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

Welcome to the Pandox Q3 Presentation for 2023. [Operator Instructions] Now I will hand the conference over to Anders Berg. Please go ahead.

Thank you, and welcome to this presentation of Pandox's interim report for the third quarter 2023. I'm here with Liia Nou, our CEO; and Anneli Lindblom, our CFO. And as always, we have STR with us, today represented by Robin Rossmann, Managing Director at STR. And Robin represents a leading independent research firm focused on the hotel market, and he will share STR's view on the market. And please remember that the views expressed by STR are completely separate from Pandox and the presentation is offered only as a service to Pandox stakeholders. And Robin's presentation will be held after we have completed our earnings presentation, including the Q&A. Before we let Robin in, Liia and Anneli will present the business update with financial highlights for the third quarter 2023, followed by a Q&A session. With that, I hand over to Liia.

Thank you, Anders, and good morning, and welcome, everyone. I would like to start this presentation with a couple of key investment highlights on Pandox. Do you see these 8 points. We are active in travel and tourism, a global and highly dynamic industry with strong structural growth drivers. Travel and tourism is one of the largest industries in the world, accounting for almost 10% of global GDP and a substantial share of new jobs created. Two, we only invest in hotel properties. We are the largest listed pure hotel property owner in Europe and with a unique portfolio of high-quality assets. Three, we are an active owner with deep hotel expertise. We work with all operational models and are focused on creating value across the value chain. The fourth point, with our turnover based leases, we have inflation protected revenue streams, which together with our minimum guaranteed rent provide both upside and stability. Five, we have a high-quality project pipeline well underway. We expect this to accelerate our organic earnings and value growth [ sensibly ] through 2024 to 2026 with an additional plus SEK 100 million in NOI per year, meaning all in all, to generate some plus SEK 300 million in additional income with full effect in 2026. Sixth, we have ambitious ESG targets, including a substantial climate transition program with high expected ROI. Seventh, our property portfolio has an average valuation yield of approximately 6.1% mainly with long leases and a WAUL of more than 14 years. And finally, the eighth point. We only have bank financing with strong and positive lender relationships, low -- and with low refinancing risk. And with more than 75% of our net debt being hedged, we also had a good overview of the positive yield spread in the short and medium term. Next page, please. We have a strong and well-diversified hotel property portfolio with 159 hotel properties with approximately 36,000 rooms in 15 countries and 90 cities, and with a property market value of more than SEK 71 billion with an average yields of 6.1%. We are divided into 2 mutually supported and reinforcing business segments, Property Management and Operating Activities. In Property Management, we lease hotel properties to strong, well-known operators under long revenue-based agreements often with a minimum guaranteed level. And this segment makes up for some 83% of our property market value. In the other segment, Operating Activities, we operate hotel ourselves in properties we own under different operating models, and this segment 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, regardless of which phase of the hotel market cycle is in. We also have one of the strongest network of brands and partners in the hotel property industry. And this all together ensures efficient operations and revenue management, which maximize our cash flow and property values and continuous flow of business opportunities. A relatively large part of investment and [ product ] management is also shared with our tenants, which lowers our risk. Next page, please. Demand in the hotel market was good in the third quarter, and it has now reached a new stabilized level based on current demand mix and traditional seasonality. That said, international travel and large meetings and conferences still have some way to go before having fully recovered compared with 2019. The good demand trend in the quarter led to a strong operational performance in both our segments, which lifted total NOI to a record level. Total NOI net operating income increased by a good 10% like-for-like. However, adjusted cash earnings decreased by 12%, as net operating income could not compensate in full for the very quick and strong increase in the market rates and interest expense. But given our interest rate hedge of more than 70% and the assumption that market rates are leveling out, conditions are improving for growth in cash earnings in 2024. Our financial flexibility remains high with an LTV of 46.8% and an ICR of 2.8% based on the rolling 4 quarters. We have 100% bank financing, strong relationship, positive discussions on upcoming refinancing and so our refinancing risk is low. And I'd also like to reiterate the high-quality investment pipeline, which will improve our future growth outlook. 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, RevPAR is currently trading above the corresponding period 2019, with ADR continues to be the main driver, the strong -- very strong average price development in most of our markets. More on next page. Here, we have a breakdown of the performance for a selection of countries, regions and cities versus 2019. The first chart on the left tracks the year-to-date 6-month performance to June; and the second on the right tracks the year-to-date performance year-to-date September, 9 months. We show ADR on the vertical axis and occupancy on the horizontal axis, [ that origo ] is the point corresponding to 2019 on both ADR and occupancy. And in the boxes, we indicate how much higher or lower RevPAR is compared with the corresponding period 2019. As you can see, the hotel market continued to improve in the third quarter. And year-to-date September, all markets, except Helsinki traded above or even well above 2019 levels on rate, where the majority still remain below 2019 when it comes to occupancy. In terms of RevPAR from the second quarter to the third quarter, the greatest relative improvements again took place in Germany, and Robin Rossmann from STR will talk more about the underlying trends in the European hotel market later in this call. But broadly speaking, RevPAR in all our regional markets is trading above 2019, with U.K. and Norway region being the strongest ones, closely followed by Sweden and Finland. Among the Nordic Capital cities -- or -- among the Nordic Capital cities, Oslo is clearly the strongest followed by Stockholm. Copenhagen recovered further in the third quarter and is now basically back on 2019 levels, whereas Helsinki continues to suffer from a lack of Asian and Russian demand. In these 2 cities, there has also been a strong inflow of new capacity in new hotel rooms in the past few years. And against this backdrop, the recovery in Copenhagen is particularly impressive. Overall, new capacity that was planned before the pandemic has come to the market, but we see very little new capacity coming in, in future years, supporting the RevPAR development further. Next page. Here on this page, we have listed some larger investment projects in our existing portfolio. Hotel Pomander opened on the 18th September after having been closed for an extensive renovation since the third quarter 2021. And the rest of the projects are expected to be completed during the second half of 2024 and in 2025. All in all, we expect them to generate some SEK 300 million plus -- SEK 300 million in additional net operating income per year with a full effect from 2026. Next page, please. In the third quarter, we also decided to invest approximately SEK 320 million in climate transition related projects in Operating Activities. The main activity is the phasing out of oil and gas, but also upgrades of technical systems for energy optimization and investments in renewable energy solutions. This will enable us to fulfill the SBTi emission reduction targets for Operating Activities when completed. It's a 3-year program, which will also generate a tangible cost savings. The SBTi targets are currently under review, and we expect to be able to communicate them within short. Next page, please. And with that, I hand over to Anneli Lindblom, our CFO.

Thank you, Liia. Good morning, everyone. We are happy to report a good set of numbers for this third quarter. And to be clear, we do have government grants in our comparison quarters, so please read the numbers carefully. This government grant refers to previous years, 2020 and 2021, and we did receive them last year with the final part in Q3, 2022. Like-for-like growth was good, both in revenue and net operating income, supported by a seasonally strong third quarter with several active demand segments. Total revenue-based rents increased to SEK 421 million compared with SEK 378 million last year. Operator Activities counted to perform well in the third quarter, in line with seasonality and good leisure demand during the summer months and a pickup in business demand in September. Adjusted for the government grant, cash earnings decreased by 12% in the third quarter due to the quick and strong increase in market rates, which put interest expense higher compared with last year. Higher current tax also explains part of the lower cash earnings since we are now in tax position in Sweden and in Norway. Next page, please. On this slide, we show the change in the main valuation parameters for the total property portfolio year-to-date. As expected, we have had positive contributions from investments and from acquisitions, but also from currency. We do have the main part of our hotel properties outside Sweden. All in all, 78% in foreign currencies and 44% in euros. Then 2 effects in the unrealized changes in value. We have the negative one from the higher average yields in the market with a negative effect of SEK 3.5 billion, but we also have the strong cash flow due to the strong price development in the hotel market with a positive effect of SEK 2.2 billion. Measured from the beginning of the year, the increase in average valuation yields was 34 percentage points for Property Management and 45 percentage points for Operating Activities. End of period, the average valuation yields for investment properties was 5.92%, and for our Operating Properties, it was 6.95%. Next page, please. Here, we have the average yield, the average interest on net -- on debt and EPRA NAV per share quarterly from just before the pandemic and up until today. When it comes to the yield, I just want to remind you that the changes in value recorded during and immediately after the pandemic were largely an effect of changing in cash flows. Cash flows were adjusted downwards during the pandemic and then adjusted upwards when the recovery started after it, both in our internal and in the external valuations, while the yields were stable. However, in line with rising market interest rates, yields have moved higher since the fourth quarter 2022. Despite higher yields and higher market interest rates, EPRA NAV per share has increased, and we have a tangible and positive yield spread. Also, growth in EPRA NAV amounted to 4.9% measured on an annual basis and adjusted for paid dividend. Next page, please. As you can see, at the end of the third quarter, the LTV was 46.8%, and the ICR on a rolling 12-month basis was 2.8x. The LTV remains at the lower end of our target range, while the ICR is resilient. Cash and unutilized credit facilities amounted to almost SEK 3 billion at the end of the quarter. And please note that we have unhedged assets as an untapped reserve. Next page, please. And Pandox has just 2 sources of financing. We have equity, and we have bank loans, secured [ by ] underlying properties. We have no market financing in the form of bonds and no external rating requirements. Given our business model, we'll 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 valued at a discount to EPRA NAV on approximately 51% at the moment. Next page, please. So far this year, we have been very active on refinancing with a total amount of SEK 13,778 million. We have no maturities on our [ refinance ] in the third quarter. The refinancing during the year have been made at longer duration, and our average debt repayment periods has increased year-on-year to 2.4 years. Looking ahead, we have some SEK 8 billion of debt maturing within 1 year, of which the majority will be in Q2 and Q3, 2024. We do have strong relations with our banks and discussions on future refinancing are positive and are ongoing. Overall, credit margins are stable, and our refinancing risk is low. And I would also like to remind you that 76% of the net debt is hedged, which means that the effects from further increase in market rates is relatively low. Next page, please. And with that, I will hand back to Liia for some final remarks.

Thank you, Anneli. We expect continued stable demand in the hotel market in the fourth quarter. There is a seasonal effect, where demand normally starts to weaken in mid-December and picks up again in mid-January. We also expect some growth in the hotel market in 2024 based on a strong event calendar in Germany and expectations for stable market conditions in our other markets. Generally speaking, hotel demand is dependent on economic activity and the main risks are geopolitical instability and its effect on economic activity and travel. That said, with a high-quality portfolio, an active and value-oriented ownership model based on deep hotel expertise, a strong project pipeline and low financing risk, we are well prepared for value creation in any market scenario. Next page, please. And now we move over to Q&A. Operator, we are now ready for questions.

[Operator Instructions] Please state your name and company. Please go ahead. Your line is now unmuted. Please go ahead.

Hi. This is Edoardo from Green Street. Can everyone hear me?

Yes, we can.

Three questions from me. On top of your maturities of SEK 8 billion for next year, how much of your debt will reprice, so in terms of interest rate derivatives that you have?

Well, we -- the interest rate derivatives, we have 76%, which is hedged on a maturity, which is more -- on average maturity, which is more than 4 years. When it comes to the refinancings, then, of course, as you know, we have sort of continuous refinancing during the year -- or during the years. So most of our -- more than, [ I'll say ] SEK 14 billion or so have basically been repriced with higher credit margin spreads maybe already this year. So we expect this to be rather limited. And again, as you know, the credit margins were already increased during the pandemic. So most of the effect is already taken. And we actually dare to say that with our interest rate cost of [ 4.2% ] in -- after Q3, we expect this to be pretty constant for the rest of the year and also with a moderate increase based on the today's interest market expectations and then a moderate increase in next year as well.

Understood. And then another question for me, regarding your current investments. So you mentioned SEK 300 million of NOI added through 2026. What is the yield on cost on that? It seems to me it's 16% based on your preapproved investments. Is that correct? 16%?

Well, we typically say that they are -- with the sort of investment we do in our own portfolio is between -- somewhere between 10% and 15%, 10% and 12%, 12% and 15%. So a little bit [ expanding ], but yes.

Perfect. And last question from me. Can you give a little bit of color around prebooking trends for Q4 and maybe Q1 of 2024? How is it looking versus last years?

Yes. When you look at the booking compared to last year in almost all our markets, it's above or well above what it looked like last year. And especially comforting is the [ right word ] for Brussels, which has been sort of laid out of the [indiscernible]. And as you know, we have a lot of our own operations in Brussels. So looking for the rest of the year and also in 2024, it's on a higher or much higher level than last year, and it goes for basically all our markets.

And how much higher roughly, would you say 10%, 20%, 30% higher?

It depends on which market. And then, of course, it depends on how -- how much further you look. When it comes to Brussels, it's actually very comforting that you actually see the weekend travel picking up in quite a large extent. So basically, same growth versus 2023.

Perfect.