Annual Report 2008 Contents 1 2008 in brief 2 This is Kungsleden 4 Chief Executive’s statement 6 Business model and implementation 8 Market – credit market squeeze 10 Market – Kungsleden adapts to new conditions 12 Customer partnerships in practice – Härnösand 14 Organisational and human resources 18 Property portfolio 19 Transactions 20 As of 31 December 2008 22 Valuation 24 Earnings capacity 28 Customers and rental revenues 30 Partnership with the Third Swedish National Pension Fund 32 Risks and opportunities 34 Financing and financial risks 38 Corporate social responsibility 40 Five-year summary 42 The share 45 Corporate governance 46 Board of Directors 48 Management 50 Report of the Directors 56 Consolidated Income Statement 57 Consolidated Balance Sheet 58 Consolidated Statement of Changes in Equity 59 Consolidated Cash Flow Statement 60 Accounting principles, group 63 Notes, group 71 Income Statement, parent company 71 Balance Sheet, parent company 72 Change in Equity, parent company 72 Cash Flow Statement, parent company 73 Accounting principles, parent company 73 Notes, parent company 76 Proposed appropriation of profits 76 Signatures 77 Audit Report 78 Employees 80 Definitions Property register Invitation to Annual General Meeting and addresses The audited Annual Report consists of pages 50–76. This Annual Report is a translation from a Swedish language original. In the event of any inconsistency between the original and the translation, the Swedish Annual Report (Årsredovisning) will take precedence. 2008 in brief • Net sales increased by 11 per cent to SEK 2,897 (2,612) m and gross profit increased by 15 per cent to SEK 1,967 (1,705) m. • Kungsleden posted a loss before tax of SEK –1,185 (2,621) m, of which unrealised value changes were SEK –1,803 (1,372) m. The net loss was SEK –962 (2,400) m in the year, equivalent to SEK –7.00 (17.60) per share. • As of 31 December 2008, the property portfolio comprised 603 (575) properties with a book value of SEK 28,576 (25,737) m. • In 2008, 54 (213) properties were acquired for SEK 3,408 (9,625) m; 28 (222) properties were also divested for SEK 1,313 (9,475) m, generating a profit of SEK 12 (580) m. These divestments affected profit for calculating dividends by SEK 268 (1,465) m. • Profit for calculating dividends for 2008 was SEK 840 (2,019) m, equivalent to SEK 6.20 (14.80) per share. • The Board of Directors proposes a dividend of SEK 1.50 (8.00) per share. • Kungsleden reached an agreement with the Third Swedish National Pension Fund (AP3) to divest 50 per cent of the ownership of 282 public properties, equivalent to a value of SEK 15.4 bn. This transaction is consistent with book value, and expected to affect profit for calculating dividends for 2009 by SEK 800 m. This transaction is conditional on retained financing and approval from the competition regulator. Earnings capacity 31 Dec. 2008 31 Dec. 2007 No. of properties 603 575 Leasable area, 000 sq. m. 3,185 3,052 Book value of properties, SEK m 28,576 25,737 Rental value, SEK m 2,902 2,509 Rental revenues, SEK m 2,736 2,366 Operating net, SEK m 1,867 1,653 Economic occupancy, % 95.0 94.4 Property yield, % 6.5 6.4 Operating surplus margin, % 68.2 69.9 The high transaction rate of Kungsleden’s operations implies that the Income Statement does not give the best view of the group’s future earnings capacity. Earnings capacity indi- cates the situation as if the properties owned at 31 December had been owned for the full year, and thus gives a more accurate view of the property portfolio and its earnings capacity. Profit for calculating dividends SEK m 2008 2007 Gross profit 1,967 1,705 Sales and administration costs –374 –316 Net financial position –986 –720 Sub-total 607 669 Property divestments Trading net on divestment 12 580 Realised value changes 256 885 Sub-total 268 1,465 Tax paid and other items not affecting cash flow –35 –115 Profit for calculating dividends* 840 2,019 * Profit for calculating dividends also corresponds to the cash flow statement item cash flow from operating activities. 1 This is Kungsleden Kungsleden owns and manages properties, and views a property’s returns as more impor- tant than its type or geographical location. Its business model focuses on its property portfolio, with the objective of improving portfolio risk-adjusted returns. THE COMpaNY Kungsleden’s ambition is to always ties across Sweden. Its tenants are Kungsleden is a property company that maintain high and stable cash flow from small enterprises and large corpora- is always open to new business oppor - operating activities. Operating risk is tions, but school students and pension- tunities – regardless of the type of minimised, and revenues are stabilised, ers occupy and live in Kungsleden property or its location. The deciding by diversifying property type and geo- properties. Over half of total property factor is high and stable sustainable graphical location, through different values are let to the public sector, or to returns, where diversifying risk is a key types of tenants, and rental agreement tenants whose operations are publicly ingredient. The experience, skills and maturities. financed. The average remaining drive of Kungsleden’s employees contract terms for customers in the enables fast, secure and valuable OperatIONS Public division is some seven years, solutions to customers’ needs for Operations are organised into three and for customers in the Commercial property and premises. divisions, with each division responsible division, about six years. Retirement home, School and Care for the management and letting of its are property types with specific needs property portfolio. Commercial properties VISION where Kungsleden is a leader. concentrates mainly on the Office, Kungsleden’s vision is that by means of The objective is always to operate Industrial/warehouse and Retail skilled entrepreneurship and a high level close to the market, be receptive and property types. Public properties are of expertise, Kungsleden will become identify new patterns that can be trans- divided between the Retirement home, Sweden’s most profitable and success- formed to benefit customers and share- School and Care types. The third ful property company. holders. Simply put, Kungsleden sees division, Nordic Modular, primarily opportunities where others do not in conducts lettings, but also the produc- BUSINESS CONcept locations, buildings, premises and areas. tion and sale, of modular buildings. Kungsleden owns and manages Kungsleden has flexible organisa- properties, generating high and stable BUSINESS MODEL tional resources with strong local links long-term returns. Kungsleden owns and manages prop - and substantial expertise in property erties. It views a property’s returns as transactions. Its head office is in Stock- FINANCIAL tarGetS more important than its type or geo- holm, and the company has offices in A minimum return on equity of 15 graphical location. Its business model another 15 or so locations in Sweden. per cent. focuses on continually enhancing the composition and quality of the property CUSTOMerS A minimum interest coverage ratio of 2. portfolio, with the objective of improving Kungsleden’s success is based on portfolio risk-adjusted returns. In satisfied customers, new ideas and the THE SHare practice, this involves working actively company’s ability to do good deals. Kungsleden has been listed on Nasdaq on managing and enhancing properties, Kungsleden’s customers are a cross- OMX Stockholm since 1999. while simultaneously seeking out deal section of the Swedish private and opportunities involving acquisitions and public sectors, with geographical divestments. diversity spanning over 100 municipali- Property portfolio, 1999–2008 Property portfolio by type in 2008 SEK m 30,000 25,000 20,000 Total book value 15,000 SEK 28,576 m 10,000 5,000 0 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 Commercial properties Public properties Retirement homes Germany Modular buildings 37% Commercial properties 58% Public properties 5% Modular buildings 2 KUngsleden annUal report 2008 VerONIca BODSteN LarS ÅkerSteDT ASSIStaNT PROpertY MaNAGer PROpertY MaNAGer, ABB FASTIGHet What do you enjoy most at work? What do you think distinguishes Kungsleden That I learn something new every day. from other property companies? Kungsleden is interested in us as tenants, and Why do you think Kungsleden has become doesn’t just switch on when rental agreements such a large public sector landlord? are to be signed. Kungsleden focused on this early, and because it was successful, we continued. Kungsleden has What characterises your collaboration worked hard on building a contact network in the with Kungsleden? public sector over the years, which has created a We perceive Kungsleden as being available, lot of business opportunities. often acting preventatively on key issues. In what way is Kungsleden innovative? How does Kungsleden contribute value, Because we are in dialogue a lot with the customer, do you think? we can produce new ideas and solutions together, They take a long-term and holistic view that suited to their wants and needs. extends beyond what directly relates to rental agreements. How would you describe Kungsleden as a workplace? What do you like most about Kungsleden? Somewhere that runs at a high tempo, with lots Kungsleden is present out in its properties and of laughs and scope for personal development. takes responsibility for management, not merely viewing them as a transaction target. We notice What do you think will be the most a long-termism where Kungsleden is prepared to important thing to work on in 2009? contribute to early exchanges of obsolete and Continued customer care and environmental un-environmental plant in property, for example. issues. Kungsleden has described itself as the property company of opportunities, how do you notice this? Nothing is impossible, which is important for us as a manufacturing business.