Interim report January-September 2002

Interim report January-September 2002 July- January- September September 3 months 9 months SEK M 2002 2001 2002 2001 Ongoing property management operations 201 239 547 693 ("operations") Gain from property sales - 91 175 442 Nonrecurring items - 89 - 102 Profit before tax 201 419 722 1,237 Current tax -5 -62 -38 -217 Deferred tax -33 -73 -89 -39 Profit after tax 163 284 595 981 Cash flow/share, SEK (operations) 3.10 3.18 8.64 9.24 Quarterly profit from operations before tax: SEK 201 M (239) Quarterly cash flow: SEK 3.10 per share (3.18) New leases signed in downtown Stockholm and Kista Unchanged full-year forecast COMMENT Market Despite problems in the IT and telecom sectors and a 60-percent decline in stock prices since the spring of 2000, the Swedish economy is still growing, mainly thanks to the automotive, pharmaceutical and forestry industries. The latest economic forecasts estimate GNP growth at slightly over 2 percent in 2003, although the bearish stock market's future impact remains uncertain. Local economic growth ("regional GNP") is the single most important factor behind growth in the rental market. Since 1985, office rents in Stockholm's CBD have risen by an average of 5 percent per year (through autumn 2002), although there have been significant fluctuations between years. Since peaking in 2000, average office rents in Stockholm's CBD have stabilized at a level about 10 percent lower, while vacancies have risen from approximately 2 percent to 9 percent in terms of space. No recovery is expected in 2003. Essentially the same conditions persist in the rest of the Stockholm region - some areas are in fact at risk for a further decline before turning around. Many companies, especially in and around the IT and telecom sectors, still have too much space. In Gothenburg and Malmö, long-term growth - and volatility - in office rents is lower than in Stockholm. Vacancy rates are largely unchanged compared with last year. For residential units in attractive metropolitan areas, rents are expected to continue to rise, not least due to a gradual adjustment to market rates. Drott Drott continues to work methodically to build up and manage a significant property portfolio in regions where long-term growth is faster than the rest of the country - particularly office and residential properties in prime locations. Although its holdings are long-term, Drott frequently reevaluates whether each individual property can contribute over time to its financial objectives. During the first three quarters of the year, Drott sold properties for SEK 0.6 billion (4 percent above their independently appraised market values as of December 31, 2002). Investments amounted to SEK 1.9 billion, of which property acquisitions accounted for SEK 0.8 billion. Contacts with Drott's commercial tenants have intensified. The goal is to meet changing tenant needs with flexible leases and alternative locations. Drott's commercial tenants are now being offered expanded services, including cleaning, receptionist and janitorial services as well as security and refreshments, through its subsidiary Drott Service. This year's survey of how tenants rate Drott as a landlord - "Customer Satisfaction Index" - indicates a clear improvement over last year. In ongoing property management operations ("operations"), profit and cash flow were lower in the third quarter of 2002 than the corresponding period a year earlier due to, among other things, the elimination of a large property portfolio outside the metropolitan regions as of year-end 2001. In addition, the occupancy rate for the commercial portfolio is lower than a year ago, due partly to properties vacated for major renovations and partly to the economic downturn and imbalance in Kista. The slow economy has also resulted in higher costs for marketing/rental activities and tenant modifications compared with the corresponding quarter of last year. Positive factors include a continued rise in residential and commercial rents (expiring leases are still being renegotiated at higher levels). Moreover, fully leased properties that have recently been renovated or constructed are affecting profit and cash flow positively. Drott is in a more favorable tax situation this year, which has reduced its tax charge compared with the corresponding quarter of 2001. Share repurchases have lowered profit and cash flow in absolute terms due to higher interest expenses, while profit and cash flow per share have been affected positively. Forecast The forecast for 2002 is unchanged since the previous interim report: Full-year profit from operations is estimated at approximately SEK 700 M before tax and cash flow is expected to exceed SEK 11.00 per share. This does not include gains on property sales (through November 6: SEK 195 M) and nonrecurring items. PROFIT AND CASH FLOW July-September Third quarter 2002 Figures in parentheses refer to the third quarter of 2001 Rental revenues for the third quarter amounted to SEK 913 M (901), of which residential rents accounted for SEK 222 M (224). The operating surplus amounted to SEK 583 M (604) and the surplus ratio was 64 percent (67). Commercial rents renegotiated in 2002 average 28 percent higher than expiring leases. Rental revenues and operating surpluses have been affected, however, by lower occupancy rates and higher rental costs. In the like-for-like portfolio - i.e. the portfolio that Drott owned in the third quarters of both 2001 and 2002 - rental revenues rose by SEK 26 M or 3 percent. The operating surplus decreased by SEK 5 M or 1 percent. The occupancy rate (ongoing leases) fell during the quarter by 0.2 percentage points to 91.0 percent (September 30, 2001: 95.0 percent). In the residential portfolio, the occupancy rate remained unchanged during the quarter at 99.4 percent, while it fell by 0.2 percentage points to 88.6 percent in the commercial portfolio. As of September 30, 2002, Drott's total annual rent from ongoing leases amounted to SEK 3.6 billion, of which SEK 2.7 billion is from commercial leases with a weighted average of 3.0 years remaining until expiration. The five largest tenants accounted for SEK 0.5 billion, with a weighted average of 4.3 years remaining until their leases expire. Interest expenses amounted to SEK 286 M (269). At the end of the period, the average interest rate on Drott's interest-bearing liabilities was 5.0 percent (5.0). Profit before tax amounted to SEK 201 M (419). Last year's quarterly profit included gains from property sales (SEK 91 M) and nonrecurring items (SEK 89 M). This year's quarterly profit from operations amounted to SEK 201 M (239). Profit after tax amounted to SEK 163 M (284) after a tax charge of SEK 38 M (135). The low reported tax charge and the low current tax are attributable to Drott's tax loss carryforwards. ------------------------------------------------------------ This information was brought to you by Waymaker http://www.waymaker.net The following files are available for download: http://www.waymaker.net/bitonline/2002/11/06/20021106BIT00090/wkr0001.doc The full report http://www.waymaker.net/bitonline/2002/11/06/20021106BIT00090/wkr0002.pdf The full report