Atrium Ljungberg AB

STO:ATRLJ B

Earnings Call Transcript 2022-Q4

[Annica Ånäs, executive]

Welcome to Atrium Ljungberg Q4 presentation. The heading of this report is Stability in Turbulent Times.

First, an update on our overall key figures. The property value at the end of the quarter was SEK 60 billion and the contracted annual rent, SEK 2.8 billion.

Offices is our largest segment with 68% of the property value. Retail stands for 20%. We focus on 4 -- Sweden's 4 biggest cities and Stockholm stands for 80%. Net day rate was 93% and increased during the year due to good net letting and the gearing ratio was 42%.

It has been a challenging year in the real estate market. In February, we launched our 2030 agenda, where we will invest SEK 30 billion up to the year 2030. And thereby, double our net operating income and property value.

To that end, we must also achieve our sustainability goals. The world around us has now changed in a rapid pace, and we're in the middle of an energy crisis, high inflation and rising interesting costs.

The goal to invest in profitable projects, build an attractive city and thus create shareholder value remains. However, the certain time shift may occur. But in the end, it depends on how the market and especially how employment and house prices in Stockholm develop.

Going into a recession, the risk for more termination than new contracts increases, but it's highly unlikely it will impact our delivery in 2023.

The risk of bankruptcies is always present, but we have mitigated the risk by having such diversified customer base. The focus here and then now is above all to improve earnings in management. We will have a major focus on costs going forward, generally, but specifically around energy.

Another action we have taken is to oversee our organization, and we have decreased the number of employees and consultants by 10%.

Although market interest rates will continue to rise, the interest rate durations we have selected means that this will only have a minor impact on us in the coming year.

Focus going forward is to follow our business plan and I see the employees that they are very committed to do so.

In the beginning of 2023, we also sold our property in Central Stockholm, Scotland, a SEK 1.9 billion deal, which gives us a better financial resilience going forward.

But now some focus on our delivery in 2022, starting with the rental market. In the first half of the year, we had a strong net letting. The third and fourth quarter has been characterized by a more pending situation, but the agreements we signed have been signed at very good levels. And we landed on a net letting for the fourth quarter of minus SEK 9 million, but were SEK 39 million is where we have terminated contracts for tenants due to upcoming projects. Primarily, it refers to the project in Söderhallarna, and I will come back to that later.

Net letting for the whole year, excluding contracts that we have terminated due to projects amounts to just over SEK 180 million, which I think is a very good number.

The 2 largest rentals during Q4 is the Swedish Chemicals Agency of 4,000 square meters in Chokladfabriken in Sundbyberg. The lease is for 6 years, and they will enter the premises in November 2023.

And the second largest is 1,200 square meters for Stockholm Region in Sickla, where the lease contract is 7 years, and they will enter their premises the 1st of July this year.

We have a well-diversified contract portfolio where our 10 largest customers amount for 20% of the revenue. Of this 20%, 8% is revenue from the state and municipality; 97% of our income, excluding housing parking, property tax and turnover base trends are linked to index.

Index for 2022 will increase our revenue 2023, with about SEK 165 million. The average contract period is 4.5 years. Offices are our biggest source of revenue with 54%. Customer durables and -- our second largest part of the revenue represents 70% of our total revenue.

Let's take a closer look at our retail portfolio. We have a very attractive retail portfolio with a good footfall in our 3 retail sites: Sickla, Gränby and Mobilia. Looking at the turnover in our shopping areas, we had a good performance in comparison with the overall retail market in Sweden. The Christmas shopping was all-time high.

If we look into the composition of retail actors in the areas, grocery stores, meaning food, Systembolaget, our liquor store in Sweden and pharmacies are goods that are basic in our lives stands for 40%.

The condominium market has been very cautious during the quarter. Selling apartments in new build is at a historical level, a low level and prices in Stockholm are down 14% from the top level.

We have 2 projects in production in Sickla and Nacka and Gränbystaden, where the total amount of sold apartments is around 50%. The project in Gränbyparken will be completed in Q2, Q3 this year; and the project in Sickla, Q1, Q2 in 2024.

The transaction volume in Sweden had a strong start 2022, but have shown quite weak numbers after the summer. The volume amounted to approximately SEK 220 billion which is a decrease of almost 50% compared to the previous year when several structural deals were carried out, but the number is aligned with previous years.

And what is clear is that the new financing costs have had an effect on the yield requirements. And therefore, we have done some adjustments in the quarter. Ulrika will tell you more about that.

But first, I'd like to comment again that we sold our property Skotten in the beginning of 2023, SEK 1.9 billion deal.

So now over to you, Ulrika.

[Ulrika Danielsson, executive]

There are 2 things in particular that goes up and down with a major impact on our income statement and balance sheet. These are interest rates and property values. Something we and the outside world have experienced in 2022.

As usual, it is interest rates that move first and then prices are underlying assets follows. But with that said, let's dive into the fourth quarter isolated, where we deliver a profit before changes in value of roughly SEK 282 million, equal to SEK 2.23 per share. It is 7% lower versus the same quarter in 2021, but then we had a large one-off of SEK 27 million from tenant moving earlier.

The NOI increases by SEK 37 million. Adjusted for the one-off just mentioned, the increase is SEK 64 million or 17%, where all parts of the business contribute management, project developments and transactions, but sharply rising market interest rates in combination with a debt volume that is roughly SEK 5 billion higher, our net interest rate income has also increased with SEK 64 million.

And in between, we have Central Administration, which has a positive one-off effect net in 2022, consisting of SEK 20 million in repaid pension premiums and roughly SEK 11 million in provisions for restructuring costs.

Higher ground rents as a result of, among other things, the acquisition of Palmfelt Center that is in 2022. And finally, results from projects and contracting activities that are roughly the same.

Non-cash items such as unrealized changes in derivatives and real estates are negative in the fourth quarter. The former due to movement in market rates since Q3 and the latter driven by higher market yields, but I will come back to that.

All-in-all, we delivered a profit for the full year 2022 of SEK 4.3 billion equal to SEK 9.34 per share, an increase of 15%, and this is the best result ever in absolute terms for Atrium Ljungberg's history.

If we look at like-for-like properties that have been in pure management for 2 years, we continue to increase our growth in rental income last quarter and went from 3.9% in Q3 to 4.4% now in Q4.

In full year, the increase is mainly explained by lower vacancies and increased cost for electricity and property tax, which we pass on to our tenants.

For the fourth quarter isolated, the explanation is mainly declining vacancies, which is also is visible in the improved occupancy rate.

Property costs in like-for-like increased by SEK 64 million or 10%, and the rate of increase is basically at the same level as in Q3.

Of the increase in electricity amounts to roughly SEK 30 million and property tax to SEK 22 million. The former increase is further charged with -- to our tenants with roughly 50% and the latter in its entirety.

The rate of increase in our revenue is higher than in our costs, which means improved growth in our NOI from 1% in Q3 to 1.7% in Q4. Thus, the NOI, the last quarter like-for-like is clearly the strongest during the year.

It is worth mentioning that Söderhallarna, which is a new decided redevelopment project that Annica will return to in the fourth quarter transition from office to project in our liners. And this sheet has not affected the development of comparable stocks or other key figures in general.

Total assets amounted to SEK 64 billion of which the major part, SEK 60 billion consists of properties. Investment properties are valued at an average price of roughly to SEK 59,000 per square meter with a yield of 4.35%.

During the year, we have net invested roughly 11%, equal to SEK 5.6 billion, divided into SEK 2.3 billion in already existing properties and projects, and SEK 3.7 billion in acquisitions. The LTV increased in Q4 by 1% unit, which is due to write-downs of our properties the last quarter by 2.4%.

The owners capital increased by 12% during the year, adjusted for dividends paid.

So to the valuation of our properties. As I said before, values go up and down, which we have certainly experienced in 2022. In the first half year, we saw a continued decline in yields, while higher interest rates and some credit crunch began to bite property prices in the second half of the year. However, some of the yield increase has been offset by the strength in cash flows, attributable primarily to the index outcome in October, but also positive net lettings.

This means that we delivered a decline in value in the last quarter of SEK 1.5 billion or minus 2.4%, but an increase in value for the full year of SEK 2.6 billion or 4.8%.

And what has happened then to our values the last quarter, we have continued to write up our values with SEK 1.1 billion, 2% due to strength in cash flow. On a full year basis, the cash flow driven increase in value is SEK 3.6 billion or 6%.

In yields that you could say peaked during the summer have continued upwards and the weighted average yield at the end of the period amounted to 4.35%, an increase of roughly 30 basis points since our lowest level in summer 2022 of which 20 basis points was taken in Q4 and 10 basis points in Q3. And the yield increased the last quarter entails a write-down of SEK 2.6 billion or 4.3%.

As usual, part of the portfolio is externally valued in Q4 roughly 35% and assumptions made in internal valuations are quality assured by an external third-party. And this makes us confident with the analysis that has been made and the outcome we now are delivering. And when market conditions change, I think it may be appropriate to clarify that portfolio change affects both reported changes in value that from our project profits and day 1 profits from transactions.

If we're clear for this, the value increase for 2022 is overall 5% for the offices, roughly unchanged retail and minus 10% for residential.

2022 has been an eventful year with major disruptions in global value chains and high inflation, reinforced by Russians invasion of Ukraine. Inflation rates of over 10% have been noted in many countries, including Sweden. The World Central banks have acted portfolio with interest rates rising at a rapid pace and reduced quarter 2 measures. This is also the case in Sweden, where an increase of 250 basis points has been implemented and more increases are expected in 2023.

The market is pricing in a policy rate of almost 3.5%, which decide other expense last published interest rate part in November, but much has happened since then in terms of both inflation outcomes and the ECB's clear communication on interest rate hikes.

The availability of interest-bearing capital and its pricing roughly follow the same part as the last time we stood high, but with some small positive signals. The Swedish bond market shows a falling trend in terms of credit margins, but it remains at high levels.

We have a feeling that investor interest has increased somewhat, and we get some proposal in both SEK and NOK, but we have chosen to wait. We have completed a sale in early 2023 that frees up liquidity and has no urgent need.

The short part of the capital market, the CP market has done quite okay last quarter. Whether this is temporary or not remains to be seen. The price tag for us right now is roughly 70 basis points for 3 months of lending over STIBOR. Both bank margins and volume are stable since Q3.

So from market to Atrium Ljungberg. We have had a high pace in our interest rate and debt management during the year to adapt to the conditions that the market gives us. If the first half of the year was about strengthening our liquidity reserve, the second half of the year has been more about nurturing liquidity and working with interest rate risk in order to be well equipped for 2023.

So what have we done? During the year, we provided liquidity partly to finance acquisitions and partly to increase our liquidity buffered in order to meet our maturities.

In Q4, SEK 900 million matured and in 2023 roughly SEK 2.4 billion is due, including CPs of SEK 1.1 billion.

In 2023, we carried out a major property sale and signed a new credit agreement of roughly SEK 1 billion. And that, together with our liquidity buffered at the end of 2022 of SEK 6.7 billion. We are well equipped to handle 2023 as well as 2024. So to the second parameter that goes up and down, the interest rate and thus our interest rate risk. We have an interest rate duration of 4 years, which has fallen slightly as time has passed. We have rearranged to closing the portfolio and further reduced the proportion of variable debt from 27% in Q2 to 20% in Q3 and now, 17% in Q4. Our average interest rate has increased from Q3 by roughly 10 basis points, which is explained by STIBOR's increase.

It is worth mentioning about our fixed income portfolio that the origins of loans occurred fairly evenly during the quarter. While the short leg of the derivatives have an emphasis towards the end of the quarter. And this means that STIBOR loans quickly during the quarter. There is a bit of a lag in our reported average interest rate at the time of letting roughly 10 basis points.

All-in-all, I would say, a debt portfolio that has not moving much since the previous quarter, diversified financing relatively long fixed income and capital tied up, only 17% variable and a good liquidity reserve, ensure that we can navigate through this storm while meeting the business need for capital.

But having said that, we can't relax since this is a long-term play. Over to Annica now.

[Annica Ånäs, executive]

So let's update you on our project portfolio. At the end of Q4, we had ongoing construction of SEK 9.7 billion, of which SEK 5 billion remain to be invested. Of ongoing projects, SEK 8.6 billion is investment in properties that are developed to own with an estimated project profit of 50%, corresponding to SEK 4.4 billion of which SEK 2.5 billion has already been reported.

Furthermore, we have ongoing condominium production of SEK 1.1 billion with an asset market value of SEK 1.3 billion, which will be reported as the projects are completed.

Here, you see 3 projects that we have completed during the year. Life City is a very, very successful project. 27,700 square meter lettable area and economic letting rate of 95%. I think it soon will be fully let.

Bas Barkarby, 24,200 square meters lettable area and an economic letting rate of 82%. Since one of the lettings to the school didn't go through since they didn't get the permission from the authorities. We are now changing the content to more health care facilities.

We have also completed our second condominium product, Konstharts, where the apartments were 100% sold.

We have a total of 10 ongoing projects, and I will update you on 2 important things that have happened in the fourth quarter.

First, Katarinahuset in Slussen. We won the legal dispute in the Land and Environmental Court where they confirmed the building rights. We now have on the top of the building. To be able to proceed and review permission is required in the Land and Environment Court of Appeal.

Another positive thing is that the digital plan gained force for the gymnasium school in Slakthusområdet in Stockholm.

During the fourth quarter, the Board decided on a new project. It is a refurbishment project in Södermalm, Stockholm, Söderhallarna. The building comprises 23,900 lettable area and it's mainly offices, but also an open area in the bottom floor with restaurants and other food suppliers. The investment totals SEK 1.3 billion and will be completed during 2026.

We are running a detailed plan and if we're successful, we will add an additional floor to the building.

As a reminder, Atrium Ljungberg has a big project portfolio, which will be carried out in the Stockholm area, where there are a subway today or will be one before 2030.

The investment in these areas is over SEK 30 billion and more than 600,000 square meters. The main investment will be offices but also condominiums.

The last thing I would like to point out is that the Board have suggested a dividend of SEK 5.30 per share to be paid out in 2 parts with 6 months apart. That means that we add another year of increasing dividends.

And over the last 17 years, the efficient increase is in average 8% a year.

And by that, we close our Q4 presentation. And if you have any questions, you can send an e-mail to me or Ulrika.

Thank you very much, and goodbye.