Earnings Call: Q3 2024

Oct 11, 2024

Welcome to today's quarterly presentation by real estate company, Atrium Jungberg. They will be presenting the results for the Q3 of 2024. So with no further ado, please let me introduce to you today's speaker, CEO, Annika Oanes. Please go ahead with your presentation. Thank you. Headline for this report is continued strong net letting in a challenging market. 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 69% of the total value and only 19% for retail. Our net letting amounted to €51,000,000 in the Q3, but in addition to that, we have terminated contracts of €2,000,000 due to upcoming projects. The profit from property management increased by 8% in the 1st 3 quarters, and for comparable portfolio, 5%. We have ongoing projects with a remaining investment of SEK 9,000,000,000 of which SEK 5,200,000,000 remains to be invested. Of the project completed in 2024, the economic occupancy rate amounts to 94%. And if we include projects to be completed in 2025, it amounts to 74%. Our primary focus is Stockholm, both in our existing properties and in our future investments. The larger areas are Hagastaden, Slussen, Slaktusomrodet, the meatpacking district and Sikla, 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 on the bottom of the recession and vacancies are increasing in Stockholm, there is still demand for good quality office space. We see the greatest demand in and Hagastaden. We have a strong net letting in the quarter, proof of our strong locations. After summer, we saw an increase on number of searches for premises, but this has gradually decreased during the fall. Retail accounts for 19% of the company's total property value and represents a large and diverse range of tenants, which contributes to an important service for our office tenants. We have a positive development in our retail location, and both have higher sales and footfall compared to the previous year. Our mix in retail makes them resilient in tougher times. The Swedish tenant owned dwellings market is heading for brighter time as the market expects increased rate cuts. Prices are now gradually increasing and have a rise in 1% to 2% points for the country the last quarter despite the large supply in the market. We need to see an increase in the number of sales to continue to be in the line with our own expectations. As the last day of September, we had 36 unsold apartments, so it's quite a small part of the whole business. As I previously mentioned, the net lending ended up at €52,000,000 a good figure in this overall challenging market. During the Q3, we signed several new contracts. The 4 largest are located in SLAC2 Sommerodet and in Slussen. In Slussen, we have signed 2 contracts, Universal Music and Meniligo, 2 very important lettings that have led to the new investment decisions, but also hand in hand with our vision of the area. In addition, we have signed a contract with Flower, and they will move in before the end of the year. And also the cinema company Filmstaden, who is moving back to Soder Hallana after the refurbishment project. Well, that was a few examples of new lettings that we have completed during the quarter. We have a well diversified contract portfolio, where our 10 largest customers account for 19% of revenues. Of this 19%, 8% is revenue from state and municipalities. The average contract period was 4.5 years. Offices is our largest source of revenue with 55%. Customer durables, our 2nd largest share, accounts for 15% of the total revenue. If I look at the term of leases, we are now in the 2024 maturity structure because we usually have 9 months of notice period, and it amounts to about SEK300 million, 10% of that entire annual contract value. 36% of the whole annual contract maturity structure was in term from 2029 onwards. And I think it's very good that they only have 4 leases, which are 3 are offices that are more than 10,000 square meters. Let's look closer to our retail portfolio. We have a wide range of supply in our retail portfolio. Fashion accounts for only 13% of the sales in our shopping centers. And I think we have a very attractive retail portfolio. As I mentioned in the beginning, both visitors and turnover are higher than last year. Food, alcohol and pharmacies accounts for 40% of our sales in our retail locations. The businesses that perform the best in our shopping centers are pharmacies and groceries. And those who have the toughest time, it's home decoration and furniture. Already in the second quarter, I signaled that we would have an increasing financial cost in the second half of this year due to larger loan maturities with a very low average interest rate. And it is starting to show now in Q3. Interest expenses increased by 11% and landed at CHF147,000,000 in the quarter compared to Q3 last year. The average closing interest rate all in all ended up at 3% in the quarter, and it's expected to reach 3.2% by the end of the year. This means that net financial cost will increase further in Q4. Net operating income increased by 3%, mainly driven by completed projects. The comparable portfolio amounts to 2.2% and has been affected by the vacanting from some major tenants during the end of 'twenty three and the beginning of 'twenty four. We see slightly increased costs in the quarter, among other things, linked to our leasing apartment, preparations for CSRD reporting and fear customer losses. The well known reconstruction of e waste, the supplier for charging electric cars, for example. On the downside, we also see that we last year received an electricity subsidy that had a positive impact on us of SEK 13,000,000. The surplus ratio amounted to 74% in the quarter. Central administration amounted to SEK 17,000,000 in the isolated quarter and is affected by the fact that we currently have several consultants who do not cost any money during the summer. For the full year, we will be slightly above the full year for 2023, as we have some costs linked to, as I said, preparation for CSRD and other system development costs. All in all, profit from property market is stable in Q3 compared to last year. But if we look at 9 months, we have grown in profit from property management of 8% and growth in net operating income of 5% in a comparable portfolio. And we had a very strong first half of the year. Changes in property value landed at SEK 75,000,000 net during the quarter. It is divided into 2 components, yield and cash flow. If we take the first, the yield, the view is that it has stabilized in the market. The slowdown in the inflation rate, interest cuts have begun and good access to quality with falling credit margins, as a result, means that buyers and sellers are moving closer together. The second component, cash flow, is in constant motion. How it develops is more property specific depending on the type of location, tenant composition, asset class, etcetera. During the Q2, we had a good net letting in our portfolio, which means positive changes in value. In addition, time has passed, which is also positive in our valuation. During the quarter, we made very small adjustments and increased the required rate of return in our retail rental apartment business and 1 in the city property. But good lettings and improved cash flow had mitigated that impact. Our long term net asset value per share at the end of Q3 landed at SEK269 1,000,000. We have a low financial risk and ended up with a LTV ratio of 40.1%. The interest cover ratio landed rolling 12 months at 3.9 percent and in the isolated quarter, 4.3%. Net debt to EBITDA came in at 11, while the liquidity buffer has increased to SEK 10,000,000,000 If we look at our like for like portfolio, we have increased income by 4.3%, which is an increase mainly by CPI, while property cost amounted to 1.7%, slightly higher than the previous quarters. In the quarter, we have slightly increased costs for our leasing resources, which I think is a good priority. But overall, net operating income in the like for like portfolio increased by 5.3%, and the surplus ratio landed in the quarter at 74%. As you know, we have Katarina Huser, which contributes positively to our net growth. In the 1st 3 quarters, Katarina Huser generated rental income of SEK 59,000,000 more than the year before. At the same time, you also know that we terminated several agreements in Soder Hallana last year, which means that we have SEK 33,000,000 lower in rental income linked to that property. On a net basis, however, we are increasing in rental income and the project portfolio of SEK 39,000,000 and the current net operating income of SEK 41,000,000. We have 2 divestments that affect our figures in the quarter, both Skoten at Rotningarten, which we vacated in January 31, 2023 and Eken 14 and Eken 6, which we vacated on June 11 this year. The sales affect our rental income by SEK61 1,000,000 SEK86 1,000,000 in the 1st 9 months of this year and last year, respectively. In September, the Riksbank cut the policy rate by 25 basis points to 3.25 and at the same time opened the way for possible double cut in November. The market's forecast in the policy rates will come down to 2% by the end of 2025. We see good access to liquidity and declining credit margins. Credit margins had gradually come down, and the last bond we executed was a 5 year green bond of SEK 300,000,000 with a margin of SEK 130 basis points. On the commercial bond side, the margin is currently 45 basis points for maturities of 3 months. Our financial position remains strong. The loan to value ratio was 40.1% and the ICR was stable at 3.9%, and net debt to EBITDA increased slightly to 11x year on year. Just I signaled last quarter that our average interest rate is increasing and amounted to 3%. But we see a further increase in the Q4 and the estimate that our closing average interest rate year end will land at about 3.2%. Our liquidity buffer amounts to SEK10 1,000,000,000 and at the same time, our largest refinancing, apart from undrawn RCFs, is at midyear 2025. We had our annual review with Moody's in September, and they once again confirmed our rating of Baa2 with a negative outlook. So let me update you on our project portfolio. At the end of Q2, we had ongoing construction with a total investment of SEK 9,400,000,000 of which SEK 5,200,000,000 remains to be invested. In terms of ongoing projects, SEK 8,200,000,000 is constructing to be investment in properties that are developed for ownership. The project profit amounts to 25%, corresponding to SEK 2,000,000,000, of which SEK 800,000,000 has already been reported. Furthermore, we have ongoing tenant owned apartments production of SEK 1,000,000,000 with an estimated market value of SEK 1,200,000,000 The project profit will be realized as profit recognition takes place. In the picture, you can see our 11 ongoing projects and completion dates. As for the project to be completed in 2024, the economic occupancy rate is 94%. And if we include 2024, the figure is 74%. At the beginning of Q3, we rented out parts of Building 43, old and new magazine net in the Sluk 2, Somroded area. The lease of 3,800 square meters to Minigo out of the total of 9,000 means a new project start. The total investment for the renovation and extension amounts to SEK 700,000,000 including land acquisition. The properties just by future metro entrance and a new park. The other list is for Universal Music Group, which rents the entire building. The agreement covers 3,800 square meters, and the investment amounts to SEK 290,000,000. The great thing about these rentals is that they are completely in line with our vision for the area. 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 is about SEK 40,000,000,000. The locations are selected where there's a metro station today or will be in by 2,030. In Sikla, we plan to expand 250,000 square meters with a total investment of SEK 14,000,000,000 in Sluktusom Rode, the Stockholm meatpacking district. We're also planning for offices and apartments of a total of 200,000 square meters and a total investment of €11,000,000,000 And also, Slussen and Hagestaden, they are big areas. And that's all from me. Thank you for that presentation, Annika Oenas, CEO at Atrium, Jungberg. And remember to write your questions to the pointed e mail presented earlier. Thank you so much for watching, and we'll come back in approximately 3 months for the next presentation.