Entra Asa

Good morning all and welcome to our first quarter presentation. Let's start directly with the highlights. Rental income of 774 million in the quarter. That is 104 million below same quarter last year. When adjusting for divestments, the underlying rental income growth was 2.6%. Net income from property management of 320 million in the quarter. and that means that the lower interest costs have more or less offset the negative effects of rental income. Value changes were minus 32 million in the quarter, mainly from financial instruments, leaving us then with a profit before tax of 280 million in the first quarter. Our net asset value increased to 163 in the quarter and the debt metrics continued to improve this quarter with our ICR now above 2.0 in the quarter. We were also very pleased to see that we have had a very active quarter in respect of financing and placed bonds of 3.1 billion in the quarter and closed also bank financing of 17 billion, enabling us then to extend the debt maturity to four years this quarter. Our net letting came in with a negative of 73 million this quarter. So if we move on to a few words on operations, the gross letting in the quarter was at normal levels with 98 million of signed leases this quarter. The gross letting was, however, offset by terminations with annual rents of 117 million in the quarter, leaving us then with the negative net letting of 73 million. Our occupancy is currently at 93.8% and out of the terminations, around 25% of these is related to different public tenants terminating as they are being co-located with other public entities, and another 25% of it approximately is related to the restructuring of two leases operating within the co-working and conference and event space. As I have commented on in previous quarters, we see no fundamental changes from working from home in Norway. However, there are some aspects affecting us in the short term. First of all, tenants are to a larger extent rethinking their workplace solutions when coming out of long leases. and this means that the lease extensions as is is much less common and this also means that our tenants are more open for looking into alternatives in the market and we are operating in a more competitive environment when working on renegotiations secondly the Employment growth we have seen in the Oslo region the last year has predominantly been within the public sector. And public sector are increasingly looking for opportunities to cut costs through co-locating through moving to less expensive areas in the city and also transitioning from one fixed desk per employee policies to free seating with underutilization. This has been going on for some time and in the more expensive part of the city we have already replaced the majority of our public tenants with high quality private tenants. However, currently the employment growth is not strong enough to compensate for this ongoing transitioning in the public sector. This should, however, improve with unexpected pickup in economic activity, also supported by future interest rate cuts. We have the right locations, we have attractive buildings and products, we have put in place the resources required to work on the letting, and we are confident that we will bring the occupancy up to our targeted 95%, but also realistic that it may take some time. Just also before I move on, I wanted to comment on the announcement earlier today that we also signed a lease contract with Yara of 11,200 square meters and at the same time then have terminated the lease they signed with us one year ago in a neighboring building at Skøying. This means that we now are back to the deal we originally wanted with Jara, namely prolonging their existing lease in their current headquarter location. This was not an option one year ago as they had outgrown the building and we were pleased at that point of time that we could provide an alternative within our portfolio. Now, however, we see that this is a good deal for us as we can extend the lease for 10 years without putting in any capex in that building. And the space they now terminate in Vækstavann 1 is one of the most attractive multi-tenant buildings at Skøyen. It should be suitable for a wide range of tenants and we expect we should be able to also re-let that space with less capex than what would have been required for the yara deal this yara deal will also have a net letting effect with a negative of expected 25 million in the second quarter It will potentially also increase our EPRA vacancy in Q1, when the existing tenants move out of the space Jara was supposed to, we were supposed to prepare for Jara. But these effects are, however, already fully reflected in our rental income bridge, and it will have no cash flow effects in 2025-26 as this has already been reflected in the income bridge as I said. Now, based on what we see now, we had expected to see that we would be able to have a positive net letting in the second quarter. And that is then, of course, before we include the effects of this JARA deal. But a clear improvement in net letting in the second quarter is expected. If we move on to our ongoing projects, they are progressing according to plan and based on the ongoing letting activity we expect to see the occupancy come slightly up in our project in Bergen in the second quarter. In Sandvika we have increased the cost of this project with 17 million as we have found it appropriate to replace more parts that we originally had planned to reuse and also we have had some unexpected costs with the building permit requirements and with this increased cost the yield on cost will be 4.9 on that project down from 5.3 percent The remaining capex for these projects is now around 600 million. We continue to have a very disciplined approach to capital allocation, prioritizing projects now related to enhancing the letting in the management portfolio, and we expect to start reporting on one refurbishment project next quarter. In these times of more uncertainty, we are of course very pleased to have a high quality tenant base, which provides both stable and reliable cash flow. Entra's tenant base consists, as you can see, of around 50% revenues from public sector, And the private tenants are also well diversified across different sectors with consulting services and IT as the largest stake within the private sector. And you can also see that we have a large diversification amongst our top 20 accounts where these clients represent collectively a total of around 50% of our revenues. Now operating our business in a sustainable manner is a strategic priority for Entra and also a prerequisite for our long-term value creation. As also it is one of the enablers for our green financing. We have now reported according to the EU taxonomy framework for two consecutive years And 100% of Entra's revenues and capex is taxonomy eligible. And in 2024, our taxonomy alignment was at 54% on revenues. up from 47 percent on capex the share is lower which also is of course natural as the quite a few of the capex projects have been initiated before the taxonomy framework was ready And we can also see that we screen fairly well relative to other real estate companies reporting on the Stockholm real estate index as you can see on the exhibit on the right side where the average is around 31% alignment on revenues. We move on to a few words on the market situation. Despite the global market volatility, Norway's economy remains solid and stable, with less than 2% of our mainland GDP from exports to the USA. The direct implications of American tariffs are minimal. However, as a small open economy, we are of course exposed to all indirect effects. Now supported by the Sovereign Wealth Fund, Norway is well positioned to support and stimulate its economy, as it has also proven to do in the past. And additionally, the Norwegian Central Bank has yet to initiate interest rate cuts, so monetary policies remains available as an effective tool to stimulate the economy. The CPI came in at 2.6% in March, following an unexpected spike in February up to 3.6%, which then also prompted the central bank to delay the anticipated rate cut in March. This means that the key policy rate has been now held at 4.5%, since December 23, and the central bank now expects that we can see two rate cuts of 25 basis points this year. Market expectations are that we will see between two and three cuts. The employment growth has been slightly on the positive side through this cycle and is expected to remain positive also going forward. The economy is expected to pick up as lower interest rates and also the solid real wage growth we have seen last year and also expected for this year starts feeding into the economy in time to come. The letting activity was very active in 2022 and 2023. also feeding into the first half of 2024, before it slowed slightly down after the summer last year. This was partially also explained by the fact that we could see that there are less lease expiries in the Oslo market in 2026. And although the leasing activity slowed down a bit in the second half, we have seen improvements this first quarter. with increasing activity and also some more lease searches coming out into the market. We are also aware that there are quite a lot of volumes which are set to expire in 2027, suggesting that we will also see increasing activity throughout this year, although of course the heightened market uncertainty may lead to delays for some of these tenants. If you look at the vacancy graph at the top right, you can see that the overall vacancy currently is around 6.5% in the Oslo market, according to our consensus report, and expected to increase slightly towards 7% going forward. Both in Oslo and Bergen the vacancy varies between six and eight percent in most clusters in these cities, but you also see that vacancies is higher in some parts where you have typically older building stock or also in certain fringe areas. Most of the vacancies are in areas with small space, where you also have increased sublease volumes, typically in times with more uncertainty. The competition in this segment is therefore quite strong. From the bottom right graph you can see that there is limited new supply coming into the market. Around 200,000 of the volume coming in in 2025 and 2026 is related to the first part of the government offices and the construction city. Both of these projects are close to fully let and the buildings they will be vacated will partially be expected to take out for refurbishment and back in the market after 27. And part of it is probably also going to be converted to hotels or resi. The moderate new build supply and also the current dislocation which we are seeing between market rents and break-even rents for new build projects means that we expect also to see rental growth going forward probably also above expected inflation rates this is also supported by our consensus market report where you can see that they at the top right expect around 12% growth in the next three years. In the short term however we expect to see a more moderate rental income growth as after some quarters with low activity in the letting market and also more intensified competition over leases. We move on to transaction market. It has remained active in the first quarter. The financing markets are open and available. However, the lending sentiment is more selective due to the increased market volatility following the rise of international trade tensions the activity was very high coming into the quarter and we have seen transactions for a total of 15 billion close in the quarter which is quite decent with a broad universe of buyers both equity buyers family offices foreign buyers and also private equity Following the increased volatility now in the later weeks, we do however expect that the market will be a bit more wait-and-see mode until we get some more clarity on where things are going. The prime yield is currently around 4.6% and as you can see the expectations are that they will remain stable there this year and expectations that they will decline in line with interest rates going forward. and the expectations for yield compression have been reduced slightly compared to what we saw in the last consensus report. Sorry. Ole, a few words from you.

Thank you, Sonja. In Q1, the financial performance was stable compared to previous periods. As you are aware of, in Q2 2024, we divested our Trondheim portfolio. So for comparison purposes, we have marked out the Trondheim impact on rental income in the graph to the left. Rental income came in at 774 million in the quarter, which is more or less flat compared to 776 million in the first quarter of 2024, adjusted for the Trondheim divestment. We had a positive contribution from CPI of 17 million, as well as positive contribution from the project portfolio of 12 million. But this was offset by divestments in addition to the Trondheim portfolio, which had a negative impact of 22 million, as well as a negative like for like of 9 million in the quarter. Adjusted for all divestments, our underlying growth is 2.6% in the quarter. Compared to the fourth quarter of 2024, our rental income grew from 767 million to 774 million. However, this is 9 million below what the bridge highlighted in our four-quarter presentation. And the reasons for this are mainly related to two items. First, we had the restructuring of a lease contract where parts of the lease was converted to turnover-based contract. And secondly, we also had another event and conference tenant, which is in restructuring, as Sonja mentioned earlier. Net income from property management came in at 320 million and this is slightly down from 325 million in the first quarter of last year. The loss of revenues from all the divestments was partly compensated by less interest costs due to lower debt levels as well as lower operational costs. Profit before tax came in at 280 million, and this includes negative value adjustments of 32 million in the quarter. Moving then to our... Sorry about that. Okay. Yes? Moving then to our profit and loss statement. I already gone through the rental income, but I will give you some flavor on the other cost items. Our OPEX came in at 66 million, which is 8.5% of the rental income. This is in line with historical levels. The OPEX is down from 78 million in the first quarter of 2024, and this is due to the mentioned divestments we talked about earlier, as well as strict cost control. Admin costs came in at 47 million, which is down from 50 million in the same quarter last year. This is in line with expectation, and we have previously highlighted that we target Admin costs for the full year at around 200 million. Net realized financials came in at 349 million. This includes 11 million from one-off costs related to the bank refinancing we conducted in the first quarter. I will come back with more information regarding the bank refinancing later on in the presentation. The net realized financials is also 79 million below what we reported in the first quarter of 2024. And the lower interest cost is mostly due to reduced debt level with nearly 7 billion, following all the divestments we have completed. But also that our interest rate on the net interest bank debt is about 30 bps lower than we had in the same quarter last year. And I will also come back later on in the presentation with the net interest costs going forward. As you can see, we had the limited impact from value changes, both in our properties as well as our hedge instruments. And this gave them a profit before tax in the end of 280 million. Moving over to our per share data. Cash earnings came in at 7.1 kroner per share in the first quarter. This is flat compared to the fourth quarter. While on the right hand side, you can see the net asset value continue a slight improvement in the quarter and came in at 163 kroners per share, up from 162 kroners per share in the fourth quarter. In addition to this, we have distributed 37 kroners in dividends since the IPO in 2014. So adding this, the total return has averagely been 9% since the IPO. Moving then over to our rental income development. Looking forward, the model indicates that the rental income will be 771 million in the second quarter, slightly down from 774 million reported in the first quarter. The Q2 rental income is however, 10 million below what the bridge highlighted in our fourth quarter presentation. And this is mainly a spillover effect from the two special situation, which also impacted the first quarter as presented earlier, as well as some other negative impact from the negative net letting we had in the first quarter. The negative net letting we now had three quarters in a row are lowering the rental income trend, as you can see in this graph. However, this graph is not a guidance. It just highlights the income trend based on existing contracts and reported events. There is significant upside potential to the rental graph going forward, especially in the latter part, and we are obviously chasing these potentials. The most important value drivers here is to rent out existing vacant space, which has a potential value of 216 million. In addition to this, we also have available space in the ongoing project portfolio, which has a potential value of 44 million per year. And lastly, we obviously also target to re-let the space that will be available in the future due to the negative net letting. We have had now three quarters in a row. Moving then over to our property value, which increased to 63.0 billion in the quarter. that value changes in our investment properties was flat in the quarter with an insignificant reduction of 6 million. There are limited movements in all value drivers in the quarter and the deviation between their pressures are relatively low and this has also come down over the last two to three quarters. As Sanja mentioned earlier, the valuation looks to have bottomed out and yields are expected to come slightly down over the next few years. CAPEX came in at 385 million, which is mostly related to the four projects that we report on and is ongoing at the moment. We will continue to have a disciplined investment strategy given the current interest rate as well as rent levels. The decision to renegotiate Yara is also partly driven by being more CapEx conscious, as in this case, the tenant will remain in the same site with an as-is lease with no CapEx for us. And lastly, you can see that the portfolio net yield is at 4.86%. Moving then over to our debt metrics, which continued to improve in the quarter. On the left-hand side, you can see the interest coverage ratio has bottomed out and improved from 1.91 to 1.98 in the quarter, measured over the last 12 months. Isolated in Q1, the ICR came in at 2.07. On the right hand side, you can also see that the leverage ratio also improved slightly with a 0.2 percentage point and came in at 49.1%. And the net debt GBTA was flat at 11.7. We expect to continue a gradual improvement in our debt metrics going forward, and this is supported by continued capital discipline as well as potential value increases and lower interest rates. Moving to our financial position. So in Q1, we have created a solid financial platform and extended our average time to maturity of our total debt from 3.1 years to 4.0 years. And we have done this by issuing 3.1 billion in new bond debt at attractive terms under a new loan agreement. as well as refinanced to 17 billion in bank debt. And thereby we have increased our financial resilience in the current volatile market. As you can see in the graph to the right, we have 9.4 billion in undrawn credit facilities. That falls due in 2028 and 2029. And with that, we have ample liquidity room for the next 24 months. 62% of our debt is now green financing, and we have the capacity to issue more green debt if required due to our existing environmental friendly asset portfolio. And lastly, you can see that Moody's affirmed our rating and outlook in April. We will continue to have a conservative approach when it comes to leverage as well as interest risk going forward. And to have a good access to bond market, we will maintain an investment grade rating throughout all parts of the cycle as we have done in the past. With now a new bank debt structure in place, as well as a gradual improvement in credit metrics and continue to be capital disciplined, we believe that we have set the path for a rating upgrade in the future. Moving then to our cost of debt. So we have had some questions regarding our interest rate going forward. And to give further transparency, we have then reworked our cost of debt slide. The interest rate on our interest bearing debt came in at 3.89%, as you can see in this graph. However, we do have other financial costs that adds to the net realized financials, which we report in our quarterly report. The all-in net financials came in at 4.44%, but this included one-offs related to the bank refinancing, which impacted 14 basis points. As you can see in this graph, the gap between the interest rate on our interest-bearing debt and the net realized financial has increased since the late 2023. And there are several reasons for this. First is that in 2021 we issued several bonds at the discount, which reduces the interest on our interest-bearing debt, but adds a non-cash amortization. Second is that we have increased commitment fees in the period as we prefer to have a significant liquidity buffer while we will be renegotiating with our banks. And this has now been completed in the first quarter. And lastly, due to much higher project activity in 2021 to 2023, we capitalized much more interest costs than we can today due to a lower project activity. These three elements offset each other from 2021 to 2023, but not so much from late 2023 and onwards. Going forward, we do expect this gap to gradually be reduced due to a combination of lower commitment fees as well as reduced amortization of bond discounts. seeing that we have had several questions on our interest costs going forward as well as that we have reworked this slide and a new bank facility refinance our bank structure we will give you an indication of net realized financials going forward in this quarter Based on the current NIBOR forward curve, our existing hedge positions, as well as our expected credit margins, we forecast a net realized financials in 2025 of 1.33 billion and 1.27 billion in 2026. However, this may change due to shifts in NIBOR curve, investments and other factors. And with that, Sonja, I'll leave it to you.

Do we have sound on this one? Yes. Okay. Closing remarks. First of all, we are operating in a very solid and stable Norwegian economy, and the public spending will continue to stabilize the economy. And lower interest rates and real wage growth is also expected to stimulate the economy going forward when we get our first rate cuts, which still are anticipated to come in 2025. We have established a very flexible platform for our long-term financing with the great job which has been done through the year and concluded this quarter. And this also provides resilience and the capability to get financing from where we find it most attractive going forward. our high quality tenant base provides also stability in respect of cash flows and we continue to see promising letting market fundamentals and expect also that we will see letting market activity pick up knowing that there is quite a lot of leases to be extended in the market in 2027 of course also a bit depending on how the economy economic economic sentiment evolves Breakeven rents for new builds above market rents continue to support also that we should see rental growth over time. And there is now quite a bit of upside in our portfolio. And we continue to work hard to deliver on growth opportunities within the reversion potential and the vacant space in our portfolio. In addition, the projects and CPI will contribute with income growth going forward. So I think that concludes the presentation for now, and we should be ready for some questions.

Our first question is, Entra has now seen three quarters of consecutive negative net leasing. When do you expect the operational environment to improve?

Well, firstly, as I just said, we know that there is quite a lot of lease volumes in the market to be renegotiated in 2027, which implies that the letting activity should pick up but then again having said that the most also the recent increased uncertainty also often prompts tenants to delay decisions so the effects of that we don't know yet but Our expectations is that we will see a pickup in the activity in the letting market which should definitely help improving also the operational environment. Now if you look at our portfolio we have in total around 30 million of lease contracts in 2025 and 80 million in 2026 which yet have not been concluded and the outcome of these are still open. The remaining part of the the portfolio or the expiries have either already been terminated or we expect to see them resigned so the volume which is still at risk you could say is quite limited and below 20 percent so that should also provide some clarity that

there is a limited downside and quite a lot of upside for us now in our letting business thank you next question can you please reconcile the comment that work from home trend has reversed but tenants are reassessing their office requirements due to hybrid working

Yes, with that I mean that when our tenants now are in a situation when they are renegotiating, they are coming out of leases which are seven to ten years long. And the way we work has changed over these years. It means that we use more space for meeting rooms, teams rooms and collaboration space, while individual desks can be reduced. So when you are in an existing office contract, you need to a much larger extent do some kind of alternations and when you are looking into what kind of alternations you have to do you are at the same time also more open to looking at alternatives because it's one thing to kind of sit in the existing building and experience that we are doing refurbishments while the tenants are in the building and then the alternative for them is maybe then just to move into something new or in another building So when you look at the presence in the office, mobility data, people are back in the offices, but the time of the week we use the office is a bit different and also the organizing of the office and what kind of facilities you need has changed.

Thank you. How do you expect occupancy to develop going forward?

I think that we, for the second quarter at least, expect that they should remain around the current levels. I think it's difficult, to be honest, to guide more on timing on how much time we will need to bring occupancy up. What I do know is that we have a target to get back up there at 95%. We have put in place the efforts which is required to intensify the letting activity and we have very good products. So knowing also now that the JARA deal will mean that The building they were supposed to move into is going to be vacated from the first quarter 26. Our EPRA vacancy development is also going to be much dependent on how quick we are able to sign that volume. So we're getting back up to 95%, but I do think that we will need to at least use this year and probably sometime next year before we can be there. I think it's worth commenting on also that the effects of all the terminations which we have reported these last three quarters are also represented in the rental income bridge. So that the rental income bridge, while it's been a very clear forecast with maybe limited upside in the past, now it also represents a picture of all known events and also represents more upside as Ole also touched upon.

Thank you. This is a question regarding the JARA contract. Is the negative net letting of minus 25 in the second quarter included in the rental income bridge?

Yes, the net letting effect is already included in the rental income bridge because the new lease contract with Jara was expected to start in 2027, so it's beyond the period which we are forecasting.

Okay. What would be your latest funding conditions and do you see banks more cautious in their approach?

In general, we don't see any changes from the banks. We just completed our bank refinancing at the very end of March. Having said that, in the debt capital market, the spread has come somewhat out from the bonds issues we did in February at 125. basis points but after that Moody's have affirmed our rating and we are targeting to to have a rating upgrade in the future so we will always work to reduce our funding costs but right now we don't see any changes in the behavior from from the banks

Thank you, Ole and Sonja. With that, we'll conclude the Q&A session for today.

Thank you all for joining us today. Please feel free to get in touch if you should have any further questions. Thank you.