Atrium Ljungberg AB (publ)

Welcome to the quarterly presentation by Atrium Ljungberg of Q4 2023. Presenting the results and the activities of the quarter is CEO Annika Åhnes and CFO Ulrika Danielsson. The presentation will be followed by a Q&A. Annika, please go ahead.

Yes, thank you very much. The heading for this report is good growth in the profit from property management and progress in our projects. 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 stands for 65% of the total value and only 18% retail. Our net letting amounted to minus 17 million in the fourth quarter including termination from our side of 7 million due to upcoming projects. The net letting amounted to 53 million for the whole year, and includes termination from our side due to upcoming projects of 15 million. But during the fourth quarter, we did a letting to Stockholm University of Arts, and that letting is not included until certain conditions in the agreement are met. Our profit from property management increased by 19% in Q4 and 21% for the whole year. And the like for like figure in operating net increased by 14%. We have today ongoing projects with an investment of 8.2 billion, where 4.9 billion remains to be invested. Of the projects completed during 2024, we have a pre-letting of 91%. As I mentioned in the beginning, we have a big focus on Stockholm, both in our existing properties and 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 demand for office space in location in greater CBD in Stockholm, where the highest demand in Atriumberg is in Slussen and Hagastaden. We had some quality discussions with potential tenants during Q4. Discussions I thought would have been landed in the agreement before the New Year's. Hopefully they can be settled in this quarter. We see a cost efficiency and flexibility focus among the tenants, but also the trend that companies want to be in an area with a context and where I think our strategy is hand in hand. Retail comprises 18% of the company's total property value and represent a large diverse range of tenants. which contributes to important supply of services for our office tenants. We have a good performance in our retail hubs and have a higher 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 a higher interest cost and inflation. We are continuing to see low number of sales launched for condominiums, far below the average over the past years. The number of apartments sold are at low levels, and we see that our competitors have done some price adjustments. We have two projects ongoing where the sales rate has approved approximately five percentage points, both in Nacka and Uppsala during the fourth quarter. At the end of the year, we had sales rate of 72% in Uppsala and 51% in Nacka. And we have had a pretty good start in the beginning of the new year with a greater interest on our viewings. As I already mentioned, net letting ended up at minus 17 million in the last quarter. I was quite certain just a few weeks before Christmas that we would have had a positive net letting. Unfortunately, we received two larger terminations that had quite big impact on our numbers. The positive part is that this termination is in Slussen and Hagastaden, areas with a big demand. One termination was from a company leaving the Swedish market and we will receive a penalty during 2024. During the quarter, we have signed several new contracts. The three biggest is Haiku in Slussen, of a little more than 2,000 square meters. Bris, 1,000 square meters, moving to Hagastaden. And then the Stockholm University of the Arts, a big lease contract for more than 20,000 square meters. And as I mentioned before, we have not included this letting in the net letting due to the fact that the lease is conditional and will therefore be reported in the net letting when all conditions are met. And hopefully that will be in Q4 this year. We have a well-diversified contract portfolio where our 10 largest customers account for 20% of the revenue. Of this 20%, 7% is from state and municipalities. The average contract period was 4.6 years. Offices is our biggest source of revenue with 55%. Customer durables, our second largest part, represent 15% of the total revenue. If we look at our maturity of leases for 2024, it's only 7% of the total annual contract value and 29% of the total that has a maturity from the year 2029 and after. I think it's quite interesting that we have only five tenants over 10,000 square meters and that the average is 700 square meters. Let's look a little closer at our retail portfolio. I know I showed you this image last quarter as well, but I think it's important to understand the mix in our retail hubs. Somehow, people tend to think that retail is only fashion, but it's 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, turnover is higher than before the pandemic. Food, alcohol and pharmacies stands for 41% of the turnover in our retail hubs. The businesses that are performing the best in our shopping centers are pharmacy, low price segment and groceries. And the ones struggling the most are electronics and home decoration and furniture. And by that, I hand over to Ulrika to comment our financial performance.

Autumn Ljungberg is closing 2023 with a profit from property management isolated Q4 of 341 million Swedish crowns, equal to 19% growth. For the full year 2023, we thus improved profit from property management by 238 million, equal to 21%. The fourth quarter developed in line with previous quarters. Good revenue development combined with good cost control and continued stable net interest income. NOI in like for like improved by 13% in the last quarter and 14% for the full year. As a result of the good management and leasing work, we achieved a surplus ratio of 71% in 2023, which is an increase of four percentage points from 2022. The central administration is usually back-heavy in our company. You only have to look back to see that roughly one third of the costs will come in Q4. In this analysis, we should remember that Q4 last year had a net one-off of 9 million as a result of two things. On the one hand, we set aside 11 million for the restructuring or reorganization we carried out. And on the other hand, we received net pension repayments of 20 million. So if we adjust for that, this year's outcome is slightly better. Net financial items are stable and our average interest rate is basically unchanged since Q3. We have done some things in Q4, but I will come back to that. Property yields continue to move upwards in our portfolio around 10 basis points in the fourth quarter, which means that we have adjusted yields upwards six quarters in a row from 4% in Q2 to 4.7% now in q4 we continue to have positive cash flow into the valuation which does not however fully mitigate the yield increase and that is why we have a net net write down of 250 million in the fourth quarter equal to 0.4 percent and as a result we have written down 2.8 percent this year Our credit-related key rates remain stable, although two of them weakened somewhat in the last quarter. The LTV of 52.5% is an increase from Q3, and that is explained by an increased rate of investment in the last quarter, as well as declines in value and paid dividends. An increased rate of investment and dividends paid also affect the net debt debita, which increases slightly to just below 13, but that is clearly better than the 2022 outcome of 16. And the ICR lands at 3.7, which is slightly better than Q3's number. But that is the history. There are a few things I think are worth mentioning for 2024. The index outcome for 2024 will be roughly 135 million for us, which will result in increased rental income. Katarina Huset, which is a major project, will be completed in this year and contribute to an increase in rental income and thereby the NOI. How much I will come back to. We have increased leasehold fees, roughly five to six million, and our average interest rate will increase gradually, which is natural, but more of that later. But first to like for like and our core business. In like for like rental income increased by 10%, which is slightly lower than in Q3. And this is mainly explained by the fact that we have lower costs and by that we charge less. That is reflected in a continued high annual income growth of 14.4% for 2023. Of the total revenue growth this year of 10%, seven percentage points is CPI and the remainder is basically The effects are completed renegotiations and lower discounts. Based on continued good cost control, this means that our NOI grows in like for like with 209 million equal to 14.4%. And that represents roughly two thirds of total NOI growth. And the remaining increase comes mainly from projects, but also transactions. So let's take a look at that. The project portfolio is progressing. Ongoing projects are moving forward, and we are starting new projects according to plan. As you already know, the completed projects Life City and Bas Barka B has contributed to the rental income by roughly 55 million 2023. However, we have vacated PV Palatset and Söderhallarna, which have entered into project phases. and that entails a loss of revenue of roughly 38 million, of which most is in Söderhallarna. And then we have Katarina ESH, which will be completed in 2024. Tenants have moved in gradually during 2023, and they will move in gradually during 2024. So, in the outcome for 2023, Katarina-huset has contributed with roughly 40 million in increased rental income. And for the next year or 2024 to be more specific, that number is expected to lead in around 110 to 150 million. And the full force of this development, we will see in the P&L for 2025. Our two acquisitions in Q2 2022 in Slaktynssonrådet and Hagastaden contribute with 85 million, while the sale of Skotten in the first quarter 2023 means that we lose income of 62 million. So the net contribution from transaction decreases as time passes. In Q4, we have increased the average yield by 10 basis points, as I said earlier, which means that we have seen increases for the sixth quarter in a row, a total of 35 basis points since the start of, during 2023, and 70 basis points since we started to increase in Q3 2022. 70 basis points increase corresponds to a total decline in value of 12% in our portfolio. That is a large movement. That decline in value has been mitigated by strengthened cash flow, which results in an increase of 7%. And that means that the net movement in value in six quarters is a decline of only 5%. The fixed income market has been nervous for most of 2023, and in Q4 we experienced a large decline in market interest rates, which certainly turned up somewhat since the turn of the year. Looking ahead, we see that there is a very big difference between the Riksbank's beliefs and the market's pricing. If the Riksbank changes its interest rate path, we will know tomorrow, and then this picture may look different. Long-term interest rates have also moved. A 10-year swap has gone from 350 basis points in October to fall back at a low in mid-December to 260 basis points. In other words, sharp movements of over 100 basis points. And since then, however, it has rebounded and was trading in mid-January roughly 40 basis points above the December low. We have navigated in this landscape by rearranging the fixed income portfolio a bit and thus managed to maintain the average interest rate while extending the duration. But having said that, it is highly likely that our and other companies' financing costs will increase and be higher than they have been over the past decade, despite falling market interest rates. Of course, how quickly this happened depends on the duration of the company's fixed interest and capital tied up. No one should be immune, I think, and neither should Otter and Jungberg. And this means that we will gradually see a higher average interest rate in 2024 and moving forwards as a result of the new normal where both market interest rates and credit margins being higher than what matures. The Swedish capital markets has gradually improved since the summer where we have shown declining margins through various issues from April to October. And the last one in October was 3.25 years with a run of 218 basis points. If we were to do the same now, I think we could land in around 170 basis points. And the fact that money exists and needs to be invested is, of course, positive. Liquidity is always important. The short part of the capital market, the so-called CP market, has also been active. While investors in the first half of the year wanted to roll maturities at the best, we have been able to issue new investors in the second half of the year and increase the volume to almost 1.9 billion. And in terms of pricing, there has been some improvement where early in 2023, we were at 70 basis points for a three month maturity. We are now at 65. So all in some improvements, even if we and everyone else need to acclimatize to higher financing The fourth quarter has been fairly calm from a refinance perspective. As I just mentioned, we have printed a small bond and been active in the CP market. We have a good liquidity benefit of 8 billion, which will cover more than future maturities into 2025 while meeting the needs of the business. And as I mentioned earlier, we have changed a little in the derivatives portfolio and thus created more duration. Even if we have 19% that falls due to maturity, During this year, at this point in time, roughly 50% of that is floating debt, and the rest is really good interest rate position from derivatives as well as fixed bonds. As far as the capital market is concerned, as far as the capital is concerned, time has passed and we now have a duration of 3.5 years. We have large bank maturities in 2025, mainly in the second half of the year. For liquidity buffer reason, the plan is to handle large part of this already this year, and dialogue has been initiated. Our credit rates are stable. We have an ICR isolated quarter of 3.8, accumulated of 3.7. The net debt EBITDA, which was far too high at the beginning of the year, has steadily slowed down and is now at 12.9. compared with 15.6 at the beginning of 2023. And the LTV, as I mentioned, is increasing, mainly as a result of an increased rate of investment and dividends paid, as well as declines in value, but remains well within our policy. And I would like to conclude by mentioning that in the fourth quarter, we had our rating confirmed from UDIS BAA2, with a continued negative outlook. And the latter is mainly driven by the fragility, you could say, of our ICR, which is nevertheless strong relative to many others. And the rating is important for us going forward, which is why this was good news and an acknowledgement that we are doing the right things. So Annika, over to you.

Thank you, Ulrika. So let's update you on our project portfolio. At the end of Q4, we had ongoing construction with a total investment of 8.2 billion, of which 4.9 billion remains to be invested. Of ongoing projects, 7 billion is investment in properties that are developed to own. We had an increase of investment in our projects due to price adjustments in constructions, but we have mitigated most of that with increased rents in new lettings. In addition, we have also increased the yield requirements in our projects, as in all properties, and today we have a project profit of approximately 22%. corresponding to 1.5 billion, of which 700 million has already been reported. Furthermore, we have ongoing condominium production of 1.2 billion, with an asset market value of 1.5 billion, and the profit will be realised as the projects are completed. On this image, you see our ongoing projects and when they will be completed. of the projects that we will complete in 2024. We have pre-let 91%. During the fourth quarter, we signed the agreement with the city of Stockholm of the acquisition of Mälartidassen in Slussen and took also the investment decision. The deal comprises 7,000 square meters GFA of restaurants, cafes and culture facilities. with a fantastic view over Stockholm Old City and the water. The plan for completion is in the middle of 2026, and the investment includes land is approximately 430 million. We have also decided on the start of the construction of the next residential block in Nobelberget, Sickla. This will be the fourth block out of the total of eight, and is the first one that will be constructed in wood. The interest of residential in Nobelberg is high. The first two blocks have been completed, and the residents have moved in. And the third block, which is the highest elevation, will be completed by summer. Constructions will now begin for the fourth block, BRF Kulturarvet, which consists of 80 condominiums, distributed between the three buildings. The total area will be around 8,800 square meters, with an estimated investment of approximately 465 million. This will be the first block in Nobelberget constructed in wood, and the start of Stockholm Wood City, the world's largest wooden city, which will be built in Sikla over the next 10 years. Stockholm Wood City will consist of 250,000 square meters of wooden frame buildings. In addition to residential, it will also include offices, retail and services. During the fourth quarter, we signed the lease agreement with Stockholm University of the Arts. The new block comprises nearly 36,000 square meters. in the Slakhtus area and is expected to be completed in 2030. The lease is 20,000 square metres and is conditional and will therefore only be reported in the net letting when all conditions are met. And as I said, I hope it will take place in the turn of 2024-2025. The investment of this project is approximately 2 billion. And finally, a few words about the 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 at the latest 2030. In Sickla, we are planning to add 250,000 square meters. And as I said, just before summer, we launched Stockholm Wood City. The investment will be the total of 14 billion. In Slaktus area, the Stockholm Meatpacking District, we are also planning for offices and apartments with a total of 200,000 square meters and a total investment of 11 billion. Hagastaden & Slussen, a part of Stockholm inner city, We have projects for more than 150,000 square meters, and a total of 9 billion. And this is mostly offices. In December 2023, we communicated a new dividend policy. In the light of an increased investment pace in our urban development projects, and to be able to conduct the business with a low financial risk taking, we believe that a lower dividend payout ratio was appropriate. Based on this, the board proposes a dividend of 3.50 crowns per share. And finally, a few words about the future. I think we are well equipped, but I'm humble going into 2024. The developments on the rental markets due to economic slowdown and the changing needs profile are affecting all property companies, including Atrium Ljungberg. However, it is during these times that our strategy, building a sustainable and attractive city, shows its true strength. The index for 2024 means that our rental income will be 135 million higher, while our objective to maintain good cost control remains. In addition, our big project Katarina Huset at Slussen will be completed in the beginning of the year, which will result in good net operating growth. Even if we see that market rates are continuing to fall, the levels are higher than those in our interest rate portfolio, which means that our average interest rate will gradually rise. Overall, we're facing conditions to deliver a good 2024, but this will require considerable commitment and hard work from all of us at Atrium Ljungberg.

And by that, we open up for questions.

Thank you, Annika and Ulrika, for that presentation. Very interesting. And in this Q&A, we will also let in equity analysts from a chat function. But I'll start off with a question before I let them in. Regarding Wood City, you have earlier told us about huge international interest. Have that continued?

Yes, it has actually continued.

We have a lot of viewings on our headquarter now showing the project and also have a lot of nominees for different prizes during this spring so we'll see what comes out of that but it's a lot of fun of course to see this big interest that is shown all over the world.

Yeah and now you've started construction of the first wooden houses.

Yes we will during the Q1 now.

Okay. And with that, I would like to welcome John Wong at Kempen. If you can turn on your camera and microphone and go ahead with your questions.

Hi. Yes. Good morning. Thank you for taking my questions. I think in your management commentary, you mentioned that you received a few late terminations just before the end of the year. Were these tenants on your radar for potential terminations or did this come as a surprise to you?

Well, as I said, it was one quite big, that was a big surprise to me. It is a tenant that is leaving the Swedish market. So that was unexpected and that means that we also had a penalty that we will have in the P&L, I think it was the Q4. So the negative net letting was both a surprise and a disappointment for me. But also, as I mentioned, the Stockholm University of Arts that we have done the deal, but we have not taken in the net letting yet because of the clause that we have in that contract.

Okay, clear. Thank you. And maybe taken together with the slow decision-making process by tenants, what are you seeing in renegotiations at the moment? Do you receive any pushback following another year of high indexation that you're getting this year?

Well, yes. The year 2023, it was not a problem. Of course, I'm humble about the fact that the index for the last two years has been quite high. So we'll see exactly how that turns out. But also the fact that on a new letting, we receive very good levels. So in that sense, the price has not really been an issue, the deals we have done so far.

Just to clarify, I suppose the new letting that's mostly on the project portfolio, are you still seeing good demand for your existing portfolio?

Definitely, especially in Slussen and in Hagastaden, we have the most interest and demand. But we're out now selling Stockholm Wood City and we see a demand because of the fact that we are doing this project in a new way with the sustainability that is a big thing in this project. And we see a lot of interest because of that. We'll see if we can make something out of that during this year now.

Okay, clear. And then maybe moving on to valuations, it states that 35% of your portfolio has been externally valued. Are these skewed to any region or asset type? And is there any difference between the external and internal appraisal?

No, it is no big differences and also I would like to say that the rest of the valuation is done internally but they are 100% checked by an external value that goes through each valuation. We have a policy that roughly one third should be external valued each year. That means that each asset in the portfolio should be external valued. on a three year basis. So it's a rotation all the time. And we try to pick a reflection of the portfolio regarding retail offices and the regional aspect.

Okay, clear. And just the last one, the inflation assumption for 2024 in your valuations is 2%. Is this a reflection of valuations given that indexation is at six and a half?

No, we together with external valuators always try to set the same assumption of the CPI uplift. And we decided to put 2% for the next year and the coming years ahead.

Okay, Claire. And on the valuation write-downs that you saw in Q4, how much of this is offset by development gains?

Only a small part, the isolated quarter. I think, if I remember it, that we had 4 million in project gains only. And you see that, you find that number in the report.

Okay, perfect. Thank you. That's it from my side.

Thank you so much, John Wong at Kempen. And I have one more question regarding Wood City, of course. Is there a big difference within the project when it comes to cost when you exchange concrete and steel to wood?

Well, expect for the sustainability part. If you look on the cost side, as you mentioned, we see that the wood is a little bit more expensive, but it mitigates the fact that the construction time is shorter. So in our calculations, we see that it's the same as we have done before. But that's still on the writing board. So we'll see what the project leaders manage to achieve. We'll see how it turns out.

And then we will move on to David Yehuda. Do you have any questions to ask? If so, you're welcome. David Yehuda, if you would like to ask questions, you can turn on your microphone. No, let's see if Monish Patel, did you have any questions? If so, you're welcome to turn on your microphone. Okay, so there were no more analysts in the call. So thank you so much, Annika and Ulrika, for your presentation and answering all the questions and good luck going forward.

Thank you very much.