Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today Pandox Q2 2019 report conference call. At this time, all participants are in listen-only mode. There will be a presentation, followed by a question and answer session, at which time, if you wish to ask a question, you will need to press star and one on your telephone and wait for your name to be announced. I might advise you that this conference is being recorded today, Friday, July 12, 2019. I would like to hand the conference over to your speaker today, Anders Nissen. Please go ahead, sir.
Well, good morning, everybody, and welcome to this presentation of Pandox interim report for the second quarter and half year 2019. My name is Anders Nissen, as said. With me, I have Liia Nõu, the Chief Financial Officer, and Anders Berg, head of our Communication and Investor Relations. As always, this presentation is divided into two parts. We start with the presentation of the quarter, followed by the Q&A session. Welcome everybody. The headline for the presentation is Profitable Diversification, which we will jump on a few times. Let me start. For the second quarter and for the half year, we report what we believe is solid increase in earnings. The total net operating income increased by 10% for the quarter and 12% for the half year. If exclude the IFRS 16, increase was 8% and 9% respectively.
Return on equity still strong at 16% on an annual basis. A few strong drivers behind this positive development. One is the profitable diversification effect, and the second one is a strong performance in our operator activities and continues to be a stable hotel market. You can say that our diversification strategy pays off in the quarter with good balance in the good market like Germany, U.K., Brussels and Canada balance out weaker market in Oslo, Heathrow and Copenhagen. Like-for-like, property management increased net operating income by 0.3% in the quarter and 0.7% for the half year. Like-for-like, operator activities increased net operating income by solid 16.8% in the second quarter and 16.9% for the half year. So full speed in our operator activity. Next page, please. The NOI increased for the second quarter by SEK 85 million and increased by 10%.
For the half year it was 12%. Excluding the effect of the IFRS 16, increase was 8% and 9% respectively. Again, a few key factors supporting previous acquisition, that is The Midland Hotel in Manchester and the Radisson Blu in Glasgow acquisition done last year. A strong growth in Brussels, some other markets and a stable underlying demand general in the hotel market. A few negative effects is negative calendar effect. Let's coming back to that. Increase of hotel supply in some markets and some renovation effects. Talking about the calendar effect, we estimate that the calendar effect has a negative impact on 2%-3% for comparable portfolio in the quarter. So what we gain more in Q1 because of Easter, we lose here. But in despite of that, we believe that the income is very strong. Next page, please. This is about our profitable growth trend in Pandox.
As you know, Pandox returned to the stock market in 2015 in June, and since then, we have had a high business tempo, including the last acquisition in Germany, three hotels, Dortmund, Erfurt, and Hamburg. We have now made acquisition for more than EUR 20 billion over these four years. We had also invested approximately EUR 2.5 billion in growth value driving project in our existing portfolio, existing hotels. We have secured more than 70 new lease agreements, most of them in market outside the Nordic region. Finally, we had also made the investment for EUR 2 billion, including the planned investment of Hotel Hasselbacken, which was announced now in Q2. Over these four years, and we are proud to say this, Pandox total net operating income and total cash earnings had more than doubled, measured on a rolling 12-month basis. Next page, please.
That takes us into our business situation that you can see. We own 144 hotel properties with 32,000 rooms at the end of the Q2, and it is not including the last acquisition, for a total market value of SEK 57.6 billion. It is very well diversified and very well-balanced between countries, location, and guest segment. 128 of these hotels are revenue-based leases, representing 85% of the value, and 16 hotels, according to close to 5,000 rooms, is own operations, own and operate hotels representing 15% of the market value. Next page, please. We have, as I said, announced an acquisition a few weeks ago, where we acquired three retail properties in Germany for EUR 103 million price and initial yield of 5.7%. We have signed long-term lease revenue-based agreement with HR Group. HR Group is what we call third parties.
They operate hotels, and then they sign franchise agreement with well-known brands. HR Group is a very professional player, operate 20 hotels across Europe. One of the largest without having any brand. We are very much looking forward to develop our cooperation with these very professional partners. The brand we have on the hotels is Dorint Hotels & Resorts. Dorint is one of the most well-known brands in Germany, together with Steigenberger and Maritim. Dorint has 51 hotels across Germany and Switzerland. The portfolio is 565 rooms, is very well-maintained properties without need to do any investment initially. We expect it to have EUR 6 million rent annualized and 5.8 NOI also annualized. If you go to the next page, you will see picture of these three hotels. On the left you have Erfurt. Erfurt is in the former East Germany. Strong leisure destination. You see the hotel there.
It is a very strong local position, well-known hotel. As you, of course, can understand or see this picture that it is one of the leading hotels in Erfurt. In the middle, we have the Dortmund and Dorint in Westfalenhallen area. We had another hotel in Dortmund before. We own and operate a Radisson Blu and Dorint. Now we own and lease out with Dorint. Dorint is one of our competitors, so we know that hotel very well, and we are now happy to be owner of two beautiful hotels and profitable hotels in Dortmund. The third one is Dorint in Westfalenhallen, which is the leading hotel in Westfalenhallen and located a little bit outside city, just next to the Congress Halle Westfalenhallen. If things happen in Dortmund, it happened there. We have 184 room food service hotel there. Next page, please.
That takes us into the Pandox wall. You can see that including our recent acquisition of these three hotels, the portfolio has increased to 147 hotels, close to 33,000 rooms in 15 countries. You can see that the Scandinavian is still dominated, even if the proportion is still continuing to go down. It is 45% of the value in Scandinavian, Sweden is the largest one. You have Mid-Europe, 33. U.K., 20, and Canada 2% of the value of the company. Next page, please. That is the selection. Very high quality selection of operating brands that we now have add two more partners. On the left-hand side, if you read down, HR Group and Dorint Hotels & Resorts. Of course, we take this step by step.
We sign up with more partners to give us more network, to give us more knowledge and more presence in the market. We have never been stronger in Pandox ever. Next page, please. If you now go over to market, you can see on the graph on the left, Europe has go up April, May, 4%. A good two first month of the Q2. If you look more into countries, you can see strong Germany and Austria. U.K. and Ireland is less strong. We are much stronger, but the market is a little bit slightly down. Scandinavian is from +3 in Finland to -8 in Denmark. A very much rollercoaster market in Scandinavia for the moment. Most of this changes is because of new capacity in some markets. Let us go next slide.
If we then move over to the next page, 11, you can see some key markets. Strong Berlin, Frankfurt, and Montreal. The Frankfurt in May was bombed because of a few big meetings in the city. It now has a very strong 14% over the Q2. Berlin continued to be strong. Meeting market is stronger and stronger, and we are also now sniffing more in the market for the high price segment in the meeting, which we gain for in our 700 rooms hotel. Of course, we is one of the big meeting machines in the city. U.K. RevPAR is -1. Pandox comparable number there is +4, so we are much stronger. Brussels strong, Helsinki strong. Stockholm, Oslo, Copenhagen is down. Stockholm is Easter effect, and Oslo and Copenhagen because of new capacity. You can see also Stockholm here is -2.
If you adjust with Easter, it will be slightly positive or positive. We have a stable level out trend for the moment in Stockholm. Next page, please. I hand over to Liia for the financial highlights.
Thank you, Anders. We are now on page 12. We are pleased with the second quarter, which was yet another quarter with profitable earnings growth in both business segments. Please note that during the second quarter, we implemented an accounting change for other property revenue and property cost in the U.K. and Ireland. As a consequence, revenue and cost decreased by SEK 30 million, respectively, in the second quarter, of which SEK 15 million relates to the first quarter. The change will result in a reduction of other property revenue of approximately SEK 60 million on an annualized basis compared to 2018. The reason is that property tax is paid directly by the tenant. However, the change has no effect on earnings. It is just between the different lines in the P&L. With that out of the way, we turn to some key numbers. Starting with property management.
In the second quarter, rental income amounted to SEK 783 million. Adjusted for the accounting change, as Anders just described, the increase was 3%. Like- for- like, property management reported an increase in rental income of 0.4%. In the second quarter, net operating income amounted to SEK 704 million, an increase of 10%. Excluding IFRS 16, net operating income amounted to SEK 689 million, an increase of 8%. Like- for- like, property management reported an increase in net operating income of 0.3%.
Continuing with operating activities. In the second quarter, net operating income amounted to SEK 212 million, an increase of 27%. The strong uplift is mainly explained by good progress in Brussels and Berlin, the acquisition of Radisson Blu Glasgow in the previous year, and improvements in other markets. Excluding IFRS 16, net operating income amounted to SEK 206 million. Like- for- like, operating activities reported an increase in net operating profit of 16.8%.
Total cash earnings amounted to SEK 565 million, an increase of 8%. Total cash earnings per share also increased by 5%. Measured from year-end 2018, the unrealized value increase for investment properties was 1.4%, and for operating properties, 2.2%. End of period, EPRA NAV per share amounted to SEK 173.83. Adjusted for dividends, the annualized increase in EPRA NAV was 16%. Next page, please. Sorry. In the second quarter, property management benefited from previous acquisitions, positive diversification effects, while underlying demand also remained positive. However, a negative calendar effect of 2%-3% affected growth negatively in the quarter. Growth was also constrained by negative supply and renovation effects in some markets. Rental growth in comparable portfolio was positive in U.K., Norway, Germany, and Austria, and negative in Denmark, Finland, and Ireland. In the U.K., like- for- like growth amounted to some 4%.
Stronger destinations were Würzburg and Cologne in Germany, Jönköping and Luleå in Sweden, and Sheffield and Brighton in the U.K. Next page, please. In the second quarter, both revenue and net operating income increased at a good pace, supported by previous acquisitions, currency and a solid development, particularly in Brussels with a good conversion. Brussels currently benefited from a combination of good demand and limited inflow of new hotel rooms. Berlin was also strong and other markets in Germany improved. The ongoing rebranding of DoubleTree by Hilton Montreal is progressing according to plan with higher RevPAR, but have yet to catch up in terms of profitability. Next page, please. Page 15. In the second quarter, approximately 20% of the portfolio was externally valued.
Since the beginning of the year, total unrealized and realized change in value amounted to SEK 821 million, or with SEK 640 million for investment properties and SEK 181 million for operating properties. The value increase is explained by a combination of improved cash flow and lower yields. In the quarter, we entered into an agreement to divest the hotel building for Hotel Hasselbacken, which contributed with some SEK 100 million to the value increase. This transaction is expected to close September 2, 2019. We also agreed to acquire three hotel properties in Germany. This transaction was closed on July 1. End of period, the average valuation yield for investment properties was 5.51%, and for operating properties, 6.61%. Next page, please. Finally, let's take a quick look at our EPRA NAV and the financial position. End of period, EPRA NAV per share amounted to SEK 173.8.
This corresponds to an increase of 16% on an annualized basis, adjusted for dividend and proceeds from rights issue. The increase is in part explained by changes in currency exchange rates. Loan-to-value amounted to 49.0%. Liquid funds and long-term unutilized credit facilities amounted to approximately SEK 3.5 billion. Our conclusion is that Pandox financial position remains strong and stable. Next page, please. With that, I hand over to Anders again for some final words.
Well, thank you, Liia. A few words about the outlook. As we have said in the report, we see a positive, stable outlook for the rest of the year. That's based on a continuously strong economic activity in all the markets where Pandox are representing on, and that is the main driver for demand in the hotel industry. We see in most of our markets a strong and continuously good business market where business travelers continue to travel. We see business on the books for meeting also is at least as last year. The leisure market is also continuously to increase in most of our markets. With the high quality of our hotels, we will having at least the shares in the market will grow with. That is positive news.
With that said, we need to remind everybody that we are in the mature phase in the hotel market, and growth is only slowing because of strong comparison. That will sum up our comments about the outlook for 2019. I hand over to the operator. We are ready for questions.
Thank you. Ladies and gentlemen, we now begin the question and answer session. If you wish to ask a question, please press star one on your telephone and wait for your name to be announced. Please stand by while we compile a Q&A queue. This will only take a few moments. If you wish to cancel your request, please press the hash key. Once again, please press star one if you wish to ask a question. The first question is coming from the line of Fredrik Stensved. Please go ahead.
Good morning, Anders. Thanks to you and Liia. A couple of questions from my side. Starting off with the weaker markets, Copenhagen, Oslo, we are all aware of that there is a lot of capacity entering those markets. For how long do you anticipate those two markets to be somewhat challenging?
I think I'll take that question. If you start with Oslo, the new capacity came in now in Q1, end of the year and in Q1. So that will be for the next 12 months, I will say, there will be some negative effects in Oslo. In Q2, it was a big meeting which has a limit the negative effect, I will say. I will say that Oslo will having a slightly, or they will having a more negative effect the rest of the year than it had in Q2. But over to the next summer, we will see that they have comparable numbers, and then we will see most likely a stable market again. Copenhagen is worse though. Copenhagen will have over three years, 8,000 rooms into the market. One third has come in and the negative effect has started.
That will be an effect that will continue to 2019, 2020, and partly 2021. I will remind everybody that we are not involved in any of these new hotels coming out to the market, and we expect most likely that something will happen in the market, and maybe there will come opportunity to trust. But what we see at the moment is a negative trend, impact of negative occupancy and rates. Those guys who have invest money there, they are not happy at the moment, I suppose. We only have in hotels, we only have 8% of Pandox total value is in Denmark, so the effect is limited.
Out of those 8%, would you say half of that is Copenhagen related?
It is Copenhagen. All new capacity coming into Copenhagen. The rest of Denmark, we do not see any other new capacity at all.
Moving over to value changes, they were quite meaningful for being Q2 and certainly a lot higher than in the first quarter. Where have you made the largest revisions? Is it Nordics again, or any other markets where you have had meaningful changes to values?
Can you take that, Liia?
Yes, absolutely. Well, it has been evenly spread. As you have seen, it has been also on the operating activities portfolio, which was mainly driven by yield, low yields. It is pretty evenly spread, including Germany and U.K. and pretty evenly, but also in the Nordics, so nothing particularly standing out.
Okay, that is clear.
But of course, sorry. But of course, Hotel Hasselbacken, which we sold, that of course is the EUR 100 million part of this, which is of course included.
Yeah, absolutely. My final question. Anything worth mentioning when we compare Q3 of last year with the one for this year that could have any meaningful impact on like-for-like?
Sorry, can you take that again? We see it.
Yes. Basically, third quarter last year compared with Q3 this year, is there any kind of conferences or any fixes that are meaningfully impacted by that, as you see?
Oh, you mean if that is one-off in Q3?
Yeah.
Okay. We don't see any specific thing happening in Q3. It will be an ordinary Q3. An ordinary quarter. Yeah.
Thank you.
Thank you.
Thank you.
Thank you. We are now taking the next question from the line of Albin Sandberg. Please go ahead.
Hi there, Albin Sandberg, Kepler Cheuvreux. I follow- up on Fredrik's last question, just also heading in maybe to H2. If you look at the like-for-like growth rates that you are posting for H1, so we do not get that Easter distortion between the quarters. I think you mentioned that overall you were kind of satisfied or in line with your expectations. You are also keeping the market outlook unchanged quarter-on-quarter is the way I read it. Given the market situation we see, is this a steady state like-for-like growth level that we should expect Pandox to operate with?
I read your question in two parts. One is that the Easter effect has always a strong compare to the first semester as always. If you adjust with Easter effect for the Q2, the result is much stronger than Q1, and that is an underlying strong effect. That is coming from a much stronger Germany than last year, and it is still a very solid U.K. despite of everyone has said that there will be a lot of negative effects for this year, we do not see that. We are quite positive. We are quite happy and satisfied with the Q2. If we move that in, with that said now in Q3, we do not have anything, one-offs, any other disturbance for Q3 compared to last year. We expect that these like-for-like growth will at least be as it is in for the first semester.
That is good to know. Thank you. I think you highlight very well the impact from Easter and so on. You have been telling us for quite some time that your ongoing renovation has a negative impact on your growth rates as well for now. I just wonder, would it be possible to somehow quantify that impact during H1 or just ballpark numbers?
The renovation effect?
Correct.
I think maybe should we take both of these, Liia? I would say that renovation effect for the Q2, that is more negative effect in Q2 than it was in Q1. We have starting a big renovation in Brussels, the DoubleTree by Hilton Brussels City, which will continue to Q2 next year. But to give you an exact number, I don't have it, Albin, I'm sorry. It's not so easy to curve out. Can you say something about that, Liia?
Yeah. As I said, it's difficult, but maybe it's in the line of between 0.3% and 0.5%.
Oh.
It's not that material. In the first quarter, we had some offsets because we had some renovations coming back, Hotel Hubertus, which was out of the market, so to say, in 2018. So there's always what is out and what's coming in and what new ones in the planning. But that's in the ballpark numbers, I would pure guess.
Yeah, I know, but that's very helpful.
Yeah.
Just get some feel. That is good.
Yeah.
Thank you for that. My final question also relates to the divestment of Hotel Hasselbacken. I just wonder, first of all, it is not too often that you see Pandox selling stuff. I wonder, is this a sign that you will become more active also on the divestment side, or only on the acquisition side, or was there any special situation that decided you to do this? Also given the quite strong capital gain you are realizing on this asset, is that representative for some other parts of the portfolio, or was there unusually low book value on that from Q1 that drove this gain, basically?
If I ask, let Anders to do so, but if I just start with the capital gain, I think there is a perfect buyer for this hotel and Anders can develop on that one. This is not reflective on our portfolio. This is just a very good buyer for this hotel.
Yeah, that is true. Thank you, Liia. That is very true. Now, Albin, we are still on the buyer side. Of course, from time- to- time, we are also selling. This is very nice hotel, but small. The potential for this hotel is to build more rooms, and that is a very long processes because it is owned by the Swedish king, the land. It is very long processes to get approval on that. I do not think maybe we can create that potential. Maybe Björn Ulvaeus has better network on the house of the king than we have, so maybe he can get it. Of course, so we see less potential. We see a very professional new partners coming in hotel, which we believe has all the possibility to develop the hotel, but still in the Pandox portfolio is representing very small part of it.
On the top we get a price that we find very attractive.
Okay. Thank you very much.
Thank you.
Thank you once again. If you wish to ask a question, please press star and one on your telephone. There are no further questions at this time. Please continue.
Okay. Thank you everyone for your interest. Our next report will be published at 24th of October. Before we meet there, I would like to take the chance of wish you a nice and relaxing summer. Thank you very much from Pandox.
That does conclude our conference for today. Thank you for participating. You may all disconnect.