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

Welcome to this call where I and my new CFO, Anna Jepson, will present Atrium Ljungberg's Q4 report. The headline for this report is higher rate of investment in the project portfolio promotes long-term growth. I would like to begin by summarizing the main content of this report. Our property portfolio looks similar to last quarter with 80% of the value in Stockholm. The largest segment, offices, accounts for 67% of the total value and only 19% for retail. Our net letting amounted to a negative SEK 8 million in the fourth quarter. And in addition to that, we have terminated contracts from our side of SEK 1 million due to upcoming projects. For the full year, we delivered a net letting of SEK 135 million. And termination for upcoming projects, if we include that, the figure amounts to SEK 109 million, a very strong figure in a challenging market. Our profit from property management increased by 4% during the year, and the operating surplus in the like-for-like portfolio also increased by 4%. We have ongoing projects with an investment of SEK 9.5 billion, of which SEK 4.4 billion remains to be invested. During the fourth quarter, we invested SEK 700 million in our own properties. And including land, the figure is SEK 1.1 billion. And for the whole of 2024, the corresponding figures landed at SEK 2.3 billion and SEK 2.6 billion. As you know, our focus is primarily Stockholm, both in our existing properties and in our future investments. The larger areas are Hagastaden, Slussen, Slakthusområdet and Sickla, all areas where we have a metro in Stockholm or where there will be a metro in the coming years. I believe that we have a unique position in our locations. Despite the fact that we are at the bottom of the recession and vacancies has increased in Stockholm, there is still demand for good quality office space. We see that the greatest demand is in Slussen and Hagastaden. We have a strong net letting during the year, proof of our strong location and business model. We continue to see uncertainty about space need, but we see an increased quorum. Retail accounts for 19% of the company's total property value and represent a large and diverse portfolio of tenants, which contributes to an important service for our office tenants. During the year, we had a positive development in our retail locations and have higher sales than the last year. Our mix in retail makes them resilient in bad times. There are many indications of increased consumption now when interest costs are falling and household and tax cuts are benefiting purchasing power. The Swedish tenant-owned housing market is heading for brighter times as the market now see interest rate cuts. Prices are now gradually increasing and have risen 1.3% for the country and 2.7% in Stockholm in the last quarter despite the large supply in the succession market. At the end of December, we had 24 apartments for sale. As I previously mentioned, the net letting ended up at negative SEK 8 million in the quarter. The last quarter of the year is historically the toughest quarter as more contracts can be terminated. During the quarter, we signed several new contracts with Södermalm being the winner -- winning market. In Söderhallarna, we signed a contract with Ramboll for almost 5,000 square meters; and in Medborgarplatsen, the first restaurant for 740 square meters. We will announce which player it is in February. We have other examples. For example, we signed a contract with the headquarter for Sabis, but also HELP Insurances that expanded their area. Unfortunately, there were some termination during the quarter as well. A large tenant leaves 4,500 square meters in Kista. But since the staff has not yet been informed, I cannot tell you which tenant it is. Convendum, which is in Chapter 11, has leased 5,000 square meter in the Glasshouse in Slussen, has also terminated its contract. It will be reported in the first quarter of 2025. On the other hand, the agreement with Stockholm University of the Arts was finalized, and it will have a greater positive impact in the first quarter of 2025. And then a reminder regarding our tenants. We have a well-diversified contract portfolio where our 10 largest customers account for 20% of revenues. Of this 20%, 8% is revenue from state and municipalities. The average contract period was 4.6 years. Offices, our largest source of revenue, is 56%. Consumer durables, our second largest share, amount for 15% of the total revenue. If we look at our maturity structure for our leases and especially what is terminated 2025, it's only 6% of our contract value. 33% have maturity from 2030 and onwards. I think it's good that we only have 4 leases, 2 of which are offices of more than 10,000 square meters. So let's look a little bit closer on our retail portfolio. We have a wide range in our retail portfolio. Fashion accounts for 13% of the sales in our retail locations. I think we have a very attractive retail portfolio. And as I mentioned in the beginning, sales are going in the right direction. Given consumers' reduced purchasing power, I think we have delivered well. Food, alcohol and pharmacies account for 40% of the turnover in our retail location. The businesses that perform the best in our shopping centers are pharmacies, the discount segment and groceries. And those who have the toughest times are home decoration and furniture. At the same time, we see a boost in consumer electronics in the quarter, which has a good growth figure. And with that, I will hand over to our new CFO, Anna, who will present the figures for the first time.

Thank you, Annica. We conclude 2024 with a stable fourth quarter in terms of underlying earnings. The operating surplus for Q4 increased by just over 3%, driven mainly by contributions from our projects of net SEK 20 million. Like-for-like, the operating surplus increased by 1.4%, affected by higher leasing costs and customer losses. The increase in customer losses is partly an effect of a change in principles for making provisions for anticipated customer losses, which resulted in a positive onetime effect in Q4 2023 of SEK 7.5 million. Excluding this onetime effect, the operating surplus increased by 3.1% like-for-like. Central administration decreased by SEK 3 million to SEK 26 million in the fourth quarter. And regarding the net interest, we have signaled throughout 2024 that we would face increasing financing costs in the second half of the year due to maturing fixed rate loans and expiring interest rate swaps. This increase in the average interest rate occurred primarily in Q3 when the average interest rates increased by 0.5 percentage points. The full effect of the increased average interest rate is now reflected in the interest expenses for Q4. Net interest amounted to SEK 158 million, an increase of almost 30% compared to Q4 the previous year. Overall, this resulted in a 7.7% decrease in income from property management for the quarter. For the full year 2024, however, income from property management increased by 4.4%. The operating surplus like-for-like also increased by just over 4%. In addition, projects contributed to the increase by SEK 60 million, while sold properties resulted in a decrease in operating surplus year-on-year by SEK 41 million. And I will come back to that later. In 2024, we also received onetime compensations totaling SEK 48 million, mainly from customers who moved out early. 2023 was also positively affected by onetime items of SEK 50 million, mainly electricity subsidies, but we get a net effect year-on-year of SEK 33 million. Central administration increased by SEK 6 million for the full year due to preparations for CSRD reporting and other system development costs. Moving on to changes in value, we can see that we, in the fourth quarter, adjusted property values down by SEK 301 million, corresponding to 0.5%. Changes in property values are, as you know, affected by 2 things: cash flow and yield. In 2024, inflation has fallen and the October index, which forms the basis for rent adjustments in 2025, landed at 1.57%. We have also adjusted index forecast for 2025 from 2% to 1%. And lower index outcomes and lower future index assumptions have led to lower assessed cash flows in our valuations, resulting in negative changes in value in Q4. At the same time, the declining inflation has led to improved financing conditions. Access to the capital market is once again good, and credit margins have decreased during the first 3 quarters of the year, stabilizing in Q4. And the transaction market has also started to recover, especially towards the end of the year. The upward trend in yields in recent years has now stopped, and we have kept the average yield in the portfolio unchanged in the fourth quarter. For the full year 2024, changes in value amount to minus SEK 272 million, and the reason in this case is instead yields. Over the full year, yields have been adjusted upwards by an average of 4 basis points, mainly for our rental properties. Higher yields mean declining property values. But this has partly been mitigated by improved cash flows. Even though index came in lower than our previous assumptions, index does, in fact, mean a rental growth in our portfolio of approximately SEK 34 million for 2025. Our long-term net asset value at the end of the year was SEK 267 per share. Adjusting for dividends during the year, this represents a net asset value growth of 3%. And looking at our credit-related key figures, we can see that figures weakened slightly during Q4, but improved over the full year. LTV increased during the quarter due to increased investments in our projects totaling SEK 1.1 billion, including land as well as the cash payment of the second part of the dividend for 2024. The negative changes in property values also contributed to the increase in the LTV ratio. However, over the entire year, LTV has decreased by just over 1 percentage point to 41.4%, thanks to net debt decreasing while property values is almost unchanged. Lower debt, combined with increased operating surplus, also means that the net debt-to-EBITDA ratio has decreased from 12.9 to 11.5 during 2024. The interest coverage ratio is unchanged for the full year at 3.7, but has decreased during the fourth quarter due to rising net interest. Together with unutilized credit facilities that have increased to SEK 9 billion during the year, these financial metrics show that we have low financial risk and that we end the year with a stronger balance sheet than we started with. Moving on to like-for-like and looking at the development in like-for-like for -- during 2024, rental income increased by 3.9%, index being the main driver. Property costs increased by 2.9%, mainly due to increased leasing costs and customer losses. And the difference in customer losses amounts to SEK 15 million year-on-year, and this is partly explained by the change in principles for making provisions for anticipated customer losses that I mentioned, but also due to higher customer losses during the year, including bankruptcies of The Park and Eways. Like-for-like, the surplus ratio increased from 71% to 72%, thanks to rental income growing stronger than property costs. And we can also note that we have a positive development in all segments and that rental income has developed stronger than costs in all segments. Our projects continue to make contributions to rental growth. In 2024, the net addition from projects is SEK 63 million, of which Katarinahuset accounts for the largest part. In 2024, Katarinahuset generated rental income of SEK 83 million more than the previous year. And rental, including -- excluding supplements, is expected to increase by approximately SEK 30 million in 2025. At the same time, we have vacated Söderhallarna, resulting in SEK 37 million lower rental income in 2024 related to that property. The net increase in operating surplus from projects amounts to SEK 60 million for 2024. In 2023 and 2024, we completed 2 sales that affect our figures: Skotten in January 2023 and Eken in Sundbyberg in June 2024. These properties contributed to rental income of SEK 62 million in 2024 and SEK 112 million in 2023. The corresponding effect on the operating surplus amounted to SEK 46 million and SEK 87 million, respectively, resulting in a decrease in the operating surplus of SEK 41 million year-on-year. In Q4, Riksbanken carried out 2 expected cuts of the policy rate totaling 75 basis points. And earlier this week, there was an additional cut of 25 basis points, bringing the rate down to 2.25%. Riksbanken has now reached the end of its rate path, but does not rule out further cuts, which is something most market participants expect. However, the curve has steepened during the fourth quarter. Concerns about increased inflation due to tariffs and expansive official policy in the U.S. have driven up long-term interest rates. Access to the capital market remains good, and credit conditions have been stable during the fourth quarter and are almost back to levels from 2021. We did not print anything in Q4, but have, in early 2025, issued a bond with a maturity of 4.1 years at 116 basis points, which is on the curve from September when we printed a 5-year bond at 130 basis points. The commercial paper market is also strong, and margins have further decreased to 40 basis points for maturities of 3 months. As I mentioned, our financial metrics have grown stronger during the year. The interest rate -- interest coverage ratio for 2024 landed at 3.7x, the net debt-to-EBITDA ratio at 11.5x and the LTV ratio was 41.4% at the end of the year. Hence, we entered 2025 with a strong financial position. In Q4, we extended several of our undrawn credit facilities and had available liquidity of just over SEK 9 billion at the end of the year. And this is a reassuring figure given our maturity structure where we have maturities of approximately SEK 4.6 billion in 2025. As we indicated in the previous quarter, our average interest rate continued to rise slightly in Q4, reaching 2.9%, excluding commitment fees at the end of 2024. And we still have a number of fixed rate bonds and interest rate swaps in the portfolio that need to be adjusted to the current interest rate levels. Overall, we expect the average interest rate, excluding unutilized credit facilities, to level out just about 3% in 2025 given current market rate levels. Our Ba2 rating with a negative outlook was confirmed by Moody's in September and remains unchanged. And by that, Annica?

So let me update you on our project portfolio. At the end of Q4, we had ongoing construction with a total investment of SEK 9.4 billion, of which SEK 4.4 billion remains to be invested. In terms of ongoing projects, SEK 8.5 billion is investments in properties that are developed for ownership. The project profit amounts to 24% or SEK 2.2 billion, of which SEK 800 million has already been reported. Furthermore, we have ongoing tenant-owned apartment production of SEK 1 billion, which an estimated market value of SEK 1.2 billion. The project profit will be realized as profit recognition takes place. In this picture, you can see our 10 ongoing projects and completion dates. In 2024, we have completed 3 projects: Katarinahuset, Slakthushallarna Phase 2 and Kulturtrappan. In 2024, we have decided to start 2 construction projects, Building 49, Stora Marknadshallen, with Universal Studios as a tenant; and Building 43 or the Nya Magasinet with Menigo as the first tenant. And finally, a few words about the project portfolio going forward. We will develop 4 areas in Stockholm where there is a natural growth of people. The potential investment with projects start-up before 2030 is SEK 40 billion, all locations where there is a metro station today or will exist by 2030. In Sickla, we plan to add 250,000 square meters with a total investment of SEK 12 billion. In Slakthusområdet, we are also planning for investment of total 200,000 square meters and gives a total investment of SEK 12 billion. And Hagastaden and Slussen, part of [ Stockholm in the city ], where we have projects for more than 150,000 square meters and a total investment of about SEK 14 billion. Well, last year, we chose to change our dividend policy to 1/3 of the profit from property management. The Board of Directors have submitted a proposal to the AGM to distribute SEK 3.6 per share on 2 occasions during the year. And finally, a few words about 2025. There are many indications that the recovery in the economy will gain momentum in 2025, although uncertainties, of course, remains. The recovery in the rental market normally comes with a lag, which means that weak demand is expected to persist for much of 2025. The low index outcome provides a small contribution to our rental income, and the 3 commercial projects that will be completed in the latter part of 2025 will have more positive impact on 2026. And as Anna mentioned, the average interest rate portfolio is expected to plateau a little over 3% based on today's market expectations. Overall, we are confident about the position and our business model, creating attractive, sustainable, innovative cities in great location, which creates demand for future tenants. This will create increased shareholder value over time. 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 Anna. Thank you very much.