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

Hello, and welcome to the Diös Fastigheter AB Interim Report January to March 2021. [Operator Instructions] Today, I'm pleased to present Knut Rost, CEO. Please go ahead with your meeting.

Good morning, and warm welcome to this web presentation of Diös' first quarter results for 2021. My name is Knut Rost. I'm the CEO. And together with me, I have Rolf Larsson, our CFO. We have now been living with the COVID-19 pandemic for more than 1 year. It has been a challenging year with many new situations to handle. With all these challenges in mind, I'm proud to say that Diös is doing very well and show resilience. If you have any questions, there will be a Q&A session in the end of this presentation. Listen for instructions how to ask questions. If you are listening on replay, you can always reach out to us if you have any questions. Contact details are at the end of this presentation and on our website. Let's go to Page 2. The outcome of the first quarter is very strong. Last year, we highlighted that the first quarter was the strongest ever. And we can now conclude this result is even stronger. To highlight some of the key figures, I start with something I'm very proud of, our property values was increased by SEK 800 million, whereof SEK 418 million came from unrealized value changes. This represent 1.6% of the market value and is very strong. This comes from both a very active and strong market as well from our own activities. Our surplus ratio was 61%, which is very strong for the first quarter. We had more winter-related costs this year despite energy savings and more efficient property management. The EPRA NRV has increased to SEK 84.4 per share. This represent an increase by 12% since last year and 6% since year-end. Our market is showing good resilience towards the pandemic with the northern part of Sweden leading the economical recovery. We see tenants in some parts of restaurants, cafés and retail struggling somewhat. We are very active and work closely to our tenants, which has proven to be a key factor to manage this situation. The effect on our results for the first quarter is fairly limited. We have settled 97% of the rental receivables for Q1. Rent payment for the second quarter 2021 which is paid in advance or at 95% compared to 89% last year. We have been giving negligible discounts for Q2. The new government support package, that has been decided a couple of weeks ago regarding Q1, will have limited effect on business and result we believe. I will hand over to Rolf, who will present the results in more detail. Rolf?

Thank you, Knut, and we can move to Page 3. Just as Knut said, our performance in the first quarter was strong. The first quarter last year was the strongest ever, and we delivered an equally strong operating surplus despite the ongoing pandemic. And income from property management increased by 1% compared to the same period last year. Like-for-like rental income increased by 1.5%, 0.2% is due to indexation and the rest of renegotiations and new lettings. Our net letting for the first quarter amounted to minus SEK 5 million, where SEK 4 million refers to a contract that expires in 2025. Our operating surplus amounted to SEK 290 million, with a surplus ratio of 61%. And as Knut said, we had higher winter-related costs this year, which was balanced by energy savings and more efficient property management. We have reduced our financial cost compared to last year, even though interest-bearing liabilities have increased. Better financing terms and a larger share of certificates have had a positive effect. Property revaluations amounted to SEK 418 million, which represents 1.6% of the market value. And I will come back to this later in this presentation. You can continue to page 4. If we go on 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 upward trend continues. We have achieved this by making the right transactions. We have acquired high-yielding properties and central locations and we have sold nonpriority locations. We have increased the quality of our properties through investments, which has led to higher rental levels and lower vacancies. And we have reduced our financial cost over the years. You can turn to Page 5. Our property portfolio is well diversified in terms of segment and geography. We have concentrated our portfolio to set this with strong growth. We have a low tenant concentration risk. Our 10 largest tenants, of which 7 are tax finance, account for 17% of our total rental income with an average lease term of 6.3 years. And 31% of our rental income comes from tax finance operations, which means that we have a low risk in our cash flow. And the average lease term for all commercial premises was 3.9 years. You can turn to Page 6. The market value of our properties amounted to SEK 25.3 billion, an increase of just over SEK 800 million since the turn of the year. SEK 410 million is due to acquisitions and investments and SEK 418 million is a result of property revaluations. The value was positively affected by lettings and investments in primarily offices and a very active and strong market with lower yield as a result. We see that the interest in investing in our cities is increasing. During the past 6 months, we have seen a number of completed transactions regarding offices, housing and community service properties. And these transactions have been carried out on much lower yield levels than before. Continue to Page 7. During the first quarter, we made several transactions, both acquisitions and divestments. We acquired modern office buildings in locations with great potential and high demand. And we sold properties containing mainly industry and retail in external areas. We will access the acquired properties in the second quarter. And they will contribute about SEK 11 million in additional net operating income for the full year. Go to Page 8. As you can see, we are investing around SEK 1.4 billion in tenant improvements, property improvements and new builds. All our ongoing projects are proceeding according to plan. Here, you can see some examples of our major ongoing projects, both new builds and major reconstructions. More than 60% of the rental income from these projects comes from tax finance operations. And before we start any project, except residentials, we always have 100% signed leases. We currently have around 100,000 square meters under construction with an investment volume of SEK 2.4 billion. The positive cash flow effect will mainly come over the next 2 years. In addition, we have about 200,000 square meters in existing or possible building rights in central locations and just over 60% refers to residentials. Turn to Page 9. As you can see, our net debt-to-EBITDA is stable between 11 and 12x. The ratio has increased slightly over the past years as a result of increased investments in new builds. Our loan-to-value ratio at the end of the period was 53.7%, which is far below our covenant levels. The average annual interest rate at the end of the period was 1.1%, which is lower compared with the turn of the year, thanks to better financing terms and a larger share of capital market financing. And during the first quarter, we extended our fixed rate term through rate swaps by another SEK 1 billion, now totaling SEK 4.5 billion. This year, we will refinance 11% of our outstanding loans corresponding to SEK 1.5 billion. And we see that the capital market is functioning again, with fall in margins. And we, therefore, see opportunities to increase the share of capital market financing further. Overall, we have a strong financial position. In addition to existing loans, we have liquid funds and utilized overdraft facilities and unutilized credit facilities available corresponding to SEK 700 million. Continue to Page 10. As you can see, most of our key ratios are improving. Return on equity amounted to 13.9%. The ICR remains strong at 6.3x and EPRA NRV increased by 12% to SEK 84.4 per share. The growth in income from property management per share rolling 12 months was negative. The change is mainly a result of temporary COVID effects and higher financial costs. And then I will hand it over to Knut again.

Thank you, Rolf. I will now shortly cover some points about our strong market and extend the reasoning around our 15-minute cities and explain how we should reach our growth target. Let's go to Page 11. All in all, we are in a very good position with a market that is expecting the greatest investment boom for decades. We see great potential in our 15-minute cities that are in pole position meeting current trends. Our market has been less affected throughout the crisis compared to, for example, Stockholm. People have been able to live their life in a more normal way and have kept their jobs. The fact is that the employment figures were back at the pre-COVID numbers already during the summer. What we now are seeing is a market-driven of industrial investment into our region, driven by increased demand of sustainable alternatives. About SEK 1,000 billion is expected to be invested into battery factories, fossil-free steel production and development. And of course, production of non-fossil energy. We've added commodities and access to natural resources in the region that is needed for driving the economy in the sustainable way that is required to reach the global goals. For instance, Northvolt battery factories under development; LKAB has started to adapt their business to manufacture fossil-free steel; H2 Green Steel announced in February, they are building a new factory to produce fossil-free steel. We will definitely benefit from all the surrounding effects they will bring. We are already seeing clusters of consulting companies establishing and increasing their presence in our cities. You might call it an industrial service sector that is now prospering. And I'm sure that we're just now seeing the inception of the wave of new establishments. These consultant companies are requiring centrally located offices with high standard and good access to urban service. We are the market leader in these premises, and our offering is exactly what these businesses requests. These investments altogether are expected to create approximately 25,000 new jobs that will lead to increased need for residential, schools and other type of services. We also see an increased demand for our centrally located residential building rights, and I believe this will continue with higher prices as a result. We are in the beginning of something major in our region. We have positioned ourselves in a great way to take advantage of the investment boom in our market. The outlook for our market looks very bright. Let's go back to Page 12. We report unrealized values of SEK 418 million, as Rolf mentioned. It represents an increase by 1.6%, which is a very strong figure for a single quarter. As I mentioned, the underlying market is very strong with lower property yields within offices, residential and community service properties. But the value changes are also driven by our own activities where we renegotiate lease contracts at higher levels. We also invest for high standard and lower operating costs, and we improve the quality and attractiveness of our cities. We see an increased activity in the transaction market. More deals are coming through at a faster pace compared to pre-COVID levels. We are also experienced --- experiencing increased competition from new investors in our market, especially within residential and community service properties. The increased activity has started to move our valuation yields downwards. The demand for residentials have made a specialized residential developer to focus more on our market. This has increased the demand for residential building rights. We have today approximately 150,000 square meters centrally located residential building rights. Let's turn to Page 13. The ongoing trend within e-commerce and retail has increased last year. E-commerce has been growing rapidly, and the customer's behavior has changed. For our premises, containing retail areas, that has evolved a clear distinction between A location and B locations. Today, we see even higher and increasing demand for really good location. What we are focusing on is to convert those B located retail premises into A location offices. How can we accomplish that with good economic outcome? B and C located retail location carries a rental level of approximately SEK 1,300 per square meter. When we convert retail into a located offices, we can almost -- we get almost SEK 3,000 per square meter, making the calculation very attractive in terms of cash flow. But we are also lowering the operational cost when doing this retail to office conversion, when many retail premises-related expenses disappears like cleaning, stairways, security and so on. We also increased the lettable space when we remove common areas. But it doesn't stop there. We are also seeing an effect on the property values. We have also started to convert B and C located offices in the city to residentials. The demand for residentials in the city center is very high. So letting this newly renovated high standard residential out is no issue. The conversions are not boosting the cash flow so much. The rental levels are approximately the same. But the big benefit is on the valuation side and, of course, on the vacancy risk side. This conversion is part of transforming our 15-minute cities to be even more attractive and meet the current demand from our tenants. With more offices in central parts of our cities, more people request surrounding urban services like restaurants, gym, cafés and so forth. With more residential in the city, more people are moving around, the clock making the city is safer, more sustainable and increase the business opportunities for the urban service providers. Let's go to Page 14. As I mentioned earlier, the outlook for our market is really looking good. We are in early stages, but fair to say is that we have not seen this kind of activity and the amount of investments before. There will be a great importance that all stakeholders, like the local authorities, the government, our other property owners, construction companies work together to take the opportunity in our hands and make the best of it. We have done a number of transactions during the first quarter, like we said we would. The transactions are mainly offices properties with great potential in areas that is developing. The net effect of the acquired and divested properties will contribute with approximately SEK 11 million on a yearly basis. We are continuously looking for new acquisitions, opportunities and are involved in many dialogues as we speak. Talking about projects. We have now finalized 3 bigger projects in our books. That's [indiscernible] with good outcome. They will contribute with approximately SEK 15 million on an annual basis and give us increased experience to take with us for current and coming projects. All of our other ongoing projects proceeds according to plan. We are looking at more conversions cases, like I described earlier, both retail to office and office to residentials. I believe these investments will grow going forward. We are also looking at new construction projects for both commercial premises and residentials on our current billing rights, and hopefully, we can release some news in the near future. All in all, we are in a very good position with a market that is expecting the greatest investment boom for decades. We see great potential in our 15-minute cities that are in pole position, meeting current trends. We have both strengths and assets to benefit from all of this. The future looks really bright. This takes us to the end of this presentation. Thank you very much for listening. We are now ready for your questions.

[Operator Instructions] Our first question comes from the line of Albin Sandberg from Kepler Cheuvreux.

I have 3 questions. And I'll start with the prepayment numbers that you provided in the quarter reported just 95%, which seems to be up year-on-year, but still down quarter-on-quarter. It's no massive changes, but is there anything to worry about because of the quarter-on-quarter -- I compare the 95% with the 97% expected in the Q4 report.

Albin, Rolf here. No, I don't think there's anything to worry about. It depends on what day you look at the number, I think, will reach 97% for the second quarter as well. So there's coming payments every day a little bit, so it's increasing.

Okay. And then while we know that the net letting can be very volatile, and you showed quite good trend at the end of last year, came out with a little bit of minus. Also if I just look at the gross numbers, it seems to be a bit down year-on-year. What is happening on that side?

Well, as you say, and you've been in the business for so long now. So the net letting for 1 quarter is not so relevant, but over time, the net letting, for instance, over a year running here and so forth, the net letting should be positive. So we are -- I am very positive, as I've said in my writings that the net letting will continue to be on a positive side. But of course, there's a little bit -- it's okay with 1 quarter, for instance, but not over a year. So I'm not worried. We have so much in the pipeline. So it looks bright in the future.

And that small negative net letting you're reporting this quarter, I understood it was related to the City Council of Luleå [indiscernible] and normally we highlight that the government tenants maybe being even safer than private tenants. Was this something that you knew about? Or did come as a surprise to you?

We knew about it because we are now in -- the Luleå Municipality is now moving into a new premises, which we own and they also do a reorganization in the municipalities. So we knew it, but we didn't know that this termination would come. This notice would come now because it actually concerns 2025...

Yes. We have the cash flow for another 4 years.

So it's actually a little unlucky for us, but that's the way it works.

And my final question is, maybe, of course, you're mentioning a very likely investment boom to come, and your company, you have both growth targets and you have dividend targets as well. If I look at the gross committed CapEx that you highlighted Q1 versus Q4, it's a bit up Q1, but it's still on historically quite high levels, have you reached like a maximum of how much you can have as ongoing CapEx? And if you need to choose, I mean, assuming that you want to keep the same balance sheet as you have, is the investment activity, is that also based on the fact that you need the money to pay dividends and which 1 has the upper hand of these 2 targets, so to speak?

Still, we are a cash flow-driven company. That's for one. And we still say that we are a dividend company. And of course, I think your question is very accurate. It's very important that we be clear about this because we can't build -- we can't construct new buildings as much as the demand actually are just now because we -- this is the fact we are getting a lot of questions about new constructions. And some of them, I think we have to pass to someone else because we can't do everything ourselves. So we are still a cash flow-driven company with a positive dividend in the future. And I think, for instance, if we're talking about our building rights, I think we have about 150,000 buildings rights now -- just now. And you will see in the near future that we probably will divest some of them because we can -- we are not able to handle it all. But that's still positive because we -- the money we get for the building rights, it's going the right way, going upwards, and some of them, we will do ourselves. So that's a very good question that we will come back to, yes.

[Operator Instructions] We have another question from the line of Victor Krüeger from ABG.

Just wondering to clarify the financial goal. You say that income from property management should increase by 10% each year until 2023, is this broken down per year for you guys? Or is it in like accumulated for all the 3 years an average?

Yes. It's an average for 3 years, the 10% increase. It's not 10% each year. And then the COVID effect have factored the outcome in a negative way so far, but we still are looking forward to the future, and we are keeping our goal 10% over a 3-year period in average.

Okay. Perfect. And regarding the financial net, do you see that this quarter is representative for what you expect for the entire year? Or what this quarter deviating?

Yes. We have had positive on fiber. We have lower margins when we have refinanced. So -- and I think we will have a larger share of capital market financing in the quarters to come. So I think it's representative for the year, yes.

Clear. And you said you had a positive effect on -- just in the beginning on the fiber or what do you say there?

Yes, fiber has had a positive effect on our cost.

And as there are no further questions, I will hand it back to the speakers for closing remarks.

Well, thank you very much for listening, and I hope you follow us in the future. So have a nice weekend, and thank you very much.