Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Pandox Quarter 1 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 1 on your telephone and wait for your name to be announced. I would now like to hand the conference over to your speaker today, Anders Nissen. Please go ahead.
Well, good morning and welcome to this presentation of Pandox interim report for the first quarter of 2017. My name is Anders Nissen, I am the CEO of Pandox, and I have in the room, Liia Nõu, the CFO in the company, and Anders Berg, which is the head of communication and investor relation. This presentation will be, as always, divided into two parts. First, the presentation of the quarter and followed by Q&A session. Before we begin, I would like to turn your attention to the tile on the first page of the presentations material. This is one of our latest acquisition. We are very proud to, after many years, enter Amsterdam. This is a premium hotel in a premium location with a long lease with a premium operator, exactly in line with our strategies. It is a nice hotel. Next time in Amsterdam, please have a look.
It is a must. With that said, let us turn over to page number two. For the first quarter, we report a solid growth in cash earning and a good return on equity. The cash earnings increased by 23% on equity. It was 16% on an annual basis. This development explained by the three main factors. First, profitable acquisition. We have the last two years done acquisition for SEK 8.4 billion. With that is a strong underlying hotel market, and you should note this is a positive calendar effect due to Easter. If you continue, like for like, property management increased net operating income by 8%, which is support by good growth of the lease portfolio, and like for like operator activities increased by 14%, support by a continuously good recovery in Brussels.
A major event during the quarter was the lease agreement we signed together with Scandic for the Nordic Hotel Group in operator activities. This transfer will be proceeded according to plan, with all hotel expecting to be reclassified to property management during second quarter this year. A very easy and efficient process together with our biggest partner, Scandic. We also announced the intention to acquire Silken Berlaymont in Brussels, for SEK 315 million, and the target is to complete the transaction at the end of May this year. Next page please, which is number three. In this quarter, the Pandox total net operating income increased by SEK 104 million and increased by 28%. The key factors, and drivers behind this positive development were those profitable acquisitions I mentioned before, the improved underlying demand, the positive Easter effect, and continuously recover in Brussels.
The negative factor is the divestment of eight hotels to Midstar in the comparable period last year, and renovation affecting Hotel Berlin and Hyatt Regency Montreal, our two largest property, those have been undergoing heavy rooms renovation in Q1. Next page, please. The business overview. At the end of this quarter, the Pandox hotel property portfolio comprised 120 hotels with a market value of SEK 38.6 billion. 99 of total properties were owned and leased, representing around 80% of the portfolio value. 21 properties is owned and operate, representing around 20% of the total portfolio value. As you can see on the map, around 40% of our business is now generating outside the Nordic region, which give us a very good balanced demand mix of international and national cities. Next page, please. If you look, you can see two graphs, showing key hotel markets for Pandox.
You can notice a strong demand pickup in all Pandox markets across our portfolio. This is driving by a more solid and higher economy activity, which gives more transients or business travelers continuously by a strong meeting calendar and a good leisure demand. In Oslo and Montreal, it's a mix of strong underlying demand combined with capacity who is out of the market due to renovation. Copenhagen and Stockholm is continuously stronger than expecting. If you see Brussels is now up 5%, which is a strong signal that we have a much better platform for our Brussels hotels for the rest of the year. Europe as a whole is 7% comparable for last year. With all this said, I have to also mention that there is a positive effect due to the Easter, which we've neutralized in the second quarter.
That is all for me at this moment, and I would like to hand over to Liia Nou for the financial highlights.
Thank you, Anders. The first quarter was a good solid quarter for Pandox. Property management continued to perform well and operating activities improved on the back of a better hotel market in Brussels. Some key numbers for the quarter. Starting with property management. Rental income amounted to SEK 474 million, an increase of 23%. Net operating income amounted to SEK 396 million, an increase of 24%. For operating activities, net operating income amounted to SEK 82 million, an increase of 52%. Like for like, property management reported an increase in rental income and net operating income by 9% and 8% respectively. A positive calendar effect, as Anders mentioned, due to Easter, is estimated to have contributed with some 3 to 4 percentage points to this growth. Like for like, operating activities reported an increase in revenues and net operating income for 4% and 14% respectively.
For the quarter, the financial net amounted to a negative SEK 130 million, reflecting a larger loan portfolio, increased average fixed interest period, some current effects, and fees tied to unutilized credit facilities. For the quarter, cash earnings amounted to SEK 290 million, an increase of a strong 23%. Measured from the year-end 2016, the unrealized value increase for investment properties amounted to 1%. For operating properties, the unrealized value increase amounted to 0.2%. End of quarter, adjusted for provision of unpaid dividends of SEK 4.10, EPRA NAV per share was SEK 129.8. Adjusted for dividend and proceeds from the directed share issue, the annualized increase was 16%. Next page, please. In the quarter, property management benefited from profitable acquisitions, solid underlying demand, and a positive Easter effect. Market demand improved basically in all key markets, benefiting from a general uptick in economic sentiment and activity.
For the quarter, Sweden accounted for 42% of rental income, and Germany accounted for 21% of total rental income. Please note that the seven hotel properties which we acquired in the end of December 2016 in Europe are included to pool in the quarter. The Mayfair in Copenhagen was reclassified 1st of January 2017 from operating activities to property management. We divested eight hotel properties in Sweden in the end of March 2016, which affects the comparable periods, i.e., around 4% of the rental revenue in Q1 2016 was divested in the end of Q1 2016. Of the recently signed lease agreement with Scandic Hotels Group for seven hotels in operating activities, three hotels were taken over in April, two hotels are expected to be taken over in the beginning of May, and the remaining two hotels in June.
The operation of Grand Hotel Oslo was transferred to Scandic in the end of April. Next page, please. In the quarter, profitability in operating activities continued to improve, mainly driven by improvements in Brussels. Brussels aside, operating activities benefited from the same positive market drivers, including a positive Easter effect as property management. However, renovations at Hotel Berlin and Hyatt Regency Montreal had a negative effect on the revenues and net operating income. Next page, please. For the period, total unrealized changes in value amounted to SEK 327 million, of which SEK 309 million for investment properties and SEK 18 for operating properties. For the quarter, the value increase is primarily explained by lower yields, supported by favorable market developments and higher cash flow from previous investments. End of period, the average valuation yield for investment properties was 5.6%, and for operating properties, it was 7.4%. Next page, please.
This page again illustrates well that Pandox track record in creating value, as well as the company's strong financial position. End of period, EPRA NAV per share amounted to SEK 125.7. Adjusted for the provision of unpaid dividend of SEK 4.10, which was paid in the beginning of April. EPRA NAV per share amounted to SEK 129.8, an increase by 16% on an annualized basis. Loan-to-value net amounted to 46.8%. Liquid funds and long-term unutilized credit facilities amounted to some SEK 2.3 billion. To summarize, Pandox financial flexibility remains strong. With that, I hand over to Anders for our final words and the next page.
Yeah. Thank you very much, Liia. To sum up this with some main drivers for Pandox the rest of the year, the market is solid, and it's better than what we have communicated before, even including the Easter effect. That is a positive driver, and it's coming from a higher activity in general in the market. That means with our quality portfolio, we will at least take our fair share, and that means more rental income and more revenue income in hotels we operate in our own operations. We have SEK 900 million of portfolio investments ongoing over the next three years, which give us a solid growth on the top of the market growth. We have operations, which is in good shape, and we see now in continuously growth in Brussels, which are in a better platform than we expected for one quarter or at the end of last year.
And on the top of everything, we always looking at opportunistic acquisitions. With that said, I would like to hand over for Q&A.
Thank you. As a reminder, if you 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 your request, please press the hash key. Once again, that's star one if you wish to ask a question. Once again, ladies and gentlemen, if you wish to ask a question, please press star one on your telephone keypads. The first question comes from the line of Erik Granström at Carnegie. Please ask your question.
Thank you so much. Good morning. My first question is regarding the European market, and obviously it seems like it's rebounding strongly now here in Q1. Anders, could you say something about the sort of opportunities in Europe, and are there still portfolios out there that could be acquired? Are you still looking at acquisitions in the European theater?
Good morning. If I split it in two answers. The first one, the market is strong in Europe. You see in all key markets a growth in Q1, and also a good business on the books for Q2. Strong exhibition calendar in Germany, and good leisure demand across our markets. If you look at acquisitions, that is a part of our business model to be very active, and we continuously look at valuation. As you see, we did one in Q1. That is of course something we are very active into that sector. With that said, maybe there is a little bit of yield compression in some markets, so then you need to change and look at other segments.
Okay, but do you still feel that there are portfolios that are still within the control of the European banks? Or are you now looking more to find targets that are sort of outside the banking system?
What mainly we see is that short-term holders are now trying to sell, and that was also the Invesco portfolio, the one we bought, these seven in Europe is a good example for that Invesco they sell when they believe that the market is going up. They have maybe a fund of five years, and it's close to close it, and then they have to sell, and they need to sell, and we see a few of that portfolio coming out from those players who has a much shorter view in the market than we have. We also see single acquisitions across all big and important hotel markets in Europe. Some of them are at crazy prices. So what I said before is that you need to look more specifically into segments where you think you can compete with.
That can be more mid-market hotel, that can be more domestic hotel, and that can be other segment linked to service department and other things. So we are active everywhere. We look everywhere. But we have nothing to report.
Okay, and then I know that previously you have said that in the Nordics, prices are perhaps a little bit on the high end for you guys. Is there any change in that? Are there any markets in the Nordics that you feel that perhaps could be interesting to start looking at, or is it still a bit too expensive?
Single acquisition in Nordic is still too expensive. Portfolio that might can be possible to do something, but that is nothing out. We know that is owner of portfolios who is now looking for maybe selling or take out a position, but nothing is out in the market yet. Again, this is the part of our networking. We continue to talk to everybody. We are active, but again, when we should acquire something, it should be something that really add value. So we look at many, we do, but we are very few who coming to a negotiation phase.
Okay. I have two more questions. Could you perhaps say something about any sort of yield compression that you've seen in Q1 in the different cities? Are there any differences, or has any city sort of taken off in terms of yield compression that changed sort of from year-end last year?
Yeah. What you can see in Germany, and that is some example for yield compression, but it's also opposite. I would say in general, I think that is a yield compression in Germany at the moment. Those acquisitions that we have done there the last few years would most likely had been more expensive by today. Again, that is only segment in those market that is still attractive yields on. That is mainly underperforming hotels, so that can maybe be hotels who has more of a local or regional profile who's maybe not of interest for some other international buyers. You should definitely stay away from single premium hotels in the premium market like Paris and Amsterdam.
All right. Thank you. Then finally, you mentioned the Easter effect, that you had a positive Easter effect this year as Easter is actually in Q2 this year versus last year. Should we therefore expect a similar negative effect in Q2 this year, all things being equal?
Yeah. Easter effect happen in April is normally better for the hotel market for, of course, that means more than the leisure traveling are more active. So like for like, that should be growth, if you look at March and April together.
All right. Thank you. Those were my questions.
As a reminder, if you wish to ask a question, it's star 1 on your telephone keypads. The next question comes from the line of Christopher Fremantle at Morgan Stanley. If you could please ask your question.
Good morning. I had two questions on tax. Firstly, on the current tax that you have reported, which looks like a sort of ongoing tax rate of around 10%. I just wanted to check if you can give us any more color around your expectations for tax for the full year. Secondly, obviously there has been a reasonable amount of news flow on potential tax changes in Sweden, and I wanted to ask you a more general question about how you think that could affect Pandox. Thank you.
Okay. Yes, I guess that is a question for me. When it comes to the current tax, as we mentioned on the last call, this is the expected run rate for the year. This is of course due to the fact that we are more profitable in Brussels. Brussels, our bedroom is going better. We do not have tax loss carry forwards, or it does not work in the same context there. We also have a greater business in Germany, where there is a sort of tax burn around 10%-13%. So this is the run rate we expect for the year, as we said. To the other question-
Sorry, just to interrupt.
Yeah.
You mean the percentage rate that you have reported this quarter, that is the run rate for the full year, or are you talking about the total amount?
The total amount.
Okay. Thank you.
Thank you for that. On the other question, there are probably a lot of people who know this better, but I do not think actually anyone knows this very well. The propositions have gone back and forth, and it is very unclear what will happen. I think everybody believes that something will come out, but how the tax proposition will look for Sweden, we do not know. I can only say two things, that in Pandox we like to keep. Even though we do transactions, we rather buy than sell, typically because we look at the cash flow and long-term value add. That together with the fact that this is a Swedish tax proposition, and there are large Swedish tax loss carry forwards. Of course that would be affected for the future, but this is nothing that we worry about too much for the time being.
Okay. Thank you.
Next question comes from the line of Albin Sandberg at Handelsbanken. If you could please ask your question.
Yes. Hi there. I was cut off during the call, so you might have already commented on that, but I will ask the questions anyway. Just starting off, Liia, on the central cost line. Is Q1 representative for the company as a whole now, given the size of the portfolio?
Yes. Of course, it depends on the activities we do. As we said, we look at acquisitions all the time. Some go through, some do not go through. But I think that is representative of what we look like as of today.
Okay, thanks. I think you were commenting on the Stockholm hotel market about increasing supply and still quite strong numbers coming through. Do you think that kind of supply, has that come through now, or is there more supply coming through on the market for the rest of the year?
With the information we have, the announcement of new hotels that is coming down, we see 3%, maybe in two, three years now in front of us. We will, of course, press the rental, specifically maybe the rate. That is something we take into our forecast for the future, that Stockholm maybe has more capacity into the market than maybe the underlying market will go for. On the other hand, you can say that Stockholm has surprised us many times the last few years by being very strong in international meetings and with more hotels into the market, more capacity, Stockholm are stronger into the international meeting segment. That is the positive part of it. It is a little bit positive on one hand and negative on the other hand. We believe Stockholm is a good hotel market to be into, but maybe not buy hotels at the moment.
Okay, and my final question. The comments about refurbishment, Montreal and Berlin. Is that going to continue into 2017, or was it only for Q1? I did not really get that.
For Montreal, we stop now in Q2, and that is a very strong hotel market. This year, we have an anniversary in Montreal, so we stop it, and we will continue to do the rest at the end of this year and beginning of the next. Similar wave of Berlin. Q1 is normally we are very active and do a lot of investment because of lower demand. That is something normally. What is special with these two hotels that they are our two largest, that they are at the same time out for a renovation. That means that has a slightly negative effect on the Q1 result.
Okay. Great. Thank you very much.
Thank you.
There is currently no further questions.
Okay. If there is no further question, I would like to thank you all for your interest. I would like to take the chance to remind you that we hold a Capital Markets Day next week in Stockholm, the 9th of May. The focus will be the property management, and you can find more information on event on our webpage. Please notice that we are good handball players, and you can see on the film that we present our way as players. However, we start with breakfast and registration at 7:30 A.M., and the presentation will start one hour later, 8:30 A.M. There will be full day program, and I really hope to see you all there. Thank you for your attention, and goodbye.
That does conclude the conference for today. Thank you for participating. You may all disconnect. Speakers, please stand by.