Atrium Ljungberg AB

STO:ATRLJ B

Earnings Call Transcript 2024-Q1

[Mattias Vahlne]

Welcome to today's quarterly presentation by property company Atrium Ljungberg, presenting the results for the first quarter of 2024. After the presentation, there will be a Q&A session.

So with no further ado, let me present today's speakers: CEO Annica Ånäs; and CFO Ulrika Danielsson. Please go ahead.

[Annica Ånäs, executive]

Thank you. The heading for this report is stable income from property management in a cautious rental market. I would like to start to summarize and highlight a few things from this report.

Our property portfolio looks quite like last quarter, with 80% of the value in Stockholm. The biggest segment, offices, stands for 71% of the total value and only 18% retail.

Our net letting amounted to minus SEK 13 million in the first quarter, including terminations on our side of SEK 8 million due to upcoming projects. Our profit from property management increased by 14%. And the like-for-like figure, net operating income increased by 8%, a very good performance.

We have ongoing projects, with an investment of SEK 7.9 billion, where SEK 4.6 billion remains to be invested. And of the projects being completed in 2024, the preletting is 91%.

As I mentioned in the beginning, we have a big focus on Stockholm, both in our existing properties and in our upcoming investments. The major areas are Hagastaden, Slussen, Slakthusområdet and Sickla, all areas where we have a subway in Stockholm or where there will be one in the future. I think we have a unique position in our locations.

Even if we are at the bottom of the recession and the vacancy has come up in the Stockholm, there is still demand for good-quality office space in location in greater CBD. We see the highest demand in Slussen and Hagastaden. We still have some quality discussions with potential tenants that, I hope, would be settled in this quarter. We see that cost efficiency and flexibility focus among tenants but also the trend that companies want to be in an area with a context. And I think our strategy in that sense is hand in hand.

Retail comprises 18% of the company's total property value and represents a large diverse range of tenants, which contributes to an important supply of service for our office tenants. We have a good performance in our retail hubs and have both higher turnover and footfall than last year. The mix in the retail hubs make them very resilient during tougher times.

The Swedish condominium market has shown a big portion of uncertainty due to higher interest costs and inflation. We now think we are heading towards brighter times since the markets expect interest rate cuts. During the quarter, we have sold a few apartments, and the sales rate was 74% in Uppsala and 56% in Nacka in the end of Q1.

As I already mentioned, net letting ended up at minus SEK 13 million and where we have terminated contracts of SEK 8 million due to upcoming projects. The biggest effect of termination in Q1 was Polestar leaving 3,800 square meters at Lindholmen in Gothenburg.

But we also signed several new contracts during the quarter. The 3 biggest ones are all in Hagastaden: GlobalConnect, 3,200 square meters; Price (sic) [ Pricer ], 1,350 square meters; and Leadstar, 1,000 square meters. GlobalConnect is leasing an office space where an existing tenant will reduce their space, with an effect that we will also receive compensation from that tenant since they are leaving the contract in advance.

We have a well-diversified contract portfolio, where our 10 largest customers account for 19% of the revenue. Of this 19%, 7% is revenue from state and municipalities. The average contract period was 4.6 years, and offices are our biggest source of revenue with 56%. Customer durables, the second largest part, represents 15% of our total revenue. And if we look at our maturity of leases for 2024, it's only 1% left of the total annual contract value, and 32% has its maturity from the year 2029 and after. And I think it's quite interesting that we only have 5 tenants over 10,000 square meters.

Let's take a closer look at our retail portfolio. I know I showed you this image last quarter as well, but I think it's very important to understand the mix in our retail hubs. Somehow, people tend to think that retail is only fashion, but it's not in our case. We have a wide range of supply in our retail portfolio. Fashion stands for 11% of the turnover in our retail hubs. I think we have a very attractive retail portfolio. And as I mentioned in the beginning, both footfall and turnover are higher than last year. Food, alcohol and pharmacies stands for 42% of the turnover in our retail hubs.

The businesses are performing the best in our shopping centers are pharmacy, low-price segment and groceries. And the ones that are struggling are electronics and home decoration and furniture.

And by that, I hand out -- I hand over to Ulrika to comment our financial performance.

[Ulrika Danielsson, executive]

Atrium, we started the first quarter with a 14% growth in income from property management. This growth is mainly driven by CPI uplift, continued good cost control, a new NOI from the project Katarinahuset and stable net interest.

The CPI uplift, combined with good cost control, means that the NOI in like-for-like increased by 8% in Q1 compared with Q1 last year. In addition, we have one-offs of SEK 10 million compared to SEK 2 million last year as well as increased NOI in our project portfolio, where Katarinahuset contributes more than what we lose through the last year's emptying of Söderhallarna. Overall, the company's NOI increased by 11% in the first quarter.

Compared with the turn of the year, the economic occupancy rate decreased by 1.8 percentage points or units, of which about half is a technical explanation. Katarinahuset, in which all customers have not yet moved in, has been transferred from project to office in our reporting this quarter. And this affects all property-related key ratios such as average rent, economic occupancy rate, valuation yield and portfolio mix. The other major explanation is a bigger office tenant in Gothenburg that moved out this quarter. And this can be seen in the city's occupancy rate, which is falling by 5 percentage points.

Administration costs are slightly higher than Q1 last year based on what we know today. This does not mean a significantly higher cost for the full year. It is more a matter of accrual between the quarters compared to the previous year.

And net interest is stable. A slightly higher average interest rate is mitigated by a lower average debt volume in the first quarter compared with a year ago.

The changes in value are virtually nonexistent net and is divided into 2 components: yield and cash flow.

If we take the first one, the yield, our view is that it has stabilized in the market for the time being. The slowdown in deflation rate, a belief in future interest rate cuts and good access to liquidity with falling credit margins as a result, mean that buyers and sellers are moving closer to each other. However, there may still be some individual corrections in combination with the fact that there may be a certain lag between the market's development and what happens in the company's earnings and balance sheets. We have not made any general yield change during Q1 but, instead, corrected in a city property in Stockholm upwards a few points, and this results in a decrease in value of roughly SEK 190 million.

The second component, cash flow, is constant in motion. How it develops is more property specific depending on the type of location, tenant composition, asset class, et cetera. Changes in cash flow can lead to both rises and falls in values, the latter mainly as a result of falling rent levels and rising vacancies, which often come in, in the wake of recession. In the first quarter, we had negative net lettings in our portfolio, which means negative changes in value but to a very small extent. On the other hand, time has passed, which is positive in the valuation. And thus we end up with a positive net figure of roughly SEK 180 million linked to the cash flow. And net is SEK 7 million in the P&L in the first quarter.

So based on our earnings, this first quarter and adjusted for dividends, we have increased our NAV per share by roughly 1 percentage. The financial risk is stable in the company, with a loan-to-value that is almost unchanged and an ICR and net debt-to-EBITDA that improved slightly while the liquidity buffer remains. So all in all, a good start to the year.

If we look at like-for-like portfolio, we have increased revenues and fall in cost, and that is a very good combination. The revenue increase of 5% is mainly connected to the CPI uplift, while the decrease in cost is due to falling electricity prices and continued good cost control in general. All segments performed well, with offices winning in the first quarter.

As you know, we have Katarinahuset, which contributes with an NOI of [ SEK 17 million ] in the first quarter. That is [ SEK 16 million ] more compared to a year ago. And at the same time, you also know that we have emptied Söderhallarna last year. And that means that we have SEK 7 million lower in NOI compared to a year ago. On a net basis, however, there is an increase in the project portfolio, which thus contributes to the total growth in the NOI in the first quarter.

Katarinahuset has been gradually moving in since Q2 last year based on retail leases and intended occupancy. Our assessment is that the rental income for this year will amount to roughly SEK 120 million in our income statement, including settlements, and that is comparable with SEK 44 million 1 year ago for 2023 as a whole.

The fixed income market has continued to be volatile and may continue to be so. But there are many more glimmers of light than before. As you can see, the market forecasters and the Riksbank expect interest rate cuts going forward. Everyone is probably in agreement on that. On the other hand, there are different views on when the reductions will come and how large or small they are, where the most aggressive forecast has a level of 250 basis points at the end of this year and the most cautious one, around 375 basis points. And the market's pricing here is around 300.

When it comes to access to liquidity, I said at the outset that it is good and that we are seeing declining credit margins. We feel that there is good pressure in the bond market. We have been active in the first quarter and thus felt the margin movements. Just after our Q4 report, which we released earlier this year, we issued a 3-year bond of SEK 600 million to a level of 150 basis points. About 3 weeks ago, we issued a 4-year bond of SEK 500 million to the same price tag. And that means that we are back to spreads that were before Russia's entry into Ukraine.

The CP market is also more alert. We have increased outstanding volume, which amounted to roughly SEK 2.5 billion at the end of the quarter, while the price tag also has been slightly lower, 60 basis points at the end of this quarter versus 65 basis points when we released the Q4 and 70 basis points at the turn of the year. So 10 basis points movement downwards during the first quarter.

When it comes to bank loans, we have not yet finalized any renegotiations, but we have ongoing discussions. And so far, there are no indications of any major upward movements for us.

Our financial position is stable with an almost unchanged LTV, while ICR and the net debt-to-EBITDA are improving somewhat as a result of strong earnings. Our average interest rate moves upward slightly from 2.5% to -- from 2.4% to 2.5% all in, which is mainly explained by the fact that we have refinanced a cheap fixed-rate bond in Q1 and increased the debt volume slightly, and new money is more expensive than old ones.

Our liquidity buffer amounts to roughly SEK 8 billion. And of course, part of this will be refinanced. But as I said earlier, we have very good dialogues with our relationship banks. And at the same time, the bond market has perked up. There is no doubt that access to liquidity at competitive prices is good for the company. And the company needs capital given its project opportunities.

Right, Annica.

[Annica Ånäs, executive]

Thank you, Ulrika. So let's update you on our project portfolio.

At the end of Q1, we had ongoing construction with a total investment of SEK 8.2 billion, of which SEK 4.6 billion remain to be invested. Of ongoing projects, SEK 6.9 billion is investments in properties that are developed to own. We have had an increase of investments in our projects due to price adjustments in constructions. We have mitigated cost of that with increased rents in new lettings. In addition, we have also increased the yield requirements in our projects as in all properties.

And today, we have a project profit of approximately 20%, corresponding to SEK 1.3 billion, of which SEK 700 million has already been reported. Furthermore, we have ongoing condominium production of SEK 1 billion, with an asset market value of SEK 1.2 billion. The project profit will be realized as the projects are completed.

On this image, you see our 9 ongoing projects and when they will be completed. Of the projects that will be completed in 2024, we have a prelet of 91%. In the beginning of the year, we decided to start the construction of the next residential block in Nobelberget, Sickla. This will be the fourth block of the total of 8. And it's the first that we will be constructed in wood. Interest in the residential in Nobelberget is high, and the first 2 blocks have been completed. And the residents have moved in, in the third block, will be completed by this summer. Construction will now begin on the fourth block.

Kulturarvet, which will consist of 80 condominiums distributed between 3 buildings. The total area will be around 8,800 square meters, with an estimated investment of approximately SEK 465 million. Kulturarvet is the start of Stockholm Wood City, the world's largest wooden city, which will be built in Sickla over the next 10 years. Stockholm Wood City will consist of 250,000 square meters of wooden frame building. And in addition to residentials, we will also include offices, retail and services.

And finally, a few words about the project portfolio going forward. We will develop 4 areas in Stockholm, where there is a natural growth of people. The potential investment is about SEK 40 billion, and all locations have a subway station today or will have one, at the latest, 2030. In Sickla, we are planning to add 250,000 square meters, with a total investment of SEK 14 billion. In Slakthusområdet, the Stockholm meatpacking district, we are also planning for offices and apartments with a total of 200,000 square meters. The total investment is SEK 11 billion. And Hagastaden and Slussen, part of Stockholm inner city, we have projects of more than 150,000 square meters and a total of SEK 9 billion.

And by that, I think we should open up for questions.

[Mattias Vahlne]

Thank you so much for your presentation, Annica and Ulrika, and we will soon start off the Q&A. But first, I want to remind equity analysts on the Team's call to raise their hand when they want to talk.

And I'll start off. So Annica, income of property management came in higher than market expectations at plus 14%. What are your comments?

[Annica Ånäs, executive]

Of course, I'm very happy and proud about the results that we have done this first quarter. I mean we are in the bottom of the recession, and it's tough times out there. So I'm pleased, I must say.

[Mattias Vahlne]

Okay. And with that, I would like to welcome John Vuong of Kempen.

[John Vuong, analyst]

In your report, you mentioned that demand in the service sector has decreased for office space. What have you noticed compared to, say, previous quarter? You're also saying that economic recovery should stimulate demand. So to balance that, what are your expectations for the coming year?

[Annica Ånäs, executive]

Well, when it comes to the net letting, as I'm saying in the report and also the last quarter that the discussion with the customer takes a long time. And that stays the same, I must say. And the discussions we had before Christmas, they are still ongoing, and that means that it's -- the positive part of that is that we haven't lost the discussion yet, or hopefully, we will sign a contract.

I am hoping for the Q2 to look better, but you never know what kind of the termination of the contract that will come. So we'll see what Q2 will look like. But we have a very good quality discussion ongoing. So that's the good part.

[John Vuong, analyst]

Okay. That's very clear. And then turning to your project, do you expect further starts this year? Or are you happy with your current pipeline?

[Annica Ånäs, executive]

Well, it depends on the lettings, I must say. We have a few projects in Slakthusområdet, for example, that we are having discussions. And if we set the negotiation, we will also start, but it's all about the letting.

[John Vuong, analyst]

Okay. That's clear. And I guess that depends also on the answer you gave to the first question.

[Annica Ånäs, executive]

Yes. But we also have one project in Slussen, and that's Mälarterrassen with the restaurants that we will start this year.

[Ulrika Danielsson, executive]

Yes, it's in the list.

[Annica Ånäs, executive]

Yes.

[John Vuong, analyst]

Yes. Okay. Clear. And then just on the unchanged valuation yield, could you provide a bit more color on this? I mean you're -- in your report, you mentioned that yield requirements have stabilized. What gives you comfort to make the statement? I mean, looking at the investment market, we haven't seen too many transactions that were debt funded.

[Ulrika Danielsson, executive]

But we are rather comfortable, and we talk to a lot of the values also. So you can use the transaction's volume base. The low transaction volume, you can have as a motivation that nothing has happened. But we don't only take that into account. We also know that there is a lot of dialogues out in the market. And then you have the obvious also that there is really a big change in access to liquidity. You have fallen credit margins in the market here in Sweden. You also have a common view on future lower interest rates. And also on inflation, just today, we have the statistics, that is more healthy, you could say.

And all that combined gives buyers, you could say, more predictability in doing business. So buyer and seller are, you could say, meeting each other much more than before.

[Mattias Vahlne]

Okay. And I'll just shoot one more question to you, Annica. We've talked a lot about the international interest of your project, Wood City. And now you also have been highlighted as a world-leading innovative company. What can you tell us about this?

[Annica Ånäs, executive]

Well, it is in the newspaper press company in the States that announced us to be one of the most innovative companies in the world. Of course, that's good news, I would say. And I think it's very much because of the real estate company, in history, is kind of conservative. And we're trying really to foresee things that we can do it differently when it comes to the sustainability part, and that's what we are doing in the coming years. And I'm really looking forward to that.

[Mattias Vahlne]

Yes, I believe so, fantastic. That was all my questions for you today, and good luck going forward.

[Annica Ånäs, executive]

Thank you very much.

[Ulrika Danielsson, executive]

Thank you.