Fabege AB

STO:FABG

Earnings Call Transcript 2019-Q3

[Operator]

Ladies and gentlemen, and welcome to the Fabege AB Q3 Report 2019. Today, I am pleased to present CEO, Stefan Dahlbo; and CFO, Åsa Bergström. [Operator Instructions] Speakers, please begin.

[Stefan Dahlbo, President & CEO]

So welcome to Fabege's presentation of the third quarter of 2019. As most of you know, it's my first presentation as CEO of Fabege. I have now been here for about 7 weeks. It has been hectic, it has been educational, but for the most, interesting and fun. And I must say I'm very impressed [i as an ] organization. I know there was a lot of knowledge, a lot of entrepreneurship, a lot of passion. But I am still very impressed. It was even better than I thought or expected it to be. The last 10 years, we can say, has been fantastic for the property sector and especially maybe for the market in Stockholm. As you can see on Slide 2, we all know that the yields have continued to go downwards. We have seen rents increasing. We have a good economic cycle, and we have been investing through this period a lot in different projects. So it has been very favorable times for Fabege, and they continue to be.Today, as we see on Slide 3, we have a total property value of almost SEK 72 billion. 40% of this value are in the inner city of Stockholm. 10 years ago, Arenastaden was very small part of our holdings. Today, it's about 30%, SEK 21 billion. And Solna Business Park is roughly 15%. So Solna and the inner city of Stockholm is about SEK 30 billion each. And [ that's even great, ] and we will come back to that, future potential in all those other areas where we're active.So Slide 4, and generally speaking, we saw continued good earnings, a good trend during the third -- continued good trend during the third quarter. And I will ask Åsa, can you please go through the quarter's results in more detail?

[Åsa Bergström, VP, CFO & Company Secretary]

I will. Thank you, Stefan. The situation remains positive with increased rental income, improved profit from Property Management and positive value changes. Rental income amounted to almost SEK 2.1 billion, an increase of more than SEK 270 million compared to the previous year. And as we measure in an identical portfolio, income increased by 14% in total. Completed projects made the biggest contribution to the increase, but higher rental rates in agreements and index adjustments also contributed positively. However, the sale of Pelaren in Q3, which was vacated on 1st of July, meant that the rental income in the third quarter fell slightly.The outcome of the property tax assessment was also better than we were expecting at the beginning of this year. This means that both income and expenses were lower. And this had a positive effect on the surplus ratio in the third quarter. And the surplus ratio for the entire period came in at 75% in total.Interest expenses are slightly lower than last year in absolute terms. Seen over the year, we have borrowing more overall but at a lower average cost. And the result in the associated companies amounted to minus SEK 32 million and mainly related to liquidity contributions to the Arenabolaget during this period. And during the third quarter, we made no further contributions. So in total, we therefore recorded profit from Property Management of SEK 1.1 billion, which was a total increase of 27% compared to last year.Before the end of the quarter, just over 40% of the portfolio was externally evaluated. The yield requirements fell further, but with only 1 basis point during the quarter to 4.03%. Overall, unrealized changes in value amounted to SEK 3.9 billion, equivalent to a value growth of nearly 6%. And values in the project portfolio rose by SEK 1.1 billion. This amount includes an impairment loss in relation to residential development rights. In total, return on invested capital on the project portfolio amounted to 104%. The values in the investment property portfolio in the third quarter were mainly driven by rent increases while the yield requirement only fell slightly.During the third quarter, we increased our fixed interest term further through new swap agreements. Together with continued falling long-term interest rates, this meant that the deficit value in the derivatives portfolio increased further and to minus SEK 718 million in total during this entire period. And the tax expense amounted to minus SEK 775 million and mainly just related to deferred tax. This amount includes dissolution of the deferred tax related to the sale of Pelaren of SEK 148 million. We have made a new complete tax calculation in all of our legal entities in accordance with the new rules that limit interest rate deductions. The change will not have any effect on taxes paid, but we will use carryforward losses at a faster rate, which is also reflected in the tax calculation for the period.And please turn to Page 6. In line with the strong earnings trend, our balance sheet has continued to strengthen. Reported equity now amounts to SEK 114 per share and the long-term net asset value, the EPRA NAV, is SEK 138 per share. The debt ratio, and in other words, interest-bearing loans in relation to EBITDA, strengthened and amounted at the end of the quarter to exactly 13, which is in line actually with our long-term target. So all our financial key ratios are more or less unchanged or have strengthened.Please turn to next page. Last week, we received an upgraded credit rating of Baa2 with a stable outlook from Moody's. Fabege has, as you know, been active on the capital market for many years via commercial paper program and bonds. For us, it's important to make investors aware of our high quality and our long-term approach to financing. So we are very, very happy to have received this acknowledgment of the company's financial stability via this upgrade from Moody's.And now please turn to page Financing. During the first half year of 2019, we were very active with refinancing of long-term credit facilities, bond issues and the launch of our new green framework. This activity has continued with the extension of one bank facility, a further bond issue and a gradual change to green certificates as they have traded during the third quarter. Through the refinancings we made, capital tied-up has further increased to 6.2 years and our green financing now amounts to 82% in total of our outstanding loans. We have also taken advantage of the opportunity to extend the fixed term -- fixed interest term during certain periods. Primarily in August, it was possible to fix the long-term interest rate at extremely low levels. We have entered into long 10-year fixed interest terms at around 20 basis points. And we have been able to balance this with shorter maturities at a negative interest rate. And finally, unutilized credit facilities amounted to SEK 5.4 billion by the end of the quarter. So we believe that we have every opportunity to spend a little more money in the form of the investments.And now back to Stefan.

[Stefan Dahlbo, President & CEO]

Thank you, Åsa. If we look at the Slide 9 and the numbers there, we see that the rental market in Stockholm still remains strong. Our rents has increased this year by about 18% in renegotiations. It's down a little bit since previous quarters. We had a major renegotiation with some lower rates. The reason behind that was we did -- it was a big contract but with the very small and minor adoptions to the premises, so it was still a very good transaction despite the low increase.The net letting for -- during the year is minus SEK 92 million. We can divide that into 3 parts. First, as you know, we lost the Swedish Tax Agency at the start of the year. And that had a negative impact on the [ net letting ] of a little bit more than SEK 100 million. And the second part is the day-to-day letting, which has been performing well. The first 3 quarters, we're up about SEK 15 million. And during the third quarter, we were down about SEK 5 million. And being down SEK 5 million during a single quarter is nothing that worries me, and I still see how the renegotiations ends up in better deals for us. And the third part is about our project lettings. And as we know, such major deals always take a long time to complete. And this is something that we must always keep in mind. We are right now having advanced discussions with several potential customers. And I'm optimistic that we will make the deals and complete them. But I think it's too optimistic to expect any major new project lettings before year-end. For me, it doesn't really matter what quarter it happens in, the most important thing is that it happens.Slide 10. You see how our average yield requirements have developed during the last 5 years. Yield requirements have fallen equally in all of our 3 areas. In the prevailing interest rate environment, I think [ there is good ] continued lower yield requirements in all our markets.In Slide 11, we can see how our changes in value came from during the period, January to September 2019. As you can see, the yield had the greatest impact even though it was largely the same. But the yield will have a larger impact in the future. During the third quarter, the rents helped us most. Slide 12. Let's move to our project portfolio. Today, we have about 7 -- 87,000 square meters in the portfolio. This is low for Fabege. And 1/3 will be -- also be completed over the next 2 quarters. Of course, we have to top our portfolio with more projects. And the first new project is Första Parkett in Arenastaden, which you can see on the next slide. In September, we turned the first sod in the Första Parkett project. This will be next to ICA's new head office in Arenastaden. Sustainability is and will be an important and integrated part of everything we do. I'm impressed of what I have seen, how we're working and it has worked in the past and will -- all the progress going on. But can't you also tell us a little bit of about the work we have done and we do today?

[Åsa Bergström, VP, CFO & Company Secretary]

Yes. In the property sector, sustainability has historically involved a lot of focus on environmental and energy issues. But Fabege -- in Fabege, we are creating our city districts. And we want people to enjoy to live, to work and visit these districts. And therefore, we believe that social sustainability will become a more important factor in the future. The life between the buildings is becoming a key issue and is something that we will take into consideration when we are developing our city districts in the future.After the summer, we have received some really good sustainability awards. We were taking part in the GRESB rating and received in total 94 points, which made Fabege the #1 of listed companies in the office sector in Europe. And we also received the Sweden Green Building Awards of 2019 for our new built project, Signalen 3, which is ICA's head office in Arenastaden. In total now, 83% of the total area in our portfolio is certified -- environmentally certified according to the BREEAM system. And we have also received 82% of green financing. So the next step will be a more focus on social sustainability.

[Stefan Dahlbo, President & CEO]

And thank you, Åsa. And as I said, I'm impressed with the work that I have seen. And I also think that as a real estate company and as a developer, you can make impact in all the areas we are active in.Slide 15. A little bit more about our 4 different urban development projects. Arenastaden is only halfway. It has been an incredible success story for Fabege. It's easy to forget that we're only halfway in the development of the area. Now we are going to work on creating more housing in order to ensure an even better mix between offices and housing. In Haga Norra, we are working right now with Phase 1. And this is to complete Bilia's new facilities. We expect -- the plan is that it should be ready during Q1 2021. In Solna Business Park, as you can see on Slide 18, there is a huge potential. The entire area is about to begin a major development journey. Today, the area is a very good office location, where we have several large and [ office ] customers. But we're now going to develop the area into an even more attractive city district. This will happen in several stages. And the first step is to obtain a better mix between housing and offices. In the longer term, Solna Business Park can also connect Sundbyberg and Solna in a natural way. I think this area and this -- has a big potential.On Slide 19, we see a photo of -- over Flemingsberg today. This is an area that we are focused on developing new office buildings, hotels and even residential buildings in the future. It would be a completely different area in the next 10 years. Today, it's a city district with universities, hospitals, housing and very, very beautiful natural areas around the corner, which is usually forgotten about. The opportunities here in Flemingsberg is actually maybe even better than they were in Dalvägen industrial area 10 years ago. And Dalvägen industrial area is today known as Arenastaden. During 2020, we will be able to present more concrete details and plans for Flemingsberg. We are currently right now conducting a dialogue with potential customers and partners about how to develop the area. We also have a very close and good cooperation with the local authorities. And we have the same vision. And of course, that makes it much easier for the process.On Slide 20, we have what we're aiming for with Flemingsberg. 50,000 living there, 50,000 working there, 50,000 visitors. Already today, we have a lot of people working there. We have 70,000 students, for example, visiting it. And there is a lot of residentials already. With this vision, we conclude the presentation. And we're open for questions, so please?

[Operator]

[Operator Instructions] First question is from Andres Toome from Green Street Advisors.

[Andres Toome, Research Associate]

First question to Stefan. Has there been or are you planning a strategic review? And do you envisage kind of potential changes in the current direction of the company?

[Stefan Dahlbo, President & CEO]

No. No big plans. I think, first of all, the focus on Stockholm will continue. Stockholm has great potential. And it's also very important for us to have focus, so we can -- we have the knowledge and we have the attractiveness of what we -- where we have the focus in, and that's in Stockholm. And also commercial office is also the focus. It will continue to be the focus. So the short answer on your query is no.

[Andres Toome, Research Associate]

Okay. And the second one, could you add some color on what's driving the decelerating like-for-like growth? Is it mainly because of the renegotiations that you talked about earlier? Or is there something else contributing?

[Åsa Bergström, VP, CFO & Company Secretary]

You mean the like-for-like growth in comparison to previous year?

[Andres Toome, Research Associate]

Like-for-like rental growth versus what we saw in H1.

[Åsa Bergström, VP, CFO & Company Secretary]

Yes. Okay. So the like-for-like growth in total is around 14%. And of that, around, I would say, 3/4 is explained by projects being terminated towards the end of last year and that they are now generating income in 2019. And the rest is increased rental levels in renegotiations.

[Andres Toome, Research Associate]

Right. But kind of the growth rate has come down from -- compared to H1. What's behind that?

[Åsa Bergström, VP, CFO & Company Secretary]

The growth rate has come down from?

[Andres Toome, Research Associate]

In Q2, you reported 20%, if I remember correctly, like-for-like growth.

[Åsa Bergström, VP, CFO & Company Secretary]

Yes. If you look at separate quarters, one large explanation for the income to come down in Q3 in comparison to Q2 was that we sold one property, Pelaren 1 in Globen. Another explanation is that when we calculated the increase in property tax, we calculated a bit too much, which means that we have now made a correction to both the income and the cost of the property tax in Q3. And this correction reflects all the 3 quarters this year. So that's the explanation behind that.

[Andres Toome, Research Associate]

Okay. And the last one for me, what are you kind of observing in the rental market currently? Admittedly, there is a view that the market is slowing down. Are you seeing that? Or are you seeing something different?

[Stefan Dahlbo, President & CEO]

No, we're not seeing that. We still have a lot of good discussions still. The renegotiations we're doing is, of course, I would say, to better terms than before. And it's still -- in Stockholm and all our areas are very good market.

[Operator]

Next question is from Niclas Hoglund from Nordea.

[Niclas Hoglund]

Niclas Hoglund, Nordea. Could you just please clarify? In your reports, you're talking about investments in new projects declining more or less in the same sentence as you talk about your weak net letting. Could you may be shed some light to clarify on the sort of impact on investments, potential returns and if this is sort of in connection with a slowdown or slightly weaker net letting we're seeing right now?

[Stefan Dahlbo, President & CEO]

No. The net letting we were talking about, as we explained before, could be divided into 3 parts. The day-to-day letting is still positive, as I see it, even if the third quarter was a little bit -- the SEK 5 million minus. The projects is running in -- with the speed we expected them to do. No changes. We are not -- we have a planned process for some. It will, as we said before, mean that it will not be started in a big -- except for Parkett in Solna. We would rather at the end of next year or beginning of 2021 before any other big projects. But we -- nothing has been changed for our plans.

[Niclas Hoglund]

Right. And then moving on to the yield requirements, it's down only 1 basis points. And we've seen some of your peers actually taking down their yield requirements slightly more in the quarter. Would you expect yield to be bottoming out on these levels? Or do you see any pending transactions to support further uplift in values?

[Stefan Dahlbo, President & CEO]

I'm quite optimistic that we see a lot of capital coming into the Stockholm market and the real estate market in Sweden as a whole. And I think we can expect the yields as it looks today to come down further.

[Niclas Hoglund]

Would you expect it to be around 10 basis points? Or what's it worth?

[Stefan Dahlbo, President & CEO]

Maybe even more.

[Operator]

[Operator Instructions] And there are currently no further questions registered. So I'll hand the call back to the speakers for any closing comments. Go ahead.

[Stefan Dahlbo, President & CEO]

So thank you very much for joining us today. You're all, as you know, always welcome to give us a call or mail us or anything. So thanks for today. Bye.

[Operator]

And that concludes today's conference call. Thank you all for attending. You may now disconnect your lines.