Entra Asa

Welcome to Entra's first quarter presentation here in Oslo. Let me start by a few words on what you can see on the picture here. This is our building in Verkstedtveien 1, where we in the quarter have signed a huge contract with Jara International. So starting with the highlights in the quarter, we have a rental income of 878 million in the quarter. That is 1% rental growth compared to same quarter last year. The underlying rental growth is 6.5% when adjusting for divestments and one-off effects from the first quarter last year. Our net income from property management is affected by higher interest costs and was 325 million in the quarter and our net value changes came in with a negative of 1 billion 624 sorry 27 in the quarter predominantly explained by the increase of the discount rates from our external appraisers with an average of 10 basis points leaving us then with a loss before tax of 1 billion 313 million We were very pleased to see that we have had a very high letting activity in the quarter, leaving us with a solid net letting of 28 million in the quarter. And also pleased to see that we signed the final agreement for the sale of the Trondheim portfolio in line with the terms of the letter of intent. And closing of that transaction will take place on May 31st. To move on to operations, strong operations in the quarter. We are pleased to see that we have had also the first quarter following an active fourth quarter, very high activity in respect of letting. We signed new and renewed leases with a total annual rental income of 162 million or approximately 52,000 square meters. At the same time, contracts with an annual rental income of 115 million were terminated. However, as much as 92% of that has been resigned within the Entra portfolio, leaving us then with a positive net letting of 28 million. If you take a look at the largest contracts in the table below, as mentioned, Yara International signed 16,000 square meters with us. They are today tenant in one of our existing buildings in the same cluster. They had expanded out of their current offices into two neighboring buildings. And they have now chosen to co-locate in Vækstedt, where we will work with them for the next 12 months to define their future workplace solution. And they also have an option to increase with some more space if they should need more. So this clearly demonstrates also the value for our tenants in having Entraz as a strong partner with a large presence in our clusters. In this building, in Biskup Gundersgatet 14, Bank ID has signed 4,000 square meters, taking up two whole floors in this building. And at the same time, we have then also signed a lease buyout agreement with one of our tenants to free up one of these floors, which will be shown as a one-off effect in our first quarter numbers. Universal Music, new tenant to us, moving into Akersgata and in Bergen also we've signed two large contracts showing that we also are having a high letting activity in the Bergen market currently. So all in all occupancy remains stable at 95.3% and our average lease duration is currently at 6.4 years including the projects and we have 57% of our rental income from public tenants currently. In Trondheim, we have now signed the final agreement with the buyer for the sale of these 13 assets or 187 square meters, which will be then handed over to the buyer on May 31st. This is a huge transaction for Entra, total value of 6.45 billion, which was signed 1% below our Q4 book values. The agreement also includes the forward sale of our ongoing project development in Trondheim, where Entra will complete the project and the building will be handed over to the buyer upon completion. The proceeds from this transaction will be used to strengthen our balance sheet and should then improve our debt metrics with 4% on the loan to value or 4 percentage points on the loan to value and our ICR should improve with 20 to 30 basis points following the transaction. And as I said, we will be closing this transaction on May 31st. So our list of ongoing projects is currently rather short. That is intentional from our part as part of our disciplined approach on improving our depth metrics. Currently, we have around 549 million of capex left on these ongoing projects, and the majority of that 383 million is related to the project in Trondheim, which has already been forward sold and at a good project margin in addition to the project cost here. There's no changes in the table or reporting this quarter other than that we have taken out the yield on cost and occupancy on the forward sold assets. The other projects are also progressing according to plan. We are now also preparing to start three refurbishment projects in Entra, following lease contracts which have been signed on one asset in Bergen, a smaller asset in Sandvika, and also one asset here in Oslo. And we will get back to more details on that in the next quarter. So a few words on the market situation. First of all, it seems to be a consensus both amongst the businesses and consumers that Norwegian economy is heading for a soft landing. We can see that the expected GDP growth is 1.1% for 2024. And employment has remained stable in Norway. And the Norwegian bank increased the key policy rate to 4.5% in September. And they have now also communicated or signalled that we should be at the top in respect of interest rates. They are, however, still holding back on cuts to ensure that they have control over inflation. Inflation is on a downward trend and for March it came in at 3.9%. If we dive into the property market, we can see that the letting activity has been high also in the first quarter. We have had a very strong market rental growth in 2023 and 2022. Expectations now is that rental growth will take a slight breather in the short term, particularly in the city center where you've seen even stronger market rental growth than the graph here for the overall market of Oslo indicates. And if we dive into the market data now from the first quarter, what we can see is that there are indications of rather strong rental growth in the fringes of Oslo, where we have seen that currently the break even rents for new projects in these markets is quite a lot above the market rents. If you look at the bottom right graph here, you can see that there has been very limited new build volumes feeding into the Oslo market for the last couple of years and also expected this year. 2025 stands out with a rather high volume. That is explained by two large projects being completed. One is the first part of the new government offices that is, of course, fully let. Secondly is the construction city which is a huge project where 80% of the volume has also been pre-let. So these tenants will move out on vacate buildings which will need some 18 to 24 months of refurbishment before they come back into the market. So we are not very concerned about that volume coming in to the market in 2025. Now seeing that we have low vacancies in Oslo around six and a half percent and the fact that there is very limited new supply coming in and also the current situation where break-even rents for new build volumes still is quite a lot above market rents gives rather favorable market conditions for renegotiations from a landlord's perspective. This also was under or supported by the fact that we saw in 2023 that around or more than actually 80% of the large contracts about 5000 square meters were actually renegotiated in the Oslo market. If you dive into the segment slightly below down to 2000 square meters, 65% were actually renegotiated. So in a scenario with a soft landing and continued employment growth, combined also then with the low new build volumes and low vacancies, we do believe that we have good prospects of long-term market rental growth in the Oslo markets. A few words also on the transaction markets. First of all, transaction activity was very low in 2023. What we've seen in the first quarter is that volumes have picked up around 20 billion and the clarity we now are getting more clarity on both inflation and also interest rates having peaked expected to see cuts by the end of the year and continuing into 2025. is also providing good fundaments for the transaction market. So we do expect to see activity pick up through 2024. Also of course supported by financing markets having opened more up and the tightening credit spreads we have seen in the bond market. Prime yields are currently around 4.7% in the Oslo market. That has been supported by some transactions we have seen in the market. And as you can see from our consensus report top right, consensus is that we have peaked in respect of prime yields and that we should be seeing some compression maybe when we move into 2025. So before I give the floor to my colleague here, I would like to take the opportunity to thank Anders, seeing that it's his last week in Entra. He's been with us and served with us for a long time, 35 quarters, including this one. It's been a great pleasure to work shoulder with shoulder with Anders. There's been some challenging times. And for me, it's been really great to have you as my professional partner. But I think that we will clearly miss you for your professional side, but even more so for the person you are. So thank you, Anders, for your service for Entra. And our new CFO, Ole Gulsvik, will join us on the 1st of August. In this interim period, our head of group accounting, Knut, will serve as acting CFO and also present with me here today and the next quarter. So, Knut, the floor is yours.

Thank you. Operations and financing costs were quite as expected in the quarter, so I will focus on three things in this presentation. The divestments of the Trondheim portfolio, the negative value changes and the financing situation. Rental income came in at 878 million in line with expectations and 1% above Q1 last year. Finalized projects put into production and like-for-like growth accounted for an increase of 42 and 33 million respectively, while properties vacated for redevelopment and divestments reduced income by 21 and 34 million respectively. Adjusting for a one-off effect of 16 million in Q1 last year and divestments of 33 million in the period, the underlying growth was a solid 6.5%. Rental income was up 2% from Q4 last year, mainly driven by CPI adjustment, for which the majority of interest contracts was 4.8%, with some offsetting effects from divestments and net letting. Net income from property management was down 17% from Q1 last year, mainly due to higher financing costs. Compared to Q4 last year, net income from property management increased by 10% due to the increase in rental income and lower financing costs due to lower outstanding debt following divestments of three assets in Q1. Like for the last few quarters, profit before tax is impacted by negative value changes. In this quarter driven by the discount rates increasing by 10 bps. Then I'll come back to the negative value changes in the portfolio later. This slide shows the effect of macro on interest numbers, where the effect of the increased interest rates on the P&L and cash flows are represented by cash earnings, and the effect of increased discount rates on the asset values are represented by the EPR NRV. Cash earnings analyzed 12 months rolling, currently at 7 kroner per share, corresponding to a CAGR since 2015 of 6%. And APRA NRV came in at 158, down from 235 at peak valuations. still a CAGR of 7% since 2015, or 10% when including dividends of 37 kroner in the period. And EPRA and NTA came in at 157. So we signed the binding contract for a sale of the Trondheim portfolio in March and we will close the transaction on the 31st of May. This means that we had income from the assets throughout Q1 and we'll have income from the assets for the first two months in Q2. As we will sell an entire geographical segment, we have due to IFRS regulations separated the results of the management properties in Trondheim in the P&L in the quarterly report and included the net results from Trondheim after value changes and after taxes at the bottom of the P&L. In this presentation, we have however combined the P&Ls of the continuing operations and Trondheim to reflect the total underlying P&L of the whole portfolio. And this table is also a good indication of how our net operating income will be affected by the sale of the Trondheim portfolio. But however, in Q2 we will have those assets in two months. The effect that this presentation doesn't show is the effect on the financing costs. But the repayment of over 6 billion of our most expensive debt will lead to a significant reduction in financing costs and a significant improvement of our debt metrics. And as mentioned, rental income and operating costs came in as expected. OPEX slightly higher than Q1 last year due to timing of maintenance activities. Other revenues and other costs saw significant increase in Q1 as we as part of the Trondheim transaction will finalize the development of phase three of Holtmannsveien 1 to 13 and deliver the property to the buyer upon completion of the project. The change in accounting resulted in 72 million in both revenues and costs in Q1. And going forward, the revenue from the development will be booked in line with the costs incurred. Revenues and costs from this transaction will be presented gross, but should be considered net. And we expect a positive effect of one to two million per quarter from this development until project completion. Admin costs came in at 50 million in the quarter, pegging towards south of 200 for the full year. Value changes on the derivatives were positive due to increased long-term interest rates. And I'll come back to the negative value changes in the investment properties later. Rental income will, based on the reported events, decrease by 3% in Q2, mainly due to the sale of the Trondheim portfolio in the end of May, which gives only two months of income from Trondheim in Q2. And we have another column that reflects a one-off effect due to a lease buyout agreement, which Sonja mentioned. which will not be carried forward into Q3. So the decline from Q2 to Q3 is due to this one-off effect and a 67 million reduction from the divestment of Trondheim. And from Q1 2025 we have included a 3.5 CPI adjustment. We have invested 303 million in our property portfolio in the quarter. We're over 91 million in our two new build projects and 170 in redevelopments and refurbishments. We divested three assets in the quarter, one in Bergen and two in Oslo, reducing the value of our property portfolio by 973 million. And our property portfolio was written down by 1.8 billion or 2.5% in Q1. The Trondheim portfolio was in Q1 sold 1% below book values as of Q4, so it was not unexpected that the appraisers reduced the value of our properties in Q1. However, it's fair to say that the write-downs was higher than we expected when we reported last quarter. In Entra, we have a consistent approach to valuations. Each quarter, we have a thorough process with at least two external appraisers who estimates the current value of all our properties based on market data and updated information from Entra. And then we take the values estimated by the appraisals and include that in the balance sheet as book values of our properties. Prime yields were, as mentioned by Sonja, flat in the quarter, but the discount rates were increased by an average 10% on several interest assets and mainly on the secondary assets. Currently, the portfolio net yield is 5.1%, up 124 bps since peak valuation in Q1 2022 or 150 bps when taking into account higher than expected CPI. If the portfolio was fully let at market trends, the portfolio net yield would be 5.7%. Isolated, this increase would imply a negative effect on property values of 28%. But good operations, a strong letting market, and high CPI has had an offsetting effect, and the like-for-like write-down for the period is 18%. However, based on the signals we currently see in the market, we believe that the property valuations are at or close to the bottom. So over to the financing position. Following the closing of the sale of three assets in Q1, we repaid 900 million in bonds and 600 million in bank debt. And further, we issued commercial papers of 500 million at attractive terms. So the net repayment of debt was 1 billion and the debt at the end of the quarter was 38.5 billion. Following quarter end, we issued two new commercial papers with a total outstanding amount of 500 million. We did one one month CP of 200 million at 25 bps margin and one eight month CP of 300 million at the margin of 65 bps. And we are pleased to see that the CP market has opened up again. The bond market is open and interest spreads have come in 65 bps since the end of 2023, significantly more than other Norwegian peers. The bank market is open but selective. Good companies with long-lasting relationships with the banks, good assets and good tenants are able to obtain bank financing in the current market. And we are working on improving our debt metrics and we will see a significant improvement following the completion of the Trondheim transaction in May, where the LTV will be improved by approximately 4 percentage points and the ICR will be improved approximately 20 to 30 bps. But bear in mind, the LTV will be improved immediately after the closing of the transaction. But the IECR will, as the reported IECR is based on the last 12 months, the IECR will gradually improve the coming year. But we're definitely on a positive trajectory. Pentos average interest rates were stable from Q4 to Q1, and for this exhibit we have taken the forward curve, Nibor forward curve, included existing hedges and terms of current loan agreements and expected debt levels, that is, assuming that the debt will be repaid after a Trondheim transaction and assuming refinancing upon expiry at today's market bank margins. and the Nibor forward curve is higher than the forward curve we presented in the Q4 presentation. But our interest rates are expected to fall sharply in Q2 due to the repayment of the most expensive debt following the sale of the Trondheim portfolio, which will lead to a significant reduction in interest expenses and an increase in the ICR. And the leveraging will also have a positive effect on our hedge ratio from today's 60% to approximately 70%, which will give further predictability on Entra's future cash flows. So we are finishing this financial update with our debt maturity schedule. In times like this, liquidity is key for asset-heavy companies like Entra, and we are very happy with our liquidity position. We have very limited bond maturities of 1.6 billion in the next two years and we are continuously working on rolling forward and extending our bank debt and we have since Q1 2022 extended 13 billion and raised new loans of 5 billion. So to sum it up, we are very comfortable with our current debt maturity schedule and we'll be even more comfortable after receiving proceeds from transaction of additional 7 billion before the end of the year.

Okay, so a few closing remarks before we are ready for Q&A. First of all, the activity in the letting market is holding up well and the demand for centrally located assets has remained strong. So low vacancies and limited new supply of offices provide favourable conditions also going forward and also support prospects of continued rental growth in the long term. we are getting more comfort on outlook both in respect of inflation and interest rates cuts are now expected to come in the end of the year and continue into 2025 and financing markets are opening up with yields tightening in or credit margins margins tightening in and we are seeing positive signs in the transaction market We have a solid balance sheet in Entra with ample liquidity and with the closing of the Trondheim transaction our debt metrics will improve bringing LTV down towards 50% and also our ICR should get above 2 sometime in the third quarter. so we believe also that we based on the signals we pick up in the market should now be at or close to the bottom in respect of valuations as knut mentions and the improving depth metrics will also start feeding into our results and our result margins going forward So I think that concludes us from this presentation and we'll just check with Tone if we have some questions.

We do have some questions. So the first one being how do you expect occupancy to evolve in the near to mid-term?

Okay, based on the very high activity we have in our letting, we are working very hard to bring it up and our target is to try to get above 96% in the medium term. So we should see that it goes up in the months to come.

What is the current level of reversion in the portfolio?

If you look at our 12 months rolling rent relative to the market rent, we are currently at 12% below market rents in Oslo and some 11% on the portfolio as a whole.

Including Trondheim, the Trondheim transaction, the total divestments accumulate now to 11.1 billion. This is above the communicated targets. Are you now finished with the divesting program?

We're very comfortable with the current situation, bringing our debt metrics more in line with our finance policy. However, we continue to work with the divestments of some non-strategic assets. And if we see that we get interesting pricing on them, we will progress on those discussions. So potentially some two, three billions more, but assuming then that we see that we get the pricing we are looking for.

Was this the final quarter with large changes in yields from the appraisers?

Well, as Knut said, we were a bit surprised that it came in at such levels this quarter and we do believe based on the signals we see in the market now that we should be close or at the bottom.

What are your objectives in terms of LTV and ICR for the company?

Well, our finance policy states that we over time should be below 50% loan-to-value and have an ICR above 1.8. Now, if we take the more long-term perspective, we do believe that a company like Entra with our... profile of both long leases, high quality tenants should move probably more towards somewhere around mid 40s in respect of loan to value and ICR would be happy to see it above two and a half in the more long term.

Comparing rental income to the rental income breach from Q4, what explains the deviation of the 5 million lower rental income?

The rental income breach isn't an exact science and it doesn't take into account all the effects that could be that will affect the quarter. So we're a few million short than the bridge we presented in the Q4 presentation, but that's more or less minor timing effects, so no big effects and we're quite... there's no single item sticking out. Moreover, the deviation is less than 1% and it's more or less as we expected.

Was the seller credit on Sørkdalsveien 6 of 185 million paid down in the quarter? Seller credit Sørkdalsveien?

Yeah, that will be paid in Q2, end of Q2.

Thank you.

That concludes the Q&A. Thank you very much.

Thank you.

Thank you for joining us and we'll see you again in the second quarter. Bye.