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

Welcome to Fabege's presentation for the first half of 2021. The short version is that earnings were stable with good activity -- and good activity in the rental market. But now I will start to hand over to Asa, who will tell us more about our results and go further into details.

Thank you, Stéphane. Please turn to next page. Now it feels like the whole economy has gained more momentum and that things are starting to ease a bit. This is also being noticed among our tenants, even though it's still tough for someone's in the exposed sectors. Rental income during the first half of 2021 came in at SEK 1.4 billion, slightly higher than the previous year. In an identical portfolio, income was largely unchanged. Vacations ahead of projects and granted corona discounts were offset by occupations in completed project properties. This year, a more normal winter was followed by a greater need for cooling early in the summer. Thus, compared to the previous year, we initially had higher cost for heating and snow clearance as well as higher cost for cooling towards the end of the quarter. The surplus ratio still came in at 74% like the previous year. Central administration includes nonrecurring costs of approximately SEK 11 million in the summer, that's compared to the previous year, we initially had high cost for heating. We really hope that we will soon have the opportunity to welcome both employees and visitors here. Interest expenses increased slightly compared to the previous year, which was due to an increased loan volume. The average interest rate fell slightly during the first half year to 1.71% at the end of the second quarter. Earnings in associated companies amounted to minus SEK 12 million and mainly related to capital contributions to Arenabolaget. For the full year 2021, we still expect to be at the same level as last year, which is around minus SEK 50 million. And in total, we therefore reported profit from property management of SEK 715 million. Last year, the properties in the portfolio were independently valued several times. Now we are changing back to more normal routines. And before the end of the second quarter, around 40% of the portfolio was independently valued. We saw continued value growth. Total change in value amounted to just over SEK 1.5 billion, of which SEK 242 million related to ongoing projects. The change in value in the investment portfolio were related to cash flows and to slightly lower yield requirements. The yield fell by 2 points to an average yield of 3.86% at the end of the second quarter. And the deficit value in the derivatives portfolio decreased a little bit further, in total, SEK 268 million in the first half of 2021. And finally, the tax expense amounted to minus SEK 532 million and related to deferred tax only. Please turn to next page, key ratios. Reported equity increased by SEK 3 per share to SEK 130 per share, and the long-term net asset value, the EPRA NRV, amounted to SEK 160 per share. Equity has decreased with a declared but unpaid dividend of SEK 580 million. The only key ratio that does not currently meet our target level is the debt ratio, which amounted to 14.1%. Otherwise, the key ratios are in line with our targets and expectations. Our balance sheet remains very strong with a high equity asset ratio and a low loan-to-value ratio. And now please turn to page, financing. Both the capital markets and banks have been there for us during the first half of 2021. We have been active in the capital market through several bond issues in total SEK 1.9 billion and regular issues and sales of commercial paper. We have also refinanced bank loans according to plan. We continued our buyback program, which has been paused, however, since we entered into the silent period. During the first half of 2021, we purchased 4.2 million shares, which means that we now hold almost 8.8 million treasury shares. The shares were repurchased at an average price of SEK 120.26 per share, and we will retain these treasury shares until further notice. And now please turn to next page. The most exciting development on the financing side during the first half of 2021 was the fact that we were able to secure a loan that is based on the new regulations for green financing in the EU taxonomy classification system. We are doing this together with Handelsbanken. The financial world has a great opportunity to steer developments into a more climate friendly direction. And as borrowers, we have significant potential to contribute to this. Since Fabege achieved 100% green financing last year, we are now taking the next step via this taxonomy link loan. The property Signalen 3 in Arenastaden is the collateral for the loan, the property has received an energy performance certification of level A, which is the highest level. We have also conducted a comprehensive analysis of potential climate-related risks, for instance, such as flooding, soil erosion, heat loads and extreme weather events and such as storms. And now back to Stefan.

Thank you, Asa. Please go to Slide #6. During the first half of the year and especially during the second quarter, there was a good level of activity in the rental market with many views and acquirers. The net debt lettings for us for the first period came in at in total of SEK 56 million. And for the second quarter, it was plus SEK 20 million. And I'm optimistic for the -- also for the rest of the year. Normally, letting activity in the third quarter is lower than the second quarter. However, I think this year, the third quarter will be better due to the discussions we are having with the potential customers. The renegotiations completed during the period resulted in an increase in rents of 12%, which is slightly higher than we expected to be at the start of the year. Please go to Slide #7. We usually show this slide and what is interesting is that you previously will have seen a connection between vacancy rates and rental levels. We are not seeing this today. Rather vacancy rates -- vacancies have increased slightly, but rental levels have remained robust. Next slide, please. Our vacancy rate in the investment property portfolio is still a bit -- a little bit high. We have no structural vacancies in the portfolio, but it is more related to a number of smaller premises. Ahead of the autumn, we have strengthened our lettings team, and this is currently a high level of -- and there is currently a high level of activity to reduce these vacancies and also to find the new tenants for our project opportunities. Next slide, please. As you know, we have a very stable customer base with long agreements. We have said it before, but the SEB, Telia, ICA, Swedbank is all among really big, larger and more stable Swedish companies. So 25% -- the largest customers represent about 43% of the rental value. So it's a strong base. Please go to the next slide. What will happen to the office market after the pandemic? What we see and hear in our discussion with our customers is that there is not going to be any standard solution, but all customers will find around unique solution that suit their organization and corporate culture. I am convinced about the continued importance of the offices for creating strong brands, a sense of togetherness and the loyalty among employees, a place for meetings and creativity and its positive significance for company's development. On the other hand, I'm not saying that all will be the same as before. We will see more remote working, less business travel and more digital meetings. The customers will surely demand more meeting rooms and more open meeting areas. But as stated, there will not be a standard solution, but there is a great variation in the view of developments after pandemic among our customers and in society as a whole. Flexibility, hybrid solution, together with the continued legalizations will be the key words. Please go to the next slide. During the pandemic, we have focused extra strongly on corporation -- cooperation with our -- and close dialogue with our customers. Some of the conclusions we have drawn from these discussions are that there is a willingness among customers to change and develop the office after pandemic. There is a willingness to invest in creating attractive office in order to create a we feeling. As we said before, the loyalty for the office and the company. The customers are looking for guidance now, but we are waiting to see actual employee behavior before making final decisions on changes. Some other concrete aspects we have seen are that the customers will invest even more in digital equipment. They are, as we said, requesting more flexibility, movable walls, more rooms and so on and so on. And they are less focused on traditional -- even less focused on traditional desk workspaces. Next slide, please. Our projects are progressing well and according to plan. We see some tendencies towards increased construction costs, and that's primarily on, for example, steel and woods. However, this is a marginal impact on our ongoing progress since most of the larger processing has already been completed. We have invested almost SEK 1 billion during the first half of 2021. Next slide, please, Slide #13. During the quarter, we have completed 2 projects. One of the projects is the Nationalarenan 3 in Arenastaden, which is our first zero-energy hotel. There will be a hotel, a long stay apartment and an office for the Nordic Choice Hotels. And their house is now called Choice -- the House of Choice. We also have moved our own public headquarters and our new lab. They work away from work solution that has been moved to Stigbygeln 2. Also in our Arenastaden. And we hope that we can welcome you all there for maybe already during Q3. Next slide, please. Slide #14. We also turned the first [indiscernible] started the -- in Flemingsberg and started Operan/Dramaten project. This is -- it's really great that we had finally got started with this planning. It will be -- the bidding will start in the beginning of 2022. And the Royal Swedish Opera and the Royal Dramatic Theatre will move in 2024. And the investment will be about SEK 500 million. Slide 15, please. We have, as you know, over 800 or 850,000 square meters of commercial development rights in our portfolio. The majority of those are in Solna and Flemingsberg. Our goal is that 300 of those 300,000 square meters will be ready for project starts within the next 5 years. Looking ahead, this means that we have a great opportunity to start new value-creating projects. We are working continually now on creating development rights in our existing portfolio. Next slide, please. But we also have about more than 500,000 square meters of housing development rights, equivalent to approximately 8 or a little more than 8,000 apartments. We have 3 -- right now, we have 3 ongoing joint ventures within residentials. They are almost -- one is finished -- almost finished, in under production right now, we have in almost 600 apartments. This has also provided us with a great experience of how we can maximize the value creation from these rights. The strategy will be for the building rights and residential building rights will vary farm projects to projects. Next slide, please. As we said, the joint venture projects are progressing very well. This reflects the strong residential market in Stockholm. In Kista and Råsunda, more than 80% of the apartments are already sold. In Haga Norra, 365 or 368 apartments are -- of the first 2 tranches are have been booking -- we have a booking agreement. And the next tranche of sales will be planned to start in the autumn. The current joint venture project was recognized according to the equity method. Income recognition will not be take -- will not replace until completion of the projects. Slide 18, please. Here, we can see the overview of Arenastaden and Haga Norra at least from 2020. And if you go to the next slide, we see an updated photo from Haga Norra, where the entire demolition work is now on the old Bilia site is under way, it's ongoing. And this is expected to be finished right after the summer. And then we will start to work on the next phase in Haga Norra. So if you go to Slide 20, please. You can see here that the green is phase number one. And the Bilia facilities now and also the residential buildings that we're talking about before in the joint venture with BRABO. We will now enter into Phase II. We will provide in total, in the red, 30,000 square meters of commercial and also the residential, next step in the residential development. And we will come back to this during the second -- the next months. I'll tell you more. Please go to the next slide. In Flemingsberg, you see our existing holdings. Almost all you can see in this picture is now owned by Fabege, one way or the other. It's a long way to go for creating the vision we have, but a lot happening now all the time in the project. And in the mid -- down in the middle, there is where we now will start the Operan/Dramaten project. 20 -- next slide, 22, please. And here, you see what we now have the ownership of and what we have agreement's on land allocation. So it's almost a whole area we saw before. Next slide, please. During the quarter -- this is what I have been talking about before is that we have 27,000 square meters of -- they gained legal approval during the quarter, and that's Operan/Dramaten and also a residential area of 45,000 square meters in Huvudsta, where we will now -- we also work with how to take the next step. Please, the next slide, Slide 24. We showed this slide in the Q1, but I think it's important to point out what that sustainability work is. It's a natural part of everything we do. We're also getting more and more questions for investments about this. And I think it is and should be, as we said, a natural part of everything we do. So please, next slide. It's not enough to be a cutting-edge today, but we must constantly challenge ourselves through clear and demanding goals so that we also remain at the cutting-edge in the future. And these goals we -- the targets we have talked about before. And I think it's important to have, as I said, all -- the picture is the Nationalarenan 3 or the House of Choice, which is the I talked about before. Next slide, please. Sustainability has been strongly focused on [indiscernible] such as energy consumption and certification of properties. I think there is also a big aspect in this work is social sustainability. As a dominant property owner, we can make a difference in our areas. Here you can see -- in this picture, you can see some of the initiatives and activities we're doing right now in our areas. The picture is a new park in Solna Business Park, which is focusing on to tell the story about the [indiscernible] and the goal's for the agenda 2030, and you'll probably recognize all the colors. And this will make this -- we think we'll make area more attractive. But it also tells you we will all -- every day, we will be seeing and we can discuss the great plan for the future. So with us, we will open up for questions, and thanks for joining us.

[Operator Instructions] There looks to be no questions from the audience at this time. So I'll hand back to our speakers for the closing comments.

Thank you for joining us today, and I hope to see you after the summer, hopefully in real life. But have a nice summer and be careful out there. Thank you.