Well, good morning, everybody, and welcome to Pandox Report Semester One, 2016. My name is Anders Nissen. I am the CEO of the company. I also have Liia Nõu, the CFO, and Anders Berg, our Investor Relations Manager. Again, that is as normal. A short introduction, financial review, then we will make a deep dive into the report, market, business, and Q&A at the end. Let us move over to page number three. A short introduction. Most of you know us very well, so we wrap up this quick. This is Pandox. We are the leading hotel property company in Europe. We own 112 properties in the upper middle and the full-service segment in eight countries. That has a portfolio market value of SEK 32.1 billion. The business model is divided into two boxes.
One is the property management, where all the lease agreement is into, and operator activities is our own operations. The property management, which is our main strategy, where we sign long leases with the best operators, representing 78% of the portfolio market value and 92 hotels. Operator activities, which are the hotels we operate ourselves. You should look at it as a risk minimizer. There are also, of course, opportunities for us, but minimize in that way that we always have the capacity of taking over a hotel if the operators fail for some reason. That is representing 22% of the portfolio value and is 20 hotels. On the right-hand side, you see the map. There you can notice that Sweden is the largest component. Now it is Germany, bigger than the second biggest. But it is a strong base in Scandinavia.
Let us move over to page number four, the business highlight in April to June 2016. We can report a strong development for property management, and opposite, a weak development for operator activities, but that is as expected and in line with what we have communicated in Q1. The property management has a rental income decrease by 20%. Like-for-like is an increase of 10. Half of this growth is organic, mostly it is market. The other half is coming from the acquisition of the Norgani portfolio with 18 hotels. Operator activities, we have a net sales decrease by 12%, and the like-for-like, a decrease of 10. This is primarily explained by the terror attacks in Brussels, and again, as I said, the number is in line with what we have communicated before, but let us come back to Brussels later on in this presentation.
We can also report that during the quarter, we have extended 19 leases with Scandic in Nordic. Something called Shark 2 that we will invest together with Scandic, SEK 470 million, which Pandox part is about 50%. This confirms our strategy and business model that we sign long leases with the best operators, which we believe Scandic is definitely one of them. Some sort of sum up for my first part is that the cash earning this quarter increased by 11%. Now I move over to Liia.
Thank you. We are now on page five. A good quarter with solid growth and earnings. We have positive like-for-like growth in revenue and net operating income from property management of 10% and 13% respectively. We have negative like-for-like growth in revenue and net operating income from operator activities of -10% and -15% respectively, as expected due to the terror attacks in Belgium. Cash earnings increased by 11%. The increase in the quarter in current tax is affected by higher profits in Germany after acquiring the 18 hotels in the end of 2015, and provision effects between the first and second quarter. If we adjust for the provision effects between the quarters, the underlying cash earnings for Q2 would have been 15%. From year-end 2015, investment properties experienced an unrealized and realized portfolio value increase of 2.7%. For operating properties, the unrealized value increase was 1.2%.
EPRA NAV per share amounted to SEK 114, an increase of SEK 6.3 from year end. Adjusted for the payment of the dividend, the return is 9.4% for the first six months. Turning to next page. Second quarter, we have strong demand in Sweden, Finland, Denmark, and Germany, and also a positive calendar effect from Easter in second quarter. Positive organic growth generally in basically all of the lease portfolio. Good growth and profitability for the acquired 18 hotels in Germany. The negative effect, as Anders mentioned, in net operating income in operating activities from the terrorist attacks in Brussels, amounted to approximately SEK 28 million in the second quarter, and SEK 35 million for the first six. The earlier communicated negative effect for the full-year of SEK 40 million is reiterated. Central admin cost of SEK 32 million in the quarter. It is higher than in previous quarters.
This is due to higher non-cash provisions for our long-term senior executive incentive program described in the prospectus from June 2015. Also non-recurring costs around SEK 4 million-SEK 5 million, especially in the area around sustainability and also in investment relations. Turning to the next page. Property management. Good development in growth and NOI margin, 88% in the second quarter versus 83% for the same quarter 2015. This is an effect of lower property costs due to previous investments made, but also due to new leases signed in Germany when acquiring the 18 hotels in the end of 2015. Like for like, revenue and net operating income, 10% and 13% respectively. Good demand in hotel markets and a positive calendar effect. Like for like year-to-date revenue and net operating income is 6% and 7%, respectively.
RevPAR for the 18 hotel properties in Germany, which we acquired, grew by 6.2% in the second quarter compared with the German market of 5.9%, and with a good profitability increase. Rental income for the first six months. We have a graph in the right corner. Sweden accounts for around 50%, and now Germany is our second biggest market with 17%, followed by Finland and Denmark with around 10% respectively. Turning to next page. Operating activities. Like for like revenue and net operating income decreased by 10% and 15% respectively, reflecting the terror attacks. Denmark, Canada and Germany performed very well, while Norway and Sweden were affected by some efficiency improvements costs relating to the recent takeover of operations.
The NOI margin adjusted for the Grand Hotel Oslo, where we operate the hotel, but we do not own the hotel, i.e., we lease the hotel, is 26% for the quarter and was at 27% last year. Of course, affected by the terrorist attacks in Brussels. For the first six months, revenues in operating activities. The six hotels we have in Belgium represented 35% of the revenues. Germany, where we have four hotels with own operations, represented 21%. Canada, two hotels, 20%, and so on. Turning to next page. Property portfolio. Total property portfolio market value as of June 2016 amounted to 32.1 billion SEK. The average valuation yield for the investment properties is 5.8% versus 5.9% in the year end. In first quarter, it was also 5.8%, but it is actually a poor basis points yield compression. It is a little bit lost in the decimals.
It goes from 5.79%- 5.75%. This is primarily in Sweden, Norway and Denmark. The unrealized value change in second quarter, SEK 319 million for investment properties. Out of that, approximately 50% comes from yield compression and the remaining 50% from improved cash flow from market, but also from previous investments being made. As of June 2016, average valuation yield for operating properties was 7.6% versus 7.5% in the year end and also in the first quarter, i.e., small increase in yields actually. Reclassification of Thon Hotel Fagernes and Thon Hotel Sørlandet from investment properties to operating properties. Turning to next page 10. A solid growth in EPRA NAV and continued high financial flexibility. EPRA NAV per share 114 SEK versus 107.7 last 2015. Adjusted for dividend payout, 9.4% for the first six months. Loan to value, 47.9%, net of cash, 46.8%.
That together with the liquid funds and long-term unutilized credit facilities of close to SEK 2.6 billion, we believe we have continued high financial flexibility. Turning to page 11. Good development with positive organic growth in basically the whole lease portfolio. Like-for-like rental income and net operating income from property management increased by 10% and 30% respectively. Like-for-like revenue and net operating income from operating activities decreased to 10% and 15% respectively. High financial flexibility based on sustainable cash-on growth and low financial leverage. With that, I hand over to Anders again.
Thank you very much, Liia. If we look at page number 12, it is this, the hotel market. We sent out a forecast in November 2015 according to our Hotel Market Day that we predicted a market growth of low single digits growth. You can see in development of the first quarter that there are some markets who are in line with that expectation, and some are better. U.S. and Europe as a whole are in line, and Scandinavia and Germany are better lucky for us. That had been a strong quarter for Scandinavia. If you look at the numbers, Stockholm 20%, Helsinki at 12%, Copenhagen 15%, and Oslo stable numbers. This is driven by both leisure and meeting and transit. That is very positive news. We also see very strong generally in Germany, the same sort of driver in Scandinavia, but also strong fares in the Q2.
The big market in Germany, like Frankfurt, Dusseldorf, Cologne, Hamburg, for taking a few examples, are driving a lot from fares and there have been fares over Q2, and there had been more participants on these fares than what we expected. If you then move over to the negative side, you can see that Brussels is down 29%. London has a negative of 3%. This has nothing to do with Brexit. It is more for the currency, strong at least as it was before, and new capacity coming into the market. New York is down, also currency and coming from very strong numbers. As a whole, very strong market and peak is Scandinavian and Germany. Let us move over to page 13. Then we are sum up the key drivers for cash earning for Pandox. The market growth is good.
We predicted still low single digits that maybe can look a little bit conservative, but we are meeting a strong second half. The growth will be slower, but still we will see a growth in the market second half. That is very positive. You see the quality of our portfolio, meaning that we at least will take the piece our fair shares in the market. Portfolio investment is ongoing with the target of always produce 8%-10% return, which we still can present. The operations is in the ramp-up phase. We, of course, will see a better Brussels on Q3, and we will most likely see a stable Q4 in Brussels, meaning that the market is under recovery, even if it is going slow. On the top of this strong drivers, we see a lot of opportunistic acquisitions that we hopefully someday can present for the market.
All in all, a strong quarter, specifically on the lease portfolio. Thank you very much. That was the presentation for Q2 2016 from Pandox side. I move over for Q&A.
Thank you. As a reminder, if you wish to ask a question, please press star and one on your telephone keypad and wait your name to be announced. Once again, it is star and one if you wish to ask a question. Your first question come from the line of Fredric Cyon. Please go ahead.
Good morning, Fredric from ABG Sundal Collier here. A few questions from my side. Starting off with the CapEx levels. You announced this investment program with Scandic now. What do you expect in terms of CapEx going into 2017?
Well, the same numbers more or less as we normally do. Let me answer this way, that this SEK 600 million was ongoing at the moment, that will of course increase because of this investment program. On the other hand, if you look at how much we can do in 2017, because of course you cannot do all this SEK 700 million in one year. It will be something in the area of SEK 350 million - SEK 400 million.
I think the Scandic program, that in specific is SEK 235 million. We expect that to be about two, three years.
Yeah.
The total commitment investment for service is with this SEK 235 million is SEK 880 million. But that of course is for a period which one should look at two to four years.
Those program, we always try to pick them in low season. As Liia said, this specifically program will be organized in 2017 to 2020.
But that is on top of the, let us say, rolling SEK 400 million that you have been investing.
Yeah.
Yes. As I said, for the SEK 880 million we have, which we have good investment cases going forward. That is for the three, four years to come. Those are typically investments that have a yield, which is at least 8%-10%.
Then on the paid tax, you mentioned that there were some one-offs. Can you update us on what to expect in actual paid tax for the next year or so?
Yes. As was mentioned on the previous call, on the last quarter, we are happy to announce that we are quite a profitable business in Germany with 18 hotels. However, that means also that there is some payable tax. We estimate that to be around SEK 45 million-SEK 50 million for the full-year. There is some provision effects, i.e., we did a provision for this full in first quarter, so the SEK 25 million which is in there in the second quarter should be seen as for the first half year.
Then two more additional questions. RevPAR fell year-over-year in operating activities in the second quarter, which wasn't unexpected given the terrorist attacks. Given the guidance you reiterated here, would you expect the RevPAR growth in operating activities already in Q3?
That is a very good question, my friend. I will say no, I don't think we will see a RevPAR growth in quarter three, but you will see a recovery in Brussels. The other hotels, which is not in Brussels, are performing well, but the negative effect in Brussels is still more. So I will say maybe hopefully stable.
That's very clear. Then the final question on the obvious one, the acquisitions. LTV is now down to 48%. How do you view the transaction markets? Are there any opportunities for you in the short term to make any significant acquisitions?
Well, we have said since Q4 last year that we are expecting that the liquidity in the market will go up because it is always like that when the market is strong, that some players decide to sell. We see that is coming out in portfolios and single hotels. Of course, it is a normal process for Pandox to be looking at these sort of opportunities. Again, we have nothing to report.
Thank you. That was all my questions.
Thank you.
Thank you.
Thank you. Your next question comes from the line of Erik Granström. Please your line is open.
Thank you very much, Erik Granström from Carnegie. I just had a question, if you could clarify a little bit about the extraordinary costs within central admin. I think you mentioned that you first of all have the incentive program, but then you also have costs related to the fact you are now listed, IT department and so on. But you also stated in the report that there were some other extraordinary costs. Could you just sort of quantify those, if you may? Thank you.
Yes. The second quarter has been a busy quarter, and I think we have had quite a lot of work around the area of sustainability. There is a lot of work and building a platform from this. This is something which is, of course, very important, and we will present it as we go along. But there are some non-recurring costs which is associated with this, especially. Then there is also some legal costs in the areas of the new regulations around insider dealing, the MAR regulations, and et cetera. So we estimate the non-recurring cost of the second quarter portion to be around SEK 4 million-SEK 5 million.
Oh, okay. Thank you. Very clear. Then just a few questions. One is on the yield requirements regarding operating properties that actually increased in Q2 by 10 basis points. Could you just give some flavor on why yield requirements increased for the segment as a whole in Q2? I find it a little bit surprising.
Yeah. Again, it is lost in the decimal, so it is not 10 basis points. We haven't made any downward adjustment for the yield, and there is some minor upward changes, especially around Belgium. Hopefully, we will see this sort of subsiding, but it is no major ones. Also, when it comes to the reclassifications of the hotels, the yield, of course, is higher when it is an operating property than when it is a mixed-in property.
Okay, perfect. My final question then is on the RevPAR development. Anders, you were talking about this very strong development in general in the Nordics, and especially in Stockholm, which was very favorable in Q2. If we look at Q3 last year, Stockholm had very strong growth in that particular quarter, 23%. Do you think that Stockholm could match that sort of rather difficult numbers that you need to beat in Stockholm for this Q3 to have some similar growth year-over-year? Is it going to be tougher in your view?
As you say, we are meeting now a very strong quarter in Stockholm, and we are expecting to be stable in Q3 in Stockholm, which is historical, very strong numbers. As a whole, there you will see growth.
Okay, thank you very much. Those were my questions.
Thank you. Your next question comes from the line of Christopher Fremantle. Please, your line is open.
Oh, hi. Most of my questions have been answered, but could you just comment a little bit more about the RevPAR development, particularly in the Nordics, and what you think the biggest risk there is to the RevPAR development? Clearly, it has been very strong. Are you seeing capacity coming on stream at all? Or should we expect continued strong numbers in the second half and the beginning of 2017?
Well, as you know, Christopher, the demand in the hotel industry coming from economy activity and now people are more wealthy, and we see a very strong trend in that in the
Yeah
Nordic countries. This is a Nordic market. Of course, you see more and more people out of Europe traveling up to Scandinavia as well, but it is primarily Scandinavian markets.
Yeah.
Long as you have these strong fundamentals in this Nordic, you will see at least a stable market. Then some quarter will go up and down because of bigger meeting or other big event one-offs. But if you look at it from a longer lines
then you see some sort of growth in the second half 2016 compared to 2015, even if we meet up with very strong months last year. This is my best answer.
Okay. But you are not seeing any change in sort of growth and capacity?
Yeah, of course. Sorry, you also say that. Not in the second half. You will see from the beginning of next year that the capacity in Stockholm will grow something like 3%, and then we have 3%, three years in a row. That, of course, will taking down specifically the rate component in Stockholm. But the rest of the market, the new capacity is quite limited. No new hotels in Helsinki, which is very strong at the moment with the Asian segment is growing a lot. You see limited in Oslo, limited new capacity in Copenhagen as well. The only market you see a lot of growth into is Stockholm. We should knowing when we are saying that Stockholm is very strong, that if we look at it from the last peak, it is still just 5% above. So there is still room for improvement.
When you say 5% above, you are talking about the RevPAR level or?
At 2007 RevPAR, if you compare
Yeah
nominal from 2007, now coding 12, 16, you have a growth of 5%, which is not impressing at all.
Yeah.
Something we very often forget that the Nordic countries are in the line of coming above this 2007 level or just over as Stockholm is. So that is normally, if you look at market who is in head of Scandinavian like Chicago and Boston, Northeast U.S. or some market out in Europe, they are 15%-20% ahead of 2017. So if you believe that Nordic will go in that area, maybe not so strong, but at least in the same direction, there is still room for growth.
Okay. That's very clear. Helpful. Thank you.
Thank you. There are no further questions at this time. Please continue.
Okay, then I would like just to say thank you to all and repeat that we have on the 22nd of November our next Hotel Market Day. As you know, that is our 21st Hotel Market Day, and it will be a very exciting program which we will come back to you in a few weeks. Please make notes on the 22nd of November. Half day from 1:00 to 6:00, and a nice after dinner as well. That was all from Pandox today.