Atrium Ljungberg AB (publ) (ATRLJB) Earnings Call Transcript & Summary

Welcome to Atrium Ljungberg's Q4 report. The headline of this report is strong net letting and impressive value creation in our projects. As a start, I would like to update you on our key ratios. The property value of SEK 52 billion is distributed on the different cities in Sweden: Stockholm, 76%; Uppsala, 11%; Gothenburg, 6%; and Malmö, 7%. The contracted annual rent is SEK 2.4 billion, gearing ratio below 40% and letting rate was 91%. And the property value was distributed on the different segments, so we can see that offices stand for almost 60% and retail 23%. I would like to start to comment the rental market. Sales in the rental markets have recovered, and the vacancy situation looks more stable than before. The underlying economic development is strong with rapidly increasing employment in office-intensive industries. For the Stockholm market, we expect that demand, even with the possible faster surface efficiency can more than meet the rather modest new production of office space. And the vacancy rates will, therefore, slowly fall and rental levels remain stable. After a good for -- net letting, for the full year landed at SEK 71 million. But with regard to agreements we terminated to prepare for projects, for example offices at Medborgarplatsen, net letting landed at SEK 40 million. We see that the retail had a good net letting of SEK 18 million linked to good business in both Sickla and Gränby. Retail has recovered significantly, and we see that sales are back at levels similar to before the pandemic. Office have a tough figure on the annual basis when the Stockholm region in Hagastaden terminated their agreement of 6,000 square meter in the beginning of the year. And as I said, we have terminated office tenants at Medborgarplatsen for future projects. A tenant in a project returned just over 4,000 square meters, and we also got 2 significant vacancies in Stockholm City and at Lindholmen in Gothenburg, but both these spaces are now let to other tenants. We have had a high viewing rate in the beginning of the year, especially on Södermalm and in Hagastaden. And we see a big interest, which paves the way for even more great deals in the beginning of 2022. During the fourth quarter, our renegotiated office contract showed an increase of 23% and retail contracts show an increase of 10%. Here you see examples of 4 major leases in 2021. Others are Immedica Pharma at Live City, IKEA and [indiscernible] to Sickla and an extension of Swedish Courts Administration in Sickla. But just to be clear, in 2022, we will continue to terminate tenant contracts to prepare for projects, especially at Medborgarplatsen. And we estimate that the net letting will be affected by approximately SEK 60 million. A few comments on the housing market. It has been very strong in 2021, supported by low interest rates and the desire for more space among many who worked from home during the pandemic. Demand has been high, while supply has been limited. Prices have been pushed up. We took the first project profit from our first condominium project during the year, SEK 91 million. The second block is sold out, and they're moving in this summer. We brought forward the start of sales of the third block, Kulturtrappan, and we see great interest. And we have started our first condominium project in Uppsala. The transaction market has delivered like never before with a new record in Sweden, just over SEK 400 billion. 44% refers to structural transactions. The largest segment has been housing followed by offices, logistics and industrial properties. And given how the yield requirements have creeped down on both rental apartments, community properties and logistics, I think that offices are starting to look attractive to investors. The interest in good retail properties is also beginning to come back to life. We have contributed to the transaction market with some deals. We sold our leasehold in Ärvinge, 44,000 square meters of offices, for just over SEK 800 million. And that in Ärvinge, we had quite big vacancies for a long time. We have signed an agreement for M1 on Lindholmen for 22,000 square meters office building, and we will access the property after the change in a detailed plan at the turn of the year '23/'24. Purchase price is approximately SEK 450 million. And we also signed an agreement for an acquisition of a leasehold Palmfelt Center in Slakthusområdet of approximately 30,000 square meters. The price will be the market price at the turn of the year '21/'22, which has been primarily reset at SEK 1.6 billion, and access is expected at the end of April this year. And now I will hand over to our CFO, Ulrika Danielsson.

Now the income statement. We delivered a strong last quarter with a profit after tax of SEK 1.4 billion, leading to a result for the full year of SEK 3.8 billion, the highest ever in this company's history. This has mainly been generated by growth in underlying cash flow from both like-for-like portfolio and completed projects. Good progress in the project portfolio, which, in addition to the net operating income has resulted in project gains of roughly SEK 1 billion; the strong property market, which has led to a lower valuation yield of roughly 15 basis points; stable interest and debt management. Based on the good result and a stable balance sheet, the Board has decided to propose a dividend of SEK 5.20 per share. And by doing that, the company again delivered a year of dividend growth. I will not talk about every single figure that you see on the screen, but there are a few things I want to highlight, partly the earnings in like-for-like that ends the last quarter strongly, and partly the company's growth in SEK per share. NOI in like-for-like increased by 4%, which is a good figure. However, we should remember that we came from a 2020 where COVID-19 affected our income statement with discounts in rental as a result. So from that point of view, 2021 has been much better. We can also note that the figures have improved since Q3. The growth in the NOI full year is 2%, while it was only 1% in Q3. This means that we end the year much better than we started it. Good performance in like-for-like, together with the results from the tenant-owned business, stable net financial items and repurchase of own shares means that earnings before changes in values ends at SEK 1.2 billion, corresponding to SEK 9.86 per share, an increase of 14% for 2021. But before we move on, I would like to pause a little and remind you of what we have with us going into this year or 2022. CPI of about 2.8%; negative net lettings in 2020 with a strong emphasis in the last quarter of 2020, which continued into the first quarter of 2021. Since then, net lettings have been positive. But as a result of lead times, a likely scenario may be slightly increased vacancies that then lead off the further into the year we get. Care of cost is a continuous work. We do not fully manage the forces of the weather, higher taxes and energy prices. But it is nothing unique to Atrium Ljungberg. All property owners are in the same situation, and much of this is also passed on to the channels. Our fixed rate and capital tied up means that increasing market interest rates and margins should not have a major impact on our average funding cost. Portfolio relocation. We sold Kista, we bought in Slakthusområdet and completed 2 major projects with gradual occupancy. And finally, [ large projects ] in 2021 is not in the cards for 2022. So all in all, we have conditions for stable development. We and many with us, however, are dependent on the magnitude of market forces. The balance sheet then. Atrium Ljungberg has a financially strong position with an LTV of just below 40%. The property portfolio is valued at roughly SEK 50.5 billion, equal to SEK 54,000 per square meter. In addition, the company has development properties of roughly SEK 1 billion, the purpose of which is to create value through the tenant ownership business. The owner's capital, the so-called NAV, amounted to roughly SEK 246 per share at year-end, an increase of 13% from 2020. In addition to good earnings, the company also uses the mandate it has received from the AGM to repurchase its own shares as a way to create shareholder value. During the year, repurchases of roughly 1.4 million shares were made at an average price of SEK 174 per share. On realized changes in value. As mentioned earlier, the real estate market is strong, which has resulted in value increases for the company of roughly SEK 3 billion for the full year and SEK 1.4 billion in the last quarter. Of this year's value increases of 6.4%, roughly SEK 1 billion is delivered from project gains in completed or ongoing projects during the year. And if we look at ongoing projects that we are developing to own, meaning the projects that are in our table in the Q4 report, and that will be completed after 2021, we currently have an estimated project profit of around 45%, provided that the letting takes place and today's yields remain. This means that roughly SEK 1.8 billion can be expected to be visible in further increases in value in the future. The funding. The company currently has a total credit portfolio of SEK 28 billion, of which SEK 21 billion was used at the year-end. The debt portfolio has a good mix of borrowing in banks and other institutions as well as capital market funding in the form of bonds as well as more short-term commercial paper. And we have started this year with increasing our framework for our MTN program from SEK 12 billion to SEK 15 billion. We have published a new sustainability-linked framework, which was published this Monday as a complement to our green framework. And the idea of the new one is to capture all the letters in ES&G, which we think is important. And at the same time, we are committed to our new sustainability goals that extend to 2030. And finally, we have updated our green framework to align with our new sustainability goals. The market for bonds and, thus, credit margins has, of course, benefited from support it as received from Riksbank worldwide. And now that the support is decreasing, the market needs to stand on its own 2 feet. This, together with inflation, rising interest rates and some geopolitical concerns has led to slightly higher pricing. If we compare a 5-year bond for us as a company, at the end of 2020, we paid a margin of roughly 100 basis points. The same price at the end of 2021 is about 150 basis points. And at the moment, we can read the screen around 120 basis points. When it comes to the short part of the capital market, the CP market, we currently pay about 20 basis points all in, which is basically the same since the end of the year and lower than a year back, despite slightly higher short-term interest rates. Banks margins are stable so far, but as their own funding cost increases, the likely scenario is that this increase will be rolled out on customers. However, we are in a good position with long duration in both the interest and capital tied up, available earnings credits of roughly SEK 7 billion. And last but not least, our rating from Moody's, about Baa2 with stable outlook. And as a result, we are well equipped for if and when the interest rate and credit market becomes more volatile, while we also have the capital to support our growing project portfolio. And then back to you, Annica.

Thank you. During the year, we invested SEK 2.3 billion in our development projects, slightly less than 2020. During the year, we completed 3 projects, the hotel in Sickla, the addition and refurbishment of the mall in Sickla and the rental apartments in Gränbystaden, Parkhusen block 1, successful projects, fully leased projects with project profits according to our goals. On the ongoing projects, I would like to mention Live City and Bas Barkarby, 2 large projects where we had invested SEK 1.7 billion in Live City and SEK 870 million in Bas Barkarby. The first tenants have started to move in, and the projects will be completed in 2022. Given that the rental work is underway and properties will be fully let, the projects will provide yield on cost of 6% in both projects. Since the market yield for Live City is approximately 3.5%, we will create a project profit of 70% and just over 20% in Bas Barkarby, since the market yield here is higher due to the location and the project has been more challenging. During the fourth quarter, we made 2 investment decisions, one in [indiscernible] in Sickla, 17,000 square meters of offices and a restaurant, an investment of approximately SEK 1 billion; and the condominium project, Kulturtrappan, 93 apartments in Sickla, an investment of SEK 490 million. The last words today will be around our goal for 2030. We have a project portfolio with the remaining investment in decided projects of SEK 2.7 billion and the potential projects of SEK 35 billion. Given the current rent levels and yield and estimated investments, we will double the property value and operating net by 2030. This means a property value of SEK 100 billion. This is what I call creating value. So our major focus going forward is running detailed plans and letting. This is crucial if we are going to realize this incredible portfolio. But I do feel confident that we can achieve this. We operate in attractive areas and our project portfolio will mostly be built in Stockholm area, where there is a subway or the station will be open in the future. These are areas of natural growth in the city. And by that, I would like to thank you for listening. If you have any questions, you can send an e-mail or call me or Ulrika. Thank you, and goodbye.