Fabege AB

STO:FABG

Earnings Call Transcript 2020-Q4

[Operator]

Hello and welcome to the Fabege AB Q4 Report 2020. [Operator Instructions] Today, I'm pleased to present the CEO, Stefan Dahlbo; and CFO, Åsa Bergström. Please go ahead with your meeting.

[Stefan Dahlbo, President & CEO]

Thanks, Åsa. A little bit disappointing figure this year -- last year with net letting. It came in at minus SEK 45 million, but -- it looks poor, it is poor. But in reality, it's a little bit better than it looks because large termination last year were Telia, for example, Telia in Arenastaden and DLA in Bocken 39. Telia had an option in its agreement to vacate approximately 6,000 square meters, which they choose to exercise at the end of last year.We already, during the beginning of this year, already have signed a new agreement for approximately 2/3 of the area at better rates than before. The same applies in Bocken, where we, last year, early last year, and now -- so DLA will move. And 2 -- about 2 weeks ago, we announced that we now have a new tenant. It's a tenant at better rates, and it will be good for the whole valuation of the property. So taking this together, this means that we will have a positive result from these 2 terminations as early as 2022, but it looks disappointing.What's also true is that we -- it's -- we have said it before. But what happened last year is that it takes longer time in negotiations with new tenants with a part -- and that's quite natural during a situation like that. We still have a lot of -- especially true when talking about the large projects and the large project lets. We have, as we said before, good discussions. There are no discussions that are closed, but they take longer time to get the final decision.In renegotiations last year, it ended up with approximately 20% plus, which was a bit higher than we expected at the start of the year. The number of renegotiations were a bit lower due to the fact that several or some renegotiations were postponed. But we're quite optimistic even for this year. We're talking about the renegotiations and their results.Even though it's impossible to say what we have been in 2021, I think we all can agree on that and if -- how long will the pandemic last, how -- when we can get the vaccines and so on, we have started this year strong.And so next slide, please, Slide #6.[Foreign Language]

[Åsa Bergström, VP, CFO, Company Secretary & Deputy CEO]

[Foreign Language]

[Stefan Dahlbo, President & CEO]

[Foreign Language][Technical Difficulty]

[Operator]

Apologies. There seems to be a bit of a technical issue at the moment. So if you could please just give us a moment, we will try and get back to you as quickly as possible.

[Stefan Dahlbo, President & CEO]

[Audio Gap]Not least at personal level at the society as a whole. The economic development was, of course, largely governed by the pandemic and its progress. But if we -- where we sat a year ago, very few of us has had probably guessed that it would be -- if we knew what would happen could be so strong in the economy as this has shown to be.Despite the year's different challenges, we managed to deliver good net operating income, a strong surplus ratio, value growth in the portfolio, and we continue to have a very strong financial position. Our projects are progressing and a few acquisitions have been completed.I will hand over to Åsa, who will go through the results in more detail. Please go ahead, Åsa.

[Åsa Bergström, VP, CFO, Company Secretary & Deputy CEO]

Thank you, Stefan. Yes, it has been an unusual year, but still, as you said, with strong figures coming from Fabege.Rental income came in at SEK 2.8 billion, slightly lower than the previous year. The divestments of Trängkåren and Pelaren resulted in decreased rental income during the period of SEK 188 million. In an identical portfolio, income increased by 5%. Discounts and provisions due to the pandemic meant a net decrease in rental income of SEK 46 million, but this was offset by completed projects, higher rental levels and index adjustments, which all contributed positively.The warm winter with very little snow in early 2020 meant that operating expenses were low during the first quarter. The lower occupancy rate in offices, that is to say that many of our tenants, to a large extent, have worked from home, has also contributed to lower operating expenses.The surplus ratio came in at 75%, something that I think we can be very satisfied with. Interest expenses were in line with last year in absolute terms. Seen over the full year, the average interest rate went up at first before falling back to 1.77% at year-end.Earnings in associated companies amounted to minus SEK 53 million and mainly related to capital contributions to Arenabolaget during the period. And to summarize, we reported a profit from property management of just under SEK 1.5 billion.Before year-end, approximately 30% of the portfolio was externally valued. A large part of the property portfolio was externally valued several times during the year. The uncertainty that existed during the spring is gone, and the valuers' positive view of the market trend meant that the portfolio has increased in value by SEK 2.7 billion in total or 3.7% during the year.The yield requirement fell by 9 basis points during the year to an average of 3.88% at year-end. We estimate that the rental levels in the valuations are in line [ we've entered ] into the rental agreements.The deficit value in the derivatives portfolio decreased again during the fourth quarter but amounted to minus SEK 229 million for the full year. And finally, the tax expense amounted to minus SEK 850 million and mostly related to deferred tax.Please turn to slide Key Ratios. Reported equity increased by SEK 6 per share to SEK 127 per share. And the long-term net asset value, EPRA NRV amounted to SEK 155 per share. The surplus ratio is in line with our long-term goal. We have a good margin when it comes to the interest coverage ratio. Only the debt ratio lies slightly over the target level of 13. And as you can see in the key ratios here, we have a strong balance sheet with a high equity/asset ratio and low loan-to-value ratio.And now please turn to slide Financing. In relation to our banks, it's been calm and stable during the whole year. We have refinanced everything that we planned to refinance. In the capital market, the year was more characterized as a roller coaster ride. After the complete stop in the capital market in March, a gradual return to more normal conditions began early in the summer. And after a dip late in the autumn, the capital market now in early 2021 is again back in earnest and at the levels we saw 1 year ago before the pandemic started.We see strong demand both for our commercial paper and for bonds. Last week, we were out in the capital market with a transaction of SEK 700 million in total in 2 tranches of 5 and 6 years, respectively. In light of the interest that existed, we could have issued 3x as much.During 2021, bonds mature of SEK 700 million in total, which we intend to refinance through new issues. And on the bank side, we have no maturities before June 2022. During the fourth quarter, we completed the refinancing of bank loans, and we also finished the process of changing over the last nongreen loans to green loans.Now 100% of Fabege's financing is green, a real milestone, which we are incredibly proud of. This is a development, which was made possible by our sustainability work, which, among other things, means environmentally certified properties and close cooperation with our financiers. It is really great that we succeeded in achieving this target.During the year, we repurchased almost 4.6 million shares in Fabege at good levels. We will keep these treasury shares until further notice. The past year has not upset Fabege's financial stability. We feel secure and with our strong balance sheet and financial muscles, we can take advantage of opportunities and also manage more challenging times. And now back to Stefan.

[Stefan Dahlbo, President & CEO]

Thanks, Åsa. A little bit disappointing figure this -- last year were the net letting. It came in at minus SEK 45 million. But -- it looks poor, it is poor. But in reality, it's a little bit better than looks because large terminations last year were Telia, for example, Telia in Arenastaden and DLA in Bocken 39. Telia had an option in its agreement to vacate approximately 6,000 square meters, which they chose to exercise at the end of last year.We already, during the beginning of this year, already have signed a new agreement for approximately 2/3 of the area at better rates than before. The same applies in Bocken, where we, last year, early last year and now, so DLA will move. And 2 -- about 2 weeks ago, we announced that we now have a new tenant. It's a tenant at better rates, and it will be good for valuation of property.So taking this together, this means that we will have a positive results from these 2 terminations as early as 2022, but it looks disappointing. What's also true is that we -- it's -- we have said it before. But what's happened last year is that it takes longer time in negotiations with new tenants. And that's quite natural during a situation like that.We still have a lot of -- especially true when talking about the large projects and the large project lets. We had, as we said before, good discussions. There are no discussions that are closed, but they take longer time to get the final decision.In renegotiations, last year, it ended up with approximately 20% plus, which was a bit higher than we expected at the start of the year. The number of renegotiations was a little bit lower due to the fact that several or some renegotiations were postponed. But we're quite optimistic even for this year. Focus for 2021 will be to decrease the vacancy rate, and we have high internal targets, both for the property management portfolio and for new lettings in the new project portfolio -- for new projects.Next slide, please. This slide is one of the explanations of why we think that we stand so strong. Our 25 largest customers account for approximately 42% of our rental value. We were affected by very few bankruptcies among -- I think it was 3 small ones among our customers during 2020 despite the pandemic and that -- all that fall from it. And as you know, many of those customers are very stable, among the strongest and largest Swedish companies.Next slide, please, Slide #9. Nobody knows how the future -- exactly how the future for offices will look. But one thing we do know is that there is no standard solution that suits everyone. During last year, we put extra focus on meeting and listening to our customers' needs. Our goal is always to be a good partner and to develop together with our customers.We believe that staff and people will be in more focus after this pandemic is over hopefully. Staff will impose higher demands on the office of the future in relation to health, security, service and accessibility. These are not really new trends, but with a lot of other things, they have been strengthened by the situation.Our work away from work concept or WAW, as we call it in Sweden, helps our customers' staff with accessibility to good offices. They can easily book a workspace with a mobile phone in any of our hubs in order to facilitate everyday life if they, for example, don't want to go back to Arenastaden after meeting in the city. In this case, they can instead just book a place in our hub in the city easily and conveniently. Now we are also planning a new hub in Flemingsberg. So that would be our fourth. We have connected up all of our properties in our network, which means that we can retrieve a lot of data about our properties. This means that we will be able to repair and elevate it before it breaks down or adjust the heating or cooling, depending on how the premises are used. The possibility, in principle, are endless. And this will be also in the future. It's one part of our digitization work that will take -- we will have focus on for the next years.Next slide, please. The activity in the transaction market has been very high during 2020, but mainly within logistics, residential and so-called public use properties or social infrastructure. Quite few transactions were carried out in the office segment in Stockholm, but those that were completed were at very good levels. For example, AFA Fastigheter sold Fyrkanten 11 on Sveavägen, close to Hötorget and close to Bocken 39, for approximately SEK 130,000 per square meter. But there is a lot to do with the development on that property.SEB Tryggliv sold another property, Guldfisken 31, at Nybrogatan in the city of Stockholm, for approximately 105,000 per square meter. Both those properties were also in principle were vacant, without any tenants and a lot, as we said, a lot to invest for the future.I can also say that we -- of course, we were in a discussion for both those properties, but I think they were a little bit too good priced. So there are no very -- no stressed sellers in the market -- in the office market in Stockholm during the year. So it ought to have been -- they're still modest sellers' market.Next slide, please. During 2020, we externally -- as Åsa said, we externally value our properties to a very large extent. We normally externally value 25% of the portfolio per quarter in a rolling schedule. This year, we externally valued approximately 60% in Q2, 50% in Q3 and 30% -- or 25%, 30% in Q4. This means that we are very comfortable with the valuation that we have today.Next slide, please, Slide #12. Investments during the year came in at approximately SEK 1.9 billion, which is under our long-term goal of approximate SEK 2.5 billion per year. We will not reach SEK 2.5 billion in 2021, either. But as we said before, during a 4-year period from now, I think we will reach SEK 10 billion. So that's in the commercial market portfolio, the commercial portfolio.Next slide. Here, we can see 4 of our projects, which we know will start in 2021, 2022, and it's a total investment of approximately SEK 1 billion. It's Bocken 39, which we talked about before. It's Glädjen 12. It's also a refurbishment project at Kungsholmen. We had also -- were Electrolux Professional. We have one of the lower part of it. We have a parking house in Arenastaden. It's a new production. And in Flemingsberg, we have the first project, which is the Royal Opera and the Royal Dramatic Theater, and it will start 2022.If we look at our building right portfolio, I think, as you know, we have approximately a little bit more than 1 million square meters. And I think it's -- about 600,000 is commercial. And if we look at the portfolio, I think it's important also to stress that we have about almost 500,000 square meters, as we said, of residential. And it's equal to approximately 8,000 apartments. And half of that is in Solna, and as you can see, it's -- half of that in Flemingsberg.Over the next few years, we will devote more time and energy to also ensure -- and ensuring the value creation of all those residential building rights that we have. The building rights have often been created on our urban development work and which also means that we have low input values.Next slide, please. Our letting team is working right now. We have some very exciting projects, both in Flemingsberg and in Solna. Especially in Flemingsberg and in Solna, we have plenty of potential. Here, you can see 4 of the potential projects in Solna and which we can start already in 2022. So they are working right now to find the tenants for those projects. For -- as you know, we don't like to start any large ones without -- on speculation. So -- but this -- I think we still -- we have a very excellent and interesting building right portfolio.

[Operator]

[Operator Instructions]

[Stefan Dahlbo, President & CEO]

So any questions? I think we have got one by [ May ], I think.

[Åsa Bergström, VP, CFO, Company Secretary & Deputy CEO]

We have one question here. In which submarkets have you observed the largest share of tenants breaking their lease? And could you provide any color on where those tenants are relocating?

[Stefan Dahlbo, President & CEO]

But we haven't had any breaking in advance any leases. We have -- the ones that are moving when their contracts are ending is -- we have some in the cities. They are moving into maybe some other higher building in the city. We have some in Solna Business Park where we have some vacancy, the vacancy rate going up a little bit. And they are -- some of them are reducing the area, the space.The one we talk about when we talk about Telia is that they had an option where they expire for -- for one of the houses that were more for expansion for them where they will not use it. So they have to pay us according to the contract. And then we can find other tenants for that house. And we -- as we also, right, already tell you, it's -- about 2/3 of that house is already filled with new contracts. So -- but no breaking in advance any contracts.

[Åsa Bergström, VP, CFO, Company Secretary & Deputy CEO]

And there's also second question. Will you carry on selling the residential rights to developers? Or do you have any intention to build and hold?

[Stefan Dahlbo, President & CEO]

It depends on how we think we will add or build most values for our shareholders. In the past, we have selling. We have been -- we have, right now, 3 on ventures. And we can also develop some of them ourselves. But we will take an active decision for each project and see how can we build values -- create values best in each situation.

[Åsa Bergström, VP, CFO, Company Secretary & Deputy CEO]

Okay. And then we have a third question here. I was just wondering if you could comment on the lease maturity structure, please. You have 40% of your leases expiring in the next 2 years. What do you estimate the rent reversion to be on these leases?Well, the expectation for 2021 is we have a target, at least 10% uplift on renegotiated contracts in 2021. The contracts that we are renegotiating during this year, they are normally for somewhere between 3 and 5 years back since we previously negotiated them. So we still see an opportunity to lift rental levels in renegotiations.

[Operator]

[Operator Instructions] Okay. There appears to be no audio questions. So I will hand back to the speakers for any other remarks.

[Stefan Dahlbo, President & CEO]

Okay. Thank you very much for joining us this afternoon. If you have any questions, please call -- give us a call or send us a mail, as usual. And we look forward to meet you soon, hopefully, also in real life during the year here. So thanks for joining us and be careful out there.

[Operator]

This now concludes our conference call. Thank you for attending. You may now disconnect your lines.