Earnings Call: Q1 2019

Apr 12, 2019

Summary

Rental income and property-management profit grew, with valuation gains exceeding SEK 1.3bn. Negative net letting reflected the Swedish Tax Agency lease exit, while financing activity extended maturities and raised green funding to 66%.

Ladies and gentlemen, welcome to the Fabege AB Q1 Report 2019. Today, I am pleased to present CEO Christian Hermelin and CFO Åsa Bergström. For the first part of the call, all participants will be in listen only mode, and afterwards there will be a question and answer session. Speakers, please begin your meeting. Thank you, Christian. For the past good opportunity is that we have been which is also helpful. For example, if you look at our profit from property management, of course, the rise in income and falling interest costs has contributed to the record strong profit from property management which decreased the impressive result compared to last year. If you look at our return on property, you can see that the value continued to rise at 142% at mid-March in the first quarter. Rent increase negotiations are also continuing at a high level. Like recent years, the increase was 19% in the first quarter. If you look at our long-term net asset value, the NAV, it decreased from SEK 135 to SEK 130 during the first quarter. We are very pleased with the result, but there is a new result, and it is our next lesson, which I will return. First, I'll ask you to go over the quarter yourself for people. Thank you, Christian. Yes. The year started well with increases in income, increases in profit from property management, and continued positive changes in value. Rented income amounted to SEK 718 million, which is an increase of more than SEK 100 million compared to the previous year. In an identical portfolio, the income increased by 19% itself. Completed projects made the biggest contribution to the increase in income, but higher rent rates in agreements and index adjustments also contributed positively. The sub-rent income in Teste and Långsta, which is our case for the first quarter, which of course was affected by costs for the winter. Leasehold cost is not part of the net operating income. Meanwhile, the sub-rent increase has been affected due to the new property taxation, which has been charged by significant increase in property tax. This is largely off of Q7, but it has a significant effect in the calculation of the sub-rent. Administrative costs are in line with expectations. Interest expenses are slightly lower than last year in absolute terms. Overall, we are borrowing more but at a lower average cost. The result from associated company amounted to minus SEK 7 million and related to liquidity contribution to area Långsta. In all, we reported profit from property management of SEK 376 million, which was 17% compared to the previous year. Before the end of the quarter, 46% of the portfolio was externally valued. The usual climate had a slight season in the quarter from 4.38% to 4.11%. Overall, the unrealized changes in value amounted to 1.3 over equivalent. Value in the public sector is owned by established performance union, generating a return on invested capital of 147%. The value in the investment portfolio was mainly due to finance increases. During the first quarter, we increased its interest terms to new property owners. Combined with the falling long-term interest rate, this meant that the distinct value in the available portfolio increased by SEK 230 million. The tax expense amounted to minus SEK 210 million and was mainly related to deferred tax. Current tax is calculated based on the tax rate of 21.4%, while the deferred tax liability is mainly calculated using the future tax rate of 20.6%. Please turn page. In line with the strong earnings trend, our balance sheet has continued to strengthen. Reported equity now amounts to SEK 109 per share, and the long-term net asset value, the EPRA NAV, amounts to SEK 130 per share. The equity/assets ratio decreased from 51% to 50% due to the fact that since year-end, we increased our total assets with the leasing liability related to leasehold. All other financial key ratios have strengthened. Please turn to page financing. The year started well with high level of activity. After the capital market stabilized and the margins declined significantly, we have issued two new bonds for a total of SEK 650 million. We have also signed a new 10-year facility and are pleased about more signs that the banks can provide really long-term financing at competitive terms. During the quarter, we entered into a total of SEK 1.4 billion in new interest rate swaps with maturities of between seven and 10 years. Capital maturity now stands at just over five years, and the fixed interest term has increased to 4.3 years. We are continuing our persistent efforts towards achieving 100% green financing. This proportion is increasing in line with the ability of our financiers to provide green financing and the certification of our property portfolio. Now the proportion has increased to 66% of our outstanding loans. Finally, unutilized credit facilities amounted to SEK 4.3 billion, which feels very reassuring. Now back to Christian. Thank you, Åsa, and turn to page rental market. Net letting was strongly negative at -107 million SEK during this quarter. This was because the Swedish Tax Agency terminated its lease for the property Nöten 4 in Solna Strand, which we already announced. Of course, we are not happy about this. We know that if customers choose to move, they normally move to where they think the quality is better. For this reason, we have to make sure that our existing portfolio meets our customers' demands in terms of standard and service. The net letting didn't get any help this quarter from any larger project lettings, which depends both on due to normal seasonal variations and some shortage of projects that are ready for construction, which I will come back to. The low vacancies means that the increase in rent is continuing in all our sub-markets. During the period, we achieved an average rent increase of 19% with our renegotiations which is in line with last year's increase at 20% the first quarter. However, the non-negotiated rent is higher this year than last year. I would consider that we continue to see rent increases between 5%-10% per year as we have been seeing for the past five years. Now over to valuation. Here you can see where our changes in values are coming from in the first quarter 2019. We see that all three parts contribute significantly, but that is in our project portfolio we see the biggest contribution. If you turn page, you can see a comparison with the former last four years. In this outcome, we can see that the value growth of just over 1.3 billion SEK is in line with the average of 1.4 billion, which we have had in average the last four years. The split between the explained factors is also relatively normal compared to the last four years, which all have been very good years. Let's move on to our project portfolio. The positive part is that we have a fantastic position. Greater Stockholm is one of the regions in Europe with the best growth forecast. We have modern properties in attractive city districts, which are linked by train, and this is what customers want today. We also added to our development rights portfolio in the past year in Flemingsberg, while our existing areas develop positively. We have many project opportunities, but as I said before, we have some shortage of zoning plans and new office projects that are ready for construction because some things have gone faster than planned. While we work on catching up with planning, we have several existing buildings that we can now modernize and start offering to the market. If you turn the page, you can here see four of them. In these four buildings alone, we have a rental value without extension of more than 300 million SEK. We still have some new building opportunities. If you turn page, you can here see four possibilities where the two on the top now are ready for construction, and the two on the bottom ones are expected to be ready for construction by at latest the next year. Their combined rental values is about 450 million SEK. 2020 at last, we shall have several building opportunities in all our. In 2022 at latest, we shall have several building opportunities in all our four city district projects, which you can see on the next page. The lack of ready-to-start projects is temporary. At last, if you go to future. Like I said earlier, we have a fantastic position. It is hardly possible to ask for more than a modern office portfolio in locations linked by rail in the Stockholm region. This position fits perfectly with our value-creating business model, where we develop areas with potential into lively and attractive city districts. Our position and business models give us a good basis, but it is what we do that matters. Without the world's best organization, we would not have such strong results quarter after quarter. The world's best organization was developed through our corporate culture, which we call SPEAK. This is the basis for our employees' good teamwork. I am happy that the board of Fabege has found a new CEO who understands SPEAK and our business model. This is a good basis for continued success. Stefan will also bring new energy and other experience that is positive for Fabege's future. Thank you. That was our presentation, and we are now ready for questions. Thank you. If you do have a question for the speakers, please press 01 on your telephone keypad now. If you wish to withdraw your question, you may do so by pressing 02 to cancel. There will be a brief pause while questions are being registered. Just a reminder, that was 01 if you wish to ask a question. There are currently no questions registered, so I will hand the call back to the speakers. Please go ahead. Yes. Thank you for listening for us and good afternoon. Thank you. Thank you. This now concludes your conference call. Thank you all for attending. You may now disconnect your lines.