Good morning, ladies and gentlemen. Thank you for standing by, and welcome to today's Pandox Q1 2019 report. At this time, all participants are in a 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 must advise you that this conference is being recorded today on the 26th of April, 2019. Without any further delay, I would now like to turn the conference over to presenter today, CEO Anders Nissen. Please go ahead, sir.
Well, good morning, everybody, and welcome to Pandox presentation of the first quarter report for 2019. As said, my name is Anders Nissen, and with me, I have Liia Nõu, our CFO, and Anders Berg, Head of Communication and Investor Relations. As always, the presentation will be divided into two parts. We start with the presentation for the report and followed by Q&A session. Please go to page two. For the first quarter, Pandox report a sustained profit growth and a good return on equity. The total net operating income increased by 14%, including IFRS 16, and 11% excluding IFRS 16.
Return on equity on an annual basis was at 15%, and the driver behind this positive report is add-on acquisitions in U.K., a strong Brussels market, and also important to say, a positive calendar effect due to Easter was last year in Q1, this year in Q2. Like-for-like property management increased net operating income by 1.3%, and like-for-like operator activities increased by strong 17.1%. Next page, please. I think we have a stable increase in total net operating income based on a combination of different factors. First, the acquisitions in Manchester and in Glasgow, both profitable from day one and both has a good potential to grow profit further. Second, a strong growth in Brussels and Berlin that we have big business and a strong footprint, specifically in Brussels, that we also have been successful of converting new revenue into cash earnings. Again, the positive calendar effect.
On the negative side, we can point out two things. First, increased capacity. That is mainly Heathrow and Frankfurt in Q1. There are also negative renovation effect, negative in that way that we're taking out capacity for renovate for a chance of taking new market shares further on. That will be hopefully some positive things for next quarter. We estimate that a calendar effect for Easter has a positive effect on growth of 2%-3% for comparable portfolio in the quarter. We believe that that will be naturalized in the second quarter. Next page, please. Since we return on the stock market in June 2015, the company or we in Pandox have had a high business tempo, and I will point out four strong driver. We have done acquisitions for approximately SEK 19 billion, all of them done out of Scandinavian.
We had invested SEK 2 billion in growth-driving projects in our existing hotels. We have secured more than 60 new leases. Finally, we have also sold out hotel for SEK 1.5 billion in Belgium and in Sweden. Over these years, the net operating income has doubled from SEK 1.5 billion- SEK 3.1 billion, and the total cash earning has grown from SEK 900 million up to SEK 1.9 billion. Quite strong number, if I may say so. Next page, please. Pandox overview. We have today, I would say in general, we are totally different company since we came back to the stock market four years ago. We have today a well-diversified portfolio dominated by revenue-based leases, and we have also a well balanced between different countries, location, and guest segments.
At the end of the year, Pandox property portfolio comprised of 144 hotels with 32,000 rooms with a total market value of SEK 56.7 billion. 128 of this is owned and leased, and representing 85% of the total property value. 16 hotel properties is owned and operate, and representing 15% of the total property value. Next page, please. The world of Pandox is more and more diversified and more and more internationally. Now we are in 15 countries and 82 different destinations. 45% of the value is in Scandinavia.
Sweden is the largest, and then we have the same share from Finland, Norway, and Denmark. 32% coming from Germany, Belgium, Netherlands, and Switzerland, and 21% the new big market for us is U.K. and Ireland, and 2% in Canada. More diversified and more international. Next page, please. Here is our broad selections of operator and brands where we cooperate in different ways. As operator with leases or as a franchise in own operations.
As you can see, we have most of the more important brands in Europe. A strong footprint together with company like Hilton, NH Hotel Group, Radisson, Scandic, Eurotel, InterContinental, and we have a strong footprint together with this company today with our more Pan-European position that the interest from them has, of course, increased now when we have hotels across Northern Europe. Next page, please. Into the market. The Q1 2019 has 1% growth, and that is slower than the end of last year. I would say that the quarter was disappointing, and hopefully, we will come back to better numbers later this year. If you look at specific market, you can see strong growth in Austria, Norway. You see Germany, Finland, Ireland is still strong. Sweden and U.K. is stable. If we go to next page, please, you can see some key markets for Pandox.
Brussels, Berlin, number of 10%, very strong, where we also have a strong footprint. Stockholm has coming back from the overcapacity situation, where it had for 1.5 years ago and has now four positive quarter in row. Helsinki is good, Copenhagen stable, and then you have U.K. regional, with this - 3%, a slower start in regional than expected. Frankfurt, - 5%. The big exhibition market hasn't started yet in Germany. That will come in May and June. The next graph is Stockholm that you can see. As I said, that we have four positive quarters there with RevPAR growth. We are back and even stronger than we was before the overcapacity situation comes. Now I will hand over to Liia for the final financial highlights.
Thank you, Anders. Overall, Pandox recorded profitable earnings growth in both business segments in the first quarter. I'll give you some key numbers, starting with property management. In the first quarter, rental income amounted to SEK 685 million, an increase of 10%. Like for like, property management reported an increase in rental income of 1.3%. In the first quarter, net operating income amounted to SEK 583 million, an increase of 10%. Excluding IFRS 16, net operating income amounted to SEK 568 million. Continuing operating activities. In the first quarter, net operating income amounted to SEK 95 million, an increase of 44%. The strong uplift is mainly explained by the acquisition of Radisson Blu Glasgow and good conversion in Brussels. Excluding IFRS 16, net operating income amounted to SEK 90 million. Like for like, operating activities reported an increase in net operating profit of 17.1%.
EBITDA amounted to SEK 634 million, including central admin of SEK 43 million, which is in line with Q4 2018. The increase versus Q1 in 2018 is explained by the company's geographical expansion, the implementation of a new long-term based incentive program starting in Q1 2019, as well as some cost for external valuations relating to Q4 2018. Total cash earnings amounted to SEK 362 million, an increase of 8%. Total cash earnings per share also increased by 8%. Measured from year-end 2018, the unrealized value increase for investment properties amounted to 0.3%, and for operating properties, it was 0%. End of period, EPRA NAV per share amounted to approximately SEK 170.5. Adjusted for dividend, the annualized increase in EPRA NAV was approximately 15%. Next page, please. Financial expense amounted to a -SEK 207 million, and is explained by several factors.
A, an increase in interest bear abilities after implementing acquisitions, where debt denominated in foreign currencies have increased. Here we talk especially of British pounds, where LIBOR is markedly higher than STIBOR or EURIBOR. Also, Pandox has interest hedge, a large share of its loan portfolio. Finally, a weaker Swedish krona versus the other currencies that Pandox have loans in. I would also like to mention that financial cost use of right assets according to IFRS 16 amounted to a -SEK 19 million. Next page, please. In the first quarter, property management benefited from previous acquisitions, positive currency, and calendar effects, while underlying demand also remained positive. However, Pandox growth was constrained by negative supply and renovation effects in some markets, as Anders previously explained. Rental growth in the comparable portfolio was positive in Norway, Germany, Denmark, the U.K., and Austria.
In the U.K. and Ireland, our hotels continue to gain market shares. Stronger destinations were Munich and Brussels. Several domestic cities, such as Lillehammer, also had a positive development. In Stockholm, rental growth increased marginally in the quarter. Next page, please. In the first quarter, both revenue and net operating income increased at a good pace, supported by previous acquisitions, currency, and a solid development in Brussels with good conversion. Berlin was also strong. Brussels currently benefits from a combination of good demand and limited inflow of new hotel rooms. The ongoing rebranding of DoubleTree by Hilton Montreal continued to have a negative impact on the profitability in the business segment. Next page, please. In the quarter, only around 7% of the portfolio was externally valued.
Total unrealized and realized changes in value amounted to approximately SEK 136 million, of which SEK 135 million for investment properties and the rest for operating properties. The value increase is explained by a combination of improved cash flow and lower yields. End of period, the average valuation yield for investment properties was 5.51%, and for operating properties, it was 6.71%. Next page, please. Finally, let's take a quick look at our EPRA NAV and financial positions. End of period, EPRA NAV per share amounted to around SEK 170.5. Adjusted for dividend paid in April, it was SEK 4.70. It was SEK 165.82. This corresponds to an increase of approximately 15.2% on an annualized basis, adjusted for dividend and proceeds from directed share issue. The increase is in part explained by changes in currency exchange rates following a weaker Swedish krona.
Loan to value amounted to 48.5%, and adjusted for the said dividend, which was SEK 787 million, it was 49.9%. Liquid funds and long-term unutilized credit facilities amount to approximately SEK 3.6 billion. Pandox financial position remains strong and stable. Next page, please. With that, I hand over to Anders for some final words.
Yeah. Thank you, Liia. Yes. Let's look at the driver for the future. We see a few strong drivers will continue to help us. That is firstly, economic activities in the market. We see an increase in travel. We see a good fair trade market, specifically in Germany. That is also a strong profitability in the hotel market, and that is so solid now, so we do a lot of wealth, the driving project together with them. We just also increase the value of the company. That is a strong picture. With that said, it is also important to point out that the hotel market is in more in maturing phase, and the growth is slower than it was for perhaps two years ago. The negative impact for that is we will see a strong comparison. We will see some increased capacity in some market.
We will take some time to digest. Also on the top of that, some negative renovations in our existing hotels. With that, all in all, it's a positive outlook that we look at, that we see with, as I said before, a strong economic activity and with our diversified portfolio profitable acquisitions we did in last year, that is condition for some growth in 2019. With this said, we close this part, and we are ready for questions.
Thank you. Ladies and gentlemen, as a reminder, if you wish to ask a question, please press star and one on your telephone keypad now and wait for your name to be announced. If you wish to cancel your request, please press the hash key. We have already a few questions on the line. The first question comes from the line from Fredrik Cyon from DNB Carnegie. Your line is open.
Good morning, Liia and Anders. A couple of questions from my side. Starting off perhaps directed towards Liia. What we all like to speak about is IFRS 16 these days. Just wanted to clarify on the cash earnings. That is a neutral effect, right? It is only on the EBITDA line that you have an effect.
Exactly. It is SEK 90 million higher EBITDA, but then it goes out on the financial. So it is a neutral effect.
That is clear. On the RevPAR development in Europe during Q1 2019, it was 1%. Of course, you indicated the calendar effect was a positive 3%. That suggests that the underlying market actually declined. Do you expect us to return to underlying growth in the coming quarter?
No, I don't think so. As I said, I believe that Q1 there was a bit disappointment, but as you said, it was slower than at the end of last year.
Okay. Finally on the transaction market, do you see a lot of deals being made? Generally, can you say anything about price levels on the deals that you have had access to?
At the start of acquisition in general, very broad answer, it's slower than it was a year ago. If that means that will continue the whole year, I don't know. But you see that at the moment, the seller has sell for forever growth and the buyers believe that there is a slowdown in the market, and they maybe are not ready to pay for forever growth. So that gap is now a little bit too high between seller and buyer, and that is normal for this part of the business cycle. So I would say that maybe going to be adjusting in the next few months.
Thank you. Those were my questions.
Thank you.
Thank you. The next question comes from the line from Albin Sandberg from Kepler Cheuvreux. Your line is now open.
Yes. Thank you. So three questions, please. One, if you just could put some more color there, Anders, on what exactly were the disappointing factors in Q1, you think on the overall market?
You can say that Germany, which we have a little bit high expectation this year on compared to last year because of the fair trade market is stronger. This year, that market hasn't really start yet. That's coming May and June. That is one factor. We also see a diversified picture in U.K., where London is very strong and U.K. regional are a bit slower, and we didn't maybe expect that. Then Scandinavia in general is coming new capacity into the market. So the underlying is good, but it's pressing RevPAR. So in general, there had been a few new pattern in the market that we might even thought should have that strong impact. We will see in Q2 if that will be better.
Yeah. Do you see anything different when it comes to business or leisure travels? Is there any specific impact if you look at it on a maybe year-on-year or quarter-on-quarter comparison?
If you see in general, the travelers, the number of travelers are increasing across Europe, specifically the tourist market and the leisure market. We also see in most of the market out in Europe that the domestic leisure segment going up and the business and meeting segment so far had been fairly stable. No difference there. Sometimes a quarter is too short time to just explain what's really exactly what is happening.
Yeah. Great. Thanks. I think I touched upon this question before, but I just wanted to repeat it a bit, since you're highlighting renovation as a negative impact. I guess that you have prior indicated that you are now in a phase where renovation is maybe running a bit above your normal average run rate. Even though, your portfolio is constantly evolving, so it's hard to really get a grip on what's the steady run rate. When do you expect this kind of renovation phase to move into a more normal state?
First of all, you're absolutely right that when you are in this material phase, where rate is a strong driver in the market, there is more opportunity to do cash flow-bringing projects together with operator, because both have strong incentive to do it. That means that we do more now than we have done ever before. So that will be something we will continue to do in full 2019. I would say the big effect on. In general, big effect, you in general, you will see positive effect maybe end of this year or beginning of next year. That depends on if we find out more interest approach there. But with the decision we have today, we will be very active with doing investment 2019, fully 2019.
Okay. Thank you.
I don't know if that give you some follow up.
Yeah. No, I think that's very helpful, so thank you for that. Then, part follow-up question from the previous, Fredrik, there. When it comes to the value changes that were quite low in the quarter, is that a sign of the slower transaction market? Is that why you are a bit cautious on that side? Or is it more a seasonal thing that you think one quarter is too little to really do anything on the values?
I think, I would assume that most companies probably have sort of a lower pace in external valuations at Q1. We did 50% of external valuations in Q4. The first quarter hasn't
changed so much. Half of the unrealized value change is yield, the other one is cash flow. But normally the first quarter is always a very slow quarter when it comes to valuation changes.
Okay. Thank you very much.
Thank you. Another reminder, if you wish to ask a question, please press star and one on your telephone keypad. We have one further question at the moment, which comes from the line from Christopher Fremantle from Morgan Stanley. Your line is open.
Hi. Yes, good morning. Just a couple of follow-ups on questions that have already been asked. When you were talking about the effectively maturing market and slowing growth, are you signaling a slowdown in the rate of EPS growth as we go through 2019? Or are you just talking about the rate of market RevPAR growth? I appreciate the two are linked, but if you just clarify what you're talking about for your EPS trend growth rate as we go through 2019, that would be helpful. Secondly, could you just clarify what your CapEx budget is for 2019? Then finally, can you just reflect on the U.K. acquisitions that you've made given the weak RevPAR growth rate? Was that part of your plan or is there more to come in the U.K. that you're not mentioning? Any reflections on the U.K. acquisitions that you've made would be helpful, please.
Yeah. Thank you. Let's start with the U.K. As you remember, we did first Jurys Inn in end of 2017, then we did The Midland Manchester last year, and also Radisson Blu Glasgow. You can say that in general, we are above plan in terms of rental income. That had been from a profitable acquisition, the rental income had grow at least as expectations or a little bit above our internal expectations. That had been confirmed that we were in the right timing. When you see now a slowdown in U.K. regional, it's such a big market with a lot of big cities, that is uneven. Radisson Blu Glasgow is coming down compared to last year. We know that when we bought the Radisson Blu, that was due to a few big event that they had at the beginning of last year.
We believe that Radisson Blu Glasgow will continue to be a little bit slower 2019 to 2018, but not on the underlying business. That will go up, but that is due to these one-off events. The next year, the market looks very strong again in Radisson Blu Glasgow. You see a little bit of that also in Manchester, and that you can see that new capacity coming in and press the market. We had increased above plan in The Midland Manchester already. The effect have been not on us at all of this negative effect. That is in general, and that is the segment who had been hardest been affected in Manchester had been the mid-market effect, which we of course have Jurys Inn, which has a slightly slowdown, but nothing specifically. But the big one, The Midland Manchester has gone up.
You can see this a little bit uneven picture when you look at U.K. In general, it might could see that there is some sort of very early trend of saying that the government business may be a little bit slower than last year. Maybe you can see something about big events from company that they maybe wait for it. But the leisure and the business segment are still very strong. I hope that helped you.
Thanks.
Hello? Yeah.
Thanks.
Then we go to the next. You?
Yeah.
Yeah.
I can take the question regarding CapEx.
Yeah.
As you said, we received the report. We have a committed investment of more than SEK 1.1 billion. Out of this, as we previously said, and I am repeating it again, maybe around SEK 100 million or so is things we just need to do with more of a sort of a technical level. Other parts are cash flow driven investments, where we typically have between 8%, 10%, maybe up to 12% total ROE return. But of course, it takes time to do all of this, so maybe we have time to spend maybe around SEK 750 million, SEK 800 million for this year. But it will be hopefully ongoing good new investments coming in moreover, which will continue in 2019, 2020, and into 2021.
Thank you. Then on the earnings per share trend as we go through the year?
Yeah, you said that if it was You said if it-
Just to clarify.
Could you repeat the question? Sorry.
Yeah, sure. So in your guidance, in your outlook statement, you are signaling a maturing market RevPAR environment, slowing RevPAR growth as a market as a whole. Can you just give a little bit more color on your own EPS trajectory as we go through 2019? I know the two are related, but just a little bit more specifics on your EPS trend, because of course there are a lot of moving parts. So a little bit more clarity on your earnings trend as we go through the year, please.
Yeah, that was not an easy one. Let me say it in this way. We talk about a slowdown, Christopher. We do not talk about decline. There is a-
Slowdown of the increase.
Yeah.
Right.
Deacceleration. It is still a growth service we look at, and that the RevPAR will go down in general for Europe will not happen. That will go down in some few markets. I do not know if exactly if that is the answer you are looking for. But in general, we see a potential for some growth in 2019, definitely.
We do not see any significant changes in the earnings per share development. I mean, of course, it varies between the quarters, but there is no sort of significant deceleration or anything like that. The opposite. Especially with all the-
Sorry.
Especially with all the investments. Yeah.
On the earnings per share growth trend, you will see an EPS growth slowdown or, you won't see an EPS growth slowdown? That's what I'm trying to get to. I know you're talking about-
Well, specifically, we don't guide on that anyway. I think the slowdown of the increase of the RevPAR. But then again, we do a lot of investments. We do profitable investments. We work with our operations portfolio, et cetera.
Okay. Thank you.
Thank you. At the moment, we have no further questions. Just another reminder, it is star and one if you wish to ask a question. At the moment, we have no further questions coming through. Please continue.
Thank you for your interest, and please notice that we have a Capital Market Day in Stockholm on the May 9th at Fotografiska in Stockholm. We also have a Capital Market Day in London on the May 10th in Andaz at Liverpool Street. So two opportunities for us to meet all investors. I hope there will be many who have the chance to participate. Please visit our website for more information. We are looking forward to see you all there. Thank you very much, and again, thanks for your interest.
That does conclude the conference for today. Thank you all for participating. You may now disconnect. Speakers, please stay on the line.