Fabege AB

STO:FABG

Earnings Call Transcript 2021-Q1

[Stefan Dahlbo, President & CEO]

Welcome to the presentation of the First Quarter Report 2021. And then first, I'd like to hand over to the Director, Åsa Bergstrom to give us a short update about the figures for the first quarter.

[Asa Bergstrom, VP, CFO, Company Secretary & Deputy CEO]

Thanks, Stefan. Please turn to Slide 2. This year has started much like the previous one ended with working from home both for us at Fabege and for our tenants. It is still a mixed picture with tenants in exposed sectors that are facing a difficult time, while the economy as a whole is chugging along nicely.Rental income for the first quarter it came in at SEK 707 million slightly lower than the previous year. In an identical portfolio rental income decreased by 1%, which was mainly due to vacating Glädjen 12, which is now a private property and the reconstruction and the fact that we made a provision of SEK 5 million as a result of the pandemic.This year, we had a more normal winter and thus more normal costs for heating and snow clearance. The surplus ratio came in at 72%, which may be considered normal for a winter quarter. Central administration includes nonrecurring costs of almost SEK 7 million relating to the move of our headquarters. Interest expenses increased slightly compared to the previous year, which was due to an increased loan volume. The average interest rate fell with a few points to 1.75% at the end of the quarter. Earnings in associated companies amounted to minus SEK 1 million and mainly related to capital contributions to Arenabolaget during the period. For the full year 2021, however, we expect to be at the same level as the previous year, that is approximately around minus SEK 50 million. And in total, we reported profit from property management of SEK 346 million. Last year, the properties in the portfolio were independently valued several times. Now we are changing to more normal routines and before the end of the quarter, a little more than 30% of the portfolio was independently valued. We saw continued value growth. Total changes in value amounted to SEK 514 million, of which SEK 102 million related to ongoing projects. The changes in value in the investment portfolio were related approximately equally to cash flows and slightly lower yield requirements. Yield requirements fell by 2 points during the quarter to an average of 3.86%. The deficit value in the derivatives portfolio decreased further by SEK 234 million. And then finally, the tax expense amounted to minus SEK 231 million and related to deferred tax only. Please turn to next page, key ratios. Reported equity decreased by SEK 1 per share to SEK 126 per share. And the long-term net asset value, the EPRA NRV amounted to SEK 154 per share. Equity has decreased with the declared but unpaid dividend almost SEK 1.2 billion in total. Otherwise, the key ratios are in line with our targets and expectations. Our balance sheet remains very strong with a high equity asset ratio and a low loan-to-value ratio. And now please turn to next page, financing. In relation to our banks, the situation is still stable. The capital market has been strong early in the year, and we have taken the opportunity to issue SEK 1.6 billion in total, of which approximately SEK 400 million related to early redemption and refinancing of future maturity. The commercial paper market has also been strong, and we have refinanced according to plan. We are still proud that we achieved our goal of converting the entire loan portfolio to green financing by the end of last year. And after year-end report, we continued our buyback program. During the first quarter, we repurchased 3 million shares, which means that we now hold almost 7.6 million treasury shares. The shares were repurchased at an average price of SEK 118.75 per share. We will retain these treasury shares until further notice. So the message is that all is still stable and secure in Fabege. And now back to Stefan. Please turn to the next page.

[Stefan Dahlbo, President & CEO]

Thank you for the review, Åsa. We saw a quarter with stable rent levels, especially during March, we also saw increasing activities and acquirers. Of course, there's still some uncertainty about the continued development due to the COVID-19 and after that we hopefully go back to what we call normal, but it's much more positive discussions and as we reset activities. Our net letting came in at plus SEK 36 million. We've new leases of more than SEK 100 million and some terminations of SEK 65 million. But it's more worth, as we said, a positive quarter and good discussions for the future. Next slide, please. We also see a lot of activities in Stockholm and the growing Stockholm. During the last 10, 15 years, we have seen the office buildings and the space came from a little bit more than 11.5 million square meters up to almost 13 million square meters and we still see some more space coming into the market in the next years. But we also see a lot of growing Stockholm, as we said. On the next page, we can, for example, see the development number of the office employees. It has also been growing, and we still see it's growing. We see more people working in Stockholm today than we saw some years ago, and it will continue. And then next page, we see the real average rents and vacancy rates in the CBD. We see even COVID-19 situation stable rent levels. We don't see any new top rents a new record highs, but we see very stable, especially in the CBD stable levels. Even if it's -- we have seen a little bit larger vacancy rates, high vacancy rates. It's -- the vacancies there are more in locations where you don't have the best commuting opportunity or -- so as we said before, it's a little bit different. The location is very, very important here. But as we are a stable market and has continued will. So we are positive for the Stockholm outlook. Next page, please. As you know, we have a stable occupation rates well above 90%. We have in the managed portfolio of 92%. We have no structural vacancies in the portfolio. We have some vacancies because of the projects we have ongoing, but we also on the -- we will come back to that. We tell you a little bit more about the project, but they all -- we have all those performed we have contracts, we have signed contracts. But anyway, I think the vacancy rates give us some opportunities. It is a little bit too high. We have also therefore strengthened our letting team in order to increase it even further, especially in the property management portfolio, and it's primarily in certain business part where we currently have some vacancy rate. And I hope we will do this quarter and next quarter be able to give you some positive news on that. So please go to Slide 10. This is mainly to remind you that how stable customers who have with long agreements. As you know, SEB, Telia, ICA, Swedbank are our largest shareholders. The 25 largest customers represent more than 40% of the rental values. And as you also know, almost 85% is offices. Next slide, please. Will we need the office in the future? This has been discussed. It is discussed a lot, mainly in -- or also in the newspapers. We are convinced that the office will be needed. We see 4 dominant trends in the development of the office markets. The digital transformation that started heavily 20, 25 years ago with Internet and so on. It will continue and even increasing speed. The need for flexibility, simplicity and service is always there and will be even more important. Values, well-being and sustainability is very important. It's not new. It's the things that we know has been there for awhile, but there are no standard solution that suits everyone. What we feel quite convinced about is that we will travel less. We will not go for meetings only for update, and so we will take those meetings for by Teams or Zoom or whatever, but some sales meeting and so on will continue to be in real live. One of the conclusions will be anyway that it will be different offices for different future needs. It will change, and we have to talk a lot about this with existing and potential customers and clients. So it will change, but we really see the need for offices even in the future. Next slide, please. At the end of the first quarter, we had about a 75,000 square meters in the product portfolio. We have a high occupancy rate. As you know, about 85%. You see it a little left in this picture on this slide, the Poolen project at TietoEVRY will have a Swedish head office. We have invested almost SEK 400 million in this first quarter. And about SEK 100 million of them were in the management portfolio in the first quarter. We realized value change for a little bit more than SEK 100 million in the product portfolio. Go to Slide 13, please. A short update about our projects and our future products, Arenastaden and Haga Norra. As you know, it's really huge areas. In the left corner, you see Haga Norra where we also had the projects were Bilia moving to the office in the third quarter, and we will also have the marketing and selling the residential apartments. Arenastaden, I think every time I see this picture, it's fantastic what has been created over the last 15 years, and we are all only half way. Next slide, please. We have potential office projects in Arenastaden, Haga Norra over the next years that we can start almost 200,000 square meters in 2021. We expect others to start a little bit more 50,000. And then year -- every year, we have the opportunity to start 50,000 to 60,000 square meters. Next slide, please. We also have the opportunities and the potential in our Solna Business Park and Huvudsta. We have to the right here, you see the park house that we are now working with. We can add another 20,000 square meters, 2021 and in the next 5 years, it's much more opportunities in this Solna Business Park. Next slide, please. We also, during the first quarter, got a -- had agreement with Solna -- the city of Solna, a land allocation for about 50,000 square meters office space in Huvudsta and some 10,000 square meter of residentials. Next slide, please. I mentioned Parkhuset is the park house before. It's a really interesting product because it also had the goal to halve the climate impact. The CO2 emission will go with halved. We also have in this as a product for rehousing to construct the building from old buildings from the -- and to reuse, for example, the concrete framework and building with wooden framework. We will tell you more about this in the future, but I think it's a really interesting product to see how we can develop the projects to have less impact on the climate. Next slide, please, Flemingsberg. As you know, we have during the last year, acquired, what we call the larger building in the middle of the picture, Regulatorn 2 . We already own the left building, Regulatorn 1. And now we have also a location agreement with Huddinge for the land next to Regulatorn 2. So most of what you can see on this picture in the middle is now controlled one way or the other by us. And we also started the next step of the project. We will start to build, to construct the building for Operan/Dramaten in 2022. And we have a lot of other discussions going on. So if you go to the next slide, please. You can see here more of what we own today, as I said, and also the land allocations we have got. So it's really -- now we have control of both commercial part of it and the residential opportunities. Next slide, please. We'd like to show you a map of our inner city properties. Sometimes, I think it's good to remember where we have about 40% of the values, we have it in inner city. In the upper part of the map, you can see we see Wenner-Gren Center and although probably we have about in Norrtull. If we walk around Stureplan in the middle of the map, we have fantastic properties. As you see on the -- to the left, the lower picture is Bocken 39, for example, where we signed a new contract with Convendum in the beginning of the year. The 2 other problems are the upper one is Apotekaren where we have had a lot of progress in the last few years. It's now fully occupied. The last IT company Mentimeter and has moved in now. And it's a huge and fantastic probably in the middle of the city. The picture in the middle is also very well located, and that will have some -- it's today full activity in the house with the tenants. But there will be some opportunities and some projects in the future, which we're working with. Next slide, please. We also have some ongoing projects in Kungsholmen which is on the left in the map and/or upper 2 pictures. And finally, down to the left, we see probably where we have very close to whether Swedish government are located at close to the old town, and we will also have today some -- we see some opportunities for future to maybe increase the area. So a lot of the holdings are in, as you know, in inner city, and I think it's a very well positioned portfolio. Next slide, please. As you know, we have today also talking about a little bit more about the opportunities we have in residential markets. We have today 3 joint ventures in Solna and Kista, which are developing very well. We also have more than 500,000 square meters of building rights, corresponding to about 8,000 apartments, which we're now trying to take the next step and discussing how to work with them in the future and how, of course, to focus on how to optimizing the value creation follows building rights.Next slide, please. Åsa, can you please tell us a little bit more about this work we're doing in the sustainability?

[Asa Bergstrom, VP, CFO, Company Secretary & Deputy CEO]

The interest in sustainability issues and Fabege's sustainability strategy has continued to increase. We are getting more and more questions from various stakeholders, and it's great to see that the financial market, in particular, is paying increasing attention to sustainability issues. We have set ambitious targets, and we also think that it is important to be transparent with how we are approaching sustainability issues and how we can make Fabege more sustainable. The work that began many, many years ago with the aim of reducing energy consumption costs, now covers all parts of the business. And on this slide, you can see some examples of where we are. We are now at 100% green financing. We have certified all the properties in the project -- property management portfolio. We are certifying all the properties in the project portfolio. We have reviewed all the strategic suppliers from a sustainable point of view. We are using almost only renewable energy sources. We are now at 96%, of course, with the target to reach 100%. And we are also aiming at 100% green leases. Today, a little bit less than 80% of the total area is signed with green leases. Please turn to next page. As I mentioned, we have a tough targets for sustainability. Among them, energy consumption is one of the most important. We had a good -- very good year in 2020 due to a mild winter and also the fact that many of our tenants were not actually occupying the offices. A couple of years ago, we set a target to reach neutral -- carbon-neutral property management portfolio in 2030, a target which we feel is very likely that we will reach. A much tougher target refers to indirect emissions, the Scope 3, where we have set the target to reduce them by 50% until 2030. And the project Parkhuset that Stefan mentioned earlier is one project, which we are investing, the opportunities already now to reduce the emissions by 50%. Please turn to next page.

[Stefan Dahlbo, President & CEO]

Thank you, Åsa. It's also important that we, as a major property owner, contribute to creating greater security and well-being in our main areas through different various initiatives. Among other ways, we can do it by contribute to improved education, leisure activities and job opportunities that we can as a property owner may change. Here is a list of some of the activity initiatives we have -- we're going on right now. The next slide, please. We also have some changes in the executive management team. Our Head of Technical Operations, Anders Borggren, will retire, and we hired Fred Grönwall as new -- coming during the summer as new Head of Technical Operations. Also our Director of Business Development, Klaus Hansen Vikström as you -- many of you know, will retire. And we hired Johan Zachrisson, as a new Director of Business development. He will start in August. Next slide, please. And to end with some very fantastic beautiful pictures of the whole executive management team from August 2021. I think it's a great team. We have 190 in total very great employees. And as you know, real estate is about human beings. So I think with this team will be also be able to make changes in the future. Finally, Fabege has a strong balance sheet, a stable customer base, a good property portfolio in great location and many, many development opportunities. During the quarter, we also utilized this strength to repurchase almost 3 million shares. And all we do, we do with ambition of creating additional shareholder value. Thank you.

[Operator]

[Operator Instructions] Our first question is from Paul May of Barclays.

[Paul J. May, Analyst]

Just 3 quick questions for me. What is the total size of Bocken 39? Obviously, the development table just covers the refurbishment part that you're doing. I just wonder what the total size is. Secondly, Stockholm CBD vacancy increased and rent declined slightly in 2020 in terms of prime rents. Any concerns with this at all? Or are you -- do you see it as sort of a one-off and you expect that vacancy to be let up and then rents to start to grow again? And just wondered on the development pipeline. You talked a lot about in the past of hearing this, I think it was a SEK 10 billion investment over a 4-year period. Obviously, that's becoming increasingly more difficult and then the pandemic hit, which obviously made that extremely difficult. Just wondered what your thoughts were about your ability to invest in your development opportunity over the coming 2 to 3 years? And I appreciate you have the potential, but potential and ability are slightly different. So I just wonder what your thoughts are there.

[Stefan Dahlbo, President & CEO]

Thanks for the questions. It was a little bit difficult to hear, but I think we try to answer what we've heard at least. But Bocken 39, I think, the space is about a little bit less than 8,000 square meters. I think it's 7,600 square meters in terms of in that product. Rents in the CBD, it's -- we see a stable market. We see the same levels on the rent levels that we saw before the pandemic, 1 year, 1.5 years ago. And the SEK 10 billion going for investments, I would say, for a 4-year period. We know that -- as you know, 2021 will be a little bit lower about SEK 2 billion or a little bit less. But we're still going forward, the SEK 10 billion to go over a longer period. So averaged SEK 2.5 billion. And you can say -- and when also talking about the potential in the residential portfolio, I think it can even long term be a little bit more. So Åsa do you like to add anything?

[Asa Bergstrom, VP, CFO, Company Secretary & Deputy CEO]

No.

[Stefan Dahlbo, President & CEO]

Was it correct, questions we answered?

[Paul J. May, Analyst]

They were indeed. And then just one additional one, sorry. You mentioned about the vacancy rate in the portfolio, hoping to have some good news over the coming quarters. Is that leases that are in negotiation at the moment? Or is it an expectation of new leases coming through that you hope to sign up over the coming couple of quarters to reduce that portfolio vacancy?

[Stefan Dahlbo, President & CEO]

I would say it's a little bit of both. It's -- we have, as we said, also, especially at the end of the quarter is much more activity. It is showing, and we saw increasing demand of questions about what we can offer. So it's both what we see in discussions and what we hope for, of course, but we see a more positive activity in the market.

[Operator]

Our next question is from Jonathan Kownator of Goldman Sachs.

[Jonathan Sacha Kownator, Financial Analyst]

Two questions, if I may. The first one is to come back on this occupancy points. If you can elaborate perhaps more where you -- the vacancy is actually currently located? I think you mentioned Solna partly. But if you can just elaborate and help us understand also where you think -- what level you can improve occupancy in effect? That's the first question. And the second question on the residential. Is that something that you're going to develop by yourself? Or would you also look to get partners or just to ultimately to sell the projects?

[Asa Bergstrom, VP, CFO, Company Secretary & Deputy CEO]

Okay. We'll start with the occupancy rate or vacancy rate. It's a mixed picture. We have the vacancies in all our areas, but a little bit more, I would say, in Solna Business Park, which has not already been rented out. And then in inner city, as we are now refurbishing for Convendum as an example, in one of the CBD properties, it is right now empty. And therefore, it's also included in the vacancies. So part of the vacancies are already let and will be moved into as soon as the refurbishment projects are finalized, and part is, of course, to be let.

[Jonathan Sacha Kownator, Financial Analyst]

So -- sorry, just to back on that point, how much of the vacancy, the 9% vacancy corresponds currently to projects currently in refurbishment?

[Asa Bergstrom, VP, CFO, Company Secretary & Deputy CEO]

Well, it's different also because it's different if there are refurbishment projects in existing buildings and if it's new production. So if you look in the project table, you can see that, for example, Stigbygeln 2 and Glädjen 12 and Bocken 39, these are 3 properties that are existing properties and where they are vacant in the vacancy table at the moment, but they are pre-let to between 12% and 100%. And I think the best way to see how income is going to develop is the graph that we published in the report on Page 13, which is based on what we know about tenants moving in and moving out in the coming 4 quarters.

[Stefan Dahlbo, President & CEO]

And then sorry, the second question was?

[Asa Bergstrom, VP, CFO, Company Secretary & Deputy CEO]

Residential building rights.

[Jonathan Sacha Kownator, Financial Analyst]

So just in gerenal, one in residential building. And to understand, if you would do, what would happen to these buildings? Are you going to do them in JVs by yourself? Sell them? And how fast you intend to develop them?

[Stefan Dahlbo, President & CEO]

Because we have now some group working internally with the residential building rights. We have today 3 joint ventures ongoing. We have about a little bit almost 500 apartments under production. But for the future and the next projects we are discussing, which way, how do we create the best values. Joint ventures, I think that's a good way, it's worked close together with some colleagues or some other companies, but we can be that we should do it in our own books, but it can also be that we see that the best way of adding the values to sell, but I think we will see -- we will be much more active ourselves in the future than we have been in the past to work with both the joint ventures and maybe in our own books.

[Jonathan Sacha Kownator, Financial Analyst]

But that said, then I assume you want to sell these back when they are produced? Or would you operate them as build to rent?

[Stefan Dahlbo, President & CEO]

It depends. Well first of all, it's a lot of -- what we have in there is owners apartments. So it's a majority of the short-term building rights owners apartments. And -- but if it will be residential buildings for higher -- it can be -- we'll have to -- I don't like to give you a 100% answer that we will sell it. Because it depends on what the deal we can get and how we can see on the -- how can we even there create cash flow on values.

[Operator]

[Operator Instructions]

[Asa Bergstrom, VP, CFO, Company Secretary & Deputy CEO]

I have 1 question that came in by e-mail, and it's regarding an environmental certification of our assets and if we have attempted to quantify the proportion according to the EU taxonomy. So we did an investigation together with CICERO who is Norwegian company that certifies green bond programs and also are looking into EU taxonomy questions in the beginning of this year, and the report is published on our website. However, the exact -- how the EU taxonomy is supposed to work? I was not sure at that moment and it still is not. But you can say that -- we can say that we have done the major part of the work. We have classified all our properties, but we have not yet been able to divide them into what's aligned with the EU taxonomy or not. It will be several properties that will sit in with the EU taxonomy. But there are, of course, also properties that will not. So I think that in -- maybe already in Q2 or in Q3, we will start to publish this information in the report or on our website.

[Stefan Dahlbo, President & CEO]

Okay. Any more questions?

[Operator]

There are no further questions from the audio.

[Stefan Dahlbo, President & CEO]

So then if not, so thank you very much for joining us today, and don't hesitate to give us a call if you have any further questions or comments. Thank you, and have a nice day. Take care for now.