Good afternoon. Thank you for standing by, and welcome to the Pandox Q3 2019 Report Conference Call. At this time, all participants are in a listen-only mode. After the speaker presentation, there will be a question -and -answer session. To ask a question during the session, you will need to press star-one on your telephone. I must advise you that this conference is being recorded today, Thursday, 24th October , 2019. I would now like to hand the conference over to first speaker today, the CEO of Pandox, Mr. Anders Nissen. Thank you. Please go ahead.
Well, good morning, everyone, and welcome to this presentation of the third quarter and nine months for 2019. As said, my name is Anders Nissen. I am the CEO of Pandox. With me, I have, as always, Liia Nõu, our CFO, and Anders Berg, Head of Communication and Investor Relations. As always, this presentation is divided in two parts. We start with the presentation of the quarter, and followed by a Q&A session. Let's start. This is Page number two. For the third quarter and nine months of 2019, we report a continually good growth in earnings or a good balance earnings development, if you may say so. The total net operating income increased by 10% for the quarter and 11% for the nine months. The return on equity was strong, measured by analyzed growth in EPRA NAV, including dividends, was 19% on rolling 12 months.
The driver behind this development were value-adding acquisition in U.K. and Germany. We had a positive rental growth in several markets, specifically on hotels who are coming back after renovations, and continually good development in the hotel market in Brussels. You can say that our strategy of diversification continued to bring benefits to us, where stronger market more compensate for weaker markets. Well, sorry. Like-for-like, property management increased by net operating income 1.7% in the quarter and 1.6% for the nine months. Like-for-like operator activities decreased net operating income by 1.2% on the third quarter, and the reason are planned renovation and start-up costs in specifically two hotels. Let's come back to that later. Adjusted for this cost, the net operating income like-for-like was strong 5.5%. For the nine months, net operating increased by 10.1%. Next page, please. Sorry, I lost my. Here it is.
For the third quarter, Pandox net operating income increased by SEK 81 million, an increase of 10%, or for the nine months, the increase was 11%. Excluding the effect of IFRS 16, the increase was 7% and 8% respectively. Again, key factors supporting were value-adding acquisitions, good rental growth, specifically in Finland and Sweden, good development in Brussels, and positive currency effect. Key negative factor were increased hotel supply in some markets in this quarter, specifically Oslo and Heathrow, challenging comparable figures, and some renovation disturbance, specifically in hotels under operator activities. Next page, please. As you know, Pandox returned to the stock market in June 2015, and we have since then had a high business tempo, including the most recent announced agreement to acquire two hotels, one in The Hague in Netherlands and one in Hannover, Germany. Pandox have now made acquisition for SEK 21 billion over four years.
We had also invested approximately SEK 2.7 billion in value-adding investment in our existing hotels, and we have secured some 70 new lease agreements, most of them in markets outside the Nordic region. Finally, we also have made the divestment for some SEK 2 billion. Over these four years, Pandox total net operating income and total cash earning had more than doubled, measured on a rolling 12-month basis. Next page, please. Pandox has a well-diversified portfolio, somewhat dominated by revenue-based leases. We have a well-balanced between different countries, location, guest segment, and brand. At the end of the quarter, Pandox hotel property portfolio comprised by 146 hotels with a total market value of 59.7%. These two last acquired hotels in The Hague and Hanover is not included in these numbers.
130 hotel properties were owned and leased, representing around 85% of the total property value, and 16 hotel properties were owned and operated, representing around 15% of the total property value. Next page, please. The last acquisition we done was, as said here before, two hotels, one in The Hague and one in Hanover. Both of them will be on the operator activities. The price is EUR 83 million, and the initial yield is approximately 6.5%, so strong numbers. We will manage this together by Grape Hospitality throughout a management agreement. We will manage Grape, and Grape will manage their daily operations. We will get two new partners for Pandox. One is this Grape Hospitality, which is a spin-off of Novotel or Accor. That give us opportunity to maybe be more active in French-speaking countries.
We also have a new partner in Novotel, which is a brand under umbrella of Accor. Accor is one of the largest hotel company in the world, which we're now eager to start to learn more about. These are two well invested hotels. Total is 421 rooms, and the price is about EUR 200 million per room, way under construction cost. We believe this has a good potential further out. We expect EUR 16 million in sales and about EUR 5.7 million in NOI in 2020. The Hague is an international market, and as you can see on the picture, it is linked to a big convention center, which it can cover 5,000 people, which is a very strong, of course, platform for that hotel, but also are active in the transient and leisure market in The Hague and well-known Scheveningen, which is the summer holiday for many people in Holland.
Hanover, which our third hotel in Hanover, is one of the largest trade Messe market in the world. Now we have one more hotel in that strong market, so we also expect some good potential here for the future. Next page, please. This is world of Pandox. Today, we are in 15 countries. We are in 85 destination. You can see it's 43% of the value coming from Scandinavia. 35% is from Germany, Belgium, Switzerland, and Austria, and 20% U.K., and 2% Canada. The next page, please, show you our selection of platform and operator and brands. If I may so, I will say this is the strongest platform in Europe today from owner side.
No one has so many relationship, and no one have so many brand and good operator where we are linked to in different partnership, which of course, is both something will increase our potential and organize our risk in bad days. If we go over to the next page, please, and talk about the market. We start with RevPAR growth development in Europe. Europe has 2% growth in the quarter. You could remember that last year, we had a World Cup in football in Eastern Europe, so that has a negative effect on this quarter, but still stable. In Northern Europe, where we have most of our hotels, it is about 2% growth. It is still stable out there. If you look to the selective countries, you can see that some countries are good and some countries are bad in the not so good in the quarter.
That is why we have this strategy by being in many different countries and the diversification strategy that we always talk about. Good countries in the quarter has been Finland, Austria, and Sweden, and weaker have been Denmark and Germany. Let us go to the next page, please, and look at some specific cities where it may be more interesting. Here you can see a selection of very strong international and domestic market. We are doing fine. Like Brussels, which are today, lucky us, who have many hotels there, one of the strongest market in Europe. You have Helsinki, which is growing by good 9%. They are now chairman European Union for this quarter, so high activity on the hotel side with more meetings. Montreal doing fine. Stockholm, we can come back to. Weaker market is Frankfurt, Berlin, and as in whole Germany, their Q3 have been weaker.
A very strong Q2. Lot of fair trade in Q3, not so many fair trade, meaning that the market is a little bit weaker in that quarter. We expect that Q4 will be stronger if you look specifically on Messe market for Germany. Oslo and Copenhagen is due to new capacity. U.K. regional has a - 2%. We have a positive number, so our portfolio is taking market shares in U.K. Stockholm, strong 3%, good July, strong September, and a stable August. All three segment, transients, meeting, and leisure doing fine over the quarter, and it looks stable in Stockholm year out. With that, I hand over to our CFO, Liia Nõu, for the financial highlights.
Thank you, Anders. We are now at Page 12. We think the third quarter was a good quarter for Pandox, where we were able to generate profitable earnings growth in both business segments. Please note that during the third quarter, we finalized the legal reorganization of our previous acquisitions of Jurys Inn based on completion accounts. This explains the majority part of the increase in deferred tax in the quarter. With that out of the way, we turn to some key numbers. I start with property management. In the third quarter, rental income amounted to SEK 851 million, an increase of 5%.
If we adjust for the previous accounting change for property tax in U.K. and Ireland, which we described in the second quarter, the increase was 7%. Like-for-like, property management reported an increase in rental income of 2.6%. In the third quarter, net operating income amounted to SEK 761 million, which is an increase of 9%. Excluding IFRS 16, net operating income amounted to SEK 748 million, an increase of 7%. Like-for-like, property management reported an increase in net operating income of 1.7%. Continuing with operating activities.
In the third quarter, net operating income amounted to SEK 160 million, which is an increase of 12%. The increase is mainly explained by acquisitions, good progress in Brussels, and German domestic regional cities. However, earnings growth was negatively affected, as Anders Nissen mentioned, by renovation disturbances in DoubleTree by Hilton Brussels City and start-up costs for DoubleTree by Hilton in Montreal. Excluding IFRS 16, net operating income amounted to SEK 153 million. Like-for-like, operating activities reported a decrease in net operating income of 1.2%, but adjusted for the cost mentioned above, there was a growth in net operating income with a total of 5.5%.
Total cash earnings amounted to SEK 581 million, an increase of 9% in the quarter. Total cash earnings per share also increased with 9%. Measured from year-end 2018, the unrealized and realized value increase for investment properties amounted to 2.3%. For operating properties, the value change was 4.1%. End of period, EPRA NAV per share amounted to approximately SEK 184. Adjusted for dividend, the annualized increase in EPRA NAV was just above 19%. Turning to the next page, please, Page 13. In the third quarter, property management continued to benefit from previous acquisitions, positive diversification effects, and continued positive underlying demand. Although like-for-like growth was stronger in the third quarter, it was constrained by negative supply and renovation effects in some markets. Rental growth in the comparable portfolio was positive in, for example, Austria, Sweden, Finland, Norway, and the U.K., but was negative in Switzerland, Ireland, Denmark, and Germany.
In the U.K., like-for-like growth amounted to approximately 1%. The stronger destinations were Wolfsburg, Belfast, Brussels, Leeds, Helsinki, Vienna, and Salzburg. Stockholm rental growth increased by approximately 9% in the quarter. Next page, please. In the third quarter, operating activities of revenue and net operating income increased at a reasonably good pace, supported by previous acquisitions, currency, and overall good development in Brussels and domestic regional cities in Germany. However, again, as previously mentioned, profitability was negatively affected by renovation of DoubleTree by Hilton Brussels City, which will be rebranded into Hotel Indigo, and as well as we have start-up costs for DoubleTree by Hilton Montreal, Canada. Next page, please. Looking at our portfolio. In the third quarter, approximately 38% of the portfolio was externally valued.
Total unrealized and realized changes in value amounted to approximately SEK 1.4 billion, of which SEK 1,189 million were for investment properties and SEK 321 million for operating properties. The value increase is explained by a combination of improved cash flows and lower yields. It's basically 40/60. 40% comes from increased cash flows and 60% from lower yields. In the quarter, we completed divestment of the hotel building to Hotel Hasselbacken, which explains the SEK 96 million in realized changes in value and SEK -480 million in divestment. We also closed the acquisition of three hotel properties in Germany, which explains the lion's share of the acquisition entry in the table. End of period, the average valuation yield for investment properties was 5.47%, and for operating properties, it was 6.53%. Next page, please. Finally, let's take a quick look at our EPRA NAV and financial position.
End of period, EPRA NAV per share amounted to around SEK 184. This corresponds to an increase of approximately 19% on an annual basis, adjusted for dividend and proceeds from various share issues. The increase is in part explained by changes in currency exchange rates. Loan-to-value amounted to 48.3%. You can write in the table, liquid funds and long-term unutilized credit facilities amounted to close to SEK 3 billion or a little bit more than SEK 3.2 billion. With all that in mind, our conclusion is that Pandox's financial position remains strong and stable. Next page, please. With that, I hand over back to Anders for some final words.
Thank you, Liia. Yes. The main driver for growth for the rest of the year, you can divide it in five boxes. Market growth is the first. Business on the books for Q4 this year looks promising, stable, but uneven as always. We believe that our high-quality portfolio, diversified in many cities, in many different sort of markets, will taking more than the market, given that we will add value into our cash earnings. We see a pipeline of growth investment, value-adding investment. At the moment, we have signed up for SEK 1.2 billion, which we constantly do our investment, and that will continue in Q4. We see a strong operations, specifically in Belgium and in Germany. We have a good team there, so we believe that also there we will do a little better than the market.
On the top of everything, we also, of course, are looking for opportunistic acquisition. We have done two good deals so far this year, three hotels in Germany for a yield of 5.7%, and now recently Hague and Hanover in operate activities for 6.5%. There is more things to do out there, but we need to be the right number, and we need to be more selected than we were perhaps for a year ago. All in all, we have a positive look out of Q4 and the end of 2019. Thank you very much for this. Now we hand over for Q&A.
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. Once again, if you wish to ask a question, please press Star and one. Your first question comes from the line of Fredric Cyon. Please ask your question.
Good morning. I have a few questions from my side. Starting off with the acquisitions you did in Hanover and The Hague. If I look at NOI margin, it seems fairly high already. What kind of potential do you see in that acquisition apart from the fairly high yield?
Well, I would say it's revenue management, most likely together with Accor, which I think we can add a lot. Agree that the operate hotels, very professional. That is also why we decide to sign up for them and partner up. We see possibility to do more together with them.
Okay, my second question relates to the renovation works that hampered somewhat the NOI in the operating segment in the third quarter. For how long do you expect this to have a negative effect on the NOI in the Montreal and Brussels?
Well, at the moment, we have two big hotels was under renovation, and the Montreal will end up Q2 next year, and the Hilton Brussels City will also end up the end of Q1 or beginning of 2020. We will most likely start another large renovation later also this year. That may be meaning to your question, that might be some sort of little bit, if not negative growth, that will be the same sort of trend the next couple of years. The next couple of quarters that we will do large renovations and taking out capacity. What exactly that means for the effect for the hotel, I can't give you that number more than to say that we are very active in renovating and develop hotels to take them to the next level. In some way, it's a positive message.
That is clear. Then the final question, I think Liia will probably answer it. It relates to financial cost. If you look at costs, it increased by about 7% quarter-over-quarter, and it is not like your total debt level has increased to that magnitude. Are there any one-offs in the third quarter?
No, not really. Other than we acquired the portfolio 1st of July, so we have a full quarter of the Hague and Hanover acquisition. We have entered into a number of hedging derivatives, even though the sort of underlying basis is. There is no real one-off.
Okay. Thank you.
Your next question comes from the line of Albin Sandberg. Please ask your question.
Yes. Hi there. I basically just have one question, and it is on your outlook, Anders, for the next coming quarters, and maybe also if you can stretch that out through 2020. It feels like you are highlighting some markets that will affect negatively and then others will compensate. If we look at it from a Pandox group perspective, are you seeing overall growth for 2020 in the market?
Yes.
That's also taking into account, company specific actions such as, still the higher renovation—
No.
—that you're running into now?
No, I answered the question about market. In totally, those hotels, that those markets that we have hotel in today, will have a positive outlook, have a positive growth. Maybe not so much, but they will have a positive growth through 2020. For Pandox side, we normally do better, but we haven't shared any figures for 2020 yet.
No. Okay. I could clarify because I was thinking also maybe, we talked about this renovation activity that is maybe a bit higher than what is normal. My feel is that as that kind of activity is leveling off a little bit, that—
Yeah
—that negative impact should have less impact in 2020 than 2019. Or maybe you keep the same renovation pace throughout 2020. If we look at the delta between the years, that is broadly the same.
No. I will say that at the beginning of next year, we are into a few big renovation and we take the opportunity when the market is weaker and we still can, finding good price on the construction market, which is easier to do in December, January and February than in March, April and May, as you had, of course, understand. That can be that we do more than we normally do there, and that can have some negative effect. But then that will coming back at positive way in another quarter.
So for a full year 2020, they will be it just out, I would say. But again, we haven't shared any number for Pandox, more than to say the market looks still stable, and there is a demand growth in the market. Some market are impressed by RevPAR because of new capacity, but most of them have no new capacity. All in all, our diversification strategy is working very well.
Okay, great. Following up then on the acquisition that you made, was it something that you looked upon for a long time or was it a quick deal? Looking now into Q4 and maybe when we close 2019, would that acquisition be good enough for you or do you target more here now in the near term?
The first question is that it was not a quick one. The one in the three of us in Germany was a quick one. Someone we know since before who wanted to do a quick deal and which we did. This was something that we had been in contact with the operator, who was also the seller for such a long time, started to learn and understand. Step by step, they came from much higher numbers and we came from lower numbers. Then we found a number, something between us and could close the deal, and we are very happy for that. Regarding the growth and new acquisition, Albin, both you and me are handball players. We play match every day and we would like to win.
Yeah. Okay.
Always something going on.
That is good. Thank you very much, Anders.
Thank you.
Your next question comes from the line of Christopher Fremantle. Please ask your question.
Hello, good morning. It is Chris Fremantle from Morgan Stanley.
Good morning.
Just wanted to ask a couple of small questions. First was, you said you had revalued 38% of your portfolio, which I think is quite a high number. Is there some reason that you have revalued more of your portfolio in the third quarter? That would be my first question. The second question was just on the impact of renovation and CapEx projects. Can you just help us understand how much of the like-for-like growth is coming from those sort of renovation and CapEx-driven projects?
That would be helpful. I think in your release, just as a follow-up, you said you were actively on the lookout for development projects, which is not language that I'd sort of heard or seen in your report before. Is that because you see less growth in the underlying market, that you're having to rely a bit more on sort of CapEx-driven growth? Any commentary you can give on that would be helpful. Thank you.
Okay. I'll start with the first question and then let Anders think about the second question during that. When it comes to the external evaluations, it's a simple answer. Of course, we do on a rolling basis, on the 12-month rolling basis, we externally value all our assets. But at this point in time, we also have bigger refinancing of the previous Norgani portfolio, which is due now in Q4. So the banks, of course, need some external valuations, and we're taking the opportunity to do that in the same time. So it's more than SEK 8 billion of refinancing, which will be put in place in Q4. That's the sort of support for that.
Thank you.
Regarding this negative like for like in operator activities, as we had been into before, that will continue to be like for like negative the next quarters because of large renovation programs. If you adjust with this, it will be positive numbers. So we have a few big hotels that we now see opportunity to do things in this market condition as it is today. That will, in short time, have some negative effect on the like for like comparison due to that we're taking out capacities.
Something similar what you see in this quarter now. Due to development, I don't know if you had misunderstood , we say something because we never develop new hotels, and that is still the strategy. Maybe we talk about that we develop more rooms and more buildings into existing hotels. I don't know if that is the one we have maybe not been so clear about.
No, there's just a paragraph saying that you're actively looking for development projects.
Okay.
That's an ongoing thing, or is that something I haven't seen that language before, and I just wondered if—
Okay.
—we should read anything particular into that.
That is in existing hotels. We are very active. In this market where we see a growth, most of the growth coming from average rate, and that means that the underlying profit in the hotel market increase and be better. That means that the possible to do value-driven investment is better than it was for the same period one year ago, that most of the growth came from volume. That's why we say we are very active at the moment and looking for development project, but that means in existing hotels, like we build more rooms in Inverness, we look at do the same in Oxford, we try to see what we can do in Birmingham. We have in Luleå extension of Scandic Hotel and more and more. So many hotels are now ongoing a large renovation program, which will take the hotels to a new profit level.
Okay. Thank you.
Thank you.
Once again, if you wish to ask a question, please press Star and one. There are no further question at this time. Please continue.
Well, thank you for interest in this March reporting day on the stock market. Please note that our next event is the Hotel Market Day, the 19th of November, and we have exciting program focused on sustainability in the hotel sector. Lucky us, this event is always fully booked, but for those who haven't registered, please do it today, so we will try to squeeze you in because the people from the capital market we like to see there. Thank you very much for today, and goodbye.
That does conclude our conference for today. Thank you for participating, and may all disconnect.