Well, good morning, everybody, and welcome to this presentation of Pandox year-end and fourth quarter of 2016. As had been said, my name is Anders Nissen, and together with me, I have, as always, Liia Nõu with the CFO of Pandox, and Anders Berg, the Head of Communication and Investor Relations. We do as always, we divide this presentation in two parts. First, the presentation, and then we have room for Q&A session.
Please then turn to page number two. We think we have a strong end, a good fourth quarter of 2016. Let me give you some highlights. The return on equity was 20%, and growth in cash earning increased to 19%. We also had a 2% growth in NOI property management and 10% in operator activities NOI. That is some sort of highlight for the fourth quarter. The driver behind this number is three major thing.
The first is a strong hotel market. Generally, the market has been stronger, specifically the end, than we had communicate before and demonstrate the very strong hospitality market we are into. Denmark, Sweden, and Germany, Canada stands out, but most of the market had been at least stable. Brussels has recovery as planned. We said before that the end should be much better than the second and the third quarter, which also have happened. Let's come back to Brussels. The second driver is the profitable acquisition we had achieved that now materialize into cash earnings and increase NOI for the company. The third driver is a good return on investment. That always been a strong driver for Pandox.
This cash flow-driven investment that we doing in existing hotels together with partners or in our own operations that we try always to develop hotel for hotel and find potential, and then we materialize this into investment. They normally have a return on 8% to something, 12%, 13%, and we also see that in the fourth quarter. So that is also very promising. That continue.
I think that is everything I need to say on this stage on the fourth quarter. Let's turn over to page number three and more focus on full year for 2016. Again, repeat, same number. A return on equity was full year, very solid, 20%, and cash earning grow by 19%. This is actually above our long-term year-on-year on over now 21 years, we have had year-on-year return on equity for 18%, and this year is even above that.
That, of course, we are very proud of. You see that the property management NOI is 7%, much stronger than the end. The operator activity is - 1%. That can be explained in three way. The first is a strong market, as I said before, that is good. The second is those hotels that we have been taking over, which is performing much better now, month by month, but still are under development. So that we have more of taking out for these hotels. The third one is, of course, Brussels, which cost us about SEK 40 million, which is in line what we have communicate before. Again, a driver behind this strong and dynamic market. We talk about profitable acquisition that is the same for full year and investment, but also, of course, the business temporary efficiency.
When we do acquisition, we have a high conversion into a cash earning, and that we also demonstrate for 2016. If you go to page four, I would like just to sum up a few things. This is now 18 months since we made our comeback as a listed company, and we can now present a few things that we have done since that time. We have acquired hotels for SEK 8.3 billion, 18 hotels with Leonardo in Germany, seven hotels out in Europe as we had acquired from Invesco and Hilton Grand Vacations. These acquisition have, of course, increased Pandox positions, specifically out of Nordic. And also increase the potential. In line, while always working with streamlining, we have sold out or divested nine non-core assets for SEK 1 billion.
Secondly, we have expanded our lease portfolio with 40 new leases, long-term revenue-based lease agreements, which demonstrate that the lease portfolio, if you have the right hotels in the right city, that is always possible for you to find a good partner who is willing to take a lease. The third one is our active ownership, that we are active across the value chain, that we have been taking over this period seven hotels who was in bad shape. Now we take them over. At that stage, there was no professional operator who would like to operate them.
Now we have taken them over. We have developed them. We have changed management brand. We have done investment, and then we have leased them out again. And that, of course, demonstrate our business model. We have done that many times, and I am happy to present that we also have achieved to do it once again. This is seven Scandic Hotels, and then there is one hotel, Urban House in Copenhagen, that we have leased out to Meininger Hotels. We also leaving with this on this stage, Grand Hotel in Oslo, so now we have just owned hotels.
Next one that I would like to present is those cashflow-generating investment. As I spoke about before, we had completed SEK 750 million over these 18 months, and we have SEK 1 billion in pipeline. And last but not least, we continue to have a high financial flexibility after the new share issue at the end of last year. That takes me over to the page number five, I think. The portfolio overview. The Pandox business situation.
As you can see, we own 120 properties for a market value of SEK 38.2 billion. 98 is leased out and only 22 is operate in Pandox own operations. After year-end, as I said before, we have reclassified seven hotels, six with Scandic and one Urban House together with Meininger. Meaning that the share of property management had increased to 84%. That is in line with our strategies.
If I leaving that part and go over to the map, you can see that we have now 60% in the Nordic and 40% out of Nordic. And I think this is very interesting to see that we now have been able to establish Pandox in three sort of strong destinations. First, all these capitals, Berlin, Vienna, Amsterdam, Brussels, and all these Nordics, which are international metropole for a lot of meetings, high activity in leisure and business segment.
That is combined with strong German city like Frankfurt, Dusseldorf, Cologne, and Hamburg, which are city to expect to grow quicker than German general, which has a positive outlook, if I understand it right. This is, though, also combined with a regional city with a more domestic demand like Mönchengladbach, Karlsruhe, Hanover, and Bremen, Dortmund. But also in Sweden, Karlstad, Jönköping, Helsingborg, and of course in Finland, Jyväskylä, Kuopio.
This combination of having a big capital, strong regional city, and with more local cities with domestic demand give this important geographic diversification. This means that Pandox has more dynamic into portfolio now since we listed the company, but still the balance because of an high proportion of domestic demand in the portfolio. Let's go to page number six. Market. You see on the left-hand side that Brussels is a - 4%.
It recovery and coming back very strong. You see Frankfurt, this is Q4, is - 1% due to a strong Q4 2015 with lot of fair trade. Helsinki, Oslo level out. Berlin continually strong and stable, 3%. Stockholm, Montreal, and Copenhagen is our three strongest markets for 2016. Specifically, Montreal and Copenhagen have been very strong, and we see good potential continuously in, specifically in Montreal. Europe, you see on the right-hand side of the graph there that it's stable. 3%, 4% is the pattern at the moment, and we believe that will continue to be in that area. With this, I hand over to Liia.
Thank you. We are now on page seven. Yes, we are very pleased with our fourth quarter and the full year 2016. Property management performed well throughout the year, and operating activities gradually improved profitability towards the end of the year. Some key numbers for the quarter and full year. For the quarter, rental income property management amounted to SEK 458 million, an increase of 25%. For the year, rental income amounted to SEK 1,787 million, an increase of 16%.
Adjusted for one-time revenue of SEK 60 million in the third quarter last year, 2015, rental income for the year increased by 20% and net operating income by 23%. For the quarter, net operating income for operating activities amounted to SEK 130 million, an increase of 25%. For the year, net operating income amounted to SEK 439 million, an increase of 6%. For the quarter like-for-like, property management reported an increase in rental income and net operating income by 6% and 2% respectively.
For the year, the increase was 6% and 7% respectively. For the quarter like-for-like, operating activities reported unchanged revenues and an increase in net operating income of 10%. The increase in net operating income in the quarter is mainly explained by the improvement in Brussels. For the year, revenues for and net operating income decreased by 3% and 1% respectively. For the quarter, the financial net amounted to a SEK -160 million. This reflecting a larger loan portfolio, but also some fees tied to unutilized credit facilities. For the quarter, cash earnings amounted to SEK 314 million, and for the year, cash earnings amounted to SEK 1,289 million, an increase of 14%.
However, adjusted for the one-time items, net of SEK 50 million in 2015, cash earnings increased by a very strong 19%. Measured from year-end 2015, the unrealized and realized value increase for investment properties amounted to 5.8%. For operating properties, the unrealized value increase amounted to 3.5%. Year-end EPRA NAV per share was SEK 126.24 . Adjusted for dividend and proceeds from the directed share issue, the annualized increase was 20%. For 2016, the board is proposing a dividend of SEK 4.10 per share, compared with SEK 3.80 2015, reflecting an increase of 8%.
Next page, please. In the quarter, property management benefited largely from the same underlying trends as early in the year. Market demand was well diversified and particularly strong in Sweden, Germany, and Denmark. For the quarter, Germany accounted for 19% of total rental income. Please note that other property income from the third quarter 2015 includes a one-time revenue of SEK 60 million, which of course affects the yearly comparison.
The recently signed lease agreements with Scandic Hotels in the Nordic will come into force during the second quarter 2017. Also, Urban House Copenhagen will be reclassified on 1st of January 2017. Thus, after second quarter 2017, we will have eight less operating properties. From the 22 hotels, we will go to 14 hotels as it looks as of today. Next page, please. In the quarter, profitability of operating activities improved, mainly due to recovery in Brussels. Brussels aside, operating activities benefited largely from the same positive market drivers as property management. Performance was strong in Canada, Germany, and Denmark.
As I said, Brussels continued to improve, and the negative effect on the NOI for the full year 2016 amounted to SEK 40 million, in line with our initial estimates. Next page, please. For the year, total unrealized and realized changes in value amounted to SEK 1,685 million, of which SEK 1,460 million for investment properties and SEK 225 million for operating properties.
For the year, the value increase is explained by a combination of lower yields, favorable market developments, and higher cash flow from previous investments. For the quarter, the value increase on the total is mainly explained by higher cash flows, even though there are yield compression in some countries, a little bit offset by some other countries, and also the fact that we are acquiring larger portfolios, thus in Germany, which had to higher yield than our average.
Year-end, the average valuation yield for investment properties was 5.7% for the total portfolio for investment properties, and for operating properties, it was 7.5%. Next page, please. At last, again, my favorite slide on value and financing. It illustrates well Pandox's track record in creating value, as well as the company's strong financial position. Year-end EPRA NAV per share amounted to SEK 126.24 . An increase of 17% during the year.
The increase was 20%, adjusted for dividend of SEK 570 million, and proceeds more than SEK 1 billion from the directed share issue. Loan-to-value gross amounted to 49.3%, and loan-to-value net amounted to 47.9%. Liquid funds and long-term unutilized credit facilities amounted to more than SEK 2.2 billion. To summarize, Pandox financial flexibility remains strong. Next page, please. With that, I hand over to Anders for some final words.
Yeah. Thank you, Liia. A sort of summary of the main driver. I think I can say, after being in this company for 21 years, that the commercial platform has never been stronger. Let me give you some examples. The first is there we are established, as I was into before, in now many of those big hotel markets in Europe, like Amsterdam, Vienna. Brussels is strong and coming back.
You see all these Nordic where we have a high proportion of our income is from. That is extremely good because that increased the potential of the portfolio. Still, as said before, the balance is there after also being in all these strong regional cities in Germany and in Scandinavia. So the platform has increased in potential but still have a good base and low risk.
The quality of the portfolio has go up, as both in terms of income and in size. Of course, that is a good start to be a part in a growing market or at least in a stable market that you will have more than market average. If you look at investment in the portfolio, we have SEK 1 billion in pipeline, that we have demonstrated in the past that we can taking out a good return on this in cash-driven investments. The operations is, we have rent out a few hotels, but we still have 14 large ones. Specifically in Brussels, which we believe will be our strongest market 2017.
We see a good Q1, stable to last year, and then we see after that, Q2, Q3, and Q4, a stronger pace in our business on books, which is according to what we have communicated before. That is what we believe will happen for 2017, and that's why we think we now see this pattern. Last, we also, of course, have the opportunities to acquire hotels. We have done SEK 8.3 billion over the last year, and we have appetite and capacity to continue to do acquisition also in 2017. Yeah. That will be the end of our presentation, and we are now ready for questions. Thank you.
Thank you. Ladies and gentlemen, we will now begin the question-and-answer session. If you wish to ask a question, please press star and one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the hash key. Your first question comes from the line of Tobias Kaj . Thank you. Please ask your question.
Yes, thank you. I would like to start to ask you regarding the expenses for the management portfolio. It was slightly higher than I expected, while like-for-like growth was a bit higher for operating income compared to for rental income in Q3, it was clearly lower in Q4. Can you give some more colors into that?
Absolutely. One has to look at, when you look at the margin for investment properties, you have to look at the full year, because there are some cyclical costs, especially in Q4 this year. We have done some maintenance costs, especially on some hotels. These are, of course, long-term we plan them long-term, but in Q4, it has been a more active quarter than the previous three quarters. It doesn't mean that the hotels are falling apart in fourth quarter. It just means that planning sometimes is that you do more in certain quarters.
Because if you look for the full year, it was still an improvement of the operating margin for management properties. Do you believe that that will continue into 2017? What kind of effect will the acquisition have on the margin level?
Yes. As previously in previous calls was said, the acquisitions we done, especially the two large portfolios we did with the Leonardo portfolio, and now there's the last portfolio. These are typical agreement structures where we have a higher margin where the operator takes a bigger part of this maintenance. Then again, there may be fluctuations between the quarters, but the increase in the margin is expected to continue some part.
If I step in and just say that, on top of what Liia said, that quarter three was extremely strong in hotel markets, so we did not have time to do any maintenance. It was more or less fully booked everywhere. Q4, it is always more easier to plan this because of lower demand in December and also over the first two months of this year. So that is a normal pattern.
Okay. On the operator properties, it was a bit of the opposite that the NOI margin was stronger than the income trend. Is that fully related to that you had some extraordinary cost in Brussels last year due to security and those reasons, or is it something else as well?
No, I think it demonstrates that we have been good of doing our cost flexible. Together with now the market coming back, our conversion had been excellent. This is a number we are quite proud about. We have an excellent management team in Brussels, which working very hard and very focused to every day follow KPIs in terms to make sure that the productivity was higher than normal. Of course, when then the revenue is increasing, then the conversion is extremely strong. That will maybe continue in the beginning of 2017 as well, but then also that will flatten out after some time, because you cannot ask people to work 24 hours a day, and that are more or less how the organization had been standing up for us this year or last year.
Also on top of that, we have the hotels we have been reclassified are taking over, and of course the work pays off after a while when you work with it to reposition them. The ones we now eventually also will lease out.
Yeah.
Okay. If I may also have two more detailed questions. First of all, admin expenses also increased a bit more than I expected in the quarter. Is there some volatility between the quarters, or should we expect this level in the quarter to continue during 2017 as well?
Well, there are always some volatility between the quarters, and that's typically also do with the amount of acquisition activities we are looking into. There is always some related cost of looking at acquisitions that won't come true or won't come due. There are some fluctuations between the quarters, but as a total, it's higher for the year number. I think on average it's reflecting what we are looking at going forward, as a combination of that we are a listed company, we are doing much more on all areas.
Okay. Finally, regarding your paid tax as a percentage of recurring earnings, it was 11% in the fourth quarter, so clearly higher than in previous quarters. I know you have highlighted that with a higher share outside the Nordics of income, you will have higher paid tax. But is this the rate we should expect going forward as well?
I think in absolute terms, the amount paid tax, it's fortunately going to be higher because we are hopefully making good profits. As said, there's a couple of reasons why the paid tax is increasing. It's as a reflection that we have more income coming from Germany and from Europe versus in, for example, in Sweden, where we have larger deferred tax assets to write off. We also have improved profitability in countries like Denmark, Finland, and also Brussels, Belgium. So the percentage paid tax will increase both in absolute terms and as a percentage.
Will it increase from 11% in Q4, or should it increase from 6% for the full year?
I do not want to give an exact number for time being. I think the increase we have gone from, I think a normalized number in 2015 from 25 to now about 70. I think in absolute terms, the increase from 2015 to 2016, we are expecting the same increase in absolute terms.
Okay. Thank you.
Thank you. Your next question comes from the line of Christopher Fremantle. Thank you. Please ask your question.
Hi, good morning. Two questions from my side. First, just to follow up on that tax issue. Just to confirm, from what you said at the end there, it sounds as though you are expecting a three-digit number for tax paid for modeling purposes, whether that is a reasonable assumption. A broader question on the yield environment. Clearly, your portfolios have been helped by cap rate compression, yield compression in recent years. How do you see that shaping up for 2017? Do you think we will see more yield compression still to come, or just a little bit of color on that would be very helpful. Thank you.
On the first question, yes, there will be a three-digit number. We expect it will be a three-digit number when it comes to taxes. When it comes to yields, then, of course, one has to remember that we have a large portfolio. You have to look at the portfolios and the hotels over a cycle in order to look at that performance on them. There are some spreads in the portfolio, of course. As I said earlier, there has been some yield compression also in Q4 when it comes to Sweden. It was offset a little bit by some other markets, but also the fact that we are taking in larger portfolios with a higher yield, as we are buying them at around six or south of six.
There is some spread between the countries, of course, depending on where the hotels are situated and what kind of hotels they are. Whether we expect the cap rates, the yields to come down further, I would love to be able to look in the crystal ball and know that. We can just guess, I would assume. But of course, by the fact that we invest a lot in our hotels, it also improves the yields. There is except for the cash flow driven part of the value increase. Also when, for example, in 2017, we will reclassify eight of our hotels from operating properties to investment properties, this will by technical mean that the yields will come down. I do not know.
You have to remember that most of these lately acquisition, we are starting a lot of actions. I have been out to visit those hotels a few times now, and I can see that it has happened a lot, but that not means that the profit has come up to the level that we hope for and aim for. That will be over the year, we will follow it closely, and if it is possible, of course, we are happy to press the yield. But we need first to produce number. That is the beauty with hotels. It is a little bit more different asset class. You need to work hard for the cash, but on the other hand, there is more potential maybe in most of other asset class. That is the world we are living in.
Yeah. Anders said there's a maximum minimum yield in the countries, and sometimes it actually varies between 2%, 3% depending on where these hotels are. I don't know if we answered your question, but it was a lot around that.
Not really, but that's still a useful color. Thank you.
You tell us if the cap rates go down, and we're happy to adjust.
I will come up with my own answer. Thank you.
Great.
Thank you. Again, ladies and gentlemen, if you wish to ask a question, please press star and one on your telephone. Your next question comes from the line of Albin Sandberg. Please ask your question.
Yes. Thank you. Start off with the broader market, looking at the supply situation on new hotels, if that is something that scares you in any way, and if so, if it is a 2017 or 2018 question or it is further out than that.
We see an increase in supply for 2017 compared to 2016, for sure. If we are starting at the end of 2016 with the two new properties coming in Helsinki, which has a press on the RevPAR for Helsinki for the last quarter bit, and that will take some time before they really are into market. The market need to grow both in volume and rate to absorb that. If you look at Stockholm, we have now a few openings also in 2017, which increased the supply by 3%. I am skeptical that we will absorb everything in one piece, as that will take also some time. We have the same other.
We also see some in German city like Frankfurt and Hamburg. They are also coming in new supply. This is rather normal, and that supply coming in some time where the market had been good. Yes, there is a little bit more supply, but it is nothing that really worried us. It is something we have in our plan. We should remember that most of the supply, which is coming in specifically in Germany, is Premium hotels. We have this beautiful balance that we are having premium hotels, but also we have more domestic hotels which are expecting to not have a negative effect on most of these new hotels. There will be a fight in the premium segment, yes, but not on the domestic segment.
Thanks. Then on the Brussels market, has that come back where it was pre-terror levels? Do you foresee any continuing charges in Brussels for 2017, or that should be more like a clean year?
I will answer like this. If you look at the end of 2016, it was strong, but you also compare quarter four in 2016 by 2015 where there was a lockdown, meaning that it should be better last year than because of this lockdown in the year before. That increase was not substantial if you compare it to the long term. If you look at Q1 this year, we are slightly above last year, which was, in spite of the lockdown, a very good quarter up to the 23rd of March where the attack came. I believe that we will be slightly above 2017 compared to 2015, or maybe 2015 before the lockdown. There is still a market growth to see in 2018 with the information we have today.
Good. Then I wonder, the investments you do on your standing assets, can you give any guidance of what you are hoping for 2017? Is it going to be, as a percentage, likely the same as in 2016, or is there anything in the pipeline plan that boosted 2016 versus 2017 and so forth?
You mean investment in existing hotels?
Yes, exactly.
We did SEK 435 million, if I remember right, 2016. I would think that will be the same number and that's a lot. Now you only have 365 days, so SEK 435 million meaning that you do more than SEK 1 million a day. We need to remember that we try to have full focus on lower demand months like December, January, maybe February and over Easter. So there's not so many times that we can do investment into, so that meaning that is full focus on this week. So more than SEK 435 million we would definitely not do. I think we would do maybe less because of just time reason. But we have, as we said before, SEK 1 billion in pipeline, and these are for 2017, 2018, and the beginning of 2019.
Okay, great. My final question is trying to get a little bit more out of your guidance, Anders. I think we're all hoping for cash earnings to grow in 2017. I guess the question is the growth rate and companies specifically. Would you be disappointed if you're not meeting the 2016 growth rate that you saw?
No. I will say that 2017 is comparable to 2016, a stronger year.
Better growth rates year on year, 2017 versus 2016.
No.
Okay, great. Thank you very much.
Thank you. Again, if you wish to ask a question, please press star and one on your telephone. Your next question comes from the line of Erik Granström. Thank you. Please ask your question.
Thank you. I have two questions. One is a follow-up on these central administration costs that you were talking a little bit about. You mentioned in the report that you did have some extraordinary costs related to the second and the fourth quarter, and those are obviously the quarters that sort of stand out if you look at 2016. Does that mean that you do not expect those kind of costs going forward? Or is it simply that they're related to projects, but you do start new projects each year? I was just wondering how should we view these sort of extraordinary costs that you mentioned in the report? Are they extraordinary in terms of 2016, or is it something that we should expect for 2017 as well?
Well, as said, it's difficult to plan for acquisitions that don't come true, and there is always some projects. I would assume that yes, there will be some project costs as long as we look at acquisitions. The overall number for the year, I think it may differ by quarter by quarter, but still going forward, there will always be project-related costs as long as we are active in the market.
All right. Thank you. The second question is regarding your acquisition potentials. I know, Anders, that you've been talking about the fact that there are portfolios that are out there and especially in Europe. I was just wondering, has that changed anything during Q4? Have you seen an increased willingness from banks, for example, that are holding portfolios to sort of divest those? Is that the kind of acquisitions that you would like to do primarily, or are you looking on a sort of piece-by-piece acquisition basis?
The question I can give you, which I think I have information about that 2017 will be something, if you look at the acquisition volumes will be more or less in the same level as 2016. That not means that there is potential acquisitions for Pandox. We see most of it what's coming out now has not been something we are interested into. That meaning that it's a few deluxe portfolio results which we not have any interest in looking at. Just to give you one example of what's out there in the market. On the other hand, it's just the beginning of the year, so we believe that that will be activities during 2017.
But again, we are very selective, and you also see on the cost of the administration that we have been into other processes in last year that we have stepped out because we did not have fulfilled because of commercial reasons. So that is many criteria who should be there before we enter into deals. So, active, yes. Possible to acquire, we will see. But the volume will be the same.
All right. Thank you.
All right. Thank you. And no further questions at this time. Please continue.
Okay. Thank you everybody for your interest. Do not forget that we have a capital market day in Stockholm on the 9th of May. Welcome everybody. And hope to see you all there, and thank you for attention, and goodbye.