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

Good morning, and welcome to the Pandox Q4 2022 Earnings Call. [Operator Instructions] I would now like to turn the conference over to Mr. Anders Berg. Please go ahead, sir.

Thank you very much, and welcome to this presentation of Pandox fourth quarter and full-year 2020 report. I'm Anders Berg, Head of IR at Pandox and I'm here together with Liia Nou, our CEO; and Anneli Lindblom, our CFO. And as always, we have STR with us as well, represented by Robin Rossmann, Managing Director at STR, and he represents a leading independent research firm focused on the hotel market and he will share STR's view on the market. And I would like to remind you that the views expressed by STR are completely separate from Pandox and that the presentation is offered only as a service to Pandox's stakeholders. But before we let Robin in, Liia, Anneli and myself will present the business update with financial highlights for the fourth quarter and the full year, followed by the Q&A session. And after that, Robin will 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 good morning, everyone, and welcome. I am happy to say that we ended the year strongly with stable demand and normal seasonal patterns in the fourth quarter. These are clear signs of a healthy hotel market. For Pandox, the positive market conditions translated into strong growth in cash earnings on the back of increasing revenue-based rents and good development in our own operated hotels. This confirms the power and performance of Pandox business model and what we are capable of delivering in a more normal hotel market. We ended the fourth quarter with a solid financial position with an LTV of 46.7%, which is in the low range or low end of our financial target. And it's worth repeating that Pandox has all of its financing through banks and that we have good and constructive dialogues on future refinancing. Based on the recovery in the hotel market, our strong cash flow and stable financial position, the Board of Directors is proposing a dividend of SEK 2.50 per share for the financial year 2022. Next page, please. We have a well-diversified hotel property portfolio. We have 157 hotel properties with approximately 35,500 rooms in 15 and 90 cities and with a property market value of more than SEK 69 billion. We are divided into 2 business segments; property management and operating activities. In property management, we'll lease hotel properties to strong and well-known operators and a long revenue-based agreement also with minimum rent. This segment makes up for 83% of our property market value. In the other segment, operating activities, we operate our hotels ourselves in properties we own and a different operating model. Operating activities makes up for some 17% of our property market value. The focus of our portfolio is upper mid-market hotels with mostly domestic demand, which is the backbone of the hotel market. It's also strength in more uncertain economic times. Next page, please. We have one of the strongest networks of brands and partners in the hotel property industry. This ensures efficient operations and revenue management, which maximize cash flow and property 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 and Leonardo hotels in Germany and in the U.K. We also have a long relationship with strong international brands such as Hilton, Holiday Inn and Radisson Group. 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 hotel markets recovery in 2022 was both faster and stronger than we had dared to hope for when the year began. And the fourth quarter cemented this trend further. RevPAR in our portfolio is now largely back to levels before the pandemic in nominal terms and the difference being that the average prices are higher and occupancy is slightly lower. We once again have proof of the hotel market's ability to overcome difficult crisis. The strong market recovery translated into strong growth and profitability for Pandox also in the fourth quarter. For comparable units, total net sales and net operating income increased by 54% and 44%, respectively. Like-for-like, Property Management increased net operating income by 22%. Our relationship with our banks are strong and we have almost SEK 4.5 billion in cash and unutilized credit facilities at the end of the quarter. Our loan-to-value fell down to 46.7%, which is in the low end of our financial target. Return on equity, measured by annualized growth in EPRA NRV grows substantially and was approximately 18%. Next page, please. Here, 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. As you can see, '22 started weak due to travel restrictions, but saw a strong bounce back during the spring and early summer, a trend that has continued since then. In the fourth quarter, the hotel demand was at a good level in all markets. In line with normal seasonality, December was a bit weaker due to Christmas holiday season. 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. And remember, 2019 was a record year for the hotel industry. Hotel demand in many larger cities, increasing (11.55) while smaller and regional city public areas, gym, restaurant and bar areas. In addition, the hotel has changed its name from Jurys Inn to Leonardo Royal Hotel Birmingham. Royal Hotel means that the product and service maintained a higher level of service and a more international character. Next page, please. And with that, I hand over to Anneli Lindblom, our CFO.

Thank you, Liia. So good morning, everyone. We are happy to report another quarter with strong growth in cash earnings. It is, of course, satisfying for CFO to see the company of the hotel market translating into strong results for Pandox. It is also an indication of the earnings we are capable of delivering during normal market conditions. What we saw in the fourth quarter was also a return to traditional seasonality with just a weaker December due to lower business demand. Cash earnings increased to SEK 515 million, driven by solid earnings improvement, both in Property Management and in Operator Activities. Operator Activities recorded a net operating margin of 24%, which was well in line with the level from 2019. As Liia said earlier, the Board of Directors proposed a dividend of SEK 2.50 per share for the financial year 2022, which totals to SEK 460 million. Next page, please. On this slide, we show the progression of variable rents in our leases over the past 8 quarters. In total, we have 96 leases with revenue-based rents and with the minimum rent levels and 32 leases, which are purely revenue-based without the minimum level. On top of these, we have variable ones, we have on top of this variable one, we do have 7 fixed leases. In the fourth quarter, total valuable rent amounted to SEK 286 million. The number of minimum leases generating variable rent continued to increase and reached 78%, as you can see on the graph to the right on this slide. The reason why we generate less revenue-based rent in the fourth quarter compared to the third quarter is seasonality, with Q4 being generally a bit weaker than Q3. Next page, please. Pandox performs internal valuation on the hotels properties each quarter. 96% of the properties have been externally valued during the past 12 months and the valuations are in line with our internal valuations. The total value change were a positive SEK 1.5 billion in the period as the higher cash flow outweighted a slight increase in yields. Of this SEK 1.2 billion was for investment properties and SEK 300 million was for operating properties. And please remember that investment properties are recognized at fair value, but according to IFRS, unrealized changes in value for operating properties are only reported for information purpose, but it is included in the NRV. End of period that average valuation yield for investment properties was 5.58% and for operating properties, was 6.50%. Next page, please. On this slide, you can see the accumulated change in value of our property portfolio since the start of the pandemic in the beginning of 2020. During the most uncertain phase of the pandemic, we had negative changes in value, 6 quarters in a row, mainly due to the lower cash flows. From the third quarter 2021, based on gradually improving cash flows, changes in value turned positive again. In the fourth quarter of 2022, changes in value were slightly negative, more on this on the next page. So the next page, please. Here we show how increasing yield requirements and stronger cash flow have affected our property values. 96% of the property was externally valued in the last 12 months. And as said before, we have enjoyed a very strong hotel market recovery in 2022 and it has been reflected in increased cash flow projections, both in our internal valuation, but also the ones made externally. For the full year, the strong cash flow had a positive value impact on SEK 2.8 billion, while higher yields had a negative value impact on SEK 1.3 billion. In the fourth quarter, isolated higher cash flow and higher yields were largely balancing each other out. So next page, please. And as said before, Pandox has 2 sources of financing, equity and bank loans, secured by underlying properties. We have no market financing in form of bonds and we have no external rating requirements. Given our business model with focus on hotels and [indiscernible] it 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. Based on the closing price of yesterday, we are still valued with a discount to EPRA NRV of 4% at moment. Next page, please. Okay. On this slide, we have some balance sheet KPIs, loan-to-value as well as EPRA LTV amounted to 46.7%, which is in the lower end of our financial target. Cash, unutilized credit facilities amounted to SEK 4.5 billion. Credit facilities maturing in less than 1 year amounted to SEK 16.2 billion, of which 50% will mature during the first half of 2023. But we do have ongoing dialogues with banks regarding all these credit maturities and we expect to refinance at least SEK 5 billion during the first quarter in 2023. And we have seen our interest cost increase during 2022, and they are, of course, expected to increase a bit further in 2023, given the development in the credit market. But with that said, our interest cover ratio is still very solid. So next page, please. And with that, I hand over to Anders Berg, Head of IR, to guide us through what happened in sustainability and in the hotel market in the quarter.

Thank you very much, Anneli. Yes, starting with sustainability. In the fourth quarter, we filed our commitment letter to science-based targets initiative. And we also shared our targets with SBTi, which we have produced in cooperation with the Swedish Environmental Institute. And these cover both Scope 1 and 2 and Scope 3, and they are meaningful and aimed at meeting the Paris Agreement. And we have a target validation slot booked with SBTi for the 12th of June 2023. Turning to the hotel market, then as you know, 2022 had a slow start, but after that, we have seen a remarkable recovery as both private individuals and business travelers have been taken to the road again. And as Liia said previously, RevPAR is now back at pre-pandemic levels at least nominally. The composition within RevPAR is a bit different compared to '19 with ADR markedly higher and occupancy slightly lower than the levels we saw in that year. And as hotels are working actively with revenue management and prioritizing rate in an environment with operational cost pressures, it appears that EDR is now at a sustainable higher level than in 2019. In the fourth quarter, domestic and retail demand remained strong in all our markets, although as both Anneli and Liia has said before, normal seasonality led to a gradually weaker demand in December in particular. So far, the hotel market has been very resilient from rising inflation, higher interest rates and higher energy prices. That said, it's reasonable to think that the market would have been even stronger in the absence of these headwinds. 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. The bars are indexed to occupancy and ADR for 2019 and the lines are nominal RevPAR in local currency -- sorry, except for Nordic region or Nordic capital, where RevPAR are in Swedish kroner. So I will start with Nordic regional. As restrictions were eased in the second half of the first quarter, demand came back quickly, as you know, and ADR began to rise from an already solid level. And in the fourth quarter, average daily rate continued well above 2019 levels, while occupancy was largely in line with 2019. The recovery in the Nordics is broad-based. But Finland remains a slightly weaker performer than the rest of the countries due to its dependence on Asian transit traffic, which is basically non-existent at the moment and its proximity to Russia and the absence of Russian demand. Next page, please. Nordic capitals. Due to the high dependence on international demand, the recovery for larger cities in general have taken a longer time than for smaller cities. In the fourth quarter, Nordic capital cities continued to perform on an occupancy in ADR level, largely in line with the third quarter. And for 2022, RevPAR was largely in line with 2019 in the fourth quarter, but for the full year, it was some 9% below 2019. This compares to the third quarter where RevPAR was 12% lower year-to-date, so the gap has been shrinking in the fourth quarter. Next page, please. Restrictions in Germany were the last to be lifted in Europe and it was not until the 20th of March, but that happened, which meant the country started its recovery later than most of the Nordic countries. But as you can see, occupancy and ADR have improved steadily from reopening. In November and December, the pace of recovery slowed somewhat due to a weaker trade fair and event calendar. However, the calendar looks stronger for 2023. For the full-year 2022, RevPAR in Germany was some 15% below 2019. Next page, please. In the fourth quarter, development in Frankfurt mirrored Germany as a whole and it was explained by the same reasons, primarily a less active trades per calendar. So for the full year 2022, RevPAR ended approximately 24% below 2019, thereby indicating sort of further improvement potential. Next page, please. U.K. regional continued to perform strongly also in the fourth quarter. Domestic demand remained solid and the weaker pound attracted additional inbound travel, which further supported the market. And with the exception of January 2022 RevPAR in the U.K. regional exceed the 2019 levels every single month of the year. And for the full year 2022, RevPAR was approximately 15% higher than 2019. Next page, please. London was a very strong performer in the fourth quarter with 2022 RevPAR trending clearly above 2019 levels, as inbound travel increased due to the weak British pound. And the strong finish in December meant that RevPAR for 2022 was some 5% higher than 2019 despite the slow start. Next page, please. And with that, I hand over to Liia again.

Thank you, Anders. The hotel market has continued to perform well also in the face of economic uncertainty. Clearly, both individuals and companies are prioritizing travel. We have a strong business model and a world-class team of people to support it. And frankly, it's an honor to go to work every day. As you know, a large percentage of our revenues is variable, which offers protection against increased financial and operating costs. This relationship is not 1:1, but it's a tangible risk mitigating component in our business model in the world of high inflation and high interest rates. That said, overall, we are cautiously optimistic about the hotel market in 2023. The greatest economic sales appears to have subsided. Peak inflation is most likely behind us and interest rates may well peak as soon as well. From a hotel market perspective, there is an additional potential in business travel and international travel and individual travelers appear to be very reluctant to give us on the travel plan. Gradually, Chinese inbound travel to Europe is also expected to increase from today's non-existing levels, which will support demand further. And as before, the greatest risk is still related to the war in Ukraine. Next page, please. And we now would like to 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] Your first question comes from Fredrik Stensved from ABG.

First, a question on the property value changes. You show in the presentation very nicely sort of the impact from yields and the impact from cash flow assumptions. And I was wondering, given where RevPAR is now and where occupancy is now, etc., the cash flow assumptions in your property valuations, does those sort of assume higher or lower trending from where we are today? And is it possible to quantify even though I'm well aware that the property valuations are done on a property-by-property basis. But if you could comment anything in general, that would be much appreciated?

Liia here. I think it comes back to the pent-up demand, which is still there to come. We still have, as we mentioned, some segments which hasn't come back. And that, of course, will materialize when we see that even further in the cash projections. So the ramp-up will and as you know, discounted cash flow work that the further you go down, the weaker quarters you leave behind the stronger devaluation from a discount perspective will be.

Right. So just to clarify, the cash flow assumptions for the next year or the next 2 years does not fully incorporate a full rebound in occupancy as of today. So if we have a full rebound, weaker quarters in the cash flow assumptions will sort of fade from the valuations. Is that correct?

Well, we, as always, try to be cautiously -- cautious in our assumptions. We are -- as we are facing a lot of a lot of question marks, but of course, we put into the projections what we see today, but we are a bit cautious maybe on that.

And then a couple of maybe detailed questions on Q4. You had or you state in the report that you had both in the Property Management segment, you had SEK 20 million of nonrecurring costs in property administration and also in the operator segment, you had SEK 20 million of nonrecurring costs. What are those costs?

Okay. In the operator segment, we have done some organization changes and also some clean out in the balance sheet of minor posts. And if you have a look at the property management, it's related to a write-down of the some unfinished projects that's not supposed to be in the balance sheet and we also did some extra maintenance that's sort of out of the ordinary. So we put the numbers in, so it's easy to sort of recalculate what is one-off costs. And you should see that -- in our operating business, you should see that we have, for the last 2, 3 years been in the pandemic. So of course, there hasn't been so many new initiatives. We are now taking the company to mix levels. And usually, with that you need to sort of step up also when it comes to some organizations.

Last question. You mentioned in your prepared remarks here that electricity prices or the impact from higher electricity prices will come first from Q1 in 2023 and beyond? Is it possible to quantify that impact either in terms of an absolute amount or margins?

It's still a little bit of an open question. When we did sort of the initial calculations, we had higher energy prices than we currently have moving into this new year, but a ballpark estimation would be somewhere between [indiscernible] and SEK 60 million in the cost [indiscernible].

Your next question comes from Fredric Cyon from Carnegie.

There is a couple of questions from my side. So starting off with the dividend proposal, it represents a lower payout ratio than the long-term ambition. What is the rationale behind the lower payout ratio?

I think [what] you remember that we have had 3 years of non-dividend. So with the sort of a strong cash flow now coming out, we are proud of actually restating the dividend. But remember that 2022, we started out with Omicron in the first quarter in the 5 months, there is some subsidies in this. So we -- I think if you compare it, it's around 25%, which is sort of slightly lower than our target range of 30% to 50%, but it should be seen that we are actually coming out of a really difficult time and with a strong cash flow, I think this is actually a quite strong statement.

That makes sense. Moving over to the refinancing. You have mentioned that it's about SEK 5 billion to be refinanced in the first quarter, and we did some refinancing during the end of the year. Can you say anything about margins compared to those that are expiring?

As we say in the report, I mean, both margins and underlying base rent is, of course, creeping up and has been there. And there is a pressure for that. It's not substantially higher, but still they are -- we -- I think the average interest cost is 3.2%. It used to be 2.8%. So there is a sort of a reflection of that already. But of course, it depends on where the refinancing is. The base -- the base interest is, of course, hopefully stabilizing now. It has -- it's actually lower than it was like 1 or 2 months ago when it was peaked. So slightly higher. But then again, remember, we have SEK 2.5 billion of Deresiewicz balance to some extent.

Sure. And the credit duration is rather short.

So now you're going to prolong it, given the pricing of long money versus short. How are you planning to handle that?

Yes. Well, during the pandemic, we were in agreement with the bank that we would actually roll most of our financing on a short basis because, of course, there is a lot of uncertainty. We now see that actually the pricing and the appetite for refinancing is greater. So we are, of course, growing this more in line with which we did pre-pandemic, which is normally about 3 to 4 years -- 3 to 5 years.