Entra ASA

OSE:ENTRA

Earnings Call Transcript 2020-Q1

[Sonja Horn, Chief Executive Officer]

Good morning, and welcome to Entra's first quarter presentation, this time brought to you by webcast only. We thought we would start by giving you an update on the COVID-19 situation here in Norway. It's developed very quickly. And on March 12, Norway came to a partial lockdown, where schools, kindergartens were closed, and the population was encouraged to work from home. Entra acted swiftly in this situation, and our priority has been to safeguard life and health and also make sure that we take responsibility for containing the spread of the infection. All our employees have been, to the extent possible, working from home. And we already have the technological platforms in place to enable remote work efficiently. Our contingency plans were put into effect swiftly, and we have maintained normal operations in all our buildings, providing the services and also property management uninterrupted in this entire period.Since April 20, Norway has started opening up again. And schools and kindergartens are now open, and also some services like hairdressers and physiotherapists and even restaurants are starting to open up. The Norwegian government has put into place necessary measures to both support the people and the businesses in this demanding situation. Temporary unemployment has risen to 10% in the period. And the government came out with a guarantee solution for 20 days of salary. They have also provided a package for businesses affected with a fair loss of revenues, where their 80% to 90% of unavoidable fixed costs will be covered, hereof also including office rents. The key policy rate has been reduced with 125 basis points to 0.25% in these weeks. And the financing market has been supported through a state guarantee scheme for bank loans and also a new government bond fund.Finally, the Norwegian government has significant muscles to support and stimulate the economy through this crisis, ensuring that we will get through it and back into a recovery.Moving on to some highlights for the quarter. Entra provided rental income of NOK 587 million this quarter. Net income from property management of NOK 357 million. Due to the uncertainty in the future, Entra has chosen to keep the property valuations from year-end 2019 in our balance sheet, despite external appraisals coming out with value increases of 2.5%. Thus, the net negative value changes of NOK 337 million is related to changes in the value of financial instruments. Profit before tax came out at NOK 58 million in the quarter. We were also pleased to see that we had very limited effect of the COVID-19 situation in our operations in the quarter. We have had a strong quarter in respect of net letting, 15 million this quarter. And we have also finalized our projects in Trondheim according to plan in Holtermans veg 1-13.Entra is in a solid financial position. And our Board has found no reason not to continue with the proposed dividend of NOK 2.40 per share for the second half of 2019. This is subject to approval at the Annual General Meeting later today and will be paid out then on May 12, leaving us then with a total dividend of NOK 4.7 for the full year of '19. Considering the dividend for the first half of 2020, our Board will discuss that ahead of the second quarter presentation. As already mentioned, we had a strong quarter in respect of letting. We signed new leases and renegotiations for 86 million in the quarter. That's a total of 36,000 square meters. Now in this -- all these contracts, we also saw an average rent uptick of 5%. We, at the same time, have terminated contracts of 45 million. Out of this 32 million is related to the renegotiations with existing clients, who have moved to different buildings or prolonged their contracts. So net letting of 15 million in the quarter. Some of the largest contracts this quarter were signed at Skøyen in Verkstedveien 1, where the Norwegian Health Network signed 5,200 square meters. And at the same time, the Norwegian eDirectorate have prolonged their -- renegotiated their contract of 3,900 square meters. At Langkaia in Oslo, a public tenant signed 2,400 square meters. At the same time, you see there Yellow Pages are vacating that same premises taken up for the public tenant and moving to a different location in the building. In Fredrik Selmers vei 4 at Helsfyr, the Norwegian Tax Administration has signed another 1,500 square meters, meaning that they are now occupying the entire building at Helsfyr.Our occupancy rate is currently at 97.4%. That's up from 97.1% in the last quarter. Average lease duration is currently at 6.9 years or 7 years, including the project portfolio.Entra has a very solid tenant profile. We have 58% of our leases from public tenants as of the first quarter, remaining 42% from also large solid private tenants. Some of our smaller private tenants are expected to suffer, or potentially suffer, from the either COVID-19 situation or oil decline. However, we have taken a hands-on approach to this, and we are following up each of these clients on an individual basis. Anders will get back on some more details on this later in the presentation.Now as you can see on the table to the right, we have a very well-diversified tenant structure. Our 20 largest tenants, 17 of them are public. The largest one tenant representing 5.5% of rental income only. And within each of these large customers, we have signed several different contracts on different properties, also then diversifying the risk within each of these customers. We also have a very well-staggered lease maturity profile, leaving us with limited renegotiation in each single year.A few words on our portfolio in Stavanger this quarter. Stavanger represents only 5% of our property values. Out of this 6% rental income from Stavanger, we have 50% from public tenants on long leases, leaving us only with a 3% rental income, which is related to our fully consolidated JV at Hinna Park, where Entra is attributable for only 1.5% then of the rent in Hinna Park.Entra has proven ability to keep the occupancy rates high in our portfolio and even through the financial crisis in 2008 and '09 and also the oil crisis in '14 and '15, our occupancy rates remained stable and high. We currently only have 3 ongoing projects in Entra, and they are all being developed according to plan in spite of the COVID-19 situation. On a general note, we can say that the constructions are fixed-price contracts, and the risk is, therefore -- to COVID-19 is therefore only related to potential delays following the situation and also then delays in cash flow. Currently, Kristian Augustsgate, we have seen some delays due to materials coming in from Italy at a later rates. And we have chosen to move the planned completion date for that from the end of the third quarter to the end of the fourth quarter.In Universitetsgata 7-9, the project is developing according to plan, both in respect of time, quality and cost. Here, we have seen that the rent pre-let ratio has been increased from 49% to 52% in the quarter as one of our tenants has called an option to increase.In Universitetsgata 2, also the project is progressing according to plan. This is the Rebel project, where we have targeted a rental group of smaller tenants within the technology sector, and these typically sign these contracts closer to completion, so 6 to month -- 12 months ahead of completion. We expect to see more development in the occupancy rates.We also have 4 redevelopment projects in Oslo that we have worked on for a while, which we were ready to start this year. They are all centrally located in the city center of Oslo. And in addition to that, we also have several new build projects, both in Oslo, Trondheim and Bergen, which can be started upon signing leases. We now believe it is important to retain some flexibility. And we are currently doing a reevaluation of the project starts we had planned for this year in light of the changed market environment.In the quarter, we finalized 1 project in Trondheim. This is the first phase of a potential 3 steps in the same land plot. It's a building of 11,700 square meters, certified BREEAM-Nor Excellent. It's been 98% let upon completion. The Norwegian Tax Authority is the largest tenant there. And the total project cost has been brought down from NOK 352 million to NOK 346 million upon completion. Yield-on-cost here is at 6.3%, and the project started reporting at 6.0%.A few words on the current market situation. Firstly, the outlook for Norwegian macro has changed quite dramatically over the past months. Mainland GDP fell by 14% in March, and it is expected by Statistics Norway to be reduced by 5.5% at the end of this year. There has also been a sharp increase in unemployment from 3.7% to current levels at 10%. However, this number includes temporarily layoffs, and we do expect that once society gets back to a normal situation, a lot of these jobs will come back to life. So Statistics Norway expects that unemployment will be around 6% at the end of the year and further down to 5% the following year. Also, according to Statistics Norway, the recovery from the lockdown is expected to happen faster in Norway, seeing that Norway has started coming back to society faster than our trading partners. And Norway also has greater room to maneuver, both from a fiscal and monetary policy. And we also have strong financial muscles through the government state pension fund. The Norwegian currency has also depreciated against most of our trading currencies. So how is this expected to pan out in the property market? Very difficult to say. However, it's true -- well, it's much too early to say also how it will affect the demand side. But what we are experiencing in the current market environment is that our ongoing processes with public tenants are proceeding according to normal progress. We're also seeing that the public sector is coming out with new searches. So for the public sector, it's very much a business-as-usual sentiment. Looking at the private sector, even there, we're seeing that the processes started pre-COVID are continuing, however, at a slightly slower pace and very limited new search is coming out from the private sector. What we typically have experienced in previous crisis is that the private tenants tend to prolong for short-term periods in these times of uncertainty, meaning that they, to a limited extent, go out and sign large new contracts in this current market situation. It is, however, a fact that the fundamentals in the property markets are very strong going into this economic downturn. Starting with Oslo, where Entra has 73% of our portfolio, we saw that we currently now have 5.5% to 6% vacancy in the overall market. If you move into the city center of Oslo, the vacancy is as low as 3% to 4%. New build activity has been very limited over the past 5 years, and in the next 2 years, 2020, 2021, volumes are expected or non-new builds are at 175,000 and 150,000. We might see some delays in when they come into the market. However, the levels are around what we would consider to be normal of 150,000 per year. We've also seen that we've had a strong market trend growth over the years. So we're also in a strong market rent situation. And what we experienced during the last oil crisis was that in Oslo, only the heavy oil clusters in the west fringe, typically Fornebu, Asker, Sandvika to some extent, were affected by the oil price crisis. The rest of Oslo was very unaffected.A few words on Bergen, where we have 11% of our property values. Here, the vacancy now is between 7% and 8% in the overall market. Again, in the city center, vacancies are much lower, 4% to 5%. Entra's portfolio is in or very close to the city center. And here, there's been very limited new supply coming into the market. We have also experienced very strong demand for modern, efficient office space close to the city center. So again, the oil cluster is -- in Bergen are located in the fringe areas south of the city. What we experienced during the oil crisis was that they suffered from increasing vacancies and declining rental prices. However, the city center was not affected. We currently have very low vacancies in our portfolio, 2.8% in Bergen, and we have an interesting development pipeline also in the city center. In Trondheim, we also have 11% of our property values. Here, the city center is less defined. New supply is also more available. We've seen strong new build volumes over the past 3 years. And only last year, 60,000 square meters came into the market. And known supply for the next 2 years is expected to be below 40,000 in total for these 2 years. Vacancies coming into the year were around 11% to 12% for the overall market in Trondheim. However, if you narrow it down to the city centers and the clusters close to the center, vacancies are at 7% to 8%, and that's where Entra's portfolio is located. Trondheim has very limited exposure to oil and gas. It's a regional administration center for public services, so as much as 38% of the workforce is related to public services, such as health care, defense, education, et cetera. Now we currently also have low vacancy in Trondheim, only 3.6%. And we have several letting processes ongoing and strong demand for our development pipeline. It's actually a fairly stable market in Trondheim currently.In Stavanger, as mentioned, we have 5% of our property values. And this is, of course, a market which is much more volatile to changes in oil prices and investments. And our exposure here is, as previously mentioned, very limited. We also have very low vacancies in our portfolio in Stavanger, less than 1% in Entra's portfolio. The transaction market, which was very strong prior to the corona outbreak, has now taken a pause as most processes are halted. The prime yield was 3.7% coming into the COVID-19 situation. It's very difficult to assess how this is going to affect the transaction markets, but the situation is not caused by any financial crisis, meaning that also we're seeing that the financial markets are still functioning. And seeing also that the key interest rates have come down by 125 basis points, we are now also seeing significantly increasing yield gaps.So thank you. Anders, some more details.

[Anders Olstad, Deputy CEO & CFO]

Thank you. On the financial situation, the numbers for Q1 came out pretty much as we had expected on the operational side. So I will focus on 3 things on this presentation. Firstly, the value changes on the assets on the financial derivatives; second, the revenues at risk following the oil price decline and the COVID-19; and thirdly, our financial situation. So going to the revenues, ended up at NOK 587 million for the quarter, so NOK 8 million down from the fourth quarter primarily driven by 3 assets going out of projects and partly offset by the CPI. If compared to the first quarter last year, we're up NOK 2 million from NOK 585 million, and as always, there's a number of things happening. Firstly, 1 acquisition, 3 divestments and 8 assets coming in and out of projects. The key interesting fact from Q1 '19 to Q1 '20 is basically strong rental uptick in terms of like-for-like growth of 2.3%, i.e. 70 bps above the CPI. Net income from property management coming in at NOK 357 million. So we're NOK 27 million down from the fourth quarter, primarily driven by reduced revenues, some higher admin costs and also increased financial costs. Compared to the first quarter 2019, we're down about NOK 17 million, all due to increased financing costs. Then in terms of the profit before tax coming at NOK 58 million. This is driven by the change in values. And let me take the financial derivatives first. Due to the sharp decline in the market interest rates, our hedges had a net increase on the liability side of NOK 337 million in the quarter. So for the balance now is NOK 405 million in total. So that goes for this minus NOK 337 million. Then we had a special situation regarding the valuation of the assets. Our 2 external appraisers delivered their valuations pre COVID-19, i.e., they did not take into account any potential effects from the COVID-19. So basically, our values appraised by NOK 1.2 billion or NOK 1.168 billion to be exact. When we see these numbers, clearly, the COVID-19 will have some kind of effect. It will affect the economy that could affect the market yields. It could affect the rental -- the market rents. But on the other hand, it can also be offset by increased spread between the yields and the lower interest rates. It could be that the market would value long-term secure cash flows relatively higher than we've seen in the previous years. Clearly because in the last couple of years, we see that risk hasn't been a sort of a key factor into many valuations. We believe that will change. So there will be some kind of offsetting effect on the possible negatives. But anyway, when we had -- our judgment call was basically either we put 0, basically keeping the valuations from Q4 or taking the full effect of NOK 1.2 billion. Anywhere in between will be kind of half pregnant, and we believe that is a difficult situation to be in. So we decided to go now with a 0 write-up in the portfolio. That also means that for the second quarter, we have a NOK 1.2 billion, call it, buffer in terms of our balance sheet. And then we will, together with the appraisers, look at the real effect on the COVID-19 and how that -- our estimates and on how that will affect the revenue market -- or the real estate market.Cash earnings coming in annualized 4-quarter rolling at NOK 8, so up 13% CAGR. The main driver for this flattening in 2019 is the increased financing costs, NOK 60 million in additional financing costs from '18 to '19, which corresponds to about NOK 0.33 per share. On the -- as we said, we had also higher financing cost of NOK 17 million from first quarter '19 to first quarter '20, which actually [ another 9 ] share as basically explaining the flattening out. And then we have the EPRA NAV and the triple-net asset values. EPRA put in place, on January 1, 3 new measures that would replace NAV and the triplet net. Those are the net reinstatement value, the net tangible assets and the net disposal value. In times like this, we believe it's important to have transparency and sort of keeping the history with us, so we have chosen to go with the old measures. You will see in our -- the back of our quarterly report, the NRV is detailed out, also the bridge between the NAV and the NRV. On the net -- the NTA and the NDV, we still believe there is some more clarity on the definition side that we will discuss with EPRA, and we will bring them into our reporting throughout 2020. But again, NAV growth of 13%, triple net of 14%. If we include the dividends that we paid out since 2015 of NOK 19.85, it would have a CAGR of 16% and 17% correspondingly.On the P&L, there's not really much to say. It's pretty straightforward. Operating cost at NOK 42 million, same as last year. Other income -- other costs coming out a net NOK 9 million for 2020. We have sold the Tollbugata 1, the project that was forward sold, that also impacted the Q1 '19 numbers. Admin cost coming at NOK 50 million, on par with last year. And then the increase in financing costs that we'll come back to in a later exhibit. So all in all, no big surprises are on the financial figures. This is the same exhibit that we have shown in all quarters previously. Basically, summarizing the known effect on our rental income in the 6 quarters to come. We have made some adjustments for the delay of the project in Kristian Augustsgate 13, both in terms of the startup and also the somewhat more staggered revenues given that it's a more difficult market now for coworking than it was only about a month or 2 ago. Otherwise, it is the same. And then please bear in mind this is the summary of what is known to the market, i.e. projects in and out and the announced net letting. There will be changes to this in terms of new contracts coming in, lease upticks, changing occupancy. If the CPI is higher or lower than we expected, we had 1.9% now for the 2020. And not the least, any kind of black swans or unexpected events like the COVID-19. And let me just show you quick on how we assessed the impact of COVID-19 into our numbers. What we have done here is, as Sonja said, we have 58% public tenants, remaining private tenants, 42%. We have, on the left-hand pie chart, separate out into different industries. And then we have in the yellow pie indicated which industries do we believe are most affected by COVID-19 and the decline in oil price. And so that amounts to NOK 210 million or about 21% of the full annual income from private tenants. On the pie on the right-hand side, you will see -- we -- first, we have singled out the oil -- the annual rental income that we have from oil companies. It's a total of NOK 47 million. Those NOK 47 million is owned through a 50-50 joint venture, so they're fully consolidated into our account, the NOK 47 million, but basically half of it belongs to our partner in Stavanger. And then it's basically the companies or industries that will be most affected by COVID-19, typically working towards the end customers, retail, parking, coworking, food and beverage, tourism and also some typical small companies, less than 15 employees with less solid balance sheets. So all in all, annualized annual revenues for those what we define as most exposed industries of NOK 210 million, out of our total revenue base of NOK 2.4 billion. And then we -- not all of them will come into trouble, some will, some will have problems. And the way we work with them is as follows: firstly, all our assets are operational. We have not -- closed no assets, all are operational and available for our tenants, i.e., we have done our share on the bargain. Second, if companies do experience problems, we discuss with them, we might change from upfront quarterly to monthly payments that will help on the liquidity part, we might do some postponement on the payments, and we basically try to help them along without losing revenue from ourselves. But out of these NOK 210 million, NOK 60 million comes from turnover-based revenues, i.e., depends on our end customers or our tenants' revenues. That's a total of NOK 60 million, primarily from parking, retail, flex offices. So that's a total of NOK 60 million, that will be, at some extent, impacted. That said, the Norwegian put in -- the Norwegian government put in place a support arrangement for the companies that are affected by the COVID-19, i.e., if they lose 30% or more of revenues, they are entitled to be covered 80% to 90% of their fixed costs, and fixed costs include rent. So i.e., there is a strong logic for us getting a fair share of those support even though the companies might be in trouble. And again, we try to help them as good as we can.On the financial side, it's been a moderately active quarter, Q1. We tapped new bonds of about NOK 645 million. We repurchased some short-term maturities of NOK 195 million, and we rolled NOK 800 million in CPs, which leads us to a total debt of NOK 19.8 billion, of which 69% is market-based, bonds and CP, and the rest is bank. Of the total debt, 36% is from green financing, both from bank and increasingly from bonds. And we see that as sort of -- all new bonds we're doing now are green.Looking at the LTV and the interest cover. We're running a safe ship, so to speak. LTV now south of 40% at 39.7%, and the interest cover at 3.2%.Moving on to the average interest rate as of quarter end, we ended up at 2.91%. And with the current market using the forward curve, our existing margins, renegotiating the same price, hedges sort of -- forward starts coming into effect and also the old swaps coming out, the -- as you can see, the interest rate will go down quite a bit going forward. Actually, if you do the -- basically, based on the forward curve, the average interest rate should be 2.43% at the end of next quarter, giving us a NOK 24 million quarterly saving for the second quarter. That's -- we like that.In terms of the market, as it is, bond markets were rather difficult the last couple of weeks. While we, on a norm, typical 5-year bond would issue a bond at NIBOR plus 60 to 80 basis points, we now saw 200 basis points if we had gone into the market. It's now down to about 145 basis point for Entra. Entra is not in the business of printing those kind of spreads in the bond market. We don't want long-term financing on those levels. So that means we will not use the bond market in the current situation.The CP market is still open, at least for Entra. Normally, we do CPs at NIBOR plus anywhere between 10 and -- actually, we're now minus as well, but normally between 10 and 20 bps. Now it's about 70. So it's significantly more expensive than it used to be, but it's still a tad cheaper than bank financing. So we actually, last week, rolled another NOK 400 million CP in order not to draw up on the bank facilities. So the market is there, but it's having quite a bit more expensive than at least we have been used to.Finally, it's a bank market. And we're very happy with the relationship we had with the top 5 of the 6 Nordic banks. So basically, in alphabetical order, DNB, Handelsbanken, Nordea, SEB and Swedbank. We have strong and long-term relationship with all those 5 banks. And actually, during the -- in the midst of this crisis or at least in -- while the crisis was well underway, we extended NOK 750 million of a facility, and we also added NOK 0.5 billion in a new facility during this period. So it really -- so we're very happy with the partnership -- true partnership that we have with our banks. And it is an important part of our long-term financing structure. So -- and as we said, I think, every quarter the statement for the last 1.5 years, in a world of uncertainty, we didn't know that this was coming. But in a world of uncertainty, having a resilient financing is key. And on the resilient financing, let me just end my part with a few comments. This shows the debt maturity structure that we have. And please note the -- it's a well-diversified structure, both in terms of the financing mix, but not the least in terms of the maturities. So it's a well spread and staggered maturity. Second, I think it's worth pointing that we have, through undrawn RCFs and the cash in our books or cash in hand, cash in bank, we've got a NOK 7.3 billion of available liquidity. It's about 3 point -- it's exactly 3.2x the next 12 months debt maturity, or if you take the other way around, almost 3 years of all debt falling due, covered by available liquidity, which is a very strong and comfortable position to be in. Second, our bank and bond agreements are what you would typically call covenant light, which we believe are good. We have an LTV covenant at 75%, we're currently at south of 40%. And we have an interest cover of 1.4 and we're currently at 3.2. So in terms of this financing situation, it's -- Entra is in a very good place. Thank you.

[Sonja Horn, Chief Executive Officer]

Okay. Some closing remarks before we move to Q&A. These are very uncertain times, both seeing the COVID situation, also the oil price decline. And it makes it more or less impossible to have any firm view on outlook. However, what we can say is that the Norwegian government and the Norwegian -- or the government pension fund global has solid muscles, and they have been and will continue to provide significant support to businesses and the financial markets. The Norwegian office market has very strong fundamentals going into this situation and in particular also the Oslo market. We have low vacancies. We have a strong market rental growth. We have moderate new building supply and also attractive transaction market pre this situation. And finally, Entra is in a very solid position and also when navigating through these uncharted territories. We have a resilient tenancy structure with 58% public tenants. We have a track record of maintaining a high occupancy rate even through previous crises, and we have strong liquidity and financial position. So we have also a flexible development pipeline in respect of future growth. So we believe that Entra is well positioned to handle whatever future will come. Thank you very much. We are open for some questions. We'll step to the side here. I'll take my side, on the chair, 2 meters from me. And Tone, if you have any questions, please put it forward.

[Tone Kristin Omsted, Head of Investor Relations]

Yes. We have one question from Simen Mortensen in DNB. How has the rent collection been from non-government tenants in the second quarter?

[Anders Olstad, Deputy CEO & CFO]

Yes. Rent collection has been -- let me say that 58% of our tenants are public tenants. And they always pay, but some of them are notoriously late, but they do pay. In terms of the private tenants, as of Friday last week, it was 91% paid. So then it will be slightly higher now, but a bit north of 91%. I don't have the exact number for today, sorry.

[Tone Kristin Omsted, Head of Investor Relations]

No further questions.

[Sonja Horn, Chief Executive Officer]

No further questions. Okay. We'll wrap it up for today. Thank you so much for joining us. And we hope to see you physically next time, but will definitely be on our webcast. Bye.