Atrium Ljungberg AB

STO:ATRLJ B

Earnings Call Transcript 2022-Q1

[Annica Ånäs, executive]

Welcome to Atrium Ljungberg's Q1 report. The headline of this report is, strong first quarter in turbulent times.

As a start, I would like to update you on our key ratios. The property value was SEK 53 billion, contracted annual rent, SEK 2.4 billion, gearing ratio of 40%. And the property value in Stockholm stands for 76% and distributed on the different segments. And we see that offices stands for almost 60%; and retail, 23%.

Sales in the markets have really recovered and the vacancy situation looks more stable than before. The good letting work during Q4 have continued during the first quarter, and the net letting ended up at SEK 54 million. But then taking into consideration that Atrium Ljungberg had terminated contracts due to upcoming projects, the net letting was SEK 44 million. There has been most activities in the office segment.

During the first quarter, we had few terminated contracts from tenants, but one big was Tengbom leaving 5,500 square meters in Slussen. The premises have a beautiful view over Stockholm, and I think it will be quite easy to find another tenant.

Here, you can see examples of 4 major leases in the first quarter. Other ones I would like to mention is 2,150 square meters for Nova Consulting in Katarinahuset in Slussen; VisualARQ, 1,350 square meters to Hagastaden; and [ Lebel ] just over 1,000 square meters in Hagastaden.

And just to be clear, in 2022, we will continue to terminate tenant contracts to prepare for projects, especially at Medborgarplatsen. And we estimate that the net letting will be affected by approximately another SEK 50 million the coming quarters. And the net letting work has had a good start also in the beginning of Q2.

Then a few words about the condominium market. We know it has been strong for quite some time now and supported by low interest rates and the desire for more space among many who worked from home.

Demand has been high, while supply has been limited and prices have been pushed up.

And we have seen the same trend during the first quarter with an uplift on prices especially in the Stockholm market of 4%.

So far, we have not seen any effect of the inflation or increasing interest rates.

We have recently release some more condominiums in both Kulturtrappan, at Nobelberget in Sickla and Blomsterkungen in Uppsala with good results. And at the end of the quarter, the booking rate was 44% in Uppsala and 63% in Sickla.

The transaction market continues to deliver like never before and ended up at SEK 50 billion for the first quarter. The largest segment has been housing followed by logistics.

Despite increased financing costs, the interest to invest in real estate remains large and access to capital remains good. Above all, interest to invest in retail have increased due to the fact that the consumers are back in physical stores.

And now I will hand over to our CFO, Ulrika Danielsson.

[Ulrika Danielsson, executive]

2022 starts with the result the first 3 months of roughly SEK 1.9 billion, which is mainly explained by growth in NOI and like-for-like with 3%, good progress in the project portfolio.

In addition to adding NOI projects of roughly SEK 6 million have also been reported. Stable and continued strong property market, which in our portfolio means low yields of roughly 6 basis points, which creates roughly SEK 700 million in unrealized changes in value. And together with project gains, we therefore report an increase in value of 2.6%.

Stable interest rate and debt management in a very messy market. We report an average interest rate at the end of March of 1.7%, which is in line what we had at the turn of the year. Financially strong position with an LTV of 40% adjusted for our cash position of SEK 645 million. The real loan to value is down to 39%. We have a strong interest coverage rate of 5.1%. Our new credit facilities of roughly SEK 6.5 billion, a cash position of roughly SEK 645 million. And finally, a long fixed interest rate and capital tied up of 4.6 years.

All in all, we increased the owner's capital, the so-called net asset value by 5% in the first 3 months of the year. To simplify it, we can divide the results into 3 parts: earnings before changes in value, unrealized changes in value of real estate and unrealized changes in value of derivatives. Earnings before changes in value are lower compared to the same period last year. But then we should bear in mind that last year, we reported a one-off revenue of roughly SEK 30 million attributable to success in a damaged lawsuit to TL Bygg.

In addition to portfolio transfers that have taken place and are taking place, projects have been completed or are nearing completion and at the same time as we sold properties in Sickla in the middle of the previous year. We have 2 other things that I was going to pay attention to.

Property tax assessment has taken place in Sweden, which entails an increased property tax for the full year of roughly SEK 27 million in comparable portfolio.

Of that, SEK 16 billion is reinvoiced to our tenants, meaning a negative impact on our NOI full year of roughly SEK 11 million. Rising energy prices have not escaped anyone.

For us, this means higher energy costs of roughly SEK 7 million in the first quarter, of which SEK 5 million is reinvoiced to our tenants.

All in all, NOI growth by 4% of which like-for-like increases by 3% inclusive one-offs and 1.5%, excluding.

Changes in value. The second part. Unrealized changes in the value of properties. As I mentioned earlier, amounted to SEK 1.3 billion of which SEK 600 million constitutes project gains. The other major contributor was the yield requirement, which has been reduced by 6 basis points from 4.25 to 4.19. And this is mainly because we have lowered the return requirement of retail properties and resi. It is worth mentioning that in our valuation in Q1, we still have an inflation assumption of 2%. Today's inflation levels continue when the October indexes spicate this year, this should, of course, be reflected in the valuation at the year-end, all else being equal.

Financial stability. The third point is unrealized changes in value of derivatives with an average interest rate of 1.7% and a duration of 4.6 years. We are in a good position versus market interest rates and the curve that currently prevails. This in turn means that we get an over value in the derivative portfolio and thus, an unrealized revenue of roughly SEK 800 million in the first quarter.

Even more important to mention that the duration is the design of the due profile. 55% of the interest rate portfolio has maturities in 2027 or later.

Our balance sheet is strong with a loan-to-value of around 40% and even though we have already paid dividends for the full year and have 9 months of earnings left. And if we adjust for our large cash position of SEK 645 million, the loan-to-value is down to 39%.

Finally, liquidity. On the 12th of February this year, we issued a sustainable linked bond of about SEK 1 billion in MS market, characterized by high inflation figures and threats for which unfortunately then came true. We issued a 5-year bond of about 140 basis points, which with today's prices on screen can be seen as cheap.

During the same period bonds of roughly SEK 800 million had matured.

We have also called off the liquidity under an 8-year agreement starting in April at a very advertising price tag that was already locked in since earlier.

So all in all, we have unutilized credit facilities of roughly SEK 6.5 billion and additional SEK 645 million in cash, of which SEK 1.5 billion will be used for payment of the property Payment Center at the end of April.

All in all, the company is well positioned or rather equipped in the turbulent environment that we are in now.

Over to you, Annica.

[Annica Ånäs, executive]

During the first quarter, we invested SEK 463 million in our own development projects. We currently have 10 ongoing projects, where Live City and Bas Barkarby be completed during next quarter.

At the end of the quarter, we had ongoing constructions of SEK 6.5 billion of which SEK 3 billion remains to be invested. Of ongoing projects, SEK 5.4 billion are investments in properties developed for ownership with an estimated project profit of approximately 50% corresponding to SEK 3.1 billion of which SEK 1.7 billion have already been reported.

In addition, we have ongoing condominium construction corresponding to SEK 1 billion with an estimated market value of SEK 1.2 billion, which will be realized in connection with the -- when the project is completed.

During the first quarter, we made 2 investment decisions. One is for the upper secondary school in Slakthusområdet where we signed a lease agreement with SISAB of 6,000 square meters. The contract has a rental value of SEK 17 million per year and runs for 15 years. The investment amounts to SEK 320 million, and completion is planned for the second quarter 2026.

We have also decided on a refurbishment project in Hagastaden, [indiscernible] of 10,600 square meters. It's a complete renovation of the property and the project is expected to be ready for occupancy during the third quarter of 2025. And the rental value is estimated to SEK 43 million.

As I mentioned earlier, we have ongoing projects with the remaining investment of SEK 3 billion. In addition, we have planned projects with an investment of SEK 36 billion. So in total investments of SEK 39 billion. We expect to invest SEK 30 billion of this by 2030. And it is offices and condominiums that are our largest segment to invest in the future.

87% of the investments will be carried out in places in Stockholm, where we have an existing metro or upcoming metro in places where Stockholm has its natural growth. The investment is, of course, dependent on the letting work and development in the detailed plans, but our plan is that the investment rate will be increasing from year-to-year with a peak in 2026. However, there may be changes and some projects may be delayed.

Our plan is to do a double. By investing SEK 30 billion by 2030 and generating project profits of SEK 10 billion. We will double our property value to SEK 100 billion. and the net operating income to SEK 3 billion. This, of course, requires that we have the market with us with rentals, yields and investment costs.

Right now, there's some uncertainty in the market. We are seeing increased energy prices, increased inflation, increasing building material prices and the challenge with supplies of building materials, especially of concrete.

At the same time, the real interest rate is still low and Autumn be has stable finances. So the double-double plan remains. It will be implemented on land that we already own or land allocation that we already have. But then we need to adapt forward just as before to market condition and act wise decision. This is why a large project portfolio is an advantage. We can reschedule within the portfolio.

For example, we can postpone the development for condominiums in case the market declines and instead move on with commercial developments and vice versa. The shortage of certain types of raw materials means that we may have to bring forward some major renovation instead of new production, et cetera. A large project portfolio gives us flexibility, a flexibility that we will nature and use. As always, each project will be evaluated based on its conditions regarding both risk and return.

And by that, I would like to thank you for listening. If you have any questions, you can send an e-mail or call me or Ulrika.

Thank you so much, and goodbye.