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

Welcome to Neobo Q2 Report 2024. [Operator Instructions] Now I will hand the conference over to CEO, Ylva Sarby Westman. Please go ahead.

Good morning, everyone, and welcome to the presentation of Neobo's interim report January to June 2024. My name is Ylva Sarby Westman and with me here today, I have our CFO, Maria Strandberg. Operations are continuing to develop positively and rental income has increased by 7.3% in the like-for-like portfolio as a result of rent increases and reduced vacancies. Net operating income increased to SEK 229 million, which corresponds to plus 3.4% in the like-for-like portfolio and profit from property management totaled SEK 68 million. Unrealized value changes amounted minus SEK 216 million, which is a decrease of 1.5% during the period. The fundamental objective of everything we do is to create attractive and sustainable living environments where people can thrive and feel secure. Sweden needs more residential that people can afford to live in and by managing and refining our properties and adapting them to people's needs, we want to contribute to a more sustainable residential property market. Our strategy is to manage and refine residential properties with inflation-protected cash flows to generate a long-term attractive total return. In order to succeed in this, optimization of the property portfolio is an important component of our business model. We have a residential-focused property portfolio with a value of SEK 13.7 billion and 8,300 apartments. Residential properties account for 94% of the property value and the remaining value mainly consists of community service properties. The rental value has increased with 5% over the past 12 months in constitutes of 76% from residential apartments and 21% from commercial premises. At the end of the period, we had completed all rent negotiations in residential portfolio with an average increase of 5.1% and the higher rents will take full effect during the third quarter of the year. Intensive work is in progress to increase the occupancy rate which has improved by 1.3 percentage points in the last 12 months and a positive example from Falköping, Sundsvall and Örnsköldsvik, where we have succeeded in reducing the total number of vacant apartments from 144 to 42 since Neobo was founded, thanks to dedicated efforts from our employees. The work to refine our property portfolio continues. And during the first half of the year, we invested SEK 56 million in value-creating measures that generated an attractive return and contributed to increased property values. We have renovated approximately 50 apartments during the spring. And as an example, we completed two apartment renovations in a property in Stockholm that led to an average rent increase of 62%. We continue to optimize our property portfolio. And at the end of June, we successfully divested a retail property in Falun at an underlying property value of SEK 75 million. The price is 18% higher than the most recent external valuation conducted and the transaction generated a positive earnings effect of SEK 10 million. Closing will take place during the third quarter and the divestment means that we have exited Falun and unlocked capital for reinvestment in strategic properties. We have taken several steps on our sustainability journey, and here are some examples from the second quarter. We have become members of the UN Global Compact, recruited 60 young people living in our residential areas as summer workers, analyzed insights from our customer survey and arranged Neobo days in several of our areas. We have also launched a save water campaign targeting our tenants. A brief market overview. There is still a strong demand for rental apartments in Sweden with a growing population, a very low market vacancy and a majority of the municipalities reporting housing shortage. This, combined with a historically low level of new construction gives us good opportunities to further increase the occupancy rate. Liquidity in the transaction market has increased by 13% compared to corresponding period last year due to lower interest rates and improved financing climate and we are optimistic about the second half of the year and believe that activity will pick up further when interest rates and financing gradually stabilize. Some comments on our half year results. Rental income increased by SEK 20 million to SEK 454 million, which is a net effect of higher income and the absence of rental guarantees in the hotel operations, which existed last year of SEK 5 million. Like-for-like portfolio showed an increase in rental income of 7.3%, and the increase is explained by higher rents, reduced vacancy rate and rent increases as a result of a partnered renovations. Property costs increased by SEK 16 million to SEK 224 million. The increase is a net effect of higher costs for operations and property administration as well as reduced maintenance expenses. The increase in operating costs was mainly attributable to increased tariff-based costs and higher costs for snow removal during the first quarter. Property administration increased since Neobo's organization and operations are now fully in place and [ since ] SEK 2 million in items affecting comparability were charged to the period relating to a reorganization. Maintenance expenses decreased by SEK 18 million during the period as the need for maintenance was lower than preceding year. Net operating income increased to SEK 229 million during the period. And for the like-for-like portfolio, the increase corresponded to 3.4%. Central administration costs amounted to SEK 38 million. Items affecting comparability of SEK 5 million were charged for the period to prepare Neobo for switch to NASDAQ Stockholm's main list and due to a reorganization. Excluding items affecting comparability, central administration costs increased by SEK 2 million, as Neobo's organization and operations are now fully in place. Profit from property management decreased to SEK 68 million as a result of higher property and financing costs. The earnings capacity, it's not a forecast and does not include any assessment for future trends. Rental income is up 6.4% compared to the earnings capacity one year ago, attributable to rent increases and higher occupancy rate. Property management costs have increased by SEK 6 million since the first quarter attributable to high cost for operations and property administration. Net operating income has increased by SEK 30 million since the beginning of the year due to higher rental income. Central administration costs amount to SEK 60 million and are based on budgeted costs for a normal year. Net financial items have improved by SEK 5 million as a result of lower interest rates and profit from property management sums up to SEK 250 million and net initial yield from the property portfolio has increased to 3.8%. The yields have continued to rise slightly during the spring and the average yield requirement used in the valuation has increased from 4.7% to 5.0% during the year. The unrealized change in value represented a decrease of 1.5% during the period. And our assessment is that the yields will now begin to stabilize after a period of rising yield and we continue to carry out external valuations of all our properties every quarter to ensure accurate book values. We have a strong financial position based exclusively on bank financing from banks in the Nordic region. At the end of the six month period, we refinanced and extended bank loans for just over SEK 1 billion at a lower margin than the average margin in our existing loan agreements. This is a sign of strength for Neobo and a clear indication of improving market sentiment. The average debt duration amounted to 2.8 years in the end of June, and our average interest rate amounted to 3.4%. Since we have a high hedge ratio of 75% that effectively has offset the upswing in interest rates that took place over the past years. The average fixed rate period was prolonged to 2.6 years in June, and the ICR amounted 1.6x on a rolling 12-month basis. In order to secure future cash flows and further reduce the financial risk, we use interest rate derivatives. At the end of the period, the aggregated nominal value of these swaps was SEK 5.4 billion with maturities of between one and seven years. In addition to this, there are interest rate derivatives with future starts at a nominal amount of SEK 1.4 billion. During the second quarter, the Swedish Riksbank cut the policy rate by 0.25 percentage points and thus commenced the downward interest rate trajectory anticipated by the market. And this will improve our opportunities to carry out value-generating investments that will further increase the return from our properties. Here, you can see our largest shareholders in the end of June, and the total number of shareholders amounted 116,000. And in this picture, you can see one of our properties in Oskarshamn, and we are, of course, happy to know that the total return in the share has been 95% over the last 12 months. Finally, some key takeaways from the first half of 2024. Continued positive development of rental income and positive outlook for next year, divestment of a retail property at a price level of 18% higher than the latest external valuation refinancing of bank loans of SEK 1 billion at a lower margin than the average margins for our existing loan agreements. And we have taken several steps on our sustainability journey. After an intensive spring, we are now preparing for the next stage of our journey with the aim of realizing the potential in our property portfolio and thereby create shareholder value. And with this, I would like to open up for questions.

[Operator Instructions] The next question comes from Keivan Shirvanpour from SEB.

I have some questions regarding the costs. We saw that maintenance costs were down from SEK 15 million last year to SEK 6 million in this quarter. So it's quite a significant decrease but I see that in your earnings capacity, we see that property management costs are actually up by SEK 6 million. I think what should we expect in the coming quarters given that the costs were way below last year?

We had high maintenance costs last year due to a rather large need for maintenance. So we spent SEK 66 million corresponding [ SEK 90 ] per square meter last year in maintenance, which is at a high level. And going forward, we see that the yearly maintenance affecting the NOI will be at a lower level than that. I mean the property costs in the earnings capacity is up with SEK 6 million from last quarter, but it's not related to maintenance. It's related to higher costs for operating the properties.

But for, let's say, Q3, should we expect a similar run rate for maintenance costs? Or how should we think there?

I think maybe if you take the half year figure and probably the full year will be the double -- to look at the six month figure.

And my second question is regarding central admin costs. We see they're also down quite a bit in the quarter, but you also have the upcoming list change. So if I might have missed that, but if we exclude for this list change costs. How much are you expecting here if we were to exclude this?

I mean, on the full year, we have in the earnings capacity, total central administration costs for SEK 60 million excluding one-offs or costs that disturb the comparability between the years. So during the first half of the year, I think it was SEK 5 million that was costs that was not -- it was a one-off. Regarding both preparations for the main list, but also related to a reorganization in Neobo.

And my final question is regarding investments. You said that you have upgraded some apartment and I -- that you have invested some SEK 46 million in the first half year what are you thinking about the investments in H2? What are you planning on maintaining this pace?