Atrium Ljungberg AB

STO:ATRLJ B

Earnings Call Transcript 2022-Q2

[Annica Ånäs, executive]

Welcome to Atrium Ljungberg Q2 report. The headline for this report is strong net letting in uncertain times.

As a start, I would like to update you on our key ratios. The property value was SEK 60 billion; contracted annual rent, SEK 2.6 billion; loan-to-value ratio of 41.6%. And the property value in Stockholm stands for 79% and distributed on the different segments. And we see that office stands for 68% and retail, 20%.

There are 2 different situations currently facing the property business. On the one hand, many major property deals are being carried out, and letting is very high level. This reflects our report, with a good net letting of SEK 96 million for the first half year, changes in value of SEK 4 billion, of which SEK 1.2 billion is project profits. On the other hand, we are seeing the highest inflation figure for a long time, with rising energy and material prices, along with higher financing costs. We delivered operating income growth in like-for-like of 1.3% and the profit after tax of SEK 4.9 billion.

For the second quarter, the profit after tax is SEK 3 billion, the best quarter ever in Atrium Ljungberg history. And with the SEK 6 billion in net credit facilities to have good liquidity preparedness despite large transactions in the quarter.

Another important thing to highlight this quarter is the fact that I have strengthened the management team in Atrium Ljungberg by employing a business area director. Andreas Malmsäter starts working at the end of August and comes most recently from Fabege, where he worked as Head of Leasing.

Sales in the rental market have continued at a high level, with the good letting work has continued. And the net letting for the first half year was SEK 96 million, of which SEK 52 million was for the second quarter. But then we have to take in consideration that we have terminated contracts due to upcoming projects of SEK 28 million.

There have been most activities in the soft office segment, but for -- both for lettings and terminations. Last quarter, I communicated that we would have to continue to terminate contracts in Medborgarplatsen, with an estimated effect up to SEK 50 million. During the second quarter, we have taken an effect of SEK 15 million of these, but the rest of SEK 45 million will likely be postponed to next year.

Here, you see examples of 4 major lettings in Q2, where the biggest one is for a high school in Slakthusområdet, 6,000 square meters. Except for these 4 leases, we also signed almost 2,000 square meters for the architect Tengbom moving to Hagastaden.

If we look a little closer on our contract portfolio, the 10 biggest customers stands for 19% of the total contracted annual rents, and of which 9% is rent from government and/or municipality-owned operations. Our single largest customer is Ericsson in Gothenburg and stands for 4% of our total contracted annual rent.

Overall, we have a large mix of different customers in different segments, which provides a good spread of risk. And finally, 97% our contractor annual rent is linked to index, excluding property tax income from rental apartments and garage.

The housing market is now slowing down as an effect on increasing financing costs, high inflation and a tough stock market. During the second quarter, we see a decrease of 7% in prices in Sweden. But on 12 months perspective, we have a positive number on 2%. In the Stockholm market, we also see a drop the last quarter of 7%.

We have 3 ongoing condominium projects: 2 in Sickla, where one is sold-out and will be completed in Q3; the other 2, Kulturtrappan and Nobelberget in Sickla, and Blomsterkungen in Uppsala are ongoing. At the end of the quarter, sales rate was 60% in Uppsala and the booking rate, 56% in Sickla.

I would like to give you a reflection on the condominium market in a historical perspective. The last 2 crisis when we saw a big drop in market in 2007 and 2017, the decline was -- in prices lasted 8 to 10 months, and the price were back in the same level 33 to 36 months later.

The transaction market still delivers high turnover but has decreased by 10% to SEK 117 billion for the second quarter. The numbers of transactions is also slightly fewer. The largest segment has been logistics, followed by housing.

Despite increased financing costs, the interest to invest in real estate in attractive markets has been good, and this has been done at very high levels. And you can see that this reflects in our valuation of properties. But how the next half year will look like is uncertain. Time will tell.

During the second quarter, we took possession of 2 acquired properties: Palmfelt Center in Slakthusområdet and Blästern 15 Hagastaden. Together, the number of square meters amounts to over 50,000 and contracted and rent to over SEK 180 million. The investment totals SEK 3.9 billion.

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

[Ulrika Danielsson, executive]

One quarter at a time but with a steady gas far ahead. That's how I would like to describe the situation right now in order to navigate our way through the time we are in. It is our reality and many with us.

In the second quarter, in isolation, we delivered a profit after tax of roughly SEK 3 billion, corresponding to SEK 24 per share, the best result a single quarter in our history. If we add to the first quarter, the result lands on SEK 4.9 billion. The delivery can be attributed to increased NOI; project gains from Life City, Bas Barkarby and Katarinahuset; increase in the value of both real estate and derivatives. But if we adjust for changes in value, the result decreases by SEK 133 million, which is due to 3 things.

TL, our subsidiary, had success in a dispute last year, meaning a one-off of roughly SEK 30 million. We delivered profit from the court's deal of SEK 91 million in the second quarter of last year. And those 2 together, SEK 121 million, we do not have the first half of this year. To this, we add a third factor, the net financial, which increased the second quarter isolated by SEK 38 million compared to the first quarter this year. And that is explained by lower capitalized interest rate of SEK 8 million due to Life City and Bas Barkarby being completed, higher debt volume of roughly SEK 3.5 billion in combination with new funding that we raised in mid-April in order to build up the liquidity buffer for acquisitions lately made in the quarter. And that resulted in increased interest rates of roughly SEK 15 million in the second quarter.

Higher interest rates in both variable rates and new swaps, smaller volume in the CP market and some one-off items increased the total net financial items by SEK 50 million, of which higher interest rates stands for 7. So if we sum all this up, will add in the result of SEK 4.9 billion the first 6 months of this year.

Rental income in like-for-like increased by 2.3%, with indices completed for negotiations and recharging of higher property taxes and electricity contributing while higher vacancies dampened growth, basically the same development as the first quarter. Cost in like-for-like increased by 4.6%, which is mainly attributable to higher property taxes and costs for electricity, which in total increased by SEK 25 million, of which SEK 18 million is passed on to tenants. As a result, the NOI in like-for-like increased by 1.3%.

In addition, we have completed projects the last 12 months that contributed positively. Worth mentioning is that Life City and Bas Barkarby had a successive move in during the year. And in the outcome as of Q2, roughly 35% of contracted annual rent has impacted our revenues. And this, together with transactions, may -- gives an increase in the NOI with SEK 54 million or 7%.

Our balance sheet is strong, with the property value, including development properties, of roughly SEK 60 billion, where the investment properties are valued at an average value of SEK 60,000 per square meter, corresponding to an average yield of 4%. The LTV amounts to 41.6% as of the end of June. But then we should take into account that we have already paid all the dividends and have 6 months of earnings left. The NAV lands at SEK 277 per share and growth by 15% the first 6 months, adjusted for dividends.

Changes in value amounting to SEK 4 billion equal to 7.4% increase the first 6 months, of which 4.8% units in the second quarter. This can be fairly evenly distributed among project profits of SEK 1.2 billion, lower yields of roughly 16 basis points, of which 10 basis points in the second quarter. If the first quarter's decrease was attributable primarily to retail, the second quarter is attributed primarily to offices in Stockholm. Improved cash flow that simplified can be distributed into 3 components: higher rents, lower vacancies, indices and time. So overall, big numbers in a market that has got different rules of the game purely in terms of financing but 1 quarter at a time.

I also want to take this opportunity to draw attention when and if we are talking about rising market yields, we also must remember stronger NOIs. If we get an index or CPI lift of 7% in October, it means everything else equals a value increase of 7%, which, in that case, should be mitigated by increased yield requirements. In our portfolio, roughly speaking, it will be offset by a yield increase of 30 basis points.

The world's central banks are focused on vigorous inflation control through increased interest rates and reduced quantitative measures. The Riksbank in Sweden has raised the policy rate by 75 basis points this year so far. And their own forecast is that the interest rate will reach 2% at the beginning of 2023. The 10-year swap rate, which was 97 basis points at the beginning of the year, was quoted as high as 315 basis points in June and at the end of this quarter, 280 basis points. And as we speak, it says roughly 250 basis points in the screen.

The world's central banks are focused on vigorous inflation control through increased interest rates and reduced quantitative measures. The Riksbank in Sweden has raised the policy rate by 75 basis points this year so far. And their own forecast is that the interest rate will reach 2% at the beginning of 2023. The 10-year swap rate, which was 97 basis points at the beginning of the year, was quoted as high as 315 basis points in June to end at 280 basis points at the end of Q2. And at the time of this writing, it says 250.

In addition to the increase in volatility of interest rates, conditions on the Swedish capital market have gradually worsened during the year, and activity has slowed down. The short part of the capital market, the CP market, has had cautious investors, which has led to higher prices and lower volumes. For example, 3 months maturity, the price has gone from about 25 basis points in the beginning of the year all in to 120 basis points. Of course, both lower volume and increased prices affect our net financial items. The longer part of the capital market, the so-called bond market has had a strong development upwards. In the secondary market, the credit margin for a 5-year bond for us is priced at 350 basis points, which is an increase with 230 basis points from the turn of the year.

How then have we navigated in an environment like this? We actually try to keep pace and provide liquidity in order to maintain our liquidity buffer despite 2 major acquisitions in the second quarter. We take the cost for a little bit too much liquidity when the financial market is like it is. We do not know how the next coming 12 months looks like. We have been active in the bond market until mid-April when we made issues, a total of SEK 2.8 billion at different maturities where, among other things, a 5-year bond was closed at 800 -- 180 basis points, expensive by historical standards sheet compared to today's pricing.

In addition to new bonds, we have also added new credit facilities in banks and renegotiated existing ones. We feel that the dialogue is good and constructive with all our relationship banks and appreciate that we get the opportunity to use our framework for sustainability-linked financing that became public earlier this year. What is not visible in the picture is that we have reduced outstanding set, CPs and made some new swaps to get the duration out somewhat as the debt grows.

So with a diversified debt portfolio, unutilized credit facility of roughly SEK 6.5 billion, a capital tied up of 4.6 years, a fixed interest rate duration of 4.1 years, we are well equipped in rather messy financial market we are in.

Over to you, Annica.

[Annica Ånäs, executive]

During the first half of the year, we invested SEK 857 million in our own development projects. We currently have 9 ongoing projects, if you consider Life City and Bas Barkarby as completed. Overall, we have good progress in our projects, but I would like to highlight 2 things. In Katarinahuset, we have applied for an extension. The building permit has not been approved since the county administrative court said no due to the subjective perception of the design of the extension. We will appeal to the land and environmental court.

In Stockholmshuset, in Sickla, we have a delay of 12 months since building of the underground line has been more complex than expected. This means that we now have a completion planned for Q4 2024.

At the end of the quarter, we had ongoing constructions of SEK 6.6 billion, of which SEK 2.8 billion remains to be invested. Of ongoing projects, SEK 5.5 billion are investments in properties developed for ownership, with an estimated project profit of approximately 50%, corresponding to SEK 3 billion, of which 2 have already been reported. In addition, we have ongoing condominium construction, corresponding to SEK 1 billion, with an estimated project profit of SEK 200 million, which will be realized as they will be completed.

As I mentioned, we have 2 completed projects in Q2, Life City and Bas Barkarby. They total up to 52,000 square meters, with a rental value of SEK 182 million, 2 very good projects with a total investment of SEK 2.5 billion and the project profit of SEK 1.8 billion. Economic letting rate for the end of the quarter was 95% for Life City and 88% for Bas Barkarby.

During the second quarter, we made 2 investment decisions: 1 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. Completion is planned for the second quarter 2026.

We have also made a small but important investment decision. It's SEK 120 million for reconstructions of the property in Slakthusområdet in the meatpacking district. We have also made one small but important investment decision. It is SEK 120 million for reconstruction of 100 properties in Slakthusområdet, the meatpacking district. It is the part where the facility will be used as a club and music venue, which is an important piece of the puzzle for making an attractive for upcoming office establishments in the area. Contracted annual rent is SEK 5 million, and the space is fully let.

As I mentioned earlier, we have ongoing projects with the remaining investment of SEK 3 billion. And in addition, we have planned projects, with an investment of SEK 36 billion, so a total of SEK 39 billion. 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. Here, you can see our 4 areas in Stockholm where we'll have the largest investment: in Sickla, SEK 12 billion; Slakthusområdet, SEK 10 billion; Hagastaden, SEK 7 billion; and Slussen, SEK 2 billion.

There is a lot of uncertainty in the market right now. We are seeing increased inflation, increased energy prices, increased building material prices and increasing financial costs. It is very likely that we will face some challenging years ahead. It is times like this I'm glad to lead the company that adopts a long-term healthy strategy.

As a company, we are in a strong position on markets that will be attractive over time. The most important issue for us is the way that we -- labor markets, and in particular, employment develops in Stockholm in the coming years. Does this mean that the double-double strategy for Atrium Ljungberg will be laid -- will be delayed? The future will tell. We cannot influence the world around us, but I'm going to work with my talented colleagues to make smart decisions that will enable us to manage the current world situation as effectively as possible.

And by that, I would like to thank you for listening. And if you have any questions, you can send an e-mail to me or Ulrika. Have a great summer. Thank you, and goodbye.