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Continued value creation

CEO comment from the interim report January-March 2023.

High demand in the hotel market
The second quarter was strong and saw high demand in the hotel market. The majority of our submarkets improved compared with the corresponding quarter the previous year. Germany saw the strongest relative improvement, explained by an active trade fair calendar and increased business travel. Brussels also developed well with a clear increase in conference demand and a good level for leisure travel. As before, the UK and the Nordics were stable at a high level and had strong average price development. Weak exchange rates in several important markets helped to increase international demand, above all in the UK based on increased arrivals from the USA.

We have now entered into the third quarter which is dominated by leisure demand. The ensuing fourth quarter is more balanced with contributions from all demand segments.

Strong operational development and continued value creation
Good hotel demand resulted in a higher total net operating income and EBITDA. Adjusted for pandemic-related government grants of MSEK 156, for the years 2020–2021, which we received in the second quarter of 2022, cash earnings increased by approximately four percent in the quarter. This shows that our model with variable rent is working and that we can create value also in a higher interest-rate environment. The grants were finally settled in the third quarter of 2022 and will therefore affect comparisons also in the third quarter of 2023.

For comparable units, net sales and total net operating income increased by a solid 18 and 16 percent in the second quarter. Higher demand in Germany positively affected Property Management and, combined with a more active hotel market in Brussels, contributed to both higher earnings and profitability in Operator Activities. Adjusted for certain renovation costs the net operating margin in Property Management was approximately 88 percent in the second quarter. At the same time, the net operating margin in Operator Activities rose to approximately 26 percent, which is a more normal level given the season and current portfolio composition.

The hotel property portfolio had high business momentum. At the beginning of the third quarter we signed a lease with Scandic to open a new Scandic Go at Fridhemsplan in Stockholm in 2024. The lease, which is revenue-based with a guaranteed minimum rent level, is for the property we acquired in February 2023 and is a good example of our value creation through investment and product shift activities. It is also inspiring to be able to contribute to Scandic’s expansion in the economy segment in Stockholm.

Refinancings completed and stable financial position
In the first half of the year we refinanced the equivalent of around MSEK 14,146 of our debt portfolio. The percentage of credit facilities maturing within one year has dropped to 15 percent. This demonstrates that our banking partners have a high level of confidence in us and that our refinancing risk is low.

Our interest expense increased somewhat also in the second quarter, mainly due to higher market rates, but our interest rate derivatives compensated for a large portion of this. The effect of higher credit margins is limited and is mainly in the form of a delayed effect from the credit margin increases that took place during the pandemic years and that are now having an impact when we refinance older credit facilities.

Our financial position remains stable with a loan-to-value ratio of 46.7 percent at the end of the second quarter. Our interest coverage ratio, on a rolling 12-month basis, as measured in all credit agreements, was 3.2 times.

Multiple factors support the hotel market
The good development in the hotel market reflects an economy with strong legs. Household demand for experiences has been high and people have prioritised travel at any price over other consumption. We believe that what people experienced during the pandemic, when freedom of movement was limited, may be one explanation for this, and that it is still a strong driver. Also, surplus household savings remain high in many of our markets.

We see further potential for increased business travel in the autumn, particularly in Germany where trade fair calendars are now well-filled. The same applies to international travel which still has a way to go to reach 2019 levels. Re-opening in Asia after the Pandemic has been relatively slow and arrivals from countries such as China and Japan into Europe are still at a low level. One explanation, which also applies to international travel in general, is that flight capacity has not yet fully returned to pre-pandemic levels. One positive short-term factor is that weak exchange rates in the UK, Norway and Sweden should stimulate increased international arrivals to these markets.