Neobo Fastigheter AB (publ) (NEOBO) Earnings Call Transcript & Summary

Welcome to Neobo Q3 Report 2023. [Operator Instructions] Now I will hand the conference over to CEO, Ylva Sarby Westman. Please go ahead.

Thank you very much. Welcome, everyone, to the presentation of Neobo's Interim Report January to September 2023. My name is Ylva Sarby Westman, and with me here today, I have our CFO, Maria Strandberg; and Head of IR, Johan Bergman. Our vision is to create attractive and sustainable living environments where people can thrive and feel secure. And we have 80 employees who work dedicatedly every day to realize this vision and thereby create value for tenants and shareholders. And in this picture, you can see one of our properties in Oskarshamn. Operations have continued to develop in a positive direction. And in the like-for-like portfolio, rental income increased by 4.9% and net operating income by 3.7%. Profit from property management decreased to SEK 127 million as a result of higher financial expenses and increased central administrative costs. Unrealized value changes in properties amounted minus 6.1% as a consequence of higher yield requirements in the market. Neobo is a residential focused company with a property portfolio with a value of SEK 14.4 billion. We have 8,400 apartments and residential properties account for 95% of the property value, and the remaining value mainly consists of community service properties. Our rental value has increased by 5.9% during the last 12 months. The total rental value for residentials has increased with 4.5% during the year. Increasing the occupancy rate has been top priority since we started Neobo, and we are happy to note that our efforts are starting to pay off. During the third quarter, the occupancy rate in total has improved with 0.3 percentage points. And in the residential portfolio, the occupancy rate is up with 0.6 percentage points since the beginning of the year. In September, we recruited Malin Arnbom as Head of Communication and Marketing, and she has contributed to significantly improve our marketing of vacant apartments. Among other things, we have increased local advertising in social media and improved the marketing of Neobo via Google, and we will continue to work focused to increase the occupancy rate and improve tenant satisfaction. We see continued strong demand for rental apartments in Sweden with a growing population, a very low market vacancy, and the majority of the municipalities reporting housing shortage. According to Boverket, the annual need for new residentials in Sweden amounts to 67,000 during the coming year, which, combined with a historically low level of new constructions, gives us an opportunity to increase the occupancy rate further. Liquidity in the transaction market remains low and the volume decreased by 55% compared to last year. However, we have seen transactions in the residential segment, such as acquisitions from Stena and Resinova. And hopefully, the market will continue to pick up when market conditions improve. During the quarter, we finalized our sustainability strategy and policy, which were adopted by the Board in September. The strategy is based on 3 perspectives: sustainable living environment, corporate social responsibility, and sustainable business. We are now working on concrete sustainability targets, and the ambition is that they will be decided upon and communicated in the beginning of next year. We have also developed a water and energy management system to ensure proactive and systematic efforts to reduce water and energy consumption in our properties. A summary of the income statement for the period. Rental income increased to SEK 658 million and in the like-for-like portfolio with 4.9% due to rent increases and a higher occupancy rate. Property management costs decreased during the period by SEK 14 million, and the reduction is a net effect of lower operating costs and increased costs for maintenance and property administration. Operating costs declined slightly as a result of electricity subsidies of SEK 8 million received during the third quarter. Net operating income increased with SEK 37 million and 3.7% in the like-for-like portfolio. And the increase is mainly attributable to higher rental income. Central administrative costs increased by SEK 18 million. And in the period, we had nonrecurring costs of SEK 15 million relating to the separation and listing of Neobo and start-up costs for the company. Excluding nonrecurring costs, central administrative costs increased with SEK 3 million, attributable to Neobo being an independent company since the beginning of the year. Net financial items increased as a result of higher underlying interest rates and raised margins in refinancing. Profit from property management decreased to SEK 127 million due to higher financial costs and increased central administrative costs. The earnings capacity is not a forecast and does not include any assessment for future trends. Rental income is up 3.8% compared to the earnings capacity in the beginning of the year, attributable to rent increases and higher occupancy rate. After 9 months as an independent company, we have increased property management costs in the earnings capacity by SEK 15 million as a result of cost increases for maintenance, electricity, and property administration. Net operating income has increased by SEK 17 million since the beginning of the year as a result of higher rental income. We have also increased central administrative costs in the earnings capacity by SEK 5 million since we can see that the costs are higher than previously estimated. No one-off costs attributable to the separation are included in the earnings capacity. Net financial items is based on existing credit agreements and STIBOR on the last of September. Profit from property management in the earnings capacity sums up to SEK 192 million. The value of the property portfolio declined by 6% during the period and with 8% during the last 12 months as a result of increased yield requirements in the market. The average yield requirement in the valuations has increased from 4.1% to 4.5% during the period. Since January, we have invested SEK 110 million in the properties. Neobo has a strong financial position with a low LTV of 48.6% and 100% of the financing from banks. The average debt duration amounts to 3.6 years. And as you can see to the right, we have almost no maturities before 2025. Our average interest rate has increased to 3.2%. But since we have a high hedge ratio of 77%, our interest costs are not fully affected by increased interest rates, and we have a good predictability of profit from property management going forward. The average fixed rate period amounted to 1.9 years in the end of September, and the ICR amounted to 1.7x during the period. Here you can see our largest shareholders in the end of October. And according to Euroclear, the total number of shareholders now amounts to 141,000. Finally, some key takeaways from the year. Efforts to increase the occupancy rates are starting to pay off. We have a continued positive development of rental income, plus 4.9% in the like-for-like portfolio, and a positive outlook. High hedge ratio resulting in a low average interest rate of 3.2%, and focus going forward on increasing the return by raising rental income and occupancy rate, controlling costs and carry through value-creating investments. And with this, we would like to open up for questions.

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

Thank you very much. We have some written questions from the web. I will start with some from [ Leon Duckworth ] at Cape Capital. Investments level for 2024 in existing properties, what's your strategy for hedging the debt portfolio in 2024?

Yes, I can start with those 2 questions. The investment volume so far this year is SEK 110 million. And part of this is that we have renovated 50 apartments in the portfolio, but we have also carried through some sustainability investments in order to reduce our energy costs going forward. For the coming year, we, at least at this stage, think that probably the same total investment volume, somewhere around SEK 130 million to SEK 150 million for next year. And when it comes to the hedging strategy. As I mentioned, we have a high hedge ratio of 77% today with an average fixed rate period of 1.9 years. And so we can see in our sensitivity analysis that we will handle our financial key figures in a good way with this swap portfolio. But of course, we follow the interest rate market closely, and we will discuss it going forward to see if we need to maybe do some more hedging and prolong the average fixed rate period.

Okay. Thank you. Is it likely that Neobo will acquire or divest properties in the coming year?

Yes. We are looking closely in the transaction market and evaluating the opportunities that we can see. And as we have said earlier, we would like to optimize the portfolio and do some divestments. So I would say that most probably we will sell something during the coming year.

Okay. What is the one-off cost in administration costs? Is it likely we will see these costs every quarter?

The total one-off costs during the period is SEK 15 million for the 9 months. And we will probably see some one-off costs in the last quarter as well. But hopefully, it will be a smaller amount and we will see it decreasing as we establish Neobo as an independent company.

Okay. Thank you. Can you elaborate more on why it's so difficult to rent out Neobo's apartments compared to other companies?

I think that it's a number of explanations. One is that we need to renovate some apartments, and we are doing it in a phase that is possible for us due to the liquidity situation that we have. We also need to improve our marketing as a newly started company in order to -- so the tenants can really find us and the vacant apartments. I also think that we need to focus on -- in the organization, in every part of it, if you look into the vacancies in the commercial premises, I think that we have a lot of work to do in order to lower that vacancy rate.

Thank you. We have some questions from [ Martin Larsen ]. The first one is, when do you expect the 2 remaining receivables from SBB to settle?

It's a hard question for me to answer. We really hope that we will be able to settle this as soon as possible. But it's hard for me to make a prognosis.

Have you found/recruited a new Head of Property Management?

No. We have decided not to recruit a Head of Property Management. Since we have a portfolio of SEK 14.4 billion, we think in the management team that it's enough with 2 regional managers taking care of the property portfolio. So when Jonny Göthberg leaves us at the end of the year, we will not recruit a new person.

Yes. Thank you. And the final question from Martin. Reduced vacancy rates or increased surplus ratio, what is the hardest?

Very good question. I mean, we have improved the surplus ratio to 63% in the third quarter. And it's up to 56% during the first 9 months. And so we have a lot more things to do in order to increase surplus ratio. But -- so it's hard to say. I would like to say that we are really focusing on both questions, both increasing surplus ratio and increasing occupancy rate. So I think that it's maybe equal between the 2.

Okay. Thank you very much. We have a question from Per-Anders [indiscernible]. Do you see any need for [indiscernible] in the near future?

No, we don't see any need. As you have seen in the report, we have a good liquidity position, and we have a long average debt duration of 3.6 years and no need for new capital as we see it today.

Okay. Thank you very much. There is no other questions from the web.

Thank you very much, everyone, for listening in, and have a nice day. Bye-bye.