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

Welcome to the Fabege Q3 report presentation. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Our presentation for the third quarter 2024. The first slide you have seen before, it's about the focus we have on Stockholm, like we only have 100 properties from Stureplan to Flemingsberg. We have a little bit more than 1,001 million square meters and a total value of SEK 78 billion. And as you now have seen in the report, the valuation this quarter was positive. During the quarter, we had the pleasure of officially welcoming -- a positive happenings. We have developments. We have welcomed Royal Swedish Opera, the Royal Dramatic Theatre to Flemingsberg. We're going to open a restaurant in Regulatorn in Flemingsberg. We have started the tenants to move in to Ackordet in Haga Norra, the garage in Haga Norra has finished, and so on and so on. The list can be quite long. But with that said, there are also some challenges. Next slide, please. You see some of the figures for the third quarter. We have almost the same level of rental incomes, even if we -- after the divestments we made during 2023. For the first 9 months, we have increasing rental incomes, and in the like-for-like, you can say the incomes increased about 5% for the first 9 months. The surplus ratio is very good for the third quarter. It depends, of course, on the weather for the first 9 months. It's at the same level as before. And as I said, after 7 quarters of negative value changes, we had a positive small one, but a positive one in the third quarter. And we will tell you more about the figures later here. I cannot say for the third quarter, we saw as a whole, lower interest rates. We had a stronger krona, Swedish krona, and that, of course, has been positive for the market. And we will -- but we will start also to tell you -- we go into a little bit deeper into the figures. So please.

Thank you, Stefan. Yes, rental income amounted to almost SEK 2.6 billion, which is slightly higher than the previous year, a decrease due to property divestments. As you mentioned, Stefan, last autumn was offset by indexation increases and taking of possession in previous project properties. And since this summer, the Swedish Royal Opera and Theatre have also moved into Flemingsberg. In a like-for-like, portfolio income increased by 5%. Operating costs are in line with the previous year after a strong third quarter with a surplus ratio of 77% in total. The surplus ratio for the entire period ended up at 75%, the same as the previous year. Birger Bostad's gross profit loss amounted to minus SEK 17 million with 2 projects completed during the period where the final recognition occurred. Excluding administration costs, the profit came in at plus SEK 3 million. And total central administration amounted to minus SEK 80 million. With falling market interest rates, interest expenses decreased in the third quarter. Cumulatively, net interest expense was in line with the previous year. The average interest rate was 3.16% at the end of the quarter. Lower market interest rates are gradually having an impact in our active -- and our active work with interest rate derivatives have delivered good results. In addition, loans are now being refinanced at better and better margins. The result in associated companies amounted to minus SEK 57 million, of which minus SEK 71 million related to the capital contribution to Arenabolaget, and SEK 11 million related to a profit from the JV project in Haga Norra. And we, therefore, reported profit from property management of just over SEK 1 billion, approximately SEK 100 million lower than the previous year. Impairment of development properties relate to a change of value of residential building rights in Birger Bostad, and realized changes in value amounted to almost minus SEK 1.2 billion after we reported a positive change in value of SEK 224 million in the third quarter. I will come back to this very soon. We also reported a small realized profit of SEK 4 million, which related to a time lag from the transaction which ended last autumn. As a result of falling market interest rates, the surplus value in the derivative portfolio continued to decrease in the third quarter. In total, the surplus value decreased by SEK 444 million during the 9 months period. And finally, the tax expense, which related to deferred tax only was positive and amounted to SEK 30 million. The next slide, please. Yield requirements leveled off and were essentially unchanged during the quarter and even slightly lower for a few of the most central properties. However, the average yield requirement remained at 4.54%, same as last quarter. In the quarter, we have once again independently valued a large proportion of the portfolio, approximately 45%. The rest of the properties have as usually been valued internally. Since the values peaked in Q3 2024, we have written down the property value by approximately 15% in total. In Q2, we reported a small lagging impairment of minus SEK 80 million. And now in Q3, there has been a turnaround, and we have revalued the properties upwards by SEK 224 million. The total change in value for the entire period amounted to minus SEK 1.2 billion, and we are now reporting a property value of SEK 78.2 billion. In addition, there is a property value of the development property portfolio in Birger Bostad of SEK 0.7 billion. Next slide, please. Reported equity was unchanged from the previous quarter and amounted to SEK 121 per share, and the long-term EPRA NRV amounted to SEK 147 per share. The equity/asset ratio amounted to 46%, and the loan-to-value ratio was 43%. Both of these key performing indicators confirm our continued strong balance sheet. The interest coverage ratio strengthened slightly and amounted to 2.5, which is in line with year-end. Please turn to slide financing. The access to and pricing of financing has continued to improve. This applies both -- to both the capital market and banks even though the biggest improvement has taken place in the capital market with significantly lower margins. The commercial paper market is continuing to function well. We have lowered the margin in a couple of steps and are now issuing 3 months commercial papers at 40 basis points compared with 70 basis points at year-end. And as stated, the bond market is functioning well. We have been active through several issues both before the summer and in the autumn. Since year-end, the outstanding bond volume has increased by SEK 2 billion. The margins have continued to improve. Examples are a 2-year bond at a margin of 82 basis points and a 3-year bond at margins just under 100 basis points. Undrawn revolving credit facilities and unpaid term loans amounted at the end of the quarter to SEK 8.5 billion, of which about SEK 2.4 billion was used for repayment of other loans after the end of the quarter. Overall, we continue to have a good preparedness for upcoming financing needs and refinancings. We have facilities in place to cover the upcoming loan maturities. In total, we have bond maturities of SEK 2.7 billion in 2025, of which SEK 2.1 billion matures during the second half of the year. We intend to refinance bond maturities with new bonds, whereas the bank facilities are continually refinanced through extensions. Next slide, please. Of the loan portfolio, 54% is fixed, mainly based on long-term maturities and mostly through straightforward interest rate swaps, supplemented by some fixed rate bonds. During the autumn, we have replaced maturities with several new long straightforward interest rate swaps with maturities of 5 to 7 years. Approximately 45% of the current loan portfolio is matched by fixed rate terms beyond 2025. In addition, there are callable interest rate derivatives of SEK 7 billion in total that now looks set to continue running. Straightforward interest rate derivatives, run with a fixed interest rate between 0.11% and 2.18%. And the callable interest rate derivatives run with an interest rate between 1.82% and 2.5%. The average fixed term amounts to 1.8 year and adjusted for the estimated maturity of the callable swaps, the fixed rate term increases to 3.1 years. Our interest rate strategy provides predictability. Fixed rate terms provide protection against rising market interest rates. Now however, we believe more in falling market interest rates. The levels that we have been able to fix at now, both for straightforward interest rate swaps and callable swaps are levels that we think work for us even in the long term. For a moving 12-month period ahead, an increase in the market interest rate of 1 percentage point would generate a higher interest expense of approximately SEK 148 million, all else unchanged. And a corresponding reduction of the market interest rate of 1 percentage will generate a lower interest expense of SEK 91 million. The average interest rate was 3.16% at the end of the quarter, and it has subsequently fallen slightly after that. And now back to you, Stefan.

Thank you, Asa. So please go to the next slide. A year ago, a lot of the questions were about the financial market. And as also said, that's -- we feel that is very stable now. And there are also a lot of questions about the transaction market. During the whole period, the transactions that has been made in our market has been made on very good levels, and are supporting also the valuation we had and -- that we had. The last quarter, we have seen some transactions within the -- within our markets. For example, in -- both in Solna in the city and in the CBD. And last week, they were really one of the largest ones announced. It was at Wallenstam acquired from AMF, the pension fund, the fifth tower, [ Hotorgss ] tower, it was really -- in mid of the CBD in Stockholm. Acquired it for SEK 2.8 billion. It is 16,000 square meters of space area, and it also -- but they had also to renovate it in the future. So I think the transaction is quite interesting in many ways. But as we said, the transaction we made in the Stockholm market has supported more than well our valuations. If we look at the office market in Stockholm, next slide, please. Here, you can see that the total market of office space hasn't been growing that much over the last almost 15 years. It has been changed since many of you have been visiting Stockholm and also seen [ Brunkerbasedall ], for example, that we had office space that have been today on the hotels. We have some other -- transmission has been done. But the new building has been mainly Hotorgss, for example, so a new modern office space. And if you look at the next slide, please. We have some more figures on how the market has been developing. You can see that we know that the rent has been improving or up to very good levels and are at record levels. We had a number of employees that during the same period have been growing, but the last quarters, we have seen it's stabilizing or even at some coming down a little bit. The vacancy rates have been stable but have been coming up the last year. But as we said, very few new space are coming to the market. So what this means is that the square meters per employee has been decreasing. And I think that also the trend we will continue to see, that we are using the office more efficient. We have seen during the period, some companies continue to downsize, mainly also because of the economy. If you look at the next slide, please. We had our largest tenants. We know that both ICA and Telia has been making more -- working with operations to make it more efficient. And last week, last Friday, actually, we got a message that Convendum are filing for Chapter 11. What does this mean for us? We can say we feel very confident that we have the best areas that areas for -- the [ working ] that they had. It's Drottninggatan and Kungsgatan, we have discussion with them going on right now. We will make -- inform you more then we have something to tell you. But Convendum have a very good operation, but has been taken a little bit too much risk, in my view, at the same time. So that's also why they're now having those discussions about for Chapter 11. But both Kungsgatan and Drottninggatan space are doing well as with what we know about. But this we have to follow-up, of course, later on. Next slide, net letting. That's a disappointing figure. I said that last quarter, and I will say it this quarter too. Unfortunately, we had a minus even this quarter of about SEK 11 million. We have, for the first 9 months, SEK 85 million. The last quarter is very -- 2 small new contracts signed. We have also a net effect of the work we are doing now with Wenner-Gren center, which we have to vacate for example, among other things, replacement of the facade. In this quarter, this is an effect of, I think, it's about SEK 7 million negative. But -- so -- but we have too few new contracts signed. Everything takes time. We have a lot of -- as we said before, a lot of good discussions. We had a lot of good showing and interest in the market, but everything takes time. And unfortunately, also part of the game right now. But we like -- we probably get some questions about that later on, too. Talk about the renegotiations on the next slide. As we said before, many of the contracts we just extend on unchanged terms. We are set away within the levels we have the contracts on. The ones we're negotiating this so far this year, SEK 60 million. We have about 2% negative -- decrease of contract with 2%. But many of the contracts also has been very -- already been renegotiated. So we think most of the contracts are at market levels. Some, of course, are still that we have a potential in, but also some of them, as we said before, are overrented. The occupancy rates are negatively impacted by the negative net letting we have had for the -- even some years ago, and we haven't seen a positive effect still yet on the projects coming up, but we still have the goal of coming up to 95%, but it will take longer time now than I hoped. Today, we write a little bit lower than 90%. And this potential, as we said before, about SEK 150 million in income, SEK 150 million to SEK 200 million in income, we are really focusing on how to take that -- to take that challenge. This next slide, you have seen this before. We try to show you how the rental development will be on the existing lease portfolio for the next four quarters. And this year taking into account both the -- what we know about the people moving out of -- the company is moving out and also people moving in. So this is the best for us so far. I can say Q4 2025, we had an effect of, I think, Alfa Laval for example at the beginning of -- especially at the beginning of 2026, but we will show you that next quarter. Investments coming down. We will still -- we have some of the large ones going on. But especially for 2025, we're seeing these investments in the portfolio and for new products coming down. On the next slide, you see the projects Ackordet, Pasen, Regulatorn, Separatorn and Noten, are the ones we are ongoing right now. Some of them, Ackordet -- the company or tenants moving in right now. Pasen, the same. We have given -- handed over the key to some of the first tenants, but in next -- but it is going to be in the beginning of next year. And Separatorn is only a little bit more than 6 months till Alfa Laval will within and the year to SAAB will move into Noten. So it's moving on. I think also maybe it could be interesting on this to see that when those projects are finalized, we will have another SEK 6 million generated cash flow from. That's on today, not cash flow positive, although we are still under projects. Next slide, please, Birger Bostad. We have the residential product in Haga Norra. It's ongoing. It's in total 288 apartments, of which 78 rental apartments. We have started during the quarter to sell them. Here, we have said that we have 9 of the first 23 sold. We think it's -- today, I can say this, we can add a couple of more sold, at least we have a very good interest for the project. So I think I'm very positive to how this will continue to develop. Also a little bit about the sustainability and what we're doing there, and there was feedback we're getting from both the market and some...

Yes. All right. What's happening in sustainability. I think the biggest news in the quarter was our excellent ranking in this year's GRESB sustainability benchmark. In our property management operations, we have taken several steps upwards and now achieved a rating of 95 out of 100 in total. And in our project development, we were unchanged with the rating of 98 out of 100. This is a fantastic result, which we are very proud of. We can turn to next slide, please. In this slide, you can see some of our main targets. An important aspect is the use of energy. Fabege has the sector's lowest energy consumption with our 2023 outcome of 71-kilowatt hours per square meter. We have a goal of reducing this further to 70-kilowatt hours per square meter. So far this year, however, the energy consumption has increased by approximately 4%, which mainly related to the climate, more cold winter and a warm summer that required both more heating and more cooling. Another important aspect is the CO2 target. Projects have the greatest impact. And we now set targets and measure CO2 in all our projects, including new constructions as well as redevelopments and tenant adaptations. Last year, we introduced a circularity target, which means that at least 20% of the material used in projects must be reused material. And today, we are at 15%. Next slide, please. This is where our recycling strategy and the recycle hub come in. Here, you can see the recycle hub, which is a storage area for material from Fabege's properties that can be reused in another project. Through systematics inventoring, warehousing and an internal marketplace for management of material that can be reused, we are leading the way. We have made a lot of progress in our strategic work with reuse and this will be prerequisite for reaching the long-term CO2 targets. And next slide, please. Finally, I want to maybe again mention our social engagement. We want to be involved and make a difference for Stockholm in general and more specifically in our areas. It is about creating secure districts and pleasant inviting areas between the buildings in our districts. It's also about being a good corporate citizen. We will not take over the responsibility but we should and can contribute through our engagement and presence. Some good examples that we are that we create some jobs for young people in our areas. We helped fund Läxhjälpen homework club in Flemingsberg. And we are engaged in TalangAkademin, which gives people outside the labor market the opportunity of work experience and, ultimately, jobs. This is a commitment that usually with quite small amount of funds contributes to society while creating pride within the Fabege organization. And by that, back to you, Stefan.

So thank you. If we just summarize with also priority we have had and had during the 2024. To increase of rates, as I said before, it's a disappointing -- disappointment that we don't have a positive net debt. I don't think it will be positive for this year. But as I said before that we have a goal of SEK 80 million, plus SEK 80 million. I hope that we said already last quarter, we will not be -- they expect us to come up to that. I hope it will be positive. I don't think it will be positive for this year. But as I said, we have a lot of good discussions. We have a lot of -- we have very good properties in prime locations, but it's a tough market. It's a challenging market with a lot of uncertainty. So if you it a year ago was a lot about the financing market and the transaction market, it's much more now about the rental market. And so -- but we have a good organization and we have really focused on this -- everything is about getting net leasing up to good levels. That also means that we are working with many future projects. As you know, we have a lot of exciting future opportunities, future options with exciting projects both in Arenastaden, in Solna Business Park, even at [ Stureplan ] and longer term in Flemingsberg. So we continue to work to see what we can do. And we also have some discussions about finding some tenants for those future projects. So hopefully, long term, I'm optimistic, by short term, it has been challenging times. We have all -- every day, we work with the cost control. I think we have a good culture of how to work with the costs, also as I've been talking about the refinancing and the situation there, and also how we try to be in the forefront of the ESG in order -- everything we do in the whole operation. So I think we have a strong fundamental base. We have strong results for the daily work, in the daily operation. We have -- financial situation is positive now, but the rental markets give us some challenging times right now. I think it will continue during 2024 with all the uncertainty in the world we have and for the economy. But I'm looking forward to 2025 with a bit more of optimistic view. So with that, please, questions.

[Operator Instructions] The next question comes from Nadir Rahman from UBS.

My first question relates to vacancy. And you mentioned the SAAB and the Alfa Laval tenant and the positive effects on the vacancy. So what quantum change could we expect in the next 18 months from these tenants moving into the properties? And the second question is a follow-up on that is that there have been talks, I guess, in the press of Ericsson potentially exploring options beyond their current site for a larger plot. Do you think they're a potential candidate for one of your properties in Solna?

It was a little bit unclear, but was your first question regarding how the vacancy rate will change.

Correct. Yes, from SAAB and Alfa Laval into the properties in the next 18 months. So what quantum change can we expect from that?

Well, in the near future, we think that the occupancy rate will be actually a little bit reduced because we have Telia leaving some of the areas which were announced in the net lettings last quarter. But then we also have projects being finalized and moved into. So for example, when SAAB moves in a year from now, that will have a positive impact on the occupancy rate. But I think it's fair to believe that in the near future, the occupancy rate will be reduced somewhat. And then hopefully, we will be able to increase it again going forward. And I think the second question from you was regarding Ericsson and the potential of them moving from Kista?

Correct. Yes.

We have all read the newspapers. And we will be more than happy to present some alternatives for them. We have a good alternative both in Arenastaden and in Solna Business Park. So yes, that's what we -- so hopefully, we can present a -- able to present something, if that can move, yes.

And if I may ask a follow-up on a slightly different topic. So you mentioned in your presentation that the decline in space needed by businesses, but you say it's driven by the business cycle. Or do you think this is a cyclical effect at this point in time? Or do you think that this is a more fundamental shift in preference that may last for a longer time?

Sorry, it's very difficult to hear, but, Asa, did you...

No, it seems like someone is just talking behind you.

Please, can you repeat the question?

Sorry.

Much better, thanks.

Sorry about that, sorry. So I should repeat that. So in your report, you mentioned a decline in space needed by businesses. That's been driven by the business cycle. Do you find that this is a cyclical effect on this occasion? Or do you think this is a more fundamental shift in the markets this time and in preferences that will be longer term?

No, I think what we see right now -- for example, taking a longer time for getting a signing of a contract, so that's more the business cycle right now in the economy and the uncertainty in the world. Longer term, it's more about how to use your offices. Offices that it's important for companies we know, but we have a trend to less square meters per employee, and that continues. We have smaller desks, we have less maybe area per square -- but that continues. But that also means that the location or the transportation opportunity -- and so it's much more important. So that's also why you're willing to pay a higher rent per square meter for the offices. So I think the trend is that offices -- we have a lot of discussions of how important the office is and also -- but right now, it's the economy and the downturn in the economy that are the main reason why it's the uncertainty of signing a new contract or so.

The next question comes from Ventsi Iliev from Kempen.

First one would be on operations, of course, you mentioned that market can...

Sorry, 1 second, there are some -- we heard when you asked the first question if we could hear you, but now it's something wrong with the line. So please, can you...

Okay. You mentioned a challenging office market. And then one trend specifically is that occupiers are taking longer. But that's not all because rents are still under pressure and occupancy is moving up. So what, in your view, needs to change for operations to turn positive?

I think we -- the main reason for taking this time for signing new contracts for making decisions is quite -- it's uncertainty in the economy and the uncertainty in the world on both political and the war scene and so we have. So the uncertainty, I think it's a little bit the main reason. Then on top of that, we have this how they look to -- how should the offices look like? How much space do we need? Maybe not less space, but how should we use it, how much is desks, how much meeting rooms, how much the whole list of questions. But the main reason right now, in my view, is the business cycle.

Okay. And then on valuations, of course, you reported stable valuations. And then in Sweden, you typically talk about the yield requirement, which you reported 4.5%, but let's say, on the rest of the continent, corporates typically look at the NOI yield, which if I calculate for you, I get to 3.8%. And first, do you have any comments on that? And second, why should your properties be appraised at such a yield when typically for the NOI yields, we see 4% or above?

Good question. I think we have to -- maybe we could be discussing that for a long time, long term. And I think also since we are so transparent with all the figures, everyone can make the calculations you would like to do. The values in Sweden have the same system that has been used for many years. And also that you know that our main values are Cushman Wakefield and [ Usyk ] and they're also using the same system as they're using in different markets. So I think it's -- no better answer than that actually, too. But transparency, I think it's very important that you can make -- so you can always see at which levels its value. But the transactions in the market is also under -- I think that's also important to say that the transactions we see in the market, in our part of the different markets is more than -- it's either at the same levels or even better levels than we -- per square meter or yield or whatever that we have in the books. So it's -- I think that's also important to say.