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
Catena is a property company focusing on properties in retail areas outside city centres.
The property portfolio is located in four growth regions in the Nordic countries:
Stockholm, Göteborg, Öresund and Oslo.
Solberg • Printed by: Strokirk-Landströms • Photos: Jonatan Fernström, Peter Brundin, Nicklas Rudfell and others.
Catena AB Annual Report 2008
CA TENA AB ANNU AL REPOR T 2008
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 buildings, land, construction in progress and building fixtures and fittings.
Debt/equity ratio
Interest-bearing liabilities divided by equity.
Economic occupancy rate
Rental revenue as a percentage of rental value.
Equity/assets ratio
Equity as a percentage of total assets.
Equity per share
Equity at the end of the period in relation to the number of shares at the end of the period.
Income from property management for the period after standard tax per share
Income from property management for the period less 28 per cent tax divided by the average number of shares.
Income from property management for the period per share Income from property management for the period divided by the number of shares outstanding at year-end.
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 properties.
Net operating income per sq.m.
Net operating income on an annual basis divided by lettable area.
Net profit for the period per share
Net profit 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 profit for the period per share
Profit before tax divided by the number of shares outstanding at year-end.
Property
One or more register properties, which constitute a management unit.
Property expenses
Operating expenses, 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 revenue for vacant premises assessed by the company.
Return on equity
Net profit for the period as a percentage of average equity.
Return on total capital
Pre-tax profit for the period 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.
DEfiNiTiONS
Catena Annual Report 2008
What you need to know
about Catena 2–3
Statement by the CEO
– Focus on the long term 4–5 Business concept, goals
and strategy 6–7
Market profile 8–10
Property portfolio 11–15
Valuation 16–19
Risk and sensitivity analysis 20–21
Financing 22–25
Description of the regions
Stockholm Region 26–27
Göteborg Region 28–29
Öresund Region 30–31
Oslo Region 32–33
Personnel 34
Active environmental work 35
The Catena share 36–37
Financial report 38–70
Auditors’ report 71
Multi-year overview 73
Property list 74–77
Corporate Governance 78–80 The Board of Directors 81
Group management 82
Calendar
Information about the Annual
General Meeting 83
Definitions 85
N.B. This is a translation from Swedish.
The Swedish version shall always take precedence.
The cover picture shows the property Malmö Urnes 2.
Contents
CATENA 2008
85
Key data
2008 2007 2006
Financial
Return on equity, % –14.6 23.6 37.6
Return on total equity, % –5.6 13.4 17.7
Equity/assets ratio, % 33.3 39.6 33.8
Interest coverage ratio, income from property management, multiples 2.5 2.4 3.2
Loan-to-value ratio, properties, % 57.5 49.4 55.6
Debt/equity ratio, multiples 1.7 1.2 1.6
Share-related (there is no dilution effect as there are no potential shares)
Earnings per share for the period, SEK –11.41 18.70 22.05
Income from property management for the period after standard tax, per share, SEK 5.55 4.59 6.19
Income from property management for the period per share, SEK 7.71 6.38 8.60
Equity per share, SEK 69.70 86.99 71.43
Dividend per share, SEK 5.25 5.00 —
No, of shares at the end of the period, thousands 11,565 11,565 11,565
Average no. of shares, thousands 11,565 11,565 11,565
Property-related
Book value of properties, SEKm 2,354 2,479 2,352
Yield, % 7.3 6.1 6.6
Lettable area, sq.m. 230,529 227,500 258,462
Rental revenue, SEK/sq.m. 846 772 697
Net operating income, SEK/sq.m 734 663 599
Economic occupancy rate, % 96.3 98.3 98.8
Surplus ratio, % 86.3 85.9 85.7
2008 in brief
• Rental revenue totalled SEK 189.3m (179.7)
• Income from property management amounted to SEK 89.2m (73.8)
• Net profit for the year amounted to SEK –131.9m (216.2)
• Realized changes in value were included in pre-tax profit for the period at SEK 4.3m (37.7)
• Unrealized changes in value were included in the result at SEK –293.7m (168.4), of which properties accounted for SEK –260.2m (167.3) and derivatives for SEK –33.5m (1.1)
• During the year, investments were made in existing facilities at SEK 128m (95)
• Acquisitions of plots took place at SEK 8m (—)
• The Board proposes a dividend of SEK 5.25 (5.25) per share
CATENA 2008
2
Catena is a property company focusing on proper- ties in retail areas outside city centres. The property portfolio is located in four growth regions in the Nordic countries: Stockholm, Göteborg, Öresund and Oslo.
Catena’s 31 property units had a book value of SEK 2,354m as at December 31, 2008. At January 1, 2009, Catena’s rental revenue amounted to SEK 197.7m (187.3) on an annual basis.
Leases are long term and the occupancy rate high. On January 1, 2009, the average remaining economic duration of all leases was 9.3 years. At the beginning of 2009, the occupancy rate was 96.3 per cent (98.3).
The Catena share is listed on Nasdaq OMX Nordic Stock- holm and is included in the list of small-sized companies, Small Cap. The share is traded under the short name CATE and is included, among other places, in the index for prop- erty companies OMX Stockholm Real Estate.
Long-term relations with tenants
Catena’s largest tenant is the Bilia, a car dealer which accounted for 91 per cent (91) of Catena’s rental revenue as at January 1, 2009.
Catena will continue to cooperate with Bilia as a major tenant, but intends to increase the proportion of revenue derived from other tenants, both by acquisitions and new letting. Catena’s know-how and knowledge of the needs and preferences of retail and distribution companies is to consti- tute the foundations for the company’s development.
Catena’s success factors
Catena has experience of working closely with tenants
•
and understands their needs and wishes. The company has unique expertise in car sales and service which can be used in other sectors in which tenants demand change and good retail locations.
Catena can expand further in the retail properties seg-
•
ment, focusing on current markets through active manage- ment 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’
operations.
According to its strategy, Catena shall acquire retail
•
properties with potential for stable revenues and good prerequisites for successful long-term value growth. Active management and improvement make the properties more attractive, and this has been a consistent feature through- out the company’s history.
Catena shall divest properties for which it is considered
•
that there are limited opportunities for further value growth.
What you need to know about Catena
Locations in growth regions
Properties Book value, Rental revenue, Lease duration, Occupancy rate,
SEKm SEKm years %
Stockholm 9 803 65.2 11.0 93.9
Göteborg 10 556 50.8 9.2 99.4
Öresund 8 529 39.6 4.9 93.0
Oslo 4 466 42.1 11.7 100.0
Total 31 2,354 197.7 9.3 96.3
CATENA 2008
3
WHAT YOU NEED TO KNOW ABOUT CATENA
Oslo Region
(read more on pages 32–33) Stockholm Region
(read more on pages 26–27)
Göteborg Region
(read more on pages 28–29) Öresund Region
(read more on pages 30–31)
CATENA 2008
4
As expected. This is how i would summarize 2008.
We coped with the start of the financial crisis and the downturn in a creditable way, even though it had, of course, a negative impact on the value of our property portfolio. A wait-and-see approach to acquisitions and an emphasis on improvement instead have proven to be a sensible strategy.
In last year’s Statement by the CEO, I expressed my concern about developments in the US economy. Despite this uncer- tainty, I was optimistic about a continued good develop- ment of business during 2008, both as regards acquisitions of properties with development potential and sales of fully developed properties.
Now, one year later, with the benefit of hindsight, we can note that the financial crisis and the downturn have hit with full force. Our market is characterized by great caution and a wait-and-see approach. The financial crisis has made it considerably more difficult to borrow and the credit squeeze has greatly affected a lot of companies. The property market more or less came to a standstill and a lot of players found it tough going.
High level occupancy rate
During 2008, uncertainty in the market made its presence felt by greater difficulties in finding new tenants for our vacancies. Despite this, Catena signed several new long-term leases at higher rental levels than we had previously had in these properties. We now have an occupancy rate of 96.3 per cent, which is a good level in the present state of the market.
During the past year, we have concentrated on major renovation and extension projects in our portfolio. We want to continue doing this. My assessment is that the crisis will eventually lead to lower construction costs.
In the light of the crisis, it feels satisfying to be able to state that Catena stands on firm foundations. Our leases extend over a long time, our loan-to-value ratio is low, we have a strong cash flow and a high occupancy rate, which meant that 2008 was more or less as we expected. On this firm basis, we can now continue the work of further devel- opment and improvement of our properties. Modern proper- ties in good locations and long-term customer relations shall make Catena a leading player in the growth regions Stock- holm, Göteborg, Öresund and Oslo.
Two projects completed during the year
During 2008, we have continued to prioritize improvement of our existing properties. We have aimed at a better yield and profitability in our own projects. In all, we invested SEK 128 million in new construction, renovation and extension projects during 2008. In August, the project at Almedal in Göteborg was completed. Our property in Drammen, Nor-
way, was completed in December after extensive new con- struction, extension and renovation.
As known, Catena’s strategy is to manage, improve and develop our portfolio of retail properties to create value for our customers and shareholders. At the start of the year, I hoped that there would be a number of acquisitions.
However, a continued high price level led us to wait before making further acquisitions. In the whole year, the volume of transactions in the Swedish market fell by around 30 per cent when vendors and buyers did not find one another.
However, Catena did carry out two transactions during the year. In January, we acquired a plot at Svågertorp’s retail area in Malmö to build new offices for the Danish wind power company Vestas. Catena is currently building around 3,700 sq.m. of offices here, for moving-in in March 2009. We have signed a ten-year lease with Vestas. This investment is SEK 72 million. Around 60 per cent of the building right is being used for this project. There are plans for an additional stage.
Our strategy also entails divesting the properties in our portfolio which are outside our prioritzed markets or which lack development potential. No sale of any such property took place during 2008. However, a green space in the Oslo region was sold to the Norwegian Public Roads Administra- tion. This space, which is adjacent to the property at Ökern in Oslo, consists of around 1,200 square metres and is to be used by the Norwegian Public Roads Administration for a new section of road. This sale produced a capital gain of SEK 4.3m.
A long-term approach
Catena’s operations are fundamentally very stable and can be described by the words “long term”. Long leases, low loan-to-value ratio and a high occupancy rate give us a good platform to stand on. Income from property management for the year is SEK 89.2m, which is an increase from last year of 21 per cent. Rental revenue rose by 5.3 per cent to SEK 189.3m.
Despite a good return on investments of SEK 128m, our result was negatively affected by a valuation of the prop- erty portfolio, which has fallen in value by around ten per cent during the year. We have noted a fall in demand for premises, although we have entered into new leases corre- sponding to SEK 16.3m during the year. The leases entered into have an average duration of around five years.
Steady course for 2009
What can we expect during 2009? I am convinced that the current uncertainty will continue and that the downturn will continue to determine the development of our market. Most experts are afraid of this too, some of them even anticipate that the poor economic climate will persist for years to come.
Focus on the long-term
STATEMENT BY THE CEO
For Catena, there will be no sharp change of course. Our strategy will be maintained. During 2009, we will concen- trate on reducing the vacancy rate at our properties, finding new commercial opportunities and making use of develop- ment potential, which can entail a considerable increase in volume of building rights. We see a possibility for construct- ing housing at one of our properties in Kungsbacka in the course of time. We are also engaged in discussions with the municipality of Solna on developing our property at Haga Norra. We envisage a future development here with retail space, housing and offices.
High-quality properties in good locations, easily acces- sible by road, in growth regions in Sweden, Norway and
STATEMENT BY THE CEO
CATENA ÅR 2008
5
Denmark, will provide good opportunities for attractive new deals. Despite the downturn. And with leases with an aver- age duration of more than nine years and a strong financial position, Catena will be well equipped when the market conditions improve.
Göteborg, February 2009
Peter Hallgren
President and CEO
CATENA 2008
6
Business concept, targets and strategy
Business concept
Catena shall own, effectively manage and actively develop retail properties in prime locations that offer 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 retail properties in a number of strategic locations.
Dividend policy
In the long term, Catena’s dividend is to represent 75 per cent of income from property management
1)after tax
2).
Strategy Catena shall:
Actively manage the property portfolio, with a focus on
•
stimulating long-term customer relations by offering attractive premises in close cooperation with Catena’s tenants.
Acquire retail properties offering favourable potential for
•
good long-term value growth and stable revenues.
Actively improve and develop the property portfolio by
•
identifying and implementing value-enhancing measures that increase the attractiveness of the properties and their return, with due consideration of risk.
Divest properties for which it is considered that there are
•
limited opportunities for further value growth.
Business model with a cash-flow focus
Catena’s business model is based on stable and long-term relationships with tenants in out-of-city retail areas in growth regions. Catena has experience of working close to its tenants and has great understanding of their needs and wishes. The company possesses a unique expertise on the car trade, which can be applied in other industries, where ten- ants make demands for changes and good retail locations.
Stable cash flows are achieved as a result of long leases, of which almost 100 per cent are subject to price-index clauses.
The business model includes the active management of prop- erties and their adaptation in line with the development of the tenant’s operations – customizations which increase the value of Catena’s property portfolio in the long term. There are good possibilities of attracting new tenants due to the strategic locations of the properties. Catena has the neces- sary expertise to develop properties to make them suitable for customers’ business activities.
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 trade facilities to other types of retail operations. Catena’s properties are located in or close to attractive retail areas in which this kind of conversion is becoming increasing feasible.
Catena’s long-term dividend policy stipulates that 75 per cent of income from property management after standard tax is to be distributed. The remaining 25 per cent 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 retail operations. However, it is a prerequisite that the properties have improvement potential. Active management and improvement shall subse- quently make the properties more attractive. This has been a constant approach throughout Catena’s history.
Catena shall divest properties where the possibility of cre- ating additional growth in value is regarded as limited.
1) Income after net financial items excluding realized and unrealized changes in value.
2) Income after net financial items less 28 per cent standard tax.
PROPERTIES FOR CAR SALES ACQUISITIONS
REINVESTMENT 25%
DIVIDEND CASH FLOW 75%
POSSIBLE CONVERSION OTHER RETAIL PROPERTIES
Catena’s business model
CATENA ÅR 2008
7
z
BUSINESS CONCEPT, TARGETS AND STRATEGY
Return on equity
2008 2007 2006
40
%
–20 0
–10 20
10 30
2008 2007 2006
4 multiples
0 1 2 3
Interest coverage ratio
2008 2007 2006
40
%
0 10 20 30
Equity/assets ratio
1) The risk-free interest rate is defined as the interest rate on a five-year Swedish government bond.
Financial targets and outcome
Over a business cycle, Catena shall achieve:
•Areturnonequitywhichexceedstherisk-freeinterestratebyatleastfivepercentagepoints
1).
•Aninterestcoverageratioofnotlessthan1.75multiples.
•Anequity/assetsratioofatleast25percentandatmost35percent.
During2008,thereturnonequitywas–14.6percent(23.6)includingchangesinvalueinthepropertyportfolio.
Theinterestcoverageratioamountedto2.5multiples(2.4)andtheequity/assetsratiowas33.3percent(39.6)attheyear-end.
Lier Gnr 18 (Drammen)
CATENA 2008
8
Market profile
Like other markets, the property market was affected by the downturn that hit the world market during the latter half of 2008. The effects have not been so marked for Catena to date, largely due to the long leases that the company has with its tenants.
The development of the property and rental market is linked to the general state of the economy, both in particular regions and nationally. The most important driving forces for economic development include population growth, access to well-educated staff, new entrepreneurship and a good infrastructure. Catena specializes in retail properties in major urban areas and the Group’s customers are affected by how the development of employment and private con- sumption.
Slackening off after the summer
During the latter half of the year, there was a sharp slow- down of growth on Catena’s market with both a slackening of activity and financial instability. The first half of 2008 was marked by a development of economic activity on a par with the previous year. Growth in the Swedish economy had already started to dampen during 2007, which continued in 2008. After the summer, the situation got worse and the autumn was marked by financial crisis, profit warnings and redundancy notices. In particular, the Swedish vehicle indus- try was hard hit, although the rest of the manufacturing and engineering industry was also affected. The construction industry also saw a sharp downturn at the end of the year, leading to construction projects being cancelled.
In Sweden, the gross domestic product (GDP) fell by 0.2 per cent (2.6), according to Statistics Sweden. It was mainly the dampened level of activity in important export markets together with a sharp fall in investment that led to lower growth. Private consumption rose by a moderate 1.3 per cent (3.1). During the year, inflation, measured as the con- sumer price index, rose by 3.3 per cent (3.2).
The weakened Swedish economy is reflected in Swedish households’ confidence in the future, which is gloomier than for many years. This probably means that consumption will be even weaker in coming years, in particular as regards investments in consumer durables such as cars and housing.
According to the Confederation of Swedish Enterprise’s forecasts from December 2008, the increase in consumption is estimated to amount to just under one per cent in 2009 and to remain unchanged in 2010.
The redundancy notices that have been issued during the year together with the reduced demand that most industries have experienced mean that employment levels will probably fall during the coming year. In December 2008, the number of unemployed in Sweden had risen by 0.8 percentage points compared with December 2007.
The Norwegian and Danish economies were also affected during 2008 by the downturn and the financial crisis. Nor- way’s GDP grew by 2.0 per cent (3.1) according to Statistics Norway. Private consumption rose by 1.5 per cent (6.0).
During the year, the consumer price index in Norway rose by 2.4 per cent (0.8).
Denmark’s GDP decreased in 2008 according to Statistics Denmark by 1.3 per cent (+1.8). Private consumption rose by 0.8 per cent (2.7) while consumer prices rose by 3.4 per cent (1.7).
Employment in Denmark, Norway and Sweden was affected negatively during the year. In Denmark, unemploy- ment amounted to 1.8 per cent which can be compared with 2.7 per cent the previous year, although it is feared that it will increase rapidly during 2009. In Norway, unemploy- ment was 2.6 per cent, compared with 2.5 per cent in 2007.
Reduced trade
The slowdown in consumption can be clearly seen in the retail trade statistics, where a negative development of sales was recorded in November, for the first time in ten years.
According to the Swedish Trade Federation, the situation is worst for consumer durables which consumers must refrain
Real GDP development
1999
5.0 % 4.0 3.0 2.0 1.0 0 -1.0
-2.0
2000 2001 2002 2003 2004 2005 2006 2007 2008Sweden Norway Denmark
Source: Eurostat, Statistics Denmark
Interest rate development, 10-year government bond
1999
%
4.0 5.0 6.0 7.0
3.0 2.0 1.0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008Sweden Norway Denmark
Source: The Riksbank, Reuters
CATENA 2008
9
MARKET PROFILE
from buying when they have to pay an increasing amount for food.
As regards the structure of trade, the markets in Sweden, Norway and Denmark are undergoing structural transfor- mation. In the past ten years, there has been a sharp increase in the number of out-of-city retail areas. New out-of-city retail areas continue to develop outside the city centres.
These areas are characterized by ease-of-access, good park- ing facilities, and large store areas.
The expansion of out-of-city retail trade is mainly due to lower land and building costs compared with city centre locations and changed patterns of consumer purchasing habits. Large trading places with a clear profile and content are taking market shares, while smaller centres in city neigh- bourhoods are encountering increasing difficulties.
The lower land and building costs in external locations mean that shop tenants pay lower rent, which, together with the economies of scale for the shops, make possible lower prices for the end consumers. Combined with the shops’
large and diversified range of products and good parking, this makes the out-of-city retail areas attractive.
In recent years, the trend towards out-of-city trading has been maintained. A number of new shopping centres are planned in Sweden, Denmark and Norway, at the same time as external and regional centres are becoming increasingly large.
In the current state of the economy, a number of planned new establishments have been put on ice, however, and the future of new retail areas is uncertain. It is more difficult to finance new construction projects in the current financial instability and the majority of new projects which have not yet been started have been stopped. This applies both to expansion of trading properties and projects consisting of offices and other activities.
Catena is active in the sphere of out-of-city retail areas.
In the current downturn, certain retail areas will have a more difficult situation than others. The areas where Catena has properties are considered to have good possibilities for coping with a downturn.
The car sales and service market
Sales of new cars are largely tracking the general state of the economy. In a short-term perspective, factors such as inter- est rate levels, fuel prices, and tax rules govern the demand for new cars. The service market with repair shop services, spare parts and accessories develops in a more stable way over a business cycle than sales of new cars.
Catena’s largest tenant is Bilia, which sells new and used cars and carries out service on well-known marques such as Volvo, Ford, Renault and BMW. Registration of new cars totalled 253,982 in 2008, which was a decrease of 17 per cent compared with 2007. After the summer, the car trade declined sharply, which had a negative impact on Bilia.
This reduction was dramatic at the end of the year, and in December alone, 44 per cent fewer new cars were registered than in December 2007. According to a forecast from BIL Sweden, a sharp drop in the new car market is forecast dur- ing 2009. This forecast of 185,000 new cars entails a drop of 27 per cent compared with the outcome for 2008.
Sluggish property market
The market for retail properties partly depends on private consumption, which is increasing despite cyclical fluctua- tions. Retail properties, such as central retail properties, shopping centres and out-of-city retail properties attract a large number of investors who are looking for low risk and stable earnings.
After a hesitant start to the year, the property market has more or less ground to a halt. Only a few transactions have taken place and there is a trend towards falling market val- ues for properties. The financial crisis has led to a consider- able deterioration in the ability to obtain financing.
Catena’s property portfolio is mainly in attractive loca- tions with long leases. Other property companies with a greater focus on, for example, offices, often have shorter leases, which increases the risk. Catena has a long-term focus in its portfolio and low turnover of properties.
The difference in yield requirements between major urban areas and smaller cities decreased previously. It is now prob-
Inflation development, harmonized consumer price index
1999
4.0 %
3.0
2.0
1.0
0
2000 2001 2002 2003 2004 2005 2006 2007 2008Sweden Norway Denmark
Source: Eurostat
CATENA 2008
10
MARKET PROFILE
able that there will be a trend towards higher yield require- ments in smaller towns, which will reduce market values.
The major urban regions will also be affected by higher yield requirements, although not to the same extent as smaller cities. However, at the end of the year, interest levels fell, which has a positive effect on the property market.
The state of competition
Catena’s markets consist of four growth regions in the Nor- dic countries: Stockholm, Göteborg, Öresund and Oslo. The company owns, manages and develops retail properties in these cities. However, Catena has a more clearly specialized focus and a more concentrated geographical market than many other property companies.
The company’s property portfolio consists largely of car trade properties. The market for car trade properties is very fragmented, and there only a few companies which solely focus on out-of-city retail areas.
Catena’s competitors are primarily the listed property com- panies such as Castellum, Kungsleden, Sagax and Wihl- borgs.
Compared with the industry, Catena has long leases, up to 15 years with an average of 9.3 years. Catena also devi- ates with regard to the occupancy rate. On January 1, 2009, the economic occupancy rate was 96.3 per cent, which is high both in an industry perspective and in comparison with other listed property companies.
Catena’s risk increases with the high proportion of income from Bilia, which, however, is offset by long leases and close cooperation with Bilia. The leases with Bilia have an average duration of over ten years.
Catena’s properties are in good, attractive locations, which facilitates attracting other tenants. Large open areas in car showrooms and repair shops make it relatively easy to convert these for new tenants. In some cases, consideration may be given to demolishing existing facilities to build, for example, new housing and offices.
Catena compared with other property companies
Property Occupancy Mortage Interest term,
yield, % rate, % rate, % years
Catena 7.3 96 58 1.2
Castellum — 90 50 2.9
Sagax 7.6 96 73 5.1
Kungsleden 6.5 95 73 2.7
Wihlborgs 6.5 93 61 3.7
Source: The companies’ year-end statements for 2008.
CATENA 2008
11
The property portfolio
At year-end 2008, Catena had a total of 31 proper- ties with a total lettable area of 230,529 sq.m. The property portfolio is divided into four geographical areas: The Stockholm Region, the Göteborg Region, the Öresund Region and the Oslo Region.
On December 31, 2008, Catena’ properties had a book value of SEK 2,354m (2,479) and on January 1, 2009, a rental value of SEK 205.2m (190.6). The Stockholm Region accounted for 34 per cent of the book value, which was the largest portion.
Focus on retail properties
Catena is focused on properties in out-of-city retail areas.
These properties are currently primarily used for car sales and associated operations such as repair shops, accessory shops and spare parts stores.
These properties are considered to have good potential for use in other out-of-city trading operations, mainly due to their good communications and retailing locations, and sub- stantial parking areas. Catena’s strategy is that the propor- tion of properties used for other retail activities should increase by wholly or partly improving and converting car trade facilities for other types of retail operations, and by the acquisition of new properties.
Rental value and rental revenue
Catena’s total rental value amounted to SEK 205.2m (190.6) as at January 1, 2009. The economic occupancy rate amounted to 96.3 per cent (98.3) on the same date. Total rental revenue for the property portfolio amounted to SEK 197.7m (187.3).
The rental trend for the property portfolio has been favourable. During 2008, Catena’s average rents rose by 9.6 per cent to SEK 846 per sq.m. (772).
As at January 1, 2009, the Stockholm Region accounted for 34 per cent of the rental revenue, which is the highest share, followed by the Göteborg Region with 25 per cent.
Customer structure and leases
Good customer relationships are a major factor in successful business operations as a property owner. Catena, with its clear focus and long experience of retail properties, has a clear advantage. Catena understands the conditions under which their customers’ businesses operate and the challenges they are facing. The company can therefore offer suitable premises and supplementary services which create added value for customers.
Bilia is Catena’s largest tenant, accounting for about 91 per cent (91) of rental revenue on January 1, 2009. Bilia, which is listed on Nasdaq OMX Nordic Stockholm is the largest car trade chain in the Nordic region, with sales of SEK 14,280m during 2008.
The other tenants include Vestas, Volvo Truck Center Sweden, Brandworld and Tidermans Hyrmaskiner.
New leases were entered into with Bilia in connection with listing on the stock exchange in 2006. At the same time, a framework agreement was entered into, which now covers seven of Catena’s 31 property units, corresponding to 15.4 per cent of the rental income as at January 1, 2009.
This agreement is intended to enable Bilia to vacate at most a third of the areas covered by the framework agreement as at December 31, 2008, at most two-thirds as at December 31, 2011 and all areas covered by the framework agreement as at December 31, 2014. Bilia has opted to make use of the framework agreement as at December 31, 2008 for a prop- erty in Kungsbacka, which will be vacated in February 2009.
This property constitutes 9.8 per cent of the total framework agreement.
Rents for occupied premises with lease terms of more than three years are normally linked to the Consumer Price Index.
Almost 100 per cent of Catena’s portfolio is subject to this form of annual price adjustment.
Leases have varying durations. The average remaining economic duration for all leases was 9.3 years on January 1, 2009. Periods of notice vary from 3 to 24 months with extension periods of 3 months to 5 years.
Property portfolio, key data
December 31 December 31 December 31
2008 2007 2006
Number of properties 31 30 35
Properties’ book value, SEKm 2,354 2,479 2,352
Yield, % 7.3 6.1 6.6
Lettable area, sq.m. 230,529 227,500 258,462
Rental revenue SEK/sq.m. 846 772 697
Net operating income, SEK/m
2734 663 599
Economic occupancy rate, % 96.3 98.3 98.8
Surplus ratio, % 86.3 85.9 85.7
CATENA 2008
12
THE PROPERTY PORTFOLIO
Active management of the portfolio
Catena classifies its properties 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.
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 improvement 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 car trade facilities to other kinds of sales operations, which is possible, for instance, when leases expire. A conver- sion of this nature may be on a scale comparable to the acquisition of a property.
Irrespective of their size, investments are always under- taken with the object of improving cash flow, and hence the return and the value. A good example of a project of this kind is the property Backa 166:2 in Göteborg, where the property was converted for another activity.
The third category – properties that should be sold – includes properties that are not located in Catena’s growth areas in major urban regions or which do not have develop- ment potential. After the sale that took place during 2007, there are currently no properties in this category.
Investments and projects
Investments, that is to say improvements and development of existing properties and acquisitions of new properties and new production, shall be made when these measures make possible an increased occupancy rate, higher rental levels and improved cash flows.
During the year, investments in existing properties totalled SEK 128m. These include the completion of the renovation of the facility at Almedal in Göteborg, “The Repair Shop of the Future” in Huddinge and new construction, extension and renovation of the facility in Drammen.
On March 7, 2008, construction of Vesta’s new office in the Svågertorp retail area in Malmö started. This invest- ment totals SEK 72 million, including land acquisition. It is expected to be completed and ready for occupation in March 2009.
The investments carried out will generate rental income with full effect from the second quarter of 2009.
Malmö Urnes 2
CATENA 2008
13
THE PROPERTY PORTFOLIO
Acquisition, an important part of the strategy Catena’s strategy is to acquire retail properties in high-prior- ity geographical areas which have the prerequisites for good long-term value growth and stable revenues. In the main, properties are to be acquired where there is potential for improvements and where the location is a decisive factor.
During 2008, Catena has been restrictive as regards acqui- sition of properties, mainly due to a high price level.
Building rights and development potential
When valuing Catena’s property portfolio, an explicit value has been established for building rights at only four property units, Hästkraften 1 and 2 (Jägersro) in Malmö, Fältspaten 2 in Lund, Skår 57:13 (Almedal) and Högsbo 35:1 in Göte- borg. Of these four building rights, only Lund and Almedal are immediately available for development; the others require that the present tenant vacates the whole or part of the property. An explicit additional value has been estab- lished for Haga Norra, Solna, for future development poten- tial when the current tenant moves. The value of the build- ing rights and development potential is included in the property valuation at SEK 41m.
At the property Urnes 2 at Svågertorp in Malmö, which was acquired in January 2008, there is a building right of around 3,000 sq.m. in addition to the 3,700 sq.m. utilized for new construction of offices for Vestas.
In the addition to the explicitly valued building rights and development potential, some properties are considered to have a geographical location which may be suitable for housing or offices. An improvement of this kind most often provides higher extent of utilization than the car trade and thus good profitability. However, at the same time, this gen- erally requires an amendment to the local plan for the area.
One example is Catena’s properties in Kungsbacka. In con- nection with the current tenant moving to another property, there is an opportunity to develop the area with housing, possibly in combination with offices and retail outlets. Plan- ning work has been initiated and, after acquisition of land, a building right for housing of around 32,000 sq.m. is con- sidered possible.
We also make the assessment that there is potential for further development, renovations or extensions to the majority of properties when the space requirements of the current tenant change or the tenant vacates the property.
In addition to the current building rights, Catena is actively looking for new land areas to develop in or adjacent to the retail areas in the prioritized growth areas.
Catena’s rental development
1,000 SEK/sq.m.
800
400 600
200
0
Source: OECD
2008 2007 2006
Catena’s occupancy rate
100
%
80
40 60
20
0 2006 2007 2008
RetaildevelopmentoncurrentportfolioaccordingtoCatena’sannualreports2006–2008.
CATENA 2008
14
FASTIGHETSBESTåNDET
Lier Gnr 18 (Drammen)
CATENA 2008
15
THE PROPERTY PORTFOLIO
Market value of investment properties as at December 31, 2008
Valued by Valued by Forum Fastighets- business
SEKm ekonomi partner Total
Stockholm Region 803 — 803
Göteborg Region 556 — 556
Öresund Region 413 116 529
Oslo Region — 466 466
Total Catena 1,772 582 2,354
Change in book value of investment
properties, January 1, 2008 – December 31, 2008
SEKm
Book value at January 1 2,479
Changes in value –244
Investments in existing portfolio 128
Acquisitions 8
Foreign exchange effect –17
Book value at the end of the period 2,354
Segment
No. of prop- erties
Lettable area,
sq.m. Book value
SEKm SEK/sq.m. Rental value1)
SEKm SEK/sq.m.
Economic occupancy rate, %
Rental revenue2), SEKm
Net operating income3),
SEKm Yield4), % Surplus ratio, %
Stockholm Region 9 88,903 803 9,032 69.4 781 93.9 65.2 53.1 6.6 81.4
Göteborg Region 10 59,194 556 9,393 51.1 863 99.4 50.8 45.4 8.2 89.4
Öresund Region 7 50,211 478 9,520 42.6 848 93.0 39.6 33.4 7.0 84.3
Oslo Region 4 32,221 466 14,463 42.1 1,307 100.0 42.1 39.8 8.5 94.5
Total 30 230,529 2,303 9,990 205.2 890 96.3 197.7 171.7 7.5 86.8
Property in process of construction
Öresund Region 1 51
Total 31 2,354
The five largest properties account for 50.0 per cent of the rental revenue.
1) Rental revenue on an annual basis as at January 1, 2009 including estimated value of vacant space on an annual basis.
2) Rental revenue on an annual basis as at January 1, 2009.
3) Rental revenue on an annual basis as at January 1, 2009 less property expenses for corresponding properties during the previous 12 month.
4) Estimated yield 12 months.
Property portfolio as at December 31, 2008 – Current earning capacity as at January 1, 2009 Lease-duration structure, contracted rental revenue
as at January 1, 2009
No. of Area let,
Expiry year leases sq.m. SEKm Proportion, %
2009 12 13,026 9.9 4.9
2010 10 6,163 6.0 2.9
2011 6 3,894 2.7 1.3
2012 7 3,468 3.9 1.9
2013 4 9,795 6.6 3.2
2014 7 37,237 30.0 14.7
2015 3 14,027 13.3 6.5
2016 3 3,830 4.2 2.1
2017 2 10,582 9.1 4.5
2018 1 3,688 6.4 3.1
2019 1 18,995 16.5 8.1
2020 2 19,951 25.2 12.3
2021 2 45,651 33.8 16.5
2022 3 27,010 26.3 12.9
2023 1 7,627 10.4 5.1
Total 64 224,944 204.3 100.0
The average lease term is 9.3 years.
Contracted rental revenue and Lease-duration structure in the tables include leases entered into but which have not yet come into effect.
Lease maturity structure as at January 1, 2009
1)1) Lease maturity structure regardless of vacation possibilities in the framework agreement with Bilia.
The framework agreement applies to seven properties, which together cover 15.4 per cent of the rental revenue as at January 1, 2009. The framework agreement enables Bilia to vacate space corresponding to at most two-thirds as at December 31, 2011 and all areas covered by the framework agreement as at December 31, 2014. The framework agreement will then cease to apply. According to the frame- work agreement, the tenant does not have the right to vacate space on any other occasion than those mentioned.
0 5 10 15 20 25 30 35 SEKm
2023 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020 2021 2022
Rental value (total SEK 205.2m) as at January 1, 2009
Göteborg Region 25%
Öresund Region 21%
Oslo Region 20%
Stockholm Region 34%
Book value (total SEK 2,354m) as at December 31, 2008
Göteborg Region 24%
Öresunds Region 22%
Oslo Region 20%
Stockholm Region 34%
Valuation
The assignment
Catena assigned Forum Fastighetsekonomi AB (”Forum”) to conduct an assessment of market value of Catena’s property portfolio in Sweden, as of December 31, 2008. The property portfolio owned by Catena in Denmark and Norway has been valued in the corresponding manner by Thurø, Bjarne Jensen & Winther-Petersen and DTZ Realkapital Verdivur- dering AS, respectively.
The aim of this property valuation is to assess the market value of the various properties concerned. The market value is the most likely price in a normal sale on the open market.
The number of properties valued amounted to 31, of which 24 are located in Sweden, three in Denmark and four in Nor- way. All properties are located in major urban regions.
Swedish properties
The state of the marketThe long period of rising property prices came to a close dur- ing the last quarter of 2007. 2008 has been marked by an increasingly hesitant market, leading to reduced turnover and rising yield requirements. The reason for this is the current financial crisis and the ensuing downturn, which has changed the conditions for the most active group of investors which has driven the market forward in recent years, namely those investing with a high loan-to-value ratio. Turnover in the transaction market has decreased although not to the extent that many anticipated. Property transactions now take much longer time to complete than before and the purchaser needs a greater amount of own funds.
It is thus now relatively difficult to acquire loans for invest- ment. This in turn leads to it not being possible to carry out many property transactions despite the purchaser and the vendor agreeing on a price. The influence of the banks on price formation is at present greater than normal.
At present, the state of the market is complicated, uncertain and difficult to analyse and it is not possible to have a definite view of yield requirements, etc. On the basis of the transac- tions actually carried out, combined with other relevant mar- ket information and theoretical models, this none the less provides indications on adjustments of yield requirements in the range of 0.5–1.0 percentage points since the previous year-end, for housing properties in good locations and cen- trally located good retail and office properties in larger cities.
More unusual properties such as properties in poorer loca- tions have been more affected by the uncertainty in the mar- ket and yield requirements are estimated to have risen by 1.0–2.0 percentage points for these. We are thus seeing a movement in the opposite direction to the yield compression of recent years.
The above-mentioned yield levels assume, however, a return to a banking system which is more willing to finance property investments and on more ”normal” terms as regards
loan-to-value ratios and pace of amortisation than has been case in the autumn of 2008. The sharp interest rate reduction in December 2008 and expectations of further interest rate cuts are positive for property owners and purchasers and have probably restrained further increases in yield require- ments. A possible reduction in yield requirements due to interest rate cuts is hindered by an expected reduction in mar- ket rents and an expected increase vacancy rates during 2009 and 2010.
For a period, the rental market in Sweden experienced a positive development of rents. Rental levels are now levelling off and will probably fall in many markets. This is because of the more pronounced downturn and due to the supply of newly produced markets in some market segments exceeding expected demand. The vacancy rate is expected to increase during 2009 and 2010. Due to comparatively high inflation (October 2007–October 2008), the rental level for the exist- ing portfolio of leases for premises will probably increase by around 4.0 per cent to the 2009 level. The increase in rents for housing will probably be between 2.5 and 4 per cent for 2009.
Major property transactions during the year have been the sale of Vasakronan as well as the divestment of Steen &
Ström. Other major transactions have been Niam’s purchase of over 40 properties from AP-Fastigheter and Akelius’s pur- chase of a housing portfolio in Täby sold by Diligentia. The purchase prices indicate a fall in prices although this is proba- bly explained by the fact that a large part of previously obtained portfolio premiums have disappeared or been replaced by the traditional portfolio discount.
Around Sweden, a number of retail properties have been purchased during 2007 in the form of shopping centres, supermarkets and volume trade for yield requirements, mainly between 4.5 and 6.5 per cent with an average of around 5.5 per cent. We estimate that the yield requirements for better properties have risen by around 0.75–1.0 percent- age points since the year-end 2007/2008. Volume trade prop- erties re considered to have fallen most in value and there has been a not insignificant rise in the yield requirement here of more than 1.0 percentage point.
It can be noted in this context that car facilities which were previously regarded as purely industrial properties, where the repair shop parts dominated the property as a whole, are now generally regarded as retail properties. The reason for this is partly that these properties are often located in industrial areas, which have developed into volume trade areas in recent years and partly because car facilities have in general been upgraded, which can be seen not least in newly-constructed facilities which have a considerably more exclusive design.
No important sales of car trade properties have taken place during 2008. There were some sales of car trade properties in 2006 and 2007 at levels between 6.0 and 8.0 per cent.
CATENA ÅR 2008
16
VALUATION
There are very few comparison properties and all purchases took place before the autumn of 2008 when the financial cri- sis became an established fact. Yield requirements have to be assessed on the basis of previous yield requirement levels tak- ing into account the current state of the economy. However, yield requirements for car facilities should be rather higher than for shopping centres and the like and then be mainly in the range of 6.5–8.5 per cent.
Tenant risk or opportunities
Bilia AB and its subsidiaries accounts for around 85 per cent of Catena’s rental revenue. All those industries which are highly dependent on manufacture, services or trade associated with vehicles will be hard hit at early on in the downturn. It is difficult to provide a good answer to whether Bilia AB is a relatively secure or a very risky tenant at present. The com- pany carried out a new issue in January 2009. Bilia is prima- rily associated with the Volvo marque but also sells Ford, Renault and Hyundai cars and vans.
The current tenant may be considered as reducing the mar- ket value of some of the properties due to long leases at rents which are low in relation to the market rents for alternative uses. Most properties/premises should be attractive for new tenants in the car trade or volume trade.
In general, the situation with long and fully indexed leases provides a good development of rents compared with the property market in general which will probably be affected by falling rents and rising vacancies in the next few years.
Input data
Catena has supplied lists with relevant information for leases/
premises, information about planned investments and infor- mation concerning framework agreements. In addition, his- torical operation and maintenance expenses have been received.
Six of the eight most valuable properties have been valued for this valuation assignment. Other properties were inspected in connection with previous valuation assignments.
Information has also been taken from the Property Data Reg- ister (FDS), detailed local plans, site leasehold agreements, etc.
Valuation method
The market value for every property valued has been assessed with the aid of a cash-flow analysis in which the estimated value of the property was based on the present value of the net operating income after investments and the present value of the residual value in the costing period (i.e. the total capital in calculations). Different value supplements or value deduc- tions are made in appropriate cases. A costing period of 10 years was normally applied, although if the lease term was more than 10 years, a costing period of 15 or 20 years was assigned.
Every valuation object was assessed individually and its loca- tion, type, condition, leases etc. affect decisions on yield requirements and the cost of capital.
The following common assumptions and prerequisites have been applied:
The rate of inflation during the costing period has been
•
assumed to be 2.0 per cent per year.
Operating and maintenance expenses have been assumed to
•
track inflation.
Rents in current leases are used during the term of the lease.
Subsequently, an assessment of the market rent is made and an adaptation if this deviates from the current rent at the same time as the vacancy risk is taken into account.
Costs for operation and maintenance, property tax, site leasehold fees etc, are assessed at property level.
Our assessments of market yield on properties etc. are based on analyses of comparable property purchases that have taken place.
The cost of capital corresponds to the market’s total required return and comprises the real interest rate, compen- sation for inflation and a risk supplement. The size of the cost of capital depends on the market’s requirements for risk sup- plement, which varies according to the type of property, its position, alternative areas of use, tenant and lease composi- tion etc. In the normal case, a cost of capital is applied which is equal to the required yield multiplied by inflation. With the exception of a few properties with short leases, the cost of capital for net operating income has been set below that for residual value. This has the case for long leases in combina- tion with the leases being entered into as basic rent agree- ments with supplements for property tax, where the tenant is responsible for almost all operating expenses, and internal maintenance. Overall, this means that the cost risk is reduced and that the cost of capital can accordingly be reduced. The cost of capital for the net operating income has been assessed at 7.50 per cent during Bilia Personbilar’s period of tenancy.
In cases where there are other tenants at the property apart from Bilia Personbilar AB, the cost of capital has been adjusted upwards proportionally.
Framework agreement
Catena and Bilia Personbilar AB (the predominant tenant in the property portfolio) have entered into a framework agree- ment (Master Lease) for seven of Catena’s properties. This framework agreement enables the tenant to give notice to vacate an unspecified part of the premises at certain times. At the end of 2011, altogether two-thirds (including those previ- ously vacated) of the premises can be vacated and the rest at the end of 2014. In principle, this has been taken into consid-
eration only by rental risk deductions at property level.
CATENA ÅR 200817
CATENA 2008
18
To date, this possibility has only been made use of for the property Kungsbacka Verkmästaren 6 which will be vacated on February 28, 2009.
Projects and building rights
Projects in progress have been treated as if they had been completed with a deduction for residual investments. This only applies to the property Malmö Urnes 2 where a building is in process of construction.
The value of any building right has been taken into account if, in practice, the property owner has an opportunity to use such rights. 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. Building rights have been valued on the basis of knowledge about market levels at the particular location and reported as additional value for the respective property valued.
Market value
The aggregate market value for the Swedish properties totals SEK 1,772m at the time of valuation. This amount constitutes the total of the separately assessed market values for the indi- vidual properties, i.e. no consideration has been taken to any portfolio premiums or portfolio discounts. Deductions have been made for remaining investments of around SEK 28m for Malmö Urnes 2. The aggregate market value gives an average initial yield of 6.81 per cent and corresponds on average to SEK 9,091/sq.m of premises area.
The following table shows the range in which the cost of capital and property yield requirements lie in the different regions and what this means for initial property yield.
Region
Cost of capital for present value cal- culation of net oper- ating income, %1)
Yield require- ment for calcula- tion of residual
value, % Initial yield on properties, %
Stockholm
Region 7.64–9.90 6.50–8.75 4.44–9.03
Göteborg
Region 6.35–10.16 7.00–8.50 4.72–9.94
Öresund Region,
Swedish part 8.19–9.65 6.75–7.75 7.41–8.37
1) Refers to the average during the calculation period, which reduces comparability.
Danish properties
The market value of every property has been mainly assessed with the aid of a cash-flow analysis. The rate of inflation dur- ing the costing period has been assumed to be 2.25 per cent per year.
The aggregate market value for the Danish properties amounts at the time of valuation to around SEK 116m. This amount constitutes the total of the separately assessed market values for the individual properties, i.e. no consideration has
been taken to any portfolio premiums or portfolio discounts.
The aggregate market value gives an average property yield of 7.50 per cent and corresponds to an average of SEK 9,107/sq.m. of premises area.
The following table shows the range in which the cost of capital and property yield requirements lie and what this means for initial property yield.
Region
Cost of capital for present value calculation of net operating income, %
Yield require- ment for calcula- tion of residual
value, % Initial yield on properties, %
Öresund
Region,
Danish part 8.75–9.00 7.25–7.50 7.16–7.90
Norwegian properties
The market value of every property has been assessed mainly with the aid of a cash-flow analysis. The rate of inflation dur- ing the costing period has been assumed to be 2.70 per cent during 2009, 2.32 per cent during 2010, 2.30 per cent during 2011 and subsequently 2.50 per cent per year.
The aggregate market value of the Norwegian properties amounted at the time of valuation to SEK 466m. This amount constitutes the total of the separately assessed market values for the individual properties, i.e. no consideration has been taken to any portfolio premiums or discounts. A deduction has been made for remaining investments of around SEK 5m for Industrigata 2 in Lier. The aggregate market value gives an initial average property yield of 8.00 per cent and corre- sponds on average to SEK 14,656/sq.m. of premises area.
The following table shows the range in which the cost of capital and property yield requirements lies and what this means for initial property yield:
Region
Cost of capital for present value calculation of net operating income, %
Yield require- ment for calcula- tion of residual
value, % Initial yield on properties, %
Oslo Region 8.25–9.00 8.00–9.25 7.66–9.48
Some uncertainty is attached to all market value assessment and it is implicit in the concept of market value that the stated market value is within a market-value interval. This interval can be estimated at up to ±10 per cent for a particular prop- erty. In market value assessment of the whole property port- folio, the deviations as a rule cancel one another to some extent so that the uncertainty interval can be assumed to be in the range of ±5 per cent.
Göteborg, February 2009 Forum Fastighetsekonomi AB
Hans Voksepp
Authorized Property Valuer SFF
VALUATION
CATENA 2008
18
CATENA 2008
19
Göteborg Backa 166:2
CATENA 2008
