Earnings Call: Q3 2017

Oct 19, 2017

Summary

Net lettings reached SEK 190m through Q3, property management earnings rose 12% to SEK 713m, and unrealized value growth totaled SEK 4.4bn. Projects and higher rents are expected to drive continued growth into 2018.

Ladies and gentlemen, welcome to the Fabege Q3 Report 2017. Today, I am pleased to present CEO Christian Hermelin and CFO Åsa Bergström. For the first part of this call, all participants will be on listen only mode, and afterwards there will be a question and answer session. I will now hand you over to Christian. Please begin your meeting. Welcome to Fabege's interim presentation. Please turn page. We have posted numerous strong consecutive reports, but despite this, our latest report stands out, and I am delighted with our results for the third quarter. Most of all, I am pleased with our net lettings, which exceed 100 million SEK for the quarter. 100 million is normally a good level for a whole year, and the fact that we have reached almost 200 million of the three quarters is extremely positive, as net lettings are the most important key performance indicator for our long-term earnings trend. The reason for our high net lettings is partly the standard Stockholm best location, with modern properties in attractive districts with rail connections. That is what all customers are currently looking for. Our attractive locations have created project volumes that are currently greater than ever before, and our project margins was a significant 98% for the quarter. Our persistently high project margins can be attributed to our business model, which involves developing entire districts on an industrial scale. This has allowed us to create Sweden's best project portfolio with extremely low initial values. We do not just have attractive products with low initial values. We also have very strong demand owing to the economy and Stockholm's growth. The good demand has resulted in rental increases or renegotiations of 28% in the quarter. This is a proof that Stockholm is currently one of Europe's very best property markets. Overall, our consistently strong results for the quarter have created very strong value growth. Our long-term net asset value, NAV, which usually governs our share price performance, increased from 173 to 196 SEK per share in the quarter. This is how well things can go when all conditions are right, and you also have the world's best organization. The foundation of our strong earnings quarter, of the quarter is our culture, in which we are continually seeking to make improvements and our excellent teamwork. Now I will hand over to Åsa who will go through the earnings in more details. Thank you, Christian. Yes, things are going well at the moment. In the previous quarters this year, we have seen continued growth in rental income, continued low interest expenses, and sustained value growth. Rental income totaled SEK 1.7 billion. Growth is coming from completed projects now generating rental income and higher rent levels having an effect on income statement. Growth in identical portfolios grew to just over 80%. This is above ratio 73%, but the improvements on last year and in line with our expectations for the full year target, which is also 73%. Administrative expenses are on par with the previous year. Interest expenses are lower than last year in absolute terms. The total volume of borrowing is higher, but on the other hand, an increased share of capital market financing and the fact that old expensive interest rate swaps have expired have resulted in lower average interest rates for the period. The average interest expense at the end of the quarter was 2.82% compared to 2.64% at the end of the year. Earnings in associated companies totaled minus SEK 81 million and relate to the capital contribution to Arenabolaget during the period. The ongoing deficit in Arenabolaget is in line with the budget, but the change in operator has resulted in a number of one-offs in the second and third quarter. Overall, earnings for property management increased by around 12% in comparison with the previous year, now up to SEK 713 million. The Selfoss 1 property in Kista was sold in the second quarter to co-own Selfoss Invest. The sale had no accounting effects, and no further sales have been made during the period. Growth in value continued with unrealized changes in value of total SEK 4.4 billion, corresponding to a value growth of around 9%. Values in the project portfolio rose by SEK 1.1 billion, producing a return on invested capital during the period of 66%. We also made an upward revision of the development rights for the property Stora Frösunda in Solna with an effect of SEK 695 million. Especially in the investment properties portfolio was driven principally by increases in rent, but also the somewhat lower yield requirements. The average yield in the portfolio is now 4.39% compared to 4.53% at the year-end. The value in the derivative portfolio continued to decrease in the third quarter, and the deficit value is now SEK 227 million less during this period. The deferred tax is estimated at 22% on current earnings. The difference compared with the previous year is due to us recording a positive item as a result of the resolution of deferred tax in connection with property sales last year. Now over to slide key ratios. The balance sheet has continued to strengthen in line with the favorable trend in earnings. Visible equity is now SEK 161 kronor per share, and the long-term net asset value, EPRA NAV is SEK 190 per share. The equity/assets ratio was 47% by the end of the quarter. The loan-to-value ratio decreased further to 44%. We have a high rate of investment, but we also have high value creation, and there has been a continued increase in value in the investment property portfolio. In view of the strong market and the greater potential forward with increased changes in value, the current loan-to-value ratio appears comfortable. Now over to slide financing. The financing market, both the banking and the capital markets continue to appear stable. We have continued to expand our financing via the capital markets. In the third quarter, we issued SEK 700 million under our own MTN program and SEK 200 million via SFF. All are green bonds and all of them have slightly longer maturities, that is 4 to 5 years. The levels are attractive both in terms of margins and as there are no cyber costs on the capital markets. There has been significant interest in our bonds in general and in the green bonds in particular, and all the bond issues we have made this year have been oversubscribed. We often receive speculative requests for new issues, which is clearly encouraging. Including the certificates program, capital market financing currently accounts for 44% of outstanding loans, and our aim is to further increase the percentage of bond loans. It has been particularly pleasing to have put in place two new green bank financing arrangements in the past quarter. Together with the green bond issues, this means that green financing now accounts for 35% of total outstanding loans. That comes with a current price advantage of around 5 to 10 basis points. We have had several maturities of old and expensive interest rate swaps during the period, and the new swaps that we have entered into have been signed at much lower levels. 52% of the loan portfolio was fixed through interest rate swaps at the end of the quarter. We are aiming to carry out more interest rate swaps at long maturities to further ensure a good level of future cash flow. In October, we have fixed another SEK 500 million in 10-year swaps. Our unutilized facilities at the end of the quarter totaled around SEK 2.1 billion. We are getting positive signals from both banks and the capital markets, and we're confident that we can both refinance existing loans and take out new loans as and when the need arises. Now back to Christian to hear how the business is developing. The mood is very good owing to Stockholm's growth and the healthy economy. This is resulting in continuous rising rents. A good indicator of the strength in the rental market is the rental increase in our renegotiations. During the quarter, renegotiated rents rose by 28%, which is an increase of 27% for the year on an accumulated basis. Net lettings are a high priority for us this year, as we want to add new projects to replace all the projects that will be completed in 2018. With SEK 190 million net lettings and 4 newly started projects during the year, it's above target. Please turn page. As a result of rising rent and completed projects, you are seeing strong growth in revenue this year, as shown here. This will continue in 2018 as we have a lot more projects that are being completed then and will start generating revenue. Please turn page. We did not make any transactions in the past quarter either. The strong property market in Stockholm and our own good work generated value growth of almost SEK 2.5 billion over the quarter, producing a total increase in values of 9% in the year. Please turn page. Value increases in the first six months of the year, as shown in the pie chart Up and right, reduced with relatively equal contribution from the project portfolio, rising rents, and declining yield requirements. The change in value in the third quarter, on the left, are as expected, mainly due to the increase in values of our projects and rise in rents. But there is still a significant portion that comes from declining yield requirements. We expect this trend to continue. We should see significant value growth from our projects operation and rising rents, while the effects of value from falling yields is gradually decreasing. Please turn page. Let's now turn to our project portfolio, which is continuing to create values. The occupancy rate in the quarter increased from 81% to 88% in our projects. It is not only Arenastaden that is contributing projects. Our major projects are well distributed across all our areas. Arenastaden has gone really well, so we are slightly behind with planning permissions, but new zoning plans for Arenastaden are starting to appear, which is important as there is a significant interest in moving to Arenastaden. Please turn page. Here you can see Haga Norra, which is a project we plan to start up next to Arenastaden, which we announced in September. Please turn page. Haga Norra contains around 90,000 sq m of apartment space and 70,000 sq m of office space. It has a fantastic location, with services at Arenastaden, rail connections, and major employers close by. Please turn page. This provide us with the optimum conditions for creating an attractive district in partnership with residential developers. Please turn page. Many are wondering where our property market is headed, and sooner or later that upward trend will of course break. On the downside today, we have primarily the tax proposal and expectation of a slight rise in interest rates. However, these two factors do not cancel out all the positive factors that currently exist. Perhaps the most powerful aspect on the downside is still probably psychological. And with that I mean the worry that development will fall short of expectations. The main area that could deteriorate and that has been a driving force for the positive trend is the strong economy. I don't believe that the upswing in our property market will come to an end before we see a clear sign of an economic downturn. When we do start to see an economic downturn, it is likely that it will then reduce the risk of a sharp rise in interest rates. So as always, the answer to questions about the future of the property market is the subject of the business cycle. Thank you. We are now ready for questions. Thank you. Ladies and gentlemen, if you do have an audio question for the speakers, please press 01 on your telephone keypad and you will enter the queue. After you are announced, please ask your question. Once again, ladies and gentlemen, if you do wish to register for an audio question, please press 01 on your telephone keypad now. As there appear to be no questions registered, I will hand back to the speakers. Okay. Then we thank you all listeners from Fabege for listening for the third quarterly report. Thank you.