Atrium Ljungberg AB (publ)

and welcome to this English broadcast together with Altrum Ljungberg. Hello, everyone, and welcome to this English broadcast together with Altrum Ljungberg as they have closed their books now on the third quarter of 2023. And with me here to present the report, I have CEO Annika Ånäs, 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 42 million in the third quarter and 78 million the first three quarters. Terminations from Our side, due to upcoming projects, amounted to 3 million the third quarter and 8 million the first three quarters. Our profit from property management increased by 26% in the third quarter and for the first 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 7.3 billion, where 4.4 billion remains to be invested. Of the projects being completed in 2023 and 2024, the pre-lating 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, Slakthusområdet and Sickla. All areas where we have a subway in Stockholm or where there will be one 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 Atriumberg is in Slussen and Hagastaden. 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 a 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 shows a big portion of uncertainty due to higher interest costs and inflation. We are continuing to see low number of sales launched for new builds, 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 six apartments in Uppsala during August, and three apartments in Siksla. But as you know, we only have two ongoing projects. During the quarter, we have signed several new contracts. As I already mentioned, net letting ended up at 39 million in the quarter. We have had a very big interest from new tenants for Katarinahuset. since we acquired 50 of the co-working and event company a house before summer it was obvious for us to prioritize a house and broaden our offer both in katarina huset but to our tenants overall since the location of katarina huset is very strategic the lease amounted to five five thousand square meters other major leases were Innestads Press, 1,400 square meters in Liljeholmen, and 1,700 square meters to the Stockholm auction hall in Sickla. We have a well-diversified contract portfolio, where our 10 largest customers account for 20% of the revenue. Of 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 second 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 nine month 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 Ulrika to comment on our financial performance.

Thank you, Annika. The third quarter 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 third quarter amounted to 366 million Swedish crowns and grew by 26%. As earlier this year, this is explained by good NOI growth and stable net financial items. We do have a one-off item of roughly 13 million in the third quarter in form of electricity subsidies that companies received here in Sweden. Adjusted for that, we still achieved a very good growth of 22%. 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 million in support to reduce tariff-related costs. That is accounted for at the line as a property cost. We have made a settlement against customers which results in credit of seven million and that has reduced the rental revenues the high growth rate of 26 percent to 22 percent depending on how you want to look at it will not last in the last quarter although we believe in growth this is partly due to the fact that q for last year had non-recurring income in the form of pension repayments and partly also because our work on cost tightening 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 third quarter. And our exposure to variable interest rates is limited at the time of writing. Property yields continue to move upwards in our portfolio, roughly six basis points in the third quarter. And that means that we have adjusted our yields upwards five 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 450 million in the third quarter 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 at that time. more apartments have been taken possession of during Q3, which is why we receive a further profit of 4 million. And after positive changes in value of derivatives and tax, the result on bottom line shows black figures of plus 36 million. But since we have red figures in nine months as a whole, the NAV has decreased slightly by 2% adjusted for dividends. Our credit-related key ratios remain stable, and LTV at 41.8% is unchanged since Q2, and in line with the year and 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 and financial discipline. The ICR is related quarter amounts to 3.8, and it is an improvement compared to Q2. Accumulated in Q2, however, it is 3.6, which is due to a weaker first quarter this year. And the net EBITDA continues to improve from 15.6 at the end of last year to 12.7 in Q2 and 12.5 in Q3. And you already know that we have good liquidity buffered. At the end of September, it amounted to 8 billion. So all in all, I would like to say that Autumn Ljungberg is putting another strong quarter behind us. In like for like, our rental income increases 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 have lower cost. And we can see this in the fact that the cost increase is slowing down and that the NOI 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 higher revenues and lower costs compared to Q2. We 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, 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. Shares 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 nine months, and this means that we have reduced our cost compared to Q2 last year by as much as 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 163 million higher in like-for-like, equal to 15% growth so far this year. The project portfolio is developing according to plan. Live sitting by Sparker B, which were completed in Q2 last year, with gradual occupancy, will result in increased rental income of roughly 45 million. The emptying of PV Palatset and Söderhällarna prior to project development has resulted in a loss of revenue of roughly 27 million, most of which is in Södertäljerna. In Katarina, which is expected to complete next year, customers have started to move in, as we told in Q2, and the project contributes with 26 million 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 million and an NOI growth of 51 million. Our two acquisitions in Slakthusområdet and Hagastaden, which we took possession of in Q2 last year, contributed with roughly 83 million in rental growth, while the sale of Skotten in Q1 this year means that we lose income of 31 million. And this means that transaction contributions are decreasing, which is natural as time passes. Just 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 million or 12% and increased NOI by 254 million or 20%. An already restrained transaction market noted its weakest quarter, with a transaction volume of 14 billion. This is 60% lower than the corresponding period last year, and 70% lower than the average for the corresponding period over the past five years. Our assessment is that there is continued upward pressure on yields, which in our portfolio means that for the fifth quarter in a row, we are increasing our yields. In the third quarter by six 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 NOI growth for this year. And that means that the net decline five quarters in a row is total 5%.

Inflation appears to be on the decline.

Despite this, a protracted decline in core inflation 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. Stibor 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 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 million 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 third quarter. However, we have not increased our volume, but that depends more on us than on the investors. We have not had the borrowing or liquidity needs.

So all in all, some lightning.

The third quarter has been relatively quiet from refinings and interest rates risk management perspective. As I just mentioned, we have printed a small bond and we have been active in the commercial paper market. We have a good liquidity buffered of 8 billion, 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 three and a half 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 to 3.6. The net debt EBITDA, which was far too high at the beginning of the year, has steadily declined and is now at 12.5. So good underlying earnings in combination with financial discipline are paying off. But Annika, what happens in the projects?

Thank you Ulrika. So let's update you on our project portfolio. At the end of Q3, we had ongoing construction of 7.3 billion, of which 4.4 billion remain to be invested. Of ongoing projects, 6.5 billion is investment in properties that are developed to own. We have an increase of investments 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 2 billion, out of which 700 million has already been reported. Furthermore, we have ongoing condominium production of 800 million, with a market value of 1 billion, and the project profit 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 and 2024, we have a pre-letting of 86%. During this quarter, we have an agreement with the city of Stockholm for the acquisition of one of three land allocation in Slussen, Mälartorassen. 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 is in the middle of 2026, and the total investment, including land, is approximately 430 million. 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 detailed plan is expected to be in place in 2025 and completion of the project in 2029. And the total investment is approximately 2 billion. And finally, a few words about our project portfolio going forward. We will develop four areas in Stockholm where there is a natural growth of people. The potential investment is about 40 billion. All locations where there is a subway station today or will be one by the latest 2030. In Sikla, we're 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 14 billion. In Slakthusområdet, The Stockholm Meatpacking District, we're also planning for offices, culture, apartments and school. A total of 200,000 square meters and a total investment of 11 billion. And also Hagastaden and Slussen, part of Stockholm inner city. We have projects of approximately 150,000 square meters and a total of 9 billion. And it's mostly offices.

And by that we open up for questions.

Ulrika, 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 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 50,000 square meters, you can be effective by maybe taking it out 20%. But in our portfolio, we have a very diversified portfolio. portfolio which makes us not as sensitive as others maybe.

There are some people who have come here to the Q&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 the quarter. I'm curious, is there more to control here?

It's a tough job behind those numbers. Of course, we had higher electricity prices here last year in Sweden. But you can always dream of fine-tuning the company, of course. But I think also we need to remember that the world around us has cast 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 will soon be heading to you i will just ask a 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 somewhere in the future, there will 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 future.

Could you comment on what exactly needs to happen for the market to turn around?

Well, it's a rental cost curve. The increase in the interest levels is the major focus, actually. And when we see that the risk there is smaller, I think we'll see a turnaround.

And so we turn to Paul. Welcome to ask your question.

Hi, everyone. Hopefully you can hear me okay.

Yes.

Great. Yeah, I just wondered if you could give a little more detail specifically on the cost savings and kind of 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, yeah, if you could break down the categories as well, it looks from the results like it falls into kind of other categories. and service charge. I know there's the electricity impact in there, but if you take that out, yeah, if you could just go through the specifics, that'd be really helpful.

Yes, you can say that we have worked with all the lines, the cost lines in the P&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 three to four percent and that is a good number so that is a hard work and also work based on or a result based on investment in electricity mitigations. We have also in the 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 simplify to say that we had different 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.

Okay, yeah, that's helpful. That's excellent. That's everything for me.

If anyone else has any questions for this Q&A session, please go ahead and ask them now. Very well. I'll move on to the final question here, the higher for longer narrative from the recent central banks, not to mention the Swedish Riksbank. The current interest rate path for the Riksbank is at 4.1%, and it indicates a possibility of another rent hike, but when that will be is uncertain, probably not at the next meeting. But tell us, with the current rent curve that the Riksbank 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 in the company based on the new normal. So we 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% exposed to floating debt this year and at this point in time. But even more is that 42% is locked in after 2027. So that is one way to mitigate what happened in the market. Another way is that we had a lot of liquidity buffered in order to handle maturities that falls due. We have worked with the capital structure and sold a big asset in the beginning of this year. We had some lay of a 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 Atrium Ljungberg. Thank you very much for being here, presenting and answering our questions.

Thank you very much.