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

Welcome to Fabege's Quarter 2 Report 2022. [Operator Instructions] Today, I'm pleased to present CEO, Stefan Dahlbo; and CFO, Asa Bergstrom. Please begin your meeting.

Welcome to Fabege's presentation for the first half of 2022. Our CFO, Asa Bergstrom, and I will present the development in our results and operations. After that, we will open the floor for questions. Please go to Slide 2. The first 6 months of this year has been very turbulent, but despite a turbulent external environment with effects of a war in Ukraine, rising interest rates and inflation that grew stronger during the spring, we delivered another strong report, which I'm very satisfied with. We also see that the target is stable, with good demand for offices and our new lettings and the renegotiations are being completed at good rental levels. The net lettings under regulations during the quarter confirmed that. A number of transactions in our market during the spring show that the property market so far still have been strong, with stable or even lower yield requirements and continued positive changes will continue positive changes in the values. But also, we'll get back to us and we will get that more in from the details about the variation, for example. So with that, I will hand over to Asa who will go through the -- more of the figures. Please, Asa.

Thanks, Stefan. Please turn to Page 4. As Stefan just mentioned, all of the turbulence we see in the world around us and in the capital market is not seen in our numbers. Once again, we are reporting a good quarter and thus also strong half year numbers. Overall, higher income, better net operating income and profit from party management and positive changes in value. Rental income came in at SEK 1.5 billion. In an identical portfolio, income increased by 4%. The increase mainly related to rental income from the completed project properties: Nationalarenan 3, House of Choice in Arenastaden and Poolen 1 also in Arenastaden. Positive effects from indexation, new lettings and renegotiations were offset by reduced income after the Swedish tax agencies relocation from Nöten 4. Increased operating expenses were mainly due to higher property tax and higher electricity costs. Meanwhile, other winter-related expenses decreased compared to the previous year, and the surplus ratio came in at 73%. SHH gross profit amounted to SEK 5 million of which minus SEK 14 million related to costs for central administration. Income recognition takes place in connection with the completion of projects and final recognition of 1 project occurred during this period. Central administration costs came in at minus SEK 55 million and the previous year's expense included nonrecurring costs for Fabege's new head office. Interest expenses increased slightly compared to previous year, which was due to an increased loan volume and slightly higher average interest rate. The average interest rate on June 30 was 1.79% compared to 1.71% at the same period of the previous year and also at the year-end. The result in associated companies amounted to minus SEK 18 million and primarily related to the period's capital contribution to Arenabolaget. And we, therefore, reported profit from property management of SEK 729 million, an increase of approximately 2% compared to the previous year. Unrealized changes in value amounted to almost SEK 3.2 billion, and I will come back to this very soon. The surplus ratio in the derivatives portfolio increased during the second quarter. The Central Bank's interest rate increases and market expectations of higher market rates of interest have affected the valuation. Today, essentially all interest rate swaps in our portfolio are reporting surplus value. And overall, we reported a positive change in value of just over SEK 1.5 billion during the first half year. And finally, the tax expense amounted to minus SEK 1.1 billion and related to deferred tax only. Please turn to next page. In the property market, no effects are currently being noted on the financial turbulence. Before the quarter, 30% of the portfolio was independently valued. Both Cushman Wakefield and Newsec have confirmed the yield requirements in our markets are stable. In other words, no movement either upwards or downwards during the quarter. The yield levels at which transactions were carried out late last year and early this year had an effect during the first quarter with a time lag on the average yield requirement, which then declined by 6 points. Our reported yield adjustment during the second quarter of 1 point related to this time lag. The average yield requirement came in at 3.69%. Total unrealized chasing value during the quarter amounted to almost SEK 3.2 billion. The changes in value have been driven by the following factors: Project, SEK 570 million, including valuation properties in the property management portfolio. And in the project portfolio, especially one project, Poolen 1, had a substantial -- stands for a substantial part. The remaining part is split by yield, 60%, and cash flow of 40%. And in the second quarter alone, this split was yield only 15% and cash flow then 85%. Now please turn to the next page. Reported equity increased by SEK 10 per share to SEK 161 per share, and the long-term asset value, the EPRA NRV amounted to SEK 183 per share. A significant portion of the increase related to property changes in value in the property and in the derivative portfolio. The approved but unpaid share of the dividend of around SEK 1 billion has been entered as a liability. The only key ratio that does not currently meet our target level is the debt ratio, which amounted to 15.1%. Otherwise, the key ratios are in line with our goals and expectations. Our balance sheet is still very strong with high equity asset ratio and a low loan-to-value ratio. And now please turn to page financing. Financing is, of course, a very topical question in the current market situation. Today's review of how we are doing and what we are working with will therefore be a little extra detailed. We were finished with the year's refinancing of bank loans already before the year-end. In February, we issued bonds of SEK 400 million with a 3-year maturity at a spread of 100 basis points. Furthermore, we issued SEK 600 million via SFS in a 2-year bond at a spread of 69 basis points and as recently as in April, we issued further SEK 550 million in a 2-year bond at a spread of 110 basis points. Since the end of February, the Ukraine war has created turbulence and has led to rising spreads in the bank and capital markets. During the latter part of the spring, the spreads for property bonds have risen sharply. There has also been decreasing demand, and it is clear that it is now both difficult and expensive to refinance bond maturities. In the light of high prices, we chose not to try to finance the 2 bond maturities we had in June with new bonds. We have instead used the revolving credit facilities that we have in banks just for this purpose. The commercial paper market has functioned better, although with a demand that we perceive as more ad hoc. Some days, there are -- there is no interest and other days, it is possible to issue. We have been able to roll over our ongoing commercial paper maturities and we have also increased the volume somewhat. At June 30, we maintained reserve of undrawn facilities in form of revolving credit lines of SEK 1.9 billion. And now in July, we will soon find a new 10-year bank facility of SEK 1.2 billion. This strengthens our readiness and further increases the fixed term maturity. We also have an ongoing process with additional bank financings where we have received process with terms, but where formal credit decisions and agreements will be taken after the holidays. Please turn to page financing sources. As the slide shows, we are working with several different financing sources. Among other lenders, apart from the Nordic banks, we also see the European investment banks and Brunswick. The additional bank facility, which we will sign now in July is not included in this chart. During the second quarter, we have updated our M10 prospectus with an increase in the framework amount to SEK 18 billion. Of course, this is something that we hope that we can use going forward. We have also updated the green framework with a partial adjustment to the EU taxonomy requirements. And CICERO has issued a second opinion with the rating medium green for the green terms and excellent with regard to governance. Please turn to slide maturity structure. We have worked for many years to spread our loan maturities. The slide here shows how the maturity profile looks. The strategy of long-term fixed rate periods is unchanged, and we aim for distribution of our loan stock among several sources of financing. When it comes to short-term commercial paper, the red bar in the chart, then we have a full backup. During the autumn, we have bond maturities coming up of SEK 1.2 billion, which will most likely be refinanced with bank debt unless the market improves. And we intend to refinance the bank facilities that mature in 2023 with each bank. And with the ongoing dialogues we have with the banks, we also see an opportunity to plan for the bond maturities in 2023. And now please turn to next page. We have not entered into any new fixed rate period since the year-end. Of the loan portfolio, 71% is now fixed, mainly based on long-term maturities and mostly through a straightforward interest rate swaps, supplemented by some fixed rate bonds. In the longer term, the plan is to replace maturities with new long-term fixed rate periods. The high proportion of fixed rate terms today gives us protection against rising market interest rates. In particular, this is reflected, of course, in the derivatives valuation. In the short term, the higher market interest rates will thus only have a limited effect on our interest expenses. For a period rolling 12 months going forward, an increase in the market interest rate generates an increased interest expense of SEK 88 million, all else unchanged. And now please turn to page buybacks. During the second quarter, we continued to repurchase shares approximately 1.6 million shares in total. Our holdings of treasury shares now amounts to 13.4 million equivalent to 4% of the total number of registered shares. The shares have been repurchased at an average price of SEK 124.95 per share and we will retain these treasury shares until further notice. And now I leave it over to you, again, Stefan.

Thank you, Asa. Of course, the financing issues and the cost of finance has been a lot of discussion during the quarter and the last month and probably will continue to be present also for the rest of the year. But as you can see, we have a very strong position and good discussions going on. If we go to Slide 14, please. In the portfolio, we have today a little bit more than 100 properties and a value that has grown to almost SEK 90 billion. Since Q4 last year, we have made a clearer breakdown in the segment, which I will also come back to when I talk about the occupancy rate, the vacancies and the potential. In investment properties, the investment property portfolio constitutes 60 properties of the total of about 100. So it's -- and it's also 80% of the value, which here, we refer to the properties in ongoing and active management. Development properties or properties that are facing a planned conversion or extension and where the cash flow is significantly affected by vacation of more temporary lettings. This includes 18 of our properties. Examples our existing properties in Flemingsberg; the vacant properties in Arenastaden called Kairo and Farao, for example; and the properties at 23 and 27 on Kungsholmen. Finally, we have land and project properties here. Besides new construction projects, we also include larger conversion projects, such as, for example, Mertenstran in Arenastaden and Påsen in Hammarby Sjöstad. Finally, as also mentioned, the increase in value during the first 6 months amounted to a little bit more than SEK 3 billion, SEK 3.2 billion. Next slide, please. As you know, our stability lies also in the long-term agreements with large and very stable customers, the Swedish -- a lot of them are the Swedish largest and more stable companies. Among those 10 largest, all apart from one, continues also to run for at least 5 more years. So on the whole, we have very low rental losses, very low as we say, you see and hope very low risk for rental losses. The hotels will have tough times during the -- almost 2 years of pandemic and now recovered with operations and are now performing well. Next slide, Slide 16, please. After long number of years, we -- rent increases in the stock market. The development has gone into -- a little bit more stable. We haven't seen any downturn, but it's stable rents on a very good levels. During the last months, we even can see some upticks in some of the new lease agreements that have been announced in Sweden -- in Stockholm -- city of Stockholm, there have been very, very good levels for good also big volume. So we can hear that the Cushman leases are -- some of the leases are on record levels, but average rents in the Stockholm various markets mainly remained stable, but at good levels. We also consider, if you see the longer term, the development from -- for rent, for example, from 2010 in the CBD, we have today about 8,000, we did well at that time, a little bit above 4.5%. The only area that has been more poor development is Sjöstad. As you know, we are not working with Sjöstad in our portfolio today. Also the vacancies on you see on Slide 17 are stabilized. However, it looks different in different markets. And even here, you can see that we -- if we look at Sjöstad separately, for example, Sjöstad has much higher vacancy. But in the city, the CBD and also in Solna, we have stable levels. Please go to Slide 18. We have had a high level of activity during the second quarter and the for first 6 months of the year, with a lot of viewings negotiations and conclusion of contracts. The net lettings in the second quarter came in at SEK 36 million. And in total, we have SEK 44 million for the first 6 months. And our target for this year of more than -- for SEK 80 million feels within reach. In the graph on the right, you can see that net lettings during the past 10 years with the peak year was 2014, '07 and '21, that were also where we had a large contract with, for example, SCB and so. But last year was the third best year in the earnings history with net lettings for example, Alfa Laval and Convendum. So please go to Slide 19. Leases of just over SEK 80 million have been renegotiated with an average increase in the rental value of about 10%. In addition, there is a volume of almost SEK 170 million, which refers to agreements extending on existing terms. Indexation and the increased property taxes has limited effects on the renegotiation. But here, we have to remember that we started the year index uptick of 2.8%, which, of course, as we said, limited effect of the renegotiation, but it's positive because it was on the whole portfolio. Please, Slide 20. Occupancy rate and potential risk in the vacancy is a question we often get to present times. Here, we now want to be extra clear with how things look. The occupancy rate in the chart on the left shows the development in the management portfolio. In other words, those portfolios at each time are classified as investment properties. Of course, we make reclassifications in line with the properties being vacated for projects or when project properties are completed. In the management portfolio, the occupation rate today is 89%. We have known occupations and relocation, it will increase to 90% in the coming quarters. Larger spaces in the investment portfolio include a couple of especially in Solna Business Park. The vacancies in Luma and Hägern are trotting out in the inner city. They're mentioned here are already rented out, but the contracts have still -- have still not started to run. In Hägern, for example, the premises are being completed for Convendum's occupation during Q2 2023. So we -- it's important to say that especially we had vacancy in the Solna Business Park as we also have discussed and mentioned before. The properties in the development portfolio is almost 230,000 square meters of which about 140,000 square meter rental, we count at a rent of SEK 200 million. Here, we have aim to optimize the cash flow in the existing properties pending the change -- depending to change in the projects. The product portfolio will have and it's potentially in line with the completions and lettings, here beside the new production -- here besides the new production projects. This include vacant properties in Nöten in Solna Strandand Påsen in Hamma, [indiscernible] which I mentioned earlier. Please go to Slide 21. And here, we have a graph that we normally show you that you can see the development of contracted rental income for the next quarters, including known occupations, rail locations and renegotiations, but excluding lettings targets and indexing. Next slide, please. Now I would tell you a little bit about the transaction market and what had been done in the market during the last months. We started Slide 23. There have been some very big transaction has been done in the market in Q2. And here, you see a list of them. And I especially like to mention the Blästern 15 the first one in Hagastaden. More than 20,000 square meters, and it was at a price above the acquired Atrium Ljungberg at a very good yield, low yield level. So it has been good for the market. Next slide. I will -- we acquired also a property in the end of Q1, and it's in our portfolio from the beginning of Q2. It's Kabelverket in Älvsjö, which you see here in the middle of the picture. I think it's, as we said before, a good feed for our portfolio. And the property is fully let. It's generates a good cash flow. We have a yield of a little bit more than 4.5%. We acquired it for, I think, it was SEK 37,000 per square meter and also potential for further building rights. So I think this is really happy that we could add this property on our portfolio. In Flemingsberg, the next page, Page 25. As you know, we have during also acquired some more land from Skanska. And this also -- it was an important -- another important piece for us to control the development of almost the whole Flemingsbergsdalen as we see here, but I will come back to that. Next slide, please. How does it look on the product side? Now of course, another question that there's been a lot of discussions about is the building costs and the cost for building and also how to find and get the delivery of some materials. So how can we look at this for the future? And how -- a lot of the value for future value, we will be creative from -- in our product portfolio. So next slide. We have completed during the quarter completed 2 projects and 3 new ones are now in the product table. We now have a total project area of about -- a little bit more than 150,000 square meters. And this also includes, as I said before Nöten in Solna Strandand Påsen in Hammarby Sjöstad. These 2 projects are even more at the planning and design stage, but we have chosen to include them anyway. Next slide. The total investments during the first half on the portfolio is a little bit more than SEK 1 billion. We have -- as I said before, we were aiming for almost 2.4 for the whole year 2022. And in the investments of SEK 1 billion, almost SEK 700 million was in projects and development projects. And the change in value was also related to the major projects and in particular to the recently completed Poolen project in Arenastaden where we also welcomed TietoEVRY during the quarter. So that's a part -- an important part of the value creation, has been in that project in this year. Next slide, please. The one -- the 2 projects that has been completed is Poolen, as I said, and it's also Bocken at Kungsgatan where we -- Convendum are moving in and open up the whole co-working area in August. So in Poolen, maybe I should also say that we have got some new tenants and signed some new contracts that is now almost 94% occupied from the beginning of 2023. So it's very positive, and we see good demand for the small part -- or the smaller spaces we have left. Next page, please. We have launched, as you know, in the beginning of 2019, we got negative net letting from that tax authorities said that they will move in some in 2022 from the 50,000 square meter property in Nöten in Solna Strand. We have now started the project to rebuild it for the future. It will be adaptive for several tenants, multi-tenant house. We are currently -- do not have an agreement signed, but we are very good in initial dialogues with dental tenants. So far, very good response on the feedback on what we have been presented. We believe strongly in the occasion where we have potential -- long-term potential and they are very good engineering qualities of the properties. So I hope we can come back with some good news about this property in the future. Next page, please. In Hammarby Sjöstad and Påsen as said before, it's an older property. It's at an industrial character, and we acquired it in 2020, and we now will be converting it, and we will extend it into more modern office space with -- but continue to keep the character. And it has a little bit of same spirit as the neighbor Trikåfabriken. We also own and we rebuilt it some years ago. So we -- and Hammarby Sjöstad that we'll see a very good demand and interest for modern offices. So this I think we will invest a little bit more than SEK 300 million. It will be finished in Q4 2024, but I think this can be also good value creation project. In Flemingsberg, on the next slide, we continue to, of course, to develop the area we have, as you know, started to construct the building for Operan/Dramaten. We will, in August also started to construct the Alfa Laval, who will move in 2025; Operan/Dramaten will move in 2024. We are continuing with the planning process and a lot of things are not happening in Flemingsberg. And so -- and we will come back, of course, more with in the future, but there's a lot going on. Next slide. We were talking about the building costs. The turbulence in the world, the high inflation has also made it difficult to know exactly what will it cost today. We have seen that material steel prices, the wood prices, the concrete have been very volatile from some time it has been up 50%, 60%, 70%, 80%. It has almost been very difficult to say exactly what it will cost. In average, where we have now have no -- or we have had very little effect in our ongoing projects. Do we have -- we also had import, most of the material a while ago. So the ongoing projects are progressing and according to plan. But of course, it has been more difficult to find the prices for the new projects. But it has so far, I think we have good discussions. It's better than we -- worst case we saw we can maybe say today that some of the prices also coming down again, for example, steel prices, oil price has been coming down. And as you know, material price is about 1/3 of many projects. So -- but we expect maybe if you should say today, it's up about 10% from start of 2021. So -- but we will -- we haven't -- will not prevent us now from starting adding new products in commercial. We are still continuously working with Haga Norra also but we have to think outside the box. We have to have extra focus on the cost. We have to maybe also choose some other material that we would have done before. So it's a lot of work, but it's still -- it's manageable, but as we said, we're seeing it coming down a little bit again. So -- but we -- of course, it's a lot of focus and a lot questions about it. But it's okay but higher prices, of course. Next slide, please. As you know, we have a lot of focus on the sustainability work. It's very important, and it's part of a daily work. Asa, can you please tell us a little bit about what we do now.

I will. Please turn to next page. For us, it's important to think sustainably in everything we do. And as you see on the slide, we have made good progress even if there is a lot left to do. What is new on this slide is that we are back at 100% green financing and that the proportion of green leases measured by floor space has increased to 88%. Next slide, please. We have a lot to focus on to reach our goals for climate-neutral property management and the reduction by 50% of our carbon emissions in projects by 2030. We are not doing this by ourselves, but this requires many different forms of collaboration. Here are some examples of what we are doing or recently have done. The sustainability building in Haga Norra is a very good example. It is built with 70% recycled materials from Bilia's old facility. It has attracted some attention and we have also learned a lot for the future. Recycling materials will be one of the major benefits in relation to the reduction of CO2. And by that, we say thank you, and we open up for questions. Thank you.

[Operator Instructions] And our first question comes from John Wong, Kempen.

Just one question on the net debt to EBITDA. So it has been rising well over the quarter and even over the 2 quarters. And -- now it's, I think, landing at 15x, which is well above your target of less than 13x. How do you see this develop over the coming quarters?

I see it will probably -- most likely be stable over the coming quarters. We have increased the loan volume, partly because of the repurchase of shares that we have been doing. So that's, in general, the explanation to why this specific metric has increased and the target for the net debt to EBITDA, it's just an internal target. So it's not linked to any financing agreements. So it's more of an internal target.

Okay. For sure what caused the financing targets are more based on sorry, the lending agreements are based on the LTV and ICR ratios.

Yes. The covenants relate to equity ratio and ICR. And then on a property level, LTV, but not on a corporate level.

Okay. That's clear. But still then coming back to the debt ratio. How do you plan to reduce this towards more your internal target of 13x?

There is no plan to reduce it at the moment.

It's not any -- we know also that projects we have. And of course, it will invest first and the incomes will come later. Repurchase buyback of shares can affect it negative, and that's what we think is positive anyway. So it's not -- no big plan for doing that in the short term.

Okay. That's clear. Perhaps one question on your reversion on the lettings you're doing. You're still capturing 11%. I think at the beginning of this year, you mentioned that this would trend back towards 5%. How do you see this going forward?

The 11% relates to quite a small volume. It's only part of the volume, which is up for renegotiation that is actually renegotiated, and I think you could see from the documentation that the 11% refers to a volume of SEK 82 million. And on the other hand, there's another volume of SEK 169 million, which is only prolonged at existing terms. So actually, if you combine these to the positive revision, it's a little bit less than 5%. Taking into account the full volume that is being prolonged either through just prolonging it on existing terms or by renegotiations.

It's important to say that we have the indexation of plus 2.8% in the beginning of the year. And also, we're looking forward to uptick in the index for next -- 1st of January next year, but then -- so...

[Operator Instructions] Next question comes from Jonathan Kownator, Goldman Sachs.

Just wanted to come back on the bank environment comment already made in the call, but I mean you see that over the years, the number of terms in the bond markets for the industry in general, I mean, from your conversations with the bank could say are the banks going to support you and the industry in general? Do they have appetite to replace the internal market in the state do you think that this is going to be a selective game? And that at some point, you can say enough is enough in terms of refinancing, it seems that you're having a dialogue with them over more than just the upcoming maturities.

Are you talking about the dialogue with the banks? It was a very bad line. So it was difficult to hear your question.

Sorry, yes, apologies, dialogue with the banks about not just the very upcoming maturities, but about really replacing the bond markets, which are not very open today.

We are not really discussing with the banks in what way they will refinance everything that is outstanding on the bond market among the Swedish real estate industry. We are discussing with the bank Fabege's possibilities to refinance bonds in the banks. And I think as Stefan mentioned also during the call earlier that we are very happy today that we have kept the relationships with all the large Nordic banks and that we are an important customer to all the banks. And we are actually today the banks contact us to let us know that they will be there for us in case we need it. So we are running discussions with banks to increase the loan volume in the banks in order to be prepared to replace bond maturities during the autumn and maybe also during next year. It all depends on how pricing on the bond market will develop going forward.

Of course. And one follow-up question. In terms of the terms that the banks are offering you. I mean you mentioned that we see some credit spread. Are they happy to use existing covenants that you have in your program? Do they want any changes to that? Or are they just happy to be lending on the same term?

Yes. They are happy to lend out money on the same terms as we are used to have. So no changes in covenants, no changes in LTV levels. Of course, there's always a discussion of a margin in every renegotiation and in every new financing. But in comparison with what we see on the bond market now, it's very, very good terms in the banks.

Similar to...

What we have seen before. Yes.

Very clear. Good to hear. And if you think about -- to follow up the previous question, I mean, why would we try to deleverage slightly or maybe stop doing your share buyback program given the current conditions and the focus of investors generally peaking on leverage.

I didn't really understood it. It's a poor line. Sorry about that.

The question is why continue on the share buyback? And why not is there some deleveraging?

So we think it's more value creation to buy back -- continue to buy back as well -- shares. Hopefully, it's more value creation.

Yes. Hopefully, I mean your stock price has been going down, and part of that is also because there's a focus on leverage, generally speaking, [indiscernible].

But on the other hand, our leverage is today relative. We think it's at a good level. We have 36% loan-to-value. We have good, as we said, a solid position. And so we think the buyback program can continue to add values. But the future will tell. We don't see any leverage as a challenge.

And our next question comes from Alexander [indiscernible].

I saw that your surplus ratio has gone down 1% from 74% to 73%. What's the driver behind this? Is it higher energy costs or maybe a marginally lower occupancy level? Do you think that the 75% full year target is achievable given this?

No, we said in the beginning of this year or when we released the Q4 report that the suppress ratio will come down this year due to higher property tax and higher energy costs. So the target for this year is 73%. And of course, the long-term target will be to go back towards 5%, which will be helped by increasing the occupancy rate as an example.

And if I may ask 1 more question. Could you provide a breakdown of the drivers behind the 3% growth in the like-for-like net operating from income indexation at 2.8%. So it is the primary driver?

I think I said that during the presentation, there are -- it's -- the growth in identical portfolio is around 4%. And in absolute numbers, that corresponds to the rental income coming from 2 projects, Nationalarenan 3 and Poolen 1, both in Arenastaden that have started to add income in comparison to last year. And then we have indexation plus and we also have renegotiations and new contracts signed. On the positive side, met by negative impact from the tax authorities moving out by the end of March. So it's a mix of different things.

[Operator Instructions] There are no further questions. At this time, I hand over to the speakers for any closing remarks.

Okay. Thank you very much for joining us this morning. And as you know, you're always welcome to call any of us also or Peter Kangert or myself, and have a nice day, a nice weekend and a nice summer. Thanks. See you soon.