Good day, and welcome to the Pandox Q1 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, sir.
Yeah. Good morning, everybody. I turn over to Anders Berg immediately.
Yes. Hello, everyone. Just a small correction in the English version of the report. We will send out the correction. It's on page 17, where the country names have been mixed up. The Swedish version is okay, but we will send out the correction for the English version very soon. Thank you.
Good morning, and welcome to this presentation of Pandox interim report for 2018. I am Anders Nissen, the CEO of Pandox. With me I have Liia Nõu, who is our CFO, and Anders Berg, Head of Communication and Investor Relations. As always, the presentation will be divided into two parts. We will start with the presentation between Liia and me, and then we are followed by a Q&A session. So welcome everybody. Let's turn to page number two. Let me start to say that I am very pleased with Pandox's first quarter. We had two strong answers that we were looking for. We get both. First, we see a growth in NOI and cash earnings like for like, despite Easter. That is strong. Easter take down the negative effect for 3%-4%. I would say most likely 4% than 3%.
In spite of that, we have a growth in NOI in cash earning. Number two is maybe even more important, that the Eurostars acquisition of SEK 7.5 billion we did in December has a good start, which is also nice to have with an acquisition of that size. With that said, everybody, the total cash earning in the quarter increased by 24%, and return on equity was continuously good, 21% on an annual basis. This positive development explained by three main drivers. Profitable acquisition, again, this Eurostars. Positive effect on product development, meaning cash flow-driven investment that we do together with our partners, and a stable hotel market with a positive underlying demand. Let's come back to that.
However, we have a negative calendar effect, as I said before, due to Easter, where normal you have. We have, let's say five to seven less days with high demand and high rates, and we change that to low demand and low rates. That has, of course, a change for the quarter. The good thing is that most of it, or maybe all, will be coming back in Q2. So it's something we will see next in Q2, as I said. Like for like, property management, more or less was flat, and like for like operator activity increased by a solid 21%. Please notice that the two hotel properties in Brussels were reclassified to property management in February. Hotel Bloom! With 306 rooms, and The Berlaymont with 220 rooms were reclassified from own and own operations to own and lease to NH Hotel Group.
That was something we have strong expectation on as well. Next page, please. Page number three s hows the increase in net operating income, total NOI, which is a substantial increase. There is different factors combined behind this. First, again, well-performing acquisitions. We have also in market in U.K. and Ireland a positive development. There is a positive mix effect in property management, where we see those recently leased contracts that we are entering into. We have lower property cost, meaning that there will be a positive mix effect compared to those contracts we signed in Scandinavia. Stable underlying market condition. That is in the positive side. On the negative side, we have a seasonal weaker quarter. That's always that Q1 is the weakest quarter over the year, so also this year. It also had Easter, so a negative calendar effect.
Again, we talk about 3%-4%, and I say again, repeat myself of saying it's more four than three. If you add that into Q1, you can see that the substantial growth was strong in Q1. We also had on the top of seasonal and calendar effect, also weaker trade fair calendar in Germany in Q1. That is something that moves every time. That's a moving target. Sometimes it can be strong at the end of the year, sometimes at the beginning of the year. Last year it was very strong in Q1. That will be spread out over the year. So that is nothing we worry about. Again, it was a strong comparison, which is also in general we have in several markets. Ongoing capacity expansion in Stockholm. Stockholm is, as you all know, our dependency on Stockholm City is lower than before.
But of course, when the market goes down with Stockholm at 6%, it has some sort of slightly negative effect for Pandox. But remember, hotel rooms in Stockholm City, not in Stockholm great, but in Stockholm City, stands only for 3% of Pandox total rooms capacity. So you can all understand that even if there is a negative effect in the market, that has not that big effect for Pandox anymore. So please turn to page number four. What have we done since stock market and returning? We have had a high business tempo. We have made acquisition for SEK 17 billion. We had invested SEK 1.7 billion in existing hotels in cash-driven investment, which give us a solid return. And we have signed 60 new leases.
Together with a structural growth in the tourism and travel market, we will continue to have a very positive outlook and our value-adding model where we are active across the value chain, as one of the few hotel property company in Europe who has that model. That had been a good outcome for the company. The net operating income during this period has increased by 65%, and 90% has the cash earning growth. So, we are very pleased and proud to present these numbers, of course. If we go to the portfolio overview, you can see that it is a very well-diversified portfolio nowadays, dominated by lease agreement, which is our major strategy. We also have a well-balanced between countries, locations, and guest segment, which is also very important for balance out risk. All in all, 143 hotels with 31,628 rooms. Market value for the property value, property portfolio is SEK 52 billion.
86% of these values due to owned and leased out properties, and 14% is coming from owned and operate business. So, of course, we have a potential in both segments that maybe at the moment the operator activities is the one who is growing fastest. So that is maybe an area we have a specific focus on at the moment. Page seven. The world of Pandox. Nordic representing 48%. Sweden is our largest market still, but the mainland Europe 32%, and U.K. and Ireland 18%. So Sweden, Germany, and U.K. is the biggest single market. But if we divide it in three pieces, it is Nordic, it is mainly Europe, and it is U.K., and then 2% in Canada. 15 countries in total. If we turn to the next page, you will see all selection of operator-owned brands that we have cooperated with.
And this is, if I may say so, a unique position that we are talking to and have a strong relationship with all these fantastic companies that you see here. The largest is Scandic. We are very active with NH Hotel Group from Spain, which is some sort of large Scandic. For those who do not know them, they are on the stock market there and are very successful in the southern part of Europe. Eurostars and Leonardo Hotels have we done acquisition for lately. Hilton, we have spread up activity with. So all in all, a broad section of operators and partners that we work active together with. Let me also, next page, please, talk a little bit about the positive development in U.K. and Ireland as I start with. This acquisition of Eurostars with 21 hotel properties, 20 owned and leased out to Fattal Group.
One owned and own operations, that is then Hilton Garden Inn in Heathrow, has a good start. These are big hotels, 124 rooms in average, in a strong location in many key markets. We see now a positive growth for this recently done investment that have been done in hotels. We now have coming out in full speed, more or less, and promising outlook for rest of the year. We also see a good market in U.K., where U.K. regional is much stronger than London. Not surprised at all. That is normal, but it is a RevPAR increase by 2%. I do not think that Easter affected so big in U.K. as had been in Sweden, but that is some sort of Easter effect there is, of course. Specifically, if you look at Ireland, they increased by 10%, who have had a very strong Easter.
So all in all, the acquisition of Eurostars had a good start. If we turn to page number 10, we go into market. You can see Europe still stable, 5% Q1, and then they compared to a strong Q1 for last year as well, but it is still good. That is due to increased activity in general in Europe. If you go by selected countries on the right, the graph on the right, you can see that Ireland and Austria is in the top. The countries that we are entering to maybe the last couple of years. Then Sweden and Norway and Denmark is a little bit behind due to Easter, but also due to new capacity. So you see very good to be in Ireland at the moment, and hopefully Stockholm and Sweden will come back, next year or whatever it happens.
If you look at some specific cities, you can see Stockholm is down by 6%. Again, only stands for 3% city center of Pandox total room capacity. But 6% down, and we can look at Stockholm more precisely. Copenhagen down 4%. It is a slower start than we expected, but Q2 looks good. So we are not worried about Copenhagen. The big challenge for Copenhagen will come next year where we see a lot of new capacity coming into the market, starting end of this year and next year, so will be much tougher. But so far, Copenhagen, if you look at capacity, they should do a stable 2018. Oslo is also new capacity and Montreal as well. So you can see all this city who has a negative growth is more or less linked to new capacity, and it takes some time before the market is adjusted and swallow that.
The rest of the market are good. Brussels in the top, who is performing very well and are close to 2008 year's good RevPAR level. In that market, we have a very strong position with our hotels, so that is very good for Pandox. Helsinki continue to be strong. Frankfurt and U.K. regional, as I spoke about before. If you look at Stockholm specifically, you can see that the Q1 last year was good. But for those who follow us, remember that we said already in 2016 that Stockholm will be a tough 2017 and 2018 because of new capacity coming into the market. We see that in Q2 that start to happen. Now in Q1 2018, we are down 6%. A bit of that is, of course, Easter. So in Q2, I expect in that Stockholm will come out better than they did in Q1.
I will give over to Liia Nõu. Thank you very much.
Thank you. We are now at page 11. Pandox recorded stable earnings improvements in both business segments. As Anders previously explained, we estimate the negative effect on revenue growth from the timing of Easter to close to 4% in the comparable portfolio in the first quarter. It is also worth noting that the first quarter is seasonally weaker. Some key numbers for the quarter, starting with property management. Rental income amounted to SEK 621 million, an increase of 31%. Net operating income amounted to SEK 528 million, an increase of 33%. For operating activities, net operating income amounted to SEK 56 million, a decrease of 20%, which is explained by previous reclassification, including two hotel properties in Q1 2018.
Remember the reclassification of some hotels which were done in the second quarter 2017, but hence were included in the numbers in the first quarter, which is the one we compare with. Like-for-like, property management reported an increase in rental income and net operating income of 0.5% and 0.1% respectively. Like-for-like, operating activities reported an increase in revenue and net operating income of 4% and 21% respectively. Total cash earnings amounted to SEK 336 million, an increase of 16%. Measured from year-end 2017, the unrealized value increase for investment properties amounted to 0.3%, and for operating properties, the unrealized value change was flat. End of period, EPRA NAV per share was SEK 151.8. Adjusted for dividend and proceeds from the directed share issue, the annualized increase was 21%. Next page, please. Financial expense amounted to a negative SEK 187 million. The increase is explained by a couple of different factors.
A, an increase in interest-bearing liabilities after implementing acquisitions where debt denominated in foreign currencies have increased, especially, for example, in British pounds, where LIBOR is approximately 100 basis points higher than STIBOR or Euribor. B, refinancing in the fourth quarter of 2017, where older credit facilities have been replaced by new facilities at a higher LTV but at current market conditions. For example, with STIBOR and Euribor floors. C, furthermore, Pandox has interest hedged a large share of its loan portfolio. Finally, a weaker Swedish krona versus the other currencies that Pandox has loans in translates into a negative currency effect of some SEK 5 million to SEK 10 million for the quarter. Next page, please. In the quarter, property management benefited from profitable acquisitions, positive effects from previous portfolio investments, and an overall stable hotel market with positive underlying growth.
The development for the recently acquired portfolio in the U.K. and Ireland was positive, supported by both favorable market growth and improvements at hotel levels. For the quarter, U.K. and Germany combined accounted for 35% of total rental income. Rental growth in the comparable portfolio was positive in Finland, Austria, Denmark, and Sweden. In Sweden, solid growth in regional cities compensated for the decline in Stockholm, as Anders mentioned, resulting in positive rental growth for Sweden as a whole. Please note that two hotel properties in Brussels were reclassified to property management as of 1st of February. Next page, please. Operating activities. In the quarter, profitability continued to improve, driven by continued good demand in Brussels. Brussels is now approaching the levels before the terror attacks in 2015 and 2016. Seasonality, calendar effects like Easter, and some tough comparison had a negative effect.
However, underlying profitability, the margin like-to-like, excluding reclassifications, have improved compared with the corresponding period the previous year. Again, sorry for repeating myself, but please note that two hotels were reclassified to property management 1st of February, in the middle of this quarter. Please also note that the former Scandic Grand Plaza with 100 rooms, which was reclassified to operating activities as of 1st of December 2017, is closed for renovation. Next page, please. For the period, total unrealized and realized changes in value amounted approximately SEK 148 million. All of it was attributable to investment properties, and the value increase is explained in equal parts by marginal lower yields, as well as improved cash flow.
Year to date, a total of two hotels, as a repeat of that all the time, have been reclassified from operating properties to investment properties, thereby explaining the SEK 773 million of assets being reclassified. End of period, the average valuation yield for investment properties was 5.6%. For operating properties, it was 7.3%. Next page, please. Finally, a quick look at our EPRA NAV and financial position. End of period, EPRA NAV per share amounted to SEK 151.8. This corresponds to an increase of 21% on an annualized basis, adjusted for dividend and proceeds from the right to share issue. The increase is in part explained by changes in current exchange rates following a weak Swedish krona. Loan to value amounted to 50.2%. Liquid funds and long-term unutilized credit facilities amounted to approximately SEK 3.4 billion. To summarize, Pandox financial position remains strong and stable. Next page, please.
With that, I will hand over to Anders again for some final words.
Thank you, Liia. Everybody, to sum up this, main drivers for growth in cash earnings for us as always. We see a stable and good market growth. Again, as I said, Easter taking out 3%-4%, and that will come back in Q2. I do not think everybody expect that. If you look at the market in general in these new markets that we enter into in U.K. and Ireland is stronger than Scandinavian. The market diversification of being in many markets is something who pay off for us, I believe, this year. During that market condition, we have a high-quality portfolio with big hotels in strong locations, together with the strongest partner in the market, giving us, we will take at least our shares in that growth. We do a lot of portfolio investment.
Last year, we did close to SEK 700 million, SEK 650 million in investment, giving us something 8%-12% return. We have SEK 700 million in pipeline, and we are signing up this investment all the time together with our partners when we see opportunities to take market shares or increase our position. That is also something who will help us to keep up the speed. Operations will be very promising if you look at full years and also the start for this year. We have very good control of cost. On the cost side, the increase of revenue is converting into cash with very substantial numbers. That is something also we are very pleased with. Of course, opportunity acquisition. We have done a lot of acquisition last couple of years. We have said it is a consolidation year, but you never know if something pass by.
We always are interested and have a look. That was all if you look at the first part, and then we will go over to the Q&A session. Operator, please, we are ready for questions.
Thank you. If you would like to ask a question, please signal by pressing star 1 on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Again, press star 1 to ask a question. We will pause for just a moment to allow everyone an opportunity to signal for questions. We will now take our first question from Fredrik Stensved from Carnegie.
Go ahead.
Good morning. Just a few questions from my side. In the report, you are mentioning that you are increasing your focusing on identifying investments in your existing hotels. Could you give some flavor on how many rooms could be added and approximately how much you expect to invest for 2018? You had around SEK 700 million, if I am not mistaken, in 2017.
Good morning, Fredrik. When we say we are increasing our interest, that do not mean that we have not done before. As you know, that is something we do with SEK 500 million, SEK 600 million a year. With all these new properties that are coming in, 49 in Pandox, we have not had time to systematically do the same thing as we have done in Scandinavia. What we are doing now, we look at every hotel in three dimension. First, can we build more beds in each rooms? That is number one. Number two, can we build more rooms in existing buildings? Number three, can we do something out of commercial in property, like turning inefficient space to selling areas? Can we upgrade rooms to higher standards and get out a better rate? Can we have a better offering in the restaurant so that gives a restaurant and meeting revenue?
We go systematically through that, and we have also operators who like to do this as well. So I am expecting that this pipeline of SEK 700 million will not go down over the year, even if we will maybe do a big piece of this 700, that will continue to be in a very high level. These are extremely profitable for us, but also for operator, because when we, for example, increase number of beds in a room, that means that we open up a new segment. We also open up for more revenue per room. That revenue is very efficient for the operator who can turn that into cash. For our deal, it means more rental income.
That is clear, Anders.
That is one example.
But as you said, we have done this before. Would you say that this is primarily related to additional investments to the U.K. acquisitions, or is this across the portfolio?
I would say there is two elements. First one is, in general, when we talk about existing hotels is Germany and U.K. That is recently when we have acquired hotels. We do that already now in Vienna. We do that in some other of these German properties like Hotel Berlin and in Brussels. We have already done it. But in mainly the portfolio of Leonardo Hotels, we did for two years ago, and the Eurostars, we have not start this job yet because we have not had time. What is also new is that we see in many markets that profitability in the market is so strong that we can start to build new building in lands that we already know. And we see that possibility in a few places, even in Scandinavia. So let us come back to see if that is possible.
We have a positive view about also, as I say, expand with more rooms. And we do that at the moment in Wolfsburg, and we will most likely announce to do that in other places as well. And that is, of course, a very efficient investment for us that we are just adding more rooms, and we do not need to do more than slightly other investments. So that is the most profitable part of hotel business is, of course, income from room.
Thanks, Anders. Then finally on the market, you have been very clear on stating that Copenhagen and Stockholm will be challenging due to increased capacity for the rest of the year. Any other red flags worth highlighting? Any particular-
If we are starting by Copenhagen, if you had asked me at the end of last year, I would have said flat for Copenhagen. So the start is a little bit disappointed. On the other hand, it was a strong Q1 last year. I expect that Copenhagen will be full year better than how it is looking for Q1. Stockholm, yeah, Q1 will be strong. Maybe not that we see a level out. We still have some minus there, and I think we will go to the end of the year. But I think the worst is over for Stockholm. So those markets who is going down, Stockholm and Copenhagen will be tougher next year.
Any other market where you see excess supply worth highlighting?
London has, of course, new capacity. That is something we know when we did acquisition of both the two Hiltons there. We see a market growth. We see an underlying demand growth, but we also see new capacity into Heathrow market, which had taken down the market also by a few percent. We do much better because we have hotel who is linked to the terminal, so has other strong position. But in general, London as a whole, and Heathrow specifically, will have a year where they most likely will have negative compared to last year. Everything is due to new capacity.
Small numbers.
Okay.
And then-
The rest are fine.
Yeah, okay. My final question, I promise. Ending on a more positive note. The strongest market that you anticipate for the next couple of quarters, obviously, Brussels is facing easy comps. Any other market that you think will be outperforming, particularly compared to the others?
U.K. regional looks very good. Dublin, Cardiff, Brighton, Oxford looks very strong. Those sort of markets that maybe is not so well known as hotel market for us in Scandinavian. They are such a very nice market. The only market who has a little bit over capacity is Manchester. On the other hand, you have both United and City into final round in Champions League. I can tell you, when there is Champions League match in Manchester, it is overbooked. So U.K. regional are doing very fine. Brussels is very strong. We expect the Sweden regional will continue to be good, same as Finland. So you see our geographic diversification is paying off.
Thank you.
Thank you.
That was all my questions.
Once again, if you would like to ask a question, please press star one. We will now take our next question from Christopher Fromental from Morgan Stanley. Go ahead.
Hi. Good morning to you. More a follow-up on the original question. I think on your front page, you talk about the existing portfolio being in focus, and you talk about some of those investments. Just reading between the lines there, are you signaling that you are effectively pausing for breath on more acquisitions in 2018? Should it be a surprise for us if you were to acquire more here? It sounds as though after the large U.K. acquisition that you've done, that there is a period of consolidation about to happen. If you could talk through that. Then, just as a follow-up also, you talk on that front page about the valuation yield on the hotel market being under pressure. I just wanted to clarify what you mean there. Are you talking about yield compression that you have seen over the last half decade?
Are you talking about something very current, that property yields are falling further at the moment? Should we expect that to come through in your valuations in 2018? Just a little bit more clarity on really what you are talking about, that would be helpful.
If you start with Pandox position after this SEK 17 billion we have done acquisition for, Christopher, we need to make sure that we can take care of all these new hotels and all these new partnerships and all investment and financing with new banks. I will say in a positive view, some sort of consolidation, and that mean that we try to grow into the new size in terms of knowledge, system, reporting, and relationship with our partners. We have strong focus on that, meaning that we are doing a lot of internal processes with it. We change system, we increase working methodology. We look at the new way of putting targets into each hotel. We try to understand even better how our new partners drives.
That is, of course, a strong internal job that we are doing at the moment, which take out some maybe time for acquisition. In that perspective, yes. Would that means that we would not do an acquisition? You should not expect that we will come back in the next two quarter saying we will do uncertain. I don't think that will happen. If there will be, that will be a bonus or something, I don't know. Of course, single acquisitions is there, always. We look at a few.
Nothing is hot, but we look at them, and what we specifically focus on is owned and operate hotel that the yield are more favorable, and we don't have so much competition when we buy, instead of buying with a lease who has had, which I come back to, a more yield compression in some markets. That is something you can see. One pattern is strong internal focus of grow into the size we are today and make sure that we are ready for the next move. Then, of course, that could come a few single acquisition, and the focus or the strategy is to look more into owned and own operations because the yield are more attractive.
We see also more potential in these sort of hotel that we can taking over and have a full mandate of do whatever we want. Yield compression in general, if you look at acquisitions, the yield has been pressed out to more likely the level that we have seen in Scandinavia. That was one of the reasons why we start to look more in Germany, because Sweden and Denmark and Norway was too expensive. We don't see a big movement, but we see some sort of yield compression. I would say those big acquisitions we have done the last couple of years had been more expensive today because of the yield had been a bit lower. But if that means that our external valuator will give us higher property value, I don't know, because this should be linked maybe to each other, but it's not.
We haven't seen that yet. But in general, there is more interest of buying lease hotels today than it was five years ago. Then we, of course, moving over to other part of our business chain. Are you happy with that?
Near enough. Thank you.
Thank you.
It appears there are no further questions. But as a reminder, if you would like to ask a question, please press star one. There are no further questions.
Sorry.
Mr. Anders Nissen, I'd like to turn the conference back to you for any additional or closing remarks.
Well, thank you all for your interest of our interim report, and please visit our webpage for more information about Pandox. Thank you very much and have a good day, and looking forward to talk to you later. Bye.
This concludes today's call. Thank you for your participation. You may now disconnect.