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

Welcome to Fabege Q2 2026 Conference Call. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Bent Oustad and CFO, Asa Bergstrom. Please go ahead.

Good morning, and welcome to Fabege's interim report to second quarter for 2026. We have a well-known agenda, and we just kick off. We own and develop and also manage our own properties, and we have the focus on creating attractive working places and a good living in [indiscernible] locations in Stockholm. We have a model portfolio occupied by high-quality tenants. We'll get a little bit back to that later on, and the rental value is SEK 4.4 billion and is divided here into different segments and the square meter, 1.3 million square meters, also divided into the different segments. And the Property value is SEK 79 billion at the end of the quarter divided with 37% in inner city, close to 50% in Solna, 10% in Hammarby Sjostad and 3% in Flemingsberg. Also repeat from last quarter, it's important for us that there are also marketing over a big strength. It's definitely our customers. We have a high Consumer Satisfaction Index highlighted by a strong track record in serving our customer needs. And 95% of our tenants say they would recommend Fabege as a landlord, and we are very proud of that. We have long-term lease contracts as a foundation in the business. We have our own employees across the entire value chain, and we have clusters giving us advantages like economies of scale, and creating engaging meeting places, meaning we take full responsibility for the ground floor for the offices for the living, et cetera, and we also invest a little bit in the community for safety, et cetera. We have an excellent capability when it comes to deliver large and complex projects from start to finish. We have done it before, and we will do it going forward. and also strong capabilities and best-in-class practice within ESG initiatives and environmental results when it comes to the CO2 pollution, et cetera. So if you just have a short summary of the second quarter as stand alone, the rental income grew by 5.9%. The surplus ratio in Q2 was 74% and we had a profit from Residential Development of SEK 39 million, meaning a margin of 21%, and we are very satisfied with that. The net letting was minus [ SEK 86 million ] in the quarter. We have commented on that also during Q1 and it's two large terminations when it comes to [indiscernible] represent this figure. Value changes more or less flattish, plus 0.5%, plus SEK 120 million for the quarter. We have improved our occupancy rate from 86% to 87%. And we have some new large leases in Solna Business Park in the quarter, get a little bit back to that also. We finalized the acquisition of Gadden 1 in Sveaplan from the municipality of Stockholm. And we also press released this morning that we have signed a construction contract for Block 4 in Haganora, its 132 residential units. So with that, I hand over to you, Asa.

Thank you Bent. One, the Rental income came in at just under SEK 1.8 billion. And looking into Rental Development in identical portfolio, it was minus SEK 17 million or minus 1.1%, mainly due to terminations that were previously announced in the negative net lettings from previous years. On the other hand, we had a net of plus SEK 100 million from finalized projects that have kicked in during the first 6 months of this year. The Properties expenses were very much in line with last year, and we saw an operating income from Property Management of just over SEK 1.3 billion with a surplus ratio of 73%, 1% up from last year. The Residential part of the business was also contributing with SEK 79 million, as you can see here. We have finalized approximately 85, 86 apartments during the period and recognized the income from those finalized projects. So if we look at the net interest expense, it increased a little bit in comparison with last year. The STIBOR has gone up, and it has been to some extent not so much because we have seen also less margins, and we have had some interest rates that have matured during the period. But all in all, up from [ 2.82 to 2.89 ] during the first half year. And the share in profits from associated companies of minus SEK 42 million relates to contributions to Arenabolaget. Then we saw in total unrealized changes in the values of minus SEK 139 million, but as Bent just mentioned, it's positive during the second quarter. We saw a plus of SEK 120 million. The tax is a little bit also different from normal. We have sold one property, which contributed to a positive tax of SEK 24 million, but we also had a finalization of the outcome in the court that gave us another SEK 550 million in in -- I lost myself here -- in carryforwards that we have now taken up to valuation, and that meant a little bit more than SEK 100 million plus in the tax. So all in all, a profit of SEK 521 million during the first 6 months. During the quarter, we have externally valued 43% of the portfolio, and we saw that the yield in the valuations have come down 2 bps from 4.59 to 4.57 bps. And thus, we also saw, as I mentioned, the value change of SEK 120 million plus in the second quarter. We had an opening fair value of SEK 78.5 million. We have disposed part of this 31 construction for building rights to [indiscernible]. We have bought Gadden 1, the SEK 211 million also includes the tax paid. We have invested almost SEK 900 million. We had the value changes of SEK 139 million minus. And we have the reclassifications when we have reclassified Haga Norra Block 4 from Property Management portfolio into development properties that will be carried out by [indiscernible] Sjostad. And all in all, the positive value changes refer to city properties, as you can see here, plus SEK 157 million during the first 6 months. While we also saw positive from the Residential part of the portfolio. The key ratios came in SEK 119 per share compared to the same figure last year, and EPRA NRV of SEK 145 per share. Total return on the properties, 1.5%. And surplus ratio, as I mentioned, increased, an asset ratio loan to value rate in comparison with last year and also year-end. The debt ratio improved from previous over 14% to less than 13%, which was also in line with our internal target for that. And the interest coverage ratio ended up at 2.6% for the full period and 2.7% if we look at the second quarter alone. Financing remains very strong for us. We have very good access to financing both from the banks and the capital market. The margins have -- on the capital markets have been a little bit volatile during the period, but ended up in very good levels towards the end of May and the beginning of June. We have refinanced everything that we are supposed to refinance during 2026 when it comes to bank loans, and we are intending to refinance the SEK 2 billion remaining on the capital market with new bond issues during the autumn. The last bond issue was done now in June, where we took in SEK 350 million in a 5-year bond at a margin of 110 bps, which I think is a very good level. And we have also increased the interest fixing by entering into new interest rate swaps of SEK 1.4 billion, 5-year terminations and at levels between 2.5% and 2.6%. So we now have an average interest cost of 2.88% compared to 2.82% at the year-end and approximately a little bit less than 50% of the portfolio is fixed and the average interest fixation is 1.4 years. But we also take into account the callable swaps, it increases to 2.1 years. So all in all, I feel confident with the financial situation. And over to you, Bent.

Thank you. So if you look at the occupancy rate in the Management portfolio at the end of Q2, it's up to 87%, sorry, up from 86%, and that also includes the remaining vacancies in the previous project that has entered into the Management portfolio. And in addition, the Improvement portfolio, close to SEK 8 billion to SEK 9 billion. It's 127,000 square meter, of which 71,000 square meter is not let, but it's let out to different customers. And the yield on that portfolio is -- it covers its own debt cost, the interest cost for the debt 100% financed. That's how it works. The net letting for the first half, minus SEK 62 million, new lettings of SEK 132 million and terminations of SEK 193 million and the 2 large ones there, it accounts for more than SEK 80 million, as I mentioned in the beginning. Telenor is moving out in the third quarter 2026. I think it's September '28, so it's given notice and a very, very good advance. We have the renegotiations. Totally, it was renegotiated SEK 230 million, was renegotiated with minus 1.7%, SEK 109 million is renegotiated and SEK 121 million is prolonged on existing terms. So I think that's also what we see in the portfolio. Lot of the renegotiations are more or less companies now many of us subsidiary, solding of our division, et cetera, and in that sense also doing -- putting on a new lease. And SEK 156 million of the maturities in '26 and onwards, I think it's '26 and '27 has already been renegotiated for the total portfolio. If you just look at Q2 separately, it was a healthy mix among all markets, market areas that we have and all segments, meaning from hotels, from restaurants to offices. Six contracts above 1,000 square meter during Q1 has been renegotiated. And all the new leases, also a mix of all kind of categories from hotels and everything, and one contract is about SEK 10 million in yearly rent. And we have divided here the renegotiations by area and also the new leases by areas. And as you see, is a healthy mix all over for us. Just want to mention, since I also had that in the beginning, that a lot has happened in the Solna Business Park this quarter. And it's been -- it's taken more than 1 year for the puzzle, but the Swedish National Agency and the Swedish work environment authorities have reduced some of their space, just to have space for the Swedish transport agency. So everything finalized the Swedish Work Environmental Authority leases approximately 4,000 square meters on a 6-year lease and the Swedish Transport Agency leases approximately 3,000 square meters also on a 6-year lease. So really, the governmental tenant has cooperated together and leased spaces in a business park. With that finalized our property front is more or less fully let. Yes, nice mix of different tenants being active in the market. We also show this every quarter. This is just signed leases today with no further activities in the future. These are the development on the leases we have signed. I mentioned we have healthy and nice customers. They are definitely one of our key strengths. We have approximately [ 700 customers ]. The average lease contract is 5.4 years. And the top 10 largest customers represent 29% of the contracted rent, and we have them on the right side there, all of them. One new is on the list is Tieto, moved into an [indiscernible] place, they just signed a new 7-year lease contract with us. The top 10 largest customers represent 29% and over actually the real number is 38 largest customers is 50% of the contract rent. And the duration on the 48 largest is 7.4 years. So it's very, very stable revenue stream. We added one new slide this quarter, more or less Fabege view on the market trends. If you look at the rental market first, we see a strong and continued activity in the CBD market, especially for larger leases. The alternatives is not that many. We see rent levels slightly started to increase in areas with less alternatives for new production and low vacancies. We see stable rents level in Greater Stockholm. And as I mentioned, a handful of tenants reduce square meter in existed leases, more or less, if you read in the press, sold a subsidiary, sold the division doing some M&A, there are always some renegotiations. We also see startups and AI companies coming to the leasing market, more or less in the city so far. For the construction markets, we see free capacity among almost all the construction companies, good demand to compete for potential building contracts, both in office and in residential. So far, we mentioned this morning that we have signed a new construction contract for residential in Haga Norra and we are happy with that. And so far, I will say we see limited or close to nonprice implications from the disruptive world outside Sweden. When it comes to the transaction market, it is active, but it's not at the same level as in more or less all days. Disposals made public during the quarter included both portfolios and individual assets. Buyers, I will say, is dominated by pension funds and insurance companies. And then I'm sure some of the listed companies and the private investors are not happy with me saying that, but I mean it's dominated by pension funds and investors are being pension funds. But all kinds of companies are active in the market. And also commented on the financing markets, we see healthy activity and competition among investors, banks, everything in all kind of financing markets. And it's been a very active financing market when we see the Nordic with all the all the data centers, massive financing and also in all kind of segments. So if we look at our ongoing projects, Farao, Kairo, investment of SEK 630 million. We are doing the ground level foundation work and the construction work up to the ground floor level. The decision for this investment were more or less taken 15 years ago when we went into the Arenastaden. So we have to do this work now because Solna municipality are are trying to finalize their work with the roads and everything and just be prepared for the new opening of the Metro station at the entrance of this building. The Wenner-Gren Center investment of SEK 610 million rental value of approximately SEK 58 million, is pre-let 30% and marketing to start more active in Q3 '26. But we are in -- we have started shortly, and we see a nice interest in this building coming to the market in Q2 '27. And also, Mimer 5 is an investment of SEK 270 million, rental value close to SEK 50 million. It's 100% let on a long, long lease to AcadeMedia and it will come -- will be finalized in August next year. So for the next school year, it will be open. So here you also see some of the growth in the top line the coming year. Completed an ongoing project in Birger Bostad, a residential builder. Haga Nora, Block 5 is right now under construction, and it's progressing according to plan, total of 288 units. We have completed 193 units. And during the second half of '26, the last 95 units will be completed. So far, of the total 288 units, 20% are on sold, so meaning 59 units to be sold the rest of the year. It feels very comfortable from oversight. With that, we also move on to the next phase. It's under the preparations are underway. And as we mentioned in the press release this morning, it will be 132 units in Block 4, estimated investment, approximately SEK 360 million. And the move-in is planned to start in first half of 2028. And if you are lucky, it will also be the first half of the first half year, so meaning in the first quarter, I will say. After that, Block 3, we have 260 rental apartments and [indiscernible] facility and preschool there, approximately 20,000 gross leasable areas with an investment of close to SEK 860 million. I just mentioned and show it for you, and we will -- with those 2 large projects, we will finalize the quarter. Block 7 and Block 6 are finalized, Block 5 to be finalized this year and sold out fully this year, accorded one, the offices are completed and part of the management portfolio, and we are signed on the construction contract for Block 4 this morning. And then the last one, Block 3, with both [indiscernible] facility and the preschool will come in the last phase. And then we will finalize Haga Nora. To check Gadden, it's in Sveaplan, Stockholm inner city, we bought it in June '26, building rights, approximately 8,800 gross square meters, purchase price, SEK 202 million plus tax divides or SEK 211 million also. We have a planned move in during '29 late '29, maybe early '30 in that range. And it's definitely one of Fabege's core areas. Also is the entrance to Stockholm in the city. We will have approximately 90,000 square meters here, work in places, including co-working, ground floor activities, food and beverage, high conference center, et cetera, et cetera. We will be everything in this area. And we have a lot of questions from you. What happened with the large Ericsson lease in this area. So just try to put it on up. The leases that Ericsson made was #1 to #6 as building to be constructed, maybe #2 is already constructed or underway, but rest is to be constructed. We, over Fabege's 90,000 square meters are #7 to #12 in the same area. So we see good interest in this area, and I'm very happy that Ericsson showed a way and took the decision to move the business into Stockholm. It comes to building rights, not much happened since last quarter. Commercial building rights, approximately 500,000 square meters with 65% legally binding and a book value of SEK 8,200 per square meter. The Residential building rights has decreased slightly since last quarter because we sold some building rights in [indiscernible]. So it's 435,000 square meters left and approximately 40% is legally binding. Book value is SEK 7,800 per square meter for the building rights. And then other project opportunities in the near term. We have talked about this also several quarters now, [indiscernible], 36,000 leasable square meters, partly demolition started in January and leasing activity is definitely ongoing in this building, and our ambitions are quite high. It's the same in Haga Nora. We just went through that, already produced 611 units, 95 units in production. And the last 2 quarters is another 390 units, including elderly home and a preschool facility. So we're looking forward to complete these projects like [indiscernible] is booked in improvement properties and our balance sheet, just so you are aware. So if you try to summarize, we have to conclude different leasing initiatives that's ongoing and decreased vacancy is always a top priority. And as I said, in Solna Business Park, it takes time, took us 12 months in the old days, it would have taken 2 months, but that's how it is right now. We want to continue to be the preferred partner for our customers. We have to be available, accessible and solution orientated. And I think we are have a very good feedback on that, and that makes me proud for whole Fabege. We had to secure value creation in ongoing projects. I hope you see that we are working with the balance sheet, working with the projects that's ongoing. And we have to continue to do that. I also analyze the value creation in our land like, both commercial and residential and continue to be active in the financing markets. I had some questions about that last quarter, but that's more or less -- of course, I have to say, we are always that and as has already done different things in Q3 already. And with that, let's conclude our presentation. So I hand it over to you, Fredrik.

My name is [indiscernible]. I'm an equity analyst with ABG. I will walk you through the Q&A of today. I'll ask a couple of questions myself, but also let the audience in through the web conference. If I may, before we sort of jump into the Q2 numbers and Q2 results, you started 6, 7 months ago. What have you -- I think we're all aware that leasing, leasing, leasing, that's top priority. But if we think about portfolio composition and strategy and capital allocation, is there anything that you have sort of learned during the 6 months that is different from what you thought when you took the CEO position?

Luckily, I learn something every day. So that's a good thing. I think we have done quite a lot as well. We have looked through the balance sheet. We have sold off different smaller plots. That's been part of the balance sheet. We have also signed some LOIs on different plots we have across Sweden. When it comes to elderly care facilities, et cetera. So you'll see we do more of that, just try to clean up the balance sheet and just focus on the core assets for us. We have done some organizational changes when it comes to the market area. We have said that Flemingsburg and Hammarby Sjostad being one market area for us that will come into effect in Q3, and we are focusing on costs all the time. So likely to see also the surplus ratio going up to 74%. So yes, you could be sure I think about and also I think think of that every day. So I think we are on the right path, still of course a lot of things to do, and it should be in a company like this. When it comes to the capital allocation, we are a developer as well as an operator. And like I tried to say here in Arenastaden, the decision was taken when to do some investments when we entered area 15 years ago. So more or less, we have to do what we need to do in our areas to comply with our -- what we have promised to the municipality and we are hunting for new tenants, and I think the pipeline looks promising, I will say.

If we we talk about that you added some slides during this presentation showing sort of the geographical split of the renegotiations and the new leases. My impression, and correct me if I'm wrong, but has been during the past couple of quarters that [indiscernible] has been working and Arenastaden has been working. But this graph shows a fairly broad picture. Is that something new? Do you think sort of the rental market recovery is spreading?

It is recurring but not in a dramatic way. But of course, when Ericsson say they will move 100,000 square meters in the Hagastaden area. Of course, something happens. It's not a lot of available premises there going forward. So we see a better leasing market in that area immediately. Of course, it's a little bit more difficult maybe for [indiscernible] but they will move out probably move that in '35 or something, I don't know. So it's a lot time. But I think that's also some reason why we took Flemingsberg, Hammarby Sjostad in market area, then it's close to the same size as Solna Business Park. And as soon as you have competition within the company, it's perfect. Then we see activity both both areas and shouldn't be in Arenastaden and look at city. They should try to fight for a city looking at Arenastaden.

Speaking of Ericsson, you showed sort of picture of Arenastaden, I think it's pretty obvious that everyone that this is a positive for Hagastaden. How do you think about Solna Business Park or Arenastaden for that quite dramatic change?

It's in the same neighborhood. It's not far away. And the leases in Hagastaden Sveaplan plan, it's a totally different levels than in in Solna Business Park. So I think also that's why we see all the municipalities, the government tenants, et cetera, moving to Solna Business Park. When it comes to Arenastaden, another story, the largest lease last year ended in the middle of Arenastaden, moving in there, you have all the activity, you have the molescandinavia, you have the arena, lot of things ongoing and happening. And right now, we have a construction site in one end of the Arenastaden and Skanska is building on the other one. So I just had to finalize those, and it looks -- I think it looks nice going forward.

One of your colleagues or peers competitors was out last week saying that there is maybe more so than in the past, a large amount of large tenants looking for quite significant space. We have seen in the media, 5 to 10 different companies may be searching for 6,000 to 15,000 square meters each. Are those looking at all of your areas or any specifics and ...

It's difficult to say they're looking at all of our areas all the time. But as you saw, the mix here also quite a nice mix between all the different market areas. But I follow that insight that a lot of -- if you say that 6,000 to 15,000 are large tenants, a lot of activity ongoing in the market. And we are also part of the discussions.

All right. I will open up the telephone conference. And also, you have the opportunity to write questions, and I will try my best to read them.

[Operator Instructions] The next question comes from Paul May from Barclays.

Just a couple of quick ones. When you talk about the investments on the ongoing properties, I think you highlighted. I assume that figures are equation is marginal investment and then include the existing value of the buildings. If you could give us a color on what is the kind of total cost that would be great on that. And then the second one, just around the like-for-like NOI and the renegotiated lease obviously getting slightly worse quarter-on-quarter. Do you see -- when do you see that changing? You talked to a slightly more positive market. Just wondering when do you see that feeding through into your operational performance in the business.

When it comes to the investments, that's the remaining CapEx that you showed on the slides here, I don't have the ingoing balance right now. We can come back to that. Yes. This quarter was slightly more negative on the renegotiations. I think it's 1 or 2 leases a little bit special when it comes to that. So I don't think you should should think of that as something ongoing in the market.

I'm not sure about your question about the investment. But if you take the remaining investment and added to the book value or the market value that's the value that is going to be recognized once the investments are finalized. And we have the end valuation, which includes also, hopefully, some uplift in valuation towards the end. So there will not be any negative valuations relating to ongoing projects.