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

Welcome to Fabege Q3 2025 Report Presentation. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Good morning, and welcome to our presentation of the third quarter. As usual, it will be -- afterwards, there will be an opportunity to ask questions. To summarize the third quarter, I would say it was a stable quarter. We had increased rental income. We had increased net operating income, and we had increased profit from the property management and the net letting was positive with about SEK 9 million. So in a stable quarter. After the summer, we have seen some signs of improvements, inquiries are increasing and there have been more viewings. So it's more activity. That's small, but maybe clear signals that we slowly but surely hopefully, will be starting to be more active -- there will be more activity in the market. And especially, this is true in the Stockholm city. So Asa, please give us a review of our numbers.

Thanks, Stefan. Please turn to Page 4. Rental income for the period amounted to SEK 2.5 billion, just above the same period last year. On a like-for-like basis, income decreased by SEK 74 million, equivalent to minus 3.2%, which was mainly related to relocations due to the previous year's negative net lettings. The sale of the property Ynglingen meant a decrease of SEK 25 million. Meanwhile, income increased by SEK 103 million related to occupations in completed projects. Net operating income decreased to SEK 1.9 billion. Property costs include a nonrecurring item of SEK 7 million. Other deviations mainly relate to slightly higher repair and maintenance costs and property tax. The surplus ratio thus amounted to 74%. For the quarter alone, the surplus ratio was 78%. No sales were reported in Birger Bostad during the third quarter as no projects were completed. The sales were then related to the second quarter when the first phase in the housing project in Haga Norra with 23 apartments was completed. This means that the residential development in Birger Bostad reported sales of SEK 128 million and a gross profit of SEK 20 million. Central administration costs amounted to minus SEK 78 million. Net interest items came in at slightly lower level than the previous year. Higher debt was offset by lower average interest rates during the period. And the result in associated companies amounted to minus SEK 49 million, of which minus SEK 50 million related to the period's capital contribution to Arenabolaget. Share in profits of other associated companies amounted to smaller positive amounts. This meant a profit from property management of SEK 1.050 billion compared to SEK 1.012 billion in the previous year. Unrealized changes in value amounted to minus SEK 338 million in the quarter and minus SEK 988 million accumulated for the first 9 months. I will come back to this very soon. Impairment of the value of development properties of minus SEK 21 million remains from the previous quarter and related to the valuation of future project opportunities in Birger Bostad. Realized changes in value, minus SEK 37 million related to deductions for deferred tax in connection with the sale of the property Ynglingen, which was vacated in the first quarter. The valuation of derivatives portfolio follows the long-term interest rates, which rose during the quarter. This meant a positive effect during the quarter, but over the entire period, this plus value decreased by SEK 216 million. The tax expense, which related to deferred tax amounted to plus SEK 47 million, of which plus SEK 128 million related to a reversal of deferred tax in connection with the sale of Ynglingen. Next slide, please. During the quarter, we have independently valued approximately 40% of the property portfolio supplemented with internal valuations of other properties. The average yield requirement increased during the second -- during the third quarter by a further 0.04 percentage points to 4.6% compared to 4.54% at the year-end. The increase related mainly to Solna, while the yield requirements in the city are unchanged. In the first quarter, we reported negative changes in value of minus SEK 565 million. This mainly related to the fact that values expected longer vacancy periods and slightly lower rent levels, primarily in Solna, where we do have some vacancies and longer implementation periods for future projects opportunities in Flemingsberg. In the second quarter, the changes in value amounted to minus SEK 85 million, net of minor adjustments, both upward revaluations and write-downs. The change in value in the third quarter amounted to minus SEK 338 million, and as mentioned, were mainly related to higher yield requirements in Solna as a consequence of Vasakronan's acquisition in Arenastaden. Overall changes in value during the period, thus amounted to minus SEK 988 million. And the total property value thus amounted to SEK 78.5 billion. In addition, there is the property value of the development property portfolio in Birger Bostad of SEK 1 billion. Next slide, please. Reported equity amounted to SEK 120 per share, and the long-term EPRA NRV amounted to SEK 146 per share. The equity asset ratio and the loan-to-value ratio were unchanged at 45% and 43%, respectively. Both of these key performance indicators confirm our continued strong balance sheet. The interest coverage ratio amounted to 2.7 in the quarter and 2.5 for the entire period, which is in line with last year. Next slide, please. Access to and pricing of financing is still very good. This applies to both the capital market and banks. The capital market is now strong after the summer with high demand and lower margins. Several of the property companies have been active, and there is a broad-based demand from investors. In late August, we issued a bond of SEK 1.25 billion. The bond has a term of 3.5 years at a margin of 100 basis points. Remaining bond maturities during the autumn amount to SEK 0.5 billion. And in 2026, we have SEK 4.6 billion maturing, of which SEK 2.3 billion during the first half of the year. We intend to refinance our bond maturities with new bonds, whereas our bank facilities are continually refinanced through extensions. We have also started the process of refinancing the bank facilities that mature in 2026, which will mostly occur during the fourth quarter. Undrawn facilities amounted to SEK 6 billion, including the backup facility for outstanding commercial paper. In October, the seller's promissory note was repaid from NREP, which meant that we received just over SEK 680 million. Overall, we continue to have good preparedness for upcoming financing needs and refinancings. We have facilities in place to cover the upcoming loan maturities. Next slide, please. The average interest rate decreased to 2.83% at the end of the quarter. Maturity of derivatives at low levels and entering into new interest rate derivatives was offset by lower margins on refinancing as well as lower STIBOR rates following the Riksbank interest rate cut in September. During the quarter, we entered into additional SEK 250 million in a fixed 5-year swap and SEK 500 million in extendable interest rate swaps that run with fixed interest for 2 years with the right of the bank to extend for a further 3 years. Of the loan portfolio, 49% is fixed, mainly based on long-term maturities and mostly through straightforward interest rate swaps supplemented by some fixed rate bonds. In addition, there are callable and extendable interest rate derivatives totaling SEK 7.5 billion. Straightforward interest rate swaps have a fixed interest rate of between 0.11% and 2.18%. The callable interest rate swaps have an interest rate between 1.82% and 2.5% and the extendable swaps finally have a fixed interest rate between 1.66% and 1.72% for at least 2 years then. The average fixed rate term amounts to 1.5 years, adjusted for the estimated maturity of the callable swaps, the fixed rate term increases to 2.1 years. So next slide, please. News in the third quarter is that we received the result of a travel survey in Arenastaden. 6,500 people responded, and we can confirm that public transport has increased and that the climate impact from work-related travel thus has decreased. In addition, Separatorn 1, the Alfa Laval office in Flemingsberg obtained its final certification, BREEAM-SE, Excellent standard. And during the quarter, we completed an internal training in Fabege's code of conduct for all the employees. So all of the employees have now participated in the training and have also signed the code of conduct. This is something that is now a requirement in connection with new hiring. Otherwise, we have continued to work in line with our environmental and sustainability targets relating to, among other things, the property energy consumption and the reduction of CO2 in project development. Last but not least, I tend to say something about the CSRD, ESRS. It's now clear that the Omnibus proposal will be approved and that Fabege is not covered by the comprehensive sustainability reporting under the CSRD. We will retain the key performance indicators we have reported previously, but we will revise the structure of the sustainability report so that it's more aligned with the ESRS inspired structure. And so back to you, Stefan.

Thank you, Asa. About the transaction market, it has been a quite slow market during the last third quarter, which is not that unusual, as you know, over the -- from earlier years. But what we see is continued healthy market when you're talking about the good properties that find good buyers at good prices. And then the most important transaction during the last quarter for us was actually when Vasakronan choose to invest in Arenastaden and acquired Tygeln 2. It is also known as Solna United, 34,000 square meters of offices for a little bit more than SEK 2 billion. That price is probably -- we don't know exactly the figure, but we know that there was -- but we know that it's probably below 5% yield on -- running yield and a little bit more than 5% yield on exit yield. And that's also what you can -- we also talked about earlier the valuation in Arenastaden, we saw a little bit of uptick in the yields because of this transaction. But we're very happy that are getting Vasakronan as a neighbor in Arenastaden. And I think that's good for area also for the future. The other transaction on this slide you have seen before, but as you know, also that are in good locations and they are confirming our valuations we have in the books. Next slide, please. The Stockholm office market, we have shown this before, is increase -- continue to be stable and even increasing rents. Vacancy rates are continuing to increase in most areas, but we see it stabilizing over during the summer, during this time now. And of course, you know that the vacancies we see right now are from what the net letting we saw a year ago. So a little bit better market, a little bit probably some of the vacancies are flattening and hopefully and some of the -- also we see now in the reports coming from the advisers, a little bit more positive view for '26, '27 and onwards. Very important for the market has been the number of employees in the office-intensive industries, and we have seen it flattening out over the last years. But hopefully, we even can see that with a little bit better economy starting to pick up during the next years. But on the other hand, we see very limited new space -- office space and especially there are very few new projects for offices started during this year. So next slide, please. You can also see it in this slide that we expect the market to be relatively flat when we're talking about total office space in square meters for the next year or so. Next slide, please. Our challenge is and it's well known, the occupancy rate in the management portfolio. It's still -- it's about 87%. And we said it before, but it's too low. And that's what one of our focus is right now is to increase this occupancy rate and decrease the vacancies, of course. We have the highest vacancies in Solna Business Park. We have in the other areas, Hammarby, some smaller spaces. But in total, when you add them up, it's quite -- it's more than 15% of that area. In Arenastaden, we have a little bit, but we now start to see more activity. And those, I think it's important to remember that the vacancy rates we see now is known already a year ago so that we will -- that we -- when we saw the net letting at that time, that what we now see in the occupancy rate. Now talking about the net letting, so let's go to the next slide, please. We -- for the quarter, we had a positive net letting of SEK 9 million. In total for the -- so far this year, it's plus SEK 3 million. We had -- so I think it's good signs and also even if it's small numbers, it's more -- as we said, it's lighter after the summer, and we see more discussions and more viewings and so in September -- or during the third quarter. And after September, I would say that continues, and we have seen a good start in the fourth quarter. Renegotiations also better during this third quarter. We have continued to extend most of the contracts on unchanged terms. We have also already renegotiated some of the contracts that will mature during next year -- end of this year and next year. And we had some negotiations that have been on the positive side. So right now, we are a little bit -- still a little bit negative for the whole -- for the first 9 months, minus 0.1%, but it's a little bit better than it in the third quarter. So next slide, please. This one we normally show -- shows and to show you what we expect for the next 4 quarters. And we have an uptick in the incomes in the rentals -- rent incomes for the next quarters, and that's mainly because of thanks to Saab. And then we have a little bit slower development for 2026, and that's due to the negative net letting we had 2024 mainly. But hopefully, we can be see a little bit -- so we will see benefit in the future. For the next slide, please. I think it's that we have long-term agreements with stable customers is important. It is an important phase for us. And you can -- we also know that very often, sometimes we get the question that large tenants don't like to have long contracts any longer, but that changed, but it's very individual. And as you know, now Saab is a 20-year contract. Alfa Laval is more than 20-year contract. So there are many -- it's so individual and many of the large companies like to have or prefer to have long long-term contracts. And I think that's also very good for our -- especially the project portfolio. So next slide, please. We have, during the year, completed the projects. We know that Alfa Laval moved in -- before summer. And in both Haga Norra and in Hammarby, we have completed the projects. We have also the new contracts that we are working on new contracts in both Hammarby and Haga Norra, and I hope we will be able to announce some positive news there for them during the fourth quarter. In the rest of the ongoing projects on the next slide, please, we know that Saab started to move in, in September for the first step -- phase. And now they will -- in November, December, they will take over the whole properties. And so from -- we will have the whole project finalized during the end of this year. And then we will have mainly Wenner-Gren -- the big project will be from that, the Wenner-Gren Center refurbishment, which will be during last year, the largest project we will have, and that will be finalized in the beginning of 2027 as it looks right now. And it's mainly the facade, but we also do some then we upgrade the whole building when we work during the next year. In Arenastaden, we take the next step with the investment of Farao-Kairo, which is the entry of Arenastaden. The demolition is almost finished and the next phase is to start to build and construct a new infrastructure, mainly a bridge that will be the new entry to Arenastaden, which also will be finalized when subway will be open some years from now. So we also will construct the groundwork or do the groundwork for the big future project of Farao-Kairo, but that will be later on. Next slide, please. Birger Bostad has no projects finalized this quarter, but it will be a better fourth quarter with some projects finalized. And especially with the 79 rental -- 78 rental apartments will be -- there will be tenants moving in during November. And for time being, we will keep that property. But long term, I would guess that it will be -- we will not -- you shouldn't see that just as a strategic decision building out our residential portfolio. It's more that it's so closely linked to the rest of the development. So -- but it's good that we start to generate cash flow and one will be finalized even that part of the project. During -- for the rest, we have started to convert the agreements with -- for the owner-occupied apartments. We have sold 34 with final agreements. There were a little bit higher numbers after Q2, but they were not finalized agreements that were at that time. Now that will -- 34 that we have got, they also have final agreements on. So we will sell -- we are right now in the process of selling the rest. And we have had another 52 apartments reserved in the total for the upcoming phases. We see a little bit better even here, activity after summer, a little bit better market. It started to be mainly -- and that's I would say we're mainly driven by Riksbank's interest rate cuts. Next slide, please. We are not talking that much about the building rights right now, but I think it's important to say that many of those building rights we have in the portfolio, both for offices and residential and mainly the one we have in Solna has been developed during -- within the -- over many years in our portfolio. It has been in the zoning plans developed by us together with the municipalities. But in Q3, we decided to sell about 8,000 square meters of building rights for approximately SEK 200 million to Västra Kungsholmen. We think that, that was a natural transaction for us to get that since we think they are very good for developing that, and it's not really in our prioritized areas. And we think especially it was a good deal. Next slide, please. When talking about future opportunities in the portfolio, we see, as we were talking about before, the Farao-Kairo more than 70,000 or almost 80,000 square meters of office space. It's apartments and there will be next door to the new subway, and that's where we have now the first step when we are starting to build the infrastructure. And that infrastructure investments are also important for the whole Arenastaden, I think. Up in Haga Norra, we have the opportunity to build another 130 apartments next door to the project Birger Bostad has today. We haven't decided when to start that. We would like to sell more in the existing project or the ongoing project before making any decisions for the future. At Kungsholmen, on the next slide, please, we have -- at Kungsholmen, we have Tegelterrassen. As you know, after I think it was 12 or 14 years of planning processes, we got it legally binding beginning of this year and where we sold building rights for residential to Västra. It was part of this block. And then we also have another 36,000 square meters of offices where we have actually good discussions with some potential tenants. And in Solna Business Park, NCC is right now developing the building in the middle for Svenska Kraftnät, the grid company of Sweden. And we have the building rights for offices to the land, but especially also for more than 20,000 square meters of residentials. And we haven't made any decisions when, but it will -- I think that is very attractive and will be a great opportunity for the future. For next slide, please. For all of those discussions are, of course, how can we create values? How can we increase the profits? How can we increase the management profit for -- of course, and how can we get the best total return in the prospect portfolio of the companies on the stock exchange. We will continue to complete the existing projects, of course. We have a strong focus on getting the occupancy rates up. We look at finding opportunities to invest in future new projects, but we will not do that much on speculations. We are looking on value-creating transactions, and we have a close eye on cost effectiveness and efficiency, of course. And I would say that the management -- in the management portfolio, we have a good cost control, and that's also what you have seen in the figures. So to summarize, next slide, please. This is not probably not a surprise, but we continue to believe in Stockholm and what Stockholm, the long-term opportunities in Stockholm and also that Stockholm is and will be the engine of growth for Sweden. And next slide, we believe -- continue to believe in offices. And I think that's also what we have seen during the year. Even if it has been a tough market over the last years, we see that offices are important for the companies, but the product will change and has changed. So we have to be proactive and we have to respond to the offers and be in front line of developing the products. So with this said, I think we summarized the quarter. We see more activity. We see a better -- a little bit better market. We have a strong financial position. We have a good cost control, and we see better numbers. And we see also future opportunities, especially for decreasing the vacancies and using the land bank for future products. So please, questions.

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

You talked about increased activities. I understand it correctly, it's mostly in the city. So that -- is it fair to say that demand is more skewed towards smaller floor plates and any specific sectors that are looking to take up space again?

You can say, yes, it's the first most focus is inner city, you can say, but we even see higher activities for questions about Arenastaden, for example. The sectors, it differs. It's everything from auditors, lawyers, but also AI companies in Stockholm now are growing quite fast. We have seen a couple of them growing very fast right now. So it's a mix. But I would say that the main reason is that people are a little bit more optimistic and also about the economy and the development. So -- but it's a mix, but we start -- normally starts in the inner city and then hope go up, but we see more activity even in Solna.

Okay. That's good to hear. And the discussions on rent levels, how does that compare to current market rents or ERVs, if you will?

I would say we are about the current market rents. And it's -- some are a little bit higher and some are the same level and some are even also a little bit lower. But it's about the level of what we expect.

Okay. That's clear. And just on the positive reversion that you're getting in Q3, I think you captured 4% on roughly SEK 80 million of leases. Could you provide a bit more color? Is this coming from a specific asset that was hugely under-rented? Or do you see a turn in the market here?

I would say it was a couple of different tenants, but it's one larger ones. And that -- but that we should also notice that it will come with some investments. So -- but it's a good deal in total, but there will be some investments in that for getting the higher rents. But it's -- but we see more stabilizing. And as you also know that we are just prolonging a lot of contracts on existing terms. So that's the main. But it's about the same level.

Okay. That's clear. And in terms of investments, what size are we talking about?

We will -- that will be, but it's -- in total, it's -- you can say, plus SEK 100 million plus.

The next question comes from Nadir Rahman from UBS.

Congrats on the positive reaction to the results. My first question is on the rent negotiations. So you mentioned at Q2 that you were seeing 3% declines and now Q3, you're seeing them stay rather flat. I think it's around minus 0.1%. So could you give some color on where this is concentrated? Are there any particular office submarkets for this? And then I'll save my following questions for afterwards.

No. As we said, it's a couple of different tenants, but there is one larger one. It's a mix in the areas. It's mainly in the cities. And as I said before, this -- the larger ones is also coming with some investments. But in total, the deal is good for us.

Okay. Very clear. And I see that like-for-like rents and values are still declining. So curious to know when these will bottom out and when you think the market will start to turn in favor of rents and value? And the same question as well for vacancy because it has been flat for a couple of quarters now around 13%. So do you think that the vacancy has now bottomed out and it will start to trend towards your 5% target? And also, you're guiding towards reaching this 5% vacancy by 2030. I think that was mentioned in your Q2 report. Is that still the case? Or do you think you can achieve this 5% ahead of 2030?

Many, many questions in one question, but let us try to sort it out. When it comes to vacancies, yes, hopefully, we will see that we are at the bottom now and we will improve from now on. I mean the signs on the rental market and the positive net letting is pointing in that direction. On the other hand, we have to be -- anything can happen. It's some positive signs and the turning point, hopefully, but there is not a big rush, I would say. The target for 95% is still there. It will take some years to reach it, but there is absolutely full focus in the organization of Fabege in reaching to get to that target. Did you also say something about yields?

No. So I mentioned the like-for-like rents and value declines. I think we've still seen the values declining the past few quarters. So I was curious to know if you think this will bottom out in 2026 or whether this will continue for the coming quarters?

Hopefully, it will bottom out, and we will see also hopefully some improvement in the coming quarters. In the last quarter, the yield shift in Arenastaden related to a transaction where Vasakronan bought a property on [indiscernible] in Arenastaden at somewhat higher yields than was previously seen in the valuations in that area. But that's now reflected in the books. And I think what we see from transactions on the Stockholm markets, they are supportive of the valuations that we have in the books.

Okay. Very clear. And on the Saab letting, how did this impact the net letting? So what contribution did that particular net letting activity have...

The Saab net lettings was recognized last year or was it even 2023. So it's not recognized in the net letting this year. However, they moved into part of the property in September, so they have started to pay some rent, and they will move in the rest of the property in November. So it will be fully occupied from November and onwards.

I can say also said it was 2023, we had a very positive net letting, one of the best years ever at SEK 160 million plus from -- almost SEK 160 million from Saab and the rest was almost neutral. So that's why.

I see. Okay. And on the topic of the rents, I see in one of your slides, you mentioned that Saab contributes 4.7% of your total rental income share. Is that only including the current 1/3 rented out? Or are you taking the entire building in that calculation?

That's the entire building, which is also in the note. So we just to make it, what will be when they have moved into the whole building.

The next question comes from Stéphanie Dossmann from Jefferies.

Just one question on your Slide 15, which relates to the rental development. What are your assumptions in terms of indexation, rental uplift, the underlying assumptions, I mean, please?

Sorry. Did you say Slide 15? Rental development?

Yes. Right. Correct. Yes.

This slide reflects what we know about tenants moving in and tenants leaving. So it doesn't include any assumptions on new lettings that have not been signed, for example. So this is just a picture of what the portfolio looked like by the end of September.

All right. And what about the indexation impact then?

Indexation is probably going to be around 1% kicking in from the 1st of January for the majority of the contracts, although we have some contracts where -- which are indexed on a more quarterly basis now. So indexation will have a very limited impact on this.

Okay. And regarding your financing, is the ICR a concern for your credit rating? And what is currently your marginal cost of refinancing?

Marginal cost is -- it depends on the maturities you choose. But for a 3-year financing, the margin is less than 100 basis points. And then you have the STIBOR on top, which is a little bit less than 2%. So marginal cost of financing around 3%, a little bit less than 3%. When it comes to the rating, we are -- Moody's are happy where we are today. We are -- we just had a management meeting with them a couple of weeks ago. So they have all the information, and we expect to maintain the rating level where we are today.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Okay. Thank you very much, and thank you for listening to us and for asking the questions and following us. If you have any, as usual, you're always welcome to give us a call or to come and visit us here in Stockholm. And we hope it will be for more sunny times than we have had in the past. So have a nice day, and thanks for listening.