CATENA AB ANNUAL REPORT 2006
C A T E N A A B A N N U A L R E P O R T 2 0 0 6
Catena AB (publ) Box 262
SE-401 24 Göteborg, Sweden Visitors: Lilla Bommen 6 Tel: +46 31 760 09 30 Fax: +46 31 700 89 88 www.catenafastigheter.se
Stockholm and Mälardalen Region Haga Norra
Oslo Region Lilleström
Öresund Region Värnhem
Solberg
West Götaland Region Sisjön
Financial information 2007
• Interim report January–March 2007 April 23, 2007
• Interim report, January–June 2007 August 9, 2007
• Interim report, January–September 2007 October 24, 2007
• Year-end report 2007 February 2008
Information about the Annual General Meeting
Catena's Annual General Meeting for 2007 will be held at 5.30 pm on April 23, 2007 at Radisson SAS Scandinavia Hotel, Södra Hamngatan 59–65 in Göteborg. To be able to partici- pate, shareholders must be registered in the share register and have notifi ed their intention to attend.
Registration in the share register
Catena's share register is kept by the securities register cen- tre, VPC AB. Only shareholdings registered by the owner are listed under the shareholder's own name in the share register.
To have the right to participate in the Annual General Meeting, shareholders whose shares are managed by a nominee must re-register the shares in their own name. Shareholders whose shares are managed by a nominee should request the bank or stockbroker managing the shares to request temporary owner registration, "voting-right registration", in good time before April 17. Stock managers usually charge for doing this.
Notification
Notifi cation of attendance at the Annual General Meeting may be made:
– by completing a form at www.catenafastigheter.se – by telephone +46 31 760 09 39
– by post to Catena AB, Box 262, SE-401 24 Göteborg, Sweden – by e-mail to arsstamma07@catena.eu
Notifi cation should include the name, date of birth (Swedish personal ID no.)/corporate ID number, address and telephone of the intended participant. Shareholders wishing to attend the Annual General Meeting must have notifi ed their wish to attend at the latest by 4 pm on Tuesday, April 17 when the notifying period ends.
Representative and assistant
A shareholder who does not attend in person may exercise his right through a representative who shall have a power of attorney signed by the shareholder. Forms of power of attor- ney are available at www.catenafastigheter.se. The power of attorney must not be more than one year old. A shareholder or a representative may be accompanied by at most two as- sistants at the General Meeting. Shareholders wishing to bring an assistant should notify this to the company at the latest by the time stated under the heading "Notifi cation" above.
Catena Annual Report 2006
What you need to know about Catena 2–3
Statement by the CEO
– Development creates value 4–5
Business concept, goals and strategy 6–7
Market profi le 8–9
Property portfolio 10–13
Valuation 14–15
Risk and sensitivity analysis 16–17
Financing 18–21
Description of the regions
Stockholm and Mälardalen Region 22–23 Västra Götaland Region 24–25 Öresund Region 26–27 Oslo Region 28–29
Organisation and personnel 30–31
The share 32–33
Financial report 34–65
Property list 66–69
Corporate governance 70–71
Principles for pro forma accounting 72
The Board of Directors 74
Senior management 75
Defi nitions 77
D e f i n i t i o n s
Average number of shares
Weighted average of number of shares at the beginning and end of the period.
Book value of properties
Book value of properties, land, construction in progress and building fi xtures and fi ttings.
Cash fl ow for the period from operating activities per share Management income for the period divided by the number of shares outstanding at year-end.
Debt/equity ratio
Interest-bearing liabilities divided by equity.
Economic occupancy rate
Rental revenue as a percentage of rental value.
Equity per share
Equity at the end of the period in relation to the number of shares at the end of the period.
Equity/assets ratio
Equity as a percentage of total assets.
Interest coverage ratio
Profi t/loss after fi nancial items after reversing interest expense, divided by interest expense.
Interest coverage ratio, before tax
Pre-tax profi t after reversing interest expense, divided by interest ex- pense.
Interest coverage ratio, current management
Income from property management after reversing interest expense, divided by interest expense.
Lettable area
Total area available for letting.
Loan-to-value ratio, properties
Interest-bearing liabilities as a percentage of the book value of proper- ties.
Management income for the period after standard tax per share Management income for the period less 28 per cents tax, divided by the average number of shares.
Net operating income per sq.m.
Net operating income on an annual basis divided by lettable area.
Net profi t for the period per share
Net profi t for the period divided by the number of shares outstanding at year-end.
Number of properties
Total number of properties owned by the Catena Group.
Number of shares
Registered number of shares on a particular date.
Pre-tax profi t for the period per share
Profi t before tax divided by the number of shares outstanding at year-end.
Property expenses
Operating expense, repair and maintenance costs, site leasehold charges/
ground rents, property tax and property administration.
Rental revenue
Rents charged including supplements such as payment for property tax, etc.
Rental revenue per sq.m.
Rental revenue on an annual basis divided by lettable area.
Rental value
Contracted rental revenue and potential rental revenue for vacant premises assessed by Catena.
Return on equity
Net profi t for the period as a percentage of average equity.
Return on total capital
Income from property management for the period after fi nancial items plus interest expense as a percentage of average total assets.
Surplus ratio
Net operating income as a percentage of rental revenue.
Yield
Net operating income on an annual basis as a percentage of the properties’
book value at the end of the period.
.
CATENA ANNUAL REPORT 2006 / DEFINITIONS
1
The year in brief
• Rental revenues totalled SEK 177.0m (170.3m)
• Income from property management rose to SEK 99.5m (86.6m)
• Pre-tax profi t amounted to SEK 352.3m (426.6m)
• Catena was distributed to Bilia's shareholders and listed on the Stockholm Stock Exchange, Stockholmsbörsen, on April 26
• On November 1, the property Trombonen 3 in Mölndal was acquired
• During the year, investments of SEK 53m were made in existing properties
• In December, a letter of intent was issued relating to sale of six properties outside priority areas in Sweden
Key d at a
2006 2005 (pro forma)
Rental income, SEKm 177.0 170.3
Management income, SEKm 99.5 86.6
Unrealised change in value, SEKm 252.8 340.0
Pre-tax profi t, SEKm 352.3 426.6
Net profi t for the year SEKm 255.0 307.1
Net profi t for the year, SEK per share 22.05 26.56
Dividend, SEK per share (proposed) 5.00 —
Economic occupancy rate, % 98.8 98.6
Yield, properties, % 6.6 7.1
Interest-coverage ratio, managed income, multiple 3.2 3.0
Return on equity, % 37.6 71.4
Equity-assets ratio, % 33.8 27.4
(All comparative fi gures for the fi nancial outcome for 2005 on pages 1–33 are pro forma.)
CATENA ANNUAL REPORT 2006
2
Lo c at i o n s i n g row t h re g i o n s
Properties Book value, SEKm Rental revenues, SEKm Lease duration, years Occupancy rate, %
Stockholm and Mälardalen 11 889 67.7 11.4 97.8
Västra Götaland 13 656 51.6 10.7 100.0
Öresund 7 459 39.1 7.1 98.0
Oslo 4 348 27.3 12.2 100.0
Total 35 2,352 185.7 10.4 98.8
Stable revenue fl ows
The book value of the properties amounted to SEK 2,352m at December 31, 2006. Approximately 59% of the book value of the properties is in Stockholm and Göteborg. At January 1, 2007, Catena’s rental revenues amounted to SEK 185.7m on an annual basis. Revenue flows are stable since leases are long term, and the occupancy rate is high – 98.8%
at January 1, 2007.
Long-term tenants
Catena’s largest tenant is Bilia, a car dealer which accounted for 93% of Catena’s rental revenues during 2006. Catena will continue to cooperate with Bilia, as a major tenant, but intends to increase the proportion of revenues derived from other tenants, both by acquisitions and new leasing. Catena’s unique know-how and knowledge of the needs and prefer- ences of retail and distribution companies is to constitute the foundations for the company’s development.
Catena – commercial properties in the right locations
• Catena has experience of working closely with tenants and understands their needs and wishes. The company has unique expertise in the motor industry which can be used in other sectors in which tenants demand change and good commercial locations.
• Catena can expand further in the commercial properties segment, focusing on current markets through active man- agement and improvement of the property portfolio. There are excellent opportunities for attracting new tenants, as a result of the properties’ good locations and Catena’s skills in the development of properties to suit customers’ opera- tions.
• Catena acquires commercial properties with stable revenues and satisfactory prerequisites for successful long-term value growth. Active management and streamlining make the properties more attractive, and this has been a consistent feature throughout the company’s history.
• Catena divests properties for which it is considered that there are limited opportunities for further value growth.
What you need to know about Catena
Focus on commercial properties
Catena is a property company with a focus on properties in commercial districts outside town centres. The property portfolio is located in four growth regions in the Nordic countries: Stockholm and Mälardalen, Västra Götaland, Öresund and Oslo.
CATENA ANNUAL REPORT 2006 / WHAT YOU NEED TO KNOW ABOUT CATENA CATENA ANNUAL REPORT 2006 / WHAT YOU NEED TO KNOW ABOUT CATENA
3 An organization close to customers
Legal structure
Catena AB is the Parent Company in a Group with three wholly-owned subsidiaries, one Swedish, one Norwegian and one Danish. The Norwegian and Danish companies own directly the Norwegian and Danish properties respectively.
The Swedish subsidiary is in a group relationship with 17 companies, which own the Catena Group’s Swedish property holdings. In addition, there is a Swedish subsidiary which is dormant.
Operational structure
Catena’s organizational structure is primarily based on the Property Management and Business Development units. In addition, there are the groupwide Accounting/Finance and Communications functions. At December 31, 2006, the Group had 14 employees.
Property management is adapted to the properties’ geo- graphic locations, and each region has its own manager in charge of operations. The Business Development unit handles projects and development, and also transactions implemented by Catena.
CATENA ANNUAL REPORT 2006 / WHAT YOU NEED TO KNOW ABOUT CATENA CATENA ANNUAL REPORT 2006 / WHAT YOU NEED TO KNOW ABOUT CATENA Catena AB
17 Swedish companies
CatenaEjendomme A/S (Denmark)
Catena Europafastigheter
AB (Sweden)
Catena Eiendom AS
(Norway)
Group Management
Property Management
Stockholm and Mälardalen Region
Västra Götaland Region
Öresund Region
Oslo Region
Business Development
Project and Develop-
ment
Trans- actions
Accounting/Finance Communications
Shares listed on Stockholmsbörsen (the Stockholm Stock Exchange)
Catena AB was spun off to the shareholders in Bilia AB, fol-
lowing the approval of Bilia’s Annual General Meeting on
April 19, 2006. The Catena share was listed on the Stockhol-
msbörsen O-List on April 26, 2006. Subsequently, the listing
classification was changed and the Catena share is now listed
on the Nordic Exchange Small Cap. The share is traded
under the CATE abbreviated designation and is included, for
example, in the OMX Stockholm Real Estate property-com-
pany index. The share price rose from SEK 94 on the listing
date to SEK 100.75 at year-end, an increase of 7%.
4 CATENA ANNUAL REPORT 2006 / STATEMENT BY THE CEO CATENA ANNUAL REPORT 2006 / STATEMENT BY THE CEO
Development creates value
Catena’s business concept involves the ef- fective management and active development of commercial properties in good locations which have the prerequisites for the genera- tion of a steadily increasing cash fl ow and satisfactory improvement in values.
Our properties are in markets with excellent growth opportu- nities – they are in attractive commercial locations, close to main highways in the major urban regions in Sweden, Nor- way and Denmark. We have a clear strategy for building value, considerable knowledge and know-how in the indus- try, and long leases with almost 100% price indexing, which ensures stable cash flows. We also have the potential to improve existing properties and acquire commercial proper- ties which provide stable revenues and good opportunities for a satisfactory increase in values.
Clear strategy
Catena has a clear strategy for creating value for customers and shareholders. We shall:
• Manage the property portfolio actively
• Acquire commercial properties
• Streamline and develop the property portfolio
• Divest properties outside our priority markets.
We actively manage our portfolio of attractive properties. We have unique know-how as regards conditions in the vehicle sector, following the years when we were part of Bilia, and we also understand the forces underlying developments in other retail and distribution sectors. We are used to working close to our customers, and we are well aware of what they want.
Currently, our portfolio almost entirely consists of proper- ties for car sales operations. But their excellent commercial locations provide considerable potential for wholly or par- tially transforming these properties for other retailing and distribution purposes. Value – for customers, for Catena and for shareholders – can be increased by freeing warehouse space, for example, and converting it into sales floor space.
We can also see opportunities for acquiring commercial properties with improvement potential, which is a priority area for growth. We are convinced that having more proper- ties in which other types of commercial operations are con- ducted is a good thing for Catena. We can offer considerable benefits to customers in other sectors who attach priority to close cooperation and good commercial locations.
This is not to say that we turn down good business proposi- tions simply because the property includes a car dealership.
For instance, in October, we decided to exercise an option to acquire a property in Mölndal, where Bilia sells and services Ford vehicles.
In recent years, both the Swedish and the Nordic property markets have been characterized by a high level of activity, and considerable interest on the part of international and domestic investors. This has resulted in increased competition and rising prices which, in its turn, has meant that we have refused offers because the price was too high.
Another aspect of our strategy is to sell properties which we are unable to develop, or which are not located in our pri- ority areas. In December we signed a letter of intent for the divestment of six properties in Eskilstuna, Strängnäs, Falköping, Skara, Skövde and Trelleborg for a total purchase price of SEK 240m. As a result, our property portfolio is now concentrated on major urban areas which we consider have potential for the satisfactory long-term development of com- mercial operations.
Knowledge of retail and distribution operations
Catena is clearly focused on properties in out-of-town retail- ing areas, which account for a growing proportion of com- mercial operations. Catena aims to be the obvious business partner for commercial properties in our markets. This is based on long-term, stable relationships with our tenants. We have long lease terms and close cooperation with customers, with the aim of developing their operations.
Our largest tenant is Bilia, which accounted for 93% of our rental revenues during 2006. An extensive restructuring process is currently under way in the car dealership sector, in which the trend is in the direction of fewer but larger compa- nies, handling more makes. Vehicle sales are increasingly con- centrated on the companies’ main facilities, while service activities are retained, or new operations established in the form of small maintenance units close to customers. Large central depots are also tending to replace the local storage of spare parts at each facility. In other words, developments in the industry are resulting in free floor space which can be upgraded for other types of commercial operations.
One clear example of this type of development can be seen at our property in the Värnhem district of central Malmö, where parts of a motor vehicle facility have now been converted into a retail outlet store. This type of tenant customization is increasing the value of Catena’s property portfolio in the long term.
Statement by the CEO
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CATENA ANNUAL REPORT 2006 / STATEMENT BY THE CEO CATENA ANNUAL REPORT 2006 / STATEMENT BY THE CEO
Improved income
In many respects, the year 2006 was divided into two parts as far as Catena was concerned. During the first half of the year, we devoted a considerable proportion of our energy to issues involving the spin-off from Bilia and the Stockholmsbörsen listing. And subsequently our efforts were focused on our ambition to become one of the leading players with a focus on commercial properties in a number of strategic locations.
We are reporting property management income of SEK 99.5m, compared with a pro forma income of SEK 86.6m during 2005. If we deduct listing expenses amounting to SEK 10.7m, our earnings were SEK 110.2m. This improvement was partly due to increased net financial items and partly the result of higher rental revenues.
As a result of this highly positive trend, we have met the target set by the Board by a considerable margin. The return on equity amounted to 37.6 per cent, with an interest coverage ratio of 3.2 and an equity/assets ratio of 33.8 % at year-end.
The considerable demand for commercial properties and the declining yield requirement resulted in a continued increase in property prices during 2006. During the year, there was a 12% increase in the value of Catena’s property portfolio.
Positive future prospects
If we look to the future, we can see that there are many indi- cations that satisfactory business conditions will continue to apply, at least during 2007. Increased household consump- tion is one key factor, and this benefits the retail sector. Fears of continued, rapid interest-rate increases have diminished after the recent meeting of the Riksbank’s Executive Board in February 2007.
All in all, there continue to be good opportunities for us to further develop our property portfolio to create value for our customers and shareholders.
Peter Hallgren
President and CEO
6
Business concept, targets and strategy
Business concept
Catena shall own, effectively manage and actively develop commercial properties in prime locations that offers the potential to generate a steadily growing cash flow and good value growth.
Overriding objective
Based on its focused approach, Catena’s overriding objective is to give shareholders a favourable long-term total return by being one of the leading players concentrating on commercial properties in a number of strategic locations.
Financial targets
Over a business cycle, Catena will report:
• A return on equity that exceeds the risk free rate of interest by at least 5 percentage points.
1)• An interest coverage ratio that is not less than 1.75.
• An equity/assets ratio of a minimum 25 per cent and maximum 35 per cent.
Outcome
During 2006, the return on shareholders’ equity was 37.6%, including the change in value in the property portfolio. The interest coverage ratio was 3.2 and the equity/assets ratio at December 31 was 33.8%.
Dividend policy
In the long term, Catena’s dividend is to represent 75% of property management income
2)after tax
3).
Strategy and business focus in brief
Catena shall:
• Actively manage the property portfolio with focus on stim- ulating long-term customer relations by offering attractive premises in close cooperation with Catena’s tenants.
• Acquire commercial properties offering favorable potential for good long-term value growth and stable income.
• Actively work up and develop the property portfolio by identifying and implementing value-enhancing programmes that increase the attractiveness of the properties and their return, with due consideration for risk.
• Sell properties for which additional value growth is deemed limited.
Business model with a cash-fl ow focus
Catena’s business model is based on stable and long-term relationships with tenants in out-of-town commercial areas in growth regions. Stable cash flows are achieved as a result of long leases, of which almost 100% are subject to price-index clauses. The business model includes the active management of properties and their adaptation in line with the develop- ment of the tenant’s operations – customizations which increase the value of Catena’s property portfolio in the long term.
The aim is an increased proportion of properties for other types of retail operations, both as a result of acquisitions and the conversion of car sales premises to other types of retail operations. Catena’s properties are located in or close to attractive commercial areas in which this kind of conversion is becoming increasing feasible.
Catena’s long-term dividend policy stipulates that 75% of property management income after standard tax is to be dis- tributed. The remaining 25% is to be reinvested in operations to ensure continued value creation in the form of the further development of existing properties and property acquisitions.
Catena has good capacity to acquire additional properties, and acquisition can take place of both car trade properties and properties for other types of commercial operations.
However, it is a prerequisite that the properties have develop- ment potential.
CATENA ANNUAL REPORT 2006 / BUSINESS CONCEPT, GOALS AND STRATEGY
1) Risk-free interest rate is defined as the interest rate for a five-year Swedish government bond.2) Income after net financial items, excluding realised and unrealised changes in value.
3) Income after net financial items, less 28% standard tax.
PROPERTIES FOR CAR SALES ACQUI-
SITIONS
REINVESTMENT 25%
DIVIDEND 75%
CASH FLOW POSSIBLE CONVERSION
OTHER COMMERCIAL PROPERTIES
C ate n a ’s b u s i n e ss m o d e l
CATENA ANNUAL REPORT 2006 / BUSINESS CONCEPT, GOALS AND STRATEGY
7
CATENA ANNUAL REPORT 2006 / BUSINESS CONCEPT, GOALS AND STRATEGY
Malmö Hästkraften, Jägersro
PROPERTIES FOR CAR SALES ACQUI-
SITIONS
REINVESTMENT 25%
DIVIDEND 75%
CASH FLOW POSSIBLE CONVERSION
OTHER COMMERCIAL PROPERTIES
CATENA ANNUAL REPORT 2006 / BUSINESS CONCEPT, GOALS AND STRATEGY
0 10 20 30 40
%
3 months Jan–Mar
Outcome Environment Outcome/
Target*
12 months Jan–Dec 9 months
Jan–Sep 6 months
Jan–June
Re t u r n o n e q u i t y
0 1 2 3 multiple
12 months Jan–Dec 9 months
Jan–Sep 6 months
Jan–June 3 months
Jan–Mar
Outcome Environment Outcome/
Target*
I n te re st cove ra g e rat i o
12 months Jan–Dec 9 months
Jan–Sep 6 months
Jan–June 3 months
Jan–Mar
%
Outcome Environment Outcome/
Target*
0 10 20 30 40
E q u i t y/a ss e t s rat i o
* The return on equity is to exceed the risk-free interest rate by at least 5 percentage points.
Source, risk-free interest rate: The Riksbank
* The equity/assets ratio is to be not less than 25% and not more than 35%.
* Interest coverage ratio not less than 1.75.
8
Market profi le
Catena’s markets comprise four growth regions in the Nordic countries: Stockholm- Mälardalen, Västra Götaland, Öresund and Oslo. The company owns, manages and deve- lops commercial properties in these regions.
As a result, Catena has a more clearly special- ized focus and has a greater concentration on its geographical markets than many other property companies.
In the markets in which Catena is active, there are properties centred on vehicle sales with a total area of around 2.9 mil- lion sq.m. With properties covering 258,462 of floor space, Catena had a market share of 8.4% at December 31.
Positive economic trend
The development of the property and rental market is linked to overall economic growth, both in specific regions and at the national level. The key factors in economic development include population growth, access to well-trained employees, the establishment of new businesses and a satisfactory infra- structure.
In recent years, Sweden, Norway and Denmark have had historically low rates of interest and inflation. In all three coun- tries, the major urban areas have driven economic growth.
The Swedish economy developed positively during 2006.
Gross Domestic Product (GDP) grew by 4.4% (2.9), while household consumption rose by 2.8% (2.4). This satisfactory economic trend has provided increased scope for private con- sumption. During the year, inflation rose by 1.4%, as meas- ured by the consumer price index (CPI). During 2004 and 2005, the CPI increased at an annual rate of 0.4%.
The Norwegian economy also experienced a favourable trend during 2006, and GDP grew by 2.9% (2.7). Household consumption increased by 4.2% (3.2). Higher raw material prices have contributed to economic growth in Norway in recent years, and increased private consumption has also ben- efited the economy. During the year, the Norwegian CPI increased by 2.3% (1.6).
The Danish economy expanded by 3.2% during 2006 (3.0) in terms of GDP growth. Exports and private consump- tion contributed to this growth. Private consumption rose by 3.0% (4.1), while the Danish CPI increased by 1.9% (1.8).
Favourable conditions for retailing
On the whole, the prerequisites for the retail sector in the Nordic countries are satisfactory, given the current relatively low rates of interest, rising disposable incomes and higher private consumption.
The retail sector in Sweden, Norway and Denmark has been restructured, and this process is continuing. Over the past 10 years, a considerable number of new shopping areas in out-of-town locations have been established. “External”
retail sites outside the urban centres have emerged, primarily in Sweden and Denmark, but also in Norway. The main characteristics of these areas are ready access, good parking facilities and extensive retail floor space. The expansion of such out-of-town retail operations is primarily due to lower land and building costs compared with central urban loca- tions, and also changing consumer buying patterns. Large retail areas with a clear profile and content are increasing their market share, while smaller local shopping centres are finding it increasingly difficult to compete.
Lower site and construction costs mean that retail tenants pay a lower rent which, in combination with scale economies, makes it possible for them to charge lower prices. The large and diversified range offered by such stores, coupled with good parking facilities and often with lower prices, makes these external retail areas attractive for consumers and visitors.
Positive developments for vehicle sales
The overwhelming proportion of Catena’s rentable floor space consists of car sales facilities. More than 500,000 passenger vehicles have been sold in Sweden, Norway and Denmark in recent years, and it is estimated that the total value of new car sales in these three countries is approximately SEK 90 billion.
To a considerable extent, sales of new vehicles follow the same pattern as the economy as a whole. In the short term, fac- tors such as interest rates, fuel prices and tax regulations affect the demand for new cars. In recent years, sales of environmen- tally-friendly vehicles have increased dramatically. Bilia, Cate- na’s largest tenant, has dealerships for brands which are in the forefront of the development of this type of product.
The service market, including repair services, spare parts and accessories, has a more stable development pattern than new car sales, over a full business cycle. The total number of cars registered in Sweden, Norway and Denmark is about eight million, with four million in Sweden, about two million in Norway and a similar number in Denmark. The number of
CATENA ANNUAL REPORT 2006 / MARKET PROFILE
CATENA ANNUAL REPORT 2006 / MARKET PROFILE
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C ate n a ’s f l o o r s p a ce a n d m a r ke t s h a re i n g row t h re g i o n s
Region Total fl oor Catena’s fl oor Catena’s space for car space for car market sales*, sq.m. sales, sq.m. share, %
Stockholm-Mälardalen 1,100,000 95,000 8.6 Västra Götaland 400,000 71,000 17.8
Öresund 680,000 48,000 7.0
Oslo 700,000 29,000 4.1
Total 2,880,000 243,000 8.4
* Catena’s estimate of market size in the growth areas in which the company operates.
Key d at a : C ate n a i n co m p a r i s o n w i t h o t h e r p ro p e r t y co m p a n i e s
Property Occupancy Mortgage Interest yield, % rate, % rate, % term, years
Catena 6.6 99 56 1.7
Castellum — 87 45 2.3
Sagax 8.1 93 70 5.9
Balder 6.7 90 80 1.0
Hufvudstaden 4.8* 92 — 1.9
* Average valuation.
Source: The companies’ year-end statement 2007 press releases.
vehicles on the road is increasing steadily, and the BIL Sweden trade association expects the total number of cars in Sweden to exceed five million at the end of the 2010s.
Vehicle sales in Europe have been deregulated, and the resultant competitive trend is fewer but larger dealers, hand- ling more makes. There is also a development in the direction of larger main facilities with extended car sales and service operations, and a number of satellite workshops for repairs and service. Smaller sales operations are being phased out. As the largest automotive chain in the Nordic region, Bilia is to some extent leading developments in this sector.
High level of activity in the property market
In a European context, Sweden is one of the countries with the highest planned expansion of retailing operations, and the major proportion of this construction is planned as out-of-town retail areas.
Temporary bans on further expansion have been imposed in some locations in Denmark and Norway, due to concern about the possible negative impact on town centres in the long run. These temporary measures may lead to higher rents and market values for properties in existing external locations.
The market for commercial properties partly depends on the level of private consumption, which has increased, despite fluctuations in the economy. Commercial properties in the sense of central retail properties, shopping centres and out-of- town retail properties are attracting a large number of inves- tors who are looking for low risk and stable earnings.
The most active domestic and foreign investors are prop- erty companies that specialize in commercial properties and who want to reinforce their market position, and also tradi- tional property companies looking for diversification of their portfolios by supplementing their existing assets with com- mercial properties.
The volume of transactions in the property market has been considerable in recent years. Property transactions amounting to a total of about SEK 150 billion were imple- mented during 2006, according to DTZ Sweden. This is the highest figure ever, and it follows 2004 and 2005, which were also record years. Increased interest in property invest- ment has reduced the yield requirements.
The market for commercial properties is no exception to this general high level of activity. During 2006, the total trans- action volume for Swedish commercial properties exceeded SEK 21 billion, according to Jones Lang LaSalle. A growing number of Swedish and foreign investors are buying commer- cial properties, although a few previous foreign investors have left the Swedish market. Most properties are sold in a package deal, in which several properties form part of the same transaction. This type of transaction commands a pre- mium, that is to say the price of the properties included in the package is higher than if they had been sold separately.
The high level of private consumption means the construction of an increasing number of commercial properties, which could lead to pressure on prices, in particular on rents. On the other hand, increased supply is offset by improved busi- ness conditions. Catena’s properties are located in attractive areas close to existing retail operations and, as a result, bene- fit from increased activity in the retail sector, and also from the limited availability of undeveloped land in attractive loca- tions in the major urban areas.
Catena in comparison with competitors
Catena concentrates on commercial properties in external retailing locations, and this distinguishes it from most of its competitors. The market for vehicle sales properties is highly fragmented. With its market share of approximately 8.4%, Catena is the largest single player in this segment in the geo- graphic markets in which the company operates. Few property companies focus exclusively on out-of-town retail areas, since the market for this segment is still in a restructuring phase.
Compared with the industry, Catena has long leases - up to 16 years, with an average of 10.4 years. Catena also differs in terms of its occupancy rate. On January 1, 2007, the eco- nomic occupancy rate was 98.8%, which is a high figure in the industry, particularly in comparison with other listed property companies.
CATENA ANNUAL REPORT 2006 / MARKET PROFILE
CATENA ANNUAL REPORT 2006 / MARKET PROFILE
10
The property portfolio
At year-end 2006, Catena had a total of 35 properties with a total rentable fl oor space of 258,462 sq.m. The property portfolio is divided into four geographical areas: the Stockholm and Mälardalen Region, the Västra Götaland Region, the Öresund Region and the Oslo Region.
At December 31, 2006, Catena’s properties had a book value of SEK 2,352m and, on January 1, 2007, a rental value of SEK 188.0m. The Stockholm and Mälardalen Region accounted for 38% of the book value, which was the highest proportion. Rental revenues from the largest tenant, Bilia, represented 93% of the total rental revenues.
Focus on commercial properties
Catena focuses on properties in out-of-town trading areas.
These properties are currently primarily used for car sales and associated operations such as workshops, accessory shops and spare parts.
These properties are considered to have good potential for use in other out-of-town trading operations, mainly due to their satisfactory communications and retailing locations, and substantial parking areas. The aim is that the proportion of properties used for other sales activities should increase by wholly or partially streamlining and converting automotive facilities for other types of retail operations, and as the result of the acquisition of new properties.
Rental value and rental revenues
Catena’s total rental value amounted to SEK 188m (178.8) as at January 1, 2007. The economic occupancy rate amounted to 98.8% (98.6) on the same date.
Total revenues for the property portfolio amounted to SEK 177.0m, on an annual basis. The rental trend for the property portfolio has been favourable. During 2006, Cate- na’s average rents rose by 3.3% to SEK 697/sq.m.
The Stockholm and Mälardalen Region account for 36%
of the contracted rental revenues, which is the highest share, followed by the Västra Götaland Region with 28%.
Customer structure and leases
Good customer relationships are a major factor in successful business operations. Catena, with its clear focus and long experience of commercial properties, has a clear advantage here. Catena understands the factors that permeate their cus- tomers’ operations, and the challenges they are facing. As a result, the company can offer suitable premises and supple- mentary services which create added value for customers.
Bilia is Catena’s largest tenant, accounting for about 93%
of rental revenues on January 1, 2007. Bilia, which is listed on Stockholmsbörsen, is the largest automotive chain in the Nordic region, with sales of SEK 14,056m during 2006.
During 2005, Catena renegotiated all the existing leases with Bilia on market terms. The leases are fixed, but with index adjustment.
Of Catena’s 35 property units, five are covered by a framework agreement with Bilia covering 15.5% of the total rental value. This agreement gives Bilia an opportunity to vacate floor space representing not more than one third of the basic rent as at January 1, 2009, not more than two thirds as at January 1, 2012, and all floor space covered by the framework agreement as at January 1, 2015. In the case of other properties, Bilia has one or more lease agreements.
Other tenants include Volvo Truck Center Sweden,
Finnvedens Lastvagnar, Märkesoutlet, Friskis och Svettis, and Lunds Fordonstekniska gymnasium.
Rents for occupied premises with lease terms of more than three years are normally linked to the Consumer Price Index.
Almost 100% of the rental volume in Catena’s portfolio is subject to this form of annual price adjustment.
Leases have various durations. The average remaining eco- nomic duration for all leases was 10.4 years at January 1, 2007. Periods of notice vary from 3-24 months, with exten- sion periods of 1-5 years.
T h e p ro p e r t y p o r t fo l i o
December 31, December 31, Property-related key data 2006 2005 (pro forma)
Number of properties 35 34
Rentable fl oor space, sq.m 258,462 252,118 Properties’ book value, SEKm 2,352 2,016 Rental revenue per sq.m., SEK 697 675 Net operating income per sq.m., SEK 599 566
Yield, % 6.6 7.1
Surplus ratio, % 85.7 83.7
Economic occupancy rate, % 98.8 98.6
CATENA ANNUAL REPORT 2006 / PROPERTY PORTFOLIO CATENA ANNUAL REPORT 2006 / PROPERTY PORTFOLIO
11
CATENA ANNUAL REPORT 2006 / PROPERTY PORTFOLIO CATENA ANNUAL REPORT 2006 / PROPERTY PORTFOLIO
Göteborg Skår 15:13, Almedal
12 CATENA ANNUAL REPORT 2006 / PROPERTY PORTFOLIO CATENA ANNUAL REPORT 2006 / PROPERTY PORTFOLIO
Managing the portfolio
Catena’s current properties may be classified under three headings: 1) properties that provide stable cash flows and which do not need to be developed in the next few years, 2) properties which should be improved or converted, and 3) properties which should be sold.
The major proportion of properties is in the first category.
Many of these properties have been converted, or have been customized for tenants in some other way, within the last few years.
The category that calls for streamlining or conversion includes several properties which, in most cases, involve improvements without changing the type of operations con- ducted. A number of properties may require conversion from motor vehicle facilities to other kinds of sales operations. A conversion of this nature may be on a scale comparable to acquisition of a property. Irrespective of their size, invest- ments are always undertaken with the object of improving cash flow, and hence the return and the value. A good exam- ple of a project involving conversion of part of the property from a car dealership to other types of sales operations is the Tyr 2 property in the Värnhem district in central Malmö.
This area is characterized by a mix of building types, good communications and development, including the Malmö Entré shopping and experience centre. After enhancing parts of the property, they now house an outlet company, which expanded during the year and which will lease additional floor space from Catena as from March 1, 2007.
Some properties have a location that makes them suitable for housing or office developments. Improvements of this nature often result in a higher degree of development that an automotive facility, and hence satisfactory profitability. On the other hand, this means that new local planning is required for the area.
The third category – properties that should be sold – includes properties that are not located in Catena’s growth areas in major urban regions. In December 2006, Catena signed a letter of intent for the sale of six properties in Swe- den, located in Trelleborg, Skara, Skövde, Falköping, Eskil- stuna and Strängnäs. The total building floor space is about 35,000 sq.m. The agreed price is SEK 240m. This sale will be conducted as a corporate transaction.
Investments and projects
During the year, investments in existing properties totalled SEK 53m. The largest investments were a new tyre hotel in Sisjön in Göteborg for SEK 10.7m, new control and regula- tion equipment at Haga Norra for SEK 4.3m and a cost of SEK 15.5m to redeem mortgages. In addition, there are a number of projects awaiting approval. Projects in progress mainly consist of conversions and extensions of facilities at Almedal in Göteborg, in Södertälje, and in Drammen in Norway.
The investments which have been approved total SEK 130m, of which SEK 30m will be utilized during 2007.
Acquisition strategy
Catena’s strategy is to acquire commercial properties in high- priority geographical areas which have the prerequisites for satisfactory long-term value growth and stable revenues. In the main, properties are to be acquired where there is poten- tial for improvements and where the location is a decisive factor.
During the year, a property was acquired in Mölndal for SEK 64m. This building, which has a floor space of about 5,000 sq.m., houses Bilia’s sales and service for Ford and is located in the vicinity of the Högsbo 35:1 property, which is Bilia’s main facility in the Göteborg area.
Building rights
One key aspect of the improvement strategy is the creation of value that occurs as a result of transforming undeveloped land into building rights through new local plans. Such rights apply, for example, to the following properties: Stora Frö- sunda 2 in Solna to the north of Stockholm, Högsbo 35:1 and Skår 57:13 in Göteborg, Hästkraften 1 and 2 in Malmö, Fältspalten 2 in Lund, and Geten 5 in Skara. In order to uti- lize these building rights, an agreement is also required with the tenant, Bilia.
In the property valuation as at December 31, 2006, build- ing rights were valued at approximately SEK 45m.
Properties which provide stable cash flows and which do not need to be developed in the next few years.
Properties which should be improved or
converted.
Properties which should be sold.
1 2 3
M o d e l fo r m a n a g i n g t h e p o r t fo l i o
Most of the properties are classifi ed as properties that provide stable cash fl ows.
13
CATENA ANNUAL REPORT 2006 / PROPERTY PORTFOLIO CATENA ANNUAL REPORT 2006 / PROPERTY PORTFOLIO
P ro p e r t y p o r t fo l i o
Lettable Net
fl oor. Economic Rental operating
Number of space, Book value Rental value1) occupancy revenues2) income3) Surplus Segment properties sq.m. SEKm SEK/sq.m. SEKm SEK/sq.m ratio, % SEKm SEKm Yield4), % ratio, %
Stockholm and Mälardalen Region 11 100,260 889 8,867 69.2 690 97.8 67.7 55.4 6.2 81.7 Västra Götaland Region 13 75,656 656 8,671 51.6 682 100.0 51.6 45.4 6.9 87.9
Öresund Region 7 53,151 459 8,636 39.9 751 98.0 39.1 33.8 7.4 86.5
Oslo Region 4 29,395 348 11,839 27.3 929 100.0 27.3 25.4 7.3 93.2
Total 35 258,462 2,352 9,100 188.0 727 98.8 185.7 160.0 6.8 86.1
The fi ve largest properties account for 48.7% of rental revenues.
1) Contracted rental revenues on an annual basis as at January 1, 2007, including estimated value of vacant floor space on an annual basis.
2) Contracted rental revenues on an annual basis as at January 1, 2007.
3) Contracted rental revenues on an annual basis as at January 1, 2007, less property costs for corresponding properties during the previous 12 months.
4) Estimated yield, 2007.
Le a s e m at u r i t y st r u c t u re a s at J a n u a r y 1 , 2 0 07
1)1) Expiration structure excl. termination options in the framework agreement with Bilia.
0 10 20 30 40 SEKm
Year 2007
2008 2009
2010 2011
2012 2013
2014 2015
2016 2017
2018 2019
2020 2021
2022 0.2 0.2
M a r ke t va l u e o f p ro p e r t i e s a s at D e ce m b e r 3 1 , 2 0 0 6
Valued
by Forum Valued by Fastighets- business
SEKm ekonomi partner Total
Stockholm and Mälardalen Region 889 0 889
Västra Götaland Region 657 0 657
Öresund Region 361 98 459
Oslo Region 0 347 347
Total Catena 1,907 445 2,352
Change in book value of
properties from January 1, 2006 – D e ce m b e r 3 1 , 2 0 0 6
Book value at Jan. 1 2,016
Changes in value 242
Investments in existing portfolio 53 Acquisitions 65
Foreign exchange effect –24
Book value at December 31 2,352
Re n t a l va l u e a s at J a n u a r y 1 , 2 0 07
Stockholm and Mälardalen Region 37%
Västra Götaland Region 27%
Oslo Region 15%
Öresund Region 21%
B o o k va l u e a s at D e ce m b e r 3 1 , 2 0 0 6
Stockholm and Mälardalen Region 38%
Västra Götaland Region 28%
Oslo Region 15%
Öresund Region 19%
Contracted rental revenue as at January 1, 2007
Expiry, No. of Leased fl oor
year agreements space, sq.m. SEKm Proportion, %
2007 11 13,152 9.8 5.3
2008 20 18,684 12.8 6.9
2009 9 5,658 4.6 2.5
2010 1 335 0.2 0.1
2011 1 300 0.2 0.1
2012 0 0 0.0 0.0
2013 2 11,329 6.6 3.6
2014 9 54,092 37.6 20.2
2015 4 18,641 13.8 7.4
2016 3 5,949 4.6 2.5
2017 3 10,640 7.4 4.0
2018 0 0 0.0 0.0
2019 2 27,745 20.5 11.0
2020 4 29,193 25.2 13.6
2021 1 39,139 25.2 13.6
2022 2 19,740 17.2 9.2
Total 72 254,597 185.7 100.0
Le a s e - d u rat i o n st r u c t u re
14 CATENA ANNUAL REPORT 2006 / VALUATION CATENA ANNUAL REPORT 2006 / VALUATION
Valuation assignment
Catena assigned Forum Fastighetsekonomi AB to con- duct an assessment of market value of Catena’s property portfolio in Sweden, as at December 31, 2006. The prop- erty portfolio owned by Catena in Denmark and Norway has been valued in the corresponding manner by Red Property Advisors and Adgestein Takst & Eiendom- srådgivning AS, respectively.
The aim of this property valuation is to assess the mar- ket value of the properties. Execution of the assignment is in line with the instructions issued by the Swedish Property Index (SFI).
The market value is the most likely price on which a buyer and a seller can agree on a voluntary basis in an efficient market, if they have similar information and act in a rational manner.
The number of properties valued amounted to 35, of which 28 are located in Sweden, three in Denmark and four in Norway. Most of these properties are located in major urban regions.
Documentation and surveys
Catena has supplied documentation such as lease agree- ments with Bilia valid on January 1, 2007, other agree- ments and enclosures, information about notice of termi- nation and vacancies, investment plans and agreements, and information concerning framework agreements. In addition, forecasts of operation and maintenance costs for 2006 and the corresponding budgeted costs for 2007 for each property were also supplied.
Supplementary information was also obtained from the Property Data Register (FDS), local price documentation, and detailed planning documentation.
The overwhelming majority of these properties were surveyed in 2005, in connection with previous valuation opinions prior to a stock-exchange listing.
Methodology
The valuation assessment is based on a cash-flow analysis in which the value of the property was based on the present value of forecast cash flows and residual values.
A costing period of 10 years was normally applied,
although if the lease term was more than 10 years, a cost- ing period of 15 or 20 years was assigned.
Assumptions regarding future cash flows were based on analysis of:
• Current and historical rents and costs.
• Future development of the market/local area.
• The property’s market prerequisites and market position.
• Existing current lease terms.
• Market lease terms on expiry of the lease.
• Operation and maintenance costs for similar properties in comparison with the property concerned.
The resulting operating net during the costing period (2007-2016: 10-year costing period) and the residual value at the end of the costing period were subsequently discounted by applying the estimated cost of capital. The cost of capital corresponds to the market’s total required return, and comprises the real interest rate, compensation for inflation and a risk supplement. The risk supplement varies in accordance with the type, location, alternative utilization potential, etc. of the property concerned.
In special cases, the cost of capital for operating nets may be set below that for residual value. This may be the case for long leases with virtually guaranteed tenancies.
Leases with Bilia with terms in excess of five years have been regarded as leases of this nature. Since, in addition, such leases do not include heating, there is a supplement for property tax, and the tenant is expected to defray vir- tually all operating costs, including interior maintenance, the risks on the cost side are also reduced, which justifies a further reduction in the cost of capital. The cost of capi- tal for the operating net has been assessed at 5% during Bilia’s tenancy. If the property has other tenants in addi- tion to Bilia, the cost of capital has been adjusted upwards to take this into account.
Operating and maintenance costs and vacancies
The assessment of operating and maintenance costs is based on the actual outcome in the preceding year, budget forecasts and experience. These costs are
VALUATION
15
CATENA ANNUAL REPORT 2006 / VALUATION CATENA ANNUAL REPORT 2006 / VALUATION
expected to develop in line with inflation. The property’s actual and anticipated future degree of value-added tax registration has been taken into account. In the case of vacancies, it was decided, in some instances, to tempo- rarily reduce operating costs. Long-term vacancies have been assessed on a portfolio basis, with the wide range of vacancies that this implies. As a result, a lower vacancy assumption has been applied than if the vacancy risk had been assessed at a property level.
Framework agreement
Five of Catena’s properties are covered by a framework agreement. The framework agreement has been taken into account by applying a vacancy risk of 10% during the fourth and seventh years, with a subsequent downward adjustment. In one specific case, the vacancy risk has instead been included after the average lease period, that is to say after the sixth year of the lease.
Rents
Market value has been assessed in terms of the rent paid, based on the prerequisites for each property in its spe- cific sub-market. In the case of Bilia, which is clearly the main tenant, leases have been regarded as signed at the market rate. In cases in which it is considered that rents for longer leases to Bilia might change during the costing period, this has primarily been taken into account by adjusting the yield requirement, since leases normally have a duration of more than 10 years and it is very diffi- cult to predict the market rent at such a time point. In cases of other leases with a shorter term for which a mar- ket rent does not apply, adjustment has been made, tak- ing into account the property’s location, condition and the standard of accommodation. The “other leases” cate- gory only represents a limited proportion of total leases, and their impact on value is marginal. Overall – with occa- sional exceptions – the estimated market rent follows the rate of inflation.
Property tax and site leasehold charges
Property tax has been estimated in accordance with the current rules, and the proportion for which tenants are
liable has been taken into account. Information about site leasehold charges are based on current site leasehold agreements.
Building rights
Crucial building rights in investment properties are based on current detailed planning documentation and have been valued on the basis of known prices in the sub-mar- ket concerned. The value of building rights has been included as an adjustment in the value of the property concerned, and has been taken into account if, in prac- tice, the property owner has an opportunity to utilize such rights during the costing period. In other words, only building rights for land that is not utilized or which is leased on a short-term basis have been taken into account.
Results
In accordance with the above prerequisites, assumptions and considerations, Forum concludes that the total mar- ket value of the Swedish portfolio amounts to SEK 1,907m (excluding stamp duty).
Valuation of Catena’s properties outside Sweden
Red Property Advisors and Adgestein Takst & Eiendom- srådgivning AS have been assigned to conduct the valua- tion of the properties in Denmark and Norway, respec- tively. In all, these valuations cover three properties in Denmark with an estimated market value of SEK 98m, and four properties in Norway with an estimated market value of SEK 347m.
Göteborg, December 2006 Forum Fastigheter AB
Håkan Olsson Malin Älmegran
Authorized Property Valuers, SFF
16 CATENA ANNUAL REPORT 2006 / RISK AND SENSITIVITY ANALYSIS CATENA ANNUAL REPORT 2006 / RISK AND SENSITIVITY ANALYSIS
Risk and sensitivity analysis
Properties
Catena has largely concentrated its property portfolio on the major urban regions in Sweden (Stockholm, Göteborg and Malmö), and on the Copenhagen and Oslo regions.
Rental revenues from these regions represent 92% of the total. At year-end, Catena had an economic occupancy rate of 98.8%. The unrealized value growth during the year amounted to SEK 242m. Interest levels, inflation expectations and general economic conditions are key factors that influ- ence value growth. Other factors include the extent to which Catena has succeeded in developing its properties and the sta- tus of the leasing and customer structure. Catena’s key objec- tive is to acquire commercial properties with stable revenues and satisfactory potential for long-term growth.
Rents and tenants
Over time, the rental trend for commercial properties is gov- erned by supply and demand. Demand for Catena’s commer- cial premises is affected by cyclical factors, structural change and the development of the location in question in terms of population and employment, for example. The supply of premises in a geographically defined market is determined by the existing floor space and by any additional new construc- tion. In locations with a declining population, the demand for premises also tends to decline in the long term, which may result in a higher overall vacancy rate, with a risk of poor or negative development of rents.
Catena’s properties are in well-located areas in the urban area concerned. Bilia, which is the largest tenant, accounts for 93% of rental revenues, and the average term for Bilia’s leases is 11.0 years. Roughly 100% of the rental volume in Catena’s portfolio is subject to annual adjustment. For the most part, rents change in line with index clauses, and largely correspond to 100% of the CPI.
The risk of rental losses is considered to be low.
Operation and maintenance costs
Catena’s tenants tend to have relatively extensive responsibil- ity for operation and maintenance, and they are normally lia- ble for all interior maintenance, and for operating costs sub- ject to a tariff structure (heat, water, electricity, etc.). In other
words, Catena’s exposure to changes in operating costs is very limited. In the event of vacancies, however, the compa- ny’s income is affected by costs such as heating, previously defrayed by the tenant.
Property tax
The majority of Catena’s properties in Sweden are classified as industrial properties, for which property tax represents 0.5% of the tax assessment value. Almost all of Catena’s leases include a clause under which Catena is entitled to bill property tax to the tenant, and this entitlement also forms part of Catena’s leases in Denmark and Norway in cases where property tax is debited to the property owner.
Net fi nancial items
Catena’s largest single cost item is interest expense for bor- rowed capital. During 2006, Catena’s Board established a finance policy stipulating rules for the way in which Catena’s Finance unit is to handle borrowing, loan terms and the way in which the risks in financing operations are to be control- led. In order to reduce the risk of higher interest rates, Catena has decided to extend the fixed-interest term by means of interest-rate swaps, in accordance with the company’s finance policy. The fixed-interest term amounted to 1.7 years at December 31, 2006.
Capital structure
Catena’s capital-structure objective is an equity/assets ratio in the 25-35% range, and an interest coverage ratio of not less than 1.75. As at December 31, 2006, the equity/assets ratio amounted to 33.8%, and the interest coverage ratio was 3.2.
Currency risk
Catena owns properties via subsidiaries in Denmark and Norway. Changes in foreign exchange rates may have a nega- tive impact on the income statement and the balance sheet.
These subsidiaries are financed in the currencies of the coun- tries concerned. If loans granted have not been utilized, cur- rency futures are purchased for the corresponding amount.
This means that, for the most part, the impact of changes in
foreign exchange rates is confined to net income and equity
in the country concerned.
17 Environmental risks
Property management and property development entail an environmental impact. Catena’s tenants have operations with an environmental impact and which are subject to permit and notification requirements – for example the handling of motor fuels, oil and chemicals – and they also conduct filling- station operations. On the other hand, Catena does not con- duct, per se, any operations which have a directly negative environmental impact.
The Swedish Environmental Code stipulates that a party that has conducted an operation which has contributed to contamination has primary liability for subsequent treatment and decontamination. If the party that has conducted such operations cannot defray the cost of subsequent treatment and decontamination, liability lies with the party that acquired the property and which, at the time of acquisition, was aware of, or should have discovered, such contamina- tion. Hence, in certain circumstances, claims may be addressed to Catena for subsequent treatment of decontami- nation regarding the presence or suspicion of contamination in soil, water areas or the ground water, in order to put the property in a condition stipulated by the Environmental Code. Claims of this nature may have a negative impact on Catena’s income and financial position.
R i s k a n d s e n s i t i v i t y a n a l ys i s
Impact on pre-tax Change income, SEKm
Rental revenues +/– 5 % 9.4
Occupancy rate +/–1 percentage points 1.9 Interest for property loans +/– 1 percentage points 6.6
Property costs +/– 5 % 1.0
CATENA ANNUAL REPORT 2006 / RISK AND SENSITIVITY ANALYSIS CATENA ANNUAL REPORT 2006 / RISK AND SENSITIVITY ANALYSIS
Catena’s environmental processes are long term and goal- oriented, and are pursued as an integrated aspect of both property management and project development. All proper- ties were subject to an environmental audit in the course of the review that took place in connection with Catena’s stock exchange listing in 2006, and it was noted that certain prop- erties have a limited degree of contamination. The possibility of the presence of other environmental contamination which might lead to costs and/or claims for compensation with an impact on Catena’s income and financial position cannot be eliminated.
Currently, however, there is no information regarding any
major environmental claims on Catena.
18
Catena is fi nanced via agreements with two major Swedish commercial banks. As per December 31, 2006, the average remaining credit term was 4.4 years, the average fi xed- interest term was 1.7 years, and the average interest rate was 3.84%.
Capital structure
Catena’s operations are fi nanced by equity and debt, in which the major proportion of debt consists of interest-bearing liabilities. The relationship between equity and debt is determined partly by the level of fi nancial risk selected and partly by the volume of equity called for to meet the creditors’
requirements for borrowing on reasonable terms. The capital structure target is designed to provide a satisfactory return on equity, to permit the required degree of loan fi nancing, to ensure adequate scope for investment, and to maintain fl exibility as regards divestments. This target is defi ned as an equity/assets ratio of not less than 25 and not more than 35, and an interest coverage ratio of not less than 1.75.
As per December 31, 2006, Group equity amounted to SEK 826m (583), which means an equity/assets ratio of 33.8% (27.4). Interest-bearing liabilities amounted to SEK 1,308m (1,356), which indicates a debt/equity ratio of 1.6 (2.3). Catena’s liquid assets and short-term investments amounted to SEK 63m (73). Catena has an unutilized line of credit of SEK 75m. In combination with some utilized scope for borrowing, this ensures that Catena has the degree of liquidity required to fi nance current property management operations and implement approved investments and investments in progress.
Financial policy
Catena’s fi nancial operations are governed by the fi nance policy determined each year by the Board. This fi nance policy stipulates the overall rules for the way in which Catena’s Finance unit is to be managed and for limited the risks in fi nancial operations.
The Finance unit is a Group function and is responsible for the Group’s fi nancing, liquidity planning and the handling of fi nancial risks.
Financing
(all values in parenthesis are pro forma 2005)
The principal objectives for the Finance unit are to:
• Safeguard the company’s short-term and long-term access to capital.
• Adjust the fi nancial strategy and the management of fi nancial risks in line with Catena’s operations in order to achieve and maintain a capital structure that is stable in the long term.
• Achieve the best possible fi nancial net within the frame- work established.
• Maintain a good reputation with participants in the fi nancial market.
Financial strategies
Liquidity, borrowing and loan structures
Catena has an active liquidity and borrowing structure.
Catena must be prepared to implement transactions – both acquisitions and divestments – when the opportunity arises, and to consistently fulfi l its commitments. Catena manages its liquidity risk by having access to credits and liquid assets which can be released at short notice.
The loan strategy is designed to minimize the risk of inadequate or unfavourable fi nancing at any given point in time. Catena aims to have a long loan term and at least two sources of credit. Catena’s loan fi nancing is safeguarded by long-term credit agreements.
When Catena became a listed company in April 2006, all loans with the Bilia Group were redeemed. New loans were arranged as the result of a procurement process in which several banks submitted tenders for Catena’s fi nancing requirements. Two major Swedish commercial banks were selected.
As per December 31, 2006, Catena’s total credit volume amounted to SEK 1,385m (1,431), of which SEK 1,307m (1,356) was utilized. The average remaining credit term amounted to 4.4 years (–) at December 31.
Interest strategy and structure
The interest strategy is crucial for Catena in view of the risk of a negative impact on income and cash fl ow as a result of a change in the market rate of interest. Interest expense is Catena’s largest single cost item. The extent of the impact of a change in the interest rate, and the speed at which it takes effect depend on the fi xed-interest term strategy adopted.
CATENA ANNUAL REPORT 2006 / FINANCING CATENA ANNUAL REPORT 2006 / FINANCING
19
Huddinge Myren 3, Segeltorp
St a n d a rd p o r t fo l i o, f i xe d i n te re st te r m
1 )1) Permitted deviation: +/- 10%
0 10 20 30 40 50 60 70
>5 years <7 years >7 years
>3 years <5 years
>1 year <3 years
<1 year
Permitted range Proportion of maturities
%
I n te re st a n d l o a n m at u r i t y st r u c t u re a s at D e ce m b e r 3 1 , 2 0 0 6
Interest maturity Loan maturity
Loan amount, Av. interest Proportion Credit agreements Utilized Proportion
Maturity, year SEKm rate, % % SEKm SEKm %
2007 657.6 3.58 50.5 — — —
2008 130.0 3.55 9.9 — — —
2009 130.0 3.83 9.9 — — —
2010 130.0 4.00 9.9 386.1 386.1 29.5
2011 130.0 4.15 9.9 598.6 520.9 39.9
2012 130.0 4.24 9.9 400.6 400.6 30.6
Total 1,307.6 3.84 100.0 1,385.3 1,307.6 100.0
