PPI Public Property Invest AB (publ) (PUBLI) Earnings Call Transcript & Summary

Good morning, everyone, and welcome to our presentation of PPI's results for the third quarter of 2025. My name is Andre Gaden, CEO of PPI. And to present the results together with me is our CFO, Ylva Goransson; and our EVP Finance, Marianne Aalby. Let's first have a look at today's agenda. We will start with some highlights from the quarter before we move on to operations. Ylva and Marianne will go through financials, before we give our summary and concluding remarks. We will end the session with a Q&A session. So, let's start with highlights. In the third quarter, we have delivered solid operations and continued to deliver on our growth ambition with the signing of three new transactions in the quarter. We have also been active in the financing market and continue to position our company for further growth while maintaining a conservative balance sheet. In the third quarter, rental income came in at NOK 262 million, an increase of 51% compared to same quarter last year. Net operating income increased by 56% to NOK 245 million. And net income from property management in the quarter increased by 40% from the same quarter last year to NOK 113 million. We are pleased to see an increase in our portfolio WAULT from 6.8 years in the second quarter to 7.5 years, mainly as a result of acquisitions. Our property management team signed leases with an annual rent of NOK 9.5 million, and we have maintained a high occupancy of 98%. As mentioned, we have signed three transactions in the quarter. Through the acquisition of seven elderly care facilities in the Greater Oslo area, we have strengthened our position within a segment that is expecting strong growth in the years to come. In Arendal, we have acquired one property with public tenants in the city center. And we have further grown our portfolio in Helsinki area with a care facility that is currently under development and will be completed in 2026. In total, and when completed, these transactions will add another 25,000 square meters to our portfolio and NOK 50 million in annual rent. On the financing side, we issued a 3-year NOK 300 million bond and our cash position by the end of the quarter was NOK 4.3 billion. Going into the fourth quarter, we have also announced the acquisition of one property in Lillehammer and three care properties under development in Helsinki. And in October, we successfully issued a new 6-year EUR 300 million bond with a fixed coupon of 3.875%. Then let's move on to portfolio highlights. By end of September, our portfolio includes 104 properties with a total BTA of 635,000 square meters. The portfolio also includes development potential of approximately 270,000 square meters. Our portfolio is broadly divided into 90% social infrastructure assets that house function of essential importance to the society. The remaining 10% is our portfolio of critical industrial infrastructure assets located in Norwegian maritime and industrial clusters. In total, 80% of our annual rental income is coming from government-backed tenants. Our normalized annual gross rental income is now NOK 1,048 million, up from NOK 1,033 million in the second quarter. Average rent per square meter for the management portfolio is NOK 1,754. As mentioned, portfolio occupancy remains high at 98% and the WAULT continued to improve to 7.5 years. The total portfolio value has increased to NOK 15.6 billion, up from NOK 14.9 billion by the end of last quarter, and the portfolio yield is currently at 6.4%. EPRA NRV per share is calculated at NOK 24.9, up from NOK 24.5 last quarter. Then let's move on to operations. After 2 quarters with very high letting activity, the third quarter had, as usual, somewhat lower activity. We signed and renewed leases with a total annual rent of NOK 9.5 million, covering 2,400 square meters. The largest contract was a 15-year lease agreement with OP Uusimaa for approximately 1,650 square meters in the recently acquired healthcare/community service property in Tikkurila in Helsinki. OP Uusimaa is the largest member bank of OP Financial Group in Finland. Net letting was positive in the quarter with NOK 1.5 million, mainly as a result of rental uplift from this contract. The portfolio WAULT increased in this quarter to 7.5 years, up from 6.8 years in the second quarter as a result of acquisitions and letting. Occupancy remained strong at 98%. Looking at the portfolio overview, you can see that the number of development properties has increased. This is due to Otervegen that is currently vacant after SSB moved out of the building this quarter. As earlier mentioned, Otervegen is currently in a zoning process with the ambition to convert the property and the surrounding area into an elderly care concept. The remaining expiring contracts for 2025 now mainly consists of the earlier announced expiries with the police in Olav Vs gate in Halden and the courthouse in Anton Jenssens Gate 9 in Tonsberg. In total, these expiries will reduce annual rental income with around NOK 8.6 million from the beginning of 2026. Moving on to transactions. In the third quarter, PPI acquired seven elderly care properties located in the Greater Oslo area for NOK 410 million. The properties are fully leased and operated by Skaar Omsorg on 35 years triple-net leases. The transaction adds an annual rent of approximately NOK 30 million and strengthens PPI's position within the elderly care segment, where we expect significant growth going forward. The transaction in Arendal includes one property with a seaside location in the city center. The property is mainly let to public tenants, the Norwegian Coastal Administration and the Norwegian Food & Safety Authority. The property was acquired for NOK 57 million and has annual rent of NOK 4.8 million. In Finland, we have signed a transaction of a care property under development in the Helsinki area. The transaction will close on project completion in August 2026, and PPI has no development risk. The property is 100% pre-let on a 10-year lease with an annual rental income of EUR 1.3 million. To date, in the fourth quarter, we have also closed the acquisition of Kleivbakken nine in Lillehammer for NOK 87.6 million. The property is fully let mainly to the Norwegian College of Elite Sports with a 10-year WAULT. We have also signed a project involving three new build high-quality care properties in the Helsinki region for EUR 28 million. Closing will be when the properties are completed. And also here, there is no development risk for PPI. On this slide, you can see our largest ongoing projects with net project cost above NOK 50 million. To the left is our, at the moment, two largest projects in the Norwegian portfolio, Gyldenloves is under refurbishment as a result of the new contract with the Norwegian Labor and Welfare Administration. And in Anton Jensens gate 8, we are building new offices for a Norwegian tax agency. Both projects will be completed early in 2026, and the tenants have signed new 10-year leases in both properties. To the right, you can see our Finnish projects, Metallum and Maurinkatu, both located in attractive parts of Helsinki. These properties are going through extensive redevelopment, which also includes new square meters. Both projects are without any project risk for PPI, and we pay yield on invested capital under the construction period until they are completed in the end of 2026. All four projects are progressing according to plan, both in terms of time and project cost. Then, I will leave the word to Ylva, who will take you through our financials.

Okay. Thank you, Andre. We start with the financial highlights for the quarter, showing that we have delivered yet another strong quarter with stable underlying performance. Rental income continued its upward trend and reached NOK 262 million in the quarter, representing an increase of 52% compared to the same period last year. From last quarter, rental income has increased by NOK 29 million. This increase is compounded of additional income from acquired properties within the quarter of NOK 8.5 million. We also had full effect of the 19 properties we acquired in the second quarter of NOK 27 million. The increase in rental income was partly offset by a negative effect of approximately NOK 5 million from SSB, the statistics agency in Norway, who moved out from Otervegen in Kongsvinger during the quarter, which we have announced earlier. Rental income for the like-for-like management portfolio increased by 4.1% from third quarter last year. Net income from property management was NOK 113 million in the quarter, slightly below last quarter, but this is fully explainable as we have maintained substantial cash position during the quarter, generating higher interest expenses. Once this cash position is put to work, this will have a positive effect on our net income from property management. Year-on-year, net income from property management was up 53%, reflecting strong underlying operational performance and our growth ambition. Our EPRA NAV per share is, by end of the quarter, NOK 24.9, up from NOK 24.5 last quarter as a result of profits generated during the quarter. If we go to the next page, you can see our P&L. And as mentioned, rental income was NOK 262 million in third quarter. Net operating income came in at NOK 245 million, a solid improvement of 56% from NOK 157 million in the same quarter last year. Our NOI margin was 92.8% in Q3, still slightly above our run rate guidance, but we had some maintenance scheduled later this year. Net administration expenses amounted to NOK 24 million in the quarter. This is slightly higher than last quarter and is due to one-off start-up costs related to the transition to a new contract manager and accounting provider here in Norway as well as some implementation costs for some systems. Net realized financials totaled NOK 108 million and is an increase of NOK 30 million compared to last quarter. This increase reflects higher interest expenses following new bond issues in late second quarter and now in this quarter. This is though partly offset by the repayment of a NOK 211 million bond. It also reflects higher interest income on cash balances and return from capital invested in our two ongoing Finnish projects generating 6.2% yield during the construction period. Net income from property management was up 40% to NOK 113 million compared to the same quarter last year and reached NOK 321 million year-to-date. Net unrealized financials contributed NOK 8 million, mostly driven by unrealized currency exchange gains. And we had negative value changes in financial instruments of NOK 11 million, but we had a positive value change in our investment properties, which added NOK 18 million to net profit in the quarter and NOK 291 million year-to-date, mainly driven by the progress in our Finnish projects. Profit before tax was NOK 128 million in the quarter compared to NOK 30 million in the same period last year. Year-to-date, profit before tax reached NOK 559 million, up from minus NOK 133 million (sic) [ NOK 173 million ] in the same period last year. Then we can go to the next slide and have a look at our balance sheet. By the end of the quarter, the value of our portfolio was NOK 15.6 billion, up from NOK 14.9 billion in last quarter. This increase is mainly driven by acquisitions. Value change in the like-for-like portfolio from third quarter last year was 3.4%, mainly driven by improved leases and CPI adjustments. The net yield of our management portfolio was 6.4% by the end of the quarter, and total investments in the quarter was NOK 211 million, whereof NOK 59 million was invested in Norwegian projects and NOK 151 million in the Finnish projects. Gross interest-bearing debt at the end of the quarter was NOK 11 billion, and we still had a large cash position of NOK 4.3 billion at quarter end, giving us a net debt of NOK 6.7 billion. And based on this, our key figures remain strong. EPRA LTV end of quarter was 45.3% and 12 months rolling ICR stands at 2.1%. Our most important debt metrics, net debt-to-EBITDA is solid at 8.3x as end of September. All in all, Q3 delivered strong operations with high margins, solid cash generations and as you can see, a very strong balance sheet. And on the next page, we present our normalized annual run rate, which reflects annualized earnings capacity based on the portfolio we owned by the end of September. Rental income is annualized from current lease contracts as end of September and property and administration expenses are presented at normalized levels, excluding historically one-offs. So, if we look at the figures, annual rental income stands at NOK 1,048 million and normalized property expenses are expected to be around 10% of rental income, giving us an NOI of NOK 946 million. Normalized administration expenses are expected at NOK 100 million and is offset by a reimbursed property management fee, resulting in net administration expenses of NOK 89 million. Run rate EBITDA is, as a result, estimated at NOK 857 million. And our net realized financial expenses are estimated at NOK 299 million. And this figure is calculated using interest rates on existing debt and derivatives at quarter-end but excludes net forward interests on unutilized funds from the EUR 350 million bond we issued late in June. The calculation includes funding costs for our finished projects and interest income on invested capital during the period. Based on these assumptions, net income from property management is expected at NOK 558 million, and this is an increase of 84% from run rate, 1 year ago. And now, I will hand over to Marianne, who will give you more details about our funding position.

Thank you, Ylva. As Andre mentioned, we've been active in the financing market this fall. The debt capital markets are open and attractive and the international interest in PPI as a credit is strong, which is continuously bringing down our borrowing costs. After the IPO last spring, one of our top priorities was to start transforming our capital structure. This was to enable a sustainable and financially-sound growth strategy. This entails building a base of diversified sources of funding in both equity and debt while keeping our conservative financial policy. In June, we placed our second bond in the euro market, a EUR 350 million bond and the 7.3-year maturity was the longest for any Nordic real estate company for several years. The issue attracted investors spanning the globe with a strong base in Continental Europe and the U.K. Our capital market strategy is to utilize the markets when they're open. Hence, in August, we took advantage of the open market conditions in the NOK market and was able to issue a NOK 300 million 3-year bond at a 3-month LIBOR plus 159 basis points. Proceeds from the issue was partly used to repay a NOK 211 million secured legacy bond. After quarter end, in October, we placed a EUR 300 million 6-year bond at mid-swap plus 165 basis points to investors. This represents a 95-basis point reduction in the span of 10 months if compared to our 5.5-year Eurobond that we placed in December 2024. During the quarter, we also established two RCFs; one, NOK 700 million RCF with two Nordic banks and one EUR 26.5 million bilateral revolver with an international bank. Currently, we are also in discussions with several international banks regarding a further RCF capacity. As you can see from the graph on the left, we now have a well-diversified maturity structure on our long-term debt with limited maturity in the near term. The average maturity on our long-term debt is now -- was at 4.8 years at the end of the third quarter. At the same time, we have ample liquidity with a total of NOK 1 billion in unutilized credit facilities and NOK 4.3 billion in cash at quarter end. Including proceeds from the recently issued Eurobond, our cash position currently is NOK 7.8 billion. We hedge foreign exchange and interest rate risk with hedging instruments and natural hedges. At quarter end, 71% of the debt portfolio was running at fixed interest. The average interest rate was 4.99%. EPRA LTV was 45.3%. As you can see, the unencumbered asset ratio was 2.4x, and our ICR was 2.1. We stay committed to maintaining a conservative capital structure with net debt-to-EBITDA less than 9x. And at the quarter end, this metric was at 8.3x. Thank you, and to you, Andre.

Thank you, Marianne. Let's move on to summary and concluding remarks. This slide sums up the development in our annual run rate numbers as presented quarterly. As you can see, our run rate rental income has increased by 51% from NOK 696 million to NOK 1,048 million in 1 year, and run rate EBITDA has increased by almost 50% from NOK 573 million to NOK 856 million. Completion of ongoing development projects in Finland will add another NOK 120 million in rental income when they are completed. As mentioned, we also have a large cash position and a relatively low LTV, providing further investment capacity. And we have an exciting pipeline in place in all the Nordic countries to add further growth. So, to summarize, we have delivered another solid quarter, and we are in good position for further growth. Rental income was up by 51% in the third quarter of '25 and 44% year-to-date compared to the same period last year. Net operating income was up by 56% and by 48% year-to-date 2025. And we have increased our cash flow from operations year-to-date with 86% to NOK 579 million compared to the first 9 months of '24. Our operations are solid, and we have a stable underlying cash flow coming from our strong counterparts. In the quarter, our WAULT in the management portfolio increased to 7.5 years, up from 6.8 years in the second quarter. Our property management team signed leases with an annual rent of NOK 9.5 million, and we maintain an occupancy of 98%, where 80% of our income is coming from government-backed tenants. In the third quarter, the transaction activity continued, announcing three transactions with a total of nine properties. Further, we announced two transactions that will be completed in Q4. With 11 new properties within care and elderly care, we have taken a stronger position within a segment that is expected to grow following the strong development in elderly population in the Nordics. Finally, we have taken advantage of a favorable financing market and issued a NOK 300 million bond in August and a EUR 300 million bond in October, continuing to tighten the issue margins. With NOK 4.3 billion in cash as of quarter end, we have ample liquidity on our balance sheet, and we are clearly well positioned for further growth. We are pursuing an exciting pipeline of opportunities in all the Nordic countries with also upholding a conservative balance sheet with a net debt-to-EBITDA below 9x. So, that was all from our side, and we will move on to a Q&A session. Marianne and Ylva, please join me on stage.

Then we can say welcome to the Q&A session. We have received many questions today, and I will start with one for you, Andre. On liquidity deployment and near-term capital allocation, with the reported NOK 4.3 billion in available liquidity, how should we think about the pace of new investments going forward?

I think we see interesting opportunities in all the Nordic countries. We have a good pipeline of opportunities, both in Norway, Sweden and Finland. We have also been able to take advantage of a very favorable financing market, and we have a very solid cash position on our balance sheet. So, we are in a very good position for further growth. However, we will maintain a very solid balance sheet also going forward.

Is the strategic focus still dominated by care assets in Norway and Finland? Or could further geographic or product expansions come into play?

The focus is the same. We are focusing on social infrastructure properties in the Nordics.

According to your report, you have acquired seven elderly homes in Greater Oslo. Can you explain the choice of adding elderly homes to your portfolio and why this is a profitable strategy?

First of all, we are very pleased with this transaction. And we also find this segment very attractive, looking at the demographics and the expected growth in elderly population going forward in the Nordics, we believe that this type of assets will be very attractive going forward. So, this portfolio in particular, we got a 35-year lease triple-net with a very solid counterpart. So, we are very happy with that transaction.

Ylva, can you comment on the ICR development in the quarter? It's slightly down.

Okay. Yes. We have held a large cash position during the quarter as a result of the EUR 350 million bond issued in June, and this had an impact on the ICR. But of course, this will -- it's not a permanent solution. As Andre mentioned, we have a large portfolio of exciting possibilities, and we will look into that while we are maintaining our conservative balance sheet. And for us, we will keep the net debt-to-EBITDA below 9x.

Marianne, you are now ticking all the boxes for an upgrade at Fitch. Can you please give some color on your discussions with Fitch? Do you expect a positive outlook or an upgrade?

Thank you. We haven't had a discussion with Fitch on that directly, but we do deliver on all the key metrics to have a BBB rating. So, we believe that we will be upgraded to BBB+ within the next 12 months. And I expect this will be the topic of conversation in our annual review, which is coming up real soon.

Can you please give the like-for-like rental growth in Q3?

Yes. Rental growth in our like-for-like management portfolio from Q3 last year was 4.1% and can be explained by CPI adjustments November to November last year of approximately 2.4% and we have a high rate of indexation in our portfolio. And the increase above the CPI indexation is mainly due to increased rent in Kunnskapsveien and some of our buildings in Tonsberg and some other small rental uplift.

We see a notable increase in development sites in Q3. Can you break down the drivers?

That is due to Otervegen that has been moved from the management portfolio to the development portfolio. And that is due to the ongoing zoning process that is happening there. As mentioned in this presentation, but also earlier quarters at Otervegen, we are working on a zoning process in order to convert that building and the surrounding area into an elderly concept. So that's why the property is moved to development and it's -- that also explains the full change in the development portfolio.

Marianne, following the recent -- or the October EUR 300 million issuance, can you quantify your current euro-denominated debt share? And how much of that is economically hedged?

Thank you, Donna. Yes, the EUR 300 million bond that we did now in Q4, if you add that up to the balance that we listed in our report, you'll see that about 76% of our outstanding long-term debt now is euro-denominated. We are fully hedged, and we will continue to manage foreign exchange risk through financial transactions and through natural hedges through euro-denominated investments. Our financial policy states that known foreign exchange payments with shorter maturities should carry a higher hedge ratio than those with longer maturities, so we're following up that closely.

On the guided run rate rental income, where should we account for the NOK 120 million from Finnish development projects?

Okay. The Finnish development projects are not included in our run rate guidance. It's based on current active leases and does not include projects that will be completed after -- in the 12 months period and does not include acquisitions after quarter end as well.

The NOI margins in the last 3 quarters have been stronger than guided forward. Can you give some more color on the guided NOI also including the acquired properties after the quarter?

Yes. In our guided run rate, we estimate with 10% operating expenses as a normal guidance. Year-to-date, we are below that percentage. But this is mainly because we have some maintenance scheduled later this year. So that's the reason for that.

Can you comment on the guided net interest cost? Is this adjusted for the two RCFs that is not utilized as of end of Q3 and also the effect of the EUR 300 million bond issued in Q4?

Yes. Our RCF are unused by the end of September, and the fees are therefore not included in net financials. And the EUR 300 million we issued now in October is not included as well as the EUR 350 million bond that we issued late in June. If we had included those figures, it would be a mismatch.

Can you comment on the lease distribution and the 8% that expires in less than a year?

Yes. First of all, I think we have a good dialogue with our tenants concerning the upcoming contracts. There are still some uncertainties related to the contracts in 2026. However, the main expiries we have already announced that is Olav Vs gate in Halden. It's the courthouse in Tonsberg and also Gyldenløves gate 8, which is in Kristiansand, which is the largest expiry in 2026. But here, as earlier announced also, we have already leased out 4,500 square meters in Gyllengården, which is one of the projects that I pointed out earlier in this presentation.

The WAULT in Finland seems to drop from 17 years to 8.1 years. What's happened?

Yes. Well, that was an error in the report for the second quarter. However, the overall WAULT that was reported was correct. So that's the reason for that big change.

The rental income contribution from Barbu Brygge in Arendal in Q3, can you elaborate?

Yes. The effect from that acquisition is approximately NOK 1.1 million in the quarter.

Based on the recent CPI readings in Norway, Sweden and Finland, where do you see the annual CPI adjustment for 2026?

That's a good question. Our external valuators have used 2.9% for Norway, and we expect CPI adjustments below 1% for Sweden and Finland.

We received another question on the capital structure and the current cash position. How do you expect to deploy the capital? Do you expect to repay any debt? And what would be the limiting factors?

No, as I said, we see interesting opportunities in all the Nordic countries. We have a good pipeline of potential transactions in both Sweden, Norway and Finland. And as I also said, we have taken advantage of a good financing market. We now have a very solid cash position that we intend to utilize. However, what is important for us is that we maintain a very solid balance sheet and that we also keep our net debt-to-EBITDA below 9x.

Thank you. And then the last question, what is the status of the development of Statens Park in Tonsberg?

Statens Park has a very positive development in the last 2, 3 years. We have done some significant reletting work there, signed many new leases with amongst other NAV, Bufdir, Skatteetaten, and so on. So Statens Park is a very good development. In parallel with the leasing work, we have been working, or we are in a very early phase of a new zoning plan for Statens Park, where we aim to add more square meters, but also to add the potential to add rescue into Statens Park.

Thank you very much. That concludes the Q&A session.

Thank you so much.

Thank you.

Thank you.