Fabege AB (publ) (FABG) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to Fabege AB Q4 Report 2019. Today, I'm pleased to present CEO, Stefan Dahlbo; and CFO, Åsa Bergström. [Operator Instructions] Speakers, please begin.

Welcome to our presentation of the year-end report 2019. As everyone knows, the past few years has been very favorable for the property sector in general and perhaps especially in Stockholm, where we had strong economic cycle, we increased rents while interest rates at the same time has continued to go downwards. And this has, of course, resulted in falling yields. We have taken, as a company, the advantage of the positive conditions. And during the last 5 years, we have invested just over SEK 14 billion, and that is an important part of where we are today. Overall, 2019 was another good year for Fabege. Our profit from property management increased by about 23% in total, and our long-term net asset value increased by 16% to SEK 145 per share. We also reached our goal to invest SEK 2.5 billion. We didn't really thought that we would be more than SEK 2.5 billion when we talked about Q3, but we increased the tempo in some of the projects, especially in Haga Norra and in the Poolen project we were -- we've been talking about has started, and we have invested more than SEK 100 million in that project now. And I will come back to this project later on. The transaction market is still strong, and I think we will see transactions at new record levels in the several areas during 2020. And especially, it will be very interesting for us to see the outcome of the sale of Skanska property in Arenastaden, Solna United. Slide #4. We ended the fourth quarter strongly with net lettings of SEK 55 million and a value growth in the portfolio of about SEK 1.9 billion or almost 3.7%. The most important project lettings during the period has been the one to Tieto and to the Swedish Work Environmental Authority. And now I will hand over to Åsa, who will present our numbers in more detail.

Thank you, Stefan. We had a strong finish to the year with continued improved profit from property management, rising values and positive net lettings. Rental income came in at SEK 2.1 billion (sic) [ SEK 2.9 billion ], an increase of more than SEK 339 million compared to the previous year. In an identical portfolio, income increased by 14% in total. Completed projects made the biggest contribution to the increase in income. But higher rental rates in agreements and index adjustments also contributed positively. The surplus ratio for the full year came in at 75% in total after a favorable fourth quarter, which was warm and with very little snow. 75% is also our long-term goal. Administrative costs are at expected level, and interest expenses were slightly lower than the previous year in absolute terms. The result in associated companies amounted to minus SEK 32 million (sic) [ SEK 34 million ] and mainly related to liquidity contributions to Arenabolaget during the period. During the second half of 2019, no further contributions were made. And then in total, we therefore reported profit from property management of SEK 1.5 billion, which was a total increase of 23% in comparison with the previous year. Before the end of the quarter, approximately 35% of the portfolio was externally valued. The yield requirement fell by a further 6 basis points during the quarter to 3.97%, and it was 4.13% at the previous year-end. Overall, unrealized changes in value amounted to SEK 5.7 billion, equivalent to a value growth of 8.5%. Values in the project portfolio rose by SEK 1.4 billion. This amount includes an impairment loss in relation to residential building rights of SEK 136 million, which was recognized in the third quarter. And values in the investment property portfolio during the fourth quarter were driven roughly equally by rent increases and lower yield requirements. As usual, the value of the derivative portfolio moves like a yo-yo between the quarters. During the fourth quarter, higher long-term interest rates contributed to the decrease in the portfolio's deficit value again. The tax expense amounted to SEK 1 billion and mainly just related to deferred tax. The amount includes the solution of deferred tax related to property transactions of just over SEK 500 million. We have also made another complete tax calculation in all of our legal units in accordance with the new rules that limit interest deductions. The change will not have an effect on taxes paid, but we will use loss carryforwards at a faster rate, which is also reflected in the tax calculation for the period. And now please turn to next slide, key ratios. In line with the strong earnings trend, our balance sheet has continued to strengthen. Reported equity now amounts to SEK 121 per share. And the long-term net asset value, the EPRA NAV, amounts to SEK 145 per share. The financial key ratios, that is interest coverage ratio, the debt ratio, loan-to-value ratio and equity asset ratio are all better than our minimum targets by a very good margin. And now please turn to Page Financing. It has been an active year with refinancing of long-term credit facilities, bond issues, the launch of our new green framework and conversion of loans to green loans. Through the completed refinancing at year-end, we had a capital maturity of 5.8 years. And our green financing now amounts to 84% of our outstanding loans in total. We did not enter into any new fixed interest terms during the fourth quarter. We've been satisfied with the average fixed interest term of 4.5 years that we reported at year-end. We were able to take advantage of the incredibly low levels that we were offered in August. And now the long-term interest rates have started to move down slightly again, and we are continually monitoring the levels. In October, we obtained an upgrade from Moody's to Baa2, stable outlook, something we could already tell you about during the last quarter's presentation. Since we did not have any capital requirements during the quarter, we have not really tested the market since the upgrade. But the indications that we are receiving from the banks are pointing towards lower margins. And finally, at year-end, we had unutilized credit facilities of SEK 4.6 billion. And after the sale of Trängkåren, the DN house was vacated. We received another SEK 3.5 billion, which we mostly used to amortize loans, mainly short-term borrowings such as the commercial papers. And therefore, we have every opportunity to spend a little more money in the form of investments going forward. And now back to Stefan.

Thank you, Åsa. And I would also like to take the opportunity to say thank you to the whole organization of Fabege for another fantastic year and excellent work. And that's only one of the year -- it's continued the long trend of excellent performance. During last year, our share price rose by about 33%, which of course is an excellent number by itself. But it was -- even if it was fantastic performance, it was lower than the property index of the stock exchange. I would say that's mainly because of our lower leverage. But we're also happy and satisfied that we're entering the new decade with a strong balance sheet, well-managed properties and a product portfolio with many opportunities, and that's what we have seen in the figures. After Swedish Tax Agency's lease termination in the January 2019 and a weak third quarter, I'm pleased that we ended the year with very successful 2 larger project lettings to TietoEVRY in Arenastaden and to Swedish Work Environmental Authority in Solna Business Park. In total, we're plus SEK 55 million during the -- in net lettings during Q4. And we ended the year still with a minus, but reduced with minus SEK 37 million. During the year, the rents in renegotiated agreements increased by approximately 90%. The rate of increase is expected to be a little bit lower during this year as the coming new rent negotiations are related to contracts signed in recent years and, therefore, starts at a higher rent level than before. However, we expect a positive net effect of at least 10% during next -- this year. Next slide, please. Here, we can see the breakdown of the market value in our respective areas. As you can see and as you probably already know, the Stockholm inner city is an area where we manage the largest values, today more than SEK 31 billion in total. But we often forget this: the Stockholm inner city contributes a lot to the stable cash flows of the company which make it possible for us to focus on future projects in other areas. Next slide. Here, you see how the average yield requirements have developed during the past 5 years. Yield requirements are falling in all of our 3 areas. It's interesting to see the spread between Stockholm inner city and the other areas had decreased. And some part of this is due to the attractiveness we have created in our areas in Solna and that Hammarby Sjöstad is increasingly growing together with Stockholm. Next slide. Here, you can see where our changes in value came from during 2019 compared to 2018. The yield has bigger impact this year than last year. I think there is scope for continued lower yield requirements in the short term. But in the long term, I think the downturn will level off but rates will remain at historical low levels. Next slide. Let's move on to our project portfolio. Today, we have more than 109,000 square meters in the project portfolio. We have a relatively small risk in the project portfolio since we have an occupancy rate of more than 91% in total. And half of that is in Poolen, which I will tell you a little bit more about later. And I'm convinced that we will fill the vacant areas before the projects are completed, that is the strategy we have of not starting larger projects based on speculation that remains in effect. As I mentioned, after Q3, I slept well at night and I was not worried. Now you know why. Next slide. Just before Christmas, we signed an agreement with TietoEVRY for more than 22,000 square meters. They also have an option to rent the remaining 6,000 square meters. This shows the attractiveness and demand there is for modern offices in Arenastaden. The total investment in the project will be about SEK 1.1 billion. Next slide. In Flemingsburg, everything is proceeding as planned. We have continued the very good cooperation with the municipality which is a requirement where we're starting Sweden's largest urban development project. The planning scheme has been out for consultation, and the next stage is for the Municipal Executive Board to approve the plan in April, and we can then start to work with the zoning plans. As you read, earlier today, we have signed an agreement with the Royal Swedish Opera and the Royal Dramatic Theatre would relocate their decor workshop, rehearsal rooms and custom storage rooms in Flemingsberg. In total, their area would be approximately 12,000 square meters. It's great. It will be great to be able to welcome such strong and well-known brands to Flemingsberg. Next page, please. We, as a company, shall continue to remain at the cutting-edge within sustainability, and we have taken several important decisions in that area during the year and during the last years. Please, Åsa, can you tell us a little bit more about what we're doing?

Yes. Let me give you some examples of what we have completed in 2019. We have now 84% green financing. And in total, 82% of our area in the properties have been certified according to the BREEAM system. And we have also, in total, 75% of green leases. Some of the things that we are proud of is that we reached 94 in the GRESB benchmark, which we also told you about in the last quarter's presentation. And we received the Sweden Green Building Award 2019 for our project property, Signalen 3 in Arenastaden, which is the head office of ICA. Please turn to next page. For us, it's obvious and natural to always invest in and work to reduce energy and water consumption in our properties to contribute to a more efficient transport and waste management and to constantly find new and better ways to reduce our own and our customers' environmental impact. During the year, we took a decision to have climate-neutral property management by 2030, among other things. We have many things to do to reach this goal, and we will increase our investment in solar power, among other things. And now back to Stefan.

Thank you, Åsa. I think it's impressive what have been done during the last years. And this is just the first step of everything that we're done -- will be done in the future. So please, over to the next slide about Arenastaden. In Arenastaden, we still have many years of development remaining. We have already, as you know, started a new project, Poolen, in Stigbygeln, which was Peab's previous headquarters. We start the reconstruction during the year, and we will also move our new own headquarter to that building, and that we are doing that during 2021. Next slide is about Haga Norra. As you know, we are working with the phase #1 right now. And that is to complete Bilia's new facility, Bilia, the car retail, as you know. And that will be ready during Q1 2021. During this year, we will also start, together with our partner, BRABO, the sale of the homes and apartments in that building on that project. The next slide is about Solna Business Park. And as I said before, there is a huge potential in Solna Business Park. The vision of developing the area from a good office location into attractive city district has been initiated. During this year, we will carry out several different projects in order to develop and improve the outdoor in the area. Next slide. And so back to Flemingsberg. Here, we can see a photo of Flemingsburg today. The project with the Royal Swedish Opera and the Royal Dramatic Theatre will be in the lower corner -- to the lower right corner of the area. Here, you can also see the area which we sometimes call the South Business District will be located. We are currently having very good discussions with a number of larger customers, and my goal is to be able to announce further agreements for the area during the first half of this year. So thank you for listening. And please, any questions?

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

I was just wondering if you could provide some color on the Flemingsburg development you announced today and the lease. And in terms of the economics, what is the rental level that you achieved there? And also, what is the yield on cost that you're underwriting for this particular project?

Thanks for the question. We haven't -- we had an agreement with Operan and Dramaten but not disclose the more detailed figures today because they have an internal process with -- to full information and so. But I can say that we are very happy with the agreement, the contract. We are looking -- I think it will be a really good deal for everyone. So the -- yes, that's what I can say today, unfortunately. It's about 12,000 square meters. So maybe you can back -- make a backward -- back-of-the-envelope calculation on that.