Atrium Ljungberg AB (publ) (A1A0.F) Earnings Call Transcript & Summary

Welcome to this year-end presentation for 2025 by real estate company Atrium Ljungberg. Presenting today is CEO, Annica Anas; and CFO, Anna Jepson. And by that, please welcome, Annica Anas. Go ahead with your presentation.

Thank you very much, Mattias. So the headline for this report is Completed Projects Drive Rental Growth. So let me begin by summarizing the key developments this quarter. Overall, I'm pleased with our delivery in 2025, given the challenging market conditions we have experienced. Our net letting amounted to minus SEK 12 million in the fourth quarter. I had actually expected a positive figure, but several large lease agreements continued to -- into the new year, and we also received one late and unexpected termination, a municipal administration in Palmfelt Center in Slakthusomradet, approximately nearly 4,000 square meters. While unexpected, it is actually -- it accelerates our plans for the future project in the property. For the full year, however, net letting is positive at SEK 5 million. And when including the contracts we have terminated in preparation for upcoming projects, the figures amounts to SEK 12 million. Net operating income in the comparable portfolio decreased by 2% in the quarter, but increased by 1% for the full year, which is encouraging given the tougher market environment. Income from property management decreased by 1% in the quarter. Market yield requirements remain unchanged, but we report negative value development in the portfolio. This is driven partly from the outcome of the 2025 indexation and lower inflation assumption for 2026 and partly by slightly weaker cash flows resulting from higher vacancies in our management portfolio. We invested SEK 2.9 billion during 2025 and the property value amount to SEK 61 billion at year-end. We currently have ongoing projects representing SEK 9.1 billion in investment, of which SEK 4.7 billion remains. The project was completed during the year, PV Palatset in Hagastaden, gives us 10 ongoing projects, including 6 in Slakthusomradet, 2 on Sodermalm and 2 in Sickla. And if we look at Atrium Ljungberg in brief, it looks very much like the last quarter with 80% of the focus and value in Stockholm and then we have 66% offices and 29% retail. And the economic letting was 89%, and we see the LTV at 42.5% in the end of the year. A few words about the market. The leasing market is showing signs that the rise in vacancies may have reached its peak, even though supply still exceeds demand at present. The development suggests a gradual return to stability as economic conditions begin to improve. During the second half of the year, we observed steadily increasing interest in the office premises in our portfolio and the number of ongoing dialogue is significantly higher than the same period last year. Many of the businesses we meet report a great focus on their office environments, either to strengthen the employee experience or to adjust their space to new conditions. Above all, we are now seeing a clear sense of determination in these dialogues, something that was missing during earlier more cautious quarters. I can say that from a broader perspective, we also meet modest but clear signs of improvement. So we can now look at the most significant lettings we did during the quarter. Liljeholmen emerged as the strongest performer this quarter with 3 major lettings, totaling close to 3,000 square meters, and we signed ForMotion, Doctors Without Borders and Leica Geosystems. Hagastaden still shows a big demand, and we had a letting also for a healthcare operator in the quarter. We had hoped to finalize 2 additional leasing in Soderhallarna before year-end, but negotiations are still ongoing. We remain hopeful that contracts will be signed shortly. We have also signed an additional lease with a restaurant in Malarterrassen, where 4 out of 6 restaurants now are confirmed, and the latest is also a very known and famous restaurateur. If we look at the customer base, a brief reminder regarding the tenants that we have. So we have a highly diversified contract portfolio with our 10 largest customers according for 21% of the total contract value. Of that, 9 percentage points represent government and municipality tenants. The average lease term is now 5 years. Offices are our largest revenue source at 53%, followed by retail at 20%. Looking at our lease maturity structure. The potential earnings impact for 2026 amounts to SEK 152 million, while the exposure from contracts that are turnable during the year amounts to SEK 546 million and can have an effect on our net letting. If we look at our retail portfolio, it's a very broad and well balanced. Fashion accounts for 13% of retail sales; while groceries, alcohol and pharmacies represent 40% of the turnover in our shopping centers. We continue to see a positive trend in turnover in our retail centers with the market increase toward the end of the year. And with that, I would like to hand over to our CFO, Anna.

Thank you, Annica. So let's review the numbers for the final quarter in some more detail. Rental income reached SEK 760 million in Q4, and that represents an increase of 3% compared to 2024. And this growth is mainly due to the completion of another project, PV Palatset in Hagastaden where the economic -- the Swedish economic Crime Authority moved into 10,000 square meters in mid-October. And in addition, we received one-off compensation totaling SEK 24 million, which is SEK 12 million higher than last year. And the reason for these one-off compensations is mainly that the reconstruction of Convendum was finalized and the 2 tenants in Hagastaden vacated their premises. We have, however, secured new tenants for most of these areas, ensuring continued occupancy. On the cost side, property expenses increased by 3%, mainly due to additional costs from completed projects. But we also saw a slightly higher customer losses in Q4. Customer losses were up SEK 3 million, which could be attributed to a couple of restaurants. As both revenues and costs increased by 3%, operating surplus rose by the same percentage. The surplus margin for the year stands at 71.8% and that's unchanged from last year, and that is despite the decline in the occupancy rate, which is now at 89%. But thanks to strong cost control throughout the year, we have managed to maintain this operating -- this surplus margin. Net financial items are 9% higher than last year, reflecting our adjustment to the higher interest rate environment. But we are now approaching quarters where this adjustment has been fully implemented. The average interest rate, including commitment fees, has remained constant at 3.2% for half a year now, although there is still a difference of about 25 basis points in Q4 compared to last year. And overall, profit from Property Management amounted to SEK 311 million in Q4, which is 1% lower than last year. Moving on to property values. We can see that the average yield has remained stable at 4.7% throughout the year and property values have been almost unchanged with the downward adjustment of 0.1% over the year. Nevertheless, we have seen movements in property values every quarter, and Q4 was no exception. And property values were adjusted down by SEK 369 million in Q4, mainly due to index effects. The October index for 2025 was low at 0.92%. And with the declining inflation, the community or property valuers have revised down the index assumption for 2026 from 2% to 1.5%. Net letting in the quarter also had an impact of property values. On the positive side, however, we recorded project gains of SEK 22 million in the quarter and SEK 127 million for the year. And if you include residential projects, that number is SEK 160 million. So let's turn now to the performance of our like-for-like portfolio. And looking at the development in the like-for-like portfolio for the year, rental income increased by 1.3% and operating surplus by 1.4%. And while the increase is not substantial, we are very pleased that it is positive for the full year despite a slight decline in Q4 due to higher vacancies. And the increase in rental income is thanks to indexation and increased charges for property tax and tenant improvements. Costs rose by 0.9%, and that's mainly due to property tax. And we've also seen customer losses decrease during the year by SEK 10 million; and also reduced media costs, thanks to active efforts to lower consumption, and energy usage has actually decreased by 15% during the year. If you exclude higher property tax and the lower customer losses of the year, costs remained flat. Looking at the different segments. Both segments showed an increase in operating surplus, though for different reasons. In the Office segment, revenue growth was the main driver with positive effects from indexation and additional charges. In the Retail segment, the increase was due to cost savings, not indexations as more contracts are turnover based. Lower customer losses and good cost control contributed positively in the Retail segment. And next, I'd like to remind you about the impact of our property transactions during the year. In June 2024, we sold 2 properties in Sundbyberg to free up capital for investments in our project portfolio. And from Q3 onwards, these disposals no longer affect quarter-on-quarter comparisons, but they do impact the full year figures. The properties -- the sole properties generated a rental income of SEK 61 million and an operating surplus of SEK 47 million in the first half of 2024. And this sale is the reason why the operating surplus for the full year 2025 decreased by 1%. And there was also a minor effect from newly acquired project properties, specifically property tax for Malarterrassen in Slussen and Angqvarn in Uppsala. So let's continue with an overview of our financial position. Property values increased by approximately SEK 400 million in Q4, reaching SEK 61 billion; and investments totaled just over SEK 800 million and value changes were minus SEK 369 million. Total investment for the year amounted to SEK 2.8 billion or SEK 2.9 billion, including acquisitions, and that is in line with our target to invest 5% of the balance sheet per year. Interest-bearing debt increased by just over SEK 400 million in Q4 and by SEK 1.9 billion for the full year, totaling SEK 26.2 billion. And the increase is, of course, to finance our project investments. Looking at the key ratios. The interest coverage ratio for 2025 is 3x. And that is a sound level, even though it has gradually declined during the year, as we have adjusted to higher interest rates. The net debt-to-EBITDA ratio is 12.9 which is a relatively high number, and that is due to low-yielding properties combined with larger project investments. The loan-to-value ratio is 42.5%, and that's up 0.5 percentage points in Q4 due to the negative value changes in the quarter. But still, that's a reassuring level, and that's where we would like to be for our LTV ratio. Net asset value per share adjusted for dividends increased by 4% in 2025 to SEK 54.89 per share. We continue to have good access to financing on favorable terms both from banks and the capital market, and credit spreads in the capital market tightened by a few basis points in Q4 and in early 2026. And we have completed a few bond issues at very good levels. In October, a 5-year bond at 118 basis points and now early January, a 5-year NOK bond at 104 basis points, which we swapped to SEK at 112 basis points and also a 3-year bond at 80 basis points. And commercial paper is currently at 35 basis points for a 3-month tenure. Our financing portfolio remains secure and stable with an average capital duration of 3.6 years and a well-balanced maturity profile. And there are essentially no bank maturities in 2026, and bond maturities amount to SEK 3.5 billion. Available liquidity -- we have available liquidity of SEK 9.5 billion, and that covers almost all maturities over the next 2 years. We are also in a secure position on the interest rate side. And although we have seen rising term premiums in Q4, which make it more challenging to maintain interest rate duration, the average duration is 2.7 years with 96% of interest exposure fixed through swaps or fixed rate loans. The average interest rate in the portfolio is 3.0 excluding commitment fees and 3.2 including them. And it has been unchanged now for 2 quarters in a row, and we expect to maintain the 3.2 level in 2026. And with that, I will now hand over to Annica who will speak a little bit about our projects.

In total, we have 10 ongoing projects corresponding to SEK 9.1 billion in investment, of which SEK 4.7 billion remains. We have 7 projects scheduled for completion in 2026. The letting rate in these commercial projects is too low, a level that I'm not satisfied with, but we also see that market interest is strongest for our new produced premises. In Soderhallarna, we are expecting substantial interest in many viewings and active dialogues. My assessment is that the property will be fully let during 2026. Also comment on Sickla Central with 23 floors. Currently, we have an occupancy rate of 20%. The building has just opened with a house on the ground floor. It is a remarkable property with panoramic views over Stockholm. However, despite the building being opened, on some floor, we have substantial tenants specific work that remains on many floors before we can receive future tenants. Then during the quarter, we completed PV Palatset in Hagastaden. It's a big, major project for us and also one of the biggest tenants that have moved in, it's the Economic Prime Authority that is, as I said, the large tenant. The project has been in -- success in several aspects with a highly satisfied tenant and the project margin of 49%. The remaining to be let is only one small office part of 400 square meters and the restaurant space in the bottom floor. And then a reminder of our big development pipeline. So we have 4 major areas in Stockholm, where we have a natural population growth. The potential investment volume of projects is around SEK 40 billion, and all locations are chosen where there's an existing or planned underground station by 2030. As you remember, we have a dividend policy that states that we should distribute approximately 1/3 of income from property management. And the Board has proposed SEK 0.74 per share, and its dividend share of 36%. And by that, I think we should say a few words about 2026, and I would like Anna to step in, so we can give you some guidelines when it comes to both numbers and also the market.

A few words about rental income. October index in 2025 landed at 0.92%, and that adds SEK 21 million to rental income in 2026. We entered the year with a lower occupancy rate of 89% compared to 91.5% in the beginning of 2025. And at the same time, we have 7 projects completing in 2026; 6 of them commercial projects, which are expected to contribute just over SEK 60 million from projects completed in 2026 and also nearly SEK 60 million of rental income from those completed in 2025. We expect continued strong cost control with no major cost increases except, of course, for cost from completed projects. Electricity consumption is also expected to continue to decrease as we work on energy savings. Leasehold fees are expected to increase by SEK 4 million in 2026, mainly due to the full year effect of the renegotiation of Stora Katrineberg in Liljeholmen in 2025 and also the renegotiation of Palmfelt Center from October 2026. And as usual, we do not agree with the City of Stockholm, but we estimate an increase in leasehold fees of about SEK 4 million in 2026 and another SEK 4 million in 2027 as a full year effect, but then the next renegotiation will not occur until 2029. As mentioned, we have completed the adjustment to higher interest rates in 2025 and expect to maintain the average interest rate in the portfolio at 3.2%, including commitment fees during 2026. And also a few words about capitalized interest. In 2026, we will change our principle for capitalizing interest, activating interest even in the early stages of projects. Previously, for simplicity, we have activated interest from start of production. But from 1st of January, interest will be activated from the first krona. And if we had applied this principle in 2025, we would have capitalized SEK 36 million more than we actually did. And finally, a few words about our investments. We will, of course, continue to invest in our projects, and we expect investments to fall just short of SEK 3 billion, landing at high SEK 2 billion. And during the year, we will also complete the residential project resulting in net investments about SEK 500 million lower than that. And with that, Annica, perhaps you can say a few words about our market outlook.

Absolutely. As I mentioned, growth is expected to accelerate in 2026, driven by a stronger domestic consumption. At the same time, we have the geopolitical uncertainty that remains. Though it appears to cause less concern than before, the market seems increasingly adapting to it. Defense spending and infrastructure investment continue to drive economic activity. We also see strengthened domestic demand combined with rising business confidence and growing investment willingness. In addition, the number of active tenant dialogue for us has doubled from roughly 60 to around 120 concrete discussion compared with a year ago, and that, of course, is a clear sign of market strength. So taken together, I see clear signs of optimism in the market, which creates stronger condition for increased leasing activity moving forward. That concludes what we intended to present in this report. And if you have any questions, you can send an e-mail for me or Anna, and we will respond as quickly as we can. Thank you very much.