Fabege AB (publ) (FABG) Earnings Call Transcript

Welcome to the presentation of our year-end report 2021 today besides our CFO, Asa Bergstrom, as you know very well since before. We also have our Head of Sustainability, Mia Häggström, here. So welcome. Before I will summarize the strong -- we will summarize the strong full year 2021, I want to say a few brief words about the fourth quarter. It was a quarter with a good level of activity, both in the rental market, but also in the transaction markets. There were many inquiries and it was many viewings. We see that the positive trend also is continuing into the Q1 [indiscernible] for 2022. Net lettings came in for the fourth quarter at SEK 22 million, and it was a good result. We will tell you more about that later. The most important event was our strategic -- was maybe our strategic acquisition of SHH, although we talked to you and we mentioned that already in the Q3 presentation. But change slide. Then despite the pandemic, the COVID-19 situation, 2021 was a very good year both for us at Fabege, but also for many of our customers. Net lettings was at record level, almost at record level, SEK 162 million for the whole year. It is one of the best years ever. And considering what unusually 2021 was, with the restrictions back to normal, new restrictions at the end of the year and all that, I think 2021 is a strange year, but it was a really excellent performance by our organization. The year was also characterized by rising share price, record low interest rates, capital -- and capital, almost [indiscernible] looking for -- seeking returns, all that you know about. And that also was, of course, it was seen in the transaction market, both in the -- for all real estates in Sweden and other countries still, of course. And we see also how the current property real estate companies are being valued by the stock market and some of us have some of the company has been valued significantly over the net asset value, which is not that normal situation. For us, it's also therefore extra important to have total focus on our transactions and what we can influence over -- and the most important, maybe, is to have focus and not forget about the daily operation. We have our basis the business -- the basis of our business lines and the management of properties with today is a combined value of around SEK 83 billion. Every day, we have to take care of our -- careful and further developed our portfolio. It's a daily grind with many small and larger details, but it's also what generates long-term results and growth. So please, Asa, tell us a little bit more about the figures and the results.

Thank you, Stefan. Please turn to Page 5. It was, as Stefan just mentioned, a strong close to the year as expected. Higher income, improved net operating income and profit from property management. For the first time, a quarter from SHH is also included. SHH is mainly reported on separate lines in the income statement and has its own segment in our segment reporting. Rental income came in at almost SEK 3 billion, slightly higher than the previous year. In an identical portfolio, income increased by 2%. Vacations ahead of projects and granted discounts were offset by occupations in completed project properties. The increased operating expenses were due to a more normal winter in terms of cost for heating and snow clearance, but the surplus ratio still improved to 76%. SHH gross profit amounted to minus SEK 9 million, of which SEK 19 million related to central administration costs. Income recognition takes place in connection with the completion of the projects, and we estimate that the costs are a little front-loaded. And now, approaching 2022, we will review the methodology for distributing the costs in the ongoing projects. Central administration includes nonrecurring costs of approximately SEK 11 million relating to the move and furnishing of our new headquarters in Solna. Interest expenses increased slightly compared to the previous year, which is due to an increased loan volume. The average interest rate fell slightly during the year to 1.75% from 1.77% last year. And the result in associated companies amounted to plus SEK 2 million, the year's contribution to Arenabolaget of minus SEK 35 million was offset by a positive final recognition of SEK 25 million relating to our joint venture project Selfoss in Kista and also SEK 12 million relating to final recognition of housing development projects in SHH. And we, therefore, reported profit from property management of just over SEK 1.5 billion. The strong property market is reflected in continued falling yield requirements and positive value changes. In total, the year's unrealized changes in value amounted to SEK 4.6 billion, of which SEK 2.2 billion were recognized in Q4. And the yield requirement fell by 12 points during the year to 3.76% at the year-end. The deficit value in the derivatives portfolio decreased further during the quarter and by SEK 532 million in total during the year. And finally, the tax expense amounted to minus SEK 1.3 billion and related to deferred tax only. Please turn to Page 6. Reported equity increased by SEK 14 per share to SEK 141 per share, and the long-term asset -- net asset value, the EPRA NRV, amounted to SEK 171 per share. The only key rate that does not currently meet our target level is the debt rate year, which amounted to 14.7%. Otherwise, the key ratios are in line with our goals and expectations. Our balance sheet is still very strong with a high-quality asset ratio and low loan to value ratio. Please turn to Page 8. On the financing side, we do not have so much to report. The strategy of loan capital maturity and the high proportion of fixed interest terms remains unchanged. We maintain a reserve of unutilized facilities in the form of revolving credit facilities of just over SEK 3 billion. Unfortunately, the proportion of green loans slipped back to 99% after the acquisition of SHH, whose loans are not classified as green loans. However, this is something we intend to change during 2022. Both the capital markets and banks have been there for us during the whole year. We have continued to be active in the capital market through several bond issues and regular issues and sales of commercial paper. We have also refinanced bank loans according to plan. We have also taken the opportunity to fix the interest rate through new long-term interest rate swaps. Of the loan portfolio, 76% is now fixed, mainly based on long-term maturities and mostly through straightforward interest rate swaps, supplemented by some fixed rate bonds. Maturities are continually replaced by new long-term fixed rates. During the fourth quarter, we reactivated our share buyback program. In total, we repurchased 4.9 million shares during the year, and we currently hold almost 9.5 million treasury shares. The shares have been repurchased at an average price of SEK 122.05 per share, and we will retain these treasury shares until further notice. Please turn to Page 9. We aim for an even distribution of our loan stock among several sources of financing, as you can see in the graph on the left. Other loans in the chart, apart from bank loans in the Nordic banks, also referred to loans from Brunswick and the European Investment Bank. And the proportion of assets free from collateral or mortgages or unencumbered assets, as they are called in the rating agency terminology, has increased to 44%. And by that, I leave over to Stefan again.

So Slide #11, please. As you know, we're only 94 properties, but it's a property value of more than SEK 83 billion. It's well-located modern properties. And I think that will be even more attractive in the future. One effect of the pandemic will be that the customers will demand -- maybe even continue to demand high quality, but they will also demand flexibility. And that's something we all have been talking about since 2 years since the COVID-19 situation started. We have a total model portfolio. We have, as we said, in our attracting locations with very good communications. This will -- I'm sure this will benefit us. The value growth for 2021 was very good. We have, today, average yield requirements of 3.76%. However, we -- the transactions that has been done, as you know, we value the portfolio every quarter with external value of about 25%, 30% every quarter as we also did for Q4. And the transaction market has been very strong when the -- even for commercial. There have been very few transactions in the office market in Central -- in the CBD and Stockholm. There were some transactions at Q4, and they were at a low level of 3%. So in the valuations, I think we saw a downturn, but I think there is still some time lag in the valuation in the market or maybe the market was -- we have seen the peak. Next slide, please, #12. As you know, we have a very stable customer base. We have long leases with some of Sweden's largest companies and more stable companies, SEB, ICA, Telia, Swedbank, Carnegie and so on and so on. I think this is really a strength for us. And the new lease agreement with Alfa Laval in Flemingsberg was 20 years -- 22 years lease. I feel very comfortable -- confident about our customer structure. We can see a small tendency that smaller company are now a bit more inclined to be for shorter lease terms than they did before the COVID-19. But for larger clients and customers, a long-term approach is important and that's also what we continue to see. And Alfa Laval is a very good example of that. Please go to the next slide. We sometimes forget the portfolio. We have a large portfolio in the Stockholm CBD or inner city is. We have a third -- we are the third largest property owner, with 27 properties with a value of more than SEK 30 billion. With our Stockholm focus, it's -- of course, it's natural for us to own attractive properties in the Stockholm inner city. It's there the new trends are born, the rental levels are high, vacancies are sort of few and the cash flow is stable. And there's also advantage to be able to offer -- for us it's an advantage to offer -- to be able to offer premises, both inside and outside of the city. For example, in Solna, Hammarby and in future, Flemingsberg. And during the year, there has been an unusual opportunity for us to get to some area for new productions in the inner city. And thanks for the land to our land location at Sveaplan, we now had the opportunity to go forward to build maybe 8,000, 9,000 square meters offices at Sveaplan close to the Wenner-Gren Center where we see here in the picture. But it's a project that will take some years to start. Next slide about Hammarby Sjöstad. We are the biggest in the office market in Hammarby Sjöstad. We have 11 properties with a value of more than SEK 8 billion. And looking ahead, Hammarby has only -- is also halfway in its development. 30 or 40 years ago, this was an industrial land for old industrial companies, so it has been developing fantastically during the last 40 years, and we'll continue to increase that creativeness as the district is linking up in a natural way within Stockholm inner city and -- but also the global area will continue to be developed. During the year, we have even here obtained some land [ notifications ]. We have in total development rights here for more than 70,000 square meters of offices. Next slide, Arenastaden. As you know, we are #1 here. We have developed most of the area. We owned Friends Arena. You can see it, the one you see to the left. And during the year, 2021, we have completed 2 larger projects, both the hotel and the lower part of this picture, the Nationalarenan 3. And also, where we have our new head office in the middle of the picture, where we have almost let up 100%. But we see -- and we see a strong demand in -- for new premises in Arenastaden. One example of this is when clearly exercised an option to lease some areas, it didn't take long before they say as well let to new customers at very good levels. In this quarter, the Q1, the Poolen 1 project will also be completed and TietoEVRY will move in, in that building. Next slide, please. Haga Norra, one of our development areas. The property value is about SEK 3 billion today. We are now entering into next phase, Phase 2, for development. We will start building office space, the one you see in the middle here for the 30,000 square meters of offices and also preparations and starting to construct more than 400 new apartments. And also, garage and so on. I will come back a little bit later to this project. Next slide, please. In Solna Business Park, which we have been owning now for about 15 years. Then even here, the next phase for development will start. In 2022, we were to make the ground floors in the area more attractive. When the area was built in the 80s, it was adaptive for heavy traffic with a lot of loading docks and loading/unloading -- and unloading areas. Now during 2021, we have worked to remove these, and now we're taking the next step to improve the area's attractiveness. We will also start new progress here. Since we are the largest property owner in the area, we have the possibility to work with the entire area in order to boost its attractiveness and its development. This is one of the many advantages of having a concentrated portfolio and being a large player in each market. It will also -- the future development in Solna Business Park, we will also include a lot of residentials. The next slide, please, Flemingsberg. In the south of Stockholm, we took several large steps forward during 2021. We have started our first project with the construction of the Royal Opera and the Royal Dramatic Theatre. We will -- it will -- that building will be ready in 2024. We have obtained even here land allocations from the Huddinge -- city of Huddinge, which will enable approximately 225,000 to 325,000 square meters of development rights. And that includes 30,000, 40,000 square meters of residential and the rest is commercial floor space. At the end of January, we will also -- we also acquired a development property from Skanska, which includes another approximately 35,000 square meters of commercial floor. So now we have control of most of the development in the area. And I think that's an advantage to be really strong and to be able to work close to the city of Huddinge to develop this area. And as you know, during 2021, we signed Sweden's largest new letting with Alfa Laval. They used Flemingsberg for its future establishment. The lease is for 20,000 square meters and is for 22 years. So there were also a lot of several initiatives to be part of the development in the whole area, a few social initiatives to strengthen Flemingsberg. But me, I will tell you a little bit more about that later on in the presentation. So next slide, where we will delve a little bit about the rental market. So on Slide 20, please. The rental market in recent years has been, as you know, very strong, and you know how the rents has almost doubled since 10 years -- during the last 10 years. We don't hear the rumors right now about new record levels. I'm sure, we -- actually, during the year, we signed new record levels, a small space -- some small space in the city [indiscernible] for us, but it were only for 300 square meters for more than SEK 9,000 per square meter. But it's a very stable market in general. So we don't see any trend that rents are falling. It's a good demand, especially in the CBD, but also, as we said before, in Arenastaden. So we would say that we have more level of -- rent level at high levels in the inner city, while in our other areas, we can see continued increase but at more moderate rate than before. But even if the rents have gone up, it's also important to remember that premises costs are generally just under 1/10 of the wage costs for the companies [indiscernible]. This means that many companies are focused on the signing office so that they really can be an attractive place to be in. And I think this -- we have only seen the start of the new step for this. Next slide, please. As we said, we had very good net revenue for the full year. SEK 162 million is one of the strongest years ever in net letting for us. In the -- in the graph to the right, you can see the development of contract rental income, including new occupations, relocations and renegotiations for the last years -- or for the last year. This is not a forecast -- aim for 2022. This is not a forecast but aims to show that the rental trend in existing contract portfolio as of closing day known what we know today. So we know -- but here, you can see that we have -- we know that Skatteverket, for example, will leave some premises in during the beginning of this year, and that was announced already January 2019. Next slide, please. Renegotiations. Very strong year even here, up 11%. It will be difficult to achieve an equivalent increase in the renegotiation for the coming year and years. But this is partly due to the fact that this is where we negotiated in 2022 -- we will renegotiate in '22 where previously we negotiated only 3, 4, 5 years ago and from high level at that time. And so the rental levels are unchanged now. So the gap to be -- the existing leases in the portfolio is getting smaller for the next years. But what is good for us but -- is that the index adjustments for this year will be 2.8%. So we had -- we can add another 2.8% for all our contracts. But of course, we have some impact on how to negotiate the renegotiations. And also, the new property tax assessment will mean that the property tax will probably increase significantly. And this will have some -- also has some impact on renegotiations. But -- so some lower levels, but a very strong market in total. You can also say here maybe that the energy cost can have some short-term impact on how the winners from some companies. But as we said, we're still quite -- we're still optimistic. What we had to work with is on the next slide, Slide 23. We have to work with our vacancies. We have some opportunities. We have some -- I don't see any, as I said before, no structural vacancies in the portfolio. But especially in Solna Business Park, we have some vacancy to work with. We have some smaller one in the CBD, where we have more. But -- so we also strengthened the team working with lettings to be able to take -- use this opportunity for -- to -- especially maybe the challenge within Nöten -- or the opportunity in Nöten 4 that were scattered like living in Solna, which we have to work harder for the next. But there are some opportunities in the [indiscernible], but we reduced the vacancy. A little bit more about the future projects on the next slides. So go please to Slide 25. Here, you can see the vacancy -- how the vacancy rate and the office stock in Stockholm for the last 15 years. The office stock has increased a little bit more than 10%, well -- and the vacancy rate has decreased. But it hasn't been -- the reason why the office space in Stockholm hasn't grown more is also some office properties have been converted into housing and hotels. So what we see in Stockholm now is it's difficult to find new and attractive land for office in good location, especially in the CBDs. Solna, we have some opportunities left in there. There are some continuing to develop. And there's some more opportunity in Arenastaden close to the inner city. And then, of course, south of the city, especially in Flemingsberg, now we are fond of. Next slide. For the next -- for the year -- we have also seen for the last 15 years a growing office employment, number of office workers in Stockholm. And we think this will continue. There is a good demand for finding -- for more -- it's good for risk to continue to grow. So -- and it has grown faster than supply. But of course, it also means that we are more -- we have been more efficient in their offices. But next slide. Our own properties we should see in the light of what we said before. We have a huge project potential. Last year, we invested almost SEK 1.9 billion. I think we will end up 2022 more -- a little bit higher, maybe SEK 2.3 billion to SEK 2.4 billion in investments. So that's what we were expecting for next year. Next slide, please. Here, we have some details about our project portfolio. They're ongoing. And as you know, we have about 59,000 square meters under production, and we have signed contracts or [indiscernible] 85% of this. Next slide. So what about the future? On page -- Slide 31, we have some large available right portfolio, as you know. This means that we have a great potential to start both commercial and housing development projects in the coming years. In total, it's almost 1.5 million square meters. Of course, it's much -- a lot in Solna and a lot in Flemingsberg in both the residential and the commercial side. Some examples, Slide 32, please. In Haga Norra, the construction, it will -- for the next step, we'll start in 2022. It will be an office block, housing and garage. The office block, at the building #1, is planned to be ready for occupation in early 2024. And we have -- it's about a little bit more than 30,000 square meters of commercial area. We will start in 2022. We have no signed contracts. We normally we like to have an anchor tenant, which take a large part of the area before we start a new project here. We have started because we think it's -- we have strong demand for good offices and it will be a multi-tenant tower. We are creating a high-quality office project in a very pleasant neighborhood. So we started and we'll work it. So I think this will be a very attractive building in a very attractive area. June 2022, we will also start, as you can see on the next slide, the development project of, as we say, is Swedish Nöten 4, where we have the Swedish Tax Agency leased during the second quarter. We will convert a property from a single tenant building into multi-tenant one. The goal is to have the first new customers here and so they can move in during 2024. Next slide, SHH. Also have a lot of projects going on and a lot of projects that they will start. In Tumba, south of Stockholm, south of Flemingsberg or close to Flemingsberg, SHH will start its project to date. It's a joint venture with Balder. In total, it will be almost 1,000 apartments that will be produced over some years, and it will be a mix of rental apartments and tenant-owned apartments. SHH will also start projects in Flemingsberg of about 260 apartments or even there will be a mix. They have some other projects going on in the south of Sweden and in the Stockholm area. And also, we will probably started a [ primary school ] in south of Stockholm. So a lot of projects even going on there. And as you know, we have a lot of projects in total in the portfolio. So they are now more integrated in the whole group. Slide 35, in Flemingsberg. We will now start the construction of Alfa Laval complex, the building of more than 20,000 square meters in total investment of more than SEK 700 million. We have very -- during the year, we also have several exciting progress will continue. As we said [indiscernible] we will return -- tell you more about this during the next -- during this year and the next presentations and other meetings we would have with you. So with that, I will hand over to Mia to tell you about all the work we do in this sustainability, right? Please, Mia.

Thank you, Stefan. It is great that sustainability is now also on the financial markets agenda. For us as a long-term actor and builder of communities, the 17 sustainable development goals have been something natural for a long time. We committed to the science-based target initiative in 2019, which means that our targets are now aligned with the Paris agreement. Sustainability is a prioritized part of our business operation and is integrated into target plans across the entire group. Next slide, please. For us, it's important to think sustainability in everything we do. As you see in the slide, we have made good progress, even if there is a lot left to do. We estimate and report both direct and indirect emissions. Now we are aiming for climate-neutral management by 2030, Scope 1 and 2, and 50% reduction in indirect carbon emissions, Scope 3, by 2030. These are tough but not unreasonable targets. But first and foremost, achieve a 50% reduction of Scope 3 requires courage, new thinking, and of course, curiosity. Turn to Slide 38, please. Our sustainability building in Haga Norra is a great example of how we are not afraid to test new possibilities in order to achieve a 50% reduction in the indirect climate impact. Instead of throwing away all the usable demolition materials in Bilia's old facility, we will essentially construct a new building from the old one. We will learn more from this about what is possible in the recycling field. This is a really exciting project, not only for us but for the entire industry. Joists rebuildings, constructing houses from houses, we'll make heavy structural building parts available, especially loaded barrier, structures and facades for reuse in new construction and refurbishment. Please turn to Page 39. During this year, we put extra focus on social sustainability and worked and planned to reduce in equality in the areas where we are operating with Flemingsberg in focus. We want to help ensure that children and young people get good schooling, meaningful leisure time, and by extension, of course, the pathway into the labor market. We believe that it contributes to creating pride for us as employers, that it is an important question of responsibility for us as a property development. And of course, it creates value for us and the society as a whole. In Flemingsberg, among other things, we have initiated collaboration with the Läxhjälpen Foundation, and with Talent Academy, with the aim that more students should achieve upper secondary school competence and that more internships and jobs are created. Thank you.

So thank you, Mia. And I think it's really -- I'm really pleased that these questions are high up at the agenda and the development over the last years has been -- a lot of good steps have been taken in many companies, I think, in the whole financial market we're talking about sustainability. I think it's been very important for us to have ambitious targets to continue to develop and be active in what we can have impact on. I think it's very important for us to work with those social initiatives, but we really can make difference out in the different areas. We can really make difference on a daily level for many people. We can -- and that will be, of course, make values for the community, but also for us as shareholders. I'm also happy to say that we, in January, was -- have been ranked as one of the best companies when talking about gender equality. So a lot has been done. A lot has to continue to be done, and we have to change to work with this together, all of us. So with that, please, questions.

[Operator Instructions] The first question we received is from Jonathan Kownator, Goldman Sachs.

First topic I wanted to come back to was occupancy. Obviously, you've highlighted in the presentation that you are expecting some leases to start, I think. Particularly for Telia, if I understand, so that should improve occupancy, but at the same time, you're losing income on the Swedish tax authorities. So how do you expect occupancy to evolve in the next few months based off your Slide 21, which shows the profile of income that you're expecting? I think that's my first question. The second question being on dividend, obviously, you've put a big increase there. That corresponds, I think, now to 95% of your EPRA earnings which is an increase effectively in payout ratio from the previous one. So how are you expecting that, particularly in the context of your future investments in the pipeline?

I'm not sure if I really can hear you clearly. I think the first one about the -- about occupancy rate when the Telia building is new contracts and the tax authorities when they're leaving. So the easy answer it will be about flat. No big deal. And the second one is, was it about the dividend and how it...

Yes. About dividend policy going forward, if we expect increase in the payout, which is about 5% of your earnings.