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

Hello, and welcome to Pandox Q3 Report 2022. [Operator Instructions] Today, I am pleased to present Anders Berg, Head of IR. Please go ahead.

Thank you very much, and welcome to this presentation of Pandox third quarter 2022. I'm here together with Liia Nou, our CEO; and Anneli Lindblom, our CFO. And hopefully -- we have some technical difficulties in connecting Robin. But hopefully, in line with our tradition, we will have STR with us also today, represented by Robin Rossmann, Managing Director at that firm, and he represents a leading independent research firm focused on the hotel market and he will share STR's view on the market. And as you know, the views expressed by STR are completely separate from Pandox and the presentation is offered only as a service to Pandox's stakeholders. And also, please note that Robin's presentation will be held after we have completed our earnings presentation, including the Q&A. The presentation is, as usual divided into 3 parts. First of all, Liia, Anneli and myself will present a business update with financial highlights for the third quarter, followed by a Q&A session. And after that, Robin will come in and provide the external hotel market update. Next page, please. And with that, I hand over to Liia Nou, CEO of Pandox.

Thank you, Anders, and welcome, everyone. I'm really happy to report another strong quarter for Pandox and the second in a row, and our best so far in Pandox's 7-year long history. It's quite remarkable given the pandemic and the uncertainty we have seen over the last 5 -- few years. The third quarter was the first restriction-free quarter since the fourth quarter 2019, and hotel market demand was strong. The combination of a positive hotel market and a well-executed business model with variable revenue resulted in a strong earnings improvement for Pandox. Revenue-based rents increased and our own operations improved considerably, which confirms the power and performance of our business model. We end the quarter with a solid financial position, with an LTV of 47.1%. And it's worth repeating that we have all of our financing through banks, and together with them, we have a good and constructive dialogue of future refinancing. Next page, please. Pandox has a well-diversified hotel property portfolio. We have 157 hotel properties, with approximately 35,500 rooms in 15 countries and 90 cities, and with the property market value of more than SEK 68.3 billion. We are divided into 2 business segments: Property Management and Operating Activities. In Property Management, we'll lease hotels to strong and well-known operators and the long revenue-based agreements. This segment makes up for some 81% of our property market value. The other segment, Operating Activities. We operate the hotels ourselves under different operating models. The Operating Activities makes up for some 90% of our property market value. The focus of our portfolio is upper mid-market hotels, with mostly domestic demand, which is a strength in more uncertain economic times. Next page, please. Pandox has one of the strongest networks of brands and partners in the hotel property industry. This ensures efficient operations and revenue management, which maximizes the value. As you can see in this picture, we work together with several well-known operators, for example, Scandic and Nordic Choice in the Nordics, Jurys Inn in U.K. and Leonardo Hotels in Germany. We also have long relationships with strong international brands such as Hilton, Holiday Inn, Radisson Group, et cetera. And we are very happy to have added Axiom Hospitality to our network during this quarter. They are managing the operations at our newly acquired DoubleTree by Hilton Bath. In our Operating Activities segment, we have also some independent brands created by Pandox. For example, our newly renovated Hotel Berlin, Berlin, which is our largest hotel with over 700 rooms. Next page, please. The third quarter was the first quarter since 2019 without any significant pandemic restrictions. The hotel markets have now returned to a more or less normal seasonal pattern and business mix. RevPAR has fully recovered to pre-pandemic levels, mainly driven by higher average prices. Hotel demand is broadly anchored and business and group travel have increased. The strong market recovery translated into strong growth and profitability for Pandox in our third quarter. For comparable units, net sales and net operating income increased by some 78% and 84%, respectively. Like-for-like, Property Management increased operating income by 39%. And our relationship with our banks remained strong. And we have almost SEK 4.5 billion in cash and unutilized credit facilities at the end of the quarter. Despite considerations paid for 2 acquisitions, equivalent to around SEK 878 million, Pandox loan-to-value fell to 41.1%. Return on equity, measured by annualized growth in EPRA NRV, rose substantially and was approximately 18%. Next page, please. Here on this picture, we see a comparison of the RevPAR level for our business segment Property Management from 2019 until today. The numbers are on a comparable basis. And as you can see, 2022 started weak due to travel restrictions, but saw a strong bounce back during the spring and early summer, a trend that have continued since then. In the third quarter, the hotel demand developed strongly in all our markets. The comparison to 2020 and 2021 is no longer relevant as the current performance is now much more in line with 2019 since we have now moved out of the pandemic. Hotel demand in mainly larger cities increased significantly, while smaller and regional cities continued to develop well. Next page, please. Here we see Pandox's total portfolio categorized based on type of locations with RevPAR index versus 2019. Almost all segments in the hotel market are now trending in line, or above the 2019 level. This is mainly explained by strong average price development. Occupancy has recovered, but has a little bit left to go until we reach 2019 levels. You can also see that the spread in performance between the different segments is currently very tight, which is a clear signal that the hotel market is almost normalized. Next page, please. On this slide, we see the same segments as the previous slide, but with occupancy instead of RevPAR indexed versus 2019. And as you can see, occupancy has stabilized in all segments just under 2019 level. This is mainly explained by the fact that some demand segments still haven't fully returned to 2019 levels. These are international long-haul travelers, and to some extent, larger groups and events that have a longer lead time in this ramp-up. Next page, please. In the beginning of August, we announced the acquisition of NH Brussels Louise with 246 rooms in Central Brussels for EUR 35 million. Brussels is a growing hotel market that we have been active in for almost 25 years and know very well. We now own 8 hotel properties in the city, 6 of which in Operating Activities and 2 in Property Management, making us a significant hotel property owner and hotel operator in the city. We are currently evaluating the best commercial alternatives for the hotels. And with our strong local commercial and technical platform in Brussels, I am confident that we will be able to generate a good return on our investment in NH Brussels Louise. Next page, please. In September, we announced the acquisition of DoubleTree by Hilton Bath for GBP 40 million. The hotel is well invested and has a strong central location in Bath with attract both leisure and business travelers. Around 3.8 million people visit the city each year, and the destination has an UNESCO World Heritage status, which guarantees its long-term position as a high-quality destination. The hotel will be reported in the business segments operating activities and will be operated under management agreement with Axiom Hospitality. Next page, please. In September, we announced that we will divest in the InterContinental Montreal for a total transaction value of CAD 80 million. The hotel has 357 rooms and we have owned it since 2007. For us, this transaction is well timed and the price is attractive. We lock in value and free up capital to be recycled into continued expansion in our core markets. Closing is planned for the first quarter of next year. Next page, please. We continue to invest SEK 1 billion annually in our existing portfolio. These are investments with a good return and for example, the more rooms in hotels, renovation of rooms and public spaces and conversion of nonproductive areas. Lately, 2 examples from our portfolio are Scandic Park at Stockholm and Hotel Pomander in Nuremberg. Scandic Park has undergone one of the biggest modernizations in the hotel industry. All areas have been refurbished with the ambition of finding a way back to the hotel's origins in the early 1917. The new product starts up very well in the inter-city competition. So I can really recommend -- and afterwards, this is to check out the public area. Hotel Pomander is the former [ margin ] hotel Nuremberg, which we acquired in late 2019. In mid-2021, we have been renovating the hotel, its 311 rooms into modern high-quality products that will set a new standard in Central Nuremberg. Next page, please. And with that, I hand over to Anneli Lindblom, our CFO.

Thank you, Liia. Good morning, everyone. This is a strong result if you look year-on-year, but also sequentially. It is an indication on what normalized earnings for us are in a normal functioning hotel market. It shows the strength in our business model and our ability to generate strong cash earnings. The biggest earnings improvement in the quarter was recorded in the operating activities, where the net operating margin rose to 22% adjusted for government support. This is well in line with 2019 levels. All outstanding government support relating to COVID-19 were received during the quarter with SEK 37 million in operator activities and SEK 48 million in property management. Repayment of deferred rent was made according to plan and invoicing is now made according to original lease conditions. Next page, please. On this side, we can see a comparison of the variable rent in our leases over the past 7 quarters. In total, we have 96 leases with revenue-based rent and with a minimum contractual rent and 32 leases, which are purely revenue-based without minimum level. And on top of this, we also have 7 fixed leases. In the third quarter, total variable rent amounted to SEK 378 million. The number of minimum leases generating variable rents continued to increase and 73% -- and reached 73%, as you can see on the graph to the right on this slide. A few more leases are expected to crossover in the fourth quarter. Next page, please. Pandox performs internal valuation of the hotel properties each quarter. 97% of the properties have been externally valued during the past 12 months and the valuations are in line with our internal valuations. Value changes were positive in the period as higher cash flow out-weighted a slight increase in yields. In the first 9 months, total changes in value amounted to a positive SEK 1.5 billion. Out of this, SEK 1.2 billion for investment properties and a positive SEK 300 million for operating properties. And as you might know, according to IFRS, unrealized changes in operating properties are only reported for information purpose, but it is included in the EPRA NRV. And okay, the average valuation yield for investment properties was 5.45% and for operating properties, it was 6.43%. Next page, please. On this slide, you can see the accumulated changes in value in our property portfolio since the start of the pandemic. During the most uncertain phase, we had a negative changes in value in 6 quarters in a row, mainly due to lower cash flows. From the third quarter 2021, based on gradually improving cash flows, changes in value have been possible. Measured from the start of the pandemic, total unrealized changes in value are still a negative 2.4%. Next page, please. Yes. As Liia said, we have 2 sources of financing, equity and normal bank loans secured by underlying properties. We have no market financing in formal bonds and we have no external rating requirements. Given our business model, we focus on hotels and variable rents. This has proven to be the most efficient and predictable financing over time. On the right, we highlight our capital structure at the end of the period. And based on the closing price yesterday, Pandox is still valued with a discount to EPRA NRV around 40%. Next page, please. Okay. On this slide, we run through some balance sheet KPIs. Loan-to-value amounted to 47.1%, while EPRA LTV was 47.0%. This is in the lower end of our financial target range. Cash and unutilized credit facilities amounted to SEK 4.5 billion. Credit facilities maturing in less than 1 year amounted to 12.7% on which the majority in the first and the second quarter next year. And we do, of course, have positive dialogues about the refinancing ongoing, regarding all these credit maturities. And we do, of course, expect some increase in costs gradually in 2023, given the development in the credit market. But with that said, we currently have a strong interest coverage ratio. Pandox also has some commercial paper programs that are used to optimize Pandox's financial costs via interest rate arbitrage. Commercial issued are always fully covered by [ REX ] . So next page, please. On this slide, we continue with how some important balance sheet metrics have been developed since 2016. With the exception of the interest coverage ratio, these metrics have remained relatively stable over the period. So just a few highlights. Loan-to-value declined to 47.1% in the third quarter, which is clearly lower than before the pandemic. The interest coverage ratio, as I mentioned on previous slide, has improved quarter-by-quarter. The 4.8% recorded this quarter is a bit out of the ordinary on the positive side. And looking at the graph to the right, you see an uptick in average interest rate, reflecting the development we have seen lately in the credit market. Average repayment period and average fixed rate period have come down a bit this quarter, which is a natural effect as we haven't made any refinancing this quarter. And with that, I hand over to Anders Berg, Head of IR, to guide us through what happened in the hotel market in the quarter.

Thank you very much, Anneli. Yes, as Liia said from the beginning, the third quarter was the first restriction-free quarter since the fourth quarter 2019, and the recovery, which we already saw in the second quarter, continued in the third quarter. And for the first 9 months, RevPAR largely recovered to pre-pandemic levels. RevPAR in the third quarter isolated actually surpassed 2019 levels with a good margin. Demand growth was broad-based with good growth in all kind of markets. Domestic leisure demand remained strong during the summer. And the domestic business demand also improved before and after the holiday season. So we are now more or less back to normal seasonal pattern in business mix, although some international demand elements are still trailing 2019. ADR continued to strengthen in all demand segments in the third quarter as hotels worked actively with revenue management and prioritized rate in an environment with operational cost pressures. Larger cities saw the biggest relative recovery, while smaller cities continued to perform well in line with a normalization of the hotel market. So far, rising inflation and higher energy prices have not had any clear negative impact on hotel demand. Next page, please. In the following 6 charts, we track occupancy, average daily rate and RevPAR for Nordic regional, Nordic Capitals, Germany, Frankfurt, U.K. regional and London and how they compare to 2019. The data points are monthly and year-to-date. And the bars in the graphs are indexed to occupancy and ADR for 2019 and the lines are nominal RevPAR in local currency, except for Nordic regional and Nordic Capital, where RevPAR are in Swedish krona. Starting with Nordic Regional. As restrictions were eased in the second half of the first quarter, demand came back quickly and ADR began to rise from an already solid level. The resilience in average daily rate has been strong all through the pandemic. In the third quarter, supported by strong summer, average daily rate increased well above 2019 levels. RevPAR crossed over 2019 levels in March and have trended above 2019 since then, and supported by the strong third quarter, RevPAR for the 9 months was clearly higher than 2019. The recovery is broad-based, but Finland remains a slightly weaker performer than the rest of the Nordic countries. Next page, please. As you know, it's been a general trend all through the pandemic, that larger cities with high dependence on international demand have seen a slower development than small and regional cities. During the second and third quarters, Nordic capital cities recovered relatively strongly in both occupancy and ADR. 2022 RevPAR was largely in line with 2019 levels in the third quarter, but is still trailing 2019 on a year-to-date basis due to the slower start of the year. However, year-to-date RevPAR is now only some 10% to 12% below the 2019 level. Next page, please. Restrictions in Germany were lifted the latest, I would say, in our markets, actually on the 20th of March, which meant that it started its recovery later than most of the Nordic countries. But as you can see, occupancy and ADR have improved steadily from the reopening. And in the third quarter, 2022, RevPAR exceeded 2019 by a clear margin. But also here, due to the weak start of the year, year-to-date, Germany is still some 18% below 2019. Next page, please. Frankfurt remains a good illustration of the rapid recovery in larger and more international destinations that we have seen in recent months. In the third quarter, both occupancy and ADR were on aggregate, on a good level and RevPAR exceeded 2019 levels. But also here, due to the weak start of the year, year-to-date, the RevPAR is still approximately 30% below '19., and this is explained by some international demand segments still having some way to go until full recovery. Next page, please. U.K. regional, as you know, has been the strongest performing market, both during the pandemic and in the recovery phase after it, and it remained a solid performer also in the third quarter. The U.K.'s open early strategy meant that U.K. regional hit the ground running in the second quarter already at relatively high occupancy and ADR levels, and that run was extended in the third quarter. So with the exception of January 2022, RevPAR in U.K. regional has exceeded 2019 every month this year. And year-to-date, RevPAR is approximately 13% higher than 2019. Next page, please. London continued to improve in the third quarter. Quick 2022 RevPAR trending clearly above 2019 despite a slow start to the year, explained by restrictions, closed offices and limited international inbound travel. Year-to-date RevPAR is now on par with 2019. Next page, please. And with that, I hand over to Liia again.

Thank you, Anders. With RevPAR at or above 2019 levels, it's fair to say the pandemic is behind us. Even if we have been missing some international demand, the business mix is now more or less normal. And we are starting to see the hotel market moves in line with normal seasonality. I am proud of our journey through the pandemic, and on behalf of all the hard-working people at Pandox to report such a strong result. It clearly shows that our business model is super strong and that we have a well-class team in our company to support it. As the hotel market has gradually normalized, so has our earnings. Through a combination of operational improvements and prudent management of our balance sheet, our financial position is strong. The lowest percentage of Pandox's revenue is variable, which offers protection against increased energy cost and financial costs. We, therefore, have a good starting point in more uncertain times. How does it evolve between strong underlying demand in the hotel market and risk related to disposable income and business cycle, will play out, is too early to tell. However, based on our experience, the hotel market demand is normally quite resilient. And our focus on upper mid-market hotels with mostly domestic demand is a strength, particularly in uncertain times. Next page, please. Before we go over to the Q&A, I would like to remind you that we have our Hotel Market Day coming up. The date is 15th of November. And we'll promise you an interesting afternoon. The topic of this year is future of work and what that means for hotels. So if you haven't registered, please do. But you'll also be able to follow the event online at our website. Next page, please. We now move over to the Q&A. Operator, we are now ready for questions, and please do not forget to hand the call back to us afterwards for Robin's presentation.

[Operator Instructions] And there seems to be no audio questions at this time. So I will hand the word over to Robin Rossmann, Managing Director of STR Global.

We have a couple of questions on the web. Maybe we can go through them first. So the first question is, how our bookings look in for Q4 given current market conditions?

Well, in -- the booking for the Q4 and for the beginning of the year looks good. So as I said, it's -- we don't see anything in the market disturbances, but the performance is looking good.

How are you expecting energy cost to impact profits going forward?

Well, as we said previously -- as we said, about 80% of our portfolio is in property management, where the operator bears this cost and where we have a sort of strong resilient ADR, which have been compensated with that. In our own operations, which is less than 20% of our market value, then, of course, energy cost will be an increasing part of the cost. There are, however -- especially in our Brussels platform, we have a number of agreements, which have been fixed. So there will be for a long time before we exactly see those increase. And we also have a resilient and increasing ADR compensated for this to a large extent.

How strong do you see the reliance in the yield use in valuation given rising interest rates?

We have to remember that the yields we see today are actually higher than in 2019. So we -- the hotel industry, we have not been part of the yield decrease or the yield squeeze, which has been going on for the last 2, 3 years. So there is a sort of a buffer in that. Of course, there is some pressures in the yield. And we have taken into account that as we see in our quarter reports already, even though the cash flow -- the strong cash flow more than offset that.

And I should add those questions were from Simen Mortensen at DNB, Norge. And then we have a question from Albin Sandberg of Kepler. Can you please elaborate on bank's financing?

On bank financing, yes. As you know, we have had -- we have only bank -- relationship banks and the bank loans. We have -- during the pandemic have been in close dialogue encountered with the banks consistently. and we see actually a more active environment when it comes to discussing new financing with our banks, even though, of course, there are market disturbances and pressures on the underlying interest rates. But when it comes to margins and the sort of the increase in margins, we have, to a large extent, already seen that during the pandemic. And it's also already sort of in -- when it comes to the margin already in the numbers. But of course, there's some pressures on the refinancing.

Those were the questions from the web. And now we are ready for Robin's presentation.