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Edited Transcript of FABG.ST earnings conference call or presentation 19-Oct-17 9:00am GMT

Q3 2017 Fabege AB Earnings Call

Solna Oct 23, 2017 (Thomson StreetEvents) -- Edited Transcript of Fabege AB earnings conference call or presentation Thursday, October 19, 2017 at 9:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Åsa Bergström

Fabege AB (publ) - CFO, EVP and Board Secretary

* Christian Hermelin

Fabege AB (publ) - CEO and President

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Presentation

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Operator [1]

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Ladies and gentlemen, welcome to the Fabege Q3 Report 2017. Today, I'm pleased to present CEO, Christian Hermelin; and CFO, Åsa Bergström. (Operator Instructions) I will now hand you over to Christian. Please begin your meeting.

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Christian Hermelin, Fabege AB (publ) - CEO and President [2]

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Welcome to Fabege's interim presentation. Please turn page.

We have posted numerous strong consecutive reports, but despite these, our latest report stands out, and I am delighted with our result for the third quarter.

Most of all, I am pleased with our net lettings, which exceed SEK 100 million for the quarter. SEK 100 million is normally a good level for a whole year. And the fact that we have reached almost SEK 200 million after 3 quarters is extremely positive, as net lettings are the most important key performance indicator for our long-term earnings trend. The reason for our high net lettings is partly that we have Stockholm's best location, with modern properties in attractive district with rail connections, and that is what all customers are currently looking for.

Our attractive locations have created project volumes that are currently greater than ever before, and our profit margins was a significant 98% for the quarter. And our persistently high profit margins can be attributed to our business model, which involves developing entire districts on an industrial scale. This has allowed us to create Sweden's best project portfolio with extremely low initial values.

But we don't just have attractive products with low initial values, we also have very strong demand, owing to healthy economy and Stockholm's growth. The good demand has resulted in rental increase in our renegotiations of 28% in the quarter. This is a proof that Stockholm is currently one of Europe's very best property markets.

Overall, our consistently strong result for the quarter have created very strong value growth. Our long-term net asset value, EPRA NAV, which usually governs our share price performance, increased from SEK 173 to SEK 190 per share in the quarter. This is how well things can go when all conditions are right and you also have the world's best organization. The foundation of our strong earnings quarter -- of the quarter is our culture in which we are continually seeking to make improvements and our excellent team work.

And now I will hand over to Åsa, who will go through the earnings in more details.

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Åsa Bergström, Fabege AB (publ) - CFO, EVP and Board Secretary [3]

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Thank you, Christian.

Yes, things are going well at the moment. As in the previous quarters this year, we are seeing continued growth in rental income, continued low interest expenses and sustained value growth.

Rental income totaled SEK 1.7 billion. Growth is coming from completed projects now generating rental income and higher rent levels having an effect on the income statement. Growth in identical portfolios totaled just over 8%.

The surplus ratio was 73%. That's an improvement on last year and in line with our expectations for the full year target, which is also 73%.

Administrative expenses are on par with the previous year. Interest expenses are lower than last year in absolute terms. The total volume of borrowing is higher. But on the other hand, an increased share of capital market financing and the fact that old expensive interest rate swaps have expired have resulted in lower average interest rate for the period. The average interest expense at the end of the quarter was 2.18% compared to 2.64% at the end of the year.

Earnings in associated companies totaled minus SEK 81 million and relate to the capital contributions to Arenabolaget during the period. The ongoing deficit in Arenabolaget is in line with the budget, but the change in operator has resulted in a number of one-off costs in the second and third quarter.

Overall, earnings from Property Management increased by around 12% in comparison with the previous year, now up to SEK 713 million. The Selfoss 1 property in Kista was sold in the second quarter to co-owned Selfoss Invest. The sale had no accounting effect and no further sales have been made during the period.

Growth in value continued with unrealized changes in value of total SEK 4.4 billion, corresponding to a value growth of around 9%. Values in the project portfolio rose by SEK 1.1 billion, producing a return on invested capital during the period of 66%. We also made an upward revision of the development rights for the property Stora Frösunda in Solna with an effect of SEK 695 million.

Value in the investment property portfolio was driven principally by increases in rent, but also by somewhat lower yield requirements. The average yield in the portfolio is now 4.39% compared to 4.53% at the year-end.

The value in the derivative portfolio continued to decrease in the third quarter and the deficit value is now SEK 227 million less during this period. The deferred tax is estimated at 22% on current earnings. The difference compared with the previous year is due to us reporting positive items as a result of the resolution of deferred tax in connection with property sales last year.

And now over to slide, Key Ratios.

The balance sheet has continued to strengthen in line with the favorable trend in earnings. Visible equity is now SEK 161 per share, and the long-term net asset value, EPRA NAV, is SEK 190 per share. The equity asset ratio was 47% by the end of the quarter.

The loan-to-value ratio decreased further to 44%. We have a high rate of investment, but we also have high value creation and there has been a continued increase in value in the investment property portfolio. In view of the strong market and the greater potential fall with increased changes in value, the current loan-to-value ratio appears comfortable.

And now over to slide, Financing.

The financing market, both the banking and the capital markets, continue to appear stable. We have continued to expand our financing via the capital market. In the third quarter, we issued SEK 700 million under our own MTN program and SEK 200 million via SFF. All are green bonds and all of them have slightly longer maturities that is 4 to 5 years. The levels are attractive, both in terms of margins and as there are no STIBOR floors on the capital market.

There has been significant interest in our bonds in general and in the green bonds in particular, and all the bond issues we have made this year have been oversubscribed. We often receive speculative requests for new issues, which is clearly encouraging. Including the certificate program, capital market financing currently accounts for 44% of outstanding loan, and our aim is to further increase the percentage of bond loans.

It has been particularly pleasing to have put in place 2 new green bank financing arrangements in the past quarter. Together with the green bond issues, this means that green financing now accounts for 35% of total outstanding loans, and that comes with a current price advantage of around 5 to 10 basis points.

We have had several maturities of old and expensive interest swaps during the period and the new swaps that we have entered into have been signed at much lower levels. 52% of the loan portfolio was fixed through interest rate swaps at the end of the quarter. We are aiming to carry out more interest rate swaps at long maturities to further ensure a good level of future cash flow. And in October, we have fixed another SEK 500 million in 10-year swaps.

Unutilized facilities at the end of the quarter totaled around SEK 2.1 billion. We are getting positive signals from both banks and the capital market, and we are confident that we can both refinance existing loans and take out new loans as and when the need arises.

And now back to Christian to hear how the business is developing.

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Christian Hermelin, Fabege AB (publ) - CEO and President [4]

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Demand is very good, owing to Stockholm's growth and the healthy economy. This is resulting in continuous rising rents. A good indicator of the strength in the rental market is the rental increase in our renegotiations. During the quarter, renegotiated rents rose by 28%, which is an increase of 27% for the year on an accumulated basis.

Net lettings are a high priority for us this year, as we want to add new projects to replace all the projects that will be completed in 2018. With SEK 190 million in net lettings and 4 newly started projects during the year, it's above target.

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As a result of rising rents and completed projects, we are seeing strong growth in revenue this year, as shown here. This will continue in 2018, as we have a lot of projects that are being completed then and will start generating revenue.

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We did not make any transactions in the past quarter either. The strong property market in Stockholm and our own good work generated value growth of almost SEK 2.5 billion over the quarter, producing a total increase in values of 9% in the year.

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Value increases in the first 6 months of the year, as shown in the pie chart on the right, were due to relatively equal contribution from the project portfolio and rising rents and declining yield requirements. This change in value in the third quarter, on the left, are as expected, mainly due to the increase in values of our projects and rising rents, but there is still a significant portion that comes from declining yield requirements. We expect this trend to continue. We should see significant value growth from our projects operation and rising rents, while the effects on value from falling yields is gradually decreasing.

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Let's now turn to our project portfolio, which is continuing to create values. The occupancy rate in the quarter increased from 81% to 88% in our projects. It is not only Arenastaden that is contributing projects. Our major projects are well distributed across all our areas. Arenastaden has gone really well, so we are slightly behind with planning permissions, but new zoning plans for Arenastaden are starting to appear, which is important as there is a significant interest in moving to Arenastaden.

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Here, you can see Haga Norra, which is the project we plan to start up the next -- up next to Arenastaden and which we announced in September.

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Haga Norra contains around 90,000 square meters of apartment space and 70,000 square meters of office space. It has a fantastic location, with services at Arenastaden, rail connections and major employers close by.

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This provide us with the optimum conditions for creating an attractive district in partnership with residential developers.

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Many are wondering where our property market is headed, and sooner or later, the upward trend will, of course, break. On the downside today, we had primarily the tax proposal and expectations of a slightly rise in interest rates. However, these 2 factors do not cancel out all the positive factors that currently exist.

Perhaps the most powerful aspect on the downside is still probably psychological. And with that, I mean the worry that development will fall short of expectations. And the main area that could deteriorate and that has been a driving force for the positive trend is the strong economy, and I don't believe that the upswing in our property market will come to an end before we see a clear sign of an economic downturn.

When we do start to see an economic downturn, it is likely that it will then reduce the risk of a sharp rise in interest rates. So as always, the answer to questions about the future of the property market is the subject of the business cycle.

Thank you. We are now ready for questions.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And as there appear to be no questions registered, I'll hand back to the speakers.

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Christian Hermelin, Fabege AB (publ) - CEO and President [2]

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Okay, then we thank you all listeners from Fabege for listening for the third quarterly report. Thank you.