Entra ASA

OSE:ENTRA

Earnings Call Transcript 2019-Q4

[Sonja Horn, Chief Executive Officer]

Okay. Good morning. And welcome to Entra's fourth quarter presentation here in Oslo. We will follow the same agenda as in previous quarters. However, at closing remarks, we'll also take a quick look at our strategic focus areas. Highlights for the quarter. Rental income came in at NOK 595 million in the quarter. That's 5% up since same quarter last year. And our net income from property management at NOK 384 million, 9% up since the same quarter last year. Also in this quarter, we have seen strong value changes, NOK 569 million, whereof NOK 470 million related to the property portfolio. Profit before tax NOK 1.04 billion in the quarter. It's been a very strong quarter for us in respect to letting. We have a net letting of NOK 26 million in the quarter and NOK 62 million for the full year of 2019. Also very high activity in our project development, where we finalized 3 projects in the quarter. That's the university building on the picture here, and Tollbugata 1 and also Brattørkaia 12 in Trondheim. And our Board has proposed a semiannual dividend of NOK 2.4 per share for the second half year of 2019, giving us NOK 4.7 per share for the full year of 2019. That's 4% above previous year. And this will be decided on the General Assembly on April 30. Moving on to operations and markets. We had a very, very good quarter in Entra in respect of signing contracts. As you can see from the bar in the lower corner, the highest number of contracts signed for us with leases of NOK 208 million signed and 90,000 square meters. We also terminated contracts of NOK 40 million in the quarter. Largest part of this, NOK 25 million, related to the renegotiation of the Immigration Appeals Board, which was one of the largest renegotiations we also did in the quarter. We were very pleased to see that we, in our renegotiations in Oslo, achieved an uptick of 17% on renegotiations, excluding the options with as-is clauses.Net letting, as mentioned, NOK 26 million, and our occupancy is up from 96.1% to 97.1% in the fourth quarter. Our WAULT currently at 6.8 years and 6.9 years including the project portfolio. In January, 4,000 students moved into this new university building in Oslo, a 23,000 square meters building completed at time and slightly below estimated cost. The building was 95% let upon completion. The remaining 5% is related to the small building on the left in the photo. That's where we currently also have our project office working with the development of the Tullin quarter. Largest contract in this building is the University of Law (sic) [Faculty of Law] with 82% of the leases. They have a 25-year lease tenure and several extension options. BREEAM Excellent certification and the total project cost of NOK 1.424 billion, that's down NOK 11 million in the quarter, seeing that all reserves now can be released. Yield-on-cost, 6.0%, it's slightly up from 5.9% last quarter. And this is a project we started reporting with a yield-on-cost of 5.5%. Next project finalized in the quarter also in Oslo, Tollbugata 1. This is a refurbishment of the 2 old buildings connected with a glass building in between, 9,000 square meters fully let; total project cost of NOK 446 million; yield on cost 5.4%. And this building was forward sold as part of that property swap transaction with Aberdeen at a property value of NOK 615 million. And the transaction closed in November last year. In Trondheim, we finalized the project at Brattørkaia 12. This is a small building of 1,900 square meters. It's been fully let to public tenants on a 10-year lease. Total project cost of NOK 86 million and yield on cost of 5.4%. All these [ 3 ] projects have been delivered on time, cost and quality. Our ongoing projects list slightly shorter than we've seen in the previous quarters. However, we are preparing several of our redevelopment projects to come into the project phase currently. First, let me start by saying that all these projects are also reporting on time, cost and quality. And at Holtermans veg 1-13, we have increased occupancy from 80% to 91% in the quarter. That's the Norwegian tax authorities which have called an option to increase their space. And this also means that the cost is up with NOK 12 million, seeing that our VAT deductions is less with public tenants. This has been fully compensated in the lease contract with the tax administration. The yield-on-cost is also up for this project from 6% to 6.1%. Seeing that we now are coming close to completion, we have released some of the project reserves. At Universitetsgata 7-9, we now have seen that the yield is slightly down from 6% to 5.9%. That's simply explained by the CPI coming out slightly below our estimates, so it's resulted in a downward decimal rounding off in the yield-on-cost calculation. At Universitetsgata 2 - Rebel, our project has increased the occupancy from 13% to 18% in the quarter. And this is a project where we are targeting much smaller tenants than we typically do at Entra, and we expect that occupancy only will start picking up closer to completion. We acquired one property in the quarter at Møllendalsveien 6-8 in Bergen. This is located within our existing property cluster close to Media City Bergen. It's a large building, 14,500 square meters with a short lease tenure. So here, we plan to redevelop it into an attractive office space in the city center of Bergen. And we also entered into a partnership with the municipality of Stavanger and Norway's largest residential developer OBOS and our existing partner Camar and Stavanger to develop this Jåttåvågen Phase 2 land plot, which is adjacent to our existing property portfolio at Hinna Park. Entra's share in this joint venture is 12.5% and we have the opportunity here to develop about 205,000 square meters whereof 60% residential and 40% office space. So --and first upfront payment for this share was NOK 12.5 million. Moving on to the market. First, Norwegian economy remains strong. And if we move into the property market of Oslo, as you can see from our consensus report, vacancies in Oslo is currently around 5.6%. If you move into the city center Oslo, we see that vacancy is much lower, between 3% to 4%. We have experienced market rental growths around 20% over the past 3, 4 years in Oslo. And this is mainly due to a lack of new supply coming into the market over the past years. For 2020, we, however, see now that the known supply is around 175,000 square meters. And for the following years, we expect also to see normalized supply levels of around 150,000 per year. And the known supply coming in, in 2020, is mainly in the fringe areas. So what we do see of new supply in the city center will actually mainly be Entra's redevelopment projects. And we expect rental growth to continue also going forward, however, in a lower growth phase than we have seen in the past years. In the regional cities, in Bergen, our vacancy currently is at 8%; in the city center, lower vacancy, around 5% there. And we're pleased to see that there also was an increase in rental incomes in the city center of Bergen. And that's mainly been driven by the fact that there is a quite strong demand for modern, efficient office space centrally located in Bergen and limited supply. In Stavanger, the overall vacancy is between 10% and 11%. And we are experiencing quite a lot of activity there, lots of rental interest, but we see still that rent levels remain flat in the Stavanger market. In Trondheim, our vacancy has increased slightly to 12% for the entire market, again, much lower vacancy in the city center. And also there, we've seen a slight increase in rents in the city center, but we are experiencing a slight downward pressure in rents in the fringe areas in Trondheim as there's been quite a lot of new construction coming into the market in the fringes. On a general note for all these regional cities, we do see, however, that if you come in with products with modern, efficient office space, there is a demand for that. There's a lack of supply of new office space. Moving on to transactions and yield market. The market remains very active, very strong demand. And we've seen that our total transaction volume, according to our consensus report, was NOK 92 billion in the last year. That's more or less the same as we saw the previous year and the strong interest for investing in Norway -- Norwegian real estate means that we do expect to see transaction levels around NOK 80 billion to NOK 90 billion also going forward. The overall high demand for office space in Norway has kept prime yields in Oslo stable, around 3.7%. And now you can also see that consensus is that this will remain stable also going forward. That's a shift since the last quarter, where we saw that consensus expected yields to pick a bit up towards 3.8% in 2021 and '22. We also see that for secondary yields that the outlook is stable also going forward. We continue to see an attractive funding market with strong liquidity supporting the transaction markets. So Anders, some financial update?

[Anders Olstad, Chief Financial Officer]

Thank you. In addition to a strong net letting quarter, the numbers also were quite good. So it's a rather decent quarter on the financial figures. Revenues came in at NOK 595 million. So we expect it at around NOK 587 million. The reason why it's up is primarily due to 3 things: we bought a small asset in Bergen at NOK 2 million; we had a stronger pickup on the rental income from Powerhouse Brattørkaia that was put in operations in the summer; and then, not to our surprise but to our delight, so to say, our partner in co-working flex area, they had a very good quarter. And we have -- in our country, with them, we have a partly fixed price and also part as a revenue share. And when they're doing well, we are also doing well. So that picked up quite nicely in the fourth quarter. So that's the reason for the -- why we're up from the NOK 587 million that we actually expected for this quarter. Okay, moving back into the figures. Compared to the third quarter last year, NOK 577 million, we're up NOK 80 million, the main reason is that we put the university project into operations now in October. Comparing to the fourth quarter last year, we were up NOK 26 million from NOK 569 million. And as usual, there are 5 things that we need to look at. The first one is we divested 4 assets with a negative revenue effect of NOK 12 million. We have acquired 2 assets with a negative -- with a positive effect of NOK 8 million, so net NOK 4 million negative on the acquisition divestment part. On the projects, we have put in place 2 major projects, Powerhouse Brattørkaia and university project, which gives us NOK 26 million in additional revenue for the quarter. And then we've taken out 3 assets out of production during the year, central assets -- or Central Oslo assets that will be redeveloped, which had a net negative effect of NOK 12 million. So if you take the NOK 26 million positive from new projects coming in minus the NOK 12 million that we took out of operations, we're up NOK 14 million year-on-year on -- from net-net projects, which basically is NOK 17 million in like-for-like growth, which is a bit weak on the quarter. We had 3.1% like-for-like growth. This is primarily due to that we have started emptying certain assets in preparing for the redevelopment. If you look at the like-for-like growth for the year, we had 3.8%, i.e., about 30 bps above the CPI. So also this year, a strong like-for-like growth for us in full. Our net income from property management coming in at NOK 384 million, so we're up NOK 24 million from Q3 and up NOK 32 million from last year. And a profit before tax of NOK 1.04 billion, NOK 3.7 billion in -- for the full year. I'll come back to those later. Going into the numbers by share, we see a continued strong development in the cash earnings. This is annualized 4 quarters rolling at NOK 8 as of the fourth quarter. If we compare this to the NOK 7.8 per share that we had for 2018, please also bear in mind that in that period, from '18 to '19, we have an additional NOK 60 million in financing costs partly due that we have increased the debt and also because the cost of debt has come up slightly. So those NOK 60 million would account for NOK 0.33 per share, and so, i.e., there's a stronger operational development than what the numbers actually look at, sort of at first glance. NAV ending up at 151 as of December 31, with the triple net at 142, which is, again, a CAGR of 14% and 15%, respectively. If we include that we have paid out during this period NOK 19.85 per share in dividends during this period, the CAGR is a full 17% and 18%, respectively, on the NAV and the triple net. The numbers of -- the P&L of a real estate company is pretty straightforward, so I'll just going to focus on a couple of sort of -- a couple of themes, and I'll focus on the full year results. Operating costs coming at NOK 189 million, so pretty much in line with last year. Other revenue, other costs, the way we look at them together, this is a positive NOK 40 million, so up NOK 19 million from the net from 2018. This is primarily due to the booking of the Tollbugata asset that we had forward sold in connection with the property swap we did with Aberdeen. Going forward, we expect the operating costs -- no, sorry, the other revenue, other costs to be pretty much a wash. We will increase our depreciation slightly over the -- or increase our depreciation over the coming years due to certain initiatives and investments in -- especially in the tech area and the digitalization. Admin costs coming in at NOK 171 million for the quarter -- no, sorry, for the full year; NOK 39 million for the quarter. We had a few positive one-offs on the admin cost this quarter, so our run rate is actually higher than the NOK 39 million. Into 2020, we expect that admin costs should be in the range of NOK 195 million. Again, we are investing in certain new initiatives, and that has -- it is a short-term cost side. I'll come back into the financing part and the value chain issues. When we discussed payable tax in June, we basically said we would not -- the group, as such, would not be in a payable tax position this year. And our tax loss carryforward went from NOK 321 million to NOK 68 million as of December 31, so we're basically sort of just scrapping off the tax loss carryforward. What's driving tax loss carryforward in our business is primarily the ordinary depreciation of assets and the redevelopment of assets [ or ] our product portfolio. So with our current portfolio, which means that we will be able to postpone the tax payable for the group probably another 2 to 3 years. The tax payable now is from one of the subsidiaries that -- where we own 60%, that's the tax -- which is in a tax payable position, and we will not -- we're not able to leverage our tax loss carryforward into this subsidiary. But all in all, profit before tax at NOK 3.7 billion, so a rather good -- the good year for us as well. If you're looking at our investment -- or the asset side of the balance sheet, it's starting up at NOK 47.6 billion, invested NOK 1.150 billion in new assets, disposed of NOK 647 million. We've had a strong investment quarter now. We invested NOK 500 million in the portfolio. The main part of that is in the pickup of the university to refurbishment or redevelopment in the center -- city center of Oslo. Value change is coming at NOK 470 million. Also, this quarter, the bulk of it comes from market rent changes, basically, 45%. The rest is evenly split between projects, a strong net letting, and also for this quarter, which is the first now in 7 quarters that we saw effect on the yield compression. That has been quiet now for the last 6 quarters. What we saw was basically that the prime yield in Bergen went down to around 4%, and that basically impacted our assets in Bergen. For the full year of NOK 1.9 billion of value changes on the assets, 61% stems from market rent and only 6% from the yield effect. So clearly, it's a healthy development in the underlying portfolio. And also, if you include the associated companies and joint ventures, our asset part of the balance sheet now for the first time exceeds NOK 50 billion, which is not a hallmark but it's good to see a number starting with 5. On the financing side, it was a moderately active quarter. We tapped 3 bonds, total of NOK 800 million, and we rolled over NOK 400 million in CP. Basically, it's been a good market also in the fourth quarter. Priorities on the financing part. We want to maintain a strong liquidity position, credit at NOK 6.2 billion. We would like to extend our debt maturities somewhat. We're now at 4.9 years. It's good, but we think we can leverage a good market now to extend it somewhat. And we would continue to do all new financing as green financing. Currently, 33% of our portfolio is green, about NOK 4 billion in bonds, and the remaining in bank -- different green bank debt. If you're looking at the -- sort of the other figures, we continue to run a safe ship. LTV now at 40.2%. ICR, comfortably at 3.4. And the average interest -- or the interest rate at the quarter up to 2.99%. Bond market is still attractive. CP market is a bit on and off, but it's -- when it's attractive, we use it. When it's a bit tighter, we basically roll into bank with our 5 solid partnership banks. And we basically stay in a world where there is uncertainty, having a resilient financing is very important for a real estate company or an asset-heavy company like ours, and we are as comfortable as we can be on -- with the situation. Looking at this exciting chart of the future revenue. It looks -- even though we try to scale it a bit up, it looks fairly flat and it is flat with the current portfolio. Basically, this is what with the existing portfolio, existing projects, no new acquisitions. Personally, I'm very much looking forward to next quarter because then we start seeing the effect of the introduction of 2 new projects, Universitetsgata 2 and Universitetsgata 7-9, which basically will start to -- then we'll see the back to sort of the growth part also on the top line. But even in this 6 period -- in these 6 quarters, we will continue to invest in the portfolio, and we will create NAV growth. Finally, the Norwegian state decided to sell down on December 3, so now the current stake is 8.2%. This had an immediate effect of our share of the Entra Europe developed index going from 0.73% to 0.86%. Clearly, becoming as -- more important in terms of the specialty international investors. And we have now seen a significant increase in the liquidity of the share. So if you compare to the trading now with a couple of years back, we're almost trading 3x as many shares today as we did then, so -- which we find are very positive. Finally, dividends proposed of NOK 2.40, which is about 60% of our cash earnings, total NOK 4.70 for the year. Thank you.

[Sonja Horn, Chief Executive Officer]

Thank you, Anders. Okay. Some closing remarks. Let me first give you an update on Entra's 3 strategic pillars and our performance according to strategy. Since the IPO, we have worked with these 3 strategic focus areas, providing profitable growth, high customer satisfaction and environmental leadership. Starting with environmental leadership. Entra's carbon emissions, 80% of it is related to the energy consumption in our portfolio. So Entra has worked very systematically in reducing the energy consumption in our portfolio over a long time. And we are very proud to see that we now have reached a level of 135 kilowatts per square meter, which is way below our peers in the market. And if you take a look on the right side of the graph here, you can see that we are also now starting to see the effects of the systematic work we have done in respect of certifying our portfolio. The certification gives us a lot of insight on how we can continue to work on pushing new limits in respect of environmental impacts. And in this picture here, we have taken in all buildings which currently are certified or in the process of being certified for BREEAM In-Use Very Good or Better. And as you can see, 48% then of our rental income and 54% of our values now have been a stamped green. Moving on to customer satisfaction. We were very also pleased to see that our customers, once again, gave us a very high score in the annual customer index, 86 points. That's relative to 80 points being the average in the market. And this is, of course, very important for us in order to maintain a high retention in negotiations and also keep the occupancy at the stable high levels, as we see here, currently at 97.1%. For the past years, our sector has been both supported by yield compression, strong market trend developments and falling interest rates. Going forward, we do see that how you operate your core business will be a stronger differentiator. And our main focus in respect of technology development has therefore been to understand how we can use technology to strengthen our core business. And we have therefore chosen to in-source our strategic IT and build a small team working on our IT architecture, digitalization and standardization, also product and service innovation. Now we have focused our efforts across these 3 main areas here, working with our buildings and our projects, where we see that technology and also the sensor data available in our buildings enables us to centralize and automize how we -- some tasks and also shift from a more preventive maintenance focus to becoming predictive. And seeing also that about 40% of the costs going into our new building projects, and this is, of course, also a very important area for us to be firm in standardization and cost focus. So our main objective in respect of buildings and projects is to use technology to reduce the operational cost and also our project cost over time and also reduce the environmental impact in -- from our buildings. In respect of customer, over the past years, we've also experienced a shift where the office product is changing rapidly. There's a surge for more flexibility and also more services. And we've seen that new entrants are coming into the market, tapping into our value chain. So for us, within the customer experience, our main objective here is to use technology more as an enabler to providing a strong value proposition to both our tenants and also their employees. And finally, IT architecture. In order to be able to use sensor data in our buildings and also efficiency -- efficiently extract the data from our buildings, we need to have an IT architecture, which makes it possible to do that without having to tap in and do deep integrations with each system in the building portfolio. On this page, you can see our roadmap for technology and digitalization. It's a very busy slide, however, it illustrates also that we've had quite an interesting year in 2019 where we have been testing and learning a lot through pilots in the year. And if you take one example, for 2019, we opened the Powerhouse Brattørkaia in Trondheim. And here, we tested several new functionalities in the building. For instance, the opportunity to use facial recognition as access to the building or your smartphone. And that's something which we can now roll out where we find it to be of interest in the additional portfolio. And we've also tested indoor mapping, where we can then help our customers to find vacant meeting rooms and book them instantly. Might seem like a small detail, but it's also something which can be used as technology for large office space where you have free seating and can book available desks. Queuing in the canteens is a problem for us, and we can either then choose to expand the space when we build buildings used for canteens or we can use the insight from the queuing visualization to spread the time where people eat their lunch. So these are the kind of insights which we are taking with us now into 2020 and applying into the buildings where we find it to be of value. We will also be testing some new initiatives in 2020. Office analytics, some way for us to help our customers becoming more -- or optimizing their space and also a full-service, flexible offering supported by technology. So our priorities from 2021 will be based on what we experienced in 2020. Profitable growth. As you can see from this graph, rental income has grown by 33% since 2015, and that's despite a significant asset rotation and also selling off of noncore assets. In 2019, our rental income grew by 4.3%, and this has been affected by the fact also that several of our buildings now have been emptied in the end of 2018 and through 2019 to be prepared for project development. The EBIT margin has remained stable at 86%. And the underlying value growth has continued, seeing that we have had the very strong operational performance, also solid netting and the strong rental market and very good project development. So NAV has increased by 70% since 2015. And in the year 2019, we saw a NAV growth of NOK 10 per share, and that's 7% up or 10% if you include dividend also. So if you were invested in the Entra share for the full year, our total shareholder returns would have been 30% including dividends. In respect to profitable growth, our project development is a very important part of providing the growth. And we're very -- have a very strong, proven track record in our project development in Entra. In this graph, you can see all the projects we have finalized since the IPO. 18 projects, they've all been delivered at time with very attractive returns. The bars show the size of the projects, and the line shows the corresponding yield-on-cost. And on average, yield-on-cost on all these projects has been 6.4%, and that's -- 55% of them are in Oslo, where we today see that the prime yield is 3.7%. The aggregated project cost for all these projects is NOK 9.1 billion. And upon completion, they were valued at NOK 11.6 billion, meaning that we can have -- we can see a NAV contribution from these projects of NOK 2.4 billion or NOK 13.8 per share. And also, many of these projects have had further uplifts after completions as we have sold the remaining vacancy in the projects. So that means that we have seen an average return on investment of 28% on our project pipeline for these years. We also do have a very significant pipeline for further growth. Currently, we have 66,000 projects ongoing. And we have 200,000 square meters of project pipeline already sold and an additional shadow pipeline of 300,000 square meters in an early stage. As you can see from these graphs here, the majority of the projects are in Oslo. Here, 68,000 square meters of new build projects, whereof 22,000 is ongoing; and 108,000 in redevelopment projects, where 26,000 is ongoing. And given the very strong market we now see in Oslo, we are very optimistic about these projects going forward, also seeing that they have very attractive micro locations in the city. In Trondheim, we have an ongoing development project of 11,700 square meters. And on that same plot, we have the opportunity to build an additional 37,000 square meters. And we have intentionally increased our land bank in Bergen because we see -- find that to be an attractive market for further growth. And also in Stavanger, we do have a land bank, where we have the opportunity to start projects upon signing of these contracts. So some closing remarks. 2019 was another solid year for Entra, 7% NAV growth, 4% dividend growth. We completed 52,000 square meters of projects and also started new projects of about 26,000 square meters. And we acquired 1 property, sold 2, in addition to completing the swap transactions previously mentioned. And looking forward, we see that the Norwegian macro is solid, and the financing markets are open and also very competitive. The rental market is very strong, and we do expect to see continued growth in rents going forward. The transaction markets continue to be active and liquid. And also, as said over the past quarters, we now are in a phase where we are taking several significant buildings into a redevelopment phase, meaning that our rental income will remain flat in the short term. However, we continue to invest in our project portfolio, so value growth will continue. And we have a strong track record of providing profitable growth in our projects and also a very, very attractive pipeline of projects to work on for the future. So I think that sums it up for today. And we will be available for questions here. Anders? Any questions?

[Tone Kristin Omsted, Head of Investor Relations]

Yes. Then I have just one through the web. Could you comment on how the financing cost has increased after you got an official debt rating?

[Anders Olstad, Chief Financial Officer]

Yes. We have a rating from Moody's Baa1, corresponding to the BBB+. I think the main reason for getting that rating was that we wanted access particularly to invest in the international investors and longer durations on the debt. What we have seen is that, currently, our sweet spot of -- in the bond market is around between 5, maybe up to 8 years in terms of pricing. So we haven't gone out on the full scale yet in terms of the long-term funding, but we do see increased interest from international investors in our bonds. This is probably partly driven by the rate -- official rating and partly driven by the green bonds that we are putting into the -- issuing into the market with a strong dark shade of green second opinion from CICERO. Price-wise, it's a bit hard to tell because we are -- even though we are then a BBB+ company, we basically -- our bonds are priced pretty much as an A-. So I mean, we are among the cheapest in the industry in terms of financing. So possibly a couple of basis points on the rating, but it's hard to tell. I mean the investors view us as a high-quality paper anyway. But I think it is more in terms of when -- currently, we've got about NOK 19.9 billion of debt, and the Norwegian market is sort of big enough for us -- for that financing. As we continue to grow, we might want to look at sort of in terms of Eurobonds and others. And in that way, the public rating is a necessity. So give or take, some small savings but a significant access to long-term capital, if and when we need it.

[Tone Kristin Omsted, Head of Investor Relations]

Okay. Then I have one more. Which buildings are entering the redevelopment phase exactly?

[Sonja Horn, Chief Executive Officer]

We have -- in Oslo, we have 4 buildings which we are preparing for redevelopment. One building is right next to us in Stenersgata 1 here. That's currently in the planning phase. And also at the Tullin quarter we bought one property from Aberdeen, at St. Olavs plass 5, so right next to our existing cluster there. And also in Schweigaards gate 15 here, just a few hundred meters down from our headquarters. This building has been vacated, and we moved the customs authorities to other buildings in our portfolio. So they're all in a phase where we have preparing them for -- starting within the year. And also Tordenskiolds gate 12 which is right in the CBD Oslo. And a small project in Trondheim probably also. One more.

[Tone Kristin Omsted, Head of Investor Relations]

Will we see even more acquisitions to increase the rent levels going forward?

[Sonja Horn, Chief Executive Officer]

We are continuously looking into acquisitions. And we would both -- ideally, we like to buy something with a value-add dimension where we can do some development. But we are also looking into standing assets. So if you find something good, you might. Okay. I think that rounds it off for today. Thank you very much for joining us. And see you all next quarter.