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

Welcome to the Fabege conference call. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Stefan Dahlbo; and CFO, Asa Bergstrom. Please go ahead.

Welcome to Fabege's presentation for the Q3 2023. As usual, we will finish up with a question and answer session. And also, as usual, it's possible to submit questions by e-mail to [ ir@fabege.se ] and you can do the question-and-answer session. On the first slide, we see a short summary of Fabege today. As you know, we're still focused on the Stockholm area. And especially in times like this, I think that is really strength, have a local focus with also local property management, and we do all that internally with our own staff. In summary for the first 9 months is that we increased the rental income and also the operating surplus. But on the other hand, we all know that also the interest costs increased. Despite that, we were able to just have a small -- slightly lower management profit. And I think that also shows the strength in the daily work that is done by our organization. We will come back to the negative value changes in the property portfolio. We have -- so we will tell you more about later. The net letting during the 3Q, the negative -- we were a little bit more than SEK 20 million. That will mean that for the first 3 months, we have a negative net letting -- in the first 9 months, we have a negative net letting of minus SEK 3 million. We will tell you more about that later on also. But I'd like already now just also say that in August, we announced that the letter we have signed for Noten 4, that was with Saab, the work on that to translating the letter of intent into a lease agreement is well underway. And we now estimate where we will announce or it will be completed, and we will also at that time announce more details and that we'll be doing in the fourth quarter of this year. And they will move in during the second half of 2025, but more about it later. We had an increased occupancy rates. And -- but with that said, I'd also like to change to Asa who will report our results and financing in more detail. So please go ahead, Asa.

Thank you, Stefan. Increased rental income and improved net operating income almost covered but not completely the increase in interest expenses. However, during both the second and the third quarters individually, we reported a higher profit from property management compared to the previous year. The increased yield requirements in the property portfolio have continued to put pressure on property values. Rental income amounted to SEK 2.5 billion, corresponding to an increase of 12% in an identical portfolio. The increase in income was mainly due to the index-linked increase that entered into effect at year-end, higher parking revenue and positive net occupations during the period, of which Convendum's move into Bocken 39 was the largest. This was partly offset by a negative effect after the Swedish tax [indiscernible] since relocation from Noten 4 on last of March 2022. Other income, SEK 11 million refers to Fabege's share of the electricity support that was paid out during the quarter. Increased operating expenses were mainly due to acquired and completed properties, which entered into operation and higher costs for snow clearance. The surplus ratio came in at 75%. The Bostad's gross profit amounted to SEK 23 million as 6 projects were completed and where final recognition occurred during this period. And central administration costs came in at minus SEK 81 million. Interest expenses increased compared to the previous year, which was due to a slightly increased loan volume and higher average interest rate. The average interest rate increased from 2.39% at year-end to 3.16% at the turn of the quarter, gradually impacted by higher market interest rates. The result in associated companies amounted to SEK 31 million, of which minus SEK 54 million related to the period's capital contribution to Arenabolaget, plus SEK 75 million related to income recognition in the Haga Norra residential project and SEK 10 million related to contributions from the Bostad's co-owned projects. And we, therefore, reported profit from company management of SEK 1.1 billion, which is almost the same figure as in the previous year. Improved net operating income has, as stated, almost offset the increased interest expenses. Unrealized changes in value amounted to minus SEK 5.4 billion, and I will come back to this very soon. And surplus value in the derivatives portfolio decreased by SEK 115 million and last, tax expense, which only related to deferred tax was positive and amounted to plus SEK 829 million. The increased market interest rates have continued to have an impact on yield requirements and valuations. There were still only a few transactions carried out in our market. During the quarter, we have independently valued approximately 55% of our portfolio. The rest of the properties have been valued internally. The average yield requirement in our portfolio increased by a further 8 basis points in the quarter to 4.25%. The inflation assumptions are the same as the previous quarter, in other words, 6%. The average yield requirement is now back at a level equivalent to what we reported at midyear 2018. Total unrealized changes in value amounted to minus SEK 5.4 billion. And the changes in value in Q3 were almost exclusively due to increased yield requirements. Simulation shows that we can withstand further write-downs of just over 15% based on today's market valuation without reaching our internal targets. And the margin is even higher in relation to the covenants in our bank agreement. Reported equity decreased during the quarter and amounted to SEK 131 per share, and the EPRA NRV amounted to SEK 157 per share. The loan-to-value ratio increased to 42%, and the equity asset ratio decreased to 47%. However, both key ratios continue to demonstrate a very strong balance sheet. The interest coverage ratio, as expected, has decreased in line with increased interest expenses and amounted to 2.5. Financing continues to remain in focus in the current market climate. The commercial paper market is functioning well and the banks continue to show that they have more capital to lend to the sector and to Fabege. The bond market is still volatile, but has become stronger during the autumn. During the year, we have repaid bond maturities of SEK 2 billion in total. In February, we carried out a smaller issue of SEK 250 million. After that, the market was quiet until September when we issued SEK 700 million in a 2-year bond at a margin of 200 basis points. The indications from the banks show that the spreads are slightly lower today. And now in October, we issued another SEK 300 million in a 3-year bond at a margin of [ 212 ] basis points. During the year, we have secured SEK 2.9 billion in new bank facilities, also paid out. In connection with the sale of Orgeln and Gladjen, we redeemed a temporary bank loan, which will be taken out again, however. Refinancings up to and including Q3 2024 are ready with binding term sheets. In October, we received the payment for the sale of Orgeln and Gladjen. In addition, new bank facilities of SEK 2.6 billion have been agreed upon. Adjusted for this, unutilized facilities amount to just over SEK 8 billion, including the backup facility for outstanding commercial paper. So we feel secure in having the capacity to meet upcoming loan maturities during next year. 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 a distribution of our non stock long tender funding sources. The short-term funding via commercial paper, the green bar in the chart, is fully covered by backup facilities. And as stated, we have facilities in place to cover the bond maturities in 2024 if required. However, we would still prefer to continue to be active in the bond market. 60% of the loan portfolio is fixed, mainly based on long-term maturities and mostly through straightforward interest rate swaps supplemented by some fixed rate bonds. Just over 40% of the current loan portfolio is matched by fixed rate terms beyond 2025. During the spring and autumn, we have entered into callable interest rate swaps with the aim of reducing our interest expense. In the longer term, we aim to replace maturities with new long-term fixed rate periods. The high proportion of fixed rate terms today give us protection against rising market interest rates. In the short term, the higher market interest rates will thus have a more limited effect on our interest expenses. For a rolling 12-month period ahead, an increase in the market interest rate will generate an increased interest expense of approximately SEK 133 million, all else unchanged. And then back to Stefan.

So thank you, Asa. As we said, we think this is a strong result from the daily work or the daily operation. But we are in a very challenging market. It's not a surprise for any of us, I think. It's only been little bit more than 1.5 years since we left the pandemic or most of the pandemic situation but also that was the same time Russia invaded Ukraine. It started -- it was the same time when the rapid and sharp rise started in inflation. [indiscernible] started to increase the interest rates very quickly. And now we also have the situation in the Middle East. So of course, it's challenging times. And in Sweden it's mainly been seen in the transaction market. The transaction market right now is -- we see very few transactions in home market. There's still a very good demand for logistics and light industrials. But in many other markets and segments it's relatively low volumes right now. We can say that in the CBD or in the most central part of Stockholm, there will be a good demand if they would pay anything for sale. During the summer, we announced that we have signed an agreement with Nrep to sell the properties of Orgeln 7 in Sundbyberg and Gladjen 12 Stadshagen. Nrep has been acquiring both properties for about SEK 3.4 billion, which also is consistent with the valuation we had. The properties were taken over on October 12. So now they are in the portfolio of Nrep. When talking about the rental or the rent development in Stockholm, I think still it's very strong and in both demand and level of the rents in the CBD of Stockholm. We have seen some contracts signed in both our own and in some colleagues or competitors on very good levels. And also it's somewhat, I think, historical record levels. In the city, still little bit more -- still strong, but not that strong as it was in the beginning or before the summer. We see it takes a little bit more longer, even it continue to take long time for decisions, and we see a little bit less than on after summer, we have to say. In Solna, our rental has still got good demand. But in Solna Business Park, we have a lot of activities. But in South part of Stockholm, we see more strategy in times. And we think if we look at the JLLs property clock, we think we are -- there's definitely a declining rental growth. We have no growth any longer for the most Stockholm area. But we all -- on the other hand, we have a lot of help with the 11% indexation last year. So it's not that -- it's not a surprise because we think that, that indexation helped us to come up to very good levels. And -- but we don't see any big downturn in the rent neither. So it's just okay, but less -- we'll say less activity after the summer. And that's also what we see as seen in the rent portfolio. The vacancies are very, very low in the CBD, growing a little bit in the other inner cities. In some of the suburbs, it's on relative stable levels. That's the same in Solna, Sundbyberg. But in other parts like Kista, it's continued to increase. [ What really ] working a lot with -- and we, as you know, it's flexible solutions. We think that the demand for more flexibility is part of the modern -- to be modern and also to what we can call tenants are looking for. We also launched a couple of new concepts during the 2023. For example, the move-in offices called NOW, whereas for nearly 4, 5 years where now they work away from work for our existing tenants that they can have a lot -- give the opportunity for the employees to sit in other parts of Stockholm if they need to doing some hours [indiscernible] per day. We also have some co-working areas in some of our locations, and we will start a dog care sort of product called VOV within the next months, everything to be -- all of this is to be more flexible, also get better margins at the end and also better able to attract the tenants for longer time. The net letting for the September, as Asa said, was negative. And for the first 9 months, it had netted minus SEK 3 million. We have -- in the CBD, we're still in positive, in some -- and part of this is that we had one tenant that was -- we have had discussion with to help to decrease the area because they have financial problems, [ social or operational ] challenges. So we have that -- a large part of the Q3 is actually from one of them on that situation. But as we said, also [indiscernible] the rest of the year, we are positive since we also have the discussion or the contract we are [indiscernible]. Next slide, please. This you have seen before, we think it's important to have it in the presentation every time. We have a very -- [ we have a few tenants ]. We have very large tenants representing [ 42% -- 24% ] of the rental value, but a very stable long-term contracts with stable Swedish companies, mainly Swedish companies. In the renegotiations, well, since we got 11% from 1 January, we have said that we expected renegotiations to be at about current agreement -- continued current contracts, and that's also unchanged in terms of [ elastics ] and that's also what we see for most of the contracts. It's also important to see that we have continued to develop occupancy rate in a positive way. We are right now at 91% [indiscernible] as you probably remember, 95%, but it will take some years for us -- a couple of years to [indiscernible]. [indiscernible] to show you the forecast for the rental development in the existing lease portfolio and [indiscernible] today for the next 4 quarters. And as you can see here, because since we have sold the 2 properties to Nrep, we do have the increase of about SEK 810 million for the next 4 quarters. But then we also have to stress that this is before any indexation. So this is without indexation and from what we know today. We continue -- on the next few slides, we'll see the project portfolio. As we said, it's -- as you know, we have this year said that we will invest about SEK 2.9 billion. And for the first 9 months, it was a little bit less, SEK 2.2 million. So we're following the plan. So when we see the project portfolio, it's, well, for you, well-known names. We're continuing to -- we will continue to work with the existing projects. We are not right now starting any big new ones. We will hope we will do so during the winter, especially in Haga Norra to continue to develop that area. And -- but we have -- still have problems more challenging with the building costs. They have been coming down a little bit, but when the raw material came down, the cost for labor and the cost of some of the other products came up instead, especially -- and also because of this Swedish krone. We -- in this -- we also see Noten 4 that will be updated when we can announce more about the details or the agreement [ we will resolve ]. So this is -- will be updated for -- in the next quarter. So Noten 4 is more about -- it is the same figures as we said before. Talk a little bit about the residential. We are continuing to -- with the project we have running since before, and there we're running as expected. We have completed 6 projects during the period. We are continuing to sell apartments or both in Birger Bostad and in [indiscernible] JV with Brabo and Haga Norra. In Haga Norra, I can say -- we can say that we have only 5 apartments left out of 418. So it's continuing to be a very successful project. And that's also where we look forward to hopefully start the next project, neighbor to the first one. Asa, please tell us a little bit about the sustainable work and what we're doing right now.

Yes. Some sustainability news for the year. And I think we have a lot to be proud of. As we mentioned earlier, we have a goal of reaching an energy consumption of 70 kilowatt hours per square meter by 2025. In '22, we were at 73. And now we have come one step closer with an average annual consumption of 72 kilowatt hours per square meter. Our solar cell installations currently produce 1.98 kilowatt hours per square meter in the management portfolio, and we are currently planning for a number of future installations. And some more news during the quarter, our office project in Haga Norra and Ackordet [indiscernible] or Ackordet 1 reaches BREEAM-SE outstanding, our highest level of certification in our portfolio. The project is also nominated for the BREEAM Building of the Year and awarded the [ Project Cool ] award last year. A few words about our recycling strategy as well. Our goal is that 20% of materials in projects must be recycled. And an important part of that is our recycling hub, which you can see in the photos on the right-hand side in this slide. The recycling hub enables smart and cost-effective recycling, which has attracted a lot of interest not only in the real estate sector, but also from, for example, politicians and other stakeholders. We are on a journey and Fabege is clearly a company at the forefront here. Last but not least, we have the GRESB result for the year. In this year's benchmark, we land on Index 93 in the management portfolio and 98 in the project portfolio, a top position among listed companies in Northern Europe and something that we are really proud of. And then finally, back to Stefan, who will say a few words about our social initiatives relating to sustainability.

And we will continue to do the work close to the society in the areas where we are active and especially in Solna and Flemingsberg. And it's a lot about activities, both in -- for finding more works, doing activities in the better time, in the schools and everything to work with the areas to go to the more safe also. And yes, [indiscernible] around, you can say. At the end, of course, it is -- we are sure that this would increase cost and we would be able to have higher rents in the areas, and it will also be lower yields that we have. So it's a win-win situation. And that's what we think it's all [indiscernible]. So before we go over to the questions, I'll summarize it, we have the challenging times, but we are standing stable. We -- there are a lot of activities going on. It's a -- and also we would hope to be able to tell you more about in the next months. So with that, please, questions.

[Operator Instructions]

It's Jonathan Kownator from Goldman Sachs. Three questions, if I may. So on disposal process, do you have more disposals that you want to work on currently? And do you see other buyers and Nrep that are out there that could be interested? Second question, please. How are your discussions going on with ratings agencies at this stage? Are they expecting to change rating at all? Any color that you can provide would be helpful there. And just on the development program, you pointed out to higher cost. If we look at the yield on cost on the program right now, it's about 4%. Would you start new development? Or should we consider that for now the development is on pause?

[Audio Gap] at least during the winter. And if I take the first question also, we have, as a part of our DNA and part of our business that from time to time, we sell some of the projects we think we can't develop or we can't add some more value on. And of course, there can be some of the other ones we have that we can do in the future. Now we sold to Nrep the Gladjen and Orgeln. In 2020, we sold [indiscernible] building here and also [ other buildings ] in Stockholm. And I think we will do that from time to time. The demand in the market in the inner city, the CBD, it's very good. In general, you can say there is quite a lot of money in the market, but it's Nrep has been -- have a lot of new funds. There are some other fund managers that also are looking for -- or have got new money into the funds. We have also the pension managers or the pension companies that have quite a lot of liquidity to continue to buy real estate. We know that they are looking for potential [indiscernible], but they are very picky right now. They like to be in the best locations and the best location is -- there is -- in the CBD, for example, it's quite -- I think if anything is for sale, it will be a lot of potential buyers for that. On the other hand, I think it's difficult to talk general about the market because it's very big or about area for area or at least city for city. It's very different market in the whole of Sweden. But Stockholm is good and Stockholm I think that we can see future demand, at least in the areas where we are. But also the second question?

Yes. The second question about contacts with the rating agency, Moody's. We are in contact with Moody's, but there is no information from Moody's on any rating activities so far. I think we got the negative outlook on the Baa2 rating approximately 1 year ago, November last year. So there will probably be some more activities from Moody's before year-end. But for us, there is no new information at this moment.

Okay. So just a follow-up on disposals just from strategic perspective. I mean, would you consider at all selling any CBD assets? Or are they strategic for you? And obviously, you may want to hang on to those. How do you think about that?

What kind of assets did you say? We didn't hear.

So CBD assets.

CBD assets.

[ Most of it is for, I think, longer ] -- we still see potential for adding value long term in the most of the CBD portfolio.

Sorry, you were far away from the mic at the beginning. You said you can or you cannot see long term potential?

We can see more long term potential.

Exactly. I thought that would be the answer. But sorry I didn't...

In most of it, it doesn't say that there can't be some smaller ones or so that, of course, we can discuss. But the most of it, we see very long term potential.

Okay. That's very clear. And just so -- sorry, the third question, you may have started first, but I couldn't get -- I couldn't hear the answer for some strange reason. So...