Fabege AB

STO:FABG

Earnings Call Transcript 2023-Q1

[Stefan Dahlbo, executive]

Welcome to Fabege's presentation for the first quarter 2023. And as usual, we will finish up the meeting and we will then take questions and also answer session, of course. It's possible for you to submit questions by e-mail through [e-mail] during the question-and-answer session.But first, I'd like to make a short summary of what we are today. Many of you know this, we are on -- Page 2, we are fully focused on Stockholm. We have a very modern portfolio in rebound locations. We really believe in our market and being close to our customers. And this is why we have been focused on the Stockholm area and why we also handle all property management internally with our own staff at all stages.Next slide, please. The first quarter can be summarized with the increased rental income and increased operating surplus, but also increasing interest rate costs. And that which led to decreasing a part -- some decreasing management profits. We also have, according to increasing interest rates, increasing yields, negative value change in the product property portfolio in the beginning of this year. We had a slightly negative net letting. Normally, the first quarter is quite slow quarter. Unfortunately, we had more negative lettings than we had positive in the beginning. So we have now minus 12 letting negative.We will tell you more about this, but we always start it with a focus on figures. I will hand over to Asa to tell you more about the result in financing and give you more details. So please go ahead, Asa.

[Åsa Bergström, executive]

Thanks, Stefan. Please turn page. As Stefan just mentioned, in the first quarter, we reported increased rental income and improved net operating income, which, however, is not covered by increased interest costs. The increased yield requirements in the property portfolio have continued to put pressure on property values. Rental income amounted to SEK 829 million, corresponding to an increase of approximately 8% in an identical portfolio. The increase was largely explained by the index adjustment that took effect at year-end.Convendum moved to Kungsgatan last summer and the Swedish tax agency's departure from Solna Strand at the end of March last year are other major factors that affected the change. The increased operating expenses were mainly due to higher costs for energy and snow clearance. The surplus ratio came in at 72%, in line with our budgets for the first quarter, which is always an expensive quarter.Payable stocks current earnings amounted to SEK 22 million as 2 projects were completed and where final recognition took place during the first quarter. And central administration costs came in at minus SEK 26 million, in line with the previous year. Interest expenses increased compared to the previous year, which was due to a slightly increased loan volume and a higher average interest rate. The average interest rate increased from 2.39% at year-end to 2.75% as of March 31 and increased loan volume and higher market interest rates are having a gradual impact on our average interest.The result in associated companies amounted to minus SEK 10 million and related to the period's capital contribution to Arenabolaget. And we, therefore, reported profit from property management of SEK 351 million, a decrease compared to the previous year, which was due to higher interest expenses. Unrealized changes in value amounted to minus SEK 2.1 billion, and I will come back to this very soon. The surplus ratio in the derivatives portfolio decreased by SEK 217 million, and the surplus value in the derivatives portfolio now amounts to almost SEK 1.5 billion. The tax expense, which only related to deferred tax was positive and amounted to plus SEK 393 million. And now please turn to Page 5.During the first quarter, the increased market interest rates continued to have an impact on the yield requirements and valuations. There continued to be few transactions in our markets and the valuations have also been influenced by transactions that were not completed. We have independently valued almost half of the portfolio during the quarter. Other properties have been valued internally. The average yield requirement in our portfolio increased by 12 basis points during the quarter to 4.11%. The increased yield requirements were partly offset by higher inflation assumptions. Both Newsec and Cushman & Wakefield now expect an inflation rate of 5% in 2023.The average yield requirement is now back at a level equivalent to what was reported at midyear 2019. Total unrealized changes in value during the quarter then amounted to minus SEK 2.1 billion. And the changes in value during the first quarter have been driven by the following factors: Yields minus SEK 2.4 billion; cash flow, including inflation, plus SEK 0.8 billion; and project and development properties, including development rights, also mainly due to yield, minus SEK 0.5 billion. Please turn to Page 6.This simulation shows that we can withstand write-downs of a further 20% based on today's market valuations without impacting our internal targets. And the margin is even higher in relation to the covenants in our bank agreements. And now please turn to Page 7.Reported equity decreased during the quarter and amounted to SEK 137 per share, a decrease of SEK 8, of which SEK 2.6 relates to a booked liability for approved but unpaid dividend. And the long term net asset value, the EPRA NRV amounted to SEK 166 per share. The loan-to-value ratio increased to 40% and the equity asset ratio decreased to 48%. However, both key ratios continue to indicate a very strong balance sheet. The interest coverage ratio has decreased, as expected, in line with increasing interest expenses and amounted to 2.6 in the quarter. Calculated on a moving 12-month basis, the interest coverage ratio was 3.4. Please turn to Page 8, financing.Financing continues to be a very topical question in the current market situation. The commercial paper market is functioning well and the banks continue to show that they have more capital to lend to the sector. The bond market is still volatile with high prices. In connection with the bond maturity of SEK 1 billion in February, we carried out a small issue of SEK 250 million in a 2-year bond at a margin of 200 basis points.The margins have then come down considerably to a level that as the first step felt sufficiently okay to show the market that we would like to be active. In relation to bank financing, however the spreads in the capital market are still too high. The turbulence in the banking sector then once again created turbulence in the capital market with volatile margins as a result. Now the spread seem to be on the way down again.During the quarter, we have raised new bank loans in accordance with previously agreed credit commitments. We have also signed another new bank facility. All in all, this means that at the end of the quarter, we had a SEK 5.7 billion in unutilized facilities including the backup for outstanding commercial paper. And please turn to Page 9.Graph here shows the maturity profile, the strategy of long-term fixed rate period is unchanged and we aimed for distribution of our land stock among several resources of financing. When it comes to short term commercial paper, the green bar in the chart we have the full backup. During 2023, we have remaining bond maturities of SEK 1.4 billion in total during the second half of the year. Our hope is that the bond market will offer more competitive terms and conditions. We are prepared, however, to also replace upcoming maturities with other debt. And the work on refinancing, our bank debt that matures within 12 months is continuing. We are now in the process of extending bank facilities that would expire during the first half of 2024. Please turn to Page 10.Just over 60% of the loan portfolio is fixed, mainly based on long-term maturities and mostly through straightforward interest rate swaps supplemented by some fixed rate bonds. The plan in the longer term is to replace maturities with new long-term fixed rate periods. The relatively high proportion of fixed rate terms today provides us with protection against rising market interest rates. In the short term, the higher market interest rates will thus have a more limited effect on our interest expenses. For a moving 12-month period ahead, an increase in the market interest rate generates a 1% -- generates an increased interest expense of approximately SEK 120 million, all else unchanged. Please turn to Page 11.

[Stefan Dahlbo, executive]

Thanks for review, Asa. The stock rental market in Stockholm has for many years been very strong. You can see it from almost for the last 10 to 15 years, it has been increasing rents and the vacancy has been at least in most areas coming down. So it has been a very healthy market for many, many years. Maybe this was a little bit unexpected during the pandemic period. that it's continued.We have seen a little bit activity slowing down as companies and organization trying to adjust the new ways of working and that also many decisions has been postponed. And I think this has been more obvious in the last months and probably also had with the economy and all the uncertainty with it.Now several surveys and a lot of indicate that we have stable rents in most of the areas, especially in the CBD continue to be at very good levels. We have in the Stockholm area increase in vacancies and also that's expected to be continued to increase. But we have to go down discussing sub areas by sub areas. CBD is still very strong. The inner city, relatively strong. In our part, Solna, Arenastaden, for example, all continue to be strong. So part in South Stockholm is a little bit weaker. But in total, I think we have with all the uncertainty in the economy, we have to discuss about the way of how we will work. We are expecting the vacancies in the Stockholm region. But this also means a lot of opportunities since we -- tenants are looking for better and better projects and better -- the best locations. And even if sometimes we're using the leased areas, they are willing to pay for the product. Next slide, please.We have said before that if you expect the interest rates or you see the interest rates coming up, we have to also be able to expect the yields to -- or the yield requirements to go up, and that's what have been seeing. The transactions that have been made in -- done in the market has been still done at good levels, but at a little bit slightly higher yields, of course. It's still -- compared to last year, it's a more quiet -- not that huge volumes that has been -- that we have seen from it. So the last year, it sort of [Indiscernible] section market. Next slide, please.As we said, we had a slightly negative net letting. It's -- normally Q1 is quite lower activity, normally lower activities, and that's also what we saw this year. The determinations are increasing a little bit, but 400 net letting is not really -- even we had some good ones beside new selling contracts, it's not really enough for having a positive. But we have a lot of discussions going on. And for the year, we are still looking for at least SEK 80 million in net letting. That's the target for 2023. Next slide, please.This slide you have seen before, but we think it's important to show it. As you know, there is very few news in this slide and that's quite natural since it's long contracts. SEB is our largest tenant, ICA, Telia all the well-known Swedish companies we have among the top tenants and the 25 largest represents a little more than 40% of our rental value.If we go to the next slide, please. I'll talk about renegotiations for the first quarter, because there have been very few active renegotiations. We had -- after what we had of index last year or in the beginning from the 1st of January, we have extended most of the contract that has been up for discussions on unchanged terms. And that's quite natural I think as it looks like right now. We have SEK 34 million, a relatively small amount. With that we had a decreased rents with about plus 94% and that's mainly, I think all of them are in retail. As you know, we have very little retail in total. And I think it will be quite natural that we see that instead of renegotiations, we will extend the contract and try to do that on [Indiscernible] especially the index for this year also looks to be quite good for us.On the occupancy rate, we're increasing it to 90%. This is one of our focus areas as you know for increasing occupancy up to the -- go from 95%. It will take some years before we will reach that, but that's further focus now with the extent and strengthen the letting team and also the way we try to work now. As part of this, we have coursed ourselves since we have during some years, been moving tenant companies from old buildings to newbuild properties in, for example, Arenastaden, quite a long group of examples of that. But we're now, as we said, entirely focused on this.Next slide, please. Here, you see what we have said, we've tried to forecast the rental development for the existing lease portfolio and what we know from today. And this is for the next 4 quarters. We will -- we are expecting the rental incomes to increase to about SEK 840 million and upward, SEK 850 million for the next quarters this year and for the first quarter next year. And compared to the end of 2022, for example, that's quite a good growth in the existing portfolio, including the projects we go on.And talking about projects, on the next slide, we will see the CapEx. The first quarter this year, it was almost SEK 700 million. We have said before that we are expecting it to be SEK 2.8 billion approximately this year, depends a little bit on what was – [ spin we will hold ] in some of the projects. We have a long-term target of SEK 2.5 billion. And last year, it was a little bit lower. And this year, we're expected to be a little bit more.If we look at the product portfolio on the next slide, the new building projects, for example, Regulatorn 4 in Flemingsberg is workshops and the Royal Opera under Royal Dramatic Theatre. We delve in full speed right now. They are going to move in, in almost exactly 1 year from now in the Q2 of 2024. And it's, of course, 100% -- we have occupancy rate of 100% already on that one. Separatorn 1 is Alfa Laval also in Flemingsberg. They will move in 2 years from now to Q2 in 2025. It's a project also almost fully let with the contract of Alfa Laval.During the first month or the last month of last year and the beginning of this year, Ackordet 1 in Haga Norra, in Arenastaden, we have been able to sign a couple of new contracts So now it's almost 50% in occupancy rate, and they will be starting to moving beginning of the second half next year. We signed the contract with JM and now we had also a contract with Randstad, and we had very good discussions going on I think in [Indiscernible]. I expect this occupancy rate to be higher during the next quarters.Then we have some projects that were more in the redevelopment projects. And it's [Indiscernible], it's also which were the tax authorities left some quarters ago. We had good discussions to that, but we also -- we will take the investment -- we have the ground investments right now. We will take the more tenant specified investments when we're there, when we know more, when we sign contracts. And that's also the same with, for example, Pasen 1 in Hammarby, which we are starting, but we will take a more step-by-step when we know more about which tenants would be sitting there. And Hagern Mindre is close to the [Indiscernible] Stockholm being close to -- the part of the Stockholm in the city, and that's -- will be fulfilling right after this summer.But talking about the building rights on the next slide. As you know, we have a huge portfolio. We have been continuing to develop or have the planning process going on to be able to start the projects when we can see both that we are able to find tenants for it. But also, we need to -- we will say the construction cost to come down a little bit. They're still too high. But we continue to prepare for the future products.When talking about the residential building wise, it's the same. As you know, it's a very uncertain market right now. But for the projects we have going on both in Haga Norra in cooperation with Brabo, we have now sold 388 of 418 apartments. 18 of them has been sold in the beginning of this year. So it's still -- but it's still possible to sell apartments when they are ready for moving in. And that's what we're also seeing in Birger Bostad in some of the projects there. And the selling rate for the projects under construction is in Birger Bostad more than 90%.And we talk about the building costs on the next slide. Unfortunately, I would say that we saw the price develop everyday -- price increases in the last year with approximately 10% to 15%. We expect it could come down a little bit and that they have some part of it -- some of the prices have been coming down. For example, there is steel and wood and some others. And the ground, the cost for ground works and they're also coming down. But unfortunately, some of that, ones have been coming up instead. So it's still up since beginning of last year, we say 10% to 15%. But we -- order volumes for the construction company is coming down. So we hope that we could be able to see that prices will be more -- will be weak prices in the construction -- for constructions cost in the next -- over the next part of this year.Talking about the sustainability piece, and I will leave that to Asa again, please Asa.

[Åsa Bergström, executive]

Sustainability continues to be a prioritized issue for the year, and we are gradually working to contribute to a more sustainable Stockholm. On the energy side, we have set a target to reach an average energy use of a maximum of 70 kilowatt hours per square meter by 2025. We are currently at an average of 73 and the goal is to reduce this by 1 kilowatt hour per year over the next 3 years. During the first quarter, we were able to note a saving of approximately 4% compared to the previous year.Our sustainability house in Haga Norra, which is constructed using 70% reused material has attracted a lot of attention and also awarded for sustainability prices. Technologies for retention of materials and reuse are being developed, and we have a lot to learn from each other in the industry. So we are very much looking forward to taking this further in other new production projects.

[Stefan Dahlbo, executive]

Thank you. Of course, that was a shortlist of all the activities that we're doing. We have a lot of it, as you've seen it before, a long, long list of both elemental projects, but also energy projects, but also social initiatives that -- so we will be happy to tell you more about that if you're interested in other meetings.So thank you for listening and please, questions.

[Operator]

[Operator Instructions] First question comes from [ Alexander Dawar ] from Green Street.

[Unknown Analyst]

Looking at Fabege's disposals over the past 5 quarters, I don't believe there have been any -- I think in the previous event, you mentioned the potential disposal of a noncore property in Ostermalm, if I'm not wrong. Would you more generally consider disposals as a means to de-lever? And if so, do you plan to be a net seller for the year and do you have any potential volumes in line?

[Åsa Bergström, executive]

I think it was very difficult to hear your question, but I think it referred to disposals and net investment over 2023, right? So yes, we are on the market with one property in discussions today. We sold some building rights to JM that were vacated in April. So just after the end of last quarter. And we have also said that we have an estimation of the investment of around SEK 2.8 billion in our property portfolio over the year. And whether there will be any further transactions, we will give notice when we have something to inform. So it's nothing that we are sort of discussing at the moment now. Do you want to add something, Stefan?

[Stefan Dahlbo, executive]

No, I think that's a repeat.

[Operator]

[Operator Instructions] There are no more questions in the queue. This concludes our question-and-answer session. I would like to turn the conference back over to Stefan Dahlbo for any closing remarks.

[Stefan Dahlbo, executive]

Thank you, and thank you for listening and joining us at the meeting. You're always welcome to give us a call, Asa, Peter or myself, and we'll be happy to have discussions, and we hope to see you soon in real life too. So have a nice day, and thanks for joining us.

[Operator]

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.