Diös Fastigheter AB (publ) (DIOS) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Diös Fastigheter AB Q4 2019 report. [Operator Instructions] Today, I'm pleased to present CEO, Knut Rost. Knut, please begin.

Hi, and welcome to this presentation of the year-end results for 2019. My name is Knut Rost. I'm the CEO of the company, and I'm here together with our CFO, Rolf Larsson. The agenda for the presentation will be me touch upon the headlines and highlights. Rolf will then present the financial results in more detail. And last, I will sum up last year and give our outlook for the near future. If you have any questions, there will be a Q&A session in the end of this presentation. Page #2. I will state that 2019 has been a very strong year in many ways. We reached all our operational targets, and we will highlight some of them in this presentation. The results from income -- from property management is improved by 7%. The net letting continues to be strong, SEK 41 million and shows the sentiment in our market. This bodes well for the coming years. Our strong cash flow provides the possibility for the board to propose an increased dividend by 10% to SEK 3.3 per share divided into 2 occasions. With our unique position in mind, we think there is time to raise the target for growth in property management income from 5% to 10% per share. I will come back to that later in the presentation, covering these bullets more in detail. But now I hand over to Rolf, who will present the results.

Okay. Thank you, Knut. If we go on then and look at the financials, you can turn to Page 4. This is a report with no major surprises. With a higher rent, we still have good control over our property costs, and we have good return on our investments in standing assets. Total revenues amounted to SEK 1.8 billion, which is an increase by 2%. Like-for-like, the rental income for the period increased with 2.5%, 1.6% is due to indexation, 0.2% to operating costs transferred to our tenants in this last quarter -- in the second quarter, sorry, and the rest is an effect of increased rental levels. Like-for-like, the rental income by the end of June was 4.7%, and by the end of December, 2.5%. The difference is due to nonrecurring effects of transferred operating costs in the second quarter and slightly higher vacancies. The majority of the vacancies that have occurred during the year have been ramped out again. Our market remains strong, which is reflected in our net letting, which amounts to SEK 42 million for the full year and SEK 11 million for the last quarter. The cash flow will normally come in 12 to 24 months time. Property costs have been normalized compared to last year when we had the snowy and cold winter. And we do reach 3% in energy savings for the full year. The operating surplus improved by 4%, which gives us a surplus ratio of 65%. And the surplus ratio in the last quarter was 64%. Net financial items are somewhat lower. Renegotiations of maturing debt in Q4 has been done on better terms. And we have outstanding certificates of SEK 1.8 billion. Income from property management is still increasing and is up 7% compared to last year. And unrealized changes in value of properties amounts to SEK 331 million, which is 1.4% of the properties' market value. The average valuation yield was 5.9%. Turn to Page 5. If we go on then and look at the development of our cash flow, which is shown in bar chart and our efficiency in property management, measured as the surplus ratio, you can see that there's a clear upward trend for both metrics. 10%, that's the average growth in income from property management per share over the last 12 years. We have achieved this by raising rents and lowering our vacancies, by lowering our financial costs and by making the right strategic transactions. This means that we can expect a stable and growing cash flow in the years to come, and thus, an increase in stock return. If we go on then and look at the surplus rates, which is shown in the line chart, we can see that the surplus ratio has increased by more than 6% in 5 years. We have, during the same period, reduced our vacancies by 1%, but the average rental income per square meters has increased by 37% during the same time. Turn to Page 6. Low-risk is important when we talk about our revenue streams. What this slide shows is that we have a well-diversified portfolio when it comes to type of properties, industry and geographical location. We have continued to reduce our exposure to industry in favor of centrally located offices. We have low tenant concentration risk. Our 10 largest tenants stands for 16% of the total rents. And 26% of the rental income comes from public related companies. The average lease term for commercial premises is 3.6 years. All in all, this shows that we have predictable and stable revenue streams and thus, low-risk in our cash flow. Okay. Turn to Page 7. The market value of our properties amounts to SEK 22.9 billion, an increase by SEK 2 billion since the beginning of the year. Net transactions amounted to SEK 0.5 billion, where we have acquired centrally located offices and sold industrials. We have invested SEK 1.3 billion, SEK 0.8 billion is refurbishment in standing assets with average return yield on cost of approximately 7%, and SEK 0.5 billion is new builds and major reconstruction projects. Unrealized value changes amounted to SEK 0.3 billion, 81% is an effect of increase in cash flow, and the rest is driven by yield. Turn to Page 8. There's a clear trend that the investments are increasing with an annual volume of nearly SEK 1.3 billion. We are now entering a new era in Diös, where we have added new builds as a major part of our property portfolio, which will have a positive effect on our future cash flow and key metrics. On the right-hand side, you can see some examples of our ongoing projects. We now have approximately 100,000 square meters under production, investments of around SEK 2.5 billion, with fully positive cash flow effects from 2022. In addition, we have identified an additional 100,000 square meters of existing and possible building rights. With our central location building rights portfolio, and the strong demand for modern premises and housing, it's likely that the investment volume will increase even more in the coming years. Turn to Page 9. As you can see, our net debt-to-EBITDA is stable around 11x which is clearly lower than the average for listed Swedish real estate companies, which, again, is an effect of our strong cash flow. We have continuously reduced our loan-to-value over the years, and it now amounts to 53.1%, and our average annual interest rate was 1.2%. And we have been busy even after the reporting date. We have expanded the maximum size of our commercial paper program from SEK 2 billion to SEK 3.5 billion and added Danske Bank as a dealer. We continue to see high demand and good conditions for our CPs. We have refinanced SEK 5.1 billion outstanding debt with better terms and conditions than before, which, for instance, means that average loan maturity now amounts to 3.3 years. All in all, this shows the financial stability in the company. Turn to Page 10. We are improving most of our KPIs, and thus, reducing the financial risk. We are increasing our cash flow, which will form the basis for dividends and profitable investments. The EPRA NAV per share is up 9% to SEK 73.4. Income from property management per share is up 6.5%. And the proposed dividend is up 10% to SEK 3.30 per share. And now I will hand it over to Knut again.

Thank you very much, Rolf, and we'll continue to Page 12. We have a unique position. We are market leaders in all our 10 cities. We have a specific focus on our 10 cities. We have a geographical diversification. We have a diversified concerning premises. And of course, as we usually say, we have a local presence in every city. Looking into the property management. I'm proud to say that we have a net letting on total SEK 42 million for the full year. And that's, of course, we have a good activity and high activity in our cities. We have reached a surplus ratio of 65%. That's good for us. We have also developed our customer satisfaction in the right way, that key performance indicator is getting better. We continue to certify our properties environmentally, and we mainly work with a preempt certification. Looking into projects, we have started 3 major projects, the 2 hotels in Sundsvall and Umeå, and we have got it -- project in Östersund concerning residential. We have released officially the project for the University of Borlänge. And we also have released a big construction work with National Transportation Authority in Borlänge as well. And we also have a bigger new build construction in Umeå concerning Police Authority. And of course, in every city, we start a lot of zoning plans for the future. We have, moreover, many tenant requested investments along -- in our 10 cities. And that is a good return of our money. And to do that, to reach our goals, we have increased the project organization with more employees, looking really strong. Looking into financing, we have one of the lowest interest rates in the Swedish real estate sector. And we think that we have a good trust from banks and the capital market. We have prolonged the loan duration through refinancing of the year-end at very attractive conditions, as Rolf mentioned earlier. Looking into transaction. We further strengthened our position throughout the year, the latest in Falun, buy properties with the right locations, sell industrial outside the city center, see good activity in the market. We see that residential is very expensive, but we are looking into that as well. And from our side, we will increase the activity for 2020. Now let's go to Page 13. I think I can say, now we have added project development to our business model, that we are a more complete real estate company. We now have the possibility to create growth and synergies in many different areas of our company and in our market. Therefore, we now increased our ambition for growth in income from property managed result. The new target is an average income from property management growth per share of 10% over a business cycle. We see great potential in our major projects, which we will increase -- which will increase our cash flow. The first new contract to be finalized is the residential project in Östersund, 85 apartments, and it will be followed by the hotel in Sundsvall. The contribution of cash flow from these projects and the ones that will follow will give us possibilities to reach the growth targets. The project portfolio will not reach the target by itself. We will need contribution from both transactions and property management. We have several ongoing discussions for potential transactions, and have good hope to release some use during the spring. Regarding increased income and reduced vacancies, there's a lot of potential. Office market is strong with polarization as an ongoing trend. The well located properties are getting better. And in the same time, the bad location have their vacancies. I think we sign a new top rent lease contract every quarter. Our main challenge and opportunity, of course, within offices is to increase the average rent level in the portfolio. We need to live even closer to our tenants and really understand their businesses to achieve this. Within retail, a lot of things are going on. The landscape is transforming. Retailers today need to give the consumers something more than before. It means that retailers need to find new ways to be profitable and sell their products. We, as a real estate company, can help them by finding the right premises, the right locations, the right logistical solutions, the right surrounding businesses and so on. I think we are in the front seat regarding these matters, and are truly looking forward on helping our retail tenants out in the new landscape. Our key performance indicators are strong and are growing stronger. We have our unique position as a market leader on our markets. Our cash flow is strong and have increased with 80% since 2013. We have a lot of tenant projects and new build projects going on that will give us even a brighter future. The Board suggests the raise concerning the dividend for 2019 to SEK 3.3 per share. So together with the business driven and very active real estate company, we are very optimistic about our future in our market. That takes us to the end of this presentation. Thank you for listening in. And we are now ready for questions.

[Operator Instructions] Our first question comes from the line of Philip Hallberg from Danske Bank.

This is Philip Hallberg from Danske. I have a few questions. So first off, regarding your growth in income from property management, the growth kind of slowed down in H2 here in 2019. So you're averaging roughly 2.5%, 3% compared to roughly 11% in the first half. Is that an effect of the deals you made with NP3 last year? I know that you divested some portfolios, maybe higher-yielding properties that were effective now in the first half of the year? Or is it anything else sort of disturbing these numbers here?

It was a tough question. I think -- Knut Rost here. I think that there are many things that has an impact on the figures. One thing can be -- actually can be weather-related, let's say, that the -- we have had very little snow, but we have had a little -- a lot of ice and it has been rather rough in our cities. That's one explanation, and other explanation is that the maintenance of our properties that has differed a little during the year. Do you have anything more, Rolf?

We also can see that we have slightly higher vacancies in this year compared to last year and compared to the first and second quarter in 2019 as well.

Okay. And when I look at your project portfolio right now and what remains to be invested, you have roughly 6% of your total property value that remains to be invested. That's roughly SEK 1.4 billion. And when I looked here in the presentation, you had some projects in Borlänge, but they don't seem to be included in this ongoing project. Are they to be started during 2020? Or -- and will they be included in like Q1, Q2 report or something like that?

Yes, that's right. We have the Berghs School in Dalarna, which will start maybe in the third quarter, and we also have [indiscernible] in Borlänge, which will start maybe in the second quarter this year.

So it's actually starting in Q1, but in the end of Q1. So you are absolutely correct. We will bring them into the next quarter reports.

Okay, cool. And my final question is regarding your building rights. You have stated before that you have quite a lot of building rights that are related to apartments and maybe both primarily rental apartments, but also co-ops. But for the rental apartments, do you intend -- now with your new goal of reaching 10% annual growth in income from property management, do you intend to keep all the rental apartments for yourself, sort of take them into your own operations? Or are you aiming to divest any one of those?

I'm sure that we will divest, at least, a few of them because there are so many -- there are so many square meters in building rights and building permits that we -- I don't think it's right for the shareholders to -- that we develop all by ourselves. But then we have a lot of other companies that can help us to develop the cities faster. So I think we will divest a few of that. That's a very good question. So we'll divest a few, but we will keep most of them for our own development.

Okay. And the last question here from my side. Do you see any immediate impact now when you are starting -- if I look at your current developments, obviously, it's quite a lot of hotels and stuff like that. But if you look on the commercial side, if you're able to, let's say, that you start an office project, are you positive that you will be able to sort of increase the total average rent level in that? Let's say, you do it in Skelleftea or in an area of those cities? Do you think that you will be able to increase the average rental level per square meter for your entire property holding in that city? Do you see sort of like a positive impact from your new started projects in terms of rent levels, I mean?

Yes, I understand the question. And we will -- we want to raise the rent in the right way. There are 2 ways of doing it. The best way is actually to build new constructions concerning office premises. That's one way of raising the rent so you get a new top level. But the other way to do it is actually to have good relations with your tenants. And then you meet up with your tenants and offer them something extra that we can prolong the lease contract or that we can raise the rent. That's how we work. And the answer on your question is, yes, we want to raise the average rent level. And we think it's a great opportunity for us to do that now.

And the next question comes from the line of Albin Sandberg from Kepler Cheuvreux.

I have 2 questions. First one is on the property value changes in the quarter. If I just go back and look at my notes, it's the first time since 2009 that we have slower property value uplift in Q4 versus Q3. So if you could comment a little bit more on that? And maybe also, if there were -- actually, I hope it's right also in Q4. And the second question I had was since you highlighted your extension of the CP program, do you feel that your financing mix, bank versus some of it financing, is at a good level? Or how do you see that going forward?

There is something wrong with the phone line. I could hear your first question about slowing down the value changes in the fourth quarter. Yes, it's right, it's lower than it used to be in the last quarter, if we go back to few years. As I said, we have slightly higher vacancies. We have a good net letting, but the cash flow from the net lettings will come in, I would say, 12 to 24 months. So the effect isn't that high at this moment. If we look in earlier years, the cash flow from the net lettings was closer in time. If that's an answer on your question, Albin?

Yes. So that would imply that all else equal, then possibly the property value revisions would be stronger a year out from now, assuming that we see that cash flow coming in from the land letting?

Yes. That's right. And your second question, could you please state that again?

Yes, that was -- since you highlighted your extension of your commercial paper program, whether your mix of financing, banks versus capital markets financing, is at a fair level? Or do you imply to raise the capital markets financing going forward as a share of total?