Entra ASA

OSE:ENTRA

Earnings Call Transcript 2021-Q1

[Sonja Horn, Chief Executive Officer]

Good morning, and welcome to Entra's first quarter presentation brought to you here from Oslo on a crispy and sunny morning.Let me start with some highlights in the quarter. Rental income this quarter at NOK 591 million. That's up from NOK 587 million in the same quarter last year. Net income from property management of NOK 370 million. And in the quarter, our external appraisers have increased the valuations of our properties with 1.4%, leaving us then with a net value changes of NOK 880 million in the quarter. Profit before tax of NOK 1.290 billion.We've had a good quarter also in respect of letting, net letting of NOK 18 million. That's taking into account that Norway also went into a partial lockdown in the quarter, slowing down the pace, of course, in the letting markets. However, much of the same effect as we saw in the first or second quarter last year, and we expect it to pick up again as soon as society reopens.We have started up 2 new development projects in the quarter. We have acquired 3 properties and also divested 1. We have proposed a semiannual dividend of NOK 2.50 per share for the second half of 2020 to be paid out on May 4. It remains to be approved at the general assembly later today, but that would leave us then with a total dividend for the 2020 year of NOK 4.9, with a 4% dividend growth than last year.A few words on the letting and occupancy in the portfolio. As I said, we had an active quarter. We signed leases of NOK 57 million, around 37,000 square meters; and a few contracts terminated, only NOK 1 million this quarter, thus, net letting of NOK 18 million. Our occupancy is currently at 98.1%. That's about as close as you can get to fully let, meaning also that net letting going forward predominantly, of course, will be driven by our ongoing project pipeline.Average lease duration currently at 6.7 years, or 6.9 if you include the project portfolio. The largest contract signed in this quarter was with the police of Norway in Stavanger, where we signed prolongation in the building Lagårdsveien 6, which was acquired in the quarter. We also signed 2 contracts in Holtermanns veg 1-13 with Volue and WSP, which was also the basis for us deciding to start the project in this building. In Bergen, Nygårdsgaten 91/93, we signed a contract with the law firm SANDS, so 1,400 square meter. Also that, the basis for starting a project. And at Lilletorget in Oslo, we renegotiated a contract with Alternative to Violence of 1,100 square meters.As mentioned, we decided to start a project in Trondheim. This is Holtermanns veg 1-13. It's a larger development, which has been split into 3 phases. If you take a look at the picture here, you can see the phase 2 marked with the white line in the picture. And the building to the right of that was phase 1 in this project, which was completed 1 year ago. That building is now fully let. And the higher building on the left in the photo is then going to be phase 3. Phase 2 is a fairly large volume for the Trondheim market. Being a regional city, the typical normal lease size in Trondheim is somewhere between 501,000 square meters, and a large contract is more around 2,000 square meters. Naturally, that also means that you will have to bundle up quite a few contracts to reach normal pre-let ratios, which we tend to go for. Seeing also that these smaller tenants normally sign leases closer to completion, we decided to start the project on the basis of the 2 contracts we have signed.This building has a very attractive location. It's located right next to the University of Science and Technology in Trondheim, close to the city center. This is a part of the city which has currently low vacancy, around 6%; the overall vacancy in the Trondheim market being around 10%. And the product has been designed in a very modern attractive building with flexibility, enabling us to attract both smaller tenants and also large tenants. So we're confident that we will see pre-let ratios here pick up towards completion. Estimated project cost here at NOK 703 million and attractive yield on cost of 5.7%. Fully let, this is a building which should have a market yield somewhere around 4.5%. We're targeting BREEAM-NOR Excellent environmental classification for this building, which will be completed in the second quarter of '23.The second project we started in the quarter is located in Bergen. This is a building which is located right in the city center of Bergen, next to our existing building, Media City Bergen, which is then close to the bus central station in Bergen. The situation in Bergen is that you have very few new build opportunities in the city center. And in the premarketing phase, we've had pretty strong interest for this product. It's going to be a prime product targeting prime rents in Bergen. And we decided to start the project on the basis on the first contract signed with the law firm SANDS, also confirming that we're achieving the rents we're targeting.This is a building which has an estimated project cost of NOK 619 million. Estimated yield on cost here, 5.3%, and prime yield currently in Bergen is around 3.75%. The building should be completed in the fourth quarter of '22. And also here, BREEAM-NOR Excellent environmental classification. In respect to the market in Bergen, vacancies in Bergen currently around 9%. However in the city center, vacancy is below 5%. So an attractive marketplace to work in with good products.Moving on then to our list of ongoing projects. As you can see, the list is growing, and we've added then the 2 newbuild projects on the middle here of the table. The ongoing redevelopments, you can see that we have 2 arrows here, marking the changes since our last reporting in February. Occupancy is slightly up in our Rebel project from 52% to 54% and also at Schweigaards gate 15 from 31% to 34% occupancy. The total then project area under development currently at 180,000 square meters, and average occupancy on all the projects is currently at 59%. And once these projects are fully let, they should add revenues of NOK 530 million over the next years.We also acquired one building in the quarter, which we previously haven't presented. This is a building which was acquired through our JV, Hinna Park, 50-50 owned by Entra and Camar. It's a building of 26,000 square meters located at Hinna Park. We currently own the 2 neighboring buildings to this one, and there are some operational synergies for us in holding also this asset. And the building currently is 60% let to solid tenants with a 7-year average lease duration. So the transaction value here was NOK 375 million, leaving us with initial yield based on the passing rent around 4.8%. However, we see a substantial value uplift potential and working on the vacancy. And we're well set to work on that with our local team at Hinna Park. So our base case here is that we should be able to achieve a yield on cost somewhere between 7% and 7.5% once we have solved the vacancy. This transaction closed on April 15 of this year.We have been active in the transaction market in the first quarter. In total, we have acquired 3 assets and sold 2. We have previously spoken about Møllendalsveien 1 and Lagårdsveien 6 and Tollbodallmenningen 2 on our fourth quarter presentation. I just went through Kanalpiren. And Nytorget is an asset we hold in the city center of Bergen. This is a building which is going to go through a development over the coming years, and we have now sold this building to our JV, Hinna Park, enabling us to make better use of the organization there at Hinna Park in the coming years.A few words on the acquisitions. They're all representing a value-added dimension for us. Starting with Møllendalsveien 1, this is a building which is located next to our ongoing project in Møllendalsveien 6-8. The building has a short lease duration of around 2.5 years, and we see that there is a rent uplift potential in this building. Lagårdsveien, as I mentioned, we had an option to acquire this building from the current owner at a price of NOK 126 million, and it was valued at NOK 313 million when we did the transaction. And following that, we've also prolonged the lease contract, and there is still rent uplift potential and some development potential in this building. And then Kanalpiren, as I said, vacancy to be sold, representing a value uplift potential for us. And on the sales side, we continue to rotate out smaller assets and also assets of nonstrategic interest for us.A few words on the market situation. If -- starting with COVID, of course, we did see then a third wave of inflection coming in, in the first quarter and experienced new lockdowns from January and also heavy travel restrictions. However, from an overall perspective, Norway has handled the epidemic fairly well. We've had a few casualties, total of 708 casualties so far, and currently around 750 people in intensive care. Infection rates are declining, and our [ R ] is currently below 1 at 0.8. Vaccination levels are picking up. Currently around 20% of the population has received the first shot, and estimates are that the adult population should have received first shot of vaccination somewhere between July and August, thereby also reopening society and kickstarting economy.A few words then on the office market. As you can see from our consensus report, the graphs to the top right, vacancy is expected to increase slightly towards 7.6% this year. The picture is fairly nuanced. The highest vacancy levels, we see then in the west corridor of Oslo, somewhere around 10%, and also in the northeastern fringe of Oslo, around 10%. Moving into the city center of Oslo, the vacancies are currently much lower, below 5%, and that is also where we have our ongoing projects. And we see few newbuild volumes coming into the market here, which are not already pre-let.A few words on the market rent situation. As you also can see from the consensus report, we are back on a growth -- rental growth track, expected rent growth to be around 1.8% this year. Our experience in the marketplace is that rents are holding up very well. We're not seeing any downward pressure in respect of rent levels.A few words also on the transaction market. It's been a very continued high interest for property investments through the quarter, particularly for office and logistics buildings, and also strong demand for attractive properties with long leases and solid tenants, which is also then reflected in Entra's valuations. Things do, however, take more time. It's more challenging to go through with site visits and the full process of a transaction under the current restrictions. But interest for property investments is still very strong in the marketplace, and the sentiment seems to be both amongst investors and tenants that activity is going to pick up and continue with strength as soon as society opens up again.Entra's being active in the transaction market through the quarter, and we've also experience that there's been a lot of competition and strong interest in the processes we've been involved in. Prime yield currently at 3.3%, expected to stay there also going forward. And the yield spreads to the regional cities have been narrowing in. Financing markets are well-functioning and open. Interest swap rates have increased in the quarter. However, that's not put or reduced the interest for property investments. And we can see that the increase in interest rates have somewhat also been offset by reducing credit margins.I think that's it on the market situation, and let's move to the financial numbers. Over to you, Anders.

[Anders Olstad, Deputy CEO & CFO]

Good morning. 2021 started on a good note for us. Except for slightly higher uplift in valuations, the P&L is pretty much as we expected. And with the strong -- decent, very strong net letting of NOK 18 million, strong balance sheet, capital -- debt capital markets coming into action again for us and a strong project pipeline, it is clearly a good start. Revenues coming in at NOK 591 million, so pretty much exactly as we expected them to be, so up NOK 1 million from the fourth quarter and up NOK 4 million from the Q1 2020.Into the uplift from 2020, we acquired one asset in Stavanger, giving us NOK 3 million in extra or additional revenues. Then we have taken out a number of assets for redevelopment, which had a negative impact of NOK 20 million in the quarter. But this was more than offset by the CPI, which came in at 0.7% for 2020, so unusually low for Norway. March-to-March CPI this year is at 3.1%. So actually, it's higher than the sort of normalized 2% that we expect. Nevertheless, very strong like-for-like growth in the quarter at 3.2%. Of that, 0.7% is CPI, and the remaining 2.5% is coming from our operations. So a very strong net like-for-like growth this quarter.Net income from property management, NOK 370 million, up NOK 88 million and NOK 13 million from fourth and the first quarter, respectively. And then you see great volatility in the profit before tax coming in at NOK 1.290 billion. And you will recall that in the fourth quarter, we wrote up our assets by almost NOK 4.5 billion, while in the first quarter 2020, due to the COVID-19 pandemic that just was at the start, we did not take any value uplifts in our P&L at all. So that sort of explains the volatility in the in the P&L. I'll come back to the cost side in later exhibits.Cash earnings coming in flat at NOK 8 per share as expected, but NRV continuing to grow now at NOK 194. EPRA installed 3 new measurements, replacing NAV and triple net. Last year, we for the -- up until the fourth quarter, we provided figures on all those 5 different asset specifics, NRV, NTA and NDV. We're now leaving NAV and triple net and only will continue with the new 3 ones from EPRA. NRV is shown in this exhibit, showing a 15% CAGR. If we include the dividends that we have paid out since 2015 of NOK 24.65, the CAGR is a solid 17%.Also a note on the NTA and the NDV is enclosed in the back of our annual -- of the quarterly report. NDV is not a relevant figure for Norwegian commercial real estate. As the tax treatment in the NDV is based on asset sales, while in Norway, all assets are sold through SPVs, and thus with a very different or very marginal tax effect.Looking at the P&L. Operational costs coming in at NOK 51 million, so we're up from the NOK 42 million last year -- first quarter last year, and down from the NOK 57 million that we had in the fourth quarter. We believe that the NOK 51 million now annualized is a good proxy for the full year. Net other revenues, other costs coming in at NOK 6 million as compared to NOK 9 million in the first quarter last year and NOK 7 million in the fourth quarter. Admin cost at NOK 49 million, so on par with first quarter last year and down from NOK 55 million in the fourth quarter. We expect that admin cost will come somewhat down in the next 3 quarters, and we should end up not far away from the 2020 figures.Then one note on the tax payable. Entra has one subsidiary, partly owned, that is in a tax payable position. And we normally pay around NOK 12 million to NOK 14 million, NOK 15 million per year in taxes on that subsidiary. Last year, Entra as a group also came into a tax payable position with the -- including the subsidiary, we had a NOK 26 million tax payable. For 2021 and the, at least, the 2 to 3 years to come, the group, as such, we do not expect that -- us to come in a tax payable position. And as such, we will only head back to the, again, give or take, NOK 12 million to NOK 15 million in tax payable for the year.Looking at the sort of expected revenues -- future revenues for the next 6 quarter based on communicated events, including project starts as is taken out of production for redevelopment, known acquisitions and net letting announced. We do see that from this quarter. Next quarter, we will increase it by close to -- will be close to NOK 600 million, primarily due to the acquisition of the one -- the small asset in Bergen and the small asset in Stavanger.And then finally, we're starting to see the effects and the impact of the assets that we have taken out for development, and that will be put back into operations. So starting off with Universitetsgata 2, Universitetsgata 7-9 in the third quarter this year; following up with the Møllendalsveien 6-8 in the fourth quarter; then the CPI adjustment for the Q1 2022. We have put that possibly a bit conservative at 1.7%. We will see if we'll update that throughout the year.And then finally, in the third quarter of 2022, we get the effects from Tordenskiolds gate 12 and St. Olavs plass 5, and then the other projects will follow. As Sonja mentioned, the 11 projects that we have currently working on, they would lead, fully let, to a net revenue of NOK 530 million, which will be phased in sequentially over the next 2 to 3 years. In this overview, we only show the signed contracts. And as such, if you look at the table of projects, we're now at 59% pre-let. So then there is some upside in the revenue figures, as we continue to sign up new tenants. But it's good to see that we are back on a growth trajectory again.Looking at the property value development, starting at NOK 56.9 million, invested NOK 390 million in the projects. That will increase over the next 3 quarters. We expect to invest probably at least NOK 5 billion in the next 2 years. The value changes came in at NOK 781 million. And if you look at the circle on the very right-hand of the exhibit, you will see that the bulk of that at 34%, I'll just check on them, came from the projects; 22%, NOK 174 million, coming from transactions. The reason is the acquisition of the small asset in Stavanger, where we had an old option to buy that asset at a very favorable price. In our NAV calculation, it was included as a financial asset. But as we acquired the asset, it was then moved into the inventory -- or the investment portfolio, i.e., the investment portfolio came up about NOK 174 million. And then you see there's a healthy further write-up stemming from the letting as the smallest project and yields and market rents. So it's a fairly widespread reasoning for the value uplift this quarter.On the financial side, it was a very quiet quarter in the first quarter. Most of our debt capital markets investors looked from the sideline at the strategic interest in Entra, and they were worried that we would be acquired by a company with a lesser credit quality than of Entra. And as such, they would have lower sort of counterparty quality. So the only thing we did on the financing side was basically to roll a small commercial paper.If you look at the as-is status as at quarter end, we have around 70% in market-based debt, so a bit -- this was pretty much similar to the previous quarters. We have now, with the 2 new bond taps that we did in April, a bit more than 50% of our financing in green financing, a combination of green bonds and green bank debt. As we talked about before, this has positive implication both on the pricing that we pay for our financing and also on the debt and the wideness of our investor base.LTV, getting lower now to 36.4%, so -- which gives us a significant war chest in terms of both financing the product portfolio and also looking selectively at acquisitions. And with the ICR at 3.6, again, it's a very solid ship that we're running on, on that part. Interest cost at 2.37%, and you will see that will increase somewhat during the following quarters due to the higher long-term interest rate, if that should end up as the forward curve now is looking.Status on the financing market, the CP market is active. It's attractive. We're typically doing now 6 months CPs at around 20%, 22% margin. Bond market is getting increasingly attractive. We added another 2 taps now of a total of NOK 750 million, 7-year bonds at -- in the margin -- in the high 70s. So very, very attractive pricing on the bond. And we continue to have the same good, open, long-lasting relationship with our 5 banks. So on the financing side, it's pretty much business as usual for Entra. Thank you.

[Sonja Horn, Chief Executive Officer]

Thank you, Anders. So moving on to some closing remarks from us. First of all, solid market fundamentals. We are experiencing that the rental market is holding up well; and also, transaction market, very active and strong through the quarter. COVID-19 uncertainty prevails. We are, however, seeing that new cases are dropping, and the vaccination program is picking up, currently at 20% vaccinated with first shot. And fair to say also that it's had a very marginal effect on the operating results for Entra. Very pleased to see that Entra now is back on the growth track, and we have a strong balance sheet and also financial capacity to support further growth. And we continue to build our project pipeline. Currently, we have 180,000 square meters ongoing, and that will add, once fully let, NOK 530 million to our rental income. And we continue to work selectively also with acquisitions. So that was all for me now. And I think we would have some questions from the audience. Tone, any questions?

[Tone Kristin Omsted, Head of Investor Relations]

Yes, we have some questions. Rental growth in Oslo is mentioned as a reason for value changes. However, certain market reports state that market rents are falling. Could you please comment?

[Sonja Horn, Chief Executive Officer]

Yes. What we've seen is that [ IDL ] statistic has a database supporting or suggesting that some areas have seen declining rents. However, what we experience is that the data points there are very different from quarter-to-quarter. So if you look at changes from one quarter to the next, it could very well be that the product qualities and micro locations are different between the quarters. We work in the market with the same products over time and clearly see that we're not experiencing any declining rent or downward pressure on these products. I think it's fair to say also that Entra's products are in the not high-end, prime, prime yield or rent segments, so less also exposed there. But we also hear that the same goes also from the landlords working in the prime segments.

[Anders Olstad, Deputy CEO & CFO]

Maybe I can add also. If you look at the same database, the rents in Oslo were up 12% in the fourth quarter and then down 9% in the first quarter. And we didn't see the prices go up by 12% in our figures in the fourth quarter, and we didn't see them go down again by 9% this quarter. So there's clearly quite a bit of noise in this. And so when we look at the datasets from brokers and companies like [ IDL ] statistic, we tend to take sort of a longer view and average it out because it's just plain wrong to do it on a quarter-by-quarter basis. It create headlines in newspapers. And you get sort of bipolar in terms of looking at them, but it's not the way you can run a business. It's -- we have to look at the longer lines and basically look on a quarter-by-quarter basis.

[Tone Kristin Omsted, Head of Investor Relations]

Are the interest costs on developments, do they include -- or the interest cost on developments, are they included in the development overview? Is the interest rate taken off the P&L? Or is it capitalized?

[Anders Olstad, Deputy CEO & CFO]

The interest cost on the project, that's the question. The interest cost on the projects are capitalized on the balance sheet, but they are not included in the table on the projects' overview. So then basically, the cost -- what we include there is the cost of the -- initial cost of the land and the CapEx that we will spend on the projects.When we IPO-ed in 2014, we went through sort of the natural peers in Europe and especially in the Nordics to understand how they presented their figures. And basic standard was that one did not include the interest cost -- the capitalized interest cost in the -- in those tables. That said, when we look at the project from our sort of internal [indiscernible], we do include the interest cost in -- on that in the IRR development -- in the IRR calculations, and it doesn't really change much. For this year, we say we expect to have CapEx of NOK 3 billion this year. The capitalized interest cost on those projects is around NOK 40 million. So it could have been in there, but we -- it has no material effect anyway. It's on a footnote now on the project table that it is not included in the project overview, but it is capitalized on the balance sheet.

[Tone Kristin Omsted, Head of Investor Relations]

Can you comment on what dialogues are being run with the new owners of Entra: Balder, Castellum and SBB?

[Sonja Horn, Chief Executive Officer]

We are talking to them the same as we do with all our investors and have good discussions with them. Very, very interesting parties to discuss with, so we look forward to having close contact with them also going forward.

[Tone Kristin Omsted, Head of Investor Relations]

That was the last question.

[Sonja Horn, Chief Executive Officer]

Thank you. Okay. So that's it for -- from here, wrap it up here, and then we'll see you again next quarter. Thank you. Bye.