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Edited Transcript of PNDX B.ST earnings conference call or presentation 24-Oct-19 7:00am GMT

Q3 2019 Pandox AB Earnings Call

STOCKHOLM Oct 29, 2019 (Thomson StreetEvents) -- Edited Transcript of Pandox AB earnings conference call or presentation Thursday, October 24, 2019 at 7:00:00am GMT

TEXT version of Transcript

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Corporate Participants

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* Anders Nissen

Pandox AB (publ) - CEO & President

* Liia Nõu

Pandox AB (publ) - Senior Executive VP & CFO

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Conference Call Participants

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* Albin Sandberg

Kepler Cheuvreux, Research Division - Equity Research Analyst

* Christopher Richard Fremantle

Morgan Stanley, Research Division - Executive Director

* Fredric Cyon

Carnegie Investment Bank AB, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the Pandox Q3 2019 Report Conference Call. (Operator Instructions). I must advise you that this conference is being recorded today, Thursday, 24th of October 2019.

I would now like to hand the conference over to the first speaker today, the CEO of Pandox, Mr. Anders Nissen. Thank you. Please go ahead.

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Anders Nissen, Pandox AB (publ) - CEO & President [2]

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Well, good morning, everyone, and welcome to this presentation of the third quarter and 9 months for 2019. As said, my name is Anders Nissen, I'm the CEO of Pandox. With me I have, as always, Liia Nõu, our CFO; and Anders Berg, Head of Communication and Investor Relation.

And as always, this presentation is divided into parts. We start with the presentation of the quarter and followed by a Q&A session.

So let's start. For the -- this is Page #2. So for the third quarter and 9 months of 2019, we report a continually good growth in earnings or a good balanced earnings development, if you may say so.

The total net operating income increased by 10% for the quarter and 11% for the 9 months. The return on equity was strong, measured by annualized growth in EPRA NAV, including dividends was 19% on rolling 12. The driver behind this development were value-adding acquisition in U.K. and Germany, and we have a positive rental growth in several markets, specifically on hotels, so coming back after renovations and continually good development in hotel market in Brussels.

And you can say that we -- our strategy of diversification continue to bring benefits to us, where a stronger market more compensate for weaker markets.

And -- well, sorry -- and like-for-like property management increased by net operating income 1.7% in the quarter and 1.6% for the 9 months. Like-for-like operating activities decreased net operating income by 1.2% in the third quarter, and the reason are planned renovation and start-up cost in specifically 2 hotels, I'll come back to that later. And just for these cost, the net operating income like-for-like was strong 5.5%. And for the 9 months net operating income, operating increased by 10.1%.

So next page, please. As you -- sorry, I lost my -- here it is, here it is.

For the third quarter, Pandox's net operating income increased by SEK 81 million, an increase of 10%. Of -- for the 9 months, the increase was 11%, excluding the effect of IFRS 16, the increase was 7% and 8%, respectively. Again, key factors supporting were value-adding acquisitions, good rental growth specifically in Finland and Sweden, good development in Brussels and positive currency effect. Key negative factor were increased hotel supply in some markets in this quarter, specifically Oslo and Heathrow, challenging comparable figures and some renovation disturbance, specifically in hotels in under Operator Activities.

Next page, please. As you know, since Pandox were [down] to the stock market in June 2015, and we since then had a high business tempo, including the most recent announced agreement to acquire 2 hotels in -- one in the Hague Netherlands and one in Hannover Germany. Pandox Hannover made acquisition for SEK 21 billion over 4 years. We had also invest approximately SEK 2.7 billion in value-adding investments in our existing hotels, and we have secured some 70 new lease agreement, most are in the market outside the Nordic region. Finally, we also have made divestment for some SEK 2 billion. So over these 4 years, Pandox's total net operating income and total cash earnings had more than double measured on the rolling 12 months basis.

So next page, please. Pandox has a well-diversified portfolio, so may dominate by revenue-based leases, that we have well balance between different countries, location, guest segment and brand. At the end of the quarter, Pandox hotel property portfolio comprised by 146 hotels with a total market value of 59.7%. These 2 last acquired hotels in Hague and Hannover is not included in these numbers.

130 hotel properties were owned and leased, representing around 85% of the total property value, and 16 hotel property were own and operate, representing around 15% of the total property value.

Next page, please. So the last acquisition we done was, as said here before, 2 hotels, 1 in the Hague and 1 in Hannover, and both of them will be on the Operator Activities. The price is EUR 83 million, and initial yield, it's approximately 6.5%, so strong numbers.

We will manage this together by Grape Hospitality through our management agreement. And so we will be -- we will manage Grape and Grape will manage their daily operations. So we will get 2 new partners for Pandox. One is this Grape Hospitality, which is a spinoff of Novotel or Accor, and that give us opportunities to maybe be more active in French-speaking countries. And we also have a new partner in Novotel, which is the brand under umbrella of Accor. Accor is one of the largest hotel company in the world, which we're now eager to start to learn more about. These are 2 well-invested hotels, total is 421 rooms, and the price is about EUR 200 million per room, way under construction cost, we believe this has a good potential further out.

We expect EUR 16 million in sales and about EUR 5.7 million in NOI in 2020. So the Hague is an international market, and as you can see on the picture, it is linked to a big convention center where it can cover 5,000 people, which is a very strong, of course, platform for that hotel, but also are active in the treasure and leisure market in the Hague and well-known traveling and with this summer holiday for many people in Holland. And now Hannover, with our third hotel in Hannover, it is one of the largest, say, niche market in the world. Now we have one more hotel in that strong market. So we also expect some good potential here for the future.

So the next page, please. This is the world of Pandox. Today, we are in 15 countries. We are in 85 destination, and you can see it's 43% of the value coming from Scandinavian, 35% is from Germany, Belgium, Switzerland and Austria, and 20% U.K. and 2% Canada.

The next page, please, show you our selection of platform and operator on brands. And if I may so, I will say this is the strongest platform in Europe today from owner's side, no one has so many relationships, and no one has so many brands and good operators who are willing to in different partnership with our course, is [set] though something will increase our potential and organize our risk in bad days.

So if you go over to the next page, please, and talk about the market. We can see -- we start with RevPAR growth development in Europe. Europe has 2% growth in the quarter. And you could remember that last year, we had the World Cup in football in East Europe, so that has a negative effect on this quarter, but still stable. In Northern Europe, where we have most of our hotels, it's about 2% growth. So it's still stable out there.

If you look to the selected countries. You can see that some countries are good and some countries are bad in the -- not so good in the quarter. And that's why we have this strategy by being in many different countries and the diversification strategy that we always talk about. Good countries in the quarter have been Finland, Austria and Sweden, and weaker have been Denmark and Germany.

Let's go to the next page, please, and look at some specific cities where it may be more interesting. Here you can see a selection of very strong international and domestic market, we're doing fine, like Brussels, which are today, (inaudible), who have many hotels there, one of the strongest market in Europe. You have Helsinki, which is growing by good 9%. They are now Chairman European Union for this quarter or so, high activity on the hotel side with more meetings, Montréal doing fine and Stockholm, we can come back to. Weaker market is Frankfurt, Berlin, and as in whole Germany, their Q3 had been weaker. A very strong Q2, a lot of mess - a lot of fair trade in Q3, not so many fair trade, meaning that the market is a little bit weaker in that quarter. We expect that Q4 will be stronger if you look specifically on niche market for Germany. Oslo and Copenhagen is due to new capacity. U.K. regional has a minus 2%, we have a positive number. So our portfolio is taking market shares in U.K. And Stockholm strong 3%, good July, strong September and a stable August, all 3 segments transience meeting unless you're doing fine over the quarter, and it looks stable in Stockholm year out.

With that, I hand over to our CFO, Liia Nõu, for the financial highlights.

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Liia Nõu, Pandox AB (publ) - Senior Executive VP & CFO [3]

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Thank you, Anders. We're now at Page 12. We think the third quarter was a good quarter for Pandox, where we were able to generate profitable earnings growth in both business segments. Please note that during the third quarter, we finalized the legal reorganization of our previous acquisitions of Jurys Inn based on completion accounts. This explains the majority part of the increase in deferred tax in the quarter.

With that out of the way, we turn to some key numbers. And I start with Property Management. In the third quarter, rental income amounted to SEK 851 million, an increase of 5%. If we adjust for the previous accounting change for property tax in U.K. and Ireland, which we described in the second quarter, the increase was 7%. Like for like, Property Management reported an increase in rental income of 2.6%. In the third quarter, net operating income amounted to SEK 761 million, which is an increase of 9%.

Excluding IFRS 16, net operating income amounted to SEK 748 million, an increase of 7%. Like for like, property management reported an increase in net operating income of 1.7%.

Continuing with Operating Activities. In the third quarter, net operating income amounted to SEK 160 million, which is an increase of 12%. The increase is mainly explained by acquisitions, good progress in Brussels and German domestic regional cities. However, earnings growth was negatively affected, as Anders mentioned, by renovation disturbances in Hilton Brussels City and start-up costs for DoubleTree by Hilton in Montréal.

Excluding IFRS 16, net operating income amounted to SEK 153 million. Like for like, operating activities reported a decrease in net operating income of 1.2%, but adjusted for the costs mentioned above then there was a growth in net operating income with a total of 5.5%. Total cash earnings amounted to SEK 581 million, an increase of 9% in the quarter. Total cash earnings per share also increased with 9%. Measured from year-end 2018, the unrealized and realized value increase for investment properties amounted to 2.3%. For operating properties, the value change was 4.1%. End of period, EPRA NAV per share amounted to approximately SEK 184. Adjusted for dividend, the -- and the annualized increase in EPRA NAV was just about 19%.

So turning to the next page, please, Page 13. In the third quarter, Property Management continued to benefit from previous acquisitions, positive diversification effects and continued positive underlying demand. Although, like-for-like growth was stronger in the third quarter, it was constrained by negative supply and renovation effects in some markets. Rental growth in the comparable portfolio was positive in, for example, Austria, Sweden, Finland, Norway and the U.K., but was negative in Switzerland, Ireland, Denmark and Germany. In the U.K., like-for-like growth amounted to approximately 1%, and the stronger disseminations were Wolfsburg, Belfast, Brussels, Leeds, Helsinki, Vienna and Salzburg, and Stockholm rental growth increased by approximately 9% in the quarter.

Next page, please in the third quarter, Operator Activities, revenue and net operating income increased at a reasonable good pace, supported by previous acquisitions, currency and overall good development in Brussels and domestic regional cities in Germany. However, again, as previously mentioned, profitability was negatively affected by renovation of Hilton Brussels City, which will be rebranded into Indigo, and as well as we have start-up costs for DoubleTree by Hilton Montreal, Canada.

Next page, please. Looking at our portfolio. In the third quarter, approximately 38% of the portfolio was externally valued. Total unrealized and realized changes in value amounted to approximately SEK 1.4 billion, of which SEK 1.189 billion was for investment properties and SEK 321 million for operating properties. The value increase is explained by a combination of improved cash flows and lower yields, and it's basically 40-60, 40% comes from increased cash flows and 60% from lower yields.

In the quarter, we completed divestment of the hotel building to Hotel Hasselbacken, which explained the SEK 96 million in realized changes in value and minus SEK 480 million in divestments. We also closed the acquisition of 3 hotel properties in Germany, which explains the lion's share of the acquisition entry in the table.

End of period, the average valuation yield for investment properties was 5.47% and for Operating Properties, it was 6.53%.

Next page, please. Finally, let's take a quick look at our EPRA NAV and financial position. End of period, EPRA NAV per share amounted to around SEK 184. This corresponds to an increase of approximately 19% on an annualized basis, adjusted for dividend and proceeds from directed share issues. The increase is in part explained by changes in currency exchange rates. Loan to value amounted to 48.3%. You can -- right in the table, liquid funds and long-term unutilized credit facilities amounted to close to SEK 3 billion or a little more than EUR 3.2 billion. And with all that in mind, we -- our conclusion is that Pandox's financial position remains strong and stable.

Next page, please. And with that, I hand over back to Anders Nissen for some final words.

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Anders Nissen, Pandox AB (publ) - CEO & President [4]

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Thank you, Liia. Yes -- and the main driver for growth for the rest of the year, you can divide it in 5 boxes, market growth that is the first. Business on the books for Q4 this year looks promising, stable but uneven as always. We believe that our high-quality portfolio diversified in many cities, in many different sort of market we're taking more than the market, given that we will add value into our cash earnings. We see a pipeline of growth investment -- value-adding investment. At the moment, we have signed up for SEK 1.2 billion, with we constantly do our investment and that will continue in Q4.

We see strong operations, specifically in Belgium and in Germany, and we have a good team there, so we believe that also there, we will do a little better than the market. And on the top of everything, we also, of course, looking for opportunistic acquisition, we have done 3 -- 2 good deals so far this year, 3 hotels in Germany for a yield of 5.7% and now recently Hague and Hannover in Operator Activities for 6.5%. And there is more things to do out there, but we need to be the right number, and we need to be more selected than we were perhaps for a year ago. So all in all, we have a positive look out of Q4 and the end of 2019.

Thank you very much and -- for this, and now we hand over for Q&A.

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Questions and Answers

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Operator [1]

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(Operator Instructions) And your first question comes from the line of Fredric Cyon.

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Fredric Cyon, Carnegie Investment Bank AB, Research Division - Research Analyst [2]

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I have a few questions from my side. So starting off with the acquisitions you did in Hannover and the Hague. If I look at NOI margin, it seems fairly high already. What's the potential -- what kind of potential do you see in that acquisition apart from the fairly high yield?

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Anders Nissen, Pandox AB (publ) - CEO & President [3]

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Well, I would say it's revenue management, most likely, together with Accor, what we think we can add a lot. I agree that they operate hotels very professional. That is also why we decided to sign up for them and partner up, we see possibility to do more together with them.

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Fredric Cyon, Carnegie Investment Bank AB, Research Division - Research Analyst [4]

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Okay. And then my second question relates to the renovation works that hampered somewhat the NOI in the operating segment in the third quarter. For how long do you expect this to have a negative effect on the NOI in the Montréal and Brussels?

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Anders Nissen, Pandox AB (publ) - CEO & President [5]

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Well, we have -- at the moment, we have 2 big hotels that's under renovation. And the Montréal will end up Q2 next year, and the Hilton Brussels City will also end up the end of Q1 or beginning of 2002 (sic) [2020]. We will most likely start another large renovation later also this year, so that may be meaning. So to your question that might be some sort of little bit that's not negative growth, that will be the same sort of trend the next couple of years -- the next couple of quarters that we will do large renovations and taking out capacity, what exactly that means for the effect for hotel, I can't give you that number more than to say that we are very active in renovating and develop hotels to take them to the next level. So in some ways, it's a positive message.

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Fredric Cyon, Carnegie Investment Bank AB, Research Division - Research Analyst [6]

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That's clear. And then the final question, I think it's a related -- Liia will probably answer it. It related to financial costs. If you look at costs, it increased by about 7% quarter-over-quarter, and it's not like your total debt level has increased to that magnitude. Are there any one-offs in the third quarter?

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Liia Nõu, Pandox AB (publ) - Senior Executive VP & CFO [7]

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No. Not really, other than -- we have acquired the portfolio on 1st of July. So we have a full quarter of the Hague and Hannover acquisition. We have entered into a number of hedging derivatives, even though the sort of underlying basis is -- so there's no real one-off.

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Operator [8]

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And your next question comes from the line of Albin Sandberg.

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Albin Sandberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [9]

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Yes. I basically just have one question and it's on your outlook, Anders, for the next coming quarters. And maybe also if you can stretch that out through 2020, but it feels like you are highlighting some markets that will affect negatively and then others would compensate. If we look at it from a Pandox group perspective, are you seeing overall growth for 2020 in the market?

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Anders Nissen, Pandox AB (publ) - CEO & President [10]

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Yes.

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Albin Sandberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [11]

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And that's also taking into account, I mean, company-specific actions such as still the higher renovation actions that you're running into now.

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Anders Nissen, Pandox AB (publ) - CEO & President [12]

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Now I answered the question about market. In totally, those hotels that those markets that we are have hotel in today will have a positive outlook -- have a positive growth, maybe not so much, but they will have a positive growth for 2020. From Pandox side, we have to -- we normally do better, but we haven't shared any figures for 2020 yet.

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Albin Sandberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [13]

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Okay. So I could clarify because I was thinking also maybe we talked about this renovation activity that is maybe a bit higher than what is normal. So my feel is that as that kind of activities leveling off a little bit, but the negative impact should have less impact in 2020 than 2019. Or maybe you keep the same renovation pace throughout 2020. So if we look at the delta between the years, that's definitely -- or definitely, that's broadly the same.

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Anders Nissen, Pandox AB (publ) - CEO & President [14]

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No. I will say that the -- at beginning of next year, we are into a few big renovation, and we take the opportunity when the market is weaker, and we still can -- have been finding good price on the construction market, which is easier to do in December, January and February than in March, April or May, as you had, of course, understand. So that can be that we do more than we normally do there, and that can have some negative effect, but then that will coming back at positive way in another quarter. So for the full year 2020, they will be adjust out, I will say. But again, we haven't shared any number for Pandox more than to say the market looks still stable and there is demand growth in the market. Some markets are impressed by ramp up because of new capacity, but most of them have no new capacity. So all in all, our diversification strategy is working very well.

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Albin Sandberg, Kepler Cheuvreux, Research Division - Equity Research Analyst [15]

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Okay. Great. And then a follow-up then on the acquisition that you made. One, a little about just how it came about? Was it something that you looked upon for a long time? Or was it like a quick deal and also looking now into Q4 and maybe when we close 2019, would that acquisition be good enough for you? Or do you target more here now in the near term?

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Anders Nissen, Pandox AB (publ) - CEO & President [16]

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The first question is that it wasn't a quick one. The one in the 3 hotels in Germany was a quick one. Someone we know since before who wanted to do a quick deal, and we -- which we did. This was something that we had been in contact with the operator who was also the seller for such a long time, start alone and understanding, and step by step, we came -- they came from much higher numbers and we came from lower numbers, and then we found a number something between us and could close the deal, and we are very happy for that. Regarding the growth in new acquisition and you know, Albin, both you and me are humble player, we play match every day, and we would like to win. Always starting alone.

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Operator [17]

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And your next question comes from the line of Christopher Fremantle.

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [18]

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It's Christopher Fremantle from Morgan Stanley. Just wanted to ask a couple of small questions. The first was, you said you had revalued 38% of your portfolio, which I think is quite a high number. Is there some reason that you have revalued more of your portfolio in the third quarter? That would be my first question. The second question was just on the impact of renovation and CapEx projects. Can you just help us understand how much of the like-for-like growth is coming from those sort of renovation and CapEx-driven projects? That would be helpful. And I think in your release, just as a follow-up, you said you're actively on the lookout for development projects, which is not language that I sort of heard -- seen in your report before. Is that because you see less growth in the underlying market that you're having to rely a bit more on sort of CapEx-driven growth? Any commentary you can give on that would be helpful.

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Liia Nõu, Pandox AB (publ) - Senior Executive VP & CFO [19]

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Okay. I'll start with the first question, and I'll let Anders think about the second question. When it comes to the external valuation, it's a simple answer. Of course we do on a rolling basis -- on a 12-month rolling basis, we externally value all our assets. But we -- at this point in time, we also have a bigger refinancing of the previous Norgani portfolio, which is due now in Q4. So the banks, of course, need some external valuations, and we take the opportunity to do that in the same time. So it's more than SEK 8 billion of refinancing, which will be put in place in Q4, and that's the sort of support for that.

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Anders Nissen, Pandox AB (publ) - CEO & President [20]

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And regarding this negative like for like in Operator Activities as we have been into before, we -- that will continue to be like for like negative the next quarters because of large renovation programs. If you adjust with this, that will be positive numbers. So we have a few big hotels that we never see -- large, we see opportunity to do things in this market condition as it is today. And that will -- in short time, has some maybe some negative effect on the like-for-like comparison due to that we're taking out capacity, something similar than what you see in this quarter now. Due to development, I don't know if you had misunderstood, we have to say something because we never develop new hotels when we can, and we did that's still the strategy. I don't -- maybe we talk about that we develop more rooms and more buildings into existing hotels. I don't know if that is the one we have been not so clear about.

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Christopher Richard Fremantle, Morgan Stanley, Research Division - Executive Director [21]

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No. You -- there's just a paragraph saying that you're actively looking for development projects. And that's an ongoing thing or is that something -- I haven't seen that language before. I just wanted to -- if we should read anything particular into that.

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Anders Nissen, Pandox AB (publ) - CEO & President [22]

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That is in existing hotels. So we do -- we are very active -- in this market where we see a growth, most of the growth coming from average rate, and that means that the underlying profit in the hotel market increase and be better. And that means that possible to do value-driven investment is better than it was the same -- for the same period 1 year ago. So most of the growth came from volume. So that's why we say we are very active at the moment and looking for development project, but that means in existing hotels, like we build more rooms in Inn Inverness, we look at do the same in Oxford. We try to see what we can do in Birmingham, we have in Luleå extension of a Scandic hotel and more and more. So many hotels are now ongoing a large renovation program, which will take the hotels to a new profit level.

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Operator [23]

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(Operator Instructions) There are no further questions at this time. Please continue.

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Anders Nissen, Pandox AB (publ) - CEO & President [24]

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Well, thank you for interest and in this mass-reporting day on the stock market, and please note that we have -- our next event is the Hotel Market Day, the 19th of November. And then we have an exciting program focused on sustainability in the hotel sector. And [like as always], this event is always fully booked, but for those who haven't registered, please do not -- please do it today, so we will try to squeeze you in because the people from the capital market we like to see there. So thank you very much for today, and goodbye.

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Operator [25]

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That does conclude our conference for today. Thank you for participating. You may all disconnect.