U.S. Markets open in 2 hrs 52 mins

Edited Transcript of KLED.ST earnings conference call or presentation 23-Oct-19 6:45am GMT

Q3 2019 Kungsleden AB Earnings Call

Stockholm Oct 25, 2019 (Thomson StreetEvents) -- Edited Transcript of Kungsleden AB earnings conference call or presentation Wednesday, October 23, 2019 at 6:45:00am GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Biljana Pehrsson

Kungsleden AB (publ) - CEO

* Magnus Jacobson

Kungsleden AB (publ) - CFO & Deputy CEO

================================================================================

Conference Call Participants

================================================================================

* Erik Granström

Carnegie Investment Bank AB, Research Division - Financial Analyst

* Niclas Hoglund

Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator

* Tobias Kaj

ABG Sundal Collier Holding ASA, Research Division - Research Analyst

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Ladies and gentlemen, welcome to the Kungsleden Q3 report 2019. Today, I'm pleased to present Biljana Pehrsson, CEO; and Magnus Jacobson, CFO. (Operator Instructions) Speakers, please begin.

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [2]

--------------------------------------------------------------------------------

Thank you and good morning to all, and welcome to our 9-month reporting. We will have all the agenda on Page 2. I will start off to present the period in summary. Thereafter, I will hand over to Magnus Jacobson to present the financial performance and our key figures. And thereafter, I will go ahead with giving our outlook. Thereafter, we will open up to questions.

If you please turn to Page 3, almost 2 years ago, we started an extensive internal process of shifting our focus from real estate and buildings to people and customers. We strongly believe that our business is people business and that we, at Kungsleden, by managing and developing attractive and sustainable places, we will offer people and with people we mean our tenants, their employees, their customers, partners, visitors and others. We will offer people better and more inspiring working life. And if managed to do so, in the end, that will result in better profitability both for our customers as well as for ourselves.

And in the process of shifting our focus from real estate and buildings to people and customers, we have, on Page 4, developed together all of us in Kungsleden our customer promise, and that is to put you as our customer at the center in everything we do.

We have also developed our offering, and we say that our offering to our customers is an experience beyond the ordinary. We offer the complete package, the right premises for your company and your employees, in the right location, with the right supporting services. And this is something that we have both the customer promise and our offering that we have implemented and started to work during this year. And today, I'm very happy to inform that we just released results from our customer satisfaction survey (foreign language) 2019, where we have substantially improved our results. In a scale of 10 grade, 0 to 10, 10 being the best grade, we have achieved, on average, 7.5, which is the highest ever customer satisfaction result in Kungsleden history. And what is even more interesting is that we have the highest score on personal contact, meaning that Kungsleden people within asset and property management, within leasing management, in their context with our customers, we have received the highest grade of 8.1. The second highest grade we received on loyalty, meaning that our customers gives us a very high score for being able -- they will want to stay with us. But not only that, they are also happy to be ambassadors to recommend Kungsleden for other potential tenants and companies.

And we have just started the journey, as I said, this implementation of both our offering and the customer promise and our shift to people has only started. And I strongly believe that our commitment to our customers will ensure and will be positioned to address ever-changing conditions and needs on the market.

If we move on, on Page 5 and look at our other results in figures, we can start with the rental market and the leasing results. We've had good demand in our core market. And as you can see, new leasings amounted SEK 142 million for 9 months, which is slightly below last year, and the net leasing amounted SEK 21 million, which is more or less the same as last year.

Renegotiations continued in very good manner, and I will come back to that later in the presentation.

The unrealized value changes amounted 3.6% for the 9 months, mainly driven by improvement in the NOI, and profits from property management so far is up by 8%, SEK 889 million.

What is also very important is that we continue to see a rental growth in like-for-like in our portfolio for the 9 months of 5%. And if we look at that like-for-like growth in net operating income, it amounted 6% for this first 9 months of this year.

If we continue on Page 6 and look at the property portfolio, almost 90% of the property value of SEK 36.8 billion is located in Stockholm, Gothenburg, Malmö and Västerås, and Stockholm is our largest market. 47% of the property value is located in Stockholm.

If you look at the categories, you will see that offices represent 75% of the portfolio value and then we have 15% of industrial/warehouses and that portfolio is predominantly located in Västerås in Finnslätten.

72% of the property portfolio is located in our 12 clusters and close to 20% of that property portfolio value is today LEED certified. And as you know, the target for us is to LEED certify 50% of our property value by end of next year, and we are on good way to reach that target already now.

If you please turn to Page 7, the leasing results, you will see that we have good leasing results so far this year. And even more interesting is that we continue to have a good pipeline of new leases onwards. And we don't see any shift into the sentiment in the occupier market as for now, and we believe that the net leasing by year-end will improve substantially.

If we turn to Page 8, we have -- despite the fact that we actually have a very strong renegotiating year last year and that we renegotiated leases that were expiring 2 years ahead, this year we continue actually to renegotiate a big number of existing leases. 86 leases at the value of SEK 180 million of rents were renegotiated, and the average rent uplift was 7%.

What is also interesting is that 25 of the 86 renegotiations included that tenant adding on more space to the existing premises which is also positive.

All in all, on Page 9, as a result of that new leases that we sign and those new leases are -- the majority of them are signed on higher rent per square meter than the old one. And thanks to successful renegotiations, you will see that the average rent per square meter has improved by 9% on a rolling 12-month basis and is today SEK 1,427per square meter. And that, together with our cost focus, you will see that the surplus ratio in the investment properties have improved substantially compared to last year and is now 68.9%.

If you turn to Page 10, you will also see that the value uplift in our portfolio amounted SEK 1,266 million. And of that, SEK 760 million were -- was as a result of improved net -- rent and net operating income. The valuation yield on average is 5.3% in this last of September, and the valuation yield contraction from second quarter were 6 basis points.

If you turn to Page 11, you will see also that we have managed to prolong average lease duration in our portfolio to 4.1 years, and that was 3.7 years at the beginning of this year, and that is also thanks to the renegotiations and also new signed lease agreements.

On the 10 top list, not much has happened and 20% (sic) [28%] of the rental value on the top list is public tenants.

On Page 12, if we continue to look at our tenant mix, I would like to say that we have a very well-diversified tenant base, everything from large ABB to small start-ups and everything in between. 15% of the total tenant base are public tenants, and we have more than 50 headquarters in our portfolio. And on Page 12, some of the names that have -- have their headquarters in our properties. So very strong and stable good quality tenant base.

If you please turn to Page 13. As a result of new lettings, we have 2 new development projects that have entered construction phase in the third quarter, and that is Eden by Kungsleden, a new construction of a very modern office that -- where we reached 54% of pre-letting ratio, signing 2 leases in that project, and that is now under construction. And the second new development project that entered construction phase is Stettin 6 in Stockholm where we have reached an occupancy rate of 65% in the third quarter.

All in all, that means that the total investment of the large ongoing development project has increased from SEK 1.5 billion to SEK 2.1 billion, of which almost SEK 800 million is completed. And as you can see, several projects will be completed next year, and that is the second space in Blästern 14, Karlslund in first half year of next year in Östersund and B26 the office building in Västerås, the same thing there, first half year of 2020. And those will, so to say, contribute with the estimated rental value as shown in the table.

If you turn to Page 14, you will find a little bit more on Eden. As I mentioned, it's a new office building in Hyllie in a very good location where we are launching our new concept of Symbiotic Building, putting well being first hand with good service, digital solutions and green areas, and this property will, of course, also be LEED certified.

And in Page 15, you will see the second new large development that is entering construction phase and that is the Tegeluddsvägen 100, which is located in our cluster on Stockholm City East. It's a redevelopment of a modernization of an existing office building in total 26,000 square meters.

And now I will hand over to Magnus.

--------------------------------------------------------------------------------

Magnus Jacobson, Kungsleden AB (publ) - CFO & Deputy CEO [3]

--------------------------------------------------------------------------------

Thank you, Biljana. Over to some comments on the financial performance. Profit from property management increased by SEK 68 million or 8% compared to last year. This is explained by higher NOI and a better financial net. Rental income is slightly higher compared to last year.

We divested high-yield properties with limited value potential in Eskilstuna, in Jönköping and in Helsingborg. We have replaced it with quality properties with good earning capacity and value potential in Gothenburg, Tändstickan, Malmö, (inaudible) .

Value change amounted to SEK 1,260 million (sic) [SEK 1,266 million] during the 9-month period and the newly acquired properties have had fine value development.

Like-for-like rental revenue growth was 5% due to higher rents, renegotiation, raise of 7% so far and indexation.

Rental growth like-for-like on charged property tax excluded shows an uplift of 4%. Vacancy is slightly up during the third quarter, 7.1%, explained by a couple of big tenants left us, for instance Stettin in end of August and ABB in the (inaudible) Västerås. And despite a good new letting this year, it's always a bigger drop when this kind of tenant leaves, but we see a lot of requests for this type of space both in Västerås and in other areas (inaudible), et cetera. Northvolt has rented more premises, and we have, in general, same positive situation in Stockholm, Gothenburg and in Malmö.

From the end of last year, we have added positive net leasing, which means that we see new tenants moving in during autumn and winter.

Property costs decreased by SEK 25 million. It's about the same decrease if you adjust it with IFRS leasehold affect and the new assessed property tax.

The low -- the lower cost level is due to better weather conditions this year compared to last year and the lower maintenance costs. And an important driver to get us even more cost efficient and customer focused as you heard the customer satisfaction and this is that we are in-sourcing the property care taking. Most of them will be on board from the beginning of next year.

Net operating income like-for-like was up 6% and the net profit for the period was SEK 1,475 million, lower than last year due to larger negative value change in the derivatives.

Profit from property management Q3 compared to the same period previous year is a little bit lower due to the -- firstly we have left some high-yielding properties last year. And secondly, we have taken up-front fees for terminating loans as a cost in the financial net and refinancing mortgage loans, I will come back to that later.

Net operating income like-for-like Q3 compared to Q2 is growing but a little slower pace. It's mainly explained by that we during this quarter have had some rental discounts and lower turnover rents. We also had some negative net effects of the new property tax and higher vacancy level in Q3, that 2 big tenants I've mentioned before.

Still, we have a strong letting pipeline, and we can see new tenants moving on -- moving in onwards.

Over to Page 18, funding mix. Q3 has been a very interesting quarter to follow up the effect of Kungsleden's upgrading. We got investment grade in June and we can see that the market has repriced our bonds and spreads have tightened. So the same level as our peers with the same rating. It has been a big demand for our name in the bond market, and we got many new investors. We are pleased to have built a broader investor base.

During Q3, we have been issuing SEK 3 million 2 times and the lowest level was at 125 basis points, 5 years maturity. The level indicates the compression of approximately 50 basis points.

We have also terminated the mortgage loan which was combined with the bank loan at the top and a total of SEK 1.7 billion and replaced it with the new clean mortgage loan, 10 years maturity. It cost us SEK 7 million in up-front arrangement fees.

On the other hand, we had reduced the margins to 115 bps, and we also got a discount on an old loan due to the upgrading, so we are going to get a lower interest cost from 2020 and onwards about SEK 5 million to SEK 6 million annually.

On top of that, we also had the opportunity to release mortgages in certain properties and unencumbered asset ratio has increased to 35%. The conclusion is that the new rating is paying off.

If we look ahead, we have no maturing bank or mortgage loans in -- until 2023. And the first maturing bond is in 2021. Bonds are amounting up to over SEK 6.6 billion and -- or 38% of the total funding of SEK 17.4 billion.

LTV has come down to 45.4%. And if you do the Moody's methodology, it's a little bit higher, 46.7%.

Then we go to Slide 19 on the green financing. We work with a broad scale of sustainability goals derived from the UN. One of the areas we focus on is to raise the quality of our properties. So we have continued the work to certify our property portfolio.

Earlier this year, we have sent in a whole lot of application. And if we get approvals for all of them, we reach 34% certified property value at the year-end. The goal is to achieve 50% value share of the green properties in 2020, and basically all of the properties in 2025.

In our funding by bank and mortgage financing and in bond issuance, the green footprint is always an issue. Together with our ambition to make a greener footprint, we also, on top of that, get better margins, which are motivating us to increase the proportion further. And until today, the green funding is now over 1/4 of the total funding.

Average debt, Slide 20. Kungsleden has achieved a robust financial situation, and we are continuously working with reducing the liquidity risk and to keep a balanced capital and interest maturity. We got a new -- we have the new 10 years mortgage loan, we have pushed the bank refinancing date away. And the average debt maturity is at a good level close to 5 years.

To gain on, as we see it, very low interest levels, we have repurchased SEK 1 billion of swaps from 2020 to 2023 and switched it to new ones maturity from 2021 to 2028 with very attractive levels. Interest maturity has increased to 3.3 years at the end of Q3. And in October, we have done another SEK 2 billion secured below interest levels until 2028.

After these transactions, maturity increased to 3.8 years.

Then, we have a look at the ICR, Slide 21. Due to good performance in the operation and low financial cost, ICR is still at very high and pleasant levels, 4.6x. After refinancing activities, which led to some one-off cost, we have reduced interest cost. The average level is still 1.8% but low 1.8%. We believe that we are well prepared from 2020 and onwards even if the market condition turns.

Key financial ratio, Slide 22. EPRA NNNAV increased by 11%, close to SEK 86, due to good performance in the operation and the positive property value changes of 3.6%.

To summarize the financial situation, our robust balance sheet and the investment grade status have given us a broader investor foundation, access to longer capital maturity and tightened margins. And that will give us advantages in the coming years. Biljana, now over to the outlook.

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [4]

--------------------------------------------------------------------------------

Thank you very much. If you please turn to Page 24. As you know, the Swedish GDP growth forecast for this year and next year has been revised down and is 1.3% for this year and estimated to be 1.7% next year. However, we don't see any change in the occupier demand in our 4 prioritized market. These markets, as shown on Page 24, continue to have low vacancy and ramp growth. And the forecast for 2020 is a slight increase in vacancy. However, still on low level below 5% in Stockholm, Gothenburg and Västerås. And the only market where the vacancy is higher than that is in Malmö where it's expected to grow from 6% to 6.5% the next year, so a continued good office rental market.

If we turn to Page 25, we have also continued good willingness to invest in the transactional market, and it's mainly driven by capital in the market and low -- long interest rates and historically high yield gap. The transaction volumes so far this year is 30% higher than last year, and last year was a very strong year. And the transactions we have seen in the market so far are on average with the lower yield than before. So we still see some yield compression in the market.

If you turn to Page 26, our growth in rent and net operating income as well as property value will primarily be a result of our investment program. And as you can see, our plan for 2019 was to invest SEK 1.3 billion, of which SEK 600 million into our larger development projects and equally as much SEK 600 million in tenant improvements and other value-creating investments.

And as you know, both of these 2 categories have a return target of IRR in excess of 9% or yield on cost in excess of 6%. And when it comes to TI, we have a target to have a pay back time less than half of our leasing contract duration.

And as you can see, we are -- we have invested very much in the first 9 months of this year in total SEK 995 million and SEK 920 million roughly is in the development project and TIs and other value-creating investment. So we are well ahead of the plan, I would like to say.

And it is almost SEK 200 million higher investment volume compared to last year the same period, which was just above SEK 800 million. This is where our, so to say, growth will come from by timely within the budget and with the right quality complete our investment program that has very high returns.

We have also continued to have a strong pipeline on -- with new development project. And as I have mentioned before, we -- in total, it's roughly about SEK 8 billion in future development project.

And if we turn to Page 27, one of the frontrunners of the developments we have in pipeline is redevelopment and modernization of an existing office building in Norrköping that is today completely vacant, close to 6,000 square meters and where we have so far reached a pre-letting rate of 15%. And again, as soon as we reach 50%, this project will enter a construction phase. Very good location in center of Norrköping where there is a good demand for office space. So all in all, we remain positive, and we believe that 2019 will be a good year for Kungsleden.

And we open up for questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) Our first question comes from the line of Erik Granström from Carnegie.

--------------------------------------------------------------------------------

Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [2]

--------------------------------------------------------------------------------

I have a few questions, and I would like to start off with your comments regarding the rental market. You mentioned that you continue to see rather strong demand. We did see positive net leasing in Q3 as well, but you also highlighted that you expect to, sort of, the end of the year to be -- to pick up and be strong as well. I seem to remember that you reported almost SEK 60 million in net leasing for Q4 2018. Our -- when you're guiding like this, are you talking about that, sort of, strength or should we expect 2019 at least to have slightly lower net leasing than last year?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [3]

--------------------------------------------------------------------------------

Well, when looking at the pipeline, last year, we knew more or less that we would actually have a very strong net leasing in Q4 because of the ongoing discussions we had with some potential tenants. I think this year, the pipeline is strong, but not as strong as Q4 2018, which was extraordinarily strong, I would like to say. But I do believe that we will see substantially improved net leasing towards end of this year.

--------------------------------------------------------------------------------

Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [4]

--------------------------------------------------------------------------------

Okay. And then I'd like to move on a little bit on your investment target. You mentioned that you continue to have SEK 1.3 billion as a target for 2019, but you also stated that you're a little bit ahead of that for the first 9 months. Does that mean that you expect the investment pace to come down in Q4 or should we rather expect you to, sort of, move past the SEK 1.3 billion for the full year?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [5]

--------------------------------------------------------------------------------

As it looks now, we will surpass the SEK 1.3 billion towards end of the year. And you -- as I said, we have added 2 new large development projects into our investment program in Q3. So it is growing, so to say.

--------------------------------------------------------------------------------

Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [6]

--------------------------------------------------------------------------------

Okay. Very good. And what about looking into next year, given the fact that you have added new projects, do you think that you would -- you'll be able to, sort of, keep the same kind of level in 2020 as in 2019?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [7]

--------------------------------------------------------------------------------

I believe so, yes.

--------------------------------------------------------------------------------

Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [8]

--------------------------------------------------------------------------------

Okay. Very good. And then, I had just a question regarding the operating surplus margin, specifically in Q3. You mentioned that you had changes to the property taxation and I assume that those figures were all affecting Q3. Is that correct?

--------------------------------------------------------------------------------

Magnus Jacobson, Kungsleden AB (publ) - CFO & Deputy CEO [9]

--------------------------------------------------------------------------------

Not totally but most of it. And we had got some negative effects because of the vacancy rate increase. So that's the answer.

--------------------------------------------------------------------------------

Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [10]

--------------------------------------------------------------------------------

Okay. So basically the reason why the operating surplus margin was down sequentially, which is fairly uncommon, it was because of, first of all, the changes but also due to the fact that vacancy increased a little bit. Do you expect sort of -- what are you expecting in terms of your profitability going forward? It's still obviously a very strong improvement from 2018. Should we expect this to, sort of, be on a 2% improvement level for this year versus last year?

--------------------------------------------------------------------------------

Magnus Jacobson, Kungsleden AB (publ) - CFO & Deputy CEO [11]

--------------------------------------------------------------------------------

Yes, I can't give you a percentage level there. But we still -- it's going to improve in the fourth quarter.

--------------------------------------------------------------------------------

Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [12]

--------------------------------------------------------------------------------

Okay. And then my final question was basically on value changes. You mentioned that yield requirements came down about 6 basis points in Q3. Could you say a little bit about where was that at? Was that, sort of, broadly over the entire portfolio? Was it specific to certain clusters within Kungsleden?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [13]

--------------------------------------------------------------------------------

It was actually mainly in Västerås and our Finnslätten cluster. We have almost -- all of the industrial warehouse logistics portfolio is actually there. And there -- as evident -- as we have seen lots of evidence in the market -- in the transactional market on new yield drivers for these kind of properties, we have take down the valuation yield in our industrial warehouse logistics portfolio in Västerås. So I would say that is the main driver behind that yield contraction this quarter and as well as Västerås City in office cluster.

--------------------------------------------------------------------------------

Erik Granström, Carnegie Investment Bank AB, Research Division - Financial Analyst [14]

--------------------------------------------------------------------------------

Okay, very good. And then just finally, perhaps a follow-up. There's been -- we've seen a number of transactions in Q3 that's related to, sort of, your biggest cities as well. But since you seem to have moved in terms of Västerås and Finnslätten, is this something you're looking into for Q4 or should we basically expect yield compression in the portfolio to, sort of, be over now after these 9 months?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [15]

--------------------------------------------------------------------------------

No. We expect the yield compression to continue in the fourth quarter. And again because of the transactions we have seen in the market in the third quarter, not at least.

--------------------------------------------------------------------------------

Operator [16]

--------------------------------------------------------------------------------

And our next question comes from the line of Niclas Hoglund from Nordea.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [17]

--------------------------------------------------------------------------------

My name is Niclas Hoglund, and I'm at Nordea as you might know. Can you hear me?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [18]

--------------------------------------------------------------------------------

Yes, we can hear you. Hello.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [19]

--------------------------------------------------------------------------------

Superb. I was little bit confused there. If we start out with a very strong like-for-like rental growth increasing further up here in the 9 month versus the first half, could you share some light on those numbers? And if we should extrapolate those numbers into fourth quarter or is it more temporary?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [20]

--------------------------------------------------------------------------------

I think what we see in the like-for-like numbers is basically the result of last year's new leases and the renegotiations made so far. So I expect that to continue onwards.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [21]

--------------------------------------------------------------------------------

So it's really a step up on the renegotiation giving effect then?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [22]

--------------------------------------------------------------------------------

Yes, yes. I mean, last year we renegotiated SEK 250 million of rental value and achieved on average rent uplift of 13%, 14%. And this year we continue. The rent uplift on average is 7%. So I expect this to continue, of course. And as you know, every year approximately SEK 250 million up to SEK 400 million of leases expire. So that is the number of leases that we can actually renegotiate, so we have very, very strong renegotiation figures. And on top of that, all new lettings on the vacancies we have had are in general on higher rent per square meter than the old lease, so to say.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [23]

--------------------------------------------------------------------------------

And I'll follow-up on that. I mean you mentioned that it's still very strong demand in your sectors and segments. But I guess, the slowdown in the economy will likely affect your tenants as well. Do you see an increased need for investments into the property? I mean, tenants -- investments related to new lettings or is it -- so isn't that's the sort of -- is it constituted within the slightly higher cost?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [24]

--------------------------------------------------------------------------------

No. We don't see any higher cost with respect to the occupier demand and their leases that we are signing. The cost are more or less the same. And just to be clear, when I talk to our lease managers, and as you know, we have a number of leasing managers in Stockholm, Västerås, Gothenburg, Malmö, Norrköping, we don't feel any change in the sentiments from the occupier market. So it seems that growth that we have of roughly 1.3% this year and in combination with us being present mainly in these 4 core markets, Stockholm, Gothenburg and Västerås, is actually sufficient for the demand to be as good as it was last year.

But then again, if the growth will continue to be revised downwards, that will in the end affect the occupier market as well, but there are no signs of that today. Last week, I met with 4 of our largest tenants in Gothenburg and in Malmö and 3 of them are in the process of expanding their business or want to expand their business, meaning that they want more space from us. So in our daily work, we don't see any, so to say, negative changes into the rental markets.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [25]

--------------------------------------------------------------------------------

Right. And some questions then on the product side where we're finally seeing or we continue to see increase your product exposure here, 2 new project starts in the quarter, even your first new build office project. When I do the math, I see that you will probably get the construction yield of around 6%. Could you maybe confirm that and talk a little bit of what is the fair yield right now in Hyllie essentially quite present.

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [26]

--------------------------------------------------------------------------------

Well, if we were to buy and we have tried to buy some of the existing office buildings that are modern and fully let, I would like to say that the initial yield is 4%. And so, of course, having a yield on cost of 6% is very good return.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [27]

--------------------------------------------------------------------------------

Quite okay. And then moving over to sort of again to your -- great part of the refurbishment in Stettin 6. Could you help us with the, sort of, return outlook for your expected investment of SEK 230 million. I mean, the rental value is still not fully reflected or related to your investment. But could you talk a little bit of the margin or support from higher rents given the SEK 230 million investment?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [28]

--------------------------------------------------------------------------------

I think that the SEK 30 million we have invested so far is mainly not linked to any new leases is -- that still we are doing the entrances, the facade. If you pass by car, you will that see we are changing the whole landscape in front of the building. So we are doing that kind of work so far.

The new leases that we have signed are on average SEK 3,000 per square meter and that goes both for Stettin 6 and Rotterdam. And that is our target to continue to stay on that level at least onwards as well.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [29]

--------------------------------------------------------------------------------

Right. Well what I was trying to get that in total you expect to invest SEK 230 million.

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [30]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [31]

--------------------------------------------------------------------------------

So what I was -- trying to get a grip on was this sort of marginal support from higher rents from the investment, i.e, returns...

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [32]

--------------------------------------------------------------------------------

Yes. Okay. Sorry. Yes. You can see that before the rent level has been around SEK 1,800, SEK 1,900 per square meter. And the new rent level that we are targeting is SEK 3,000 per square meter. So there is the difference.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [33]

--------------------------------------------------------------------------------

Okay. So doubling of rents more or less?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [34]

--------------------------------------------------------------------------------

Well that's exactly, yes.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [35]

--------------------------------------------------------------------------------

On Blästern 14, you're sort of finalizing the hotel while still awaiting for completion of the office building. If I know you're right, you're quite conservative in your sort of accounting of profits from projects. You tend to deliver on one more or less fully complete, most of it at least. When you look at Blästern 14, what's your assessment of the return of investments when it's finalized?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [36]

--------------------------------------------------------------------------------

Well, again, if we look at transactions made in Lustgården where this property is located, I would say that yield levels are below 4% for this kind of quality, and that is what I expect when we finalize Blästern development project and tenants have moved in we will do a reevaluation of this property. And I expect that to be reflected in our valuation as well.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [37]

--------------------------------------------------------------------------------

Okay. I was trying to get more -- I mean this -- I will be back when it's finalized together. And sort of the final part your average financing cost is quite stable in the quarter despite prolong the duration a bit and yield. What's your thought on duration at this point? Have you come to an end there? Will we -- or we'll see a move out to go further here and sort of mitigate the sort of lower interest fees we see right now but at the same time reducing risk in portfolio?

--------------------------------------------------------------------------------

Magnus Jacobson, Kungsleden AB (publ) - CFO & Deputy CEO [38]

--------------------------------------------------------------------------------

Niclas, it's -- this is a combination of that factors. And what -- we don't have this refinance -- needs to refinancing the business, so we can keep calm and look after the situation day per day. And if we see opportunities, we are going maybe to prolong the duration. And we have seen that in September and in early October, so nice drops in the interest levels.

--------------------------------------------------------------------------------

Niclas Hoglund, Nordea Markets, Research Division - Senior Analyst of Construction & Real Estate and Sector Coordinator [39]

--------------------------------------------------------------------------------

So am I right to conclude that you are quite happy with the level you're at in an absolute terms and that if you see further opportunities you might go a little bit longer out the curve and we should not expect the sort of average interest rates in your portfolio to decline substantially despite, I mean, the ratings and the sort of 50 basis point better margins that you talked about in the presentation?

--------------------------------------------------------------------------------

Magnus Jacobson, Kungsleden AB (publ) - CFO & Deputy CEO [40]

--------------------------------------------------------------------------------

Yes, the next thing is that our bonds in 2021 is going to be refinanced and then we have -- and this is not going to happen in 2021 it's going right -- will happen before that. So now we can use this new level of margins.

--------------------------------------------------------------------------------

Operator [41]

--------------------------------------------------------------------------------

(Operator Instructions) And our next question comes from the line of Tobias Kaj is from ABG.

--------------------------------------------------------------------------------

Tobias Kaj, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [42]

--------------------------------------------------------------------------------

I would like to ask you regarding renegotiation. Even though you increased the volume that you renegotiate, you have a slightly lower uplift. How should we view that and what should we expect going forward? Should we view the uplift last year as unusual high or is this year as unusually low?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [43]

--------------------------------------------------------------------------------

Good question. I think it's a little bit more complicated than that. So I think last year, we had a fairly -- a big number of low hanging fruit, meaning that we saw that we have a large amount and a big rental value where we had an under rented situation. And that -- in combination, with a strong rental market, that was the main factors behind the very good rent increase on average. This year, the, so to say, low hanging fruits are not there. So this was more of a steady business for us to renegotiate.

And I think that the rent uplift of 7% doesn't fully reflect the potential of revisions because this year we have had a large number of existing leases where we have -- when we have started the renegotiation process where the tenants have actually extended their premises quite substantially. And it's always tricky then to how to say is that the new rent and how do you calculate the rent on the old space versus the new space and so on.

So I think that if that was not the case of our existing tenants taking on more space, I believe that the rent uplift would have been higher on average.

And the third part that has happened also this year is that tenants tend to want to prolong the leases more. So instead of the so to say traditional 3 years, we have had a number of renegotiations where the leases have extended by 4 years or 5 years and that you can actually see already now in the total portfolio the remaining lease duration have improved from 3.7 years to 4.8 -- in 1 year, and that is actually mainly thanks to the renegotiations this year.

--------------------------------------------------------------------------------

Tobias Kaj, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [44]

--------------------------------------------------------------------------------

Okay. And the investment for (inaudible) were mainly on -- in tenant adjustments. How much of that then is related to the renegotiation so far?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [45]

--------------------------------------------------------------------------------

Well, it's -- a smaller part of that is linked to renegotiations and the largest part is new lettings.

--------------------------------------------------------------------------------

Tobias Kaj, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [46]

--------------------------------------------------------------------------------

And regarding your new letting in the development, I know this that its unchanged occupancy ratio for Lustgården, for example and also for B26 a quite small improvement. Is that the main reason why you are confident for Q4 that you expect a significant improvement in the development that you have completed first half next year?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [47]

--------------------------------------------------------------------------------

Well, we definitely expect that will lease more in Stettin, Rotterdam and B26 all of the ongoing development as well as actually Finnslätten. But it will also be other leases, so it's not only development that we have in the pipeline.

--------------------------------------------------------------------------------

Tobias Kaj, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [48]

--------------------------------------------------------------------------------

Okay. And general question regarding your view on your balance sheet. I mean, you have -- you do invest a lot more in development now compared to a few years ago. Does that mean that you are not actively looking for acquisitions or if you're looking for acquisitions as well in this market?

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [49]

--------------------------------------------------------------------------------

Well, we do of course look at acquisitions. As you can see, we have brought down our LTV substantially. And however, so far, we have not managed to see any, so to say, good investment opportunities in the market. The price expectations are high. And as we are targeting a few locations where we do want to expand, the offering in those locations are quite limited, so -- but of course we are working on -- to see if we can acquire something as well.

--------------------------------------------------------------------------------

Tobias Kaj, ABG Sundal Collier Holding ASA, Research Division - Research Analyst [50]

--------------------------------------------------------------------------------

Okay. And finally, a bit of a detailed question. But I was a bit surprised that interest not increased that much compared to Q2. You mentioned a new item of SEK 7 million, was that related to the third quarter? And is that included in the expenses for the quarter?

--------------------------------------------------------------------------------

Magnus Jacobson, Kungsleden AB (publ) - CFO & Deputy CEO [51]

--------------------------------------------------------------------------------

Yes, they were. So SEK 7 million is cost that we took in Q3 and related to this refinancing activities with the mortgage banks. So it's going to be matter of situation in 2020 and onwards.

--------------------------------------------------------------------------------

Operator [52]

--------------------------------------------------------------------------------

(Operator Instructions) And as there are no more questions registered, I now hand back to our speakers for any closing comments.

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [53]

--------------------------------------------------------------------------------

Well, thank you for listening in today.

--------------------------------------------------------------------------------

Magnus Jacobson, Kungsleden AB (publ) - CFO & Deputy CEO [54]

--------------------------------------------------------------------------------

Thank you.

--------------------------------------------------------------------------------

Biljana Pehrsson, Kungsleden AB (publ) - CEO [55]

--------------------------------------------------------------------------------

Bye.

--------------------------------------------------------------------------------

Magnus Jacobson, Kungsleden AB (publ) - CFO & Deputy CEO [56]

--------------------------------------------------------------------------------

And bye.

--------------------------------------------------------------------------------

Operator [57]

--------------------------------------------------------------------------------

And this now concludes our conference. Thank you all for attending. You may now disconnect.