Well, good morning, and welcome to Pandox report for Q3 2016. I am Anders Nissen, the CEO of Pandox. With me in the room, I have Liia Nõu, who is the CFO of Pandox, and Anders Berg, Head of Investor Relations and Communication. This presentation will, as normal, be divided into three parts. First, I will start off with some business updates, talking about market and what we are doing. Then I will leave it to Liia, who will do the financial highlights, and then we are ready for Q&A. Let's turn to page number two, which shows some headlines for the Q3 report, which we believe we report a strong growth in cash earnings.
On the first table up there, you see if you adjust for a one-time revenue of SEK 60 million and a tax compensation of those SEK 19 million, we have an increase of 18% in cash earnings, which we are satisfied with. This is coming mainly from three factors. First, a strong hotel market, good leisure, and good trade market, specifically in Germany. We have across the portfolio, a good operation performance, and I maybe can say that we have a bit of payoff in our strategy as good hotels in strong markets with turnover-based contract give us a strong momentum.
If we move over to earnings, we have improved in both our segments. First, looking at the property management, has an like-for-like increase of net operating income by 9%. That is supporting specifically by a strong performance in Finland, Denmark, but also Germany, and some sort of recovery a little bit better than planned in Norway. If you go over to operator activities, we increased our net operating income like-for-like by 5%.
It is also supported by Germany, Denmark, but also we will include Canada, which is doing fantastic at the moment. Having a quick look at Brussels, we have gradually improved the market, but maybe a little bit slower pace than expected. You can say that if you divided the market in three pieces, the first business market has been coming back as expected, maybe even stronger. The leisure is as expected, slow. What we are still looking for is more meetings. We believe now that those meetings will be— That is important for Brussels as a whole.
I think we will not see so much improvement in meetings in 2016, but you will have them on 2017, specifically after Q2. The negative effect on this attack in Brussels is we are now expecting just over SEK 40 million. Before we said about SEK 40 million, so a slightly decrease. Before I will move on to next page, I would like to highlight the return on equity, a solid 19% on third quarter, and that is measured on annual basis. Next page, please. Strong driver for explaining a good third quarter and a strong year so far. First, I would like to highlight that we have a high-quality portfolio.
Strong hotels, strong position, talking to all three important segments, business, leisure, and meetings, give them a strong momentum and a strong position in the market. That generating good growth in cash, and those hotels across the portfolio are at least in line with its competitor set. We always compare our hotels with the toughest competitors. That is a good performance, I would say. The second strong driver is our lease model with revenue-based leases, which give us an able to capitalize on a growing hotel market, which is very good.
As you know, we have security downsides because of our strong guarantees. The third one I would like to highlight is we have a good return on renovations and investments that we see hotel coming back from renovations grow faster than market. That is strong also pace for Pandox. We will see also an improvement in operator activities in various states. First, we have Brussels, of course, that we already have been talking about.
We have those hotels, five in Norway and two in Stockholm that we have been taking over because the operator did not perform as we expect them, and now they are under development, meaning renovations, change brand, supporting or change management, whatever we do, and that will take a few more quarters before we can report good numbers there, as we have said before, but everything is on plan and is going as planned. The two, one that we started with the first Lillehammer and Mr. Chip in Kista is above plan.
That is something I can say on an early stage. The rest of the portfolio, specifically Germany and Canada are doing great. The last strong driver for Pandox is, of course, the acquisition of 18 hotels in Germany. Those Leonardo in 12 different cities that we acquired last year in December, and they are performing better than expected and also better than the market. That is nice to also have mentioned. If you go to the next page, please, we go over to market.
The market is continued to develop very strong in the third quarter. We see a strong RevPAR growth in most of our key markets. If you see the table on the left-hand side, the key markets, you can see there on the right, Copenhagen, 18% up, fantastic. That is strong leisure and event market. Copenhagen is some sort of gateway to Scandinavian, so the leisure market is booming, and on top of that, they have had a very strong trade fair market year.
Now six years in a row, the market has gone up and we continue that will be stable. Montreal has a strong position favorable currency in Canada, good domestic market. A lot of U.S. people are visiting the city. On development and on top of everything, 1,000 rooms in our segment have been taken off for renovation. The Queen Elizabeth— The Fairmont Queen Elizabeth Hotel is out for renovation, which gives our market segment the boost even stronger than we expected. This is also something who is a strong driver. Helsinki benefit from the Asian demand in general.
Also, the local domestic demand is also waking up. Oslo, stronger than we expected. Strong leisure destination during the summer, and Norway as a whole is doing better also than we expected for a year ago. Some negative things, Brussels, we have been talking about. Frankfurt, they have a tough comparison with third quarter last year. The trade fair calendar is not favorable for Frankfurt this year. If I, on the other side, talking about another city, Dusseldorf has a favorable calendar this year, so they had gone up 20%.
That is three hotels that we bought from Leonardo, and we have had a strong start with these three. You can see trade market in Germany they are in different cities. This year, Dusseldorf is the winner and Frankfurt is doing slower. Maybe next year it can be opposite. Stockholm shows a very strong underlying performance, doing flat in third quarter due to the fact that we had two big meetings last year in Stockholm, more than 20 participants. In spite of that, the market is level out, and that is, of course, very strong underlying market.
Overall, I will say market had been strong in our key markets, and you can say that this 2% that Europe is growing, we believe that is quite stable at the moment. In most of the markets, as I said before, we are doing in line in the market or better. Next page, please. This is Pandox today. As you all know, our strategy is focused on long-term revenue-based lease agreement with the best operator. The other one is operator activities where we have an active model to combine our knowledge in properties, hotels, and operations.
These two segment is now ended up in 112 hotel properties with a value of SEK 33.1 billion. 91 of those are leased out. That's representing close to 80% of the property value, and 21 is operate in our own business, and that is representing about 20% of the total value. Our most recent acquisition of Hilton Grand Place is not yet including in this number.
That will come in on the next quarter. If you look at the map on the right-hand side, you can see that Pandox exposure to the international market has increased after the acquisition of Leonardo Hotels, and that is something which is important. That is the diversification is increased, and that means a more balanced revenue structure, which is something we believe is favorable in the long run. Next page, please. I would like to hand over to Liia Nõu for the financial highlights.
Thank you, Anders. Yes, we are pleased with our progress during Q3. Pandox benefited from a generally strong hotel market. Property management continued to perform well, and operating activities showed improved profitability. Some key numbers. Rental income property management amounted to SEK 479 million, an increase of 5%. Net operating income for property management amounts to SEK 409 million, an increase of 1%.
However, adjusted for one-time revenue of SEK 60 million in Q3 last year, rental income increased by 20% and net operating income by 19%. Net operating income operating activities amounted to SEK 130 million, an increase of 13%. Like-for-like property management reported an increase in rental income and net operating income by 7% and 9% respectively. Like-for-like operating activities reported an increase in net operating income of 5%, while the revenues decreased by 2%.
The decrease in revenues is, of course, explained by still slow Brussels market. The instantaneous interest rate continued to decrease due to swap contracts expiring, and our financial net amounted to SEK -114 million, reflecting a larger loan portfolio and also fees tied to our unutilized credit facilities, which we are happy to have.
Cash earnings amounted to SEK 386 million. However, adjusted for one-time revenue of SEK 60 million and the received tax compensation of SEK 19 million in the third quarter last year, cash earnings increased by a strong 18%. Measured from year-end 2015, the portfolio unrealized and realized value increase for investment properties amounts to 4.2%, and for operating properties, the unrealized value increase amounts to 1.4%. EPRA NAV per share was SEK 120.53. Adjusted for dividend of SEK 3.80, the annualized increase is 19%.
Next page, please. Property management benefited from a good demand in all guest segments in the third quarter. Market demand was particularly solid in Finland, Denmark, and Germany. Norway also improved. Sweden was largely flat due to a strong comparison with the third quarter last year, as Anders mentioned. For the first nine months this year, Germany accounted for 17% of total rental income. Please note that other property income for the third quarter 2015 includes a one-time revenue of SEK 60 million.
Also remember that we bought 18 hotels in Germany, included from January this year, that eight hotels in Sweden are excluded from April this year, the ones we sold, and that three hotels have been reclassified this year. Next page, please. Profitability in operator activities improved in the third quarter despite negative effects from Brussels. Overall operating activities benefited from the same positive drivers as property management.
Performance was strong in Denmark, Canada, and Germany. Brussels has gradually improved but at a slower pace than expected. We now estimated a negative effect on net operating income for the full year 2016 versus last year to just over SEK 40 million. For the first nine months this year, Belgium, Germany, and Canada together accounted for more than 70% of total revenues. Next page, please. For the first nine months, total unrealized and realized changes in value amounted to SEK 1,138,000,000, of which SEK 1,047,000,000 for investment properties and SEK 91 million for operating properties.
In the third quarter specifically, unrealized changes in value for investment properties amount to SEK 369 million and SEK 50 million for operating properties. The value increase, both in the quarter and for the first nine months, is explained by the combination of lower yields and favorable market developments and higher cash flow from previous investments, roughly 50/50, 50% coming from lower yield compression. At the end of the third quarter, the average valuation yield for investment properties was 5.7%, and for operating properties it was 7.6%.
Next page, please. Finally, my favorite slide on value and financing. It illustrates the Pandox track record in creating value, as well as the company's strong financial position. At the end of the third quarter, EPRA NAV per share amounted to SEK 120.53, an increase of 15% in the first nine months this year, and 19% on an annual basis, adjusted for dividends. Loan-to-value growth amounted to 47%, and loan-to-value net was 45.5%. Liquid funds and long-term unutilized credit facilities amounted to SEK 2,000,000, 801. To summarize, Pandox have high financial flexibility based on sustainable cash on its growth and low financial leverage. Next page, please. With that, I also hand over to Anders for some final words.
Thank you, Liia . I would like to conclude this presentation by summarize the main driver for cash earnings. First, the market is still too early to have a strong view about 2017, but we expect gradually a lower growth rate in our key markets. With that said, the underlying positive driver for hotels markets remain intact, I will say. The second one is the quality portfolio. We have spoken about that before, but hotels with strong position in good markets will give us a favorable growth position. The third one is investment we do in our portfolio where the pipeline of SEK 1 billion committed profitable investment, which step by step will add to our growth.
The next one is our own operation. You will see improvement in profitability in our own operations the next couple of quarter because of expecting improvement in Brussels. Not in Q1 because the second attack was, as you remember, in March, but the rest of the year, of course, will be strong. The last one, opportunistic acquisitions. This is of course, possibilities and the liquidity in the market, even if it's not strong, is good and we are active in looking into that sector as well. Thank you very much. Operator, thank you. We are now ready for questions.
At this time we will have our question- and- answer session. If you wish to ask a question, please press star then the number one on your telephone and wait for your name to be announced. If you wish to cancel your request, please press the pound or hash key. We will pause for just a moment to compile the Q&A roster.
No question?
Again, that is star one if you wish to ask a question by the telephone. Your first question is from Christopher Fremantle.
Hi, can you hear me?
We can hear you, Christopher. Welcome.
Hi, Anders. You wrote in your release that you said, you saw good prospects for improved profitability in your operator activities. Can you just be a little bit more specific there? I know this is an area where I think the analyst community find it quite hard to forecast that. Can you give us a little bit of help as to how big you think that improvement could be?
As I said here on the presentation before, the improvement in various states. First you have the Brussels, which we are now expecting to go down a little bit more than SEK 40 million. I believe that the market then next year in Brussels will be much stronger. You need to exclude Q1, because in Q1 last year it was rather strong. The market came back very strong from the first lockdown, and the market was up 16%- 15%, and then the second attack came, meaning that Q1 next year will be slower, but the rest of the year will of course be much stronger.
We see business on the books, specifically on big meeting is coming back on the city. We do not have give any number for what we are expecting, but of course, the expectation for the Brussels market is not coming back to the number we saw 14% and part of 15%, but it is much stronger than this year.
Okay.
If you then look at those hotels that we have been taking over, as I said, the Lillehammer and the [Habis], those two that we are starting with first, and they are above market, meaning that they are performing better than they did before when we took over, meaning that they are both producing more revenue and they also having good conversion into cash. These seven hotels that we took over should be also much stronger than it is this year, specifically on cash side, because first the revenue coming and after that you start to work harder with your productivity, meaning that you increase your efficiency.
That is also a number that you have this year will be much stronger, and it will also be stronger than it was when you had them on leases before. The third part of it is those hotels that we already operate. You can see in Canada, we expecting a very strong 2017. We have two hotels which are in a very strong position, even if we do a lot of renovation at the moment in Hyatt. We also having an anniversary in Montreal this year, so a lot of big meetings. So Montreal will be also stronger next year compared to this year. Germany as a whole will be right stable, we believe. So the operator activities is the one who we will expect to grow quicker. We will have the best growth space for next year.
Thank you.
Again, if you would like to ask a question by the telephone, please press star one on your telephone keypad. Again, that is star one. You have no further questions by the telephone.
Okay. Then we from the Pandox side say thank you for your interest. We would like to remind you about our hotel market day on November 22nd. It's absolutely more than fully booked, but we always have a seat for our strongest partners. So please, if you don't have market in your calendar, please do so. This year we will focus on China. It will be the 21st Market Day. We will focus on China, both on the hospitality side, but also investor of international hotel market. So I think we have great speakers. So I hope to see you all there. From Liia, Anders, and myself, thank you very much and goodbye.