Earnings Call: Q3 2023

Oct 12, 2023

And welcome to this English broadcast together with Altrium Jungberias. They have closed their books now on the Q3 of 2023. And with me here to present The Report. I have CEO, Annika Oanes as well as CFO, Ulrika Danielsson. Welcome. Thank you very much. The heading for this report is strong quarter with a good cost control. I would like to start to summarize and highlight a few things from this report. Our property portfolio looks very similar to last quarter with 80% of the value in Stockholm. The biggest segment, Office, stand for 63% of the total value. Our net lending amounted to SEK 42,000,000 in the 3rd quarter and SEK 78,000,000 the 1st 3 quarters. Terminations from Our side due to upcoming projects amounted to SEK 3,000,000 in the 3rd quarter and SEK 8,000,000 the 1st 3 quarters. Our profit from property management increased by 26% in the 3rd quarter and for the 1st three quarters 22%. And the like for like figure for operating net increased by 15%. This is really an excellent performance. We have today ongoing projects With an investment of SEK 7,300,000,000 where SEK 4,400,000,000 remains to be invested. Of the projects being completed in 2023 and 2024, the pre letting is 86%. As I mentioned in the beginning, we have a big focus on Stockholm, both in our existing properties And in our upcoming investments, the major areas are Hagastaden, Slussen, Slaktusomrodot and Sikla, all areas where we have a subway in Stockholm or where there will be 1 in the coming years. I think we have a unique position in our locations in Stockholm. We still see a demand for office space in location in Greater CBD in Stockholm, Where the highest demand in Altium Jugendberg is in Slussen and Hagestaden. We have Some quality discussion with potential tenants, but the inflow of leads has been weaker after summer. We see a cost efficiency focus among tenants, but also the trend that companies want to be located in areas with a context And where I think our strategy is the perfect match. Retail comprises approximately 20% of the company's total property value and represents a large diverse range. We have a good performance in our retail hubs and have a higher number of both footfall and turnover now than before the pandemic. Our mix in the retail hubs makes them more resilient during tougher times. The Swedish condominium market show a big portion of uncertainty due to higher interest costs and inflation. We are continuing to see low number of sales launched For newbuild, far below the average over the past years. The number of apartments sold are at low levels, And we see that our competitors are doing some price adjustments. We have sold 6 apartments in Uppsala during August and 3 apartments in 6thla. But as you know, we only have 2 ongoing projects. During the quarter, we have signed several new contracts. As I already mentioned, net letting ended up at €39,000,000 in the quarter. We have had a very big interest from new tenants for Katarina Hufsetz. Since we acquired 50% of the co working and event company, Ehaus. Before summer, it was obvious for us to prioritize Ehaus and broaden our offer both in Katarina Housat, But to our tenants overall, since the location of Katarina Huse is very strategic, The lease amounted to 5,000 square meters. Other major leases were In the Stadts press, 1400 square meters in Lilleholmen and 1700 square meters to the Stockholm auction hall in Sikla. We have a well diversified contract portfolio, where our 10 largest customers account for 20% Of the revenue. On this 20%, 7% is revenue from state and municipalities. The average contract period was 4.5 years. Office is our biggest source of revenue with 56%. Customer durables, our 2nd largest part, represent 15% of the total. If we look at the maturity of leases of the last quarter this year And 2024, it's only 11% of the total annual contract value. And since most contracts have a 9 months notice period, most of this is already handled. Let's take a closer look at our retail portfolio. I know I showed you this image even last quarter, But I think it's very important to understand the mix in our retail hubs. Somehow people tend to think that retail is only fashion, But this is not our case. We have, during a long period of time, worked to diversify our retail hubs to have a wide range of different players. Fashion stands for 14% of the turnover in our retail hubs. I think we have a very attractive retail portfolio. And as I mentioned in the beginning, both footfall and turnover is higher than before the pandemic. Food, alcohol and pharmacies stand for 39% of the turnover in our retail hubs. And by that I hand over to Ulrikka to comment our financial performance. Thank you, Ulrikka. The Q3 is financially very strong, and I would say probably the strongest of all three quarters this year, Where the company's cost control and financial position are clarified even more. Certainly, we have continued to have declining property values, But the last line of this quarter still ends up in black numbers. Profit from property management for the 3rd quarter amount to SEK 366,000,000 and grow by 26%. As earlier this year, this is quarter in form of electricity subsidies that companies received here in Sweden. Adjusted for that, we still achieved very good growth of 22%. And I would like to take this opportunity to clarify how the electricity subsidy behaves in our income statement. We have received a maximum of €20,000,000 in support to reduce tariff related costs. And that is accounted for at the line as a property cost. And we have made a settlement against customers, which results in credit of 7,000,000 and that has reduced the rental revenues. The high growth rate of 26% to 22%, depending on how you want to look at it, We'll not last in the last quarter, although we believe in growth. This is partly due to the fact Q4 last year had non recurring income in the form of pension repayments and partly also because our work on cost tightening It was already starting to bite. NOI growth in like for like amounted to 15%. In that figure, we do not include the electricity subsidy, but treat it as a one off item, just like the redemption of leases. In order to get a fair assessment of underlying management and rental work. This means that we are maintaining the strong trend from the first half of the year. Even the revenues and expenses are developing in a slightly different way, and I will come back to that. As I just said, net financial items are stable and should remain so as no major volume changes occurred during the Q3. And our exposure to variable interest rates is limited at the time of writing. Property yields continue to move upwards in our portfolio roughly basis points in the Q3. And that means that we have adjusted our yields upwards 5 quarters in a row from 4% in Q2 2022 to 4.6% now in Q3. We continue to have positive cash flow into the valuation, Which, however, does not fully mitigate the yield increase. And that means a net write down of roughly EUR 450,000,000 In the Q3 equal to roughly 1%. And as a result we have written down 2.5% this year. We completed our condominium project in Uppsala in Q2, when we recognized a profit of 54%, Corresponding to the proportion of apartments taking positions of at that time, More apartments have been taking possessions of during Q3, which is why we received a further profit of SEK 4,000,000. And after positive changes in value derivatives and tax, the result on bottom line shows black figures of plus EUR 36,000,000. But since we have read figures in 9 months as a whole, the NAV has decreased Slightly by 2% adjusted for dividends. Our credit related key ratios remain stable LTV of 41.8 percent is unchanged since Q2 and in line with the year end outcome or the beginning of this year. Despite falling prices, we have been able to fend off major blows in the key figure through good earnings financial discipline. The ICR is slated quarter amounts at 3.8% and is an improvement compared to Q2. Accumulated in Q2. However, it is SEK 3.6 billion, which is due to a weaker Q1 this year. And the net debt to EBITDA continues to improve from 15.6% at the end of last year to €12,700,000,000 in Q2 and €12,500,000,000 in Q3. As you already know that we have good liquidity buffet. At the end of September it amounted to €8,000,000,000 So all in all I would like to say that Artem Jungberjell is putting another strong quarter behind us. In like for like, our rental income increased by 11%, Which is slightly lower than in Q2. And this is mainly explained by the fact that we charge lower cost as a result of the fact that we ourselves has lower cost. And we can see this in the fact that the cost increase is slowing down and that the NY growth is basically unchanged versus Q2. All segments continue to show good NOI growth with offices having the strongest development in isolated quarter with both high revenues and lower costs compared to Q2. You can note that the revenue growth for retail is declining towards Q2. This is not because retail is doing worse, But because retail went very well in the corresponding period last year, much better than offices. And to remind you, offices had a like for like rental growth of 2% last year, while retail had over 6%. Of the total revenue growth this year, roughly 11 percent of 11%, roughly 7 percentage points are from index and the rest are mainly an effect of lower vacancies and discounts as well as completed negotiations. Shar's costs are marginally higher, but not much. The business has continued to have a very good cost control. In the first half of the year, we had an increase of 6%, Which now has decreased to 2% in AMAs. And this means that we have reduced our costs compared to Q2 last year business. First, not just 6% this quarter. Certainly we had a very high electricity prices last year, Which explains parts of this development, but we have also worked hard in the business. All in all, this means that our NOI is SEK 163,000,000 higher in like for like, equal to 15% growth so far this year. The project portfolio is developing according plan. Live seating Buspark B, which were completed in Q2 last year with gradual occupancy will result in increased rental income of roughly €55,000,000 The emptying of PV Palatinate and Soderhallahna prior to project development has resulted in a loss of revenue of roughly 27,000,000, most of which is in St. Helena. In Katarinai offset, Which is expected to complete it next year. Customers have started to move in. And as we told in Q2 And the project contributes with EUR 26,000,000 more in revenue this year so far compared to a year ago. On a net basis the project development does deliver a rental growth of 36,000,000 And an NOI growth of 51,000,000. Our 2 acquisitions in Sluktiv, Somroded and Hagerstajen, which we took possession of in Q2 last year, contributed with roughly €83,000,000 in rental growth, while the sale of Skotter in Q1 this year mean that we'll lose income of €31,000,000 And this means that transaction contributions are decreasing, which is natural as time passes. Yes, and as in the first half of the year all parts of our value chain, property management, leasing, projects and transactions contribute to increased rental income of 233,000,000 or 12% and increased NOI by NOK 254,000,000 or 20%. An already restrained transaction market noted its weakest quarter with a transaction volume of 14,000,000,000 And this is 60% lower than the corresponding period last year and 70% lower than the average for the corresponding period over the past 5 years. Our assessment is that there is continued upward pressure on yields, Which in our portfolio means that for the 5th quarter in a row, we are increasing our yields in the 3rd quarter by 6 basis points, Which means that this year's yield increase amounts to roughly 25 basis points. And as a result since Q2 2022. We have increased yields by roughly 60 basis points, equal to a decrease in value of 10% in our portfolio. And that decline has been mitigated by 5% due to stronger cash flow, which you can see in our NY growth for this year. And that means that the net decline 5 quarters in a row is total 5%. Prevents the Riksbank and other central banks from rapidly cutting interest rates. Instead of The previous concept of low for long, the term higher for long is now used. And it is higher for long that we have had in our mindset since late spring 2022 and working after that to adapt the business. Swedish short term market interest rates have continued to rise as the Riksbank raised the policy rate by 25 basis points to 4% in September. However, the market assesses that further hikes are less likely, but there is also no expectation of any rapid cuts from the Riksbank, which we can see from the graph and which we have previously communicated most recently in Q2. So the policy rate is thus expected to remain around today's level for several quarters to come. Steelber increased by roughly 30 basis points during the quarter and the 10 year swap rate by roughly 45 to 50 basis points. Pricing in the fixed income market still indicates high long term interest rates, Although they are somewhat lower in the future pricing than today's price levels. The Swedish capital market like the rest of the world has been volatile but has gradually improved since the summer. We are noticing increased interest from investors and are now receiving calls every week. Our feeling is that many bond investors have investments needs. During the quarter several real estate companies issued bonds Including us, we issued €300,000,000 over 2.8 years at a credit margin of 225 basis points. The margin was the same as our issue in April, which was then with a shorter maturity of 2.5 years. And our assessments here and now is that if we were to print new papers, We would get additional duration at the same prices or maybe a little bit lower. The CP market is also developing in a positive direction. While investors in the first half of the year wanted to roll maturity at the best, we have been able to issue to new investors in the Q3. However, we have not increased our volume, but that depends more on us Then on the investors, we have not had the borrowing or liquidity needs. So all in all, some lightening. The Q3 has been relatively quiet from Refinings and interest rates risk management perspective. As I just mentioned, we have printed a small one and we have been active in the commercial paper market. We have a good liquidity buffet of SEK 8,000,000,000 which will cover more than future maturities into 2025, While meeting the needs of the business. So we sleep pretty well at night. We have not made any changes to our derivatives portfolio this quarter, but have let time pass. And that means that the duration now amounts to 3.5 years. We feel confident about this here and now and it is worth mentioning that 42% of the portfolio matures beyond 2027. Our credit ratios are stable with some improvement. We have an ICR isolated quarter of 3.8 accumulated of SEK 3.6 billion. The net debt to EBITDA, which was far too high at the beginning of the year, A steadily decline and is now at 12.5. So good underlying earnings in combination with financial discipline are paying afternoon. But Annika, what happens in the projects? Thank you, Ulrike. So let's update you on our project portfolio. At the end of Q3, we had ongoing construction of NOK 7,300,000,000 of which NOK 4,400,000,000 remain to be invested. Of ongoing projects, NOK 6,500,000,000 is investment in properties that are developed to own. We have an increase of investment in our project due to price adjustments in constructions. We have mitigated most of that in increased rents In New Lettings. And by that, we have an estimated project profit of approximately 28%, Corresponding to SEK 2,000,000,000 out of which SEK 700,000,000 has already been reported. Furthermore, we have ongoing condominium production of SEK 800,000,000 with the market value of SEK 1,000,000,000 and the project profits will be realized as the projects are completed. On this image, you see our 10 ongoing projects and when they will be completed. Of the projects that will be completed in 2023 2024, we have a pre letting of 86%. During this quarter, we have an agreement with the City of Stockholm for the acquisition of 103 land allocation in Mela Turasen. The deal comprises 7,000 square meter GFA of restaurants, cafe and culture facilities with a fantastic view over Stockholm Old City and the water. The deal is conditional on approval by the City Council, which is expected to be at the end of this year. The plan for completion It's in the middle of 2026, and the total investment, including land, is approximately SEK 430,000,000. In March 2021, we signed a letter of intent with Stockholm University of the Arts. The work has proceeded, and we are working with a detailed plan for this block. The school comprises approximately 20,000 square meters. The digital plan is expected to be in place in 2025 and completion of the project in 2029. And the total investment is approximately SEK 2,000,000,000. And finally, a few words about our 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 all locations where there is a subway station today or will be 1 by the latest 2,030. In Sitkla, we are planning to add 250,000 square meters. And just before summer, we launched Stockholm Wood City, the world's largest timber construction project. Here, we will add both offices and apartments, And we're also planning to be self sufficient in energy. The total investment is SEK 14,000,000,000. In Slaktusom Rodet, the Stockholm mid packing district, we're also planning for offices, culture, apartments and school, a total Of 200,000 square meters and the total investment of SEK 11,000,000,000. And also, Hagastaden and Slussen, part of Stockholm inner city. We have projects of approximately 150,000 square meters and a total of SEK 9,000,000,000 call. And Ulrike, I thought I'd begin with your office tenants. You described they're more focused now on cost control. Is that reflected in their demand? And if so, how? Well, of course, all the companies are thinking cost efficiency right now, and that includes us, and you can see that in our result. So I think people tend especially if you have a tenant that has a lot of square meters, if it's around 40,000 to 50 1,000 square meters. You can be affected by maybe taking it out 20%. But in our portfolio, we have a very diversified portfolio, which makes us not as sensitive as others, maybe. There are some people who have come here to the Q and A, and I see Alban, amongst others. I will return to him shortly, and he can prepare to unmute his mic as well as if you want to also turn on your camera. But I'll ask a question again here. You mentioned that you're keeping costs under control or you're doing some more cost control. And that is reflected here in quarter. I'm curious, is there more to control here? It's a tough job behind those numbers. Even, Of course, we had higher electricity prices here last year in Sweden, but You can always trimming or fine tuning the company, of course. But I think also we need to have to remember that the world around us has caused pressure on companies, both regarding higher costs for property cost in general. So just in order to mitigate that, you need to work with the cost efficiency. So I think that's a continuous work that never ends for a property company. And so we turn to Alban. Welcome to ask your question. No response there. But Paul, we'll soon be heading to you. I will just ask another question here. The market for transaction is noting its slowest so far. Tell us, is there light at the end of this tunnel? Well, there's always sunshine after rain. So some well, somewhere in the future, there would be a turn. When that will happen, we're not sure about. But there has been some transactions, mainly in logistics, for example. But what I think is interesting is that the transactions that are made are actually on very good levels, and I think that's very important going forward. So we'll see what will happen in the Could you comment on what exactly needs to happen for the market turnaround? Well, it's a rental cost curve. That's actually the increase in the interest levels is the major focus actually. And when we see that the risk there is smaller, I think you will see a turnaround. And so we turn to Paul. Welcome to ask your question. Hi, everyone. Hopefully, you can hear me okay? Yes. Great. Yes, I just wondered if you could Wondered if you could give a little more detail on the specifically on the cost savings, and kind of what's, yes, what you've Done differently to sort of achieve them. How much of it do you think is a kind of postponement of cost And how much is permanent? And just, yes, if you could break down the categories as well, it looks From the results like it falls into kind of other, and service charge. I know there's the electricity impact in there, but if you take that out, Yes. If you could just go through the specifics, that would be really helpful. Yes. You can say that we have worked with all the lines, the cost lines in the P and L. So if we start with the electricity, it's not only that prices have fallen, we use also lesser units, you could say. And you see that because the unit use per square meter adjusted for different weather is down 3% to 4%, and that is a good number. So that is a hard work And also work based on or resolved based on investment in electricity mitigations. We have also in the last end of last year announced that we laid off people Based on what we saw was coming and that, of course, hits both the Central Administration and Property Management this year in a positive way. Then we have gone through every item in the company, and you can simplified to say that we had deferred nice to have and need to have and focused on need to have and nice to have we have got rid of. So it's a lot of work in every line by every person in the company. Initiative from the recent central banks, and not to mention the Swedish Riksbank. The current interest rate path for the Riksbank is at 4.1%. And in case a possibility of another rent hike, but when that will be is uncertain, probably not in the next meeting. But Tell us, with the current rent curve that the Riksbanken has, how well equipped are you to handle the higher rates for longer? Yes. That has been our view since late spring last year, you can say. And the company has done a lot of different things, and I think that is what you need to do. It's not only one tool that works in this environment because you need to adapt the business business in the company based on the new normal. So we have had a very good interest rate, interest portfolio, derivative portfolio. But we kept even more interest rates and used The value of that portfolio in order to get an even better position, that means that we only have 12% exposure to floating debt this year and at this point in time, but even more is that 42% is locked in 2020 after 2027. So that is one way to mitigate what happened in the market. Another way is that we had a lot of liquidity buffet in order to handle maturities that forced you. We have worked with the capital structure and sold a big asset in the beginning of this year. We had some layoff of person in the end of last year. And we have worked and gone through all our cost side in order to support the surplus ratio and by that the ICR. So it's a lot of activities. Have I forgotten something? No, I think that was 100%. And that was everything from me, Annika and Ulrika from Altria Jungberght. Thank you very much for being here presenting and answering our questions. Thank you. Thank you very much.