Earnings Call: Q2 2019

Jul 5, 2019

Summary

Rental income and property management earnings rose, while unrealized gains lifted property values. Management targets at least SEK 80m in full-year net lettings and expects falling yield requirements to support prices.

Ladies and gentlemen, welcome to the Fabege Q2 report 2019. Today I am pleased to present CEO Christian Hermelin 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. I will now hand you over to Christian. Please begin. Thank you. Christian speaking. Welcome to Fabege's presentation for the second quarter 2019. Please turn to page 2. The low level of interest rate has for many years helped to drive the strong earnings performance of the property sector. This has led to both falling capital cost and rising property prices. Over the second half of 2018, there was a growing conviction that interest rates would turn upward. However, between the first and second quarters 2019, forecasts have swung sharply the other way, as you can see from the graph. This swing has not yet shown through in our values, but the stock market has noted the change, which is clear from the strong upturn in the property sector over the past month. Please turn to page 3. We can see that earnings continued to develop strongly in the second quarter. Also, the positive impact of the falling interest rate is lagging behind. The second quarter is even slightly better if you look at our most important key ratios. I will now hand over to Åsa, who will go through the result and our key metrics from the quarter in more details. Thank you, Christian. Fabege's doing well. The positive trend is continuing with higher rental income, improved earnings from property management, and persistent value growth. Rental income totaled just short of SEK 1.5 billion, a rise of more than SEK 200 million compared with the preceding year. In an identical portfolio, income rose by all of 20%. Completed projects account for most of the income increase, but higher rents and leases and indexes were also positive factors. The surplus ratio ended up at 73%, which is in line with our expectations. As usual, the surplus ratio strengthened in the second quarter, which after all is not burdened by winter costs. We are very pleased to have achieved the same level as last year as we are now liable for considerably higher property tax, which even if it is for the most part charged out, still impacts negatively in calculating the surplus ratio. Interest expenses are slightly lower than last year in absolute terms. Overall, we are borrowing more but at a lower average cost. Earnings in associated companies totaled minus SEK 32 million, consisting mainly of the period's cash contributions to Arenabolaget. We therefore reported earnings of SEK 741 million from property management, an increase of 30% in comparison with the previous year. Around 40% of the portfolio was valued by an external party prior to the end of the quarter. The yield requirement fell further to 4.04%, 4.13% by the end of last year. in May, we sold Pelaren 1, a property in a suburb location in Stockholm. The transaction established a new low threshold for similar development properties in attractive suburban locations and had positive impact on several of our properties in valuation. Overall, unrealized value changes totaled SEK 3.1 billion, representing a value growth of 4.6%. Values in the project portfolio rose by SEK 1 billion, producing a return of 132% on invested capital during the period. Values in the investment property portfolio were driven by both rent increases and lower yield requirements. In the second quarter, we increased our fixed rate term via new swap agreements. This, combined with sharply falling long-term interest rates, led to an increase in the negative fair value of the derivatives portfolio. The tax charge was minus SEK 568 million, consisted largely of deferred tax. The amount included resolution of deferred tax relating to the sale of Pelaren. Please turn to page key ratios. The balance sheet has continued to strengthen in line with the favorable earnings trend. Visible equity is now SEK 111 per share, and the long-term net asset value, EPRA NAV, is SEK 134 per share. The reduction in the equity/assets ratio from 51% to 50% reflects the fact that since the year-end, we have increased the balance sheet total with the lease liability relating to ground rents. All other key ratios have strengthened. Now please turn to slide financing. After an active start to the year with newly contracted long-term facilities, bond issues, and additional fixed interest periods, we continued by establishing a new green financing framework. We are very pleased with the new framework, which also gained a strong rating in CICERO's second opinion. It means that both our commercial paper program and the backup facility, as well as other loans, can now be linked to the new framework, and our outstanding loans are now gradually being converted to green as they are rolled. Today, only one of our financiers is not able to offer green loans. We have issued our first green commercial paper, and we have converted more loans to green. Our green financing now accounts for 77% of outstanding loans. Our capital maturity has now increased to six years, and the fixed rate term is 4.2 years. Finally, unutilized facilities totaled SEK 3.6 billion, which seems very secure and satisfactory for us. With that, I will hand back to you, Christian. Thank you, Åsa. Please turn to page "The Rental Market." During the period, we achieved an average rental increase of 20% in our renegotiations. The second quarter was slightly stronger than the first, with an increase of 23%. Net lettings are still negative as a result of a major termination we received from Skatteverket in the first quarter. On the other hand, net lettings were positive during the second quarter. We generally say that we at least aim for net lettings of SEK 80 million per year. Since we have made progress in several projects during the quarter, I feel safe in saying that despite starting from a tough position, we will manage net lettings of at least SEK 80 million over the full year. Please turn to page 8. In line with our business model, in May, we sold the Pelaren 1 property right opposite Globen for SEK 1.6 billion. We began the project in 2016 with a total investment of around SEK 870 million. That is a good example of how we create values. The deal also shows that the market is at a lower yield level than we have in our books. Please turn to page 9. Here you can see where our changes in value for the first and second quarter is in 2019. We can see that all three constituents makes a considerable contribution, but the biggest comes from our project portfolio. At the beginning of 2019, we did not believe that the yield requirement would have the major effect that they have had. The sale of Pelaren 1 has had a positive impact, and the sharp swing in interest rates forecast seen in recent months, as I showed in the graph earlier, is likely to have a major effect on the yield requirement in the form of rising property prices over the next few quarters. Please turn to page 10. Now let us take a look at the project portfolio. Today, it extends to 107,000 square meters, which is slightly low for Fabege. Please turn page to page 11. In Arenastaden, next to ICA's new headquarters, our new Parkett project gained building permission in June, and we are delighted to be starting on another new project in Arenastaden. We know that demand is strong, and our target of at least SEK 80 million in net lettings means, in turn, an ambition to rent out more than one major project this autumn. To sum up, the future for Fabege still looks bright. Our positioning is fantastic. You could hardly wish for a better one. Greater Stockholm is among the regions of Europe's best forecast for growth, and we have what our customers are seeking. In Flemingsberg, everything is progressing according to plan. There, our business model, where we develop district with potential into attractive living areas really comes to its own. We will be creating something of truly genuine quality in Flemingsberg that will create major values for both Fabege's owners and for the tenant for many years to come. This, together with a fixed income market that remains favorable and Stefan soon to take over as a new CEO with energy and experience are also positive factors for Fabege's future, of course. Thank you. We are now open for questions. Thank you. Ladies and gentlemen, if you do wish to ask a question, then please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. Once again, that is 01 if you would like to ask a question. There will be a brief pause while questions are being registered. There seem to be no questions at this point, so I will hand the word back to the speakers. Yes. From Fabege, we just say thank you for listening to our presentation. Thank you. This now concludes the conference call. Thank you all for attending. You may now disconnect your line.