Pandox AB (publ) interim report January–September 2023

Record strong NOI but higher interest expense

July–September 2023

• Revenue from Property Management amounted to MSEK 1,040 (967). For comparable units, the increase was 7 percent, adjusted for currency effects
• Net operating income from Property Management amounted to MSEK 920 (866). For comparable units, the increase was 7 percent, adjusted for currency effects
• Net operating income from Operator Activities amounted to MSEK 222 (193). For comparable units, the increase was 28 percent, adjusted for currency effects
• EBITDA amounted to MSEK 1,102 (1,037), an increase of 6 percent
• Cash earnings amounted to MSEK 558 (717), equivalent to SEK 3.04 (3.90) per share
• The comparison quarter includes government grants for Property Management and Operator Activities of MSEK 48 and MSEK 37 respectively. Adjusted for these amounts, EBITDA increased by 16 percent while cash earnings decreased by 12 percent
• Changes in property values amounted to MSEK –90 (572). Unrealised changes in value of derivatives amounted to MSEK 43 (815)
• Profit for the period amounted to MSEK 460 (1,687), equivalent to 2.48 (9.16) SEK per share
• During the third quarter Pandox acquired and took over Hilton Belfast

January–September 2023

• Revenue from Property Management amounted to MSEK 2,762 (2,459). For comparable units, the increase was 12 percent, adjusted for currency effects
• Net operating income from Property Management amounted to MSEK 2,388 (2,170). For comparable units, the increase was 12 percent, adjusted for currency effects
• Net operating income from Operator Activities amounted to MSEK 493 (382). For comparable units, the increase was 89 percent, adjusted for currency effects
• EBITDA amounted to MSEK 2,754 (2,476), an increase of 11 percent
• Cash earnings amounted to MSEK 1,327 (1,542), equivalent to SEK 7.22 (8.39) per share
• The comparison period includes government grants for Property Management and Operator Activities of MSEK 116 and MSEK 141 respectively. Adjusted for these amounts, EBITDA and cash earnings increased by 24 and 3 percent respectively
• Changes in property values amounted to MSEK –768 (1,246), of which MSEK –971 is unrealised and MSEK 203 is realised. Unrealised changes in value of derivatives amounted to MSEK 31 (2,377)
• Profit for the period amounted to MSEK 545 (4,103), equivalent to 2.87 (22.28) SEK per share
• The loan-to-value ratio was 46.8 percent and the interest coverage ratio on a rolling twelve month basis was 2.8

Comment from CEO Liia Nõu

Stable earnings in a solid hotel market

Demand in the hotel market was good in the third quarter. We have now reached a stabilised level based on current demand mix and seasonal patterns, even though international travel and large conferences and congresses have not recovered fully to 2019 levels. Demand in the leisure segment was good during the summer months and developed well in the business segment after the holiday period. Households have continued to prioritise experiences and travel despite higher living costs, and companies have in general continued to increase their travel. Looking at individual hotel markets, the UK and Ireland saw particularly strong development, mainly driven by very strong average price development.

In the third quarter Pandox’s total revenue and net operating income increased for comparable units by 7 and 10 percent respectively, adjusted for currency effects. In absolute terms, income and net operating income were at their highest levels ever, driven by good operational development for both Property Management and Operator Activities. However, due primarily to fast and sharply rising market interest rates accompanied by higher financial costs, cash earnings decreased by 22 percent. Adjusted for pandemic-related government grants totalling MSEK 85 for the years 2020–2021, with final settlement in the third quarter of 2022, cash earnings decreased by 12 percent.

Given our interest hedge ratio of more than 70 percent, and the assumption that market rates are levelling out, conditions are improving for growth in cash earnings 2024.

Increased growth potential after investments

We are continuing to focus on long-term value creation by developing our existing portfolio. Pandox has an impressive toolbox for value creation which includes working actively with our tenants to develop the hotel products and increase the value of the hotel properties. During the first nine months of the year we invested around MSEK 730 in various value-increasing and cash flow-driving projects. Being able to invest even in a more uncertain world shows our strength.

Among the larger ongoing investments, I would like to highlight our remodel of Citybox in Brussels, where we are converting the concept from a traditional business hotel into an urban lifestyle product. The expansion of DoubleTree by Hilton Brussels City is another exciting project where we are extending the hotel to add 150 rooms, creating the largest hotel in Brussels and the city’s most modern conference product. Other examples are Scandic Go Fridhemsplan where we have signed a new lease with Scandic and are now repositioning the hotel to target the budget segment, and Radisson Blu Glasgow where the hotel product is undergoing extensive modernisation. During the year we also completed significant renovations at Pullman Stuttgart Fontana and Quality Grand Borås, as well as at Hotel Pomander in Nuremberg which has now opened after two years of comprehensive renewal. The new hotel products are highly competitive and have great growth potential in their respective markets. Our completed and ongoing projects will make positive contributions to our earnings and value growth gradually in the years 2024 and 2025, with full effect equivalent to around MSEK 300 in annual net operating income in 2026. During the quarter we also decided on an extensive climate transition project for eight hotel properties within Operator Activities for an amount equivalent to MEUR 29. The project will continue for three years and is expected to generate cost savings of around MEUR 3 per year once completed.

Considerable value creation with new leases

Our latest lease with Strawberry is a good example of our value creation when renovating and signing new leases. The lease, signed after the end of the quarter, is for Hotel Mayfair in central Copenhagen which will be repositioned under the Hobo brand. There was significant interest from both Nordic and international hotel operators in signing a lease for the hotel.

The lease is in line with our strategy of active value creation. It is also a milestone in a process that started back in 2020 when we assumed operation of the hotel and began the remodel, which is expected to be finished in the second half of 2024 when the new lease goes into effect.

The tenant is strong, the terms which include a good guaranteed minimum level are attractive and the transaction will significantly increase the value of the hotel property. 

Continued good financial flexibility
Our banking partners have a high level of confidence in us and our refinancing risk is low. Around 22 percent of our credit facilities have a maturity of less than one year and most of these will mature in the second and third quarter of 2024. We have ongoing and positive discussions with lenders regarding refinancing. At the end of the quarter our loan-to-value ratio was 46.8 percent, which is at the lower end of our range, and our interest coverage ratio measured on a rolling twelve month basis was 2.8 times.

During the first nine months, net unrealised changes in value for the total property portfolio, amounted to MSEK –1,306. The good development in the hotel market has resulted in higher cash flows for the hotel properties, which to approximately two thirds have offset the negative effect from higher valuation yields. Through our international exposure we also had a positive exchange rate effect of MSEK 1,781 in the property value in the period.

Pandox’s strategy is to create value through growth in cash flows driven by revenue-based rental income, efficient own operation of hotels and project development for the existing properties, combined with optimisation of the property portfolio, through both acquisitions and divestments. In general the transaction market for hotel properties is on the back burner and there are relatively large differences in price expectations between buyers and sellers. There are, however, pockets of opportunity which we are utilising when the price is right – as both a buyer and a seller. During the year we made three acquisitions, the most recent of which was Hilton Belfast. This includes operation of the hotel which we took over in July. The hotel is well invested and has a strong location in central Belfast. Divestment is an important tool that allows us to reallocate capital to investments with higher yield potential. One example is Intercontinental Montreal which we divested earlier this year in line with the property valuation before the pandemic.

Positive outlook
In the fourth quarter we expect continued stable demand in the hotel market with a normal seasonal pattern. Demand usually decreases in the second half of December before picking up again from mid-January. For 2024 we expect some RevPAR growth in the hotel market supported by a strong event calendar in Germany with Euro 2024 in June-July and stable market conditions in other markets. Hotel demand is dependent on economic activity and the biggest risk is associated with geopolitical consequences impacting the economy and travel.

Liia Nõu, CEO

Presentation of the interim report
Pandox will present this interim report to investors, analysts and the media in a conference call webcast on 26 October 2023 at 08:30 CEST. As a service to Pandox’s stakeholders there will also be an external update on the hotel market.

If you wish to participate via webcast, please use the following link:
https://ir.financialhearings.com/pandox-q3-report-2023.

If you wish to participate via teleconference, please register via the following link:
https://conference.financialhearings.com/teleconference/?id=5009236.

Attachment: Interim report January–September 2023

FOR FURTHER INFORMATION, PLEASE CONTACT:
Liia Nõu, CEO, +46 (8) 506 205 50
Anneli Lindblom, CFO, +46 (0) 765 93 84 00
Anders Berg, SVP Head of Communications and IR, +46 (0) 760 95 19 40

This information is information that Pandox AB (publ) is obliged to make public pursuant to the EU Market Abuse Regulation. The information was submitted, through the agency of the contact persons set out above, for publication on 26 October 2023 at 07:00 CEST.

About Pandox
Pandox is a leading owner of hotel properties in Northern Europe with a focus on sizeable hotels in key leisure and corporate destinations. Pandox’s hotel property portfolio comprises 159 hotels with approximately 35,800 hotel rooms in 15 countries. Pandox’s business is organised into Property Management, which comprises hotel properties leased on a long-term basis to leading hotel operators, and Operator Activities, which comprises hotel operations executed by Pandox in its owner-occupied hotel properties. Pandox was founded in 1995 and the company’s B shares are listed on Nasdaq Stockholm. www.pandox.se

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