being very, very close to our customers and among other things we have worked intensively with dialogues with the tenants. But I will directly hand over the presentation to Orsa. Please, Orsa. Thank you, Stefan. Please turn into Page income statement. The trend during the Q2 of rent discounts to exposed sectors and net impairments of property values went into reverse during the Q3. Although we obviously also still see some continued impact from the COVID-nineteen in the numbers, so much is now better. Rental income came in at SEK 2,100,000,000, slightly lower than the previous year. In an identical portfolio, income increased by 5%. The divestments of Trenkoren and PLRN alone resulted in decreased rental income during the period of NOK 144,000,000. The net discounts amounted to NOK 26,000,000. This was offset by completed projects, higher rental levels and index adjustments, which all contributed positively. The warm winter with very little snow meant that operating expenses were low during the Q1. We also made the provision for increased bad debt losses. However, the amounts involved are not high. The surplus ratio for the entire period came in at 75%. Interest expenses were slightly lower than the previous year, mainly due to lower borrowing. Earnings in associated companies amounted to minus 43,000,000 and mainly related to capital contributions to Ariana Belaget during the period. And in total, we reported profit from property management of SEK 1,100,000,000, which was a small decrease compared to the previous year. Changes in value turned upwards again during the Q3 by 3 99,000,000 and just over 1,900,000,000 for the entire period. I will come back to the valuations shortly. The deficit value in the derivatives portfolio increased during the period. And finally, tax expenses amounted to minus 595,000,000 and mostly related to deferred tax. And now please turn to page COVID impact. Some of our tenants have continued to face a tough and challenging time with lost revenue during the Q3. Mainly that refers to hotels and restaurants in the suburb locations. We have had a close dialogue during this period and in all we have granted discounts for Q2 and Q3 of a total of SEK 44,000,000. Of this figure, SEK 36,000,000 related to the government rent support package where Faberge will get half the amount back. Thus, this means that the net decrease in rental income for the whole period amounts to 26 NOK. Remaining rent receivables due relating to Q2 and Q3 amount to SEK 11,000,000. We do not see any risk for further bad debt losses in relation to these receivables. In addition, we have granted around SEK 4,000,000 in discounts relating to Q4, which will reduce rental income in Q4. Before the end of the quarter, approximately 50% of the portfolio was externally valued with some overlap regarding the 50 that was also valued before the end of Q2. The valuers more positive view on the market trend means that we have now once again reported positive changes in value. Yield requirements are generally slightly lower while rental rates are in line with signed agreements. The average yield requirement in the portfolio decreased from 3.9% to 3.88%. Upward revaluations in the quarter were related both to investment properties and project properties. And for the period as a whole, this meant a positive change in value of just over NOK 1,900,000,000 or 2.5%. Please turn to page key ratios. As you can see in the key ratios here, we are in a strong position with an equity asset ratio of 52% and a loan to value ratio of 35%. Reported equity now amounts to SEK 124 per share and the long term net asset value, the EPRA NRV amounts to SEK 153 per share. So you can see we are well prepared. And now please turn to page financing. After the complete stop in the capital market in March, a gradual return to more normal conditions began early in the summer. After the summer, this trend has really gained momentum and we are now essentially back at the levels we saw before the COVID-nineteen started. We have no upcoming refinancings of bank loans before Q4, 2021. However, we have already started the process of refinancing that maturity in advance. We have also an upcoming bond maturity that we intend to refinance in the bond market. And in the unlikely event that the capital market would turn sour again, we have bank facilities as a backup in place. We are also pleased that we can continue to change our financing to green financing. Now we are up to 95% green financing with the goal of reaching 100% hopefully by the year end. The average interest continued to fall during the quarter, partly as a result of larger loan portfolio and partly due to loans being refinanced at lower margins, mainly related to Commercial Papers. We did not enter into any new additional fixed rate terms during the quarter. In total, we have repurchased almost 2,600,000 shares for SEK 307,000,000. We will keep these treasury shares until further notice. At the end of the quarter, we had a capital maturity of 5.5 years and an interest maturity of 4.3 years. We also had unutilized facilities amounting to SEK 4,300,000,000. This means that after acquisitions, buybacks and dividends, we have resources for continued investment and possible acquisitions. We are confident about our stable financial situation. With our strong balance sheet, we can take advantage of opportunities and also manage these more challenging times. And now back to Stefan. So thanks, Asa. The Q3 is normally a quarter with lower activity compared with especially the 2nd Q4 of the years. But at the end of the quarter, we have seen an increase in activities, especially about when talking about inquiries and which has been increasing during the end of the quarter. The of course, there's still uncertainty about the development in the market, but we have good discussions and I feel comfortable when we're looking forward. We have been some renegotiations during the quarter have been deferred. Or have brought them forward, but the one that have been computed have been at good levels. In Q3, a major renegotiation contributed to strong increase of 30%. Next slide, please. The net lettings for Q3 came in at minus SEK 16,000,000. It's also worth to notice that some of the large at the Koonskaat, Danie, Onen Sonne Business Park and at Sverwegen. All we already have very good discussions with new tenants, and I expect them all to that the investments will also lead to potential rental uplifts. Please go to the next slide. The overall occupancy rate is it was 91%, but in the investment property portfolio, it's about 93%. We are never going to be in the 1st place when it comes to the occupancy rate since we are working so actively with projects and refinements of our properties. The takeover of Regulaton in Flemingsberg has also had negative impact on the vacancy rate. Please, next slide. As you know, we have very stable customers with long leases. We have carried out a spot check among our customers and can confirm that the majority of their business are developing even better than we could expect them to do. But the presence at the offices are still low. Slide 10, please. Of course, one of the or the $1,000,000 question will be or is how COVID-nineteen will affect the property market in the longer term. We don't know, of course, the answer. And in conversation with our customers, most of them want us to wait and see how they will use the office space in the future. And that's also too early to make any hefty conclusions or decisions. But what we know is during this period the importance of a modern office has also been is more than ever in focus. But how to use the office space? I think we will have a lot of discussion about and how to use the office space for work and for meetings. What we probably see is that we will not travel for internal status updates meeting in Gatlinburg, for example, as much as in the past. But we will probably go for meetings, sales meetings or creative meetings with important customers, for example. Digitalization has taken a huge step forward in this period, and it will continue to impact how we work. Remote working is certainly likely to increase. But in order to develop a company and to build a strong capital culture, a modern office will also be needed in the future. Our ambition is to be in the front edge of how to optimize future office and workspaces. We will work very close with our tenants to develop the future cities and offices. Slide 11, please. In the transaction market, especially in our focused areas, we haven't seen any stressful sellers or any sellers at all almost. So they also have been having there have been very few transactions. But many some of our sector peers have been very active in some other segments or other areas in Sweden. We also we have noted a greater interest at the end of the Q3 compared to during the summer. Here you can see 2 of the properties we have acquired earlier this year And as you know, we acquired Porcelain in Hammarby in the Q1 and regulating into this summer. Slide 12. Also mentioned, the year requirements were slightly lower once again, and the expectation for rental levels are in line with the contracted levels. And I must say I feel very comfortable with the valuation process and the level of our values. The next slide, please. Our projects are proceeding according to budget and plan. We are in the process for completing Belia's new head office and are preparing for handover of the property to the customer in the beginning of next year. In total, we have approximately SEK1.6 billion left to invest in our ongoing portfolio or ongoing projects. Slide 14, please. During 2021 2022, we will start 3 larger reconstruction projects with great potential. The total investments for these projects is expected to be about SEK 700,000,000. Slide 15, please. Now I would like to quickly go through a little bit the future in our areas. In Arena Stadren, as stated and as you know since before, we say we are only halfway and we will be active for there for a long time to come. Many people think that all of our other properties in the area are ultra modern, but as you can see, there are some still some older ones with great development potential. Next slide. In Arena Staden, the Cairo block will go out for the consultation during October, November. The goal is to have an approval approved local development plan ready by year end 2021. This will provide us with approximately 7,000,000,000, 7,000,000 square meters of office space and another 15,000 square meters residential units. Parts of Dalbergen will also be converted into a pedestrian street. We will further post the Ontario area. Along the rest of Dalwaggen, as you can see on the next slide, we have the opportunity to develop another about 30,000 square meters of office space and 35,000, 40000 square meters of residential space. The local developments of Adalverghen is where we will be working with during the next years. On the next slide, you can see the potential on this other side of the railway in Arena, Staden, where we can develop another 65,000 square meter of offices and 4,000 square meters residential space. Local development plan is expected to be ready during the next years. And we will also move our, as you know, our own head office in the beginning of 2021 to Stigbogen 2 as you see in the lower right corner. In Haga and Haga Norah, next slide please. We just started development. Here you can see a photo of Hagenora from 2018, a large car park but a low and old fashioned property. On the next slide, we have the building constructed right now and how it looks today. We have started to transform the area into an ultra modern facility for Belia, And it's all it and as I mentioned earlier, they will move in during Q1 of 2021. We will also now start the sales of the first 450 apartments through autumn and winter in the joint venture we have with Brabhu. When Belia has moved in, we can see on the next slide, the next step of the development of Haagenora will start. When they have moved in the beginning of next year, we can start we can begin to demolish their old facility. And in the future, we're planning for building 55,000 square meters of office space and to develop another 1,000 residential units. The goal is that all of Haga Norah will be developed 6, 7 years from now, But the office part should be ready for occupation as early as 2024. On the next slide we move to Sonnar Business Park. We haven't done that much since we acquired that for 13, 14 years ago. It is an area that has been working and we have focused on other areas as you know, for example, Arena started. But now start the transformation of Sonar Business Park. The area shall be transformed from an office district into a modern city district with also residential units, new offices, more services. And as you can see on the Slide 23, you can see the plans on how we hopefully will look in the future. The goal is to create another 90,000 square meters of new offices, 30,000 square meters of residential units. And some of our colleagues and some other companies will develop some will also develop in the neighborhood. And for example, Saga, Castellan and NCC, they also own properties in the area. Even I must say, we are the biggest. On the next slides, we will see some examples of new properties. In Slide 24, you can see here in Sleep and 1, for example, where we will replace a garage with a modern office building. The next slide, we will develop a new office called Parkuset. And on the next slide, a lot of housing or residential building will also be developed close to facing what the Anglunderbergen. Flemingsberg, where we also now start to take the next step. On the Page 27, you see our properties today. In Q3, we took possession of Regulaton 2, the large building in the middle of the picture. And as you know, what we have mentioned earlier, the comprehensive plan was approved by the Munich Poly Executive Board in April. And on Page 28, you can see the area of Flemmingsberg, Stalin. We don't own all of it, but a lot of it. And we are now focusing on the work with the local development plans in the two of the areas. The photo at the top is where Opella and Martin will move to during 2024. The process is advancing together with the municipality, and it hasn't slowed down because due to COVID-nineteen. So it's still a good tempo. Slide 29. The goal is to transform a gray industrial property and car park area into one of the best office locations on the south of Stockholm. And we have also and residential, a new residential area. And this is what we have been talking about before in Flemingsberg, and we are now one step having more tax take it one step further. When talking about the south of Stockholm, I'd like to mention a little bit about Hammarby Hverstad. As you know, we said earlier, we acquired Poisson 1 during the first half of this year. But now we also signed an agreement of Copa about Copa Pipe 5 where we have obtained a land allocation permit consisting of 33 square meters 33,000 square meters gross floor area for offices. A land allocation permit is an option with an exclusive right to negotiate with the city regarding a specific area of land. Corp of V is used today as a work tunnel for the expansion of the blue metro line, which will have 2 new stations in Amabburg Hohestar, which means that the street will be even more closely linked to the inner city and will get new and closer connection to Naka and Harksettra and some other cities close south of Stockholm. In our view, this makes it even this the Hamburg Sudhak even more attractive for both offices and residentials. Next slide, on the last slide, we see the inner city. In the bottom of the picture, we see Benelgrasse Center. To the left corner, the lower left corner, we see the Svea plan and where we had a land allocation permit for about 9,000 square meters of offices. And we're excited to develop that area more. We already hold, except from Svea Apaan, 5 of the buildings close to or except the Vennorgen Centre, 5 of the buildings close to Sveraporn is ours. So this was a brief summary of what we have in our future pipeline. It is I think it's important to stress or to mention that we will continue to be cautious. We will not start any projects based on pure speculation. But we have a strong balance sheet. We will also carry out and we are looking at acquisitions in our selected areas in order to further boost the potential for the future. To summarize, of course, it has been challenging for all of us, challenging the 1st 9 months due to the COVID-nineteen situation. We have a respect for the situation and all the challenges we see, but we also see some very interesting opportunities with this. As we said before, we have a strong balance sheet. We have a strong focus on Stockholm and that is also where we will continue to focus. And as I said before, our ambition is to be very close to the tenants, to our customer, to be in the front edge to develop the future office and city spaces. So over to the questions, please. Thank first question comes from Nicholas Wertelin from GMP. Please go ahead. Thank you. Firstly, I want to ask about the vacancy rate in your Stockholm inner city assets, which has increased from 5% to 10% during 2020. How much of that can be explained by weaker demand? And how much can be explained by wanted vacancies due to project developments? It's a combination of the 2. And I think the major reason for the increasing vacancy is 2 specific properties. 1 is Gladyen on the western part of the city, where we are now starting to refurbish for the 1st tenant who has still not occupied the building. Another explanation is in the property Apotyakkaren in Central Stockholm, where we're also refurbishing for Mentimeter, who we signed a contract with previous in the springtime. So it's not reflecting a weaker market situation. It's more specific objects and specific tenants that have left. Okay. And then I wanted to ask about your latest view on the time line for Flemingsberg. How likely do you see that it's possible to get a completion ahead of the ones you already signed with the Opera that is opera that is completed in 2023. Is it possible to complete then development in Flemingsberg ahead of that? Or will it be after? We hope and we're working for that about the same timing through 2020 end of 2023, 2024 to be have the first buildings up. That's what we're working with. Even as well first, we'll put on Martin and then we work with some other more ones, yes. Okay. I'm sorry, but I can't hear you properly. Okay. Sorry. No, what I said was that we are working with some other buildings and some other potential tenants. And what we're going for is to have Opera de Marte in 2024 and also some other buildings at almost the same time in end of 2023, 2024. So that's the most where we will see the first results out there. And we are just to complete, we are still in the process of the detailed planning. So it's unlikely that anything will start before we actually reach the detailed plans. Okay. Thanks. That's all of my questions. Thank you. Okay. There appears to be no further questions. So I will hand back to the speakers for any other remarks. Okay. As you know as I hope you know, you're always welcome to give us a call and have discussions or ask any questions. So please do so. Looking forward to talk to you soon, and thanks very much for joining us today. Bye.