Good day, and welcome to the Pandox Q3 2018 report conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Anders Nissen. Please go ahead.
Well, good morning, and welcome to this presentation of Pandox interim report for the third quarter of 2018. I am Anders Nissen. As said, I am the CEO of Pandox, and with me, I have Liia Nõu, our CFO, and Anders Berg, our Head of Communication and Investor Relations. In this presentation, we divide it into two parts. We start with the presentation of the quarter and followed by a Q&A session. Let's go. Page number two. Continuity is a profit growth in Pandox. For the third quarter and the nine months, Pandox is reporting good growth in both revenues and earnings. Total net operating income increased by 31% for the quarter and 30% for the nine months, so strong. Return on equity was 20% on annual basis.
The main driver behind this, if I may say so, positive development were profitable acquisition in new large market, that is U.K. and Ireland. We have a good development continuously in Brussels and a stable demand in the hotel market as a general comment. However, growth in the comparable portfolio was slightly uneven in including some renovations effects as normal. Like-for-like property management increased net operating income by 2% in the quarter and 1% for nine months. Like-for-like operator activities increased net operating income by 4% in the quarter and 10% for the nine months. Next page, please. Solid increase in total net operating income. For the third quarter, we report a net operating income increase by SEK 200 million, an increase of 31%. For the nine months, similar number. The increase was 30%. Key supporting factors is the same.
Strong performance in U.K. and Ireland, a good growth in Brussels, and stable underlying demand in the hotel market. Key negative factors in the quarter were a slightly weaker September than expected, some negative renovation effects, and weaker trade fair calendar in Germany, which is a part of why it became a weaker September than expected. Next page, please. Focus on profitable growth. As many of you know that since we returned to the stock market in June 2015, we have had a high business tempo, including the last two acquisition, The Midland Manchester and Radisson Blu in Glasgow. We had made acquisition of approximately SEK 19 billion over these three years. On the top of it, we have investing SEK 2 billion in cash-driving project in our existing portfolio, and we have secured more than 60 new lease agreement, most of them in market outside Nordics.
During this time, Pandox total net operating income and total cash earnings had approximately doubled measured on a rolling 12-month basis, as you can see on the graph. Next page, please. Pandox has a high quality, well-diversified portfolio, dominant by lease agreements. Demand is also well-balanced between different countries, location, and guest segment. At the end of the quarter, Pandox hotel property portfolio comprised 143 hotels with a total market value of SEK 53.3 billion. That is excluding The Midland Manchester and Radisson, which was acquired in the quarter, but we will not enter this business from the quarter four. 128 hotel properties were owned and leased out, representing around 86% of the total portfolio value, and 15 hotel properties were owned and operated, representing around 14% of the total property value. Next page, please. We are now at page number six, The world of Pandox.
Following our active strategy of diversified Pandox portfolio, the international share has increased in recent years. We are now present in more than 80 cities in 15 different countries, with a well-balanced and attractive mix of international and domestic destination, which in itself is very important to keep the balance in the revenue stream. In terms of portfolio market, we have Nordics representing 48%, mainland Europe 32%, U.K. and Ireland is up to 18%, and 2% in Canada. Page number seven. Please help me to welcome two nice hotels. The first one is Radisson Blu, Glasgow, a premium hotel property in downtown Glasgow, AAA location. It is one of the leading full-service premium hotels in Glasgow, a very strong position.
We do it with an attractive yield of 7%, and the plan is to start to renovate the lobby and the food and beverage area, and then continue to actively manage this hotel together with Radisson. The next acquisition is The Midland Manchester. It is an iconic hotel in very much the heart of Manchester. More than 300 rooms in the premium position and has a good potential in the hotel. All rooms need to be renovated, which we have put aside EUR 11 million together with the operator, Fattal Hotels Group. At the top of that, we can build another 40 hotels and maybe up to 50 different studios in the existing buildings. This is, of course, a fantastic hotel, one of the most well-known hotels in U.K. out of London.
Another one I would like to point out is the Hotel Hubert, which we now have open again as a new lifestyle concept to take off in Brussels. It was before a mid-market hotel where we had the lease together with the brand, and we took over their own operations because we saw a potential of creating a new concept. This hotel is located absolutely close to the Grand Place and is now ranking as one of top three in TripAdvisor already after a few weeks open. It is a very nice hotel, small, but very funny for young people. A broad selection of brands. If you look at page number, I think it is number 10. The new one here is the DoubleTree, where we repositioned the Hyatt in Montreal. Now we have more than 20 different brands.
We work with the best players, with the best brands, which is secure our business, of course. We believe that the Hilton system can increase something between 5%-10% compared to the Hyatt. The first action is now to start to do renovation of lobby, entree, and food and beverage and meeting areas, which we will do over the next year. But after that, we believe that we have a strong growth and a stronger and more stable platform that we had before. That is the positive news for Pandox. Let us go over to market. We are at page number 11. You can see that the EUR coming back. We are now at 5% on the quarter three. There will be calendar effects both in Q2, Q1, and in Q3, we see a stable growth coming back by 5%.
Southern Europe is the weakest, and Northern Europe is the most stable. That is also good for Pandox. If you look at selective countries, you can see that on the left-hand side, Finland, Norway, Denmark are in the weaker part, and Germany, Austria, and Ireland are in the more stronger part. That is some sort of confirm Pandox geographic diversification. If you go into key markets in different cities, Brussels is still very strong, 12% up in Q4. We are now ahead of the market, which was before the attack 2015, and the outlook is looking very promising. Berlin is also continuously strong. It is meeting and leisure is the driver. Stockholm coming back. Let us come back to that. Oslo, Copenhagen are still stable. U.K. regional is at one, and then Montreal, Helsinki, and Frankfurt are at minus.
Frankfurt is due to a weaker trade fair, that will be the opposite number next year because there is still the weak trade calendar for next year is strong in Frankfurt. Helsinki is from strong numbers, 2% down, and that is due to weaker leisure, Asian leisure. So it is from very strong number there now take a little step back. Montreal is minus one. Last year we had an anniversary together with new capacity. But we believe that will be continues to be a strong and stable market. If you look at the graph on the right-hand side, you see Stockholm. As we said at the last quarter, we said that the worst part of Stockholm with new capacity or overcapacity is over. We see now in Q3 a good growth of 4%, surprisingly strong, mostly coming from rate.
Maybe the end will be a little bit slow in Stockholm due to strong comparable months. But all in all, the message is Stockholm, the problem with overcapacity is for this time over. Then I will say I hand over to our CFO, Liia Nõu for financial highlights. Liia, thank you.
Thank you, Anders. Now we are on page 13. Both for the third quarter and for the nine months, Pandox recorded solid earnings growth in both business segments. To give you some key numbers for the quarter, I will start with property management. Rental income amounted to SEK 810 million in the third quarter, an increase of 38%. Net operating income amounted to SEK 698 million, an increase of 37%. For operating activities, net operating income amounted to SEK 142 million, an increase of 10%. If we then look at like-for-like, which is already taking into account acquisitions, currency, and reclassification, then property management reported an increase in rental income and net operating income of 2%. The same like-for-like operating activities reported an increase in revenues and net operating income of 4%.
Total cash earnings amounted to SEK 537 million in the quarter, an increase of 16%, giving total cash earnings per share increased by 10%. Measured from year-end 2017, the unrealized value increase for investment properties amounted to 1.9%. For operating properties, the unrealized value change amounted to 2.1%. End of period, EPRA NAV per share was approximately SEK 158. Adjusted for dividends and proceeds from the directed share issue, the annualized increase in EPRA NAV was approximately 20%. Turning next page, please. Page 14. Financial expense amounted to a negative SEK 207 million. The increase is explained by different factors. Among others, an increase in interest-bearing liabilities after implementing acquisitions, where debt denominated in foreign currencies have increased, especially the mark to British pounds, where liability is markedly higher than EURIBOR.
Pandox has interest hedged a larger share of its loan portfolio, and we also did that in Q3. Finally, a weaker Swedish krona versus the other currencies that Pandox has loans in. Next page, please. Turning to page 15. In the third quarter, property management benefited from profitable acquisitions and a growing hotel market. The development for the recently acquired hotel properties in the U.K. and Ireland remained strong in the third quarter, supported by both favorable market growth and market share gains after previous renovations. Rental growth in the comparable portfolio was positive in Sweden, Germany, Denmark, and Finland. Stronger destinations in the third quarter were, among others, Gothenburg, Malmo, Oslo, Frankfurt, and Munich. In Stockholm, rental growth decreased by 2%, mainly due to negative renovation effects in Scandic Park and Hilton Stockholm Slussen. Next page, please. Page 16.
In the third quarter, both revenue and net operating income increased on the back of a continued growth in Brussels. Germany and Montreal had a slower quarter, mainly due to very challenging comparisons with last year. Please note that Hotel Hubert , Brussels, reopened after renovations on the 3rd September . The hotel had been closed since December 2018, and previous to that, it was in the investment property. Next page, please. Page 17. In the nine months, total unrealized and realized changes in value amounted to SEK 981 million, of which SEK 822 million for investment properties and SEK 159 million for operating properties. The value increase is explained by a combination of improved cash flows and also lower yields.
Year- to- date, a total of two hotels have been reclassified from operating properties to investment properties, thereby explaining the SEK 773 million of assets reclassified, those two being in Belgium.
The Hotel BLOOM! and the Hotel Berlaymont, which now is with NH. End of period, the average valuation yield for investment properties was 5.54%. For operating properties, it was 6.74%. Next page, please. Turning to page 18. Finally, a quick look at our EPRA NAV and financial position. End of period, EPRA NAV per share amounted to SEK 158.44. This corresponds to an increase of approximately 20% on an annualized basis if adjusted for dividend and proceeds from the directed share issue. The increase is in part explained by change in the currency exchange rates following a weaker Swedish krona. Loan to value amounted to 49.9%, and this is, of course, excluding The Midland Manchester relative to Glasgow, which will come in in the fourth quarter. Liquid bond and long-term unutilized credit facilities amounted to approximately SEK 3 billion total. To summarize, Pandox financial position remains strong and stable.
With those words, next page, please. I turn over to Anders again.
Yeah, thank you much. Thank you, Liia. The third quarter was overall stable, but maybe September was a bit weaker than we expected. For last quarter, we see two pictures. One is the continuously strong hotel market, and high activity leads to a lot of demand in front sense. We see business on the books for meetings are strong. We see leisure coming in all cities where we have. Christmas market is fully booked already. That is strong. That positive pattern meets two challenges. One is that we meet a strong comparable month, and the second one that some markets has new capacity. That all in all means some sort of press on RevPAR. That combined with renovation in Pandox portfolio, it mean that growth in the last quarter for comparable portfolio is likely to be lower than the third quarter.
With that said, in absolute terms, we will continue to have a very good growth. Before I end up, I would like to ask you and welcome you all to Pandox next big event, which is our Hotel Market Day on November 20th. We have a very exciting program about urbanization. Please, you can sign off in on our website, and hope to see you there. Thank you very much for your interest, and now it is Q&A.
Thank you. If you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow the signal to reach our equipment. Again, please press star one to ask a question. We will pause for 10 seconds. We are going to open first for questions. The line from Carnegie, Fredrik Stensved. The line is open. Please go ahead.
Good morning. Fredrik from Carnegie here. A few questions from my side, starting off with the softer like-for-like growth that you are indicating for Q4. You are mentioning three items affecting that. New capacity, negative renovation effects, and also challenging comps. Which is the majority of the reason for the softer growth?
Renovation.
Okay. That is crystal clear, Anders. In terms of CapEx, you have been spending about SEK 700 million annually. Now you are stating that renovation is impacting like-for-like. Should that also lead to higher CapEx needs going into 2019 as well?
Well, I will not say CapEx needs, but I say that we see a lot of opportunity with this wide portfolio as we have today to do what we call cash flow driven investment with higher returns. So when we have agreement with operators, that might be that maybe we will increase that for the next year, but only if it is high profitable for Pandox.
Then one final question on the yield development. You are reporting a yield of 5.54 for the investment properties. That is basically flat. I am aware that there are mix effects, but still it is flat. Would you say that is also what you are seeing in the transaction market, that nothing has happened with yields?
Well, in general, there is a press on yields. That is no effect for us for this quarter.
Okay. Do you think the external valuation is cautious then?
I guess the higher, I guess as always, there's some delay when it comes to yield valuations from the external evaluators. There is some delay.
Yeah. I think there will be adjustment in the market, but we don't know that yet.
Okay. Thank you.
Thank you, Fredrik.
Next question comes from Kepler Cheuvreux. Albin Sandberg. Your line is open. Please go ahead.
Yeah, thank you. Two questions. One, if you just could provide some more information about what that weakness in September was due to. What was it that you had expected that didn't really come through? The other question I have is on acquisitions just in general now. Obviously, the last few acquisitions we have seen being tilted towards the British area, and I just wonder if that is just by hazard, or is that where you see the best opportunity, or was it just that that's where the investments were offered in these past two quarters, so to speak? Thanks.
About the acquisitions. Do we want to?
Yeah.
The first question. Good morning, Albin. The first question is that September is very often the strongest month of the year, and there are always high expectations. The September was a little bit weaker of two major reasons. We know that the travel trade in Germany is weaker this year, is stronger next year. That is very often every second year, the travel trade is, that is the pattern. That is normal. But what normal September then will have is a few bigger meetings where people know that the travel trade is not in the city, so they take the opportunity and maybe organize bigger meetings. That not happened so much as we expected for September. That is one of the reasons. Another one was that Finland came in slower than we expected, and there was less leisure.
September was strong, and we expected to have growth in September. Now it became to -2. Montreal, we had expected Montreal also to be a little bit stronger September than it was. So you can say these three, and then left to right, means that September came out a little bit slower than we expected after strong July and August. So that is maybe some sort of explanation of September. If you are happy with that, I will continue with these two acquisitions. You can say that at the moment, liquidity in market is not super strong at the moment. As we spoke about here before, that is yield compression. At the same time, a little bit more uncertain, maybe market for some people are a little bit waiting for selling or they do not want to bid in the way that they maybe did for a year ago.
I do not know what the reason is, but there have not been so many portfolio out there. These two, what we did have been off-market, which is normal when we do acquisition that is in our network. People come to us and say they offer us acquisitions. We believe this is too high-quality investment than it was in U.K. It is more coincident. That could have been in Germany as well. But you can say in general that if you should find an attractive yield today, U.K. is a good market due to uncertainties about Brexit. There is not so many international players who are buying there. The yield was still quite attractive. So U.K. may be the market that is easier for us to grow at the moment. That could change for the next quarter. The hardest is Scandinavia. It is very expensive at the moment.
Okay, thank you. Just to then follow up on the first question there on September, do you read anything into the strength of the cycle, either on the leisure or on the business side? Or was it just that this happened and it could reverse, or do you see anything there?
That is the SEK 1 million question. No, I do not say that there had to be more month. Again, September came a little bit weaker, and we think that is something we should report because September is normally the strongest month of the year.
Great. Thank you.
Thank you.
Next question comes from the line of Morgan Stanley, Christopher Fremantle . Your line is open. Please go ahead.
Yes, good morning. Some of my questions have been answered already. I just want to ask you, though, about the balance sheet. I think you mentioned on slide 18 that you have the potential to issue new shares. I just wanted to make sure that you are not hinting at something at an active intention to do that. How are you feeling about further acquisitions in the context of your balance sheet levels? Would you consider issuing stock when the shares are trading below your NAV? Thanks.
Well, we have the capacity for something between SEK 2 billion- SEK 4 billion. We think that is quite strong. We continue to see strong hotel markets, so the earnings will continue to be good. So we believe that we have the capacity we need at the moment. If we will have the opportunity to do a large acquisition, call it something close to EuroCity, then maybe we need to go back to the market. But we do not have any plan of that at the moment, and we do not look at any sort of acquisition of that size at the moment.
We do not think it is very likely if we are trading below NAV.
No.
Not at all.
Okay. Thank you.
Thank you.
There is no further question.
Well, thank you for your interest, and hope to see you all at the Pandox Hotel Market Day at the 20th of November. Thank you very much, and have a good day.
This concludes today's call. Thank you for your participation. You may now disconnect.
Thank you.