Welcome to Kungsledens Financial Statement and strategy presentation - - PowerPoint PPT Presentation

Welcome to Kungsleden’s Financial Statement and strategy presentation

15 February 2013 Thomas Erséus, Chief Executive Anders Kvist, Deputy Chief Executive

Today’s agenda

• 1. The lettings and property market
• 2. The fourth quarter, operations and figures
• 3. Results for the full year 2012
• 4. Financial position
• 5. An update on tax
• 6. Strategic review and new strategy
• 7. Value creation in property management
• 8. Growth and concentration
• 9. Financial targets

10.Summary

Contents| 2

Q4—a turning-point, strategically and financially

■ Kungsleden has been obstructed by an impending tax threat for some time ■ The effects of a fixed interest rate have impelled a defensive attitude ■ The Hemsö transaction takes care of a worst-case scenario for tax, and the company is well positioned with financial flexibility ■ This transaction is part of implementing Kungsleden’s new strategy ■ The management of wholly owned properties has been a strong value creator for Kungsleden over time ■ After seven years as Chief Executive, this is a good time to leave ■ Cost savings program initiated ■ The Board is proposing a dividend of SEK 1.00 per share ■ Very good prospects for future value creation

Q4—a turning-point| 3

• 1. The lettings and property market

Lettings market remains stable

■ Employment continues to grow in major city regions ■ A segmented office market, with strong demand in good locations ■ Rent levels for commercial properties in major city regions outside CBDs are stable ■ Big spread in required yields in major city regions outside CBDs ■ Unchanged vacancy levels and variations between sub-markets

Source: Newsec

| 5 The lettings and property market

Continued good lettings for Kungsleden in the quarter

■ Some new lease contracts with annual rent exceeding SEK 9 m: – The Port of Gävle – Västmanland County Council – Cap Gemini, Västerås – RB Glas & Plast, Partille

| 6 The lettings and property market

Increased new lettings for 2012 and continued stability

■ New lettings of SEK 80 m* for the full year ■ Västerås is one of our expansive markets. SEK 17 m

• f new lettings

■ Net lettings of SEK 15 m** for the full year ■ Full-year economic occupancy level 89.3 (89.2)% ■ Remaining average contract term of 4.9 years

* New lettings are annual rents for contracts signed in Jan-Dec 2012 ** Net lettings are signed contracts less signed terminations

| 7 The lettings and property market

Transaction volume up from SEK 85 bn to 106 bn*

| 8 The lettings and property market

35 70 105 140 175 210 245 280 20 40 60 80 100 120 140 160 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012

Transaction volume per segment - Sweden

Transactions ≥ 100 MSEK Office Residential Retail Logistics, warehouses and industrial Nursery homes Others (for example hotel, soil, health care and school) Nr of transactions

Source: Newsec

BSEK Nr of transactions

Strong closing quarter for transactions in Sweden

■ Transaction volumes in Q4 were SEK 42 bn—the highest volume since Q3 2008 ■ Total transaction volumes for December were SEK 30 bn ■ Highly capitalised institutions and pension funds behind most transactions on the buy and sell sides ■ Office market represented 40% of total volumes in 2012 ■ Kungsleden was the biggest single seller in 2012 with its sale of 50:50 joint owned Hemsö

| 9 The lettings and property market

• 2. The fourth quarter, operations and figures

Kungsleden’s portfolio optimisation in the quarter

| 11

■ 15 properties were sold for SEK 552 m ■ These sales were at a property yield of 6.6% ■ The sold properties were located in Greater Stockholm, central and southern Sweden. ■ A portfolio of 9 properties, sold for SEK 380 m, was the single largest property sale ■ All sales were made at around book value ■ 11 properties were purchased for approx. SEK 1,549 m from Hemsö – Total rental value of SEK 163 m, 143,000 sq.m. leasable area – Remaining contract term 8 years ■ Earnings capacity of the remaining portfolio: 8%

The fourth quarter, operations and figures

Better positioning after the sale of Hemsö

■ Kungsleden sold its holdings in Hemsö after 11 years’ positive progress, which has created substantial shareholder value over time ■ Total purchase price of SEK 3,320 m – Price of the shares was SEK 1,820 m – Repayment of shareholder loan was SEK 1,500 m ■ After the share sale, loan repayment and purchase of 11 properties – liquidity strengthened by SEK 1,750 m – Increased borrowing capacity, utilised by arranging a new SEK 1 bn loan over three years ■ The sale is part of the implementation of Kungsleden’s new strategy,

• n wholly owned properties, and will contribute to increased returns

by reallocating funds

| 12 The fourth quarter, operations and figures

The quarter in brief

■ Net sales and gross profit decreased by 10% and 8% to SEK 494 m and SEK 309 m respectively compared to Q4 2011, due to a smaller property portfolio ■ Profit before tax was SEK 677 (348) m ■ Profit after tax was SEK 923 (303) m, or SEK 6.80 (2.20) per share. The profit increase is sourced from the sale of Hemsö ■ Cash flow from operating activities was SEK 66 (136) m ■ Profit for calculating dividends for the fourth quarter was SEK 1,732 (241) m, or SEK 12.70 (1.70) per share

| 13 The fourth quarter, operations and figures

Kungsleden has a new principal owner

■ Welandson Gösta and companies 13.1 ■ Länsförsäkringar fonder 3.2 ■ Norges Bank Investment Management 2.9 ■ Olle Florén and companies 2.5 ■ Danske Invest fonder (Sweden) 2.0 ■ BlackRock fonder (USA) 1.6 ■ AP4 1.4 ■ AP2 1.2 ■ Swedbank Robur fonder 1.2 ■ Avanza Pension Försäkring AB 1.0 30.1

Source: SIS Ägarservice, 31 December 2012

| 14 The fourth quarter, operations and figures

• 3. Results for the full year 2012

Income Statement

SEK m 2012 Jan-Dec 2011 Jan-Dec Δ, % Rental revenues 1,840 1,759 Sales revenues, modular buildings 270 288 Net sales 2,110 2,047 3 Property costs

• 533
• 512

Production costs, modules

• 249
• 258

Gross profit 1,328 1,277 4 Trading net 16 56 Sales and administration costs

• 257
• 244

Profit/loss from participations in Hemsö 794 413 92 Net financial items

• 586
• 559

Unrealised value changes, properties

• 60

241 Unrealised value changes, financial instruments

• 70
• 491

Profit before tax 1,165 693 68 Tax

• 813
• 55

Net profit for the year 352 638

• 45

| 16

The large positive item is from the sale of Hemsö Sales and gross profit increased by 3 and 4% respectively due to a larger property portfolio and milder start to the winter

Results for the full year 2012

Substantial values realised through the sale of Hemsö

2012 2011 SEK m Jan-Dec Jan-Dec Gross profit 1,328 1,277 Sales and administration costs

• 257
• 244

Net financial items

• 586
• 559

Profit from property management 485 474 Realised items Trading net on sale 16 56 Realised value changes, properties 129 65 Deduction for deferred tax on sale

• 20
• 7

Sale of Hemsö 1,507

• Realised value changes, financial instruments
• 81
• 66

Realised items 1,551 48 Profit for calculating dividends from Hemsö 223 207 Taxes payable

• 342
• 26

Profit for calculating dividends 1,917 703 | 17 Results for the full year 2012

Income Statement, wholly owned properties

SEK m 2012 Jan-Dec 2011 Jan-Dec Δ, % Rental revenues 1,583 1,515 4 Property costs

• 489
• 463

Gross profit 1,094 1,052 4 Trading net 16 56 Sales and administration costs

• 194
• 184

Net financial items

• 528
• 507

Unrealised value changes, properties 301 Unrealised value changes, financial instruments

• 55
• 380

Profit before tax 333 338

• 1

Tax 182

• 70

Net profit for the year 515 268 92

| 18 Results for the full year 2012

Income Statement, Nordic Modular

SEK m 2012 Jan-Dec 2011 Jan-Dec Δ, % Rental revenue, modules 257 244 Sales revenue, modules 270 288 Net sales 527 532

• 1

Property costs

• 44
• 49

Production costs, modules

• 249
• 258

Gross profit 234 225 4 Trading net Sales and administration costs

• 63
• 60

Net financial items

• 58
• 58

Unrealised value changes, properties

• 60
• 60

Unrealised value changes, financial instruments

• 5
• 42

Profit before tax 48 5 860 Tax

• 13
• 1

Net profit for the year 35 4 775

| 19 Results for the full year 2012

Income Statement, Hemsö

SEK m 2012 Jan-Dec 2011 Jan-Dec Δ, % Profit/loss from participations, Hemsö 794 413 92 Net financial items 6 Unrealised value changes, financial instruments

• 10
• 69

Profit before tax 784 350 124 Tax 3 16 Net profit for the year 787 366 115

| 20 Results for the full year 2012

• 4. Financial position

Financial position—pro forma after Hemsö transaction

| 22 Financial position

2012 2011 SEK m 31 Dec 31 Dec ASSETS According to Interim Report Pro forma after Hemsö transaction Properties 15,777 15,777 Other fixed assets 666 666 Receivable from AP3 3,363

• Other current assets

373 373 Cash and bank balances 721 3,549 Total assets 20,900 20,365 EQUITY AND LIABILITIES Equity 7,726 7,726 Interest-bearing liabilities 9,704 10,720 Derivatives 1,125 1,125 Other non interest-bearing liabilities 2,345 794 Total equity and liabilities 20,900 20,365

Maturity structure, credits

As of 31 December 2012 Utilised credits, SEK m Un-utilised credits, SEK m Total credits, SEK m 2013 667 260 927 2014 1,459 1,459 2015 5,600 900 6,500 2016 1,978 1,978 Total 9,704 1,160 10,864 Average conversion term, years 2.3 2.2 | 23 Financial position

Maturity structure, fixed interest periods

As of 31 December 2012 Loans, SEK m Interest deriv- atives, SEK m Ave. interest, derivatives, %

• Ave. interest,

loans and derivatives, years Average fixed interest term, years 2013 9,704 2014 800 3.9 2015 1,400 4.2 2016 500 3.9 2017 500 4.1 2018 3,650 4.2 2019 800 3.5 2020 800 3.7 2021 400 3.8 2022 500 3.8 Total 9,704 9,350 6.8 6.8 5.1 Market valuation of loans and derivatives 1,121 Total 10,825 | 24 Financial position

• 5. An update on tax

An update on tax proceedings

■ As previously reported, in November 2012, the Swedish Tax Agency reported its decision to tax Kungsleden for capital gains on transfers or participations in partnerships for the tax year 2007 ■ As previously reported, the estimated profit effect would be SEK 1,380 m and the estimated liquidity effect would be SEK 1,360 m ■ In December 2012, the Swedish Tax Agency decided to make a secondary claim (tax evasion) on the same transaction if the Agency’s primary claim was unsuccessful ■ Given a negative outcome in tax evasion proceedings, the estimated profit and liquidity effect would be approx. SEK 500 m lower than the above amounts ■ The tax evasion proceedings will be conducted in parallel with consideration of the primary claim

| 26 An update on tax

Estimate of maximum tax effects

SEK m Effect on equity Liquidity effect Provision, Q2 2009 325 Provision, Q2 2012 725 260 Deposited in anticipation of ruling

• 100

Total provisioned tax cases 1,050 160 Un-provisioned tax cases 2,930 2,920 Deposited in anticipation of ruling

• 160

Total 3,980* 2,920 An update on tax | 27

* Please refer to quarterly report for explanation for change on the third quarter

• 6. Strategic review and new strategy

Strategic review

■ Kungsleden has been working on a strategic review for some time ■ This review has been driven by fundamental changes on the property market, and the desire to concentrate its business ■ The new strategy is designed to clarify how Kungsleden creates lasting value for shareholders ■ Managing wholly owned properties has been a strong value creator for Kungsleden over time ■ Kungsleden is now concentrating on this, taking a new direction, focusing on wholly owned properties on growth markets in Sweden ■ Value creation is achieved by satisfying customers’ needs for premises, managing and enhancing properties, and optimising the company’s property portfolio

Strategic review and new strategy | 29

A strategy that puts value creation in focus

Strategic review and new strategy | 30

Kungsleden will create value by satisfying customers’ needs for premises, managing and enhancing properties and optimising the company’s property portfolio

Satisfying customers’ need for premises ■ Providing premises where customers can operate and develop ■ Creating strong customer relationships through responsiveness, being flexible and having short decision-paths Managing and enhancing properties ■ Actively manage and enhance properties to increase stable cash flows, and thus the value of the property portfolio ■ Attract good tenants and endeavour to secure long lease contracts, high occupancy levels and a balanced cost level Optimise the property portfolio ■ With good market knowledge and strong relationships with participants on the market, identify and exploit the opportunities for purchases and sales to increase risk-adjusted returns

Strategic review and new strategy | 31

A platform for creating value for shareholders, customers, employees and wider society is a strong corporate culture where people enjoy their work, develop and deliver.

Focusing geographically and by segment

Annual growth (%), total pay

Kungsleden will own, manage and enhance properties that generate high risk-adjusted returns in the warehouse/industrial, office and retail segments in Greater Stockholm, the lake Mälaren region, south western Sweden, and growth locations in northern Sweden ■ One key precondition for value creation is where in Sweden the growth is located ■ By focusing on three property types, Kungsleden will increase its knowledge of customer needs and market conditions in these segments, which will bring stronger customer relationships, improved management and enhancement of properties, and thus increase the value

• f the property portfolio

Strategic review and new strategy | 32

The current portfolio, wholly owned properties

Segment

• No. of

properties Area, 000 sq.m. Book value, SEK m Operating net, SEK m Property yield, % Occupancy level, % Average contract term, yr. Industrial/warehouse 116 1,197 6,058 511 8.4 91.0 5.3 Office 88 672 5,579 424 7.6 90.2 4.3 Retail 56 266 2,071 158 7.6 94.0 4.6 Other commercial 18 76 560 37 6.7 91.4 6.2 Total 278 2,211 14,268 1,130 7.9 91.1 4.9

Property portfolio as of 31 December 2012

Strategic review and new strategy | 33

Focus on locations outside CBDs offers attractive property yields

Strategic review and new strategy | 34

2 4 6 8 10 12 14 1981 1983 1985 1987 1989 1991 1993 1995 1997 1999 2001 2003 2005 2007 2009 2011 %

Source: Newsec

Yields - offices in prime locations

Office Stockholm CBD Office Göteborg Prime Office Malmö Prime

Interval: 4.0 - 7.0%

2 4 6 8 10 12 14 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E %

Source: Newsec

Yields - offices in secondary locations

Office Rest of Sweden Office Rest of Greater Stockholm Office Other Major Cities

Interval: 5.75 - 8.5%

Stable rents in locations outside CBDs

Strategic review and new strategy| 35

700 800 900 1 000 1 100 1 200 1 300 1 400 1 500 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E SEK/sqm

Source: Newsec

Market rent - offices in secondary locations

Other Major Cities Rest of Greater Stockholm

Interval: 1 100-1 400 SEK/sqm

1 000 2 000 3 000 4 000 5 000 6 000 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012E SEK/sqm

Source: Newsec

Market rent - offices in Stockholm CBD

Stockholm CBD

Interval: 3 500- 5 000 SEK/sqm

High property yields outside CBDs create a good cushion

04 05 05 06 06 07 07 08 08 09 09 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 % Stockholm CBD Övriga Sverige

Source: Newsec Strategic review and new strategy| 36

2 3 4 5 6 7 8 9 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 %

Source: Newsec

Yields - offices in prime locations

Stockholm CBD Rest of Sweden

Combination of high total returns and low market risk

2013 2014 2015 2016 2017 Property yield

7.65% 7.50% 7.35% 7.25% 7.20%

Rent growth

1.50% 2% 2.50% 2.50% 2.50%

Industrial & Warehouse established industrial estate, rest of Sweden Total returns, 2014-2017: 11%

2013 2014 2015 2016 2017 Property yield

7% 6.75% 6.75% 6.50% 6.50%

Rent growth

1.50% 2% 2% 2.50% 2.50%

FMCG retail, rest of Sweden Total returns, 2014-2017: 10.3%

2013 2014 2015 2016 2017 Property yield

4.50% 4.50% 4.70% 4.90% 5%

Rent growth

2% 3% 5% 7% 5%

Total returns, 2014-2017: 6.7% Office, Stockhom CBD

Source: Newsec Strategic review and new strategy| 37

Yield spread expected to reduce

Attractive pricing currently in secondary segments

Strategic review and new strategy| 38

1,50 2,50 3,50 4,50 5,50 6,50 7,50 8,50 9,50 Logistics Rest of Sweden - Category B * Office Rest of Sweden Office Rest of Greater Stockholm * Retail Rest of Sweden * Office Other Major Cities Retail Rest of Greater Stockholm * Office Stockholm Prime Suburb Residential Rest of Sweden * Logistics Rest of Sweden - Category A * Logistics Stockholm - Category B * Logistics Malmö - Category A * Logistics Stockholm - Category A Logistics Göteborg - Category A * Retail Malmö Prime Retail Other Major Cities * Office Malmö Prime Office Stockholm Central Retail Stockholm Prime Suburb * Office Göteborg Prime Retail Stockholm Central * Residential Other Major Cities Retail Göteborg Prime Residential Rest of Greater Stockholm Office Stockholm CBD Retail Stockholm CBD Residential Stockholm Prime Suburb Residential Malmö Prime Residential Göteborg Prime Residential Stockholm Prime

Yield intervals 2002-2012

Min Max 2012E

*2007-2012

Source: Newsec

• 7. Value creation in property management

How will Kungsleden create growing cash flows?

Management efficiency Customer care and lettings Develop operating net

Growing cash flows

Enhance

Value creation in property management| 40

Strong value creation over time—operating net/sq.m. up 25% since 2007

Value creation in property management| 41

200 300 400 500 600 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 Q1 Q2 Q3 Q4 2007 2008 2009 2010 2011 2012 Driftnetto per kvm

Operating net per sq.m.

• 8. Growth and concentration

Growth and concentration

Annual growth (%), total pay

Kungsleden will own, manage and enhance properties that generate high risk-adjusted returns in the warehouse/industrial, office and retail segments in Greater Stockholm, the lake Mälaren region, south western Sweden, and growth locations in northern Sweden

Growth and concentration | 43

Reinvestment after the Hemsö sale

• Investment volume of approx. SEK 5-6 bn achievable through individual

and portfolio acquisitions in a time horizon of approx. 1-2 years

• New strategy captures properties and sub-markets exhibiting sustainable

and fairly stable sales over time

• There is still a good supply of properties that fit the new strategy
• Kungsleden sees good investment opportunities on the market with

property yields of 7.0-8.5%

Growth and concentration 44

Some transactions completed on the market that fit the new strategy

• Office and warehouse portfolio of approx. 16,000 sq.m. in Märsta.

Transaction volume approx. SEK 120 m. Property yield approx. 7.75-8.0%

• Office portfolio of approx. 45,000 sq.m. in Linköping, Norrköping, Västerås

and Växjö. Transaction volume approx. SEK 320 m. Property yield approx. 7.5-8.0%

• Logistics property of approx. 50,000 sq.m. in western Sweden. Lease

contract approx. 7 years. Transaction volume approx. SEK 300 m. Property yield approx. 7.25%

• Logistics property of 10,000 sq.m. in Greater Stockholm. Transaction volume
• approx. SEK 90 m. Lease contract 3-5 yr. Property yield approx. 7.5-7.75%
• Two logistics properties totalling approx. 80,000 sq.m. in western Sweden.

Sale and leaseback with lease contracts of 15 yr. Transaction volume

• approx. SEK 400 m. Property yield approx. 8.75%

Growth and concentration |45

Kungsleden is concentrating its property portfolio

Growth and concentration |46

2012 2015

The non-strategic property share of portfolio value will fall from 10% to 5% or less over three years

Strategic properties Non-strategic properties

Sale of Nordic Modular—a matter of time

• As part of Kungsleden’s focus on wholly owned properties, Nordic Modular

will be sold when there is an opportunity, and on reasonable terms

• Kungsleden has owned Nordic Modular Group since January 2007
• Return on equity has been very positive over time, and averaged over 20%

per yr.

• The capital transfers from Nordic Modular received to date exceed the

capital Kungsleden has invested

• Nordic Modular has a strong cash flow and is a positive contributor to

Kungsleden’s earnings

• There is no hurry to sell Nordic Modular, with the plan being to sell in a few

years, given positive conditions

Growth and concentration |47

• 9. Financial targets

Financial targets and limits for 2013-2015

■ The overall target is to maximise cash flow growth within the financial limits set to secure a strong balance sheet for the short and long term: – Liquidity contingency (see below) – Loan to value ratio (our prudent estimate is 60% on new credit facilities) – Equity ratio (should be over 30%)  The most important restriction in the short term is our liquidity

• contingency. Kungsleden will maintain cash and available credit

facilities corresponding to the worst-case outcome of tax proceedings until their outcome is clear. The total is SEK 2.9 bn, which will cost an estimated 1% per year.

Financial targets| 49

Investing cash flows

■ Reinvesting the funds freed up by the sale of Hemsö, and investing the free cash flows generated by operations, is the financial base of Kungsleden’s value creation. Scope to invest is limited by the liquidity contingency that should be maintained and the share dividend (redemption, buy-backs) the Board considers appropriate ■ Alternative usages for cash flows: – Purchasing new properties within our strategy – Enhancing (converting, extending and developing) – Reinvesting in the current property portfolio

Financial targets | 50

Review of costs to save 10%

■ General review of central administrative costs ■ Identify opportunities for shared services centrally ■ Take management organisation from five regions to four ■ Charge properties with relevant costs for property operations in the accounts, to produce clearer profit centres and achieve better comparisons with other property companies ■ Target of reducing costs by a total of 10%

Cost saving| 51

Managing by objectives

■ Kungsleden will be managed towards: – The final target for the whole group’s profit from property management for 2015 – Phase targets for 2013 and 2014 ■ The phase targets and final target will be expressed at – segment level (Properties and Nordic Modular with individual administrative costs allocated) – net financial position at group level – central costs ■ Profit for calculating dividends will no longer be a target

Financial targets| 52

Kungsleden’s required return

■ Over the long term, Kungsleden should generate a return on equity exceeding the required return applied by the stock market on the company’s share ■ The 15% return on equity target used to date would be difficult to attain in current market conditions ■ In the short to medium term, in current circumstances, the stock market’s required return on Kungsleden is expected to be not less than 10-12% ■ Accordingly, Kungsleden’s investments and usage of shareholders’ funds overall must always at least satisfy this required return in advance and post-costings

Financial targets| 53

New dividend policy from 2013 onwards

■ The dividend policy will be differentiated considering the need for liquidity contingency resulting from tax proceedings: – In the medium term, dividend payments of up to 50% of profit from property management will be permitted, which also reflects the practice of listed property companies – As long as the outcome of tax proceedings remains unclear (probably until year-end 2015), a lower share of profit from property management will be paid out

Financial targets | 54

• 10. Summary

Good prospects for future value creation

■ Strict control of central administrative costs will generate operational leverage as the asset base grows ■ Investment strategy focusing on high-yielding property segments with very moderate risks ■ Cash flow back to pre-Hemsö levels within 18 – 24 months, even with higher liquidity reserves. Profit from property management restored within three years ■ As tax risks decline, liquidity reserves will be freed up for reinvestment in new properties. Average interest rates to improve with new property purchases ■ Strong and growing underlying earnings capacity based on strong cash flow from property management, visible in the bottom line when tax proceedings are concluded and interest hedging costs have tapered off

Summary| 56

Questions