Fabege AB (publ) (WILC.F) Earnings Call Transcript & Summary

Welcome to Fabege's conference call. With me today, I have our new CFO -- CEO, Bent Oustad and our CFO since many years, Asa Bergstrom. The purpose of this call is actually to just introduce Bent to the market. He's very familiar and many of you knows since the past, but for some of you, he's new. So please, Bent, tell us a little bit about your background.

Thank you. Pleasure being here. Thank you for joining this. I have to maybe start because a lot of you an list, all our companies have contacted me and wanted to have meetings with clients and interviews, et cetera. And I know Peter as an employee in Fabege, motivated, highly enthusiastic, want me to book all these meetings, but I said no. But now he has booked for today. So I'm really happy that you showed up. My background, I'm a Norwegian citizen. I have moved to Stockholm now from 1st of December. Very, very happy to be in the city. My education is from the university in Bergen, the Norwegian University of Business Administration. I started to work in Arthur Andersen when I finished my studies, I worked there until they went bankrupt in 2002. And then ABG Sundal Collier called me and asked if I would join them. So I joined the corporate finance department. They were building up a new real estate arm and asset manager. So I started that business in 2002, worked there for 8 years, building it up, had properties. I was asset manager for different real estate funds. We had properties in Norway, Sweden, Baltics, Germany, Denmark, U.S., more or less around the world. We were about 30 employees in ABG, and we had several contacts with different managers around the world. After 8 years, I joined -- or I was repositioned to head the real estate corporate finance team in ABG Sundal Collier, stayed there for another 8 years. That was more core corporate finance like M&As, IPOs, financing, different financings, both debt, not so much debt but mostly equity then. From 1st of January 2018, I was asked if I would take over the CEO position in Norwegian property. It was a listed real estate company at that time. I said yes, new challenge. I've been there now for 8 years. We have done several things, and I see a lot of similarities with the position I joined right now, actually. So...

So can you some -- similarities, differences between Norwegian properties in Fabege?

Yes. The similarities is when I joined Norwegian Property, they had sold several properties on forward contracts. So more or less, we were -- a lot of the cash flow was sold. So we had to do something with the firm. We had also some properties that have been vacated from larger tenants, single tenants. So we were in a position that we had to transform them finding a new single tenant or do it multi-tenant buildings. So we had some challenges. We started the work there just to try to meet all the placeholders a little bit like we do today. I had to meet all the placeholders get an overview of the company, meet all the employees, see our strengths and weaknesses and try to put a plan up after that. And the years ahead, we started to do some smaller transactions. We bought a very large -- when the pandemic hit the market, we bought a large property just outside Oslo City in Fornebu, the former Telenor headquarter is 200,000 square meters. Opportunity the way we saw it during the pandemic, Norway had quite strong restrictions of foreigners going into the country. So we thought that we don't see any foreign investors buying that property without being on a property tour. So that's a real opportunity for Norwegian property at that time. 20,000 square meters was several tenants, the ABB head office in Norway is there, Telenor and several good credit tenants. We also used the time to start to invest in some debt in properties that the return on the debt itself, debt was good for us, was okay. But we had an ambition that maybe they will fail on the debt because the interest rate and inflation started to kick off, then we would have the property. And that happened around 1 year after. So they got a new property, the neighboring property to the Telenor headquarter, also with creditworthy tenants, credit rated A tenants, long leases. So we try to use this period to do a lot of opportunistic moves. and other things, very centrally located, newly refurbished building in the CBD of Oslo, owned by the syndicate. SPV syndicate more problems when the interest rates started to increase. So we also placed a bid on that and got that in a favorable position for us at least. And I think that's why we also have to start to think in Fabege. So that's similar to SC. We have to stay informed. And when telling this is more or less if you look back to Fabege when it was founded by the Paulsson family. It was -- maybe that way it was founded. It was driven by a lot of transactions. They bought properties. They did some refurbishment. They got the leases in place. They sold it, bought a new one. It was more or less driven by that in the beginning. And then, of course, you all know real estate are in different cycles and the cycle maybe it's not favorable to buy it because it was too expensive. So the new management in Fabege, they started more development, was really developers, bought land and made a fantastic job in Arenastaden. It's a superb area. I really love it. And then they did that for several years. And when the pandemic hit, more or less you started a more consolidation phase for the company. And always with a strong balance sheet through the cycle, the last cycle, it's fantastic. So this company has a lot of opportunities going forward.

Yes. Over to you, Asa. Bent will be your third CEO. What was your first reaction when you heard it was going to be a Norwegian? Oh my God, not another one.

Oh my God, not another one. No. I know Bent since a couple of years since you've been on the Board and you are very familiar with the company already. So I'm very much looking forward to continue working with Fabege together with you. So I think from my point of view, the change is not that big. Of course, there's another person to sit and have these daily conversations with, but I'm sure it will be very good.

Do you want to comment anything about the Stockholm office market? We were quite a little bit more optimistic after the last call.

Not to tell too much in front of the Q4 report, which will be released in February. But yes, so far in the fourth quarter, and we are coming close to the end of December, it still looks positive. So I'm much more optimistic about the future than I was a year ago, and I was somewhat optimistic even a year ago. So I think we are looking forward to better times.

One last question to you, Bent, before we open up for the audience. We had a new owner this week, read in the paper. Can you have a comment about that?

You also asked about that. Everyone asked about that. I'm more or less familiar with the question, had it for 5 or 6 years, I think, but it's nothing changed in that. Every time it's a press asking me the question, and I say, okay, what do you know, I ask? Now all the researchers are telling me this. So probably you guys are telling the press that something will happen. As I said, I'm still in the Board of Norwegian Property. I'm also in the Board of Fabege and now even the CEO of Fabege. And I'm pretty sure I would have known if that was on the steps right now. So quite comfortable with that. I don't spend a lot of time discussing who are my main owners or owners at all. But I don't think that will happen now. What happened in the future? I don't know. But I have taken this step. I moved from Norway, moved from my family, moved here. I go all in for his job. And to say it in an American way, I would do far great again. But I really have high ambitions for this job. This is where I will try to make a good return going forward.

Any questions from the audience?

Okay. Lars Norrby, SEB. A couple of questions from my side. First, a follow-up on that transfer of ownership, which was done, as I understand earlier this week on Monday, wasn't it? Now why now? Why was the change done at this point in time? I understand it obviously strengthens the balance sheet of Norwegian property, but why this week and not earlier?

When they are doing anything, it's out of my hand. I have nothing with that to do. But it's like you said, you have probably also read the credit reports for Norwegian property. So everyone is asking if they would strengthen the balance sheet. Just show the support from the owners, I think. It comes to are there any synergies between different countries, et cetera. And one synergy is maybe financing so to have some Swedish assets in Norwegian property. I think that sounds good.

Okay. Fine. And just then turning to Fabege. Of course, like in any property company, the composition of the property portfolio is something that -- well, that's what you work with basically. So you've been on the Board for what is now 1.5 years and now you're in a different position in the company. What's your view of the composition of the portfolio would there be potentially be parts that could be of material size that could be up for sale going forward?

You should never say never. Everything is in the toolbox at all time, but I'm not very fan of selling properties when I feel the market is not super hot. But if it's a hot market, it's easier to do it. But otherwise, if our stock is trading good, you as an investor can also decide to sell or not. The composition of portfolio, I like it a lot because you have several properties here in the city. That's not so concentrated. I would have preferred to have even more concentrated portfolio in the city because then we can have full control over the area like we have in Arenastaden, like we have in Haga Norra and also partially in Hagastaden. Then we have more control. We can have a gym, we can have a parking, we can do everything together. So we have a lot of synergies when we have more in one spot. But our main concern or my main concern these days are just the vacancy. So that's what we really have to focus on. We have to take away the vacancy. We have to be best on renting out leasing. So operations, operations, operations. And I see if we have a cluster of -- or a core area with properties, it's easier to have the real focus on the same.

This is Fredrik from ABG. A couple of questions as well. First, you talked about kind of a couple of similarities between Fabege and Norwegian Property. And during your time at Norwegian property, you did some acquisitions, you invested in credit, talked about being opportunistic. What do you think that sort of means for Fabege to be more opportunistic what -- in what way?

Maybe opportunistic is the wrong word. But in my work, I have 2 things. I'm addicted to details. I really are hands on. I really like to understand everything. I'd like to keep myself informed what's happening in the market and see if there are something that we can do. to grow the company, to have better operations. Can we have some economy of scale by having more properties together in one area. We can divest someone and invest in something else. Of course, we can, and we probably will do going forward. But I think that's what I tried to say is that I think going forward, you will see more happening in Fabege than you have seen in the last 5, 6 years. There are some very large differences between Norway and Sweden in my view so far. I will come back to that later on also. But in Norway, you don't have the large corporations as we have here in Sweden. So here, we have several tenants renting 50,000, 60,000, 100,000, 150,000 square meters. We don't have that in Norway. only have the governmental tenants being that big. So that means that when you do some structural changes, every corporation are more or less in a cycle. So maybe they have rented 10,000 square meter too much, maybe something is happening then. So they may be reduced from 100,000 to 80,000 square meter. It's still a fantastic tenant to have. It's fantastic. You have all possibilities. All of our tenants are not only in Stockholm, maybe they need some help, other places around Stockholm or even other places that we can have some opportunities to follow them. We have to look into that to see what can we do. So when I see here in Stockholm, we see the increasing vacancy more or less all over. That's probably because they are reducing. They don't have excess square meters, et cetera. that we don't see that in Norway yet. But still Norway are behind Stockholm in the cycle. And what you see in the cycle, more or less what's happened in at least Paris, a little bit in London, where the office market also is awakening up. I think that will transform into Stockholm as well. And when we see the IPOs in on Stockholm Exchange this year, like Klarna, very sure. Very, very large share of IPOs, also tells a lot about the market and what's going on. We don't see that in Norway this year.

And then second question on -- do you have sort of a view of the balance -- you mentioned the balance sheet being strong in Fabege and that sort of sets up for good opportunities ahead. Do you have a personal view of where the balance sheet should be? Should it be where it is today? Or can you increase leverage and so on?

I didn't mean it that way, actually. But I think to be in a position to eventually look at opportunities, you need a strong balance sheet. That's the base. And Fabege has had that through this cycle. So I think this company is ready for everything. That was my meaning. How strong should the balance sheet be? That varies through the cycles. And it's important to be there. And if you don't have a strong balance sheet, you missed the opportunities. So -- but we have centrally located properties, close to 50% of our portfolio yielding assets are here in the center. It's not a lot of cash flow. So that's why also we need a strong balance sheet. The balance sheet has to be adjusted for the kind of properties you own.

Yes, you have a very strong balance sheet and you also have a big discount valuation to net asset value, and you talk about buying new properties and et cetera. Isn't it more profitable from a net asset value enhancing perspective to buy back your own share?

That's absolutely a good opportunity these days. So more or less, the toolbox is there. Do we have enough cash flow or do we have enough free cash to do it? I think, first of all, we have to focus on the operations the way we are today. And that meaning reducing the vacancy we have. We have above SEK 0.5 billion in yearly rents in vacancy. So that's job #1 for all of us. So of course, should they borrow money to buy back shares? I don't know. More or less, my opinion is that the shareholders should have at least a small portion of dividend. And that's what they have in Fabege, not a lot. And then I'm not deciding even if I'm part of the Board, but you can be quite sure that that's also on the table in the Fabege Board if you should use that mechanism or not. But before we do purchases of eventually properties, that also has to be evaluated definitely.

Okay. And on the vacancies, I think you have like 13%, 14%, and it's been quite high for quite some time, one of the higher ones among the real estate companies. What are you structurally going to change to actually get this vacancy down to a more normal like 4%, 5% level?

Yes. I've been in this position for 2.5 weeks and a Christmas party, as I say, and probably I learned more during the Christmas party than did the first weeks. I started on Monday, and we had to send the papers to the Board on Friday. And luckily, I got it postponed 2 days during the weekend, so we had some more time. So we haven't done enough work to really answer in detail that question. But that's job priority #1. And every time I speak to some of our employees, I say, don't wait for me, work on the vacancy. That's job #1 for all of us. I tell it every time I meet our employees. So there are different ways we can do it. Today, we do most of the work ourselves. and we are very, very good at it. But still when the vacancy get at this number we are now, we have to look into different possibilities how to work on that. But definitely job #1 before everything else.

Yes. Emil from Pareto. How familiar are you with Stockholm since before joining Fabege?

Quite familiar. We -- in the funds when I told you about my background as asset manager, we owned [indiscernible], we own several properties in Kungsholmen. We never got the possibility to buy inside CBD because it was too low yields. We had about 50,000 rental flats in Stockholm and other places in Sweden, southern part of Sweden. So we had logistics here. We had [indiscernible] in our funds. So I've done a lot here in Sweden.

And what's your view on Flemingsberg?

Very, very small portion of Fab so far. We have some very, very good tenants in Alfa Laval and Dramaten. Yes, we have SEK 160 million in revenues there. We have SEK 15 million in vacancy. So that's more or less my view on Flemingsberg right now.

Albin Sandberg, SB1 Markets. Two questions from me. You were referring then to we should expect more activity from Fabege over the next 5, 6 years than we've seen in the past. Obviously, the market situation is a bit different maybe, but is it that you're referring to? Or is it anything that you would have wanted to see in Fabege over these past 5 years that didn't happen? Or how should we...

All things I would allow to see. There have been some opportunities in our areas as well. I think on the Q3 report, we heard the neighboring building to our headquarter was sold, in my view, at quite favorable price. I think we had -- if we have been very lucky, it could have been us owning it. But of course, we have a lot of vacancy. The share is priced where it is right now. So I think we have to do some homework within our team first, and then I think you will see more from us.

And final question is, obviously, you've been doing a lot of property deals over your time as a banker and the CEO. What's your view on a property company in general? Would a larger size Fabege make more sense? Would it be more interesting to invest in? Would you get more favorable financing terms? Or how do you see a property company enabling the best return, so to speak, in your view?

Of course, how that's happening is dependent on where we are in the cycle. And that's also why I tried to go a little bit back and look at Fabege from the beginning where they were set up the way they were and then they got more urban developers. And right now, we still have a small land bank in our balance sheet. I think it's around SEK 7 billion. So it's not a lot now, but it's not really high valued in the investor market right now, for sure. It will come back, definitely. But when I look at the property company, I want to build it as a stable company. That's work number one. And I love to have some CBD properties, but they're not yielding more or less anything. So cash flow is close to 0. And that's why it's very, very good to have strong areas around the city, giving us a little bit higher yield, maybe 100 bps higher. And like Arena has done, it's just fantastic. I took my car first day to work and one later they told me, you are crazy driving here. You take the tram and the train. And that takes 15 minutes from my walk out my door. It's so central actually. You have everything. You have hotels, you have nice offices, very nice offices. When it gets finished, you have -- you already have a shopping center right there, but we need to have the security. We need to have more shops, restaurants on the ground floor. And when I visit some of the tenants there, you're not sure if you are in my living room, I'm not the living room I have now, but living room home in Oslo or if I'm in a hotel or if I'm in a lobby, it's very, very nice offices. So I think when you build a company, we need to have stable cash flow. And that then you can -- if you only have centrally located properties, you don't have enough cash flow in my view. So we try to balance that out. And here, we are close to 50% the yielding assets in CBD, then we need something else as well.

Jan Ihrfelt, Kepler Cheuvreux. I have a question on your building rights. You have a lot of residential building rights. And have you considered anything about these assets? Are you going to develop your own or going through joint ventures or even selling them or -- because that's a kind of a hidden asset in the company, I would say.

Yes. I think you saw last quarter that we were selling some building rights in Kungsalman. So they will be divested, is it first quarter or second quarter? First quarter, next...

May.

May, next year, second quarter. But I think we have the building rights where we own all the properties and also on the commercial properties. We are kind of urban developer in these areas to have control of the residentials. If we are competitive, can be competitive and we can do that job well, which I think right now that we can. We should do that at least on our balance sheet. And we have a perfect team, a very lean team, hands-on team doing very, very well in Haga Norra these days. So I think we'll come back to that actually on Q4. So I'll little bit ahead right now. But yes, we will come back to that at the Q4 report, how we are thinking about that.

Okay. And right now, it looks like you're going to develop them yourself. develop the building rights yourself and doing residential. A lot of them construction.

Not all of them, but a lot of them.

Michael Anderson, Handelsbanken. Coming back to the question about the balance sheet and leverage. I guess Norwegian property has been run a bit higher leverage, at least looking at LTV than Fabege in the last couple of years. And it's also rated and not lower than Fabege. How is your view of rating agencies or at least some experience with them, I guess, with more transactions maybe going forward and buybacks, et cetera, they might have an opinion on that. So a bit your thoughts on the rating agencies and the rating.

I think they do their job. It's -- I don't have a lot of views on them actually. They have to make up their opinion more into what the question from the front row here that how is the company looking? And I like -- I prefer to have a balance there. And we need a strong balance sheet to act on possibilities and act on things happening in the market. So pandemic inflation. We have low interest rates here in Stockholm. Look West, it's quite much higher. So I think they do their job. Why is Norwegian property a higher loan-to-value? They were down to on the 30s some time and then they did a lot of acquisition, opportunistic acquisitions, bought buildings with -- also with vacancies. And then you have a higher LTV, but still get supported with some new equity, but not 60% new equity. So it's going up and going down. But my view is to have some stable balance sheet through the cycle. I'm not in my head, not has to be below this and below this. That's more or less over the cycle and see how the company is performing and how we look at it.

Do we have any questions from the telephone conference?

Next question comes from Stephanie Dossmann from Jefferies.

I would have 2 questions, please. One -- the first one will be related to the AI adoption with -- by corporates. I was thinking about what's your view, I mean, on the impact from AI on office demand in the long term and especially in the situation that we see currently with lots of vacancies. And I know there are -- there have been disruptions in the past, such as working from home trends and so on. So I was thinking about the megatrends on the office market. And maybe the second one correlated to the first one. When it comes to fill the vacancy, do you think about converting assets into other asset types such as either data centers with the AI adoption or other type of assets, please?

Yes. Try to start with number one. So you have to remember the question to Peter. When it comes to AI, of course, it will influence. Hopefully, it will influence, and I'm sure it will influence the companies really succeeding with AI, they will get even stronger, will be better credit. They will have a lot of opportunities going forward. Some of them will be growing, some will losing and maybe really reduce. That's also why I say our job #1 is to lease out. There are a lot of tenants in this city. And in my view, everyone should be at Fabege. It's the best company. And when I am out there, not so many yet, but I met some of our largest tenants, everyone very enthusiastic telling so good stories about all the Fabege employees they are meeting on a more or less daily basis, and that's really one of our strengths. We have to be there for our tenants. We have to be out there hunting for new tenants. And as I said, we will reduce someone will reduce, someone will grow, some will be stable, and that's part of life. That's our work. We should be #1 in renting out offices. I don't think any office will -- I don't think the office will die. When you see the total vacancy in Stockholm is also heavily influenced by some areas with larger vacancy. We have also, as was a question from the audience here, quite high vacancy, but we've also done a lot of new build, new construction and not everything is rented out 100% when you have started the project. So we have a little backlog to work on there, and that's goal #1, as I said several times.

And the second question was about your view on converting vacancies -- office vacancies to other.

Yes. It's not so much potential in our portfolio. It was a little bit question from Flemingsberg here. There can be some other -- everything doesn't have to be offices to say it that way. On the core portfolio we have in Arenastaden , Haga Norra in Hagastaden or here in CBD, we don't see that much conversion. But of course, we have -- is it 6 or 7 hotels in our portfolio today. That's not pure offices, even though we don't market them so much as a hotel portfolio. We have a central located hotel in Sturegatan and also several hotels in Solna. So we have different types of assets. And as I said, we have several office tenants that also want to expand into other things. That could be an opportunity for us. We see also maybe more tenants asking for combined properties with some kind of research development department, some smaller part logistics together with office. we also have plots available for that. But the offices we already own, they are not that -- not all of them at least so flexible to convert to other things right now.

Well, if this is still -- this was the last question, do you want a last comment before we wrap this up then?

Not so much, but I want to say I'm very enthusiastic. I'm humble about this task I have. I'm grateful for the opportunity. And my big, big dream is that my position is not necessary because then the management team and all employees really runs the company. But I'm looking forward to this. Thank you for taking your time, and we we'll meet more investors, sorry. But after Q4, I think we will be very much more available. Thank you for taking your time.