Earnings Call: Q1 2020

Apr 16, 2020

Welcome to Autumn Jundberg's Q1 presentation. The headline for this report is the profit for the first quarter is stable, but the future impact of the coronavirus pandemic is difficult to assess. As a start, I want to update you on our overall key figures. The property value at the end of the year was billion and the contracted annual rent SEK2.5 billion. Offices is our largest segment with 50% and the contracted annual rent. The occupancy rate was still 93%. We did two major deals during the first quarter. First, we sold Faspla Centrum for SEK4 billion. The agreement was conditional upon a review by the competition authority and has now been obtained. As a result, all conditions are met for sale, and we will lease Arsta Centrum on June 1. The result will be reported in the second quarter. The other big deal we did was when we returned the land allocation Hamnesparen of 20,000 square meters for offices in Switzerland in favor for a new Nobel Center. In compensation, we have received several land allocation. In Slussen, we received 8,000 square meters for a retail site and 4,500 DFA for a hotel. In Hagastaden, we received the land allocation of 23,000 GSA offices and 310 condominiums. And finally, 4,000 GSA in the Slaxus On Rodet for a hotel. In the first quarter, we also decided to carry out a refurbishment of the Catarina Husetin system. The property were acquired in the beginning of twenty nineteen and have been preparing for a renovation since then. The investment amounts to $980,000,000. Finally, we signed an agreement on green bank loan with a Nordic investment bank of SEK $920,000,000. I think many of you are wondering what our key figures will look like after the sale of Fausta Centrum. If everything else is equal, then the property value amounts to SEK 44,000,000,000 and our contractor annual rents amounts to SEK 2,300,000,000.0. Offices will account for 54 of the contracted annual rents and the contracted annual rents for retail will be reduced to 21%. And our loan to value ratio will also decrease to 39%. Since retail has an extra focus for the moment, I thought it would be good if you look at how our contracted annual rents for retail of $477,000,000 are distributed in our various areas after we have sold Fasta Centrum. Then Grandestadens stands for 32%, Sikla 31%, Mobilia 20%, the rest of Stockholm, which has two properties on Drottning Ganthan in CBD, 14% and Forum District in Nepesala, 3%. January and February showed transaction for offices at peak levels for pounds per square meters. At present, we see the stability of the majority of the office tenants, although some industries are affected by the crisis. It is primarily activities within events and conferences, but also certain consulting companies that are affected by reduced demand. For our condominiums, we have now sold 78% of the 68 condominiums we built. The number of impressions has decreased considering the corona pandemic. The project will be completed and moved in in October. The capital market has been very volatile the recent weeks, and liquidity problems have led to many companies having difficulty financing through the capital markets. The retail have been severely affected by the corona pandemic when consumers have been advised to work at home and not stay among other people. Due to many layoffs and the fact that the stock market has fallen sharply, we also become more restrictive to consume goods. We have seen a big drop in our retail for the number of visitors in the recent weeks and the turnover has fallen sharply. Retail, restaurants, and cafes have lost up to 70% of their sales, while groceries, pharmacies, and the Swedish where you buy wine and alcohol have increased their sales. The government provided a support package to the affected industry in the April, which means that if the landlords give a 50% discount on the rent, the state will pay half of that reduction. However, they are still unclear as to which tenants are covered by the package. If we were to give 50% discount on all our retailers, restaurants and cafe operations and receive the state support for all these, it would affect our total rental income by approximately 45,000,000 second quarter. In recent weeks, we have faced several bankruptcies in Chapter 11, primarily of businesses in the field of retail. The most difficult question to answer is during how long this pandemic will last and what effects it will have on the global and the Swedish economy, both in the short and long term perspective. Now I will hand over to our CFO, Martin Lindquist. Thank you, Annika. Our net letting amounted to million, of which SEK20 million comes from project properties. The signed contracts and the cancellations are relatively well spread across our areas. Looking on the consolidated income statement, rental income increased by 2.4% and property cost increased slightly more than income, greatly due to vacated project properties and low initial gross margins in the Slacktuzumab area. In comparable portfolios, rental income increased by 1.6% and costs decreased by 3.4% due to the mild winter. Central administration was stable compared to the previous year. And in project and construction work, the result was slightly better than the comparison period, partly due to slightly increased distribution of development costs to the project. Net interest rises due to higher borrowings, and we write down our retail properties by approximately SEK1.5 billion. More about that later. If we look on rental income and property cost in comparable portfolios, rental income increased by 1.6 while cost decreased by 3.4%, much related to the mild winter. The high cost level in project properties is related to the vacancies mainly in Catarina Rusert, Axlussen, but also low initial operating in the slagtisch Rohlov area. Looking on income growth and surplus margin, the development of incomparable portfolios revenues is distributed on office properties by plus 4.6% and minus 2.4% on retail properties, quite evenly distributed among our areas. Last year, we had some traction from increased property tax rates that we build out. But even with that in mind, this is a negative development for retail properties. The surplus ratio increased to 67%, As you see in the chart to the right there, this is stable against the previous quarter one. And as of this report, this is excluding land leasehold fees in accordance with IFRS 16. Looking on investments, during the quarter, we invested $570,000,000 and there we have the long term ambition to be above $2,000,000,000 per year over time. We have not yet noted any major disruptions in our projects due to, for example, missing material deliveries or illnesses. When we look on property values, usually, we do a desktop valuation in Q1, so in this quarter as well. But because of the increased uncertainty, we have met four different external valuation companies to understand and get a feel for the level, partly on the total, of course, and also on the yield requirements. And the uncertainty in these figures is greater than usual. And as you see, we write down our property values by €1,500,000,000 almost all of it related to retail properties. And a quick look on the consolidated assets. I just want to point out that our property portfolio now consists of partly investment properties, partly development properties and partly also now assets held for sale, which corresponds to Forresta Centre. If we look on the financing, we see that we now have a new piece in the pie chart. It is a green unsecured bank loan with a Nordic Investment Bank of €920,000,000 which is linked to the LifeCity project. And on the next page, we see that our average interest rate remains at below 1.6%. The loan to value ratio has risen slightly linked to the negative revaluation of our retail properties. However, that figure will improve, as Annika mentioned, when the liquidity for Karta Central enters our books in the second quarter. Annika? We have a large and interesting project portfolio. And after the agreement with the Stockholm municipality, enables investment of approximately billion, where SEK 4,000,000,000 is for confirmed projects. If we're looking at the potential projects of SEK 28,000,000,000, these investments will mostly be in Sikla in Nakka, Flaktus and Brodet in Stockholm, in Greimberstaden in Uppsala, and in Slussen in Stockholm, and where offices represent the biggest kind of investment. And as Martin mentioned, so far, our projects are performing well. We see very little effects on the corona pandemic. 23,000,000,000 worth of our project portfolio are situated near an existing or future underground station in the Stockholm area. It is apparent that office properties with direct underground links have rental levels approximately 30% higher than equivalent office projects just a kilometer further away. Our future investment in municipalities with strong growth are also creating long term security in our business. Let's look closer at our project portfolio, starting with Sikla. Sikla is one of our most prioritized area with a large part of our future project portfolio. The construction of Kurantan in Sikla is underway and will become a health care destination with stores, cafes, and restaurants on the Ground Floor. The project comprises 11,700 square meters and most of the areas for health care. Occupancy is planned for the end of this year. Another project in Sikla is Tapiaksovirken. This is a hotel that would be next to Markus Platzon. The project is fully let to Nordic Choice Hotel, and it will be a total of 240 hotel rooms and a public lobby. And the hotel would be completed in the spring of twenty twenty one. At Nobelweite in Sicla, we will build a total of about 500 condominiums. We have launched the sales for 68 apartments in the first phase. And as I mentioned earlier, we have now sold 78% of them. Completion of the project is in the end of this year. In Grandestaden in Uppsala, we have decided to continue with rental apartments in the area. Grandepark District 1 comprises 44 rental apartments with commercial premises on the Ground Floor. Scheduled for completion is the first half of twenty twenty one. In Mobilia in Malmo, as you know, we're adding 71 rental apartments and the culture activities to the site. There will be a four d x cinema, but also a culture center for children, funnies event tour, which is equivalent to Unibakken in Stockholm. It will open this fall. One of our biggest projects are LifeCity in Hagastaden. The building is to be the clear choice of meeting place for everyone working in the life science segment in Hagastaden. The major tenant will be academic work. The property is in the merging life science cluster close to Nizha Karolinska Solna, and the project's going to as planned. And academic work will move in in December 2021, but the project will be fully completed during the spring twenty twenty two. Our project in in is under construction. The first phase comprises 24,000 square meters and includes an upper secondary school, culture, sports, and businesses. The major tenant is Yarsalam municipality of 11,000 square meters. The project will be completed in the spring twenty twenty two. During the first quarter of this year, we decided to renovate the Katharina Husset in Switzerland. We took possession of the property in early twenty nineteen and have since then planned for a project. After renovation, the house will feature state of the art offices with a unique view, a hotel, and several restaurants. The investment amounts to 980,000,000 and will be completed 2023. By that, we close our q one presentation. And if you have any questions, you can send an email email to me or Martin. Thank you very much, and goodbye.