Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Pandox quarter three report call. 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 one on your telephone and wait for your name to be announced. I must advise you that this conference is being recorded today, on Friday the 10th of November, 2017. I would now like to hand the conference over to your speaker today, CEO Anders Nissen. Please go ahead.
Well, good morning, everybody, and welcome to this presentation of Pandox interim report. My name is Anders Nissen. I am the CEO of Pandox. I also here have with me Liia Nõu, our CFO, and Anders Berg, Head of Communication, Investor Relations. This presentation will as always be divided in two parts. First, we start with presentation as ourselves, and then we have Q&A session. Please, turn to page number two. Yeah, a good growth and high efficiency. For the third quarter, we report a good growth and a solid profitability. Total cash earnings increased by 20%, and return on equity is 17% on annual basis. The driver behind is mainly three factors. A good hotel market, profitable and successful acquisitions, and improving profitability in operator activities, mainly in Brussels.
Like-for-like, property management increase net operating income by 3%, and like-for-like operator activities increase net operating activity by 44%, again, with a strong comeback for Brussels. Please note that the previous completed reclassification has full effect in the quarter. That is an important note. We also announced our complete acquisition of Hilton London Heathrow Airport, Terminal 4. Next page, please. Hilton London Heathrow Airport. Yeah, fantastic for us to including this 398 rooms hotel in one of world largest airport and one of the world largest hospitality markets. Heathrow has about 75 million arrivals and a strong demand. We see there is a lot of plans for building one or maybe even two more runways. We believe it is a strong location for having hotels at Heathrow.
This is one of the premium hotels, and one of the RevPAR leader in the market. As I said, 398 rooms. It is a big hotel. It is mainly business and leisure hotel, which we now acquire this year. It is a long-term revenue-based lease agreement with an excellent location directly linked into Terminal 4. That was Hilton London Heathrow Airport. Next page, please. If we look at our net operating income, it increased by SEK 101 million according to 19%. The key factors supporting this was a strong underlying demand. As I said before, well-performing acquisitions, profitable acquisitions, and a recovery in Brussels. In general, a very strong quarter. The negative side was more room into Stockholm hotel market, which has an increase in the underlying demand but press on RevPAR because of more rooms into Stockholm's hotel market.
Next page, please. That takes me over to the portfolio overview. As you might know, we own 122 hotel properties in the upper middle market and the premium segment, all in strong and good locations. For a portfolio value of SEK 41 billion. 107 of these is leased out to third parties with a revenue-based agreement, normally with a guarantee and share investments. That is representing 83% of the market value. 15 hotels is operated by ourselves. They are all in different brands that operate 17%, t hat are representing 17% of the property value. You can see on the map we are now in 11 countries, but still Sweden is the largest. Then we have Germany, Belgium, Denmark, Finland, Norway, and then the rest is a small proportion of the total value.
If we go to the next page, please, we can look at some key markets. If you look at the graphs on the left, we can see that Stockholm is down 3% in Q3. That is in line what we have communicate before. Berlin and Copenhagen have been stable during the quarter. Montreal, still strong. Helsinki has a very strong underlying demand coming from both a stronger economy activity in the country, but also a lot of Asian demand. They are one of the most important hub for Asian travelers and Chinese travelers into Europe and back out again to China, which drive the demand. Frankfurt due to a strong exhibition market. Oslo, due to both a strong market itself, but also that two hotels is closed for renovation, which one will coming back mid 2018 and the rest maybe end of 2018.
That will continue to be a good market in Oslo even next year. Brussels, as you say, 31%, very strong coming back, and that is in line or little above what we have communicated before. So that is very positive for us, of course. We run eight big hotels in the city. In Europe, you can see that quarter three was 7%, and that is very stable in both Q1, two and three. This is despite of all terrorist attacks and political problems in the world and more Airbnb and everything where people have predict will press the market. So hotel market is still very strong. As I said, 7% in Q3, stable numbers. Then I would like to hand over to our CFO, Liia Nõu, for the financial highlights.
Thank you, Anders. Overall, in the third quarter, it developed along the lines seen in the first and second quarter this year. Property management continued to perform well, and operating activities saw further improvements following a better hotel market in Brussels. Some key numbers for the quarter, starting with property management. Rental income amounted to SEK 589 million, an increase of 23%. Net operating income amounted to SEK 511 million, an increase of 25%. For operating activities, net operating income amounted to SEK 129 million, a decrease of 1%, which is explained by reclassification. Like-for-like, property management reported an increase in the rental income and net operating income by 4% and 3%, respectively. Like-for-like operating activities, reported an increase in revenues and net operating income of 10% and 44%, respectively.
For the quarter, the financial net amounted to a SEK -132 million, reflecting a larger loan portfolio and fees tied to unutilized credit facilities. For the quarter, total cash earnings amounted to SEK 462 million, an increase of 20%, including a reversal of an extra tax expense of SEK 21 million. Measured from year-end 2016, the unrealized and realized value increase for investment properties amounted to 3.8%. For operating properties, the unrealized value increase amounted to 1.2%. End of quarter, EPRA NAV per share was SEK 136.5, and adjusted for dividend and the proceeds from the direct share issue of last year, the annualized increase was 17%. Next page, please. In the quarter, property management benefited from well-performing acquisitions and positive underlying demand. The quarter saw a full effect from the previously completed reclassifications. Hilton London Heathrow Airport was acquired and consolidated per 31st of August.
For the quarter, Germany accounted for 20% of total rental income. Next page, please. In the quarter, profitability in operating activities continued to improve, primarily driven by the ongoing recovery in Brussels. Brussels aside, operating activities benefited from a stable, positive development in Canada and Germany. Next page, please. For the period, total unrealized changes in value amounted to approximately SEK 1.2 billion, of which approximately SEK 1.1 billion for investment properties and SEK 95 million for operating properties. For the quarter, the value increase is basically explained in equal parts by lower yields, as well as favorable market developments and higher cash flow from previous acquisitions and investments, especially in Germany and Belgium. Year to date, a total of eight hotels have been reclassified from operating properties to investment properties, thereby explaining the SEK 1.7 billion of assets being reclassified.
One hotel property has been acquired and consolidated into investment properties and one hotel property into operating activities respectively. End of period, the average valuation yield for investment properties was 5.6%, and for operating properties, 7.2%. Next page, please. On this page, we illustrate Pandox's track record in creating value and our financial flexibility. Our period EPS per share amounted to SEK 136.5. This corresponds to an increase of 17% on an annualized basis, adjusted for dividend and proceeds from directed share issue. Loan- to- value net amounted to 47.7%. Liquid funds and long-term committed and utilized credit facilities amounted to approximately SEK 1.8 billion. To summarize, Pandox's financial flexibility remains strong. Next page, please. With that, I hand over to Anders for some final words.
Yeah, thank you, Liia. If we look at page number 12, we have as always divided the drivers for our business in four pieces, starting with market growth, which is solid, and we expect to have the same sort of trend rest of the year as we have seen before. It might be a bit better than we have said before summer, so we predict it to be stable the rest of the year. In that market, our high-quality portfolio will take that share, meaning that we will go up at least with market. The portfolio investment is we have investing now SEK 500 million, and that is something that is coming back step by step, and that gives normally a very attractive yield.
The operation has been a good recovery in Brussels and stable as a whole. We expect to have a good also end of the year in terms of growth compared to last year. Of course, it is always opportunistic acquisitions. If something coming in our mind, we of course, are an active company. With that said, we are ready for questions.
Thank you. As a reminder, if you do wish to ask a question, please press star one on your telephone keypad and wait for your name to be announced. If you wish to cancel that request, please press the hash key. Once again, that is star one to ask a question. Your first question comes from the line of Christopher Fremantle at Morgan Stanley. If you could please ask your question.
Yes, good morning. I had two questions. One was related to the Swedish market. I wonder if you can just comment a little bit more about, you mentioned that there was more supply. I wonder if you can talk a little bit more about the future. Do you expect the RevPAR growth rate in Sweden more broadly to slow further than it has already done? That is my first question. The second question is about further geographic expansion. You have been mentioned in the press relating to a portfolio of hotels in the U.K. I wonder if there is any comment that you can make there about your intentions. Thank you.
Good morning, Christopher. The Swedish market is very strong and stable. If you look at this in pieces, you see a lot of new capacity in Stockholm, and there will still coming new capacity in the end of this year, and there will some even more for next year. So we expect that Stockholm will be having maybe a stronger demand, but that will be pressed on RevPAR as we see it the rest of this year and even next year. That is something in line what we have communicate before. Malmö is another city which is maybe have a little bit, because of a lot of new capacity coming in Copenhagen, that is that overflow will maybe go away and there are coming in a few hotels in Malmö. So maybe there is also a little press on that. The rest of the market is strong.
Gothenburg is continue always developing above our expectations, and they have a very strong 2018 in front of it. The Swedish regional cities is seeing something between 3%-5% in general, and that is continue. Related to the strong economy activity as we have in the country. We see both an increase in all the Swedish market in meeting business and leisure. So as a whole, excluding Stockholm, I am very positive Sweden. If I go then to the second question, Christopher, that is a rumor that someone else has started, and we cannot comment that regarding acquisitions that people talks about that we are involved with. We don't have any comments about that.
Okay. Thank you.
Once again, ladies and gentlemen, if you do wish to ask a question, it's star one on your telephone keypad. Your next question comes from the line of Erik Granström at Carnegie. If you could please ask your question.
Good morning. I had two questions as well. The first one related to the value changes in the property portfolio. It seems that you lowered the yield requirements in Q3 for the property management properties. But I would have expected that would have had a bigger impact on the value uplift. It was a little less than SEK 200 million, if I'm correct. Could you just perhaps comment a little bit on that, just to make sure that I get everything right? Thank you.
Can you do that, Liia?
Yes, absolutely. In the third quarter, there was, as I said, some yield changes. As you know, we applied the external evaluators yield assumptions. That was especially in Sweden, to some extent in Denmark and Norway, and to a lesser extent in the rest of the portfolio. So, no big movements, but around SEK 200 million in uplift. On top of that, the SEK 100 million for the operating properties. So, no big yield changes. A little bit, bits or pieces, but in total for the portfolios, around SEK 300 million.
Okay, thank you. My final question was regarding the current tax. You stated in the report that there was a SEK 29 million positive impact on the current tax. Does that mean that the figure would have been a SEK -45 million then in Q3 if that hadn't been the case? If that's so, it seems that the tax rate is a little bit higher than we've seen in previous quarters. Is there an explanation for that, or should we sort of look at that as we move forward? Or should we stick to what we've seen so far in the first nine months?
Yeah. Well, you're right about the SEK 29 million. This was a reservation we made in the end of 2015. We got a sort of positive verdict on this one, so that's why this was sort of reversed. In total, around 10% have been the sort of efficient tax for the portfolio. It has been slightly increasing, and this is due to the fact that we have more and more of our business outside Sweden, where we primarily have the large loss carry-forwards. So, hopefully we'll be paying a lot of tax or hopefully we'll be doing a lot of profits. But it's gradually increasing, but not to a major extent. This is obviously because of the loss carry-forwards and as we today know of the tax regulations.
Okay, thank you. Then a final question. Sorry for that, but it is regarding the press release that you sent out in early to mid-October regarding the positive verdict that you got in the civil case in Norway. You stated that you will evaluate how you will proceed with any further claims. Is there a timeframe here when we could expect you to come to some sort of decision whether or not to proceed or not? If you could give us a little more clarification on that would be much appreciated.
Can you guide us on that, Liia? You want to-
Yes, absolutely. Well, this is a rather long process. This will most likely take a couple of years before everything is clear. So, it will take a longer time, and we will come back when we have something more.
Okay. Thank you very much. That is all I had.
Thank you.
Your next question comes from the line of Albin Sandberg at Handelsbanken. If you could please ask your question.
Yes, hi there. Albin Sandberg, Handelsbanken. Two questions, please. The first one relating to the first question you got on the RevPAR growth and so forth in Sweden. If you look on the supply situation as a whole, how do you see it compared to previous cycles you've been experiencing? Is this supply on par what you have expected, or do you think that supply is on the excessive side relative to demand and so forth? If so, if you could point out any region, if that would be the case?
Yeah. Hello, Albin. I would say in general, Europe has lower new supply in the market compared to previous upturns. If you compare it to 2001st in beginning of 2005, and 2006, and 2008, what happened there, and then also after the financial crisis. So it's less new capacity in general in Europe. With that said, there is a few market who has more than average. One of them is Stockholm. Stockholm has, as I said, still an increase in demand, but press on RevPAR because of more rooms. Hamburg is another one. Frankfurt is a third one. London is another example of a market which has a lot of new supply coming in the market.
But then if you take most of the other market is less new capacity than demand, meaning that what we see a strong trend a little bit everywhere, even in Sweden, specifically on the regional cities, is that the occupancy is going up to a high level and is above 2008, most of the market, and that is now room for start to increase the price, which is very positive in many way. And one of them is that the operator will have a higher profitability because rate means more efficient P&L, and that gives also possibility to go in and do a common investment program together with this attractive for Pandox. That's all.
Yeah, thank you. And then on the Brussels market, in the report, you're still talking about the recovery of the Brussels market. Where are we relative to the pre-terror? Are we back-
We are under.
-at those levels? Yeah.
We are under. If you compare to 2015, we still have, I would say 5%, 6%, 8% up to the market, up to that level, and hopefully we can even cross that line next year. We have a positive view about Brussels, that Brussels coming back, and we see that business on the book is stronger than it was. It is stronger year quarter-by-quarter. And the pickup during every month is also stronger than our forecast. That is an underlying stronger market in terms of transients and in meetings. Leisure is still not there. But Brussels have never been a strong leisure destination, so that is not so important for Brussels. But hopefully that could also can come. We have now a few big leisure event in the end of the year, like the Christmas market, that we expect to have full houses.
That is something that we still have. We still see some positive movement is also in the leisure market. But to sum it up, we are still behind 2015, and we expecting to cross that line next year.
Thank you. Very clear.
Thank you.
Once again, ladies and gentlemen, that is star one to ask a question. There is currently no further questions.
Okay, thank you very much for your participation, and have a good day. If you need anything, more information, please come back and you can visit our webpage for more information. I will also take the opportunity to repeat this 24th of November, the market date. It is a highly interesting program, and we are looking forward to see you all there. Thank you very much. Have a good day. Bye-bye.
That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.