Earnings Call: Q4 2019

Feb 5, 2020

Summary

Property management profit rose 23% in 2019, with EPRA NAV up 16% to SEK 145 per share. Strong lettings and valuation gains supported results, while 2020 was expected to be a transition year for rental income.

Ladies and gentlemen, welcome to Fabege AB Q4 Report 2019. Today, I am pleased to present CEO Stefan Dahlbo and CFO Åsa Bergström. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Speakers, please begin. Welcome to our presentation of the year-end group report 2019. As everyone knows, the past few years have been very positive for the property sector in general and perhaps especially in Stockholm. We have strong economic cycle with increased rents, while interest rates at the same time has continued to go downwards. This has, of course, resulted in more deals. We have taken, as a company, the advantage of the positive conditions, and during the last five years, we have invested just over SEK 14 billion, and that is an important part of where we are today. Overall, 2019 was another good year for Fabege. Our profit from property management increased by about 23% in total, and our long-term net asset value increased by 16% to SEK 145 per share. We also reached our goal to invest SEK 2.5 billion. We did not really thought that we would be more than SEK 2.5 billion when we talked about Q3. But we increased the tempo in some of the projects, especially in Haga Norra and Poolen project we have been talking about has started, and we have invested more than SEK 100 million in that project now. I will come back to these projects later on. The transaction market is still strong, and I think we will see transactions at new record levels in the several areas during 2020. Especially it will be very interesting for us to see the outcome of the sale of Skanska Property in Arenastaden, Solna United. Slide number 4. We ended the fourth quarter strongly with net lettings of SEK 55 million and a value growth in the portfolio of about SEK 1.9 billion or almost 3.7%. The most important project lettings during the period has been the one to TietoEVRY and to the Swedish Work Environment Authority. Now I will hand over to Åsa who will present our numbers in more detail. Thank you, Stefan. We had a strong finish to the year with continued improved profit from property management, rising values, and positive net lettings. Rental income came in at SEK 2.1 billion, an increase of more than SEK 339 million compared to the previous year. In an identical portfolio, income increased by 14% in total. Completed projects made the biggest contribution to the increase in income, but higher rental rates in agreements and index adjustments also contributed positively. The surplus ratio for the full year came in at 75% in total after a favorable fourth quarter, which was warm and with very little snow. 75% is also our long-term goal. Administrative costs are at expected level, and interest expenses were slightly lower than the previous year in absolute terms. The result in associated companies amounted to minus SEK 32 million and mainly related to liquidity contributions to Fabege Arenabolaget AB during the period. During the second half of 2019, no further contributions were made. In total, we therefore reported profit from property management of SEK 1.5 billion, which was a total increase of 23% in comparison with the previous year. Before the end of the quarter, approximately 35% of the portfolio was externally valued. The yield requirement fell by a further 6 basis points during the quarter to 3.97%, and it was 4.13% at the previous year-end. Overall, unrealized changes in value amounted to SEK 5.7 billion, equivalent to a value growth of 8.5%. Values in the project portfolio rose by SEK 1.4 billion. This amount includes an impairment loss in relation to residential building rights of SEK 136 million, which was recognized in the third quarter. Values in the investment property portfolio during the fourth quarter were driven roughly equally by rent increases and lower yield requirements. As usual, the value of the derivative portfolio moves like a yo-yo between the quarters. During the fourth quarter, higher long-term interest rates contributed to the decrease in the portfolio statistic value again. The tax expense amounted to SEK 1 billion and mainly just related to deferred tax. The amount includes dissolution of deferred tax related to property transactions of just over SEK 500 million. We have also made another complete tax calculation in all of our legal units in accordance with the new rules that limit interest deductions. The change will not have any effect on taxes paid, but we will use loss carryforwards at a faster rate, which is also reflected in the tax calculation for the period. Now please turn to next slide, key ratios. In line with the strong earnings trend, our balance sheet has continued to strengthen. Reported equity now amounts to SEK 121 per share and the long-term net asset value, the EPRA NAV, amounts to SEK 145 per share. The financial key ratios, that is interest coverage ratio, the debt ratio, loan-to-value ratio, and the equity asset ratio are all better than our minimum targets by a very good margin. Now please turn to page financing. It has been an active year with refinancing of long-term credit facilities, bond issues, the launch of our new green framework, and conversion of loans to green loans. Through the completed refinancing at year-end, we had a capital maturity of 5.8 years, and our green financing now amounts to 84% of our outstanding loans in total. We did not enter into any new fixed interest terms during the fourth quarter. We have been satisfied with the average fixed interest term of 4.5 years that we reported at year-end. We were able to take advantage of the incredibly low levels that we were offered in August, and now the long-term interest rates have started to move down slightly again, and we are continually monitoring the levels. In October, we obtained an upgrade from Moody's to Baa2, stable outlook. Something we could already tell you about during the last quarter's presentation. Since we did not have any capital requirements during the quarter, we have not really tested the market since the upgrade, but the indications that we are receiving from the banks are pointing towards lower margins. Finally, at year-end, we had unutilized credit facilities of SEK 4.6 billion. After the sale of Trängkåren, the DN-huset was vacated. We received another SEK 3.5 billion, which we mostly used to amortize loans, mainly short-term borrowings such as the commercial papers. Therefore, we have every opportunity to spend a little more money in the form of investments going forward. Now back to Stefan. Thank you, Åsa, and I would also like to take the opportunity to say thank you to the whole organization of Fabege for another fantastic year and excellent work, and that's one of the year it's continued the long term of excellent performance. During last year, our share price rose by about 33%, which of course is an excellent number by itself. Even if it was a healthy performance, it was lower than the property index at the stock exchange. I would say that's mainly because of our lower leverage. We're also happy and satisfied that we're entering the new decade with a strong balance sheet and well-managed properties and a product portfolio with many opportunities. That's what we have seen in the figures. After the Swedish Tax Agency's lease termination in January 2019 and a weak third quarter, I'm pleased that we ended the year with very successful two larger property lettings to TietoEVRY in Arenastaden and the Swedish Work Environment Authority in Solna Business Park. In total, we were plus SEK 55 million during the net lettings during Q4, and we ended the year still with a minus, but reduced to minus SEK 37 million. During the year, the rent and renegotiated agreements increased by approximately 9%. The rate of increase is expected to be a little bit lower during this year as the coming renegotiations are related to contracts signed in recent years and therefore starts at the higher rent level than before. However, we expect a positive net effect of at least 10% during this year. Next slide, please. Here we can see the breakdown of the market value in our respective areas. As you can see, and as you probably already know, the Stockholm Inner City is the area where we manage the largest values, today more than SEK 31 billion in total. We often forget this, the Stockholm Inner City contributes a lot to the stable cash flows of the company, which make it possible for us to focus on future projects in other areas. Next slide. Here you see how the average yield requirements have developed during the past 5 years. Yield requirements have fallen in all of our 3 areas. It's interesting to see that the spread between Stockholm Inner City and the other areas have decreased, and some part of this is due to the attractiveness we have created in our areas in Solna, and that is because that is increasingly growing together with Stockholm. Next slide. Here you can see where our changes in value came from during 2019 compared to 2018. The yield has bigger impact this year than last year. I think there is scope for continued lower yield requirements in the short term, but in the long term, I think the down trend will level off, but rates will remain at historically low levels. Next slide. Let's move on to our project portfolio. Today, we have more than 109,000 sq m in the project portfolio. We have a relatively small risk in the project portfolio since we have an occupancy rate of more than 91% in total, and half of that is in pre-let, which I will tell you a little bit more about later. I'm convinced that we will fill the vacant areas before the projects are completed. It is strategy we have of not starting larger projects based on speculation that remains in effect. As I mentioned after Q3, I slept well at night and I was not worried. Now you know why. Next slide. Just before Christmas, we signed an agreement with TietoEVRY for more than 23,000 sq m. They also have an option to rent the remaining 6,000 sq m. This shows the attractiveness and demand there is for modern offices in Arenastaden. The total investment in the project will be about SEK 1.1 billion. Next slide. In Flemingsberg, everything is proceeding as planned. We have continued the very good cooperation with the municipality, which is a requirement when we start in Swedish largest urban development project. The planning scheme has been out for consultation, and the next stage is for the municipal executive board to approve the plan in April, and we can then start the work with the zoning plans. As you read earlier today, we have signed an agreement with the Royal Swedish Opera and the Royal Dramatic Theatre, which will locate their decor workshop, rehearsal rooms, and costume storage rooms in Flemingsberg. In total, their area will be approximately 12,000 sq m. It will be great to be able to welcome such strong and well-known brands to Flemingsberg. Next page, please. We as a company shall continue to remain at the cutting edge within sustainability, and we have taken several important decisions in that area during the last years. Petra, can you tell us a little bit more about what we're doing? Yes. Let me give you some examples of what we have completed in 2019. We have now 84% green financing, and in total, 82% of our area in the properties have been certified according to the BREEAM system. We have also in total 75% of green leases. Some of the things that we are proud of is that we reached 94 in the GRESB benchmark, which we also told you about in the last quarter's presentation, and we received the Sweden Green Building Awards 2019 for our project property Signalen 3 in Arenastaden, which is the head office of ICA. Please turn to next page. For us, it's obvious and natural to always invest in and work to reduce energy and water consumption in our properties to contribute to a more efficient transport and waste management, and to constantly find new and better ways to reduce our own and our customers' environmental impact. During the year, we took a decision to have climate neutral property management by 2030, among other things. We have many things to do to reach this goal, and we will increase our investment in solar power, among other things. Now back to Stefan. Thank you, Petra. I think it's impressive what have been done during the last years, and this is just the first step of everything that will be done in the future. Please over to the next slide about Arenastaden. In Arenastaden, we still have many years of development remaining. We have already, as you know, started a new project, Trängkåren, in Stigbygeln, which was Peab's previous headquarters. We start the reconstruction during the year, and we will also move our new own headquarter to that building. We are doing that in 2021. Next slide is about Haga Norra. As you know, we are working with the phase 1 right now, and that is to complete Bilia's new facility with the car retail. That will be ready during Q1 2021. During this year, we will also start, together with our partner, Brabo, the sale of the homes and apartments in that building on that project. The next slide is about Solna Business Park. As I said before, there is a huge potential in Solna Business Park. The vision of developing the area from a good office location into attractive city district has been initiated. During this year, we will carry out several different projects in order to develop and improve the outdoor in the area. Next slide. Also, back to Flemingsberg. Here you can see a photo of Flemingsberg today. The project with the Royal Swedish Opera and the Royal Dramatic Theatre will be to the lower right corner of the area. Here you can also see the area, which we sometimes call the South Business District, will be located. We are currently having very good discussions with a number of larger customers. My goal is to be able to announce further agreements for the area during the first half of this year. Thank you for listening. Pete, any questions? Thank you. If you would like to ask a question, please press 01 on your telephone keypad. If you wish to withdraw a question, you may do so by pressing 02 to cancel. That is 01 if you would like to ask a question. Our first question is from Anders Tommy from Green Street Advisors. Please go ahead. Your line's open. Hi. Good afternoon and- Welcome to our presentation of the year-end report 2019. I was just wondering if you could provide some color on the Flemingsberg development you announced today and the lease. In terms of the economics, what is the rental level that you achieved there? Also, what is the yield on cost that you are underwriting for this particular project? Hi, Anders. Thanks for the question. We have an agreement with the Royal Swedish Opera and Dramaten but not disclose the more detailed figures today because we have an internal process with some information and so on. I can say that we are very happy with the agreement, the contract. I think it will be a really good deal for everyone. That is what I can say today, unfortunately. It is about 1,000 sq m, so maybe you can make a backward economic calculation on it. Sure. Fair enough. Could you also maybe elaborate more on what sort of discussions are you having in Flemingsberg with other prospective tenants? We have a couple of very good discussions, more offices and maybe other commercial areas. I hope that we will be able to announce some more good news at least during the year, but hopefully sooner. All right. You also referred to 2020 as a transition year in terms of growth. Can you expand on that? Are you referring here to your earnings growth or development launches? Yeah. If you look at page 11 in the report, we have a graph with as the portfolio stands today, how rental income will develop. We have some projects that are going to be finalized during the year that will produce rental income, but we also sold a large property which was evacuated in the mid of January, so we will also lose some income. As you can see, income in the first quarter will be a little bit less than in the fourth quarter, and then it will be quite flat over the coming quarters. This, of course, is only as the portfolio stands today. Any new lettings that will produce income and indexation that we do not know today is not included in these figures. In reality, we expect the figures to improve from what you can see in the graph. But this is why we say that it will be a sort of transition year. Okay. Well, understood. Are you expecting to launch some sizable developments during the year? Hopefully, we will be able to announce more projects during the year. We are in some very good discussions, and I would say time will tell. But it is definitely our ambition to launch more projects this year. All right. Thank you very much. And just as a reminder, if you do wish to ask a question, please press 01 on your telephone keypad now. As I have no further questions, I will hand it back to you speakers for any final comments. Thank you very much for listening, and thanks for your interest for Fabege. If you have any more questions or some other thoughts, please give us a call or mail us. Thank you for listening. Thank you so much.