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

Welcome to the Fabege webcast teleconference Q3 2021. [Operator Instructions] Today, I am pleased to present CEO, Stefan Dahlbo; and CFO, Asa Bergstrom. Please begin your meeting.

Welcome to our presentation of the third quarter. The quarter can be summed up as a strong quarter in many respects. We had a strong net lettings and positive changes in value but the 3 main pieces of the news were that after almost 600 days, we have reopened the society, which we all have longed for. We completed -- we also completed our second major letting in Flemingsberg with Alfa Laval of 17,000 square meters. And after the quarter in October, we presented our strategic acquisition of SHH in order to take advantage of the value in our residential development rights. But now I will hand over to Asa, who will present the results in more detail.

Thank you, Stefan. We have now seen a quarter with high activity and improved numbers. Rental income came in at SEK 2.1 billion, slightly higher than the previous year. In an identical portfolio, income increased by 1%. Vacations ahead of projects and granted rebates were offset by occupations in completed project properties. Increased operating expenses were due to a more normal winter this year in terms of cost for heating and snow clearance. The surplus ratio like the previous year, still came in at 75%. Central administration includes nonrecurring costs of approximately SEK 11 million relating to the move and furnishing of our new headquarters here in Solna. We are so happy to be back in our fantastic new office. 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 period to 1.75% at the end of the quarter. Earnings in associated companies amounted to minus SEK 20 million and mainly related to capital contributions to Arenabolaget during this period. And we, therefore, reported profit from property management of SEK 1.1 billion. We saw continued value growth. Total changes in value amounted to SEK 2.4 billion, of which SEK 722 million related to ongoing projects and upward revaluation of development rights. The changes in value in the investment portfolio were related approximately equally to cash flows and slightly lower yield requirements. The yield requirement fell by another 2 points during the quarter to 3.84%, 3.88% at year-end. And the deficit value in the derivatives portfolio decreased further during the quarter in total SEK 392 million during the first 9 months. And finally, the tax expense amounted to minus SEK 847 million and related to deferred tax only. Please turn to next page. Reported equity increased by SEK 7 per share to SEK 134 per share, and the long-term net asset value or the EPRA NRV, amounted to SEK 164 per share. Equity has been reduced by the second dividend of the year, SEK 580 million, which was paid out in early October. The only key ratio that does not currently meet our target level is the debt ratio, which amounted to 14%. Otherwise, the key ratios are in line with our goals and expectations. Our balance sheet is still very strong with high-quality assets ratio and low loan-to-value ratio. Please turn to slide financing. Both the capital markets and banks have been there for us during the period. We have continued to be active in the capital markets through several bond issues and refinancing of commercial paper. We have also refinanced bank loans according to plan. We have taken the opportunity to fix the interest rate through new long-term interest rate swaps. The longest swaps is for 11 years at an interest rate of just under 72 basis points, and now 78% of the loan portfolio is fixed. No further buybacks were carried out during the quarter. In total, we hold almost 8.8 million treasury shares. The shares have been repurchased at an average price of SEK 120.26. And we will retain these treasury shares until further notice. And so back to Stefan again.

Thank you, Asa, and please go to Slide 5. We had strong net lettings for the entire period of approximately 130 million where the 2 major contracts are with Alfa Laval and Convendum, and they contributed for approximately over SEK 100 million. If we exclude our large project lettings, we also have reported positive net lettings in the investment property portfolio of slightly more than 20 million. It's very nice to see that the lettings in the investment property portfolio, not leased in the city have gained momentum again. We had strong demand at viewings and there was great interest in the market. The positive trend has also continued early in the fourth quarter. We do not see any downward price pressure, but the leases we are signing are at very good levels. We don't see any new record rents, but the average rents in our portfolio are increasing. After second quarter, I was optimistic about the third quarter, for the net lettings for the third quarter. We met my expectations with net lettings of more than SEK 74 million in the quarter. When talking about the renegotiations, we came in at about 12% for the -- and that's in line with a little bit better than our expectations, which are approximately 10%. Please go to Slide 6. In the quarter, we completed our largest and even largest in Sweden office letting so far in 2021. When Alfa Laval opted to design a 22-year lease contract in Flemingsberg for approximately 17,000 square meters. I'm very satisfied with an annual rent of SEK 45 million and hopeful that rent in the area will increase in line with the development that we saw in Arenastaden, where we signed the contract with Vattenfall almost 15 years ago. The letting also includes Alfa Laval's innovation center, which will have many international visitors, that also will generate a positive impact for the future hotels and the service industry in the area. Please go to Slide 7. When talking about the occupancy rate, I'm not that pleased. We have a rate came in at 10%. I think it's a little bit too high, but it's also something we will focus on in the coming quarters. We have some opportunities. One of the reason for the increased vacancy rate or vacancy level is that Telia decided to prematurely leave free floors in [indiscernible] Nationalarenan 8. But these floors are already led to new customers, and they are led design on much better terms, but they impact -- for this quarter, that impacted the occupancy rate negatively. I'm not worried that we will have structural vacancies in Nöten or in other of our properties, but it will be -- we have some to work with. We're often asked about how demand for offices will be affected in the postpandemic era. They're honest. But unfortunately, a boring answer is that we don't know and we don't have a concrete answer today. What we have become even more convinced -- but what we have been even more convinced about, however, after dialogue with our customers, it's all companies will do things differently according to the condition that best use their business and corporate culture. There will not be any standard solution or template that everyone can proceed from. We have -- but so far, we had customers that had both opted to reduce and to increase the floor space. We have also had customers that have revoked their terminations, but is still in a wait-and-see attitude and a learning process for the majority of the customers. But I'm also convinced that our good locations in modern offices will be an advantage and that offices will be needed in the future. We continue -- we'll please go to Slide #8. We continue to have stable customers with long -- very long lease agreements. We are now carrying out that new customer satisfaction index survey to take the pulse of our customers. We have been in very close contact with all of them during the last 2 years, especially during the COVID-19 situation. And I think that's also 1 of our strengths to be close to our tenants. Our property management organization does a very good job here, maintaining and building relationships with the tenants. Please go to the next slide. The product portfolio is progressing well according to plan. As we mentioned on a number of occasions, we will not reach our investment target of SEK 2.5 billion for 2021. But as we also have said many times, we think that average in longer term will be more about SEK 2.5 billion. For this year, we will end up around SEK 2 billion as it looks today. The property portfolio accounted for approximately 33% or 1/3 of our value growth, which shows the value of a large and good project portfolio for building net asset value. Next slide, please, Slide 10. Here are 2 projects in Flemingsberg that we have signed so far. I'm sure that these 2 projects will be a game changer for the area, just like, as I said before, Vattenfall was in Arenastaden. Although the rents are slightly low in Flemingsberg, our initial values are low, which makes the calculations very attractive. And then the one up in the top of this picture is Alfa Laval, and in the bottom of the picture is Operan/Dramaten, which we're now starting to construct in the beginning of next year. Next slide, please. This one you have seen before, that we have approximately almost 800,000 square meters of commercial development rights and approximately 20% of them have gained legal force. So we have a really good -- continue to have a great potential to create value in these projects in the next few years. In the interim report, you can find a more detailed table. Slide 12, please. In Haga Norra, we are finalizing the first phase and has also begun demolition work in order to start a phase that will involve approximately 28,000 square meters of offices and 400 apartments. In the first phase, what you can see here, Block 6 and Block 7, the apartments are -- most of them are sold and the interest for buying apartments here in the area is very, very good. And for the next phase, I think they will start -- can be ready for occupation in the fourth quarter at the end of 2024. So we will come back to this and tell you much more during the next quarters. Slide 13, please. And here is a picture where you can see when -- how it will look when the entire project is finished. The entire area will be natural growth together with Arenastaden. And Block 1 and Block 2 is the office and commercial areas and Block 5, 4 and 3 is our apartments, all apartments. Please go to the next slide, Slide 14. When talking about residential, we -- early in October, we carried out and presented a strategic acquisition of SHH Bostad. The acquisition will strengthen our position as an urban developer in Greater Stockholm. Thanks to the SHH -- it's difficult to say in English, expertise is in residential and local authority properties, we can be involved in the value creation for longer and run several different types of projects under our own management, which is a natural next step in our urban development strategy. We have previously collaborated with our new partners in a joint venture with approximately 270 homes which were built in Kista under the name Selfoss, and with very good results. Our overall strategy with Stockholm in focus, Sweden in focus, we'll also be the basis for the residential and local authority properties. SHH will continue to operate as a subsidiary with its own staff and management. Slide 15, please. SHH was founded in 2010 and has since then completed more than 40 real estate projects, which is equivalent to approximately 2,100 homes. They have their own production of 574 homes spread across 11 projects. And in addition to these, our 18 development properties with development rights equivalent to just over 2,300 homes, including an old people's home and a school. Approximately 2/3 of the future development rights are located in Greater Stockholm, and these are good additions to our own extensive portfolio of residential development rights. A few years ago, the housing market in Stockholm wobbled due to an oversupply of expensive apartments directed towards a narrow target group. SHH works with affordable housing and thereby reaches a larger customer group, which means a lower risk exposure. On the next slide, Slide 16. You can see our residential development rights, excluding to SHH. There are, as you know more -- a little bit more than 500,000 square meters, equivalent to approximately 8,000 homes. But most of these rights will be utilized a little bit further in the future, which means that SHH complements us very well even when talking about the timetable. Slide 17, please. As I mentioned, SHH complements us very well. The majority of our residential development rights are slightly more longer term. But as I said, on SHH in terms of the intended production start, our portfolios match each other well, both in relation to implementation time and geographically. About 2/3 of SHH's future development rights are located, as we said, in Greater Stockholm. Together, our development rights constitute approximately a little bit more than 700 square meters equivalent to more than 10,000 homes. And I'm really looking forward with confidence to develop these homes in our new structure. Now I will hand over to Asa, who will briefly review our sustainability work. Please go ahead, Asa.

Thank you again, Stefan, and please turn to next page. Sustainability is an ever more important factor, and external interest in sustainability issues and Fabege's sustainability strategy is increasing. Not least the new EU taxonomy will impose additional reporting requirements and will hopefully encourage further improvements of processes too. New in this slide is this year's result in GRESB, the international benchmark, where like the previous year, we ended up with 93 points out of 100, a result that we are proud of. Many Swedish companies are in the top tier, and we are encouraged to continue working for improvements. Please turn to next slide. In 2019, we set a goal that our property management should be climate neutral, net zero carbon emissions by 2030, that is Scope 1 and Scope 2. And that carbon footprint in Scope 3, which is project operations, shall be halved. Since 2020, we are measuring and following up with the ambition to gradually reduce our carbon footprint through various measures and innovations in our projects. It is an educational journey towards a very tough goal. Please turn page. We also have an ambition to contribute to the community around our city districts through various measures. This work has become even more important by the virtue of our investments in Flemingsberg. A number of engagements in Huddinge are, therefore, shown on the list here. For example, [indiscernible] where we sponsor preparation of homework for pupils in [ Anesta ] school in Flemingsberg with the aim that everyone should be eligible for high school. Another initiative is TalangACademin, which aims to provide internship and work experience to people who are far removed from the labor market. And I think that's it, and we are open for questions.

Yes, please.

[Operator Instructions] Currently, we have one question coming forward. That's from the line of Jonathan Kownator at Goldman Sachs.

I just wanted to come back to the vacancy point and exactly understand, you're saying no structural vacancy. So what do you think will be the part of the recovery of that metric if it's at the [ press-pointed ] term currently?

Thanks. First of all, I think, as I said, that we have already signed some contracts that will move in during the next years, and then we reduced the -- so we don't see the long-term structural vacancies there. We also have Bocken 39, for example, the big contract we signed with Convendum of this year and at Kungsgatan, and that's also part of the vacant today. And that will be -- they will move in during the next years. But on the other hand, as we said, when we try to tell today that Nöten is coming up when Skatteverket is moving out next year. It was announced early 2019, but I think it's good to remember that, that would be in the figures. But there no longer, we have good in the -- especially in the city, when we have vacancies, we see a good demand and good activity. They're a little bit more challenging in the business part, but that's no structure.

So is it fair to assume that over sort of the next 18 months or so vacancy should hover in the sort of 90%-92% or something along these lines? Or you're expecting a much faster recovery than this given also the releases that you'll have as well?

What I said is that the vacancies, the spaces, the vacant spaces, it will change. We know now that some will be -- some of them fill up next year and some will -- Nöten, for example, will come up.

So can I -- perhaps just to clarify a bit, like already you obviously highlighting contracts that are signed and releases that are known already. If you take those into account, what would be the corresponding vacancy, not assuming anything else happening just what you know and what has already been announced, on the pro forma basis.

I couldn't catch it quite. Did you hear, Asa?

I think this is the way for you to get grip of it is to look at the graph that is published on Page 12 in the report, where we are not forecasting, but where we are presenting rental income over the next 4 quarters. So I think, as Stefan said, we will have tenants moving in that will contribute to this, but we have -- we will also have tenants moving out. And there is a dip in Q2 in 2022 when the tax authorities are moving out. Yes. So I think that will help.

So effectively, if I read correctly that chart, there that should improve in Q4, but then you have this dip in Q2, which brings it actually back to a level comparable to Q1, but a level below Q3. And you can extrapolate that to the trends in terms of occupancy in general, obviously, not taking into account further leasing that you would do.

That's right. We also had another question coming in by e-mail relating to occupancy drop. And because there was a drop in Q3 from Q2 of 1% in the calculation. And it was mainly referring to that Telia actually vacated some of the areas in a property here in Arenastaden. So that made the difference of 1% in the calculation.

We said in the Swedish presentation that Telia, when we signed a new contract, it was up about 50% from the rent levels.

Any further questions?

None so far. [Operator Instructions] No, there seems to be no further questions from the phones at this time.

Thank you very much for joining us this morning. And if you have any questions, please call us. And looking forward to see you soon again. Thank you. Have a nice day.