Pandox AB (publ) (PNDXB) Earnings Call Transcript & Summary

Ladies and gentlemen, thank you for standing by, and welcome to today's Pandox Year-end Report 2019 Conference Call. [Operator Instructions] Please be advised today's conference is being recorded. And I would now like to hand the conference over to your first speaker today, Mr. Anders Nissen, CEO of Pandox. Please go ahead, sir.

Well, good morning, and welcome to this presentation of Pandox full year report and fourth quarter of 2019. As said, my name is Anders Nissen; and with me, I have Liia Nõu, Pandox CFO; Anders Berg, Head of Communications and Investor Relations. And as always, this presentation is divided into 2 parts. We start with the presentation of the quarter, followed by a Q&A session. So welcome, everyone. 2019 was another good year, if I may say so, for Pandox, an active year as well. Let me point out a few strong developments. The first is that we cemented our position as one of the leading pan-European hotel property companies. And that is important in itself. To have reached this position is one of the few assets. We also strengthened our business platform and geographic position into some of the biggest hotel markets in Europe. That is beneficial. Our diversification brings -- and has brings clear benefits over the year with good markets more than compensating for weaker markets in terms of growth. And finally, we have seen an increase of number of new partners and had -- that had strengthened our network to leading hotel operators and hotel brands in the world. The most important is when we combine these 4: pan-European position, geographic diversification, network together with our expertise. That brings in high-quality new business opportunities in terms of acquisitions and in terms of investment. I also believe that, that shows in our result for 2019. With that said, let me move over to some numbers for the fourth quarter and the full year 2019. Total -- we are now at Page #2. Total net operating income increased by 10% for the quarter and 11% for the full year. Return on equity was 17%. And the driver behind are profitable and value-adding acquisitions. We also have -- we also see a positive underlying demand and positive rental growth in several markets. Like-for-like Property Management increased by 3% -- 3.7% in the quarter and 1.9% for the year. So we have a slower start, but a very strong end in Property Management. Like-for-like Operator Activities decreased net operating income by 18.5% in the quarter and then increased 1.5% in the full year. The decline explain with has been communicated before with combination of factors. Most likely, ongoing planned renovation where we're taking out capacity. Let's come back to that later. So next page, please. And in the quarter, Pandox total net operating income increased by SEK 83 million, an increase of 10%. For the full year, the increase was 11%. Again, the key factors supporting the development was profitable acquisitions in both business segments, positive underlying demand and a positive rental growth in many markets. The key negative factors in the quarter was mainly related to Operator Activities. Specifically, it was renovation and reposition of Hotel Indigo in Brussels, and the same with Hilton Garden Inn in Heathrow Airport. We do 2 large renovations there. We'll be taking out capacity, and that also had a negative development of the EBITDA that will come back. We also have a slightly weaker meeting market in Brussels in October and an ongoing reposition of DoubleTree, Hilton Montréal. And on the top of it, we took 10% restructuring costs for operational platform in Brussels. We have grown that business a lot the last couple of years, and we will need to rebuild a bit. Now that is done. In general, we have, for -- a general comment from both business segments is that RevPAR was also negatively affected by a new supply in many markets, and we also had some currency headwinds in the quarter. Next page, please. Yes, profitable execution of strategy. As you who follow us know since we returned to the stock market, we have had a high business [ temper ] since then. We had now made acquisitions for approximately SEK 25 billion. We had also invest about SEK 2.9 billion in value-adding projects in existing hotels. We have secured some 80 new leases. And finally, we have sold out hotels for SEK 2 billion. All in all, over these 4.5 years, total net operating income and total cash earning had more than doubled over this year, measured on a rolling 12-month basis. So next page, please. As I said at the beginning, one of the most important targets for Pandox had to be reach our pan-European position. We're talking about strategic position in size and scale, geographic presence, partner network, portfolio compositions and stakeholders' recognitions. These all in all mean that we all now have a position and known for the full integrated pan-European hotel property company, which is itself create lot of opportunities. Next page, please. Geographic balance is one of them, who can be developed to diversification because of this pan-European position. We are now in 15 countries and 90 destinations, and that continuously -- we could continue to [ strengthen] that all the time, meaning that diversification in terms of being in many sort of destination in different segments with different partners give us opportunities but also balance out the risk. Next page, please. And our strong network, because of our pan-European position, is also increasing. Number of new partners is there, meaning that we have more alternatives in our 4 business model and easier for us to be active in the full value chain when we can choose between world-class partner, as you can see on this. I don't think anyone in Europe has so many strong partners as we have at the moment. So this, when you combine this, said before, position, geographic presence, the diversification, the network, that give us a flow of business opportunities. And if you go to the next page. One is that materialized by, we had expand in major markets in Europe and totally made acquisitions for EUR 537 million, that including 13 new hotels with 2,800 rooms in 11 cities in Germany and Netherlands. We add 7 new cities. We add 5 new brands, and we include now 3 new partners to our position. And that is -- we have communicate that, that will give EUR 30.8 million in net operating income measure on a full year for -- annualized for 2020. If we then move to next page, we have -- we did 4 -- we made 4 acquisitions last year. The first was a sale and leaseback together with HR Group, 3 hotels in Germany. And then I flow to next page, you see the first one is Dorint in Dortmund, 300 -- 211 rooms hotel. Next page is the leading hotel in Augsburg, Dorint as well. And then you see on page after that, Dorint in Erfurt. The seller stay as operator. That's why we call it the sale and leaseback, and we have now starting development program for these 3 hotels. The initial yield was 5.6%. We did also a sale and manage-back together with Grape Hospitality, 2 hotels in 2 cities: 1 in Germany and 1 in Netherlands. That meaning that the seller stay and manage our hotel on our behalf. And there was 1 hotel in the Hague, and next page, and 1 hotel in Hannover. Two great properties that we now have in our portfolio and give us opportunity to invest into these hotels, but also have Grape in our network, giving us a chance of also finding new hotels together with Grape. Grape has close to 90 hotels, so they are a big player in Europe. We did a one, single acquisition in Maritim Hotel in Nuremberg, city center location, 316 rooms. And we believe it's a great potential of value-adding investment. We take over an existing lease with Maritim short term, and we are now evaluate our position. If we go back to Grape, we did that on 6.5% initial yield. And now on Maritim, we're starting with 5.4%. And then you see the picture on next slide of this beautiful hotel. And late in 2019, we also closed a new sale and leaseback with 7 hotels in Greater Frankfurt, Munich, Stuttgart mainly. And these are, again, that the operators stay and sell to us these hotels who need position and a lot of inspiration, vitalization and CapEx. And we have now starting up this program together with HR Group. The business plan for each hotel, initial yield, 5.7%. So here, you see our next page, these 7 hotels, who, as I said, now starting to be upgraded in different ways. When we -- when you move to the next slide, you will see a picture of our well-diversified portfolio, dominated by leases. And all in all, 156 hotels; 35,000 rooms; and a property market value for 6-point -- SEK 64.1 billion. 85% is Property Management and 15% is Operator Activities. Let's move over to the page of markets. So growth in most countries, you can say, in general, that the demand is growing in most of our markets, but in some markets, this -- there is a press on RevPAR because of new supply. If you look at Europe as a whole, you see that Europe was stable all quarters last year. If you move over to the next slide, our next graph, you can see in selected countries that our diversification works well. Finland, Norway, Germany, strong. Ireland, U.K., weaker. Austria and Sweden, stable. And that is how we also see that our portfolio should continue to develop in -- that diversification play an important role. Next page, please. If you look at key markets, you see that Helsinki was very strong and last year, and that's due to our chairmanship of EU. You have Frankfurt, an extremely strong Q2 last year because of exhibitions. Brussels, good. Stockholm, good as well. Copenhagen came out surprisingly good. That means stable despite of a lot of new capacity coming into the market. Montreal as well. And then we had a few other market, Berlin, after a couple of strong year, they're slightly minus. Oslo, minus 2% due to new capacity in UK Regional. Combination of a little bit weaker meeting market together with new supply took down UK Regional to minus 3% will come out better in our portfolio. Stockholm, stable, I would say, continued to -- it's a big hotel market in Stockholm, and they continue to demonstrate the strengths of being -- it has a strong position for international leisure and meeting markets. Next page, please. And then I am happy to give over the stage to Liia.

Thank you, Anders. Page 23, I think we are on. We ended the year with a stable fourth quarter, although a combination of factors affected both revenue and profit negatively in operating activities. We also had a few tax items in the quarter, which affected cash earnings positively. I would like to stress that our underlying tax rate is in the 11% to 12% range, and that's also our planning assumptions for 2020. On the decision from Swedish Tax Authority regarding transfer pricing, we do not have more to add at this point than what we already described in the report. So let's turn to some key numbers instead. Starting with Property Management. In the fourth quarter, rental income amounted to SEK 810 million, an increase of 8%. If we adjust for the previous accounting change for property tax in U.K. and Ireland, the increase was 11%. Like-for-like Property Management reported an increase in rental income of a solid 4.4%. In the fourth quarter, net operating income amounted to EUR 716 million, an increase of 14%. Excluding IFRS 16, net operating income amounted to SEK 700 million, an increase of 12%, which means like-for-like Property Management reported an increase in net operating income of 3.7%. Continuing with operating activities. In the fourth quarter, net operating income amounted to SEK 159 million, a decrease of 4%. The decline is explained by a combination of factors, including the renovation of Hotel Indigo in Brussels City and Hotel Garden in Heathrow Airport, the ongoing repositioning of DoubleTree by Hilton Montréal, a slightly weaker media market in Brussels in October and restructuring costs of around SEK 10 million for the operations platform in Brussels. We also had negative currency effects in the quarter. Excluding IFRS 16, net operating income amounted to SEK 150 million. Like-for-like operating activities reported a decrease in net operating income of minus 18.5%. Adjusted for the cost and tax mentioned above, the decrease in the net operating income was approximately 2%. Total cash earnings amounted to SEK 651 million, an increase of 34%. Total cash earnings per share increased by 28% based on the weighted average number of shares. Measured from year-end 2019, the unrealized and realized value increase for Investment Properties amounted to 3.2%. For Operating Properties, the value change was 3.9%. End-of-period EPRA NAV per share amounted to SEK 186.4. In the fourth quarter, currency also affected EPRA NAV negatively somewhat. Adjusted for dividend and proceeds from the new share issue, the annualized increase in EPRA NAV was approximately 17%. Next page, please, Page 24. In the fourth quarter, Property Management continued to benefit from previous acquisitions, positive diversification effects and improved demand in some markets. Although like-for-like growth was stronger in the fourth quarter, it was constrained by negative supply and renovation effects in some markets. Rental growth in the comparable portfolio was positive in Germany, Switzerland, Finland, Norway and Sweden and negative in Ireland, Denmark and the U.K. Stronger destinations mentioned are Wolfsburg, Frankfurt, Cologne, Dusseldorf, Leeds, Belfast, Helsinki, Vienna and most regional cities in Sweden, Norway and Finland. In Stockholm, rental income increased by approximately 3% in the fourth quarter. In Oslo and Copenhagen, rental income decreased by 11% and 2%, respectively, due to an increased supply of hotel rooms. Next page, please, Page 25. While revenue increased in the fourth quarter, net operating income declined for the reasons explained earlier. It should be noted, however, that underlying demand remains positive in all of our markets. Next page, please. Looking at value increase. In the fourth quarter, approximately 34% of the portfolio was externally valued. For the year, total unrealized and realized changes in value amounted to SEK 1.798 billion, of which SEK 1.5 billion for Investment Properties and SEK 330 million for Operating Properties. For the year, the value increase is explained by a combination of improved cash flow as well as lower yield. In the quarter, we closed the acquisition of 7 hotel properties in Germany in Property Management, as Anders previously told you, and the acquisition of 2 hotels in Germany and the Netherlands in the operating activities. End of period, the average valuation yield for Investment Properties was 5.41%. For Operating Properties, it was 6.41%. Next page, please. Let's take a quick look at our EPRA NAV and financial position. End of period EPRA NAV per share amounted to a rounded SEK 186.4. This corresponds to an increase of approximately 70% on an annualized basis, adjusted for the dividend and proceeds from the directed share issue we had in November. Loan-to-value amounted to 46%. Please note here that it doesn't include a payment for the hotel in Maritim Hotel in Nuremberg, which will close in Q1 2020, which is an amount of EUR 61 million. Liquid funds and long-term unutilized credit facilities amounted to SEK 4.2 billion. Next page, please. The Board is proposing a dividend of SEK 3.60 per share, corresponding to approximately 30% of cash earnings and approximately SEK 662 million in total amount. The dividend is an adjustment to Pandox' current dividend policy, while at the same time, building our capacity to capitalize on future business opportunities. Next page, please. And with all of those numbers, I hand over to Anders for some final words.

Well, thank you, Liia. Yes, the outlook for 2020 looks stable. The fundamental is there. And what we also see -- so the demand will -- has -- will have possibility to increase also 2020. But on the other side, we believe that new capacity will press RevPAR in several markets. So the RevPAR growth will be more of a stable trend. For Pandox, the start will be as communicated before, slower in Operator Activity due to heavy investment program, which will add value. And in medium and long term will be -- have a positive effect on of -- in terms of growth. We also have some heavy investment in our Property Management. All in all, we have planned -- we have a focus on investment when the market normally is weaker. Over the year, that will balance out. So that was all from this report today, and we now are ready for questions.

[Operator Instructions] Our first question comes from the line of Simen Mortensen.

I have a question, which perhaps it goes, if it goes on the tax, first of all, it was a positive payable tax in the quarter, as I can read from the result. Can you please elaborate how that came about? And what's behind that positive payable cash figure?

Yes, absolutely. I think that's a question for me, Anders, or you want it, I guess. It's -- what one should look at is the total number for the year. So the tax rate -- the efficient tax rate for the full year is actually 6%. But we had some one-offs in Q2 -- sorry, in Q4, and that was related to the Jurys Inn acquisition we did 2 years ago with the reorganization last year, and we made some reservations last year, which we now have reversed. We also have some one-off, tax income one-offs in Canada. Then also in Q4, we have got some decisions and implemented some reorganization with our new acquisitions. So we have a slightly more efficient tax rate -- bond rate in U.K. So all in all, one should look at 2019 with an efficient tax -- after-tax rate of around 8%. However, as I said in the beginning, looking in 2020, we guide at around 11%, 12% because of the fact that we're actually making a lot of profits in Sweden and our -- is what? Our tax...

Deficits.

Deficits are running low. So we are getting into a tax position in Sweden. So all in all, a lot of different factors going both ways, but you want to look at the accumulated year number.

Okay. Another thing that goes on to the market today is there's talk about the coronavirus. Of course, travel and leisure could always be impacted by anything. Have you seen any impact on bookings going forward in and out from China? Or any elements that might disrupt your business due to the coronavirus outbreak?

Now we don't see any specific effect at the moment. What we follow is number of flights and arrivals from Northeast Asia. And if we put it in the context, they stand for about 3% of the total capacity of arriving in Europe. And on this 3%, we see globally the number of flights, the number of passengers coming down. What that means, as I said at the beginning, we don't know yet and we don't see any specific effect on Pandox on this stage. And one of the reason is that the big -- the high seasons is to the summer. So we have to wait and see if -- what effect will be when the big numbers are planned to come in.

So -- but you haven't seen anything on bookings ahead after summer already?

Not in our hotels, not something specifically. These are -- the groups are not planned to come. It's more tourist groups, and they normally stay on economy hotels. And we don't have so many of them, as you know.

Our next question comes from the line of Niclas Hoglund.

Niclas Hoglund from Nordea. Could I ask a little bit of your investment capacity and pipeline right now? You've taken on some interesting investments here supporting the property under management and outlook for growth. But what do you see for 2020? And how much can you do?

We have a capacity for something around SEK 10 billion, and that we're spending this base capacity in 2 areas. One is value-adding investment in existing hotels, and we do so much as we can. It's only 365 days a year, and we do a lot and we see a lot of growth possibility to -- after renovation taking market shares. The big one is, of course, acquisitions. And as you know, we did SEK 5.5 billion last year. We are active in looking at other possibilities. But at the moment, we are active and we try to figure out in which market, in which sort of acquisitions we most likely would focus on. And we have a few leads that we're looking at, but nothing to report about.

Looking at the market, will you sort of stay within your scope in Europe today? We've previously talked a little bit about Spain as looking a little bit more interesting. What's your thought on your current sort of mix in the portfolio?

The easiest way is to continue to buy hotels in [ European ] market that we already are established into. We have legal setups. We have network. We know the market. So that is the easiest way. If there would come a profitable deal in Spain, we'll be happy to look at it, the same as in France. But at the moment, I would say it's more likely that we do something in U.K. and Germany.