Earnings call transcript: Neobo Fastigheter AB Q1 2025 shows rental income growth

Neobo Fastigheter AB (Market cap: $229.24M) reported a notable increase in rental income for Q1 2025, with a rise to SEK 9.8 million. Despite a slight decrease in unrealized value changes, the company maintained a positive outlook, emphasizing improvements in net operating income and property management profits. According to InvestingPro analysis, the stock appears undervalued based on its Fair Value metrics, though it has faced challenges with a -26.56% return over the past six months. The company’s current trading price reflects a low Price/Book multiple of 0.4x, suggesting potential value opportunity.

Key Takeaways

• Rental income increased by 6% on a like-for-like basis.
• The company signed a significant lease with the Swedish prison and probation service.
• Neobo invested SEK 164 million in property enhancements.
• Occupancy rates improved, with a reduction in commercial vacancies expected.
• Positive outlook on market liquidity and potential central bank rate cuts.

Company Performance

Neobo Fastigheter AB demonstrated strong performance in Q1 2025, with rental income reaching SEK 9.8 million, a 6% increase compared to the previous period. The company also reported a 3% rise in profit from property management. Despite a 2.2% decrease in unrealized value changes, the overall financial health remains robust, supported by strategic investments and refinancing efforts.

Financial Highlights

• Rental Income: SEK 9.8 million, a 6% increase year-over-year.
• Net Operating Income: Increased by SEK 30,000 to SEK 473,000.
• Portfolio Value: SEK 13.7 billion, with 95% in residential properties.
• Occupancy Rate: Improved by 1.5 percentage points.

Outlook & Guidance

Neobo is targeting a substantial improvement in its net operating income margin, with continued investments of approximately SEK 167 million planned for 2025. The company anticipates rental growth of 4.9% and potential portfolio expansion through acquisitions. The financial position is expected to strengthen further if central bank rates decrease.

Executive Commentary

CEO Ylva Sarbi Westman noted, "We see continued increase in both NOI and profit from property management with a positive outlook going forward." She emphasized the company’s focus on achieving a "substantially higher surplus ratio" and exploring opportunities to enhance shareholder value.

Risks and Challenges

• Market Volatility: Changes in interest rates could impact financing costs.
• Property Market Dynamics: Fluctuations in transaction volumes and yield requirements.
• Vacancy Rates: While improving, further reductions in commercial vacancies are necessary.
• Economic Conditions: Broader economic trends could affect rental income and property values.

Q&A

During the earnings call, analysts inquired about rent negotiations, with Neobo reporting that 48% have been completed with a 4.9% increase. The company also highlighted improving financing conditions and efforts to reduce vacancies in specific properties.

Full transcript - Neobo Fastigheter AB (NEOBO) Q4 2024:

Conference Operator: Welcome to Neobo q four report twenty twenty four. For the first part of the conference call, the participants will be in listen only mode. During the questions and answer session, participants are able to ask questions by dialing 5 on their telephone keypad. Now I will hand the conference over to CEO, Yilva Sarbi Westman. Please go ahead.

Ylva Sarbi Westman, CEO, Neovoz: Thank you. And, welcome everyone to the presentation of Neovoz year end report 2024. My name is Ylva Sarbi Westman, and I’m joined here today by our CFO, Maria Stantberg. Sweden needs more affordable housing and, by developing our properties to meet people’s needs, we aim to contribute to a more sustainable residential property market in Sweden. We have worked intensively during the last year to prepare new for compliance with NASDAQ Stockholm’s listing requirements.

The listing was followed by the positive news that new at the end of the year had been included in the index. Operations have continued to perform well throughout the year. Rental income in the like for like portfolio increased by 6%, driven by rent adjustments and lower vacancies. Net operating income increased by 12% in the like for like portfolio and profit from property management increased by 3% despite the divestment of seven properties and higher financing costs during the year. Unrealized value changes amounted to minus $3.00 1,000,000, reflecting a 2.2% decrease over the year.

We have a residential focused property portfolio with a value of 13,700,000,000.0 and eight 300 apartments. Residential properties account for 95% of the value and the remaining value mainly consists of community service properties. Our rental value is slightly above 1,000,000,000 with 77% derived from residential apartments and 20% from commercial premises. Increasing the occupancy rate has been a top priority since we started New Bow. The occupancy rate in the residential portfolio has improved by 1.5 percentage points since the start of and by 0.3 percentage points during last year.

During the summer, a six year lease agreement was signed with a Swedish prison and probation service with a rental value of 10,000,000. And in conjunction with occupancy during summer this year, the commercial vacancy rate will fall by 2.9 percentage points, and the total rental value will at the same time increase by 5,000,000. We create attractive and sustainable living environments where people can thrive and feel secure. And during the year, we have invested 164,000,000 in value creating investments that have increased our net operating income and made our residential areas more attractive and secure. This includes renovation of about 100 apartments and a number of sustainability investments.

We have taken further steps on our sustainability journey and successfully met all internal sustainability targets for 2024. We have continued the important work with energy optimization in our properties and conducted a survey of climate related hazards. We have also implemented a code of conduct for employees and a corresponding one for suppliers, enhancing our ability to steer sustainability initiatives in the desired direction. During the fourth quarter, we completed an energy and the climate roadmap detailing the necessary steps and providing a comprehensive assessment of the required actions to achieve our long term goals. Work on our climate report for 2024 is in progress and will be presented as part of our Sustainability Report 2024.

It is positive to note that the liquidity in the transaction market is recovering and the transaction volumes in Sweden increased by 40% compared to previous year. We are optimistic that liquidity will continue to rise, which is positive as we plan to accelerate our transaction activities in order to further optimize and grow our property portfolio. Some comments on our year end result. Rental income increased to $9.00 8,000,000, which is a net effect of higher income in the like for like portfolio and the absence of income from seven divested properties. The like to like portfolio showed an increase in rental income of 6%, explained by rent increases, reduced vacancy and additional rent increases as a result of renovated apartments.

Total (EPA:TTEF) property costs increased by 6,000,000 to $435,000,000. And the increase is a net effect of higher costs for operations, as well as reduced costs for maintenance and sold properties. The increase in operating costs is mainly attributable to increased costs for tariff and snow removal at the beginning of the year. Excluding non recurring costs, property administration decreased by 2,000,000. Net operating income increased by 30,000,000 to $473,000,000, and in the like for like portfolio by 12%.

Central administration costs declined to $75,000,000 And during the year, we had non recurring costs of $16,000,000 attributed to preparations for the transition to NASDAQ’s main list, reorganization and to a provision in the fourth quarter relating to an ongoing insurance case. Excluding one offs during both the current and preceding year, central administration costs decreased by 11,000,000 as a result of the structuring of operations now being complete. Profit from property management during the fourth quarter increased by 50% compared to corresponding period previous year. Nubu’s earnings capacity is not a forecast and does not include any assessment of future trends. Since the previous quarter, profit from property management has increased by $17,000,000 mainly attributed to increased rental income of $23,000,000 as a result of indexation of commercial rents and increase in negotiated residential rents.

So far, 48 of our rental income in the residential portfolio has been negotiated with an average increase of 4.9%. That took full effect as of January one of this year. The remaining rent negotiations are expected to be completed during the spring. Increased property costs are attributed to higher tariff expenses and increased central administration costs due to the addition of two new employees, a head of transactions and a financial controller. The improvement in net financial items is primarily due to a lower policy rate.

Over the past three years, the value of the like for like portfolio has decreased by 2,200,000,000.0 with a decline of $3.00 1,000,000 during 2024 due to increased yield requirements and also higher tariff based costs. The average yield requirement used in the valuations have increased from 3.8% in the beginning of twenty twenty two to 5% by the end of twenty twenty four. And we now clearly observe that yields have leveled off and stabilized. We continue to conduct external valuations of all our properties quarterly to ensure accurate and reliable book values. We have a strong financial position based exclusively on bank financing from banks in the Nordic region.

Over the past year, we successfully refinanced loan agreements totaling 2,700,000,000.0 at margins lower than our average interest margin. Additionally, we reached we reached an agreement with our banks to reduce the annual amortization rate by 50%, which will enable us to prioritize value generating investments and accelerate the refinement of our property portfolio. The average debt duration amounted to two point eight years in the December, and our average interest rate amounted to 3.2%. Since we have a high hedge ratio of 76%, that effectively has offset the upswing in interest rates that took place over the past years. The average fixed rate period was prolonged from two point two to two point eight years during the year, and the ICR amounted 1.6 times on a rolling twelve month basis.

The Swedish central bank reduced the policy rate on multiple occasions throughout the year to support the economy and stabilize inflation at its target level. For this will result in an improved financial position and enhanced opportunities to make value accretive investments in the property portfolio. In order to secure future cash flow and further mitigate financial risk, we utilize interest rate derivatives. At the close of the period, the total nominal value of these swaps amounted to 5,400,000,000.0, with maturities ranging from one to seven years. Additionally, there are interest rate derivatives with future commencement dates, totaling a nominal amount of 1,400,000,000.0.

And here you can see our largest shareholders as of the December. And we are very pleased with our large number of shareholders totaling 102,000. Some key takeaways. We see continued increase in both NOI and profit from property management with a positive outlook going forward. Strong prospects for rental growth in the coming years.

Refinancing of bank loans of 2,700,000,000.0 and amortization in a significantly improved financing climate. Listing on NASDAQ Stockholm and inclusion in the EPRA index. We have successfully achieved all interim targets for sustainability in 2024. And we see improved liquidity in the transaction market as we now increase our focus on optimization and growth. So we are now entering our third year with a solid foundation in place and strong opportunities to generate shareholder value moving forward.

And with this, I would like to open the floor for questions.

Conference Operator: If you wish to ask a question, please dial 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial 6 on your telephone keypad. The next question comes from Kevan Shirvanpour from SEB. Please go ahead.

Kevan Shirvanpour, Analyst, SEB: Good morning, and thank you for the presentation. I just have a couple of questions. First of all, the earnings capacity. You mentioned that 48% of the negotiations are finalized, so that’s 4.8% rent increases. Are only the completed negotiations reflected in the earnings capacity?

Or do you have any type of assumption for the remainder of the portfolio?

Ylva Sarbi Westman, CEO, Neovoz: No. Only the negotiated part, 48% of the residential rents in the earnings capacity.

Kevan Shirvanpour, Analyst, SEB: Okay. And also when it comes to the rent increases 4.9% for 2025, do you have any type of two year agreements that could give an indication for rent increases for 2026?

Ylva Sarbi Westman, CEO, Neovoz: Yes. We have a few ones, but we have also seen in the market two years agreement indicating increases of approximately 3.5 to 4.5% during next year, depending on which municipality and what type of premises and so on.

Kevan Shirvanpour, Analyst, SEB: Okay. Do you have any type of indication for 2027? Do you think this will carry over at a slightly lower rate? Or do you have any type of assumption for 2027?

Ylva Sarbi Westman, CEO, Neovoz: No, we haven’t really done that assumption yet. But hopefully, it will be a bit over inflation since we still have high inflation during the last years that we need to pick up on.

Kevan Shirvanpour, Analyst, SEB: Okay. And I also wondering about the investments. So you had SEK 167,000,000 in investments and you talk about you want to continue improving the portfolio. What do you expect the type of investment pace in 2025? And how will this be financed given your LTV 51%?

Will you divest?

Ylva Sarbi Westman, CEO, Neovoz: Yes. I think we will be able to keep the same pace during this year with only our earnings and the cash flow generated from operations. But hopefully we will be able to grow the portfolio further. But when it comes to the investments in existing portfolio, we think that approximately the same level as this year sorry, as last year.

Kevan Shirvanpour, Analyst, SEB: Okay. Good. I have so yes. Okay. I just have one final question and it’s related to the operating and maintenance costs in Q4.

First of all, how much of the decline is due to weather effects isolated?

Ylva Sarbi Westman, CEO, Neovoz: Yes. Good question. When it comes if you compare the fourth quarter twenty twenty four with the last quarter previous year, It has been warmer and not so much snow and that has, of course, affected the costs in a positive direction. But we have also worked very hard with trying to lower the all our costs. So I don’t have the exact figure.

Kevan Shirvanpour, Analyst, SEB: But of the SEK70 million combined operating and maintenance, could you say it’s maybe half of that or

Ylva Sarbi Westman, CEO, Neovoz: Yes, maybe half or a bit more.

Kevan Shirvanpour, Analyst, SEB: Okay. And just a final follow-up on that and that’s also related to the weather. Based on the first one point five months of the year, did you expect any type of carryover from weather effects in Q1 maybe?

Ylva Sarbi Westman, CEO, Neovoz: No, we don’t expect that.

Conference Operator: The next question comes from John Ehrfeldt from Kepler Cheuvreux. Please go ahead.

John Ehrfeldt, Analyst, Kepler Cheuvreux: Okay. Thanks. Good morning. I have a couple of questions. Starting with your earnings capacity, just to be how to interpret that you have included contracts that will not hit P and L until, let’s say, mid twenty twenty five.

I’m looking at the Solentuna contract. Is that correct? Would you include that in your capacity?

Ylva Sarbi Westman, CEO, Neovoz: No, we haven’t included that in our earnings capacity. We have a very strict way of presenting the earnings capacity. As we say in the report, we only use contracts really active on the specific date. So as of January, this year, that we can see in the Q4 report, we haven’t included the signed lease agreement in Solentumna. So it will start to affect earnings capacity when they have moved in and started to pay rent.

So it will have When they

John Ehrfeldt, Analyst, Kepler Cheuvreux: move in, it will have Yes. I’m just coming back to the earnings capacity. And if I I mean, just do a simple math here, dividing the Q3 earnings capacity when it comes to rental income, you end up at SEK231 million and the actual outcome was SEK 227 billion, so it’s SEK4 billion, SEK4 million lower rental income than the earnings capacity indicated in that at the end of Q3. So something changed during the quarter here.

Ylva Sarbi Westman, CEO, Neovoz: Sorry, can you please repeat the question?

John Ehrfeldt, Analyst, Kepler Cheuvreux: If you look at your earnings capacity at Q3. Yes. And divide the rental income by four, then you probably will end up with what you’re going to deliver in the fourth quarter. And that’s the difference of SEK 4,000,000 in rental income. So I just wanted to check whether something has changed during the quarter.

Ylva Sarbi Westman, CEO, Neovoz: No, nothing has changed. I think that’s probably the we see the effect that only at each date, we only present the things that has really, really happened in the earnings capacity. And maybe that’s something that can explain the the difference. So but we can absolutely take a look into this deeper a bit deeper into this question.

John Ehrfeldt, Analyst, Kepler Cheuvreux: Okay, great. Next (LON:NXT) question regards financing. You mentioned that you have end up to be the somewhat lower average interest rate for your new financing. Could you maybe share a little bit of what kind of magnitude in terms of bps that you have been lowering your average interest rates from the new financing?

Ylva Sarbi Westman, CEO, Neovoz: Yeah. I mean, we see a significantly stronger finance climate. So it’s very positive when it comes to refinancing discussions right now. And we haven’t communicated the exact figure. But, I mean, we have said before that we have an average margin in the NIOB somewhere around 117 basis points.

So we have the refinancing agreements have been at lower levels than that.

John Ehrfeldt, Analyst, Kepler Cheuvreux: So maybe 150 or

Ylva Sarbi Westman, CEO, Neovoz: Yeah. In a range of, I mean, it’s more than one refinancing in the figure. So they have different levels. But yeah. We haven’t communicated the exact figure since we are in ongoing discussions, negotiations with our other banks right now.

But, we we see it’s

John Ehrfeldt, Analyst, Kepler Cheuvreux: a Okay.

Ylva Sarbi Westman, CEO, Neovoz: It’s a competitive market, so that’s very good.

John Ehrfeldt, Analyst, Kepler Cheuvreux: Okay. Great. And I’m just a little bit puzzled about your as I follow a lot of similar companies, your NOI margin comes down seasonally very much in the fourth quarter compared to your, let’s say, Viappa Theatre? Or are there any reasons for it? Or is it some kind of extra cost that you maybe could squeeze out later on?

Ylva Sarbi Westman, CEO, Neovoz: Yes. I mean, I think the surplus ratio still is too low in Neobor. We are really focusing hard on increasing it in a lot of different ways. So I don’t know why it’s I mean, since we had a strong development in NY. But of course, the fourth quarter is a bit challenging always.

So that’s why it’s lower in Q4 and Q1. But we can see an improvement on a full year basis and we are very glad to see that we are going in the direct, in the right direction with a positive trend.

John Ehrfeldt, Analyst, Kepler Cheuvreux: Okay. And have you set up any targets for your NOI margin in a couple of years? I mean, just to get a feeling where you’re targeting.

Ylva Sarbi Westman, CEO, Neovoz: Yes. Not a specific number, but we are really targeting substantially higher surplus ratio.

John Ehrfeldt, Analyst, Kepler Cheuvreux: Substantially higher, okay.

Ylva Sarbi Westman, CEO, Neovoz: Yes.

John Ehrfeldt, Analyst, Kepler Cheuvreux: And my last question regard could you just remind me of the metrics here, loan to value, ICR and so on, your targets and is this any have any put any constraints to your expansion plans?

Ylva Sarbi Westman, CEO, Neovoz: No, it’s the no changes in the financial goals and restrictions to keep the LTV below 65% and the ICR above 1.5 times. And so it’s the same financial targets and restrictions that we have already had, but of course we will take very good care of our balance sheet and our financial position. And since it’s important for us, of course, to keep a strong position.

John Ehrfeldt, Analyst, Kepler Cheuvreux: Okay. Thanks for taking my questions.

Ylva Sarbi Westman, CEO, Neovoz: Thank you very much.

Unidentified Speaker, Neovoz: Yes. And then we have some written questions. I start with the

Conference Operator: first one. There are no questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Unidentified Speaker, Neovoz: Yes. We have some written questions as well. I start with the first one. The vacancy, can you give a more detailed description of it?

Ylva Sarbi Westman, CEO, Neovoz: Yeah, yes. It has been a top priority, as I said, since we started, near Bow. And, but we can also, so, I mean, we have lowered the residential vacancy from 6.6% when we started the Evo to 5.1% today. And, we see it clearly that we have, I think 50% of the vacant apartments allocated in four or five areas. So we are really targeting them and working, focusing on increasing the attractiveness in these areas in order to lower the vacancy rate going forward.

And when it comes to the commercial vacancy, we still have a high figure, but it’s the same situation. We have 50% of the commercial vacancy in four or five properties. So it’s, we can really focus our efforts to those vacancies. And, we have good hope that we will be able to lower or to increase the occupancy rate going forward.

Unidentified Speaker, Neovoz: Yes. And the next question, can you please give some color on the current options for refinancing?

Ylva Sarbi Westman, CEO, Neovoz: Yes. It’s the same question. And, as I said, really, really strong and good climate right now. And, I mean, we have seen the bond market really, really, really recovering, almost all time, a good conditions, at least for some companies. So it is a good situation.

And, I mean, we are really, we have strong relationships with our banks, very, very good discussions with them and really appreciate their intention to help us to also, we have lower the amortization rate by 50% in order to be able to increase value accretive investments in the portfolio and so on. So it’s a good situation right now.

Unidentified Speaker, Neovoz: Yes. And the next question, can you elaborate more when you say you want to focus on growth?

Ylva Sarbi Westman, CEO, Neovoz: Yes. It’s a very good question, of course, since, I mean, our portfolio it’s still it’s low yielding residential properties, But we think that we have good opportunities to both, grow by continue to invest in the existing portfolio, doing renovations on apartments and sustainability investments and so on. And we will also be active and really evaluate opportunities to grow the portfolio through acquisitions. Things, we think that it’s a good way to create increased shareholder value and increased profit from property management per share. So we will continue to evaluate interesting opportunities.

And if it’s possible to really increase shareholder value, we will take the opportunity.

Unidentified Speaker, Neovoz: Yes. Could it be an option to sell some properties and start buying back your own shares?

Ylva Sarbi Westman, CEO, Neovoz: We would like to optimize our property portfolio as we have communicated. And so absolutely, we are working, trying to do some good divestments. Our core business is to increase the yield from the property portfolio. And that’s our focus. If we will buy back shares, it’s a question for the board, of course, but as we see now, we think that it’s better long term shareholder value to truly invest in the liquidity in the existing portfolio.

Unidentified Speaker, Neovoz: Yes. And the last question, an ICR of 1.6, How fast do you think it could improve?

Ylva Sarbi Westman, CEO, Neovoz: Yeah, I think, I think that it will improve during coming years. So we will absolutely see an increase during this year.

Unidentified Speaker, Neovoz: Yes. That’s the last question.

Ylva Sarbi Westman, CEO, Neovoz: Okay. So thank you very much for listening in and have a great day, everyone.

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