Ladies and gentlemen, welcome to the Fabege AB Q1 Report 2020. Today, I'm pleased to present CEO Stefan Dahlbo and CFO Åsa Bergström. For the first half of this call, all participants will be in listen-only mode, and afterwards, there'll be a question-and-answer session. Speakers, please begin.
Welcome to Fabege's interim report for the first quarter of 2020 and this beautiful picture of Stockholm, a Stockholm that is today not quite that much activity, unfortunately, as you know. Please go to slide two. We have rarely or never seen a quarter that consisted of two such distinct halves as the first quarter of 2020. The year began with new record levels for rents, property prices, and yield requirements, but during the second half of the quarter, a black swan in the form of COVID-19 flew in and darkened the world. Despite this, Fabege was able to report a strong first quarter. Our key ratios developed positively during the quarter, and as you can see in the slide, and despite a more cautious market, our valuation rose during the quarter. Please go to the next slide.
COVID-19 started as a health crisis, which has led to an economic crisis of so far immense proportions. There is great human suffering, and the economic consequences will be substantial. Many countries are, as you know, in total shutdown. This uncertainty is leading to a sharp decrease in consumption and investment. In principle, there is a complete stop in the economy, and of course, we will also be affected by this storm. We have granted deferrals of Q2 rents totaling SEK 84 million, of which SEK 37 million is related to changeover from quarterly to monthly rents, which we expect to be paid in during the second quarter, so far, our projects are still running on schedule, and we have not seen any major inflation in construction costs. Our financial situation is, as you know, stable, which is reflected among other ways in the record low LTV ratio of 32%.
Our long-standing and good relationships with banks and other financiers are a great strength right now. Our strategy of spreading our financing among as many sources as possible gives us stability and security today. Please, next slide. The fact that we also have a stable tenant base with long leases is reassuring and secures our cash flows. In total, 84% of our rental values come from offices, and we have little exposure to more risky sectors. Our 25 largest customers or tenants account for 48% of our contracted area. Please, next slide. In these times, the well-being of our employees and customers is our top priority. We have close dialogues with our tenants where we discuss measures to help them with, for example, liquidity problems.
The group management and our crisis management team have daily status meetings about the situation and what we can do for the tenants, employees, and also for the community. All employees, apart from the technical operations, have been working from home for more than one month now. We also have provided materials to a field hospital outside Stockholm. During April, we contributed with more than 5,000 lunchboxes to the City Mission and hospitals in Stockholm, to mention some examples. Now, Åsa, can you please take us through the more details and the figures, please?
Thank you, Stefan. And please turn to the next page. The numbers during the first quarter of 2020 were not dominated by Corona. In spite of everything, we had a strong start to the year with rising values and positive net lettings. Rental income decreased slightly to SEK 711 million. This was explained by property divestments, that's Pelaren and Trädgården. In an identical portfolio, income increased by 14% in total. Completed projects and higher rental levels and index adjustments contributed positively. The warm winter with very little snow meant that property operating expenses decreased. The surplus ratio came in at 73% in total. Interest expenses were slightly higher than the previous year, mainly due to higher average interest cost. The share in earnings of associated companies amounted to minus SEK 11 million and mainly related to capital contribution to Arena bolaget during the period.
And in all, we therefore reported profit from property management of SEK 369 million. Before the end of the quarter, approximately 40% of the portfolio was externally valued. In line with transactions in the market, the yield requirement fell in the valuations. We carried out the valuations in two stages. The initial valuations were adjusted downwards in a second stage as a result of Corona. The average yield decreased to 3.89 from 3.97 at year-end. Overall, unrealized changes in value amounted to SEK 1.8 billion, equivalent to a value growth of 2.5%. During the first quarter, the deficit value of the derivatives portfolio increased again. And finally, the tax expense amounted to minus SEK 405 million and mostly related to deferred tax. And now, please turn page to key ratios. We can now report an even stronger balance sheet, which feels very secure in these uncertain times.
Reported equity now amounts to SEK 126 per share, and the long-term net asset value, the EPRA NAV, amounts to SEK 152 per share. The equity-asset ratio amounted to 55%, and the loan-to-value ratio decreased to 32%. We are well prepared to meet tougher times than what we have experienced in recent years. Now, please turn to page financing. It has been a different quarter with an active capital market to begin with and a complete stop since March. We received approximately SEK 3.5 billion in January when Trädgården was vacated, and we have used the money to amortize bonds and commercial paper maturities. Until very recently, we even had some excess liquidity. However, we refinanced one of our bank facilities during the quarter, and we have also converted loans to green loans. In total, 90% of our outstanding loans are now green.
The increased average interest rate was mainly due to higher underlying market interest rates since we have now, of course, exited negative interest rates. We have also increased our fixed rate term compared to the same period last year. In early March, we fixed a further SEK 400 million in a 10-year swap at less than 20 basis points cost. And at the end of the quarter, we had a capital tie-up period of six years and a fixed rate term of 5.1 years. Unutilized facilities amounted to SEK 6.1 billion. In March, we carried out a buyback of 2.5 million shares for 300 million SEK in total. We will now keep these treasury shares until further notice. Please turn to the next page. As you all know, sustainability is a well-integrated part of our business model.
Some things I want to highlight during the first quarter are that the property 408 in Arenastaden was upgraded to BREEAM In-Use rating Excellent, one of the few office buildings in the country to achieve this level, and we have also finished the environmental certification of Friends Arena. Today, our green financing, as I mentioned before, is 90%, and according to a recently published survey conducted by Nordea, with the Coronavirus pandemic, green financing has now been seriously tested for the first time. It has been shown that green bonds have performed better during the crisis than other asset classes, and now, back to Stefan.
Thank you, Åsa. Our portfolio today consists of 86 properties with a market value of about SEK 73 billion. About 40% of those are in the inner city, as you know, and about 40% in Arenastaden. Approximately 40% of the portfolio was externally valued before the end of the quarter. Higher rents and lower yield requirements mean higher values, but the external valuation was negatively impacted by the market situation. We did, as Åsa said before, first valuation in the end of February, beginning of March, and then we did a new one at the end of the quarter because of the situation. We saw, during the quarter, value growth in all of our areas. Please go to the next slide.
Demand for office premises in Stockholm is still strong, and we saw, during the first quarter, rising rental rates in all of our submarkets, especially early in the year, of course. Rent in our renegotiations were up about 11%, and net letting was about SEK 15 million. The largest letting was related to Operan Dramaten in Flemingsberg, and the largest termination was related to DLA on Kungsgatan in the inner city of Stockholm. But, of course, the Corona situation is creating great uncertainty regarding the future market development. Many potential customers are adopting a wait-and-see approach and want to know how the crisis will develop before taking the decision. But we have good discussions with them, and we have, of course, respect for that we have to wait for the signing. Please go to the next slide.
The average yield in our areas fell by 8 points to 3.89% during the quarter. And I will not here, and today, forecast the future or the development during the rest of this year. But I'm happy that we are in attractive areas with very good properties and good products. However, I think, of course, we will see fewer transactions during this quarter and the next quarter because many potential buyers will find it more difficult to secure external financing, and we have to see a more stable market before it will turn to more volume again. Please go to the next slide. As I mentioned earlier, our projects, our five projects, as you can see here, are running on schedule and according to budget. We have, during the quarter, invested approximately SEK 450 million.
We have said earlier that we will not reach our investment target of about SEK 2.5 billion for 2020. However, I'm not concerned about this because I'm convinced that we will invest more than SEK 10 billion over the period of the next four years. And to meet this target, we need to have more zoning plans ready and succeed with future project lettings, which take us to the next slide, please. The work on producing more zoning plans in all of our projects is progressing and has not stopped due to the Corona crisis. In February, we also signed a lease agreement with the Royal Swedish Opera and the Royal Dramatic Theatre to move their operation from Nacka outside Stockholm to Flemingsberg. The agreement is the first in Flemingsberg, as it is a milestone in our development of the area.
The project start will be during this year, and they will move in during 2024, so to conclude, we have a lot of respect for the situation, and I want to point out that, like everyone else in the society, we will be affected by COVID-19, but with our strong financial position, we have a good basis to perform well even during tougher times. We have a strong balance sheet, which makes so we even can take the opportunities that will come up. We have a stable customer base. We have long lease agreements. We have access to financing for our banks and the market, and we have dedicated employees, and that makes a big difference, so thank you, and now we will move on to the questions.
Thank you. If you wish to ask a question, please dial zero one on your telephone keypads now to enter the queue. Once your name is announced, you can ask your question. If you find your question is answered before it's your turn to speak, you can dial zero two to cancel. Our first question comes from the line of Andres Toome of Green Street Advisors. Please go ahead. Your line is open.
Hello. Good morning. I had a question regarding the deferrals that you disclosed today. Does that SEK 84 million include all tenants that could be eligible for the proposed government proposal, or would you expect some additional tenants to come forward once the program is being implemented?
First of all, I had a little difficulty to hear your question, but I think it was about a government program for discounts, and first of all, we will use the program as one of the vehicles in the discussions, individual discussions with our tenants. The SEK 84 million is somewhere within the sectors or the business that will be possible, which could be possible to use. Some are not. We will, as we said before, use the program within the discussions, but we are still waiting for some details to be clarified before we can say exactly how we will use it.
And just to add on, when it comes to SEK 84 million, this includes everything that is not paid for Q2 rents. The remaining rents have been paid in, so we don't expect this number to increase in Q2. And then, of course, what happens in Q3 is we don't know today.
Okay. Thank you. That's very clear. And then an additional question on your development pipeline. Maybe you mentioned this already, but I guess the line got off a little bit. But my question is, are you seeing in your current development pipeline that you've committed already any delays in terms of deliveries, and how are you thinking about the potential future projects in terms of launching them?
There have been some delays in the delivery of some products, but not that will affect the timeline or time schedule. The current projects are running as expected. For future projects, we are continuing with the planning process. We don't have any new signed contracts except the one with Operan Dramaten in Flemingsberg. And exactly how the timescale for the future project will be affected, we'll know what the venue of those projects are some years from now starting. So I'm not that worried about that. But we haven't seen any impact on the running projects, no.
Okay. Thank you very much. And the final question regarding financing costs. You issued some commercial paper through the quarter. How much higher financing costs did you incur on that versus previously that you issued?
We have issued around SEK 1.1 billion in commercial papers on two and three months. And the price has been around 90 basis points for that. So it's more than twice as high as it was before.
Okay. Thank you very much. That's all from my side.
Thank you. And the next question comes from the line of Oliver Gilbert of Clearance Capital. Please go ahead. Your line is open.
Hi there. Oliver Gilbert of Clearance Capital here. I was just wondering if I could ask one question. I think Andres asked me as I had. But what is the approach you guys are taking with regards to your share buyback? I mean, obviously, you're quite quick to announce one. I mean, do you expect to get to the full 10% if you feel your shares are too cheap? I mean, what's your kind of criteria around this? Is it simply a large discount to your NAV? I mean, is it not a bit risky in this environment where yields are moving out and rents could be falling?
You can say that when we announced that more than a month ago, we thought it was a good time to do some buybacks since we had a strong balance sheet. But we also protect the strong balance sheet. We will not. I don't see that we will do any more buybacks right now because it's also. Of course, in my opinion, it's the cheapest real estate portfolio to buy in Sweden today. But there are also coming up some opportunities in the market. So we would like to have the use of strength to be able to maybe look at some other deals too. Is that [crosstalk]
Yeah. No, it does. I mean, so just on that point, I mean, you guys often tend to develop assets, and you haven't been that busy on the acquisitions front in the past. Does that mean you would be looking to buy assets opportunistically, and are you expecting it to be distressed sellers?
If we can find properties in our focused areas, and if we think that will be of long-term interest, yes, we absolutely will see if we can be buying something else, acquiring something else.
Okay. Thank you. That's very helpful. Thanks.
Thank you. And our next question comes from the line of Rayan Boumara , also from Clearance Capital. Please go ahead. Your line is open.
Yeah. Hi. Rayan Boumara here from Clearance Capital. Just a quick question with regards to financing in the interest rate maturity structure in this report. I can see the outstanding amount of around SEK 4.5 billion has an average interest rate of around 6.22%. Could you give us some idea as to what that relates to? I mean, I appreciate financing costs are a bit higher, but just a little color around that would be great.
It's because in this table, the prices from one up to 10 years are reflected as an average of the swap rates that we pay. So all the margins are included in the short-term financing. So that's why it shows an odd figure. It's the same way that we have produced these figures since I started the company. So it's no change from before.
I appreciate your question because it's not that easy to understand that table sometimes. I also must take the opportunity to say this is Åsa's 50th quarter report. It's a unique day in many times. 50 reports, that's fantastic.
Okay. Yeah. I mean, the main reason why is because I think I believe last quarter was around 3%-3.5%. So the jump just caught me out a little bit, but what you're saying does make sense.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. We have a couple more questions coming through. The first is from the line of David Dafoe of Pictet. Please go ahead. Your line is open.
Yes. Good morning. Thank you for taking my question. I wonder if you could put the current situation in a slightly longer context. I mean, if we look at the office rent level for Stockholm CBD, they had a very nice and strong development, let's say, past decade. Even before this situation, it looks like if we take the level from 2019, they were possibly at some kind of peak of the cycle type of situation. Given your knowledge and your experience having gone through crises before, what could you frame a little bit in terms of the possible down cycle from here in terms of rent level and uptake of new space and property values just in both terms? Please, thank you.
Of course, it's a difficult question. First of all, I can say that already at the last presentation, when we presented the Q4 report, we said that we had top levels in the inner city of the CBD of Stockholm of more than SEK 10,000 per square meter. And we don't think that will be the long-term levels. So, of course, that is even more true today. Still, we think that the average rents will have a small upturn for the market. But there are many questions in a crisis like this that also means that all companies, including ourselves, we have been used to work from home much more. We have been talking for many years about flexible office space, to be able to work more flexible, to downsize, upsize. And that was the trend we've been seeing for the last years or for quite a long time already.
I think that will continue even with higher speed. That will also mean that you maybe can take a higher cost for some of your space, the total cost for your space, your offices, if you can find the right space in the right location. I think the top locations will continue to be quite good. The average or the second or third locations that are more has-been will be much more difficult. I think modern office space in good locations will continue to perform well, and people will be willing to pay for that. That's what we've seen in other crises too. I think it's important to stress that this crisis is not like any of the crises we've seen before.
First, it starts with the health crisis, and then it will develop into an economic crisis that we can so far not even calculate what it will mean. We don't know when it will end and when we go back to normal. But good location and good flexible office space will continue to perform well. But, as we said, if other more in second or third tier will probably have more problems, I think.
Thank you. Our next question comes from the line of Jonathan Kownator of Goldman Sachs. Please go ahead. Your line is open.
Good morning. Just perhaps to follow up on David's question on two areas, Steve. I think you've commented in the short term that obviously you respected the decision of some of your tenants to delay decisions. Are all discussions on hold at this stage, or are you still holding discussions on renewals? If you can perhaps give slightly more colors on what you're seeing in the market today, is there still appetite at all to sign leases? And if not, are there discussions around, again, based on the level of market rents, are there discussions on trying to lower those levels and attempts from tenants to change these market dynamics? That's the number one question. The second question is really more about long-term appetite for your development portfolio and Flemingsberg area, for instance, or even some of the space in Arenastaden.
I mean, is that changing your appetite for development projects at this stage and how you're thinking about it? Thank you.
To start a second way, it's not changing our long-term appetites. We are still convinced that we are working with and we are active in the right attractive areas of the future Stockholm. The discussions are not at all on hold. I must say I'm even surprised that they are so active. So what's changing or what we have respect for is the time to signing. But the discussions are there. We have signed some contracts during the last weeks. We have still activities. There's still discussions. So not at all. But the big contracts in new projects will take some more time than we expected, of course, and when talking about Flemingsberg, still with the focus of inner city, with the focus of Solna, Hammarby and Flemingsberg, I think we're well positioned for the future too.
But some of the projects will probably take in Flemingsberg. We are planning for so many years. It's 10, 15 years from now to be building with the start 2022. We will start construction first building of that. So it's many projects and many years to come and to work for. So is that an answer to your question?
Yeah. I guess two follow-ups. The first one on big projects like Flemingsberg, did you need any infrastructure work or anything that the project depends on that could be frozen given the current context and could actually mean delays that are not in your control necessarily, but that could have a significant impact? And the second one, obviously, your renewal rates were a bit lower this quarter at 11%. Are you expecting that to drop much further in the short term?
Sorry, I didn't catch your second question.
I was talking about the renewal rates on your leasing. They dropped materially for Q1 already at 11% uplift. I just was wondering where you expect those to go?
First of all, the first question with infrastructure projects in, for example, Flemingsberg, we haven't seen and we are not expecting any delay of them because of the Corona so far. Of course, there can be some, but not anything we expect. With Operan, Dramaten and the first projects out there are not depending on the infrastructure, the big infrastructure investments. So I think the second is the renegotiation. First of all, we had about 20% last year, but that was older contracts that were renegotiated. So we expected it to be at this level or about this level when, because these newer contracts are renegotiated. I would be naive if I would say we will not be affected. Of course, all discussions will be affected by the Corona situation.
But the one we had, we still see that we have low average yields from the old contracts. So average rents for the old contracts. So I'm still quite positive, but of course, it will be affected one way or the other.
Should we then assume that excluding Coronavirus, effectively those old contracts have now been renewed and then it's rather new contracts that are still expiring in 2020, or do you still have some of the older contracts renewed?
As you know, with the contract structure, everything is, but we have some that will be renegotiated at the second half of this year for 2021. So the one that we renegotiated at the end of last year, we will see an effect of end of this year. They are set, of course, at these levels.
Normally, we have around 15%-16% of the portfolio coming up for renegotiation each year. And I think we said in Q4 that we expected the uplift this year to be around 10% or above 10%, which is what we have seen in Q1. But as Stefan mentioned before, it's likely that the figure in the end will be lower this year due to this situation that we are in now. But it's difficult to give a new figure. But if we said above 10% in Q4, it's probably somewhere below 10% now.
Perfect. Thanks so much.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. There seem to be no further questions. Actually, just as I say that there is one from Jack Patrick of Heitman. Please go ahead. Your line is open.
Hi, guys. It's Jack Patrick, Heitman. I just have a quick one on your building rights, the residential part of your building rights. If you could give us a bit more flavors of what you guys want to do there. I know it's probably not a good time to monetize, but kind of anything you could do mid to long term once the situation normalizes for you to kind of unlock further value in the portfolio. Thank you.
Thank you. We continue to work with the plans. Most of it, we are focused on developing the office space or the commercial rights, building rights. We will not change that policy. We will not be in the residentials. We will sell them or do joint ventures, but we're working with it. We have some discussions, as I said before, with potential tenants for some of the projects, but what's most important is that we are continuing the work closely with the authorities or the municipalities for the plans, and there are no changes in that. They continue with the same, but then we're talking about, of course, it's long periods of work that we have ahead of us.
Thanks. And you've read about SEK 7.2K per square meter book value for those. What do you think is the current market value right now?
This is our best valuation of today, of course. We think it's worth today. We think also for most of what we have done in all of our valuations, of course, we have to take into account the IFRS. But we also try to be within that frame. We try to be quite conservative.
Thank you.
Thank you. Once again, if there are any further questions, please dial zero one on your telephone keypads now. Okay. There seems to be no further questions at this time, so I'll hand back to our speakers for the closing comments.
Okay. Thank you very much for joining us today, and thanks for the activity and the questions. If any of you have further questions, please don't hesitate to give us a call. You're always welcome. As we said when we started, it has been a very special quarter. And now we will be respectful for the situation, but I'm happy and I'm pleased that we have a very solid base, as we said, to work out from. So thank you for joining today and take care of.