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CEO comment: “Our business model is profitable and sustainable”

2023 was a good year for Pandox, with strong net operating income and strong business momentum. We ended the year strong and our outlook is positive.

8 mars 2024

How would you summarise 2023?
I’m glad that the hotel market is strong despite headwinds in the world around us. Despite higher interest rates, high inflation and a weaker economy, both companies and individuals are prioritising travel and experiences. Meanwhile, on a human level, my colleagues and I are both saddened and distressed by the current conflicts, wars and geopolitical tensions around the globe.

In 2023 we delivered the highest sales and net operating income in the Company’s history, although cash earnings decreased slightly due to rapidly and sharply rising market interest rates and the higher financial expense that ensued.

I’m also proud of our progress in sustainability. We reached an important milestone when our science-based climate targets for GHG emissions were validated and approved by the Science Based Targets initiative (SBTi). This firmly establishes sustainability as a prioritised area for Pandox in the years ahead.

What conclusions do you draw from 2023?
1. Strong forces are driving the hotel market forward. The world is getting larger and the global middle classes are growing. This increases demand for travel and experiences. With the pandemic behind us, people are putting a high priority on freedom and experiences.
2. A tougher business climate requires us to be an active owner with deep knowledge of the hotel industry; an owner that understands how to generate cash flows and value through the hotel value chain. Being a specialist in hotel properties is our strength. Our large and diversified portfolio
is a unique platform for value creation throughout the hotel value chain.
3. People make the difference. An agile organisation made up of talented people who have great freedom to act is a powerful business tool, particularly when combined with a strong network of companies and individuals who are driven and solutions-oriented.
4. Courage to invest. In order to develop our existing portfolio, we invest on an ongoing basis in projects that drive cash flow. What we invest today lays the foundation for future growth and competitiveness, especially in an environment where fewer new hotels are being built
and there is great uncertainty about what normalised interest rates are.
5. Fact-based optimism always wins. Reality is seldom as dark as the headlines suggest. During the pandemic the general perception was that it would take many years for the hotel market to
recover. In reality it has gone much faster.

How has Pandox handled the higher interest rates and high inflation?
Our business model involving variable revenue allows us to take advantage of a growing market and be compensated for increased inflation.

Average room rates for hotel nights in 2023 developed strongly and this resulted in higher variable rents for Pandox. For comparable units, net sales increased by 16 percent with a fixed exchange rate. This good price level has more than compensated for the portion of demand that has not
yet returned after the pandemic.

One major advantage is also that most of our leases have downside protection through guaranteed minimum rent levels.

Our balance sheet is stable. We have a reasonable level of debt, with a loan-tovalue ratio of 46.6 percent, and a good interest coverage ratio of 2.7. The valuation yield in our property portfolio is relatively high. We have a clearly positive yield gap of just over 2 percentage points, compared with our average interest expense. Our financing consists solely of bank loans through our
banking partners and with low refinancing risk. Also, around 75 percent of our loans with a term of more than one year have hedged interest rates, which gives us good visibility into our future interest expense. We also have just over SEK 3 billion in cash in addition to around SEK 3.3 billion in unpledged properties.

Can you provide a few examples of how Pandox has created value during the year?
A large portfolio enables us to implement value-increasing initiatives in many different ways.

In 2023 we completed three acquisitions totalling around MSEK 1,576, two of which were in the UK, in Leeds and Belfast, and one in Stockholm, Sweden. All acquisitions have been complex – for example involving Pandox operating the hotel – and were made in highly uncertain times. This
reduced the competition and contributed to clearly attractive acquisition prices.

In the first quarter we also concluded the divestment of InterContinental Montreal for a selling price equivalent to around  20 percent over the book value in 2022.

The activity level in our existing portfolio was high during the year. We have a large toolbox which includes working actively with our tenants to develop the hotel products and increase the value of the hotel properties. In 2023 we invested MSEK 922 in projects that increase cash flows for the properties in various ways. Being able to invest at a high rate even in a more uncertain world shows our strength. Going forward, we have a pipeline of projects that will make a positive contribution to our net operating income growth in the years ahead.

In particular, I would like to highlight our major expansion of DoubleTree by Hilton Brussels City. We are adding around 150 rooms to the hotel, making more than 500 in all. This will make it the largest hotel in Brussels. In addition to the new rooms, we are creating exciting conference, food and beverage spaces. We are also building a new rooftop bar. I am very much looking forward
to the day when we can open the doors to abrand new hotel product in late 2025.

An important aspect of our value creation is also signing new leases with skilled operators. I am therefore particularly pleased that we have signed new leases with Strawberry and the Hobo brand for Hotel Mayfair in central Copenhagen, with Scandic and the Scandic Go brand for our
hotel at Fridhemsplan in central Stockholm and with hotel operator Frich’s for our hotel property in Hamar, Norway. All of the hotels are now undergoing renovations and I’m excited about their relaunch into the market in 2024.

I would also like to mention our new lease with Scandic for what is currently Hotel Pomander in central Nuremberg. This lease confirms our ability to create value by acquiring, developing
and elevating underperforming hotel properties in an international environment.

Pandox has been gradually increasing its focus on sustainability and 2023 was no exception. What would you like to highlight in particular?
Our science-based climate targets were approved by the SBTi in November, which is an important milestone for us. The targets set the course for our continued sustainability efforts and will keep us focused on the areas that cause Pandox’s largest CO2 emissions. We have a clear plan for
how to reach our climate targets for Scope 1 and 2 emissions based on phasing out gas and oil, installing energy-efficient systems and increasing renewable energy at the hotels we operate. To reach the targets we have for our Own Operations segment, we have decided to invest around MEUR 29 over three years and we expect a return in excess of 10 percent.

An important step in Pandox’s sustainability work is to add green agreements to existing
leases. What has happened in this area in 2023?
Increased regulatory requirements and greater demand for sustainable alternatives are putting more pressure on us and our tenants to deliver sustainable hotel products. We have an ongoing dialogue with our tenants about sustainability-related cooperation and we are pleased to report
that in 2023 we added green agreements to three leases with two operators. The agreements are tailored for each property and include, for example, phasing out gas and installing geothermal heating and solar panels.

The aim is to reduce our climate footprint while also finding a commercial agreement that is profitable for both us and our tenants.

Pandox also entered into sustainabilitylinked loans with SEB and Swedbank. What does that mean?
Existing loans of around MSEK 2,200 with SEB and Swedbank have been sustainability-linked. This is a stamp of quality for our sustainability work. The loans are linked to ambitious and material environmental, social and governance targets. We see good potential to convert the majority of our bank loans over time.

Looking ahead, what changes do you see in Pandox’s future?
Pandox is fundamentally very well positioned. Our business model is well tried and tested, and is profitable and sustainable over time. At the same time, we always want to get a little better at what we do every day. This involves paying attention to how we allocate our capital, how we
calculate and implement investments, how our portfolio is composed, and how we work as individuals and as an organisation.

One of our trademarks – and something we will continue to put great effort into – is working with our tenants to increase the value of the hotel properties through repositioning, extensions and product improvements. Investments with a high riskadjusted return. Katsching! Music to my ears!

What is most important to Pandox in 2024?
Our basic outlook on the hotel market in 2024 is positive and we expect to create value for our shareholders. We will pay particular attention to delivering on the substantial investment pipeline we have for existing hotel properties, several of which will re-open in the second half of 2024. We are also open to optimising the portfolio through divestments when the price is right and we can reallocate capital to projects with higher return potential.

All in all we are optimists in a world where geopolitical issues still pose the greatest risk.

Last but not least, I want to thank my fantastic colleagues and our shareholders, tenants and business partners for a great 2023. We are also grateful to our office dogs – our Pandogs – for adding more joy to our days at work.

Stockholm, March 2024

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