Pandox AB

STO:PNDX B

Earnings Call Transcript 2023-Q1

[Operator]

Good morning, good afternoon and good evening, and welcome to the Pandox Quarter 1 2023 Earnings Call. [Operator Instructions] After today's presentation, there will be an opportunity to ask questions. [Operator Instructions] Please note this event is being recorded. I'd now like to hand the conference over to Mr. Anders Berg.

[Anders Berg, executive]

I'm here together with Liia Nou, our CEO; and Anneli Lindblom, our CFO. And on the line, we also have Robin Rossmann, Managing Director of STR, who will guide us through the hotel market after we have finished our formal presentation. And Robin represents a leading independent research firm, focused on the hotel market, and he will share STR's view on this market. And please note that the views expressed by STR are completely separate from Pandox and that the presentation is offered only as certain will provide his external hotel market update. Next page, please. And with that, I hand over to Liia Nou, the CEO of Pandox.

[Liia Nõu, executive]

Thank you Anders, and good morning, and welcome everyone. The first quarter was stable, positive and in line with our expectations. The hotel market was strong and resilient, considering that the economic headwinds we have faced going into the quarter. Our earnings development was also positive with solid growth in both business segments and continued earnings recovery. Seasonality is back. Q1 is historically the weakest quarter of the year with lower demand for meetings, which has an effect on larger meeting hotels, particularly in more international destinations, such as, for example, Brussels. Also international travel and larger meetings are still trailing 2019 level. And it's worth repeating that we have all of our financing through relationship banks and that we have good and constructive dialogues on all future refinancing. This is also underlined by the refinancings done of approximately NOK 5.2 billion in the first quarter. Annaly will talk more about this later in the presentation. So we move to next page, please. We have a well-diversified hotel property portfolio with 158 properties with SEK 270 billion. Pandox is divided into 2 business segments: property management and operating activities. The property management will lease -- we own the hotels and we lease them out to strong and well-known operators under long revenue-based agreement. This is about 83% of our property market value. In operating activities, we own the hotels and also operated ourselves under different operating markets. This segment makes up for some 17% of our property market value. The focus of our portfolio is upper mid-market hotels with mostly domestic and regional demand, which is the backbone of the hotel market. It's also strength in more uncertain economic types. Next page, please. We have one of the strongest networks of brands and partners in the hotel property industry. In this picture, we work together with several well-known operators like Scandic and Nordic Choice in the Nordics, and Leonardo in the U.K. and Germany. We also have a long relationship with strong international brands such as Holiday Inn, Hilton, Radisson Group, et cetera. In our operating activities segment, we also have some independent brands created by Pandox. For example, our newly renovated Hotel Berlin, Berlin which is our largest hotel with over 700 rooms. Next page then as the first quarter progressed. And my view is that the hotel market is robust and in a good state for the coming quarters. Our growth was strong in the first quarter, although the comparable quarter last year 2022 was negatively affected by pandemic restrictions. For comparable units, total net sales and net operating income increased by 47% and 45%, respectively. Like-for-like Property Management increased net operating income by SEK in cash and unutilized credit facilities at the end of the quarter. A lot of value fell to 46.2%, which is in the low end of our financial target, and if we adjust for the dividend, which we paid out in April. The LTV was 46.8%. Return on equity, measured by annualized growth in EPRA NRV was approximately 15%. Next page, please. Here, we see a comparison of the RevPAR level for our business segment property management from 2019 until today. The numbers are on a comparable basis. And as you can see, RevPAR in 2023 is largely at the same level as the corresponding period 2019, which was a record year. Next page, please. Here, we have a breakdown of the performance for a selection of country show ADR on the vertical axis and occupancy on the horizontal axis. Plus [Indiscernible] is the point corresponding to 2019 on both ADR and occupancy. In the boxes, we indicate how much higher or lower RevPAR is compared with the corresponding period in 2019. Think, for example, Edinburgh on the top right-hand side. The metric shows that basically all markets are trading above 2019 levels on rate, where the majority of markets is trading below 2019 levels on occupancy due to that we still are lacking international traffic. Asian traffic hasn't still started, larger meeting takes some time, et cetera, et cetera. Hannover here is the only outlier, which is very much dependent on fares and exhibitions. And this is something which is taking off in Q2 this year. So Q1 was a slower quarter when it comes to fares and exhibition in Germany. In terms of RevPAR, U.K. is above, and Germany below 2019 levels on aggregate. In terms of RevPAR in the Nordics, regional markets are well above 2019. However, among the Nordic capital cities, only Oslo has some so far climbed past 2019 levels. Next page, please. This is an amazing hotel with 232 rooms in the best location in Leeds. We also acquired the Best Western Hotel Fridhemsplan in Stockholm, Sweden, with 221 rooms. I'm super happy to be able to acquire a hotel in Stockholm with such great potential. We have a long and successful history of acquiring underperforming hotel properties and increasing their profitability and value. Both of these acquisitions are done at very attractive prices and yield levels. So very excited about both of these. Next page, please. And with that, I hand over to Anneli, our CFO.

[Anneli Lindblom, executive]

Thank you, Liia. Good morning, everyone. We are happy to report continued earnings recovery and strong like-for-like growth in this first quarter. And yes, we do have easy comps this quarter, but still we are proud of continued earnings recovery in a traditionally weak quarter. So totally, revenue-based rents increased to SEK 208 million compared with net SEK 98 million last year, and revenue base gap was generated in 55 out of 96 agreements, which is in line with normal seasonality. We therefore fly in the second quarter on a good level. Operated activities delivered in line with our expectations. As you know, we do have mostly large, this will improve in the second quarter and even more so in the second half of the year. Next page, please. We performed internal valuations of our hotel properties each quarter. 94% of the properties have been externally valued during the past 12 months and the valuation are in line with our own internal valuations. Unrealized changes in value were a negative SEK 420 million the period following an increase in yields with 0.04 percentage points. The remaining SEK 10 million was for operating properties were an increase in yields of 0.09 percentage points was almost fully balanced by higher cash flow. In the first quarter, we also had a positive realized change in value of SEK 198 million. Firstly, a capital gain from the divestment of our hotel in Canada, Montreal, and secondly, a positive net from disposal of hotel in Germany, which suffered flooding damage in 2021 and has been closed since then. And as always, please remember that investment properties are recognized at fair value. According to IFRS, unrealized changes in value for operating properties are only reported for information purpose, but is included in the EPRA NRV. End of period, the average valuation 6.59%. Next page, please. Yes. And as you know, Pandox has two sources of financing, equity and bank loans secured by underlying properties. We have no market financing in the form of bonds and no external rating requirements. Given our business model with focus on hotels and variable rents has proven to be the most efficient and predictable financing over time. On the right, we highlight our capital structure at the end of the period. And based on the closing price of yesterday, Pandox's valued at a discount to EPRA NRV on approximately 35%. Next page, please. And then this slide with some balance sheet per 31st of March. Loan-to-value as well as EPRA LTV amounted to 46.2%. Adjusted SEK 48 billion credit facility maturing in less than 1 year, amounted to SEK 11 billion, of which NOK 3.5 billion will mature in the second quarter. And then we have SEK 6.7 billion that will mature in the fourth quarter. And we do have well-advanced and positive dialogues ongoing regarding all of these credits. Interest costs will, of course, continue to increase a bit as upcoming maturities are final based on the current conditions on the market. Next page, please. And with that, I'll hand back to Liia.

[Liia Nõu, executive]

Thank you, Anneli. Pandox is a company driven to succeed, and we are financially strong. Our business model with variable revenues offer protection against both inflation and higher interest rates. We continue to see a recovery potential in business and international travel, and we also see a strong and cautiously optimistic on 2023. Next page, please. And we now move over to Q&A. Operator, we are now ready for questions. And please don't forget to hand the call back to us afterwards for Robin's presentation.

[Operator]

Thank you. We'll now begin the question-and-answer session. [Operator Instructions] At this time, we will pause momentarily to assemble our roster. Your first question comes from Albin Sandberg from Kepler.

[Albin Sandberg, analyst]

Hello, good morning. So a few questions from me. The comment you're making about seeing sort of a pickup of demand as I understand, it's throughout Q1. Is that in line with your initial expectations on how the year was going to start? And also if you could comment maybe a little bit on what you're seeing in terms of start of Q2. And I guess also just trying to factor in what we're seeing on the overall macro.

[Liia Nõu, executive]

I think [Indiscernible] Yes. Last quarter is very much in line so far and what our internal expectations about this for the Q1, because it is a slower quarter when it comes to the fares and exhibitions. We see that report picking up for Q2 and forward. So it's good on this. We still -- we are ramping up. We still the big meetings on exhibitions, the trade, et cetera, cetera. Of course, they are not booked to Q1, they are still coming in. And we see this ramp up we have been expecting. So very much in line. It's always clear of how we will venture travel. We haven't seen any flag on that. People seem to prioritize travel. And also when and if there would be any slowdown there, we do see that the business segment is coming up compensating for that all. So in line with our own expectations or even above.

[Albin Sandberg, analyst]

And then on the business segment that you mentioned, there are no signs of potential, let's say, cancellations of planned meetings and so forth on the back of maybe a weakening outlook.

[Liia Nõu, executive]

No, not at all. And of course, we are humble and cautious. But as we have seen -- said all the time that people want to meet, people need to meet. We -- there is always -- there has been a hesitation last year of booking major events, so -- or trades, but these are booked for the rest of the year. So no.

[Albin Sandberg, analyst]

And then I saw in your balance sheet that you have not separately highlighted the rent receivables any longer. Is that because you're now back on a normalized level so it is not worthwhile highlighting them specifically and also what works.

[Liia Nõu, executive]

And you're completely right. We don't highlight them anymore because we sort of just back to normal. And we have got, I mean we have no issues with nonpayment from that period. So we are sort of back on track and we didn't get paid all the expected amount. So that's why we don't highlight it anymore because it's I mean, we're sort of back to normal.

[Albin Sandberg, analyst]

Okay. Great. And then my final question is around the financing and the refinancing, and as you point out, I mean, you're doing a quite substantial amount in Q1. But there is still quite a lot falling due within a year or so, do you expect to refinance now on a quarterly basis? Or will we see like one big news coming out from Pandox saying, "Okay, now we're done with all the refinancing for this year." And also, if you could make a comment on how you see margin progression maybe over the last 6 or 9 months in your negotiation with the banks.

[Anneli Lindblom, executive]

Okay. I mean we are continuously working with our banks. So this is sort of normal for us to do the refinancing. So we have a bunch now coming in the next quarter and then in the fourth quarter, but this is ongoing discussion. So I mean, I do expect us to have no problems with doing the financing.

[Liia Nõu, executive]

And to add to Anneli's point, I mean, these are very much dependent on the also its portfolio financing. It may be three properties or maybe 10 properties and is not dependent on quarterly calendar. It's more depending on when we acquired it, was it just 3 or 5-year term loan we put in place coming up for refinancing. So you see these sort of maturities in our reports during the COVID, we have sometimes road has shorter maturities because it's been more uncertainties around the levels on the margins. These are tightening, of course, and we are rolling them longer. So back to more normal patterns, the same patterns as we had before.

[Albin Sandberg, analyst]

I know you don't have like a stated financial target on credit maturity, but I see your most recent reported is 2.1 years. Do you expect that to be prolonged? Or is this the level where Pandox would be in a steady state scenario?

[Anneli Lindblom, executive]

No, I would guess that that's sort of the level that we will have now because, I mean, we -- I mean you do as for now, no one actually knows where the credits are heading. So in my opinion, it's better to don't go that long with -- I mean, unless you do get a really good level from the bank. But so far, we sort of -- we will stay on this level, because this is where we get the best price from the banks.

[Albin Sandberg, analyst]

Okay. Thank you very much. Those are my questions.

[Anneli Lindblom, executive]

Thank you.

[Operator]

Thank you. Your next question comes from Fredrik Stensved from ABG. Please go ahead.

[Fredrik Stensved, analyst]

Thank you very much. May I start with a follow-up on the last question. Maybe I wasn't listening carefully enough, but margin development in the last quarter or last six months or so. Can you say anything about that?

[Liia Nõu, executive]

Well, on like we said, actually, during all of the pandemic, COVID, the margin were -- if they were around 150 bps prior to the pandemic, they are now may be at around between 200, 230 bps. So it hasn't changed so much. It's just that during the pandemic, we rose the maturities shorter. Our sweet spot normally is about 3, 4 years. Credits tend to be a bit more expensive when banks were, I don't know, it's a bottle requirement or whatever it is. But it tends to be more expensive if you go plus 5-plus years. So it's like a sweet spot there, and we are going from the sort of pandemic shorter with slightly increasing margins. Some of our maturities are now refinancing. So of course, we are coming up on those credit margins, which were -- which are more in line with 200 bps instead of 150 bps. But above that, no major different shock.

[Fredrik Stensved, analyst]

Okay. Great, thanks. And then secondly, you stated in the presentation and in the report that 55 hotels generated turnover rent now in Q1 and that's sort of in line with the historical pattern. Can you state what share of hotels normally or historically or 2019 generated turnover rents in Q2, Q3, Q4.

[Liia Nõu, executive]

Yes. In 2019, which again was a record year in the first quarter. It was about 73-or-so hotels. So about 18, 20 hotels less this quarter than four years ago coming above the [Indiscernible] threshold. Then remember that during all of these four years, our minimum rents have been indexed with the inflation adjustment. And also, of course, there are some hotels, especially in Germany, which have due to jurisdictions taking some longer time to get out of the sort of starting blocks.

[Fredrik Stensved, analyst]

Right. Okay. And sort of if we look at the the historical pattern throughout the year, if it was 73 hotels in Q1 in 2019, what was sort of the Q2, Q3, Q4 figures, when is the -- I mean sort of looking for the historical pattern in terms of pickup and when you reach that full level?

[Liia Nõu, executive]

In 2019, we have 95 hotels that have -- that are turnover base with a minimum level. We were -- I mean, usually in the basically in the second, third and fourth quarter, maybe all of them access quite has been typically 1, 2, 3 hotels which may be trading around or just below because of renovation or something else. So in normal quarters, there should be a substantial pickup during second quarter, but of course, the calendar effect needs to catch up for the first quarter. So in '18, '19, maybe 85, 86 hotels of the 95 were at revenue-based above that level and almost all of them then fully in Q4, depending on. Thank you.

[Operator]

Thank you. Your next question comes from Edoardo Gili from Green Street. Please go ahead.

[Edoardo Gili, analyst]

Hello. So one question for me on the refinancing. Do you have more color around the $5 billion you've managed until until now in terms of locations and types of hotels as well. Just to get a bit more information around what's left for the year? And do you have on these or...

[Liia Nõu, executive]

Well, again, as I mentioned before, we -- the refinancing has to do with when we acquired the portfolio. In first quarter, the majority part has been refinancing of the previous Jurys Inn portfolio, which we got wired in 2017, which had a financing, which was a little bit plus five years and was maturing now in the first quarter. The Jurys Inn portfolio, which has been rebranded now to Leonardo with 21, 23 hotels. And then for the rest of the year, it's I mean, it's a diversified portfolio we have. So there will be a mix of refinancing portfolios both on our own operations, but also in the Nordics.

[Edoardo Gili, analyst]

Understood.

[Liia Nõu, executive]

That is basically one of our 13 relationship banks.

[Edoardo Gili, analyst]

Understood. And do you have a split between the operations versus the Property Management, just for the rest of the year.

[Liia Nõu, executive]

In what extent, sorry?

[Edoardo Gili, analyst]

The refinancing of the hotels.

[Liia Nõu, executive]

Well, there's not separate. We don't have separate financing for operations or to our property management. Sometimes when we buy a portfolio, it may be mix of them both. So a little bit depends on which relationship banks and what sort of the nature of the portfolio. So, not really.

[Edoardo Gili, analyst]

Understood. Thank you. So in the next couple of months, is going more in Nordics and in the past quarter was more. Perfect. Thank you.

[Liia Nõu, executive]

Thank you.

[Operator]

Thank you. As there are no any further questions at this time. I'd now like to turn the conference over to Robin Rossmann, MD at STR. Please go ahead.

[Robin Rossmann]

Well, good morning everyone. Just check you can hear me all right. I presume so, if not jump in. Thank you very much for that. I'm going to now hand over, not hand over, I'm going to take over from the one in the last quarter and expectations going into the rest of the year. Starting on the slide with the world and showing occupancy for the first quarter or year-to-date 2023 in the big bubbles. And then the percentage change versus 2019, what you can see, yes, it is a season, especially in the northern hemisphere at pretty lower performance quarter. But when we look compared to 2019, in most places, across the world, occupancy is either already recovered or exceeding 2019 levels. You can see that in Central South America, the Middle East, Southern Africa, not far off, or not far behind in North America, 3% behind Europe 5% behind. Even China has seen a significant rebound domestically, now that things have reopened and is only 3% behind important outward-bound Chinese markets, so international travel from China not yet recovered yet. So Asia, excluding Mainland China and still trailing Australia still trailing. So focusing on Europe, it is not far behind, but it is still not fully recovered to 2019 levels. And when trying to understand why that is, I'm going to go on to the next slide and just show you the picture across some of the major countries in the region. The dark dotted France, Netherlands, Belgium and Germany. So I'll just touch on France first, even though it's in the middle, and that is definitely the impact of the unrest and the protests over the last month in particular, which has taken that hotel market from being pretty much fully recovered to, as you can see, trending downwards. But that is expected to recover now that those protests are receding, which then takes us to the Netherlands, Belgium and Germany in particular. And the reasons underlying those countries a slower recovery or lagging recovery is a greater reliance on international business travel and meetings, which have not yet come back. And unlike some of the countries at the top where that has been offset by significant growth in U.S. inbound travel, the destinations to the bottom are not as strong in terms of pulling that U.S. demand to offset other gateway cities, it broadly mirrors what we've seen at a country level. So Edinburgh, Dublin, London, all sort of close to fully recovered in Southern Europe or between sort of 9% and 100% recovered. It is that really Amsterdam, Brussels, Berlin, and some of the other countries l mentioned, the broader dark market, Zurich, Vienna, are still trailing a bit further behind because of those factors that I mentioned. So just going on to the next slide and looking specifically at Germany because Germany did -- it was also the loss to recover coming out of the pandemic last year. Here, you can see '22 index versus 2019 and 2023 index versus 2019. And so it's consistent with last year that Germany has been weaker than the rest. Last year, Germany had some of the strongest COVID control still in place. And whilst those COVID controls have gone away, I think at the most conservatively due to the concerns around the war in Ukraine and restrictions on energy supply. And that certainly has played into the slower recovery that we've seen this year. However, what happened last year is even though Germany was behind in the first quarter, it did recover broadly in line to the rest of European countries as we headed into the second and third. So moving on to the next slide and focusing on rooms rate or ADR. Here, you can see a similar graph to before. It's showing absolute rates in U.S. dollars. And then it's showing the percentage change in the smaller bubble versus 2019, slightly different sort of color coding here. Anything that is exceeding [Indiscernible] and Europe, where rates are on average 21% above 2019 levels, similar to North America, where we are now of just under 20%. So rates either at or ahead of inflation, broader economic inflation. That compares to the Middle East and Southern Africa, where rate growth is up close to 25%, 27%. So ahead of inflation and Northern Africa and South America, where rate growth is significantly higher than inflation. And then the markets where because of the slow recovery rates not tracked inflation is in China and Asia, excluding Mainland China. But we do expect that to change as that Chinese output bound demand comes back and demand fully comes back in domestic China. So just a bit more on Europe then, and last year, it wasn't necessarily true that the markets that have the highest occupancy recovery had the same rate recovery. But that certainly is what we have now stepped into, which is what you would expect, but generate pricing power and push rates up. And you can see here that Ireland at the top, but also Portugal, getting rates now that are now over 30 to almost 40% higher than 2019 levels. And as we head down to that European average of just about 20%, you can see Spain, U.K. and Italy above that, all tracking above inflation ADR growth in real terms. However, it's not true for all countries in Europe. France, slightly below more from a domestic perspective than from Paris, which is well ahead. And then it is Netherlands, Belgium and Germany that are certainly trailing the rest of Europe. And that is underpinned by those demand drivers that I mentioned earlier. So just a bit more on those demand drivers when we look into some of the outlook. The one other thing I would mention that has certainly not helped sort of moving on to the next slide, which is Europe. Just on this one. The thing I wanted to explain was one of the other reasons why Germany, Belgium and Amsterdam have underperformed the rest of Europe, particularly on rate growth is they have less luxury supply in those markets. And certainly, when we look at rate growth across the world and in Europe, it is the luxury hotel market that has seen the best rate growth coming out of the pandemic with about 43% ahead of pectus to develop what we've seen in the U.S. and what we expect to see in Europe is that luxury rate growth will moderate and potentially even go down slightly this year. A lot of that was spent-up demand, which is now spent up. And what we're seeing in the U.S. is those hotels at the bottom and the middle of the market continue to grow rates whilst that luxury is coming down. So on to the next slide, which says outlook and then on to the next slide, which shows GDP over the long-term index with room demand. And this is one of the key points that historically in almost every economy in the world because hotel activity is underpinned by broader economic activity, there was a very strong correlation between the two. However, because of certain barriers to that travel in Europe, in particular, around airlift, around group demand, still not fully back because of concerns of the logistics. There is still this gap to demand, but that is expected to close as some of those factors reside in the coming months. And just to give you an idea on group demand, in particular, the U.S., which does tend to be ahead of Europe and these sort of things has for the past 4, 5 months had group demand that is really single digits behind 2019 levels, whereas Europe is still some 50%, 60% behind 2019 levels.So move demand growth that would cause occupancies to go down. And what we've seen in the last couple of years is that supply growth slowed down slightly in 2020 as a result of disruption. There was a bit of catch-up. But broadly, over the three years, 2020 to '22 was about 66,000 in growth per annum rooms. And based on known rooms under construction and pipeline and anticipated delays for the next 2 to 3 years, we expect that to remain at a similar level. So no significant increases in supply. And just to give some context, there's about 6 million odd rooms in Europe. So 67,000 rooms growth represents just over 1% growth in supply per year, which is broadly the same as consensus forecast of economic growth across Europe for the next couple of years, just above that 1% mark. So from a high-level macro perspective. However, there are still a number of factors that should help close the gap with the fact that demand growth hasn't recovered fully to the same level GDP has. And one of them is if you move on to the next slide, the international arrivals. And what you can see is that even though there was a significant recovery in '22, it is still below those 2019 levels. And tourism economics, who we work with are forecasting, that will recover further in '23 and even further in 2024. And certainly, when you look in the airlines capacity levels, they are all back to pretty much the levels they were in 2019. So just getting on to a bit more granular data that really focuses only on the next 90 days, but it is indicative of what we expect to see this year. And so on slide 27, the next slide, business on the books. It shows you across the major gateway cities, business on the books for the next 90 days. So rooms already sold as at the 17th of April. And what that is versus same time last year. And what that's showing is that there's already much more business on the books, particularly in Rome, Lisbon, Amsterdam, Madrid, Brussels than there was this time last year, and that would be indicative of stronger actualized performance in the next 90 days than what we saw in the second quarter of last year. So in summary, on the last slide, they are clearly sort of benefiting the accommodation sector. We still have a relatively weak euro and sterling, and we are seeing that drive stronger demand from dollarized economy. So not just the U.S. but the Middle East too. And that's benefited some countries and destinations more than others, and that should continue for the coming period. There is still recovery to happen in business travel, and that's being facilitated by in particular, over the summer months. There was a concern that, that might tail off because business demand would not recover. However, we did see and we have seen in the actualized data that even though there's still that bit to go, that sort of 5% to go business demand had a significant recovery and sufficient enough to certainly hold on to that rate growth that the market achieved through the summer months and that the combination of that looking back.

[Liia Nõu, executive]

Thank you Robin for this hotel market update. And thank you all for participating in this call. We really appreciate your time and interest in Pandox. And our interim report for the second quarter is published on July 14. So thank you. Enjoy spring and stay in our hotel. Thank you, and goodbye.

[Operator]

Thank you. That does conclude our conference. Thank you for attending today's presentation. You may now disconnect.

[Robin Rossmann]

In the big bubbles, and then the percentage change versus...