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

Dear, ladies and gentlemen, welcome to the Diös Fastigheter AB Q1 2020 report. [Operator Instructions] Today, I'm pleased to present Knut Rost. Knut, please begin.

Thank you, very much. Good morning, and welcome to this presentation of Diös' First Quarter Results for 2020. My name is Knut Rost. I'm the CEO of the company. And I'm here with our CFO, Rolf Larsson. The focus on this presentation will be shared between our strong Q1 results and the effects and uncertainty concerning the COVID-19 pandemic. I will start with the highlights of the report. Then Rolf will guide us through the results and the key figures, and we will finally discuss the effects of COVID-19 and the outlook for the coming quarters. If you have any questions, you will be able to ask questions at the end of this presentation. Turn to Page 2. I'll start with the highlights. The first quarter was the strongest first quarter in Diös' history. It shows that we do many good things within the business and that our activities are profitable. The result from property management is improved by 8% to SEK 229 million. Net leasing continues to be strong. Net rental as a key figure, over time, is a good thermometer for our market. This quarter, among other things, we have signed and extended the lease agreement with the Swedish Transport Administration regarding the new head office in Borlänge, and signed a new lease agreement with Dalarna University for the new campus in Borlänge Center. The Swedish Transport Administration's new lease or extension of existing lease is very important. This tenant is our largest individual tenant, and the contract in Borlänge is our single largest contract. By extending the tenant's agreement for 10 years, this means that the agreement is currently 13 years. The Swedish Transport Administration is a great tenant to us, and it gives us a good return and cash flow for many years to come. It's also good to note that this tenant is a public tenant, which means safe cash flows. Dalarna University, also a public tenant, has decided to move the campus to our centrally located property, Mimer. It will increase the flow of people in the city center. It also creates relocation chains, so we can fill vacant premises with tenants who need to be evacuated. Both of these leases will come into force in July 2022. Our surplus ratio was 62%, which is the strongest ever for the first quarter. We saw both increased rental income and reduced costs. I will now hand over to Rolf, who will present the result in more detail, and then I will return to discuss the prospects ahead and the effects of the pandemic. Rolf?

Thank you, Knut. We can move to Page 4. Our third quarter was strong. Income from property management increased by 8% compared to the same period last year. Like-for-like, the increase was 7%. Rental income and payment of the first quarter's rents were not affected by COVID-19 as the due date was last -- December last year for most of the rents. Like-for-like rental income increased by 2.8%; 1.2% is due to indexation, 0.6% for cost transferred to our tenants and 1% was due to renegotiations and new lettings. Our net letting in the first quarter was strong and amounted to SEK 31 million. Most of the revenue streams will come within 12 to 24 months. Winter-related operating costs have been normalized compared to last year. Our operating surplus increased by 8%, resulting in a surplus ratio of 62%. And as Knut said, the highest in the company's history. Net financial items is slightly higher due to rising STIBOR and higher average debt. Unrealized changes in value for properties amounted to SEK 10 million. Profit after tax is lower compared to last year, which is mainly explained by lower unrealized changes in value. Continue to Page 5. If you go on then and look at the development of our cash flow in the form of earnings per share and our management efficiency measured as surplus ratio, we can see that there's a clear trend for both measures. 10% is average growth in income from property management per share over the past 13 years. We have achieved this by raising rents and reducing vacancies, by reducing our financial cost and by making the right transactions. If we look at the surplus ratio, which is the line chart, it has increased by 6% over the last 5 years. This is a result of our strategy, urban development. We have made the right transactions. We have acquired properties in CBD, and sold nonpriority cities and properties in peripheral locations in our cities. As a result, we have reduced industries in favor of primarily offices. We have increased the quality of our portfolio through investments, which has led to higher rents, lower vacancies. Rental income per square meter has increased by 39% during the same period. Go to Page 6. What this slide shows is that we have a well-diversified portfolio when it comes to type of properties, industries and geographical location. Our exposure to industries that currently belong to the most exposed is relatively limited. Cafés and restaurants stand for 5% of total rental income, hotels stand for 1.8%, retail [ and system ] for 9% and high street retail stand for 10%. This category includes, for instance, grocery stores, pharmacies and Systembolaget, the state-owned chain of shops that have exclusive rights to sell alcoholic beverages. The majority of our revenues come from type of premises that are currently regarded as secure payers. Offices account 54% of rental income and housing for 8%. We can turn to Page 7. As you can see, we have low tenant concentration risk. Our 10 largest tenants account for 16% of total rents, 78% of the rental income from our 10 largest tenants come from public-related tenants, 26% of our total rental income comes from public-related tenants. The average lease term for all leases was 3.9 years. We are, as I said before, well diversified with relatively low exposure to exposed sectors. But there's great uncertainty in how long the spread of infection will continue and what the long-term economic effects will be. Continue to Page 8. The market value of our properties amounted to SEK 23.2 billion, an increase of SEK 300 million since the turn of the year. The change is mainly due to investments. Unrealized changes in value amounted to SEK 10 million. 77% is cash flow-driven. The rest is an effect of yield change. Our lettings and investment in primarily offices and higher rental levels than expected for housing have had a positive impact on the value while the outlook for above all certain retail has had a negative impact on the value. The average valuation yield was 5.9%. Go to Page 9. There's a clear trend that the investment volume has increased in recent years. We've become a more complete real estate company as we also add new production to future earnings and cash flow. On the right side, you can see some of our larger projects. We currently have about 100,000 square meter under production, with an investment volume of about SEK 2.3 billion. The positive cash flow effect will mainly come during 2022 and 2023, which will also have a positive impact on other key operating figures. In addition, we have an additional 100,000 square meter in existing or possible building rights in central locations with an estimated investment volume of just over SEK 2 billion. We will complete our ongoing investment. Then we must be humble in the current situation and let the future show at what pace new projects are started. Move to Page 10. As you can see, our net debt-to-EBITDA is stable over time and amounts to about 11x. This is clearly below the average for listed Swedish real estate companies, and again shows our strong cash flow. Our loan-to-value ratio at the end of the period was 54.9%, which is slightly higher than in Q4. If we take into account utilized overdraft facilities in Q4, the loan-to-value ratio was 54%. The difference is due to increased lending to finance-planned share dividends in early April. During the first quarter, we have refinanced SEK 5.1 billion of bank loans on better terms than before. In connection with this, we have extended our average loan maturity to 3.2 years. In addition, we have increased existing credit limit by SEK 600 million, among other things, finance ongoing projects. After the end of the reporting period, we have refinanced a bond maturity of SEK 574 million through bank loans. What remains to be refinanced this year does amount to SEK 255 million. The average annual interest rate was 1.3%, which is 0.1 percentage point higher than at the turn of the year, due to the fact that STIBOR has increased in Q1. Thanks to our strong cash flow and an interest coverage ratio exceeding 6x, we continue to choose a short-term interest rate fixing. We, like many others, continue to see low interest rates in the foreseeable future. Overall, we have a strong financial position. In addition to existing loans, we have liquid funds and utilize overdraft facilities and unutilized credit facilities available, corresponding to SEK 1.2 billion. Continue to Page 11. We report the key EPRA figures according to the new standards. EPRA NRV increased by 8% to SEK 75.1 per share. The interest coverage ratio remains strong and amounts to 6.1x. Income from property management per share increased by 5.4%, rolling 12 months. And then I will hand it over to Knut again.

Thank you, Rolf. We'll turn to Page 13. We can conclude that Q1 was a very strong quarter in many ways, that we are just now facing a new reality. The effects of COVID-19 are very difficult to assess today. And taking this into consideration, some of our tenants experienced a major impact of their operations, hotels, cafés and some part of retail have seen the number of visitors decrease, which has direct effect on their sales. We handle our tenants on individual basis. This means that we must make an assessment for each specific tenant based on their specific needs. By doing so, we will get even closer to our tenants and be able to make better decisions about what actions we should take. There is a lot of activity going on, both within the administration centrally, but above all in the field. Our local business managers and their team handle all issues and issues that arise from the current situation. Example on actions taken is, for example, flexible opening hours, we have accepted monthly payments instead of quarterly and so forth. The uncertainty is reduced concerning the governmental rescue package. And even though we don't have the final details, we are very proactive with our tenants. We make an individual assessment, take into account the tenant ownership and whether they have taken their own measures to lower their costs. When we look at the tenants' exposure in more detail, we state that we have a well-diversified portfolio in terms of industries, geographies, tenants, private and public tenants. The effect varies greatly. With the hospitality industry being the most vulnerable at this stage, we have about 6% of the exposure to rental income from restaurants, hotels and cafés. We also have a good diversification within our tenants with everything from grocery stores, pharmacies and public tenants like Systembolaget to the large retail chains. Many tenants are also small local entrepreneurial companies. About 9% of rental income comes from the city malls. It is difficult to give a forward-looking picture when there's such a high degree of uncertainty about the effects of COVID-19. What we can say is that we take the situation very seriously. We follow the instructions from the public health authority with different types of measures. We see that about 91% of the expected rental payments for April have been paid. We do not see any delays in our projects, and we intend to continue ongoing projects and commitments as planned. Our financing situation is good, and our financial position is strong, as Rolf already mentioned. We believe that many of the ongoing trends in both office, retail and residential will continue, but perhaps now at an even faster pace. Urbanization in our cities is most likely to increase. The office market has an ongoing trend of polarization. The right location is becoming increasingly important. Owning offices in the right neighborhood with the right-surrounding companies and urban services as well as good infrastructure becomes more important. Here, we have a unique position that is very positive. Retail is changing. Stores is combined with e-commerce. That trend is being accelerated by the pandemic. I think we are at the forefront of these issues, and I really look forward to helping our tenants in the new landscape. On the residential side, we see an increased demand for centrally located apartments, where, as a tenant, you want to take advantage of the urban service offering. Our long-term goal remains. Although the effects of the pandemic are impossible to assess, at this stage, we see no reason to reconsider our long-term target for growth, in profit of 10% on average, over a 3-year period. I end by turning to our employees and thank them for good efforts for a fantastic result we present for the first quarter. I am also very grateful for all the efforts that they have been putting lately regarding the current situation. Together with our tenants and shareholders, we will handle this challenging time. That takes us to the end of this presentation. Thank you for listening. We are now ready for questions.

[Operator Instructions] So we have a question from Staffan Bulow.

Staffan Bulow of ABG. First off, I would like to ask a question about your net lease. You report a strong net lease of SEK 31 million. So I'm wondering if there are any big or new leases in these figures. Or is it spread out over many new leases?

Knut here. Thank you for good questions. Of course, since we have so many tenants and then so many properties, there are the spread of many ins and outs, so to speak, but there are 2 big ones there. The one is the National Transportation Authority in Borlänge, and the other one is the University of Borlänge. So both in the same city that contribute to that figure. Yes, that's correct.

All right. And concerning your interest rate, the average interest rate increased by 10 points from 1.2% to 1.3%. Could you give us any estimate of what we should expect for the full year 2020?

Rolf here. We don't give any prognosis over our thoughts. But the effect from Q4 was related to increase in STIBOR. So it depends on the development of STIBOR.

All right. Could you give us an update on your 2 hotel projects? Has the time frame changed or is it business as usual?

Yes. It's -- I don't think anything is business as usual right now. But concerning our 2 hotel projects, they are ongoing. There are no change in that. Of course, we are living close to the [ Ostersund ], Sundsvall and companies. And we are looking at them to see the strength in what we have. But we haven't heard anything from them concerning the -- any problems with those hotels. One hotel is going to open in Q3 2021. The other one is due Q3 2022. So it's rather far away in time, so to speak. But of course, we follow the company -- our tenant very closely. But just for now, this is -- it's ongoing business. And the construction cost and the construction are all going forward, and it's going very good.

Yes. And you mentioned the government's rent relief program. Do you think it will be applicable for your tenants? And do you think you will use it?

We are in the forefront here, so we can speak. We have many deals with our tenants, as we speak now. And we -- in our Q1 report, we say that until now, it's our part of the contribution, 25%. It's worth about SEK 8 million for the Q2 right now. But I think it will -- I think it will go up to about SEK 10 million to SEK 12 million for this quarter. It's only about the second quarter this year. So that's progressing well. So we are in the forefront. And we can see that -- and we think that this sort of rescue package from the government is very good. But everyone has to realize that when the state -- the government says that they contribute with 25%, they want us also to contribute with 25%. So it's a contribution to the tenant, not to us.

All right. And value revisions came in at roughly SEK 10 million. And you mentioned there was a negative effect from retail and positives on office. Could you give us any split between office and retail?

Yes. We have made some good investments and lettings in office that contributes to the change, and we have high rent levels and expect for housing. Then we have -- for certain retail, the yield is up. And we have lowered the long-term market rents for certain retail. Also, that affects the market value negatively this quarter.

Okay. And one final question. What is your view on transactions at the current moment? Will you be -- will you wait and see how the situation will evolve in Q2? Or do you think you will be active on the transaction market in the coming months?

We are -- thank you for good question. We are always hungry for transactions. And just now -- I think it is a cause, not effect. The transaction market just now is rather low. We don't get too many prospects from the brokers. But we are looking at some things in both ways, so to speak. So I think the transaction market for the coming months will be very low. And maybe we'll do some transaction, but this -- I don't think there will be any big issues concerning this.

[Operator Instructions] So there are no further questions at this time. Yes. Please go ahead. Yes. We don't have any further questions.

Okay. Okay. Thank you very much. Thank you for participating in this Q1 report. And take care out there, and have a good day. Thank you very much from Diös.

This now concludes the conference call. Thank you all for attending. You may disconnect your lines now.