Entra ASA
OSE:ENTRA
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Earnings Call Analysis
Q3-2024 Analysis
Entra ASA
In its Q3 earnings presentation, Entra announced a rental income of NOK 770 million, reflecting a decrease of NOK 63 million compared to the same quarter last year. The drop in revenue was primarily due to divestments, particularly the Trondheim portfolio and Hotels Savoy, which accounted for a NOK 99 million decline. However, when adjusting for divestments and one-off events, the underlying growth in rental income stands at 4.4% from the previous year.
The company's net income from property management was reported at NOK 318 million, flat year-over-year but down 8% compared to Q2 of this year. Interestingly, despite some operational challenges, the overall profit before tax amounted to NOK 156 million, affected by negative value changes in hedge instruments, which totaled NOK 201 million due to declining forward interest rates. This reflects the complexities in navigating market fluctuations while maintaining profitability.
Cash earnings have remained stable at NOK 7.0 per share for the last three quarters, indicating consistency in cash flow generation. The company's Net Asset Value (NRV) has seen a slight increase from NOK 158 to NOK 160 per share, contributing to an annual growth rate of 7%. This positive trajectory gives an annual total return of 9% when including dividends distributed during the period.
Entra reported operating expenses of NOK 64 million, representing 8.3% of rental income—aligning with historical trends. Administrative costs are projected to total around NOK 200 million for the full year, slightly below previous expectations. Additionally, net financial expenses decreased by NOK 61 million compared to last year as the company strategically utilized proceeds from divestments to reduce debt.
The latest figures indicate a negative net letting of NOK 76 million, primarily due to large contract terminations amounting to NOK 86 million. As a result, occupancy rates have dipped to 94.4%, still above historical levels but below internal targets. Notably, 75% of the current vacancies are in highly desirable locations, suggesting an upside potential as market conditions stabilize.
Looking ahead, Entra anticipates flat rental income in Q4 compared to Q3 numbers. For 2025, the company has revised its growth outlook, reducing the CPI assumption from 3.5% to 3% and reflecting potential impacts from net lettings and contract expiries. Despite current market challenges, there is optimism regarding rental income growth driven by CPI and the potential from existing vacancies.
Entra showcased improvements in its debt metrics, achieving leverage levels below 50%. The interest coverage ratio (ICR) has strengthened, now standing at above 2.0. The effective cost of debt has remained stable at 4.0%, with future expectations indicating further reductions as interest rates are expected to decline. This financial prudence signals a strong balance sheet, capable of sustaining long-term growth.
The broader Norwegian economy is projected to stimulate growth, with GDP and employment gains expected. Opinions suggest interest rates may have peaked, with potential for the first cuts to occur in early 2024. The property market fundamentals remain favorable, driven by increasing rental demands and low vacancy rates, which positions Entra well for future expansions.
Despite facing challenges with net lettings and contractual terminations, Entra's strategic focus on enhancing operational efficiency and managing costs underlines its resilience. With a solid balance sheet, ongoing project completions, and promising market indicators, the company is poised for sustainable growth in the evolving Norwegian property landscape.
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Good Morning, all, and welcome to Entra's third quarter presentation. moving on directly to the highlights. NOK 770 million of rental income in the quarter, that is NOK 63 million below same quarter last year, affected by divestments in the past year. Our rental income growth currently then at 4.4% when adjusted for divestments and one-offs.
Net income from property management of NOK 318 million in the quarter and net value changes was minus NOK 164 million in the quarter due to negative value changes on financial instruments. We were pleased to see that property valuations came out positive in the quarter, leaving us then with a profit before tax of NOK 156 million this quarter.
We have seen that our net asset value has increased in the quarter for the first time now since Q1 '22 currently at NOK 160 per share. And we have continued to see improvements in our debt metrics in the quarter. effective leverage is now below 50% and ICR in the quarter. Effective leverage is now below 50% and ICR in the quarter above 2.0. We have had a negative net letting of NOK 76 million in the quarter.
And we have also finalized one project according to plan in Moskva 16 in San Mika. Our Board has decided not to use their authorization to pay out dividend for the first half, considering that their key focus is to strengthen the company's balance sheet, the company's dividend policy, however, remains unchanged.
So moving on to operations and starting with a few words on letting. As I commented on last quarter, we have had relatively high letting activity in the first 2 quarters this year, as you also can see from the bottom right graph, in -- following the first half, we see that our current leads pipeline is less progressed than we would like to see. At the same time, we have also experienced that the activity in the letting market seems to have slowed slightly down in the third quarter. This is also confirmed when we dive into IStatistics database from the third quarter, where you can see that the total volumes signed in the Oslo market as a whole, were lower than what's normal for a third quarter.
At the same time, yes, so signings in the quarter came out with NOK 28 million of rental value or 13,000 square meters. At the same time, we have had some large terminations in the quarter in total, terminated contracts of NOK 86 million of rental income or 27,000 square meters. Out of this, NOK 64 million is related to 3 larger contracts, leaving us then with a negative net letting of NOK 76 million. With limited new signing volumes in the quarter, this means that our occupancy also is down currently at 94.4%.
This is still a high level, however, below our own targets. The higher vacancy compared to historic levels is also a consequence of us having a rather high renegotiation volumes to work on. And the fact that we are seeing after the pandemic that a higher amount of our tenants are rethinking their workplace solutions and thereby also more open to look into alternatives, which means that we are in a more competitive environment when we work with renegotiations.
The vacancy in our portfolio clearly also represents an upside potential for us. 75% of our vacancy is attractive space, and we are very comfortable that we should be able to let this space going forward. However, we do expect also that it may take some time. When we look into the vacancy situation in the Oslo market, we can see from our consensus report that consensus is that vacancies is slightly up in the quarter, but still only around 6.6% for the Oslo market as a whole.
However, there are some imbalances between where we see demand and available space. So on the one side, you can see that the large -- in the segment for large contracts, there are scarcity of opportunities or alternatives. This is, of course, good news for Entra, seeing that this is where we have the majority of our income is our core segment.
On the other hand, when you look at the smaller segment of leases, there is an abundance of alternatives in the market, meaning that the competition is much stronger in that segment. This is also where we've seen the increase in vacancies also because of this being the segment where subleases also typically come in. Entra's vacancy is predominantly 80% of our vacancy is in the small segment. So when we work on solving our vacancy, it is in a more competitive market environment.
Having said that, we are in the market with positive outlook, and we're confident that we should be able to let our vacant space, but we're also realistic that it takes some time to solve it. And before we see that feeding into increasing occupancies in our numbers. The project we finalized in the quarter is in Sandvika, Malmskriverveien 16. It's a building which we have put on top of an existing parking space. It's been rented out for 25 years to a Norwegian high school.
And we were very pleased to see that this project was completed on time and at the cost NOK 11 million below our initial project cost, leaving us then also with a yield on cost of 5.6% compared to the 5% we started reporting on.
Take a look on our ongoing list of projects. we have brought down the project intensitivity as part of our disciplined approach to strengthen the balance sheet. We currently have 4 ongoing projects. Let me start by saying that they are all progressing according to plan, on time and at cost. The remaining CapEx in this list of projects is currently NOK 1.08 billion. And we have also forward sold the top project, the new 1 -- new build project in Tom meaning that -- and now we've also signed an agreement that we will receive the proceeds from the forward sale upon completion in the fourth quarter of 2025.
So that should then feed into our liquidity from them. No changes in the reporting on these projects in the quarter. ESG is a fundamental part of our business model, and we work systematically with a road map towards becoming a net 0 carbon company. And we are currently also in the process of aligning our road map with the science-based target initiative. And we have started reporting on the EU taxonomy, and we are also working to prepare to report in accordance with the CSRD framework. For several years, we have had third-party evaluations of our ESG qualities, thereby also enabling us to capitalize on our ESG qualities in both debt and equity markets, and we were pleased to see that we once again achieved the highest ranking in the GRES score with 5 stars and also got EPRA Gold level for our sustainability reporting.
If we move on to the market. First of all, the Norwegian economy is expected to pick up as a solid real wage growth and also lower interest rates are expected to feed into private consumption, combined with increased public spending. We have seen a moderate employment growth. And also this is expected to pick up as economic activity increases going forward. CPI was slightly up in September and came in at 3.0%.
This was in line or slightly below the Central Bank's expectations. And the key policy rate has now been held stable at 4.5% since December 2023. And the most recent projections from the Central Bank is that we can expect to see the first rate cut in the first quarter next year. If we move on to the property market. As I already mentioned, we have had a high activity in the letting market in the first half, however, slightly slower than in the third quarter.
And if you take a look at the top right graph, you can see that vacancies are a tad up currently around 6.6% in the Oslo market as a whole, of course, with some variations between the different areas. And the expectations from our consensus report is that it will remain at these levels going forward. As you can see also from the top right graph, the market specialists in our consensus reports expect to see that we will have a positive market rental growth also going forward in the interval between 3.4% and 4%, and this is actually higher than what we saw in the last consensus report last quarter.
This is supported by the fact that we firstly have seen limited effects from the working-from-home trend in the Norwegian market. that we are seeing expectations of employment growth also going forward and the fact that we have low market vacancies and that there is limited new build supply coming into the market. And also the fact that the current breakeven rents for starting new projects remain above market trends. So it seems likely that we will see limited new build projects starting in the new future.
Just to comment on the high new build volumes coming into the market in 2024 -- '25, sorry, this is explained by large projects, the first part of the new government offices, which are being completed in the next year and also Construction City, which has been close to fully let. So the buildings, they will be vacating will also need some time for refurbishment before they feed back into the market.
So the combination of limited new build supply and expectations of also new limited new build starts going forward, provides a favorable environment for renegotiations also going forward. If you take a look at the transaction market, let me start by saying that we it clearly seems that interest rates now have topped out and inflation is on a downward trend. Property values are believed to have bottomed out as also confirmed by our Q3 valuations. And we can see from the top right graph here that consensus report expects to see that prime yields now should start declining from the next year onwards. And yields are now expected to decline more than what we could see from the previous consensus report last quarter.
If you take a few words on the [indiscernible] capital markets. They are open and available, and we are seeing that credit margins already have tightened and continue to tighten -- this is, of course, positive for the transaction market, where we also are seeing increasing activity. And when we look into the most recent investor survey -- sentiment surveys, we see that there is increasing by interest and also that Office is sticking out now as the favorite segment or asset class.
And this is, of course -- this is also confirmed on the incoming interest we are experiencing from a more wide universe of buyers. So with that, I would like to leave the floor to my new colleague and our CFO, Ole Anton Gulsvik. I'm very pleased to have him on board as part of our team. The floor is yours.
Thank you, Sonja. Starting with the financial highlights. As you're all aware, in Q2, we divested our Train portfolio. As such, comparison to historical numbers has to be adjusted for this transaction and all other transactions in the period. Rental income came in at NOK 7 million. This is NOK 7 million below what we highlighted in our rental bridge in the Q2 presentation. And I will come back with more details on the rental bridge later on in the presentation. Compared to Q3 2023, our rental income is down NOK 63 million. Divestment reduced our rental income with NOK 99 million -- and we also had a negative net letting in the period of minus NOK 13 million.
This was partly offset by a positive CPI contribution of NOK 32 million as well as a net positive contribution from our project portfolio of NOK 18 million. Adjusting for the divestment and one-offs, the underlying growth in the quarter was 4.4% compared to the same quarter last year.
Moving to the net income from property management. As you can see, this came in at NOK 318 million which is flat compared to the same quarter last year, but down 8% compared to the second quarter this year. The NOK 30 million reduction from the second quarter is due to less lower rental income as we divested both the Trondheim portfolio and Hotels Savoy in the second quarter. And this was partly offset by lower interest costs. of NOK 58 million as we used the proceeds in this transaction to repay debt.
On the right-hand side, you can see that our profit before tax came in at NOK 156 million However, this also includes negative -- was negatively impacted by value changes in our hedge instruments of minus NOK 201 million. And the reason for this is that the forward [indiscernible] curve came down in the period.
Moving to the per share data. As you can see, the cash earnings has been now unchanged at NOK 7.0 per share the last 3 quarters. The annual growth rate since IPO is 5%. On the right-hand side, you can see our NRV actually came up in the quarter from NOK 158 to NOK 160 per share. And this gives an annual growth rate since IPO of 7%. However, adding the dividends we paid out in the period, the total return has annually been 9%.
Moving then to the P&L. I've already given quite a lot of details on the rental income, but I will give you some flavors on the other line items. Our OpEx came in at NOK 64 million. This is 8.3% of our rental income. Historically, this is in line with the same level maybe had on the lower side. Administrative costs came in at NOK 49 million, and we now expect the administrative cost for the full year to be around NOK 200 million or slightly below.
Net financial income -- sorry, net financials was NOK 61 million lower this quarter than it was in the same quarter last year. As mentioned earlier, we used the proceeds from several transactions to reduce our debt level, but we also have a lower interest rate this quarter compared to where we were 1 year ago. Changes in investment portfolio. I will come back to this. This is positive. And also, I mentioned earlier, the changes in the financial instruments is negative NOK 200 million because of the forward labor curve coming down. As a sum, we came in with a pretax profit of NOK 156 million, as mentioned earlier.
Moving then to our rental bridge. As mentioned earlier, our rental income came in SEK 7 million below what we highlighted in our rental bridge, in the second quarter presentation. We had a couple of contracts that with a negative -- with a negative outcome which combined gave us a negative net net letting in the quarter of minus NOK 6 million.
Looking forward, in Q4, we expect more or less flat rental income compared to the Q3 numbers. In 2025, we have done some adjustments to this bridge. We are taking down the CPI from 3.5% to 3% and also the impact from net letting in Q3 as well as some negative net letting in Q4 rolls into the 2025 numbers. At the end, you can also see now we added the first quarter of 2026, where we included a CPI of 3.25%. However, there is a couple of larger contracts coming to an end at the end of 2025, which impacts the 2026 numbers as such the growth from Q4 2025 to Q1 2026 is not as much as the CPI.
There has been a lot of questions related to this bridge. I will use a few minutes to just explain how we build it up. First and foremost, this bridge is not a guidance. It just highlights the rental income trend going forward based on the current portfolio as well as all reported events. On contracts that expires in the period, we assume this will be renegotiated at current terms. And on top of that, we add the CPI as nearly 100% of our contracts are indexed adjusted. The upside potential in this bridge is that we are capable or able to rent out the existing vacant space or that we are able to renegotiate contract that expires at higher terms than they have today. And the downside risk here is that contract that expires in the period are terminated or will renegotiate that at the lower terms than it is today. So this is a mechanical model based on the reported events as well as on simple assumptions, which is transparent.
And it's not include any targets for net letting going forward. Moving then to our property portfolio. We had a positive value change in the quarter of NOK 37 million. And although small, is the first increase in value since the first quarter of 2022 A notable factor here is that on the pressure actually reduced the yield on certain assets also in Central Oslo. CapEx the period was NOK 330 million, which is mostly related to the 4 ongoing projects we have. And this gave a total value in our portfolio of NOK 62.2 billion, which is up NOK 300 million from the second quarter this year.
Portfolio net yield is 4.97% and 5.71% if you have fully let at market rent. This is more or less unchanged from where we were in Q2. We also want to just highlight the significant value reduction we had since the peak levels. On a like-for-like basis, the values has been written down 19% since the first quarter 2022.
And average property yield has expanded with 110 bps in the same period. And adjusted for higher-than-expected CPI, the increase is actually 136 bps. Moving then to our debt metrics, which has improved across the line. Our effective leverage has come down below 50% and reduced 0.5 percentage points to 49.9%. As you can see in the graph to the left, also the EPRA LTV came down in the quarter and slided to 53.7%.
The ICR isolated in Q3 increased about at 2.01, up from 1.91% in the second quarter. On the right-hand side, we added a new graph net interest-bearing debt to EBITDA. And this has also come down from peak levels after we acquired [indiscernible] in first quarter 2022. And the net interest and debt to EBITDA came in at NOK 11.8 million in the third quarter. We expect to continue the positive trajectory on our credit metrics over time, and this is supported by value increases and lower interest rates.
Then moving on to the cost of debt. The fixed line here represents the historical cost of debt as well as our estimates going forward. While the dotted line is the NIBOR forward curve. The difference between the yellow line and the green one is that the green is what we estimate today, while the yellow one is the comparison to what we had in our presentation in Q2.
As you can see, the cost of debt came in at 4.0%, which is more or less unchanged from the second quarter this year. And for 2025, you can see in this graph that we expect cost of debt to come down compared to 2024. And this is supported by a lower NIBOR curve, as you can see in the graph, the dotted line. Another positive note here is that we are slightly more optimistic about the cost of debt in 2025 now than we were in Q2.
Moving then to our debt situation. Our net interest-bearing debt is unchanged at NOK 31.9 billion. We did issue 2 commercial papers in the second -- sorry, in the third quarter at attractive terms with a total value of NOK 800 million. In the graph to the right, you can see that we have ample supply of liquidity, and this increased significantly after the Trondheim divestment in Q2. Our maturity profile is well staggered, and we have postponed issuing new bonds as we have a significant liquidity buffer, as well as somewhat less attractive credit spreads historically.
The credit spreads has tightened over the last periods, and we are preparing to test the market going forward. So we will be more active in the next 6 months than we have been in the last period. Extending bank maturities is also part of our normal business. When you look at this liquidity buffer, we assume this to come down going forward as it's not really required, and we also want to reduce our commitment fees.
And with that, I hand it over to you, Sonja, for some closing remarks.
Thank you, Ole. A few closing remarks. First of all, positive outlook for the Norwegian economy. We are expecting to see that both GDP and employment growth will pick up going forward. interest rates are believed to have topped out and the first policy cut is now expected to come in the first quarter some time. We continue to see favorable property market fundamentals with increasing market rents and also low vacancies and supported by the fact that we have limited effects from working at home in the Norwegian market and also low new build volumes coming into the market and breakeven rents also limiting new project starts going forward.
Our property values are believed to have bottomed out the debt markets are open and available and credit margins are tightening, as Ole mentioned. Increased activity in the transaction market is expected going forward. and consensus is that we should see prime yields starting to decline slightly from 2025 onwards.
Entra has a solid balance sheet, continued with continued improvements of our debt metrics also going forward. We have an effective leverage currently below 50% and ICR above the in the quarter. And we see future prospects of rental income growth driven by CPI, our projects and the rent uplift potential in our vacancy also and in the reversion potential in the management portfolio.
So that concludes our presentation for now, and we can check if we have some questions. And maybe, Ole, you will join me here if there are questions for Ole also.
We have a couple of questions. The first 1 being, could you provide some more color on the net lettings and at 3 terminated leases.
Yes. Well, in respect to net letting, as I tried to mention in my presentation, first of all, -- we have seen that we have less progressed lease pipeline after signing a lot of contracts in the first half. This means that we are, of course, working hard to activate leads and increase the activity in the letting.
But we are also then a bit surprised that we saw in the third quarter that the activity in the market also slowed down slightly. It's a bit early to understand whether this is just a breather. We expect that it is a breather, seeing that also that fundamentals with employment growth also support that there should be good demand going forward. Now regarding the terminated contracts, the 3 terminations, a few words on that. There are quite different cases. The smallest of the 3 is in Oslo, a good attractive location. -- but it's a downsizing company, which has reduced their size.
So this is a vacant space, which is very attractive in the market, but we will need some time to solve it. On the second one, it's a case in Bergen, where the tenant has actually grown out of their space. This is a tenant, which we have tried to find other solutions for -- within our portfolio. Our letting team has worked very intensely in active processes in different buildings in our portfolio. Unfortunately, they concluded to move out of our portfolio this quarter.
And the final one is a public tenant, the largest one, which is which we had already let out their space. So they had to find an alternative because the current space they were occupying was too expensive for them. So we have been working intensively to find alternatives within our portfolio, having 2 alternatives on the table. And again, they chose unfortunately, to go to another landlord offering a lower price product than what we had on the table.
So very different incidents, but a bit unfortunate that they all came at the same point in time. But I think that's also part of what I tried to explain during my presentation that we are in the -- we are experiencing that tenants are, to a greater extent, rethinking how to use the office and how to track tenants, meaning that they're also more open to alternatives. And we are in real competitions. And sometimes you lose some. That's just part of the business. This time, we lost 3 in the same quarter. which is brutal, but that's just the way it is. We continue to work. We have a good portfolio, a good product.
But I think also, we have to be realistic that the time from you start dialogue until you sign a contract is -- it takes some time. And it takes more time when the customers are rethinking how to sit. So in the good old days, we could roll them on. And that was, of course, very nice. But now we have to work harder to get signing on each contract. That's part of our business, and that's what we're good at. But -- right now, we had a few losses
Is there a timing effect in the net letting where you expect to see more leases signed in W.
Well, I would say that we -- on a general note, Q4 is an active quarter. But as I said, the timing effect is based on the activity and how progressed our current leads and letting processes are, I do not expect to see a big hike in the Q4. We are, of course, pushing to come to closure, but we have to just be realistic that it takes time for the processes to conclude.
So no big catch-up effect expected in the Q4, but we are working with a lot of leads.
Thank you. That concludes the Q&A session for today. Okay.
Thank you all for joining us today. We are, of course, available for any questions after the presentation, and have a great day, everybody.