Atrium Ljungberg AB

STO:ATRLJ B

Earnings Call Transcript 2019-Q4

[Annica Ånäs, Chief Executive Officer]

Welcome to Atrium Ljungberg's Q4 Webcast. The headline for this report is we are continuing along our chosen path and have prepared our organization for the future.Next page, please. As I start, I would like to update you on our key ratios. The property value is now SEK 49 billion with contracted annual rents of SEK 2.6 billion. Offices stand for 50% of the total contracted annual rents. The letting rate is 93% due to 2 projects, Sickla Front II and Entrehusen in Granbystaden Building 3 being completed but not yet being fully let. And the fact that properties in Slussen and Sickla are being prepared for reconstructions.Next page, please. Atrium Ljungberg has made some major strategic changes over the last few years. Among other things, we have sold all our properties in location outside Sweden's 4 big cities, and properties where we had no opportunities for long-term development in line with our vision. And we have sold retail in favor of more office properties.Next page, please. The last decade, we have increased our property value by 160% and massively increased our project portfolio from SEK 5.5 billion to SEK 28 billion. During the years, we have also refined our urban development strategy. Due to a much stronger project portfolio we have, during 2019, recruited new employees, mainly within business development and project leaders, to be able to keep our investment rate of SEK 2 billion per year in the long-term perspective for our own development projects.Next page, please. During the fourth quarter 2019, the major event was the lease agreement with Nordic Choice Hotel in Sickla for an additional 3,000 square meters, meaning that the hotel project Tapetfabriken in Sickla now is fully let. Except for this letting, we have signed several other lettings in Sickla Front II and in Curanten in Sickla. We decided to start the project Sickla Galleria Phase IV to add 200 parking spaces and additional 3,000 square meters of retail. This project will, of course, have an effect on the turnover in the shopping galleria for this year and next year until the project is completed.Next page, please. In the beginning of 2019, we finalized our agreement with Stockholm Municipality in terms of the meatpacking district, Slakthusomradet, and we took possession of the first 50,000 square meters of existing properties. On the transaction side, we also sold our residentials in Kista. On the construction side, we started 2 projects, Life City in Hagastaden and Bas Barkarby in Jarfalla. And finally, we entered the EPRA index, which has had a good effect on our liquidity in the share.Next page, please. The economic outlook on the market remains good, but growth has started to slow down in Sweden. The transaction market for the year 2019 was very active with a record volume of approximately SEK 219 billion and an uplift of 35% from the year before. The yields on the office segment has continued down, but we see a stable yield for our retail hubs.Next page, please. Rental levels for offices continue to rise, particularly in Gothenburg and Uppsala. Although the top rents in Stockholm CBD have stabilized, the rents in the other parts of the market to continue to rise.Next, please. Interest in the development of the retail segment remains high. As I have mentioned before, we are seeing a structural change in the industry, which is having an effect of the profitability of some stores. Our retail sites are in growth areas on strong subsidiary markets with a high consumer footfall. We have reported an increase of total sales for our retail sites of 3.3% in 2019.Next page, please. If we look a little closer on the performance on the retail side, we see that furniture and home device performed well, clothing and cosmetics show positive numbers, but shoes are struggling. We had some bankruptcies or Chapter 11 companies the last month in Sweden, [indiscernible]; where we have had one establishment in our properties; and also Teknikmagasinet went bankruptcy, but Teknikmagasinet are now sold to another stakeholder. We have 3 companies in Chapter 11, and those are Twilfit, Indiska and Accent, and we will have a follow-up on this the next quarter. Next page, please. The prices on tenant-owned units in Atrium Ljungberg's subsidiary markets remains stable or shown a minor increase. Sales of the apartments in the first district in Nobelberget in Sickla have really taken off, reaching a sales level of 59% by the end of December and 65% today.And now I will hand over to our CFO, Martin Lindqvist.

[Martin Lindqvist, CFO & Business Area Director of Business support]

Thank you, Annica. We go to next page, and there we find net leasing, which amounted to minus SEK 8 million in the quarter, of which minus SEK 10 million was related to the vacating in preparation for project at Katarinahuset at Slussen in Stockholm. If we look at the accumulated figure, the net leasing for the year was minus SEK 82 million, and out of the SEK 82 million, Katarinahuset at Slussen stands for minus SEK 85 million.Next page, please. We read in the income statement for the year. We can see that rental income increased by 6.9%, of which 5.9% is in the like-for-like portfolio. The net operating income increase amounts to 5.2%, of which 3.6% is in the like-for-like portfolio, and that figure is excluding the effect of the change to IFRS 16. Central administration amounted to SEK 80 million, which is an increase of SEK 7 million, and this is attributable to investments in the company's future growth, among other things within marketing and IT.In the project and construction operations, TL Bygg has a deteriorating gross profit versus last year due to certain project delays. However, TL Bygg has worked successfully with its order backlog, which will affect the figures going forward. Net financial expenses last year was SEK 360 million, excluding leasehold fees, and the average interest rate at the end of the year was 1.6%. Value changes for the properties for the full year amounted to 5.4%, of which approximately 40% is attributable to increased operating nets. Tax for the year increases compared with 2018. In 2018, a new tax rate was adopted, which does have a positive effect on deferred tax during the comparison period.Next page. Rental income in the like-for-like portfolio increased by 5.9%. The vacancy rate improved slightly compared to Q3 and now amounts to 6%. Costs for the full year have been affected by certain customer losses that we have previously reported and also by new concepts, such as Leveriet, and increased cost of property tax. Next page. If we break down the development of rental income in the like-for-like portfolio in each segment, we see an increase in the office properties of 7% and an increase in retail properties of 5%. The 5% in retail properties includes SEK 16 million, which comes from the southern entrance extensions at Granby. If we exclude those SEK 16 million, the development in rental income in the retail segment like-for-like amounts to 3.2%.The gross margin for the quarter amounts to 65% and the full year to 67%. The gross margin in 2019 is slightly lower than the gross margin in 2018, and it's related partly to the customer losses we have reported, partly to the fact that we have sold properties with relatively higher gross margins and acquired properties with relatively lower gross margins. Furthermore, we have prepared the organization for future growth.Next page, positive one-off effects in 2017. Net sales of properties in 2018 and vacating in preparation for projects in 2019 mean that profit before changes in value has remained stable at around SEK 1.2 billion over the last 3 years, however, with a reduced loan-to-value ratio, which is now below 42%.Next page. Investments for the year amounted to SEK 1.8 billion, which is slightly below the target of SEK 2.0 billion, but slightly higher than the latest forecast of SEK 1.7 billion.Next page. Unrealized changes in value amounted to 5.4% during the year, of which 40% is attributable to increased operating nets.Next page. A reminder of how the assets are distributed in the balance sheet. Atrium Ljungberg's total property portfolio is divided into the lines investment properties and development properties. Also note that the line leasehold rights of SEK 1.3 billion has been added, both on the asset side and on the debt side in 2019 related to the IFRS 16 change.Next page. The loan portfolio has been relatively stable over the past 3 quarters, and I think it's very gratifying that green financing now amounts to 37% of the total portfolio.Next page. Loan-to-value ratio amounts to 41.7% and the average interest rate to 1.6%. The average fixed interest term is 5.4 years and the average capital commitment term is 4.3 years.Next page. The forecast for earnings before changes in value for 2020 amounts to SEK 1.2 billion. The vacating in preparation for projects at Katarinahuset and the sale of the residential portfolio in Kista will contribute to limit the growth in earnings for 2020. In addition, there are relatively few large projects with planned completion in 2020. The forecast for investments amounts to SEK 2.4 billion for 2020.Next page. The Board's proposal for dividend amounts to SEK 5 per share. And if the AGM approves this level, the historical dividend trend will look like, on the next page, where we see that Atrium Ljungberg has never lowered the dividends since the IPO in 1994.Next page. Atrium Ljungberg delivered on all financial targets in 2019, except for investments in owned properties where the outcome was SEK 1.8 billion against the target of SEK 2 billion. The deviation versus the investment target is expected to be compensated already in 2020.Next page. Most of the goals for sustainable enterprise are set for the year 2021, and we show here how we are moving towards those goals. In terms of employee index, we reached the target in 2019 for the seventh consecutive year. Good news, Annica. Back to you.

[Annica Ånäs, Chief Executive Officer]

Yes, thank you. Then a few words about the project portfolio on the next slide. We have a large and interesting project portfolio that enables investment of approximately SEK 28 billion, where SEK 3 billion is for confirmed projects. If we're looking at potential projects of SEK 25 billion, these investments will mostly be in Sickla, in Nacka, Slakthusomradet in Stockholm, in Granbystaden in Uppsala and in Slussen in Stockholm, and where offices represent the biggest kind of investments. Our product portfolio guarantees the company's continued growth. And due to the fact that we have a great amount of future investments, we increased our investment target to SEK 2 billion in February 2019.Next page, please. SEK 23 billion worth out of our project portfolio are situated near to existing or future underground station in the Stockholm area. Rail-based public transport is becoming more and more important as urbanization increases. It is apparent that office properties with direct underground links have rent levels approximately 30% higher than equivalent office products just 1 kilometers further away. Our future investment in municipalities with strong growth are also creating long-term security in our business.Next page, please. If we look at our timetable for confirmed projects, we see that we have some projects that will be completed in 2020, but the bigger projects will be completed in 2021. So 2021 is the year we will see a positive net operating income effect from project completion.Next page, please. Let's look closer to our project portfolio, starting in Sickla. Sickla is one of our most prioritized area with a large part of our future project portfolio. Intensive development work is currently underway here to make Sickla an extension of Stockholm's inner city. We have landed a new vision for the future development, and we are actively working with the municipality to start a new detailed planning work for Sickla during the year to create a dense urban environment with more offices and housing. The construction of Curanten in Sickla is underway, and we've become a health care destination with stores, cafés and restaurants on the ground floor. The project comprises total of 11,500 square meters, which includes 8,000 square meters for health care. Occupancy is planned for the end of this year.Next page, please. Another project in Sickla is Tapetfabriken. This is a hotel that will be next to Marcusplatsen. The lease with Nordic Choice Hotel was expanded by 3,000 square meters, which means that the hotel will accommodate a total of 200 hotel rooms and a lobby. The hotel will be completed in the spring of 2021.Next page, please. At Nobelberget in Sickla, we will build a total of about 500 condominiums. We have launched sales for 68 apartments in the first phase. As I mentioned earlier, we have now sold 65% of them. Completion of the project is in the end of this year.Next page, please. In Granbystaden, we have completed 2 buildings of rental apartments, and this year, the final building will be completed. This means that we'll be created a total of 200 rental apartments in the area and the wonderful square next to the shopping center. Several office tenants have moved into the ground floors of the buildings and more are planning to move in.Next page, please. We have also decided to continue with rental apartments in the area, Parkhusen in Granby district 1 comprises 44 rental apartments with commercial premises in the ground floor. The building permit is now in place, and is scheduled for completion in the first half of 2021.Next page, please. In Mobilia in Malmö, as you know, we are adding 71 rental apartments and cultural activities on the site. There will be a 4DX cinema, but also a cultural center for children Funnys Aventyr, which is equivalent to Junibacken in Stockholm. It will open this year. Next page, please. In September last year, we carried out a symbolic groundbreaking event for the Life City project in Hagastaden. Our ambition is -- for this building is to be the clear choice of meeting place for everyone working in the life science segment in Hagastaden. The major tenant will be academic work. The property is in the emerging life science cluster, close to Karolinska Solna. We have started the construction on already -- with a fairly critical casting work over the traffic ramp that runs through the building. Academic work will move in, in December 2021, but the project will be fully completed during the spring 2022. Next, please. Our project in Bas Barkarby in Jarfalla is under construction. The first phase comprises 24,000 square meters and includes an upper secondary school, culture, sports and businesses. The major tenant is Jarfalla municipality of 11,000 square meters and the project will be completed in the spring 2022.Yes, and by that, we will close our Q4 presentation. And if you have any questions, you can send an e-mail to me or Martin. Thank you, and goodbye.