Pandox AB

STO:PNDX B

Earnings Call Transcript 2019-Q2

[Operator]

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to today's Pandox Q2 2019 Report Conference Call. [Operator Instructions] I must advise you that this conference is being recorded today, Friday, 12th of July 2019. I would like to hand the conference over to your speaker today, Anders Nissen. Please go ahead, sir.

[Anders Nissen, CEO & President]

Well, good morning, everybody, and welcome to this presentation of Pandox interim report for the second quarter and half year 2019. My name is Anders Nissen, as said. With me I have Liia Nõu, the CFO; and Anders Berg, Head of our Communication and Investor Relations. And as always, this presentation is divided into 2 parts. We start with the presentations of the quarter followed by the Q&A session. So welcome, everyone -- everybody. And then headline for the presentation is profitable diversification, which we will jump on a few times. And for that, so let me start. For the second quarter and for the half year, we report what we believe is solid increase in earnings. The total net operating income increased by 10% for the quarter and 12% for the half year. If it exclude the IFRS 16, increase was 8% and 9%, respectively. Return on equity still strong, 16% on the annual basis. And a few strong drivers behind this positive development. One is the profitable diversification effect. And the second one is the strong performance in our Operator Activities and a stable -- continuously to be a stable hotel market. You can say that our strategy, that we're having a diverse -- our diversification strategy pays off in the quarter with good balance in market from -- the good market like Germany, U.K., Brussels and Canada balanced out with the market in Oslo, Heathrow and Copenhagen. Like-for-like, Property Management increased net operating income by 0.3% in the quarter and 0.7% for the half year. And like-for-like, Operator Activities increased net operating income by solid 16.8% in the second quarter and 16.9% for the half year, so full speed in our Operator Activities.So next page, please. The net, the NOI increased for the second quarter by SEK 85 million and increased by 10%. But for the half year, it was 12%. Excluding the effect of the IFRS 16, increase was 8% and 9%, respectively. And again, a few key factors supporting: previous acquisition, that is the Midland in Manchester and the Radisson Blu in Glasgow, which we've done last year; a strong growth in Brussels and other markets; and a stable underlying demand general in the hotel market. A few negative effect is negative calendar effect that's coming back to that, increase of hotel supply in some market and some renovation effect. And talking about the calendar effect, we estimate that the calendar effect has a negative impact on 2% to 3% for comparable portfolio in the [quarter]. So what we gained more in Q1 because of Easter we lose here but -- and in spite of that, we believe that the income is very strong.Next page, please. This is about our profitable growth trend in Pandox. As you know, Pandox returned to the stock markets in 2015 in June. And since then, we have had a high business tempo, including the last acquisition in Germany, 3 hotels, Dortmund, Erfurt and Augsburg. We have now made acquisition for more than SEK 20 billion over these 4 years. We had also invested approximately SEK 2.5 billion in growth value-driving project in our existing portfolio, 16 hotels. And we have secured more than 70 new lease agreements, most of them in the market outside the Nordic region. Finally, we had also made a divestment for SEK 2 billion including the planned divestment of Hotell Hasselbacken which was announced now in Q2. Over these 4 years, and we are proud to say this, Pandox total net operating income and total cash earnings had more than doubled measured on a rolling 12-month basis. Next page, please. So that takes us into our business situation that you can see, we have -- we own 144 hotel properties with 32,000 room at the end of Q2, and it's not including the last acquisition, for the total market value of SEK 57.6 billion. It's very well diversified and well in terms -- and very well balanced between countries, location and guest segment. 128 of these hotels is revenue-based leases and representing 85% of the value. And 16 hotels according to -- close to 5,000 rooms is owned operations -- owned and operated hotels, representing 15% of the market value.Next page, please. Yes, we have, as I said, announced an acquisition in -- for -- a few weeks ago and where we acquired 3 hotel properties in Germany and for EUR 103 million price, an initial yield of 5.7%. We had signed long-term lease revenue-based agreement with HR Group. HR Group is what we call a third party. They operate hotels, and then they sign franchise agreement with well-known brands. HR Group is a very professional player who operate 20 hotels across Europe, one of the largest without having any brands. We're very much looking forward to develop our cooperation form with these very professional partners. The brand we have with hotels is Dorint Hotels & Resorts. Dorint is one of the most well-known brands in Germany together with Steigenberger and Maritim. And Dorint has 51 hotels plus in Germany and Switzerland. And the totality is 565 rooms. It's very well-maintained properties. We don't need to do any reinvestment initially. And we expect it to have EUR 6 million rent annualized and EUR 5.8 million NOI also annualized.And if we go to the next page, you would see picture of these 3 hotels. On the left, you have Erfurt. Erfurt is the former East Germany, strong leisure destination. And you see the hotel there, it's very strong local positioned, well-known hotels. As you of course can understand, we always see this picture that it is one of the leading hotels in Erfurt. In the middle, we have the Dortmund in -- Dorint in Westfalenhalle area. We had another hotel in Dortmund before. We own and operate the Radisson Blu and Dorint. Now we also own this -- now we own and lease out the Dorint. Dorint is one of our competitor, so we know that hotel very well, and we are now happy to be owner of 2 beautiful hotels and profitable hotels in Dortmund. And the third one is Dorint in Augsburg. It's a leading hotel in Augsburg located a little bit outside city just next to the Kongresshalle Augsburg. So if things happen in Dortmund, it's happened there and we have 184 rooms, full-service hotel there.So next page, please. That take us into the Pandox world, where you can see and where we -- that's including our recent acquisition of these 3 hotels. So now the portfolio has increased to 147 hotels, close to 33,000 rooms in 15 countries. And you can see that the Scandinavian is still dominating, the proportion still continue to go down. It's 45% of the values in Scandinavian. And Sweden is the largest one, they have lead then in Europe, 33%; U.K., 20%; and Canada, 2% of the value of the company.Next page, please. That is the selection -- very high-quality selection of operator and brands that we now have add 2 more partners. On the left-hand side, you see down HR Group and Dorint Hotels & Resorts. And of course, if you take this step by step, we sign up with more partners to give us more network, to give us more knowledge and more presence in the market. We have never been stronger in Pandox ever.Next page, please. If we now go over to market, you can see on the graph on the left, Europe is -- has go up April-May 4%, so a good 2 first months of the Q2. And if you look more into countries, you can see strong Germany and Austria. U.K. and Ireland is less strong there. We are much stronger, but the market is a little bit -- slightly down. Scandinavian is on plus 3% in Finland to minus 8% in Denmark so very much rollercoaster market in Scandinavian for the moment, most of this coming because of changes and because of the new capacity at the market. Let's come back to that.And if we then move over to the next page, 11, you can see some key markets, strong in Berlin, Frankfurt and Montréal. The Frankfurt in May was bombed because of a few big meetings in the city and now has a very strong 14% over the Q2. And Berlin continued to be strong. Meeting market is stronger and stronger, and we are also now sniffing more in the market for the high-price segment in the meetings, which we gained for in our 700-rooms hotel and of course with one of the big meeting facility in the city. UK Regional is minus 1%. Pandox comparable number there is plus 4%, so we are much stronger. Brussels, strong; Helsinki, strong; and then Stockholm, Oslo and Copenhagen is down. Stockholm is Easter effect and Oslo and Copenhagen because of new capacity. And you can see also Stockholm here at minus 2%. If you adjust for the Easter, it would be slightly positive or positive, so we have a stable level-out trend for the moment in Stockholm. Next page, please. Then I hand over to Liia for the financial highlights.

[Liia Nõu, Senior Executive VP & CFO]

Thank you, Anders. And we are now on Page 12. We are pleased with the second quarter, which was yet another quarter with profitable earnings growth in both business segments. Please note that during the second quarter, we implemented an accounting change for other property revenue and property cost in the U.K. and Ireland. As a consequence, revenue and costs decreased by SEK 30 million reflected in the second quarter, of which SEK 15 million relates to the first quarter. The change will result in a reduction of the property revenue of approximately SEK 60 million on an annualized basis compared to 2018. The reason is a property tax is paid directly by the tenant. But however, the change has no effect on earnings. It just lay between the different lines in the P&L. With that out of the way, we turn to some key numbers, starting with Property Management. In the second quarter, rental income amounts to SEK 783 million. Adjusted for the accounting change, as Anders just described, the increase was 3%. Like-for-like, Property Management reported an increase in rental income of 0.4%. In the second quarter, net operating income amounted to SEK 704 million, an increase of 10%. Excluding IFRS 16, net operating income amounted to SEK 689 million, an increase of 8%. Like-for-like, Property Management reported an increase in net operating income of 0.3%.Continuing with Operating Activities. In the second quarter, net operating income amounted to SEK 212 million, an increase of 27%. The strong uplift is mainly explained by good progress in Brussels and Berlin, the acquisition of Radisson Blu Glasgow in the previous year and improvement in other markets. Excluding IFRS 16, net operating income amounted to SEK 206 million. Like-for-like, Operating Activities reported an increase in net operating profit of 16.8%. Total cash earnings amounted to SEK 565 million, an increase of 8%. Total cash earnings per share also increased by 5%. Measured from year-end 2018, the unrealized value increase for Investment Properties was 1.4%; and for Operating Properties, 2.2%. End of period, EPRA NAV per share amounted to SEK 173.83. So adjusted for dividend, the annualized increase in EPRA NAV was 16%. Next page, please. In the second quarter, Property Management benefited from previous acquisitions, positive diversification effects while underlying demand also remained positive. However, a negative calendar effect of 2% to 3% affected growth negatively in the quarter. Growth was also constrained by negative supply and renovation effects in some markets. Rental growth in comparable portfolio was positive in U.K., Norway, Germany and Austria and negative in Denmark, Finland and Ireland. In the U.K., like-for-like growth amounted to some 4%. Strong addition measures were Wolfsburg and Cologne in Germany, Jönköping and Luleå in Sweden and Sheffield and Brighton in the U.K. Next page, please. In the second quarter, both revenue and net operating income increased at a good pace supported by previous acquisitions, currency and a solid development particularly in Brussels with a good conversion. Brussels currently benefited from a combination of good demand and limited inflow of new hotel rooms. Berlin was also strong, and other markets in Germany improved. The ongoing rebranding of DoubleTree by Hilton Montreal is progressing according to plan with higher RevPAR but has yet to catch up in terms of profitability. Next page, please, Page 15. In the second quarter, approximately 20% of the portfolio was externally valued. Since the beginning of the year, total unrealized and realized change in value amounted to SEK 821 million, of which SEK 640 million for Investment Properties and SEK 181 million for Operating Properties. The value increase is explained by combination of improved cash flow and lower yield. In the quarter, we entered into an agreement to divest the hotel building for Hotell Hasselbacken, which contributed with some SEK 100 million to the value increase. This transaction is expected to close 2nd September 2019. We also agreed to acquire 3 hotel properties in Germany. This transaction was closed on the 1st of July. End of period, the average valuation yield for Investment Properties was 5.51%; and for Operating Properties, 6.61%. Next page please. Finally, let's take a quick look at our EPRA NAV and the financial position. End of period, EPRA NAV per share amounted to SEK 173.8. This corresponds to an increase of 16% on an annualized basis adjusted for dividend and proceeds from deducted share issue. The increase is in part explained by changes in currency exchange rates. Loan-to-value amounted to 49.0%. Liquid funds and long-term unutilized credit facilities amounted to approximately SEK 3.5 billion. So again, our conclusion is that Pandox financial position remains strong and stable. Next page, please. And with that, I hand over to Anders again for some final words.

[Anders Nissen, CEO & President]

Well, thank you, Liia. And yes, a few words about the outlook. And we, as we have said in the report, see a positive stable outlook for the rest of the year. That's based on continuously strong economic activity in all the markets where Pandox are representing on, and that is the main driver for demand in the hotel industry. And we see in most of our markets a strong and continuously good business market with business travelers continue to travel. We see business on the books for meeting also is at least as last year. And the leisure market is also continuously to increase in most of our markets. And with the high quality of our hotels, we were having at least the shares in the market which grow with, that is positive news.And with that said, we have a few we need to remind everybody. That is we are in the mature phase in the hotel market, and growth is always slowing because of strong comparison. So that will sum up our comments about the outlook for 2019.So then I hand over to the operator. We are ready for questions.

[Operator]

[Operator Instructions] The first question is coming from the line of Fredric Cyon.

[Fredric Cyon, Research Analyst]

A couple of questions from my side. Starting off with the weaker markets, Copenhagen, Oslo, you're well aware of that there is a lot of capacity entering those markets. For how long do you anticipate those 2 markets to be somewhat challenging?

[Anders Nissen, CEO & President]

I think I'll take that question. If you start with Oslo, it's the new capacity came in now in Q1 -- end of the year and in Q1. So that will be for the next 12 months, I will say, there will be some negative effect in Oslo. In Q2, it was a big meeting, which we have said, which has limited the negative effect, I will say. So you can -- I will say that usually we're having a slightly -- or we're having a more negative effect the rest of the year than it ever had in Q2. But I will -- over to the next summer, we will see that they have comparable numbers, and then we will see most likely a stable market again. Copenhagen is worse off. Copenhagen will have over 3 years 8,000 rooms into the market. 1/3 has come in, and the negative effect had started. And that will be effect that will happen in -- that will continue to 2019, 2020 and partly 2021. I will remind everybody that we haven't done any -- we are not involved in any of these new hotels coming out to the market, and we expect most likely that something will happen in the market, and maybe that will come up during this disrupt, but what we see at the moment is a negative trend impact of negative or propensity in rates. So it's not -- those guys have invested money there. They are not happy at the moment, I suppose. We only have in hotels -- we only have 8% of Pandox total value is in Denmark, so the effect is limited.

[Fredric Cyon, Research Analyst]

And out of those 8%, would you say half of that is Copenhagen related?

[Anders Nissen, CEO & President]

It's Copenhagen, yes. They're all new capacity coming into Copenhagen. The rest of the -- the rest of Denmark we don't see adding new capacity at all.

[Fredric Cyon, Research Analyst]

And then moving over to value changes, they were quite meaningful for being Q2 and certainly now look higher than in the first quarter. Where have you made the largest additions? Is it Nordics again or any other markets where you've had meaningful changes to values?

[Anders Nissen, CEO & President]

Can you take that, Liia?

[Liia Nõu, Senior Executive VP & CFO]

Yes, absolutely. Well, it's been -- even the spread, as we've seen, it's been also in the operating -- on the Operating Activities portfolio, which was mainly driven by yield, lower yields. But it's pretty evenly spread including Germany and U.K. and -- yes, pretty evenly, but also in the Nordics, so nothing particularly standing out there. But of course -- sorry, and of course, Hasselbacken, which we sold, that of course is SEK 100 million part of this, which is of course inclusive.

[Fredric Cyon, Research Analyst]

Yes, absolutely. And then my final question, anything worth mentioning when we compare Q3 of last year with the one for this year that could have any meaningful impact on like-for-like?

[Anders Nissen, CEO & President]

Sorry, can you take that again? I missed it.

[Fredric Cyon, Research Analyst]

Yes. So basically, third quarter last year compared with Q3 this year, is there any kind of conferences or any [ specifics ] that are meaningfully impacted by that as you'll see later on?

[Anders Nissen, CEO & President]

You mean if that is a one-off in Q3 with this?

[Fredric Cyon, Research Analyst]

Yes.

[Anders Nissen, CEO & President]

Okay. No, we don't see any specific thing happening in Q3. It will be an ordinary Q2 -- Q3, yes, an ordinary quarter, an ordinary quarter. Yes. Yes.

[Operator]

We are now taking the next question from the line of Albin Sandberg.

[Albin Sandberg, Equity Research Analyst]

Albin Sandberg, Kepler Cheuvreux. I'll follow up on Fredric's last question, just also heading maybe to H2. And if you look at the like-for-like growth rates that you are posting for H1, so we don't get that Easter distortion before between the quarters, I think you mentioned that overall, you were kind of satisfied or in line with your expectations. And you're also keeping the market outlook unchanged quarter-on-quarter is the way I read it. So I mean given the market situation we see, is this a steady-state like-for-like growth level that we should expect Pandox to operate within?

[Anders Nissen, CEO & President]

Yes. Well, yes, I read the question in 2 parts. One is that the Easter effect, it has -- it's always strong compare to the first semester, as always. But if you adjust to the Easter effects for Q2, the result is much stronger than Q1, and that is an underlying strong effect and that is coming from a much stronger Germany than last year. And it's still a very solid U.K. Despite of everyone has said that there will be a lot of negative effect for this year, we don't see that. So we are quite positive, we are quite happy and satisfied with the Q2. So if you move that in -- with that said, now in Q3, we don't have anything one-off any other disturbance, Q3 compared to last year. And we expect that this like-for-like growth will at least be as it is in for the first semester.

[Albin Sandberg, Equity Research Analyst]

It's good to know. And then I think you highlight very well the impact from Easter and so on. And then you have been telling us for quite some time that your ongoing renovation has a negative impact on your growth rates as well for now. I just wonder would it be possible to somehow quantify that impact during H1 or just ballpark numbers.

[Anders Nissen, CEO & President]

The renovation effects?

[Albin Sandberg, Equity Research Analyst]

Correct.

[Anders Nissen, CEO & President]

I think maybe -- should we take both of these, Liia? I will say that renovation effect is -- for the Q2 is -- that is more negative effect in Q2 than it was in Q1. We have starting a big renovation in Brussels, which is in the Hilton Brussels City, which will continue to Q2 next year. To give you an exactly number, I don't have it, Albin, I'm sorry. It's not so easy to curve out. Can you say something there, Liia?

[Liia Nõu, Senior Executive VP & CFO]

Yes. Well, I think it's -- well, it's -- as I said, it's difficult, but maybe it's in the line of between 0.3%, 0.5%, so it's not that material. In the first quarter, we have some offsets because we had some renovations coming back, Hotel Hubert, which was out of the market, so to say, in 2018. So there's always what is out and what's coming in and what new ones is in the planning. But that's in the ballpark numbers, I would -- pure guess.

[Albin Sandberg, Equity Research Analyst]

Yes, I know, but that's very helpful and so just to get some feel. So that's good. And then my final question also relates to the divestment of Hasselbacken. I just wonder -- first of all, it's not too often that you see Pandox selling stuff, so I wonder, is this a sign that you will become more active also on the divestment side, not only on the acquisition side? Or it was then a special, yes, situation that decided you to do this? And also given the quite strong capital gain you are realizing on this asset, is that representative for some other parts of the portfolio? Or was that unusually low book value on that from Q1 that drove this gain basically?

[Liia Nõu, Senior Executive VP & CFO]

If I ask -- let Anders develop on that. But if I just start with the capital gain, I think there is a perfect buyer for this hotel, and Anders can develop on that one, but this is not reflective on our portfolio. This is just sort of a very good buyer for this hotel.

[Anders Nissen, CEO & President]

Yes, that's true. Thank you, Liia. That is very true. And now Albin, we are still on the buyer side, but of course from time to time, we're also selling. It is a very nice hotel but small. And then the potential for this hotel is to build more rooms, and that is very long processes because of it's owned by the Swedish king, the land, and it's very long process to get approval on that. I don't think maybe we can create that potential. Maybe Björn Ulvaeus has better network of the house of the king than we have, so maybe he can get it. And of course, so we see less potential, we see a very professional new partners coming into hotel which we believe has all the possibility to develop the hotel but still in the Pandox portfolio representing very small part of it. And of course on the top, we get a price that we find very attractive.

[Operator]

[Operator Instructions] There are no further questions at this time. Please continue.

[Anders Nissen, CEO & President]

Okay. Thank you, everyone, for your interest. Our next report will be published at 24th of October. And before we leave there, I would like to take the chance of wish you a nice and relaxing summer. Thank you very much from Pandox.

[Operator]

That does conclude our conference for today. Thank you for participating. You may now disconnect.