Pandox AB

STO:PNDX B

Earnings Call Transcript 2018-Q1

[Operator]

Good day, and welcome to the Pandox Q1 2018 Report Conference Call. This conference is being recorded. At this time, I would like to turn the conference over to Anders Nissen. Please go ahead, sir.

[Anders Nissen, CEO & President]

Yes, good morning, everybody. I turn over to Anders Berg immediately.

[Anders Berg]

Yes, hello everyone, just a small correction in the English version of the report. We will send out the correction, it's on Page 17 where the country names have been mixed up. The Swedish version is okay, but we will send out the correction for the English version very, very soon. Thank you.

[Anders Nissen, CEO & President]

Good morning, and welcome to this presentation of Pandox Interim Report for 2018. I am Anders Nissen, the CEO of Pandox, and with me I have Liia Nõu, and that was our CFO; and Anders Berg, Head of Communication and Investor Relation. And as always, the presentation will be divided into 2 parts. We’ll start with the presentation between Liia and me and then we are followed by Q&A session. So welcome everybody. Let's turn to Page #2. And let me start to say that I am very pleased with the Pandox first quarter. We have 2 strong answers that we were looking for, we get both. First, we see a growth in NOI and cash earning like-for-like, despite Easter, that is strong Easter take down the -- it's a negative effect for 3% to 4%, I would say most likely 4% than 3%. And in spite of that, we have a growth in NOI and cash earning. And then number two is maybe even more important, that the Jurys Inn acquisition of SEK 7.5 billion we did in December has a good start, which is also nice to have with an acquisition of that size.With that said everybody, the total cash earning in the quarter increased by 24% and return on equity was continuously good 21% on an annual basis. And this positive development explained by 3 main drivers. Profitable acquisition again this Jurys Inn, positive effect on product development, meaning cash flow driven investment that we do together with our partners and a stable hotel market with a positive underlying demand. Let's come back to that. However, we had a negative calendar effect, as I said before due to Easter, where we -- that we had a normal -- you have -- we have, let's say, 5 to 7 less days with high demand and high rates and we changed that to low demand and low rates so that has, of course, changed for the quarter. The good thing is that most of it or maybe all will coming back in Q2. So that is -- and something we will see next in Q2 as I said.And like-for-like in property management more or less was flat, and like-for-like operator activity increased by solid 21%. And please notice that the 2 retail properties in Brussels were reclassified to property management in February, Hotel BLOOM!, and with 306 room and Berlaymont with 220 rooms were reclassified from owned and owned operations to owned and leased to NH that was something we have strong expectation on us as well.So next page please. Page #3 shows the increase in net operating income, total NOI, which is a substantial increase. And there is different factors combined and behind this. First again, well-performing acquisitions, we have also in market in U.K. and Ireland and positive development. There is a positive mix effect in property management, where we see those recently leased contract that we had [ hinted ], we have lower cost, property cost, meaning that, that we will be a positive mix effect compared to those contracts we signed in Scandinavia and a stable underlying market condition that is in the positive side. On the negative side, we have the seasonal weaker quarter. There's always that Q1 is the weakest quarter over the year, so also this year, but it also had Easter, so a negative calendar effect. And again, we talk about 3% to 4% and I say again repeat myself of saying it's more 4% than 3%. So if you add that into Q1, you can see that the substantial growth was strong in Q1.We also had on the top of seasonal and calendar effect also weaker trade fair calendar Germany in Q1 and it is something that moves every time, that's a moving target. Sometimes it can be strong at the end of the year, sometimes at the beginning of the year. Last year, it was very strong in Q1 that will be spread out over the year so that is nothing we worry about, but again it was a strong comparison and which is also in general we have in several markets and ongoing capacity expansion in Stockholm. Stockholm is, as you all know, has a -- we are -- our dependency on Stockholm City is lower than before, but, of course, when the market go down with Stockholm at 6% they have some sort of slightly negative effect for Pandox. But remember, hotel rooms in Stockholm City, not in Stockholm [ Great ], but in Stockholm City stands only for 3% of Pandox's total rooms capacity. So you can all understand that, that has even if there is negative effect in the market that has not that big effect for Pandox anymore.So please turn to Page #4. Yes, and what have we done since stock market are returning, we have had a high business tempo. We have made acquisition for SEK 17 billion. We had invested SEK 1.7 million in existing hotels in cash driven investment, would give us a solid return, and we have signed 60 new leases. Together with a structural growth in the tourism and travel market, we'll continue to have a very positive outlook and our value-adding model where we are active across the value chain and as one of the few hotel property company in Europe who has that model, that had been a good outcome for the company. And the net operating income during this period has increased by 65% and 90% as the cash earning grow. So we are very pleased and proud to present these numbers, of course.If we go to the portfolio overview, you can see that is a very well-diversified portfolio nowadays dominate by lease agreement, which is our major strategy and we also have a well balance between countries, locations and guest segment, which is also is very important for balance out the risk. All in all, 143 hotels with 31,628 rooms, market value for the property portfolio of SEK 52 billion, 86% of this value’s due to owned and leased out properties and 14% is coming from owned and operate business. So of course, we have a potential in both segment that maybe at the moment the operator activities is the one who is growing fastest. So that is maybe an area we have a specific focus on at the moment.Page 6, 7 the world of Pandox, Nordic representing 48%, Sweden is our largest market still, but mainland Europe 32% and U.K. around 18%, so Sweden, Germany and U.K. is the biggest market, single market. But if we divide it in 3 pieces, it is Nordic, it is mainly Europe and is U.K and then 2% in Canada, 15 countries in total.If we turn to the next page, you will see all selection of operator and brands that we have -- cooperate with. And this is, if I may say so, a unique position that we are talking to and have a strong relationship with all these fantastic companies as you see here. The largest is Scandic. We are very active with NH from Spain, which is some sort of large Scandic. For those who don't know them, they are on the stock market there and are very successful in the southern part of Europe. Jurys Inn and Leonardo have we done acquisition for lately. Hilton, we have spread up activity with. So all in all, a broad section of operators and partners that we work active together with.And let me also -- next page, please, talk a little bit about the positive development in U.K. and Ireland as I start with. This acquisition of Jurys Inn with their 21 hotels -- hotel properties, 20 owned and leased out to Fattal Group and one owned and own operations that is the Hilton Garden Inn in Heathrow has a good start. These are big hotels, 224 rooms in average, in a strong location, in many key markets and they have -- we see now a positive growth for these recently done investment that have been done into hotels, [ which now are ] coming out in full speed more or less and promising outlook for rest of the year.We also see a good market in U.K. where U.K. Regional is much stronger than London, not expected -- not surprised at all, that is normal, but its ramp-up rate increased by 2%. I don't think that Easter affected so big in U.K. as had been in Sweden. But some sort of Easter effect there is, of course, specifically, if you look at Ireland, they increase by 10%, who had had a very strong Easter. So all in all, the acquisition of Jurys Inn had a good start.If we turn to Page #10, we go into market and you can see Europe still stable 5% Q1 and then they compare to a strong Q1 for last year as well, but is still good and that is due to increased activity in general out in Europe. If you go by selected countries on the right, the graph on the right, you can see that Ireland and Austria is in the top, countries that we had entered into the last couple of years. And then Sweden and Norway and Denmark, a little bit behind due to Easter, but also due to new capacity. So you see very good to be Ireland at the moment and hopefully Stockholm and Sweden will come back, next year or whenever that happens.If we look at some specific cities, you can see Stockholm is down by 6%, again only stands for 3% city center of Pandox's total room capacity, but 6% down and we can look at Stockholm more precisely, Copenhagen down 4%, is a slower start than we expected but Q2 looks good. So we are not worried about Copenhagen, the bigger challenge for Copenhagen will come next year where we see lot of new capacity coming into the market, starting end of this year and next year. So will be much tougher but so far Copenhagen, if you look at capacity, they should do a stable 2018, Oslo is also new capacity and Montreal as well, so you can see all these city has a negative growth is more or less linked to new capacity and it takes some time before the market it adjust and swallow that. The rest of the market are good, Brussels is in the top, who is performing very well and are close to 2008 year's good RevPAR level and in that market, we have a very strong position with our hotel, so that is very good for Pandox, Helsinki looking to be strong, Frankfurt and U.K. Regional, as I spoke about before.If we look at Stockholm specifically, you can see that Q1 last year was good but for those who follow us, remember that we said already in 2016 that Stockholm will be a tough 2017 and '18 because of new capacity coming into the market and we see that in Q2 that start to happen, and now in Q1 2018, we are down 6%, that is, a bit of that is, of course, Easter, so in Q2, I expect Stockholm will come out better than they did in Q1. And now I will give over to Liia Nõu. Thank you very much.

[Liia Nõu, CFO & Senior Executive VP]

Thank you. We are now at Page 11. Pandox recorded stable earnings improvement in both business segments. As Anders previously explained, we have met a negative effect on revenue growth for the timing of Easter to some close to 4% in the comparable portfolio in the first quarter. It's also worth noting that the first quarter is seasonally weaker. Some key numbers for the quarter, starting with property management. Rental income amounted to SEK 621 million, an increase of 31%. Net operating income amounted to SEK 528 million, an increase of 33%. For operating activities, net operating income amounted to SEK 66 million, a decrease of 20%, which is explained by previous reclassification, including 2 hotel properties in the first quarter 2018. But also remember the reclassification of some hotels which were done in the second quarter 2017 but hence were included in the numbers in the first quarter, which is the one we compare with.Like-for-like property management reporting an increase in rental income and net operating income of 0.5% and 0.1%, respectively. Like-for-like operating activity reported an increase in revenues and net operating income of 4% and 21%, respectively. Total cash earnings amounted to SEK 336 million, an increase of 16%. Measured from year-end 2017, the unrealized value increase for investment properties amounted to 0.3% and for operating properties, the unrealized value change was flat. End of period, EPRA NAV per share was SEK 151.8, adjusted for dividend and proceeds from the directed share issue, the annualized increase was 21%.Next page, please. Financial expense amounted to a negative SEK 187 million, the increase explained by couple of different factors: a, an increase in interest-bearing liabilities of implementing acquisitions where debt denominated in foreign currencies have increased especially, for example, in British pounds where LIBOR is approximately 100 basis points higher than STIBOR or EURIBOR; b, refinancing in the fourth quarter 2017 where all the credit facilities have been replaced by new facilities at a higher LTV but at current market conditions, works on both with STIBOR and EURIBOR floors; c, furthermore, Pandox has interest hedged a lot of share of its loan portfolio; and finally, a weaker Swedish krona but at -- the currencies that Pandox has loans in translate into a negative currency effect of [ some ] SEK 5 million to SEK 10 million for the quarter.Next page, please. In the quarter, property management benefited from profitable acquisition, positive effects from previous portfolio investment and an overall stable hotel market with positive underlying growth. The development for the recently acquired portfolio in the U.K. and Ireland was positive, supported by both favorable market growth and improvement at hotel level. For the quarter, U.K. and Germany combined accounted for 35% of total rental income. Rental growth in the comparable portfolio was positive in Finland, Austria, Denmark and Sweden. In Sweden, solid growth in regional cities compensated for the decline in Stockholm, as Anders mentioned, resulting in positive rental growth for Sweden as a whole. And please note that 2 hotel properties in Brussels were reclassified to property management as of 1st of February.Next page, please. Operating activities in the quarter continue to improve -- profitability continued to improve, driven by continued good demand in Brussels. Brussels is now approaching the levels before the terror attacks in 2015 and '16. Seasonality, calendar effects are Easter and some tough comparison had a negative effect. However, underlying profitability, the margin like-for-like, excluding reclassifications have improved compared with the corresponding period the previous year. I'm again sorry for repeating myself, but please note that 2 hotels were reclassified to property management 1st of February in the middle of this quarter. And please also note that the former Scandic Grand Place with 100 rooms, which was reclassified to operator activities as of 1st of December 2017 is closed for renovation.Next page, please. For the period, total unrealized and realized changes in value amounted to approximately SEK 148 million, all of it was attributable to investment properties and the value increase is explained in equal parts by marginally lower yields and as well as improved cash flow. Year-to-date, a total of 2 hotels, I’m sorry for repeating myself one more time, have been reclassified from investment properties to operated properties thereby explaining the SEK 773 million of assets being reclassified. End of period, the average valuation yield for investment properties was 5.6%, for operating properties it was 7.3%.Next page, please. Finally, a quick look at our EPRA NAV and financial position. End of period, EPRA NAV per share amounted to SEK 151.8, this corresponds to an increase of 21% on an annualized basis, adjusted for dividend that was [ taken ] from the director share issue. The increase is in part explained by changes in currency exchange rates following a weak Swedish Krona. Loan to value amounted to 50.2%, liquid funds and long-term unutilized credit facilities amounted to approximately SEK 3.4 billion.So to summarize, Pandox's financial position remains strong and stable.So next page, please. And with that, I will hand over to Anders again for some final words.

[Anders Nissen, CEO & President]

Thank you, Liia. Yes, and everybody to sum up this, main drivers for growth in cash earnings for us as always. We see stable and good market growth. Again, as I said, Easter taking out 3%, 4% and that will come back in Q2. And I don't think everybody expect that. And then if you look at the market in general in these new markets that we enter into in U.K. and Ireland is stronger than Scandinavian. So the market diversification of being in many markets is something will pay off for us, I believe, this year. In that -- during that market condition, we have a high quality portfolio with big hotels in strong locations together with the strongest partner in the market, giving us at -- we will take at least our shares in that growth.We do a lot of portfolio investment, last year we did SEK 600 million and close to SEK 700 million, SEK 650 million in investment, will give us something 8% to 12% return. We have SEK 700 million in pipeline and we signing up this investment and all the time together with our partners, when we see opportunities to take market shares or increase our position. So that is also something who will help us to keep up the speed. And operations will be very promising, if you look at full year's and also the start for this year. So we have very good control of cost. On the cost side, the increase of revenue is converting into cash with very substantial numbers. So that is something also we are very pleased with. And of course, opportunistic acquisitions, we have done a lot of acquisitions last couple of years, we have said is a consolidation year, but you never know, if something pass by, we always are interested and have a look. So that was all for the -- if you look at the first part and then we will go over to the Q&A session. So operator, please, we are ready for questions.

[Operator]

[Operator Instructions] We will now take our first question from Fredric Cyon from Carnegie.

[Fredric Cyon, Analyst]

Just a few questions from my side. In the report, you're mentioning that you're increasing your focusing on identifying investments in your existing hotels. Could you give some flavor on how many rooms could be added and approximately how much you expect to invest for 2018? You had around SEK 700 million if I'm not mistaken in 2017?

[Anders Nissen, CEO & President]

Good morning, Fredric. When we say we are increasing our interest, it does not mean that we haven't done before. As you know, that is something we do with SEK 500 million, SEK 600 million a year. But with all this new properties [indiscernible] in Pandox, we haven't had time to systematically do the same thing as we have done in Scandinavia. And what we are doing now, we look at every hotel in 3 dimensions. First, can we build more room in each -- more beds in each rooms, that's number one. Number two, can we build more rooms in existing buildings. And number three, can we do something out of commercial in a property, like turning inefficient space to selling bar -- selling areas, can we upgrade rooms to higher standards and get out a better rate. Can we have a better offering in the restaurant, so that gives restaurant [ in meeting ] revenue. And we go [ about systematically ] just to do that, and we have also operators who like to do this as well. So I'm expecting that this pipeline of SEK 700 million will not go down over the year even if we will maybe do a big piece of this SEK 700 million. That will continue to be in a very high level. And these are extremely profitable for us, but also for the operator, because when we, for example, increase number of beds in a room, that means that we open up for new segment, we also open up for more revenue per room and that revenue is very efficient for the operator who can turn that into cash. For our hotel, it means more rental income. That's one example.

[Fredric Cyon, Analyst]

But as you said, we have done this before, would you say that this is primarily related to, I mean, additional investments to the U.K. acquisitions or is this across the portfolio?

[Anders Nissen, CEO & President]

Yes, I would say there is 2 elements. First one is, in general when we talk about existing hotels it's Germany and in U.K. that is recently when we have acquired hotels. We do that already now in Vienna, we do that in some other of these German properties like Hotel Berlin, and in Brussels, we have already done it, but in mainly the portfolio of Leonardo, we did for 2 years ago and Jurys Inn, we haven't started because we haven't had time and what is also new is that we see in many markets that profitability in the market is so strong, that we can start to build new building in lands that we already know and we see that possibility in a few places even in Scandinavia and so let's come back to see if that is possible, but we have a positive view about also, as I say, expand with more rooms and we do that at the moment in [Wolfsburg ] and we will most likely announce to do that in other places as well. And that is, of course, a very efficient investment for us that we just adding more rooms and we don't need to do more than slightly other investments, so that is the most profitable part of hotel business is, of course, income from room.

[Fredric Cyon, Analyst]

Thanks, Anders, and then finally on the market, you've been very clear on the thing that Copenhagen and Stockholm will be challenging due to increased capacity for the rest of the year, any other red flags worth highlighting, any particular - ?

[Anders Nissen, CEO & President]

We are starting with but Copenhagen, I'm -- if you had asked me at the end of last year, I would have said flat for Copenhagen. So the start is little bit disappointed. On the other hand, it was a strong Q1 last year. I expect that Copenhagen will be fully better than how it looked for Q1. Stockholm, yes, Q1 will be strong, maybe not that we see a level out, we still have some minus there and I think we will go to the end of the year, but I think the worse is over for Stockholm, so those market, who is going down. Stockholm and Copenhagen, will be tougher next year.

[Fredric Cyon, Analyst]

Any other markets where it's excess supply worth highlighting?

[Anders Nissen, CEO & President]

London has, of course, new capacity that is something we know and we did acquisition of the Hilton, both the 2 Hiltons there and we see a market growth. We see an underlying demand growth, but we also see new capacity into Heathrow market, which had taken down the market also by a few percent. We do much better because we have hotel, who is linked to determine also who has other strong position. But in general, London as a whole and Heathrow specifically will have a year where they most likely will have negative compared to last year. Everything is due to new capacity, small numbers.

[Fredric Cyon, Analyst]

My final question, I promise. Ending on a more positive note, the strongest market that you anticipate for the next couple of quarters, obviously Brussels is facing easy comps, any other market that you think will be outperforming, particularly compared to [ last year ]?

[Anders Nissen, CEO & President]

U.K. Regional looks very good. Dublin, Cardiff, Brighton, Oxford looks very strong, those are the market that maybe is not so well known as hotel market for us in Scandinavia and they are such a very nice market, the only market who has little bit over capacity is Manchester. On the other hand, you have both United and City into final round in Champions League. I can tell you when there is Champions League match is Manchester, it's over booked. So U.K. Regional are doing very fine. Brussels is very strong and we expect Sweden Regional will continue to be good as same as Finland. So you see [ how you rough this ] diversification is paying off.

[Operator]

[Operator Instructions] We will now take our next question from Christopher Fremantle from Morgan Stanley.

[Christopher Richard Fremantle, Executive Director]

More a follow-up on the original question. I think on your front page you talk about the existing portfolio being in focus and you talk about some of those investments, just reading between the lines there, are you signaling that you are effectively pausing for breath on more acquisitions in 2018. Would it -- should it be a surprise for us, if you were to acquire more here? It sounds as though after the large U.K. acquisition that you've done, there is a period of consolidation about to happen, if you could talk through that? And then just as a follow-up also. You talk in the -- on that front page about the valuation yield on the hotel market being under pressure. I just wanted to clarify what you mean there. Are you talking about yields compression that you have seen over the last past decade? Or are you talking about [ that recurrent ] property yields are falling further at the moment, should we expect that to come through in your valuations in 2018? Just a little bit more clarity on really what you're talking about, that would be helpful?

[Anders Nissen, CEO & President]

If I start with Pandox position after this SEK 17 billion we have done acquisitions for, so, of course, Christopher, we need to make sure that we can take care of all these new hotels and all these new partnerships and all investment and financing with you bank. So I will say in a positive view, some sort of consolidation and that mean that we try to grow into the new sites in terms of knowledge, system reporting and relationship with our partners. And we have strong focus on that, meaning that we have -- we're doing lot of internal processes with it. We change system. We increase the working methodology. We look at a new way of putting targets into each hotel. We try to understand even better how our new partners drive. So that is, of course, strong internal [ yoghurt ] we're doing at the moment, which take out some maybe time for acquisition. So in that perspective, yes, what that means, that we will not do an acquisition. Yes, you can -- you should not expect that we will come back in the next 2 quarter of saying we will do a new Jurys Inn, I don't think that will happen. If there will be, that will be a bonus or something, I don't know. But of course, single acquisitions is there always, we look at a few, nothing is hot. But we look at them and what we specifically focus on is owned and operate hotel that we -- that yield are more favorable and we don't have so much competition when we buy, instead of buying with a lease who have had with a comeback tool and more a yield compression in some market. So that is something you can see, so one pattern is strong internal focus of grow into the size we are today and make sure that we are ready for the next move. And then, of course, there could come a few single acquisition and the focus or the strategy is to look more into owned and own operations because the yield are more attractive, and we see also more potential in this sort of hotel that we can taking over and have the full mandate of do whatever we want. Yield compression in general, if you look at acquisitions, the yield has been pressed out to more likely the levels that we have seen in Scandinavia. That was one of the reason why we started to look more in Germany, because Sweden and Denmark and Norway was too expensive. We don't see a big movement but we see some sort of yield compression, I would say those big acquisitions we have done in the last couple of years had been more expensive today because the yield had been a bit lower. But if that means that our external valuator will give us higher property value, that is not -- I don't know because this should be linked maybe to each other, but is not, so we haven't seen that yet, but in general, that is strong -- there is more interest of buying leased hotels today than it was 4, 5 years ago and then we're, of course, moving over to other part of our business chain. Are you happy with that?

[Operator]

It appears there are no further questions. [Operator Instructions] There are no further questions. Mr. Anders Nissen, I'd like to turn the conference back to you for any additional or closing remark.

[Anders Nissen, CEO & President]

Well, thank you all for your interest of our interim report. And please visit our web page for more information about Pandox. Thank you very much and have a good day, and looking forward to talk to you later. Bye-bye.

[Operator]

This concludes today's call. Thank you for your participation, you may now disconnect.