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

Good morning, and welcome to the presentation of our report for the first half of 2024. As usual, I am with our CFO and Vice CEO, Asa Bergstrom, here with me today. And after our presentation, of course, there'll be opportunity to ask questions. Firstly, the next slide, please. In one way, it's difficult to summarize the first half of 2024, mainly because of the geopolitical situation we're also in, but what has been positive is that we've seen one of our markets developing in a positive way. For example, the transaction market in Sweden is more liquid today than it was a while ago. The financial market, we will tell you more about that, it's absolutely much more healthy. And -- but on the rental market, where there are some more challenging -- mainly because of the strike economy in Europe and Sweden. Now we will tell you more about this later. What is positive for the quarter and for the first 6 months is that we're increasing our rental income. We have essentially unchanged gross profit. We have, some during Q2, a very small write-downs, SEK 80 million. And so we see, as I said, a stabilizing transaction market and value in the markets. And -- but we're talking more about it later on, too. What is negative, of course, is that, that our net lettings were weak. I will tell you a little bit more about -- we'll come back to those, the net letting and the view of the market view of -- our view for the market a bit later. But I will stop and will hand over to Asa to go through our numbers in more detail. So please go ahead, Asa.

Thank you, Stefan. Slide 3, please. The first half of 2024 showed stable numbers with increased rental income and improved net operating income, despite the sale of two properties at the end of 2023. Rental income amounted to SEK 1.7 billion, which is slightly higher than the previous year. A decrease due to property divestment in the Old Town was offset by index increases and the taking of possession in previous project properties, of which Convendum's occupation in Oxen Mindre was the largest one. On a like-for-like basis, income increased by 8%. Increased operating expenses were mainly due to increased heating expenses and higher administrative expenses. The cost ratio came in at 73%. The gross profit amounted to minus SEK 5 million as one project was completed and where final recognition occurred during the first quarter, and the second quarter was only charged with administrative expenses. Central administration costs came in at SEK 60 million. Interest expenses increased somewhat compared to the previous year, which was mainly due to a slightly higher average interest rate. The average interest rate was 3.17% at the end of June. After having increase during Q1, it fell back slightly during Q2. Our active work with interest rate derivatives have delivered good results. In addition, loans are currently refinanced at improved margins. The result in associated companies amounted to minus SEK 38 million, of which SEK 49 million -- minus SEK 49 million related to a capital contribution to Arenabolaget and SEK 9 million related to a profit from the JV project in Haga Norra. We therefore reported profit from property management of SEK 659 million compared to SEK 703 million in the previous year. Unrealized changes in value amounted to almost minus SEK 1.5 billion. I will come back to this very soon. We also recognized a small realized profit of SEK 4 million, which was a time lag from the transaction with Nrep. The surplus value in the derivatives portfolio, which increased during Q1, decreased again in Q2. Overall, the surplus cost value increased by SEK 29 million during the first 6 months, and the tax expense, which related to deferred tax only was positive and amounted to plus SEK 137 million. Please turn to Slide 4. The yield requirements leveled up and were essentially unchanged during the quarter. The transactions in our markets during the period confirmed the yield requirements and property values in our portfolio. In the quarter, we have again independently valued a large proportion of the portfolio just over 50% this time. The rest of the properties have been valued internally. The average yield requirement in our portfolio increased due to a certain time line by 3 basis points during the quarter to 4.54%. Since the value peak in Q3 2022, we have now written down the property value by approximately 15% in total. And the total change in value amounted to minus SEK 1.5 billion, and we are now reporting a property value of SEK 77.6 billion. Slide 5, please. The simulation here shows that we can withstand write-downs of a further almost 15% based on today's market valuation without impacting our internal target, and the margin is even higher in relation to the covenants in our bank agreements. Next slide, please. Reported equity decreased during the quarter and amounted to SEK 121 per share, and the long-term net asset value, the EPRA NRV, amounted to SEK 146 per share. The equity/asset ratio amounted to 46%, and the loan-to-value ratio was 43%. Both of these key performance indicators confirm our continued strong balance sheet. And the interest coverage ratio amounted to 2.4, only a small decrease of 0.1 since year-end. Now please turn to Page 7. The access to and pricing of financing has continued to improve during the spring. This applies to both the capital market and banks, even though the biggest improvement has taken place in the capital market, where margins are currently competitive with or better than banks. The commercial paper market is continuing to function well. We have reduced the margin in a couple of steps and are now issuing 3 months commercial paper at 50 basis points compared to 70 basis points at the year-end. As stated, the bond market is also functioning well. Overall, during the first 6 months, we have issued SEK 3.7 billion, of which SEK 1.2 billion to be settled early in July. The margins have continued to improve. In February, we issued a 3-year bond at a margin of 148 basis points. And most recently, the corresponding margin was 110 basis points, and we also issued a smaller 5-year bond at a margin of 135 basis points. Undrawn revolving credit facilities totaled SEK 6 billion. In addition, SEK 1.2 billion will be received in proceeds from the latest bond issue, which will be used for repayment of other loans. Overall, we have good preparedness for upcoming financing needs and refinancing. We have facilities in place to cover the upcoming bond maturities during 2024 and 2025. We intend to refinance our bond maturities with new bonds. Our bank facilities are continually refinanced through extensions. And now please turn to Slide 8. Of the loan portfolio, 55% is fixed, mainly based on long-term maturities and mostly through straightforward interest rate swaps, supplemented by some fixed rate bonds. Approximately 40% of the current loan portfolio is matched by fixed rate terms beyond 2025. We have continued to work actively with callable interest rate swaps with the aim of reducing our interest expense. The average fixed term amounts to 1.8 years. Adjusted for the estimated maturity of the callable swaps, the fixed rate term increases to 2.8 years. Fixed term rates provide us with protection against pricing 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 moving 12-month period ahead, an increase in the market interest rate will generate a higher interest expense of approximately SEK 145 million per year, all else unchanged. And now back to Stefan.

A question, Asa. That works both ways, doesn't it?

It does both -- it does work both ways, yes, correct.

Asa, and also as -- it has been nice to see how the margins for the last, I think, 6 months have developed, as we've said. And I think that's important to also see that is the liquidity has been really good in the natural [indiscernible] market. So next slide is, as we mentioned, we're listing some transactions that had been done in our core market. And as you see, the list is long. It could have been even longer because quite a lot it, the transactions are done. We saw yesterday also really a big one when -- at the top of this list, we see Mentron 1, 18,000 square meters sold by AMF, the pension fund, and bought by Folksam actually to the KPA Pension as part of the Folksam Group, and it was a SEK 3 billion deal. So it's -- and all those transactions has been at very good levels, very well in line with our valuation. So it -- some even lower. There are some of those that has been done in lower yield levels on the below 4%, and they're mainly -- you can look it on as a proper assets close to [indiscernible] and then some of them brought by family offices. So it's more liquid, more activity into the transaction market. And we also see that in other segments like residential, there are more activity over Sweden and, as you know, in the logistics that we've been for quite a while. So it's nice to see how it's developing. Next slide, please. Those growth are from the last quarter, since it's only a couple of weeks and [ suddenly ] and we report it for Q2 -- Q1. And the last update we got from CityMark. But I think it's the same trend. The rental development -- the rents in the city of Stockholm in the CBD are still stable. We saw some contract sign of the [indiscernible] record levels close to NK from 5,000 square meters in offices, rented by a lawyer -- a law firm. But we also see a [ must ] struggling in some sub areas. We can see continuing vacancy rates growing in some of the suburbs. We especially see that, as we know. We also see that the number of employees are flattening out of the growth for more 20 years. But on the other hand, very little new office space is under construction. So I would say it's still a good market. It's take longer -- it still takes a long time to get a decision, especially from the private companies and a little bit more decision-making in the public sector. But as a general, we have a lot of discussions going on, but it will take some time. On the other hand, we also see that the trend of fewer square meters has continued. But that's what mainly because we become better at using space and determining how different workplaces are used. The interest in the different services is continuing to increase. And we are, therefore, also taking further steps to better cutting edge when it comes to acting as adviser to our existing and potential tenants and -- or to help them to create places for human meetings, conversations, concentration and doing business on that. And I'd also like to stress that the situation in the Stockholm office market is different. It's not entirely gloomy as we can hear from -- sometimes from markets, London, Paris and New York and other U.S. cities. As you know, all markets are there in the current status, which make all of us different, and I'm still a great believer in Stockholm's long-term development for the office market. But it will be even more focused on, as we said before, the location, the public transportation and some other things. And areas are mainly good location if we include transportation. So long term, I think we will have a lot of reason to be positive. So this leads to, as you have seen before, and long term, I think it's important to say, show it be -- show how stable and strong long-term customers we have. As you know, we also signed a renegotiated Telia contract, and that will mean that in a while that we've said, that will be down to 2.5% instead of 3.6%. On the other hand, we will also say -- seen some of the other new tenants coming up here, for example, Alfa Laval and SEB within the next 12 months. So we're talking about here, maybe all I can say, you have seen the press release we sent out some weeks ago. We did an agreement with them that they are reducing the space with about 12,000 square meters. The initial effect in this quarter is a net letting negative of SEK 23 million. At the same time, clearly, we also have to pay some exit compensation, which will be allocated over the term of the lease agreement. And with this agreement, clearly, as leasing bonus, that will be -- they're only leasing 25,000 square meters. We also prolonged the contract longer, 9 months. So it's at end of 2031. And so -- but in total, we see also that we were able to treat this space -- this area and -- for better rents than we've got so far. And we are expecting it will have an investment, expected to about SEK 60 million, SEK 70 million. And we will -- but we will -- when we have signed special new contracts, will add another positive net letting of SEK 20 million. So in total, we're expecting it to be more than EUR 40 million in new contracts. So long term, it will be net positive. This quarter, it was negative on the figures. Here, we see the net letting, minus EUR 74 million for the first 6 months, minus EUR 36 million for the second quarter. And of course, it is a disappointing figure. We have, as I said before, a lot of discussions, negotiations that we think will end up in signing a contract, I hope at least. We didn't get them to sign it before the summer. So with that said, I'm looking forward to the rest of the next 6 months here for the year. We have a goal, as you know, for reaching a positive netting of about SEK 80 million annually. But after the start of this year, I don't really dare to believe that we can manage this for 2024. I hope, but I'm not really believe it right now that we will be lucky with some of the larger product discussions we have. But it's more likely that this year will end on an economic process that we made, plus figure when we're ending it up, so a good second half, but they're not the whole year. We want to -- we don't really dare to think it would be positive. But we only expect it to be. And as I said, we have several good discussions in progress. But -- so that's really coming back after the summer. Next slide, please. Yes, as you see, we do know about the big renegotiations now that we know normally in most of the cases that we just put on the contracts on unchanged terms, and that has continued during the beginning of this year. We had some small renegotiations with negative outcome. In the second quarter, I think it was minus 0.8 or something, so relatively unchanged. But it's not -- a bit stable rental levels in most of the areas. Some of this still has some upside for renegotiating. But in some, of course, there can be some small ones that rents go for -- in some areas. So our occupancy rate of about 90% is still not where we like it to be. As you know, we are working for getting up to 94%, 95%. Again, it will take some time, which we had before. But that's where we will be in the -- we would like to be in the couple -- in the next 3 to 5 years -- in 5 years -- 3 to 5 years. And this -- where we see the vacancies is mainly in Solna Business Park. And that we hope, we feel we have good investments on our business partner. And they have -- we have been able to visit next time, we will see a lot of new activity, new office tenants, but also a lot of retailers that are now opening up for the [ buy cycle ]. And we also have Bosch, Siemens there. We have [indiscernible] there, And so it's happening a lot there, but it will -- so we see positive -- we have a very positive feeling about that. As we know, we would like to aim to be as transparent as possible, which is may always include this graph in our reports and presentation. It shows the development of contracted rental income, including what we know about their occupations, relocations, renegotiation, but excluding letting targets and indexation. It decreased in the fourth quarter of 2023, as you know, because of what we -- what we sold and also the banking profits we -- is a bit lower from -- and before and it's mainly because of the -- if we would have added another 2 quarters here, for example, it should be end of '25 of 3, beginning of '26, I would say that the goal for us is this should be started with a 9. It will be what we know now, SEB, Alfa Laval, other discussions we have, the Haga Norra, Ackordet, some indexation. So it will definitely, I hope, be more than 900-something in end of '25, the beginning of 2026. So far this year, we have invested about SEK 1.3 billion. It will be a bit similar next 6 months. And after that, it will be less. We haven't started adding new commercial products. And the big one during this update -- it will take -- I think what we see today, it will also be -- it takes some time before for the next 3 months. We will started having more signed contracts, though. Yes, the projects are progressing in line with the plans. We have completed the Regulatorn 4, the Royal Opera and Royal Dramatic Theater. As you can see, we're missing that job this time. And the other ones, that's also why the occupancy rates has been a little bit lower because that was 100% occupied, of course. We have the other ones working with filling up for signing new contracts with Folksam. We know that Regulatorn 3 is on its way now in this next door to the Operan/Dramaten, Separatorn 1, Alfa Laval is actually a little bit higher than that, but we don't have the contract signed with [indiscernible]. Alfa Laval has options to take more areas. So that's why we don't work with that as often. So we -- I think this will be -- here, you can also see that it's a rental value for only those products with almost SEK 400 million, SEK 366 million as it looks today. So the negative is the building costs. And as we said before, the business costs are still too high. I see -- I think we can see a little bit easing, a little bit easing to new reviews, and then they give it some -- in some of the new condo when we're out there right now on [indiscernible] a big, big changes, but still a little bit too expensive. I think you'll be able to be -- have a positive view on new products. But with that said, Birger Bostad, next slide, please. Start residential products, and we started in Haga Norra, I think that looks good, actually, because of the demand of apartments in good locations. And I think Haga Norra is a very good location. And we will start to sell the two [indiscernible] apartments after summer, and we still -- we have a very good list of interest for that. So hopefully, we can have some positive news in the second half of this year. And that looks much, much more attractive right now as it is. But in the whole, we will continue also to work with future project. But it's a small asset now, it's a small part of our business. But right now, it's a positive part. Next slide, please, Asa?

Yes. Back to sustainability, and this quarter, I thought I would go back to show some of our sustainability key performance indicators. You can see here in the table the energy performance target, energy performance target for this year is 70-kilowatt hours per square meter, which represents an improvement of 1 kilowatt hour compared to 2023. However, there has been a cold and winter start of the year, an extra day in February and very warm April and May, which means that the energy consumption has actually increased slightly during the first half year of 2024. The proportion of environmentally certified properties remain at an unchanged level. On the other hand, we have improved the rating of two properties that were recertified during the quarter. The proportion of green leases is also unchanged. Likewise, the proportion of green financing, which fell to 99% last year. In terms of total green assets, we have plenty of scope left for green financing. However, one individual mortgage property does not result to updated energy consumption requirements. This is a good incentive through the attractive discount on financing, however, and our property management operations are working on bringing down the energy consumption, not only in this specific property, but over the whole property portfolio. Last but not least, I would also like to say that we are very proud that our commitment to social sustainability is making a difference, and I thought that I would provide two good examples of this. One example is The homework help foundation, Läxhjälpen in Swedish, to which we provide funding for Annerstaskolan in Flemingsberg where we supported students with requirements to enter upper secondary school. Now we have received feedback that 96% of these pupils passed the entry requirements and that our homework help group had higher merit rating than the rest of the school in average. Also our engagement in TalangAkademin is also delivering results. So far this year, about 40 people have obtained internships, including a couple in their 60s that got permanent jobs and a completely new life situation. A small contribution from Fabege that makes a big difference for individuals. And by that, back to you, Stefan.

Thank you. So to summarize before I open up for questions, it's a stable report. It's a stable half -- first 6 months, I think. The negative, of course, the net letting. We are focused now on -- continuing focus on the cost control. We have continued, of course, a huge focus on rental work. And the financial market has been, I would say -- I think I have to say normal and stabilizing and is back to normal. Transaction market is more kind of normal because it has been maybe too many transactions for some years before. So -- but it's liquidity, good assets [indiscernible] as we said by us. And there are money on the -- sitting on the sidelines still, I think. And we will see that with the pension funds. So transaction markets are okay. The financial market, okay. The rental market, Stockholm is attractive, is more focused on the even -- continue to be focused on the good locations, public transportation, as we said. And we are focused on our signing new contracts and reducing the vacancy rates, hopefully. So with that, questions, please.

[Operator Instructions] The next question comes from John Vuong from Van Lanschot Kempen.

On your discussions with occupiers, is there any specific submarkets where you see better demand than others? Could you perhaps also zoom in on the letting progress for the Haga Norra and Hammarby Sjöstad developments?

Thanks, John, for the questions. You can say the CBD is maybe the most -- the strongest market. And then I think all our markets are, as you know, they have good public transportation. So I think we have good discussions in all of them. In Hammarby, maybe we have a little bit more of, what I call it, creative companies, and they have also more -- a little bit more struggling when maybe with the economy, and it's also challenging times. So maybe you see a little bit more turnover there on -- but there is still also a good interest for the future. And we have Haga Norra and Hammarby in Påsen and Ackordet, I think, is we're mainly thinking of. We don't -- haven't had any new signed contracts this quarter, but we have good discussions going on in both of them. So hopefully, within the next -- after summer, we probably have some good news there. Hopefully, if everything is -- we're going to wait at least good discussions, but no signed contracts.

Okay. Clear. And when you're talking about more -- potentially more turnover in those creative industries, are you talking about downscaling for these occupiers? Or how should I...

As you know, this kind of industry is more sensitive to the economy. But we have -- very often, it's smaller companies, so it's not any big issue. We had in Hammarby as you know, the last 12 months some companies that have been striving for refinancing. For example, Cake, the motorbike company that scaled down or even went bankrupt, and the Goodbye Kansas. But that is also a potential for -- we have good locations out in these areas. So -- but it's normal when you have a little bit more negative economic outlook that those companies are striving before. So no big deal.

Okay. That's fair. And then just on the last slide, so Slide 22, you mentioned as one of the priorities for 2024 is to enable future projects. Could you maybe talk about that?

We continue the planning processes and the planning discussions in selling discussions in Arenastaden, where we also, as you know, we normally say we're only halfway. But we need some time and some sign before we realize that. And also in Flemingsberg, of course, we are continuing the zoning process with the city of Huddinge and taking it to the next steps. So that's what we mean with -- and also you can also add another dimension is that we work with the products that we can get better -- hopefully cut the investment -- or the project investments a little bit, so making it possible to build. It doesn't mean too expensive. Of course, where the building cost has been coming up, but also maybe we have to look at the products, what are we building and how we're building it to be able to reduce the investment.

The next question comes from Alexander Totomanov from Green Street.

Two questions for me. So this morning, you reported a negative rent reversion of 2.3% on SEK 69 million of renegotiated leases. Are the negative renegotiations limited to specific submarkets or the submarkets in Stockholm?

Thanks, Alexander, for the question. It's -- no, it's some different -- it's -- first of all, it's a very limited number of -- amounts for the first 6 months. And as we said before, we -- the most of the -- when we negotiate, we just prolong the contracts on existing terms since we think it's in good levels. There are some that has been reduced and -- but it's very, very few. And now you can -- no specific sector, no specific area, and it's some -- no. So the short answer is no.

Very clear. And one question probably for Asa. Fabege has expanded the portfolio of callable swaps to SEK 7 billion from SEK 6 billion previously. Could you give us an idea of the breakdown of the portfolio? Are volumes approximately equally spread out, say, SEK 2 billion in 1.8% to 2%; 2 billion, 2.2% and maybe SEK 3 billion in 2.2% and 2.5% Or is it skewed in one way or another?

You mean for the SEK 7 billion? Yes, the SEK 7 billion, they are all 10-year swaps, so the risk we take is to be -- to maintain these swaps for a period of 10 years. And they are at levels between 1.8% and 2.5%. So we pay somewhere between 1.8% and 2.5%, and we receive STIBOR, which today is roughly 3.7%. And the bank can cancel them after a period of between 3 and 6 months. And then every 3 months, the bank has an option to cancel as well.

I don't really have here because all -- how much is on 1.8% and how much is on 2.5%. But think, make it more close to 2%, a little bit about 2% to 2.2%, but less due to higher loans.