Fabege AB Q4 2023 Earnings Call Transcript

The following is excerpted from the question-and-answer section of the transcript.

Question: John Vuong - Van Lanschot Kempen N.V. - Analyst : Correct me if I'm wrong, but your surplus ratio for Q4 screens quite strong for a typical Q4. Could you highlight the drivers? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 07, 2024 / 2:30PM, FABG.ST - Q4 2023 Fabege AB Earnings Call

Question: John Vuong - Van Lanschot Kempen N.V. - Analyst : All right, very clear. On the lease renewals for this year, maybe I misunderstood it, but you said you were expecting plus minus 0% for 2024. Does it mean that you expect to keep the 6.5% indexation? And perhaps in other words, do you expect market rental growth to follow indexation there?

Question: John Vuong - Van Lanschot Kempen N.V. - Analyst : Okay. That's clear. So you're expecting that the portfolio is rented after the 6.5% indexation.

Question: John Vuong - Van Lanschot Kempen N.V. - Analyst : Okay, clear. And then does that mean that the decline that you saw on a couple of leases of 3.2%, those were essentially one-offs?

Question: John Vuong - Van Lanschot Kempen N.V. - Analyst : Okay. And also on this topic, I think you mentioned that the office market is in balance. Looking at the slide with the chart on office employees, looking at step one, the number of office employees is stagnating, but the net new space for the coming three years is still positive. Wouldn't that imply that demand will be still weaker than supply going forward?

Question: Bart Gysens - Morgan Stanley - Analyst : Bart Gysens from Morgan Stanley. I have two questions, if that's okay. The first one is on interest payable. You've cleared all net interest expense. You've been very successful in managing those costs. But can you please help us understand maybe a little bit more how you've done that. If you look at the fourth quarter net interest expense, it's about 11% below the third quarter net interest expense. How have you managed to reduce that expense to such an extent?

Question: Bart Gysens - Morgan Stanley - Analyst : And the increase in capitalized interest, does that have anything to do with it because I think it has gone up from SEK20 million to --

Question: Bart Gysens - Morgan Stanley - Analyst : Okay. And then my other question is on the dividend. I appreciate at the end of the call, you referred or you provided a concise explanation as to why the dividend was reduced again. But I just wanted to reconcile the relatively constructive outlook for the market where the management team REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 07, 2024 / 2:30PM, FABG.ST - Q4 2023 Fabege AB Earnings Call clearly feels that things are getting better out there in the market, yet you've cut the dividend again by 25% to now below your dividend policy. Can you help us understand a little bit the the consistency of that thinking?

Question: Bart Gysens - Morgan Stanley - Analyst : Okay.

Question: Jonathan Kownator - Goldman Sachs - Analyst : Three questions, if I may. Just coming back to the occupational market. I think you're clearly saying things are quite okay. You say you've signed a big lease contract with Saab which is, I guess, the majority of your net lettings at this stage. How do you think the occupational market is going to evolve? Are you seeing a bit more interest for the assets, or do you think like this quarter like occupancy was in line, this is the trend that we have to think about for the time being (inaudible)

Question: Jonathan Kownator - Goldman Sachs - Analyst : Yeah. And so just -- I think your retention rate was a bit lower this year versus last year. Are you expecting increasing releases, or is that something temporary or?

Question: Jonathan Kownator - Goldman Sachs - Analyst : No, I'm saying just this is new signing obviously, but the tenancy departures and I think your retention rate was a bit lower this year versus last year. So just asking whether you're seeing your tenants leave at a faster pace or that's just temporary or maybe I didn't read it properly actually?

Question: Jonathan Kownator - Goldman Sachs - Analyst : Okay, very clear. The two following questions are perhaps slightly connected. But effectively, the first one is on the derivative portfolio, again, maybe following Bart's question. But effectively, if I look at the P&L, there's SEK888 million, I think, of losses relative to the derivatives and financing. I wanted to understand whether part of that was cash or whether it was all non-cash, and the question being behind it, was there a cash cost --

Question: Jonathan Kownator - Goldman Sachs - Analyst : To work on the derivative portfolio we're talking about?

Question: Jonathan Kownator - Goldman Sachs - Analyst : Okay, very clear. And so we can come back to the next question which is, we see you showing 6.2% growth in profits from property management which is great, but there's a slight difference in when we look at the cash flow before changing working capital which shows actually 12% decrease. That seems to be due to a higher interest paid, but I struggle to reconcile with the capitalized interest we're talking about of SEK60 million because the differences were noticeably higher than this. So could you help us reconcile those differences, please?

Question: Jonathan Kownator - Goldman Sachs - Analyst : I can -- yeah, I mean, I have the numbers in front of me, so if you look at the -- REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 07, 2024 / 2:30PM, FABG.ST - Q4 2023 Fabege AB Earnings Call

Question: Jonathan Kownator - Goldman Sachs - Analyst : Okay. Well, maybe let me rephrase the question just to try to make it simple. The interest paid in the cash flow was substantially higher than the interest cost in your P&L. And this balance is higher than the SEK60 million capitalized interest by at least SEK100 million. So that's the question.

Question: Jonathan Kownator - Goldman Sachs - Analyst : And those were positive, I guess?

Question: Jonathan Kownator - Goldman Sachs - Analyst : Okay, sorry.

Question: Jonathan Kownator - Goldman Sachs - Analyst : And so what do they correspond to? Are these cash loans?

Question: Jonathan Kownator - Goldman Sachs - Analyst : Okay. That's clear, actually. I'll call in case there's more. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 07, 2024 / 2:30PM, FABG.ST - Q4 2023 Fabege AB Earnings Call

Question: Paul May - Barclays - Analyst : Apologies if you've answered one of these companies questions before. I was able to join late. I'm just wondering if you could highlight why the admin costs were down quite materially in Q4 relative to some prior years. Is there anything that we should take into account there?

Question: Paul May - Barclays - Analyst : Perfect. And just on the year-on-year movement similar to Jonathan's question that on the year-on-year movements in your profit from property management, how much is the year-on-year growth due to the provision that was taken in the residential business last year as a negative because

Question: Paul May - Barclays - Analyst : Okay. Perfect. The rental income chart that you provided on page 13, which shows the quarterly rental income expected over the coming year, does that reflect the indexation or is that is before indexation is applied because it says at the balance sheet date which will assume that's before indexations applied? I'm just trying to see whether indexation (inaudible)

Question: Paul May - Barclays - Analyst : Okay. So the year on year flat is just simply due to the disposals. Is that right?

Question: Paul May - Barclays - Analyst : Very final one which just as a housekeeping. On the developments, the rental values that you highlight. Is that gross or should we -- do we need to net anything off that in turn or is it net income the SEK384 million?

Question: Paul May - Barclays - Analyst : Yeah, in the projects, the SEK384 million of rental value, is that a gross number or is that after the surplus ratio?

Question: Paul May - Barclays - Analyst : And, sorry, just following on from that on N÷ten 4, obviously highlighting you've got additional rent that's come through from Saab, but I -- and I appreciate you mentioned this in October but a quite material increase in the cost. If I work it through, it's costing you SEK400 million and something, SEK480 million-odd of additional cost for SEK250 million of additional rent over the 10 years. Is that correct?

Question: Paul May - Barclays - Analyst : Right. Okay. And are you able to give some color on what that additional cost is, or is that commercially sensitive? Just wondering what, because it's quite a big increase in the cost of development (multiple speakers) REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. FEBRUARY 07, 2024 / 2:30PM, FABG.ST - Q4 2023 Fabege AB Earnings Call

Question: Paul May - Barclays - Analyst : Good to know the longer lease is there. And very final one. You mentioned, I think, in the portfolio, just one last one. You mentioned the report property values down, I think, 13% in yields back to 2017 levels on a valuation basis. I mean, if we look at where cost of financing is, we're still back to 2009, '12 levels. And at that point, your property yield was in the high 5s. I think 5.8 if you look at an average over those years. What gives you the confidence because I appreciate you highlight there has been some transactions, but there has not been many transactions. And what gives you the confidence and the comfort that you're at the right level now because at the end of the day, I mean, I appreciate you've had things externally valued, but that's a best guess as well by the values.

Question: Paul May - Barclays - Analyst : Perfect.

Question: Alexander Totamanov - Green Street - Analyst : You mentioned that in the Q1, we've already received index strength with the 6.5% indexation as of October last year. Hasn't it had any pushback from existing tenants? And if so, is there a theme, like, are there specific industries that potentially you're having pushback from any specific submarkets that you find more worrisome?

Question: Alexander Totamanov - Green Street - Analyst : Okay.