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

Hello, and welcome to the Diös Year-end Report 2021. [Operator Instructions] Speakers, please begin.

Good morning, and warm welcome to this web presentation of Diös results for the full year 2021. My name is Knut Rost, I'm the CEO of Diös, and I'm here today with our CFO, Rolf Larsson. I will start today's agenda with the key highlights and major events for the quarter. Then Rolf will dig into results and key figures, and I will end this presentation with a brief outlook of 2022. If you have any questions, there will be a Q&A session after the presentation. Listen for instructions how to ask questions. If you are listening on replay, you can always reach out to us with your questions. Contact details will be shown at the last slide and on our website. The year 2021 has been a successful year, where our market really has been in the spotlight due to what we call the Green Revolution. Major investments are made in our markets that create economic growth, population growth and high activity. The positive trend is something that we think will continue. For the first, the net letting for the fourth quarter sums upto SEK 6 million and for the full year, SEK 30 million. All cities are showing positive figures, and we experienced good lettings in all segments and worth mentioning is that retail letting is picking up. Our surplus ratio was 65%, which is good for the fourth quarter due to the fact that we have higher costs for snow and cold weather. For the full year, the surplus ratio was 68%. Our property value has continued to increase. The unrealized value changes in the property portfolio for the fourth quarter was SEK 884 million. And for the full year, value changes summons to record high nearly SEK 1.8 billion. The fourth quarter has been an eventful period with many dialogues for new business. Some we closed and released in the fourth quarter and some are or will be made public in 2022. For example, one major transaction was released during the period where we acquired 5 centrally located properties in Skellefteå for SEK 810 million. I will cover the details later in this presentation. Second, we did a successful direct issue of new shares targeting both existing and new shareholders. We raised SEK 800 million with a premium to last report, EPRA NRV of 25%. The new equity will be used to finance new investments and support continued growth. We are in the final negotiations of several acquisitions that will support our strategy and growth targets. We continue to experience a very active transaction market with deals closing at lower yields. This has supported our valuation. However, with our local presence and strong relationships, we still see opportunities to buy properties at an attractive yield with great potential. During the quarter, we released our climate target that was approved by climate base targets. This means that we have committed to reduce our CO2 emissions by 50%, no later than 2030 within Scope 1 and 2. The next step is to create our road map within Scope 3. I will now hand over to Rolf, who will present the result in more detail.

Thank you. And as Knut said, the results for the fourth quarter was strong. The operating surplus increased by 9% compared to last year and amounted to SEK 321 million, corresponding to a surplus ratio of 65%. We have somewhat higher financial costs due to increased interest-bearing liabilities. The average interest rate at the quarter remains at 1.1%. Property revaluations amounted to SEK 884 million, which represents 3.2% of the market value. And I will comment on that later. Profit after tax was very strong and amounted to SEK 965 million, which is more than doubling compared to last year. Our property portfolio is well-diversified in terms of both segment and geography. We have a clear concentration of our properties towards the city centers, in cities with good growth. We have a low tenant concentration risk. Our 10 largest tenants, of which 7 are tax finance accounts for 16% of our total rental income with an average lease term of 6.8 years. The average lease term for all commercial premises amounted to 4.3 years compared to 3.9 years for the previous year. And 30% of our rental income comes from tax finance operations and 8% from residential, which means that we have a low risk in our cash flow. The market value of our properties amounted to SEK 28 billion, an increase of SEK 3.5 billion since the turn of the year. Approximately SEK 1.7 billion is due to acquisitions, divestments and investments and SEK 1.8 billion is a result of property revaluation. 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. The interest in investing in our cities is increasing. Completed transactions have been carried out on much lower yield levels than before, which also affects the value of our existing properties. A large proportion of our commercial leases have an index clause that regulates the rent increase. The index in October last year came in 0.8% higher than our inflation assumption, which has affected the property value by SEK 170 million. On a yearly basis, we are currently investing just over SEK 1.2 billion in tenant improvements, property improvements and new builds. All our ongoing projects are proceeding according to plan. And before we start the project, except residentials, will always have 100% signed leases. We currently have around 100,000 square meters under construction with an investment volume of SEK 2.5 billion. In addition, we have 200,000 square meters in existing or possible building rights in central locations and just over 60% refers to residential. Here, you can see some examples of our major ongoing projects with an investment volume of SEK 1.9 billion in total. Most of the rental income comes from tax-financed operations and most of these projects will be completed in 2022 and will thus have a positive effect on our operating surplus. Here is an example of a project we will start in Q2. It's a centrally located profit in Luleå in an area called [indiscernible], where we, in Stage 1 or building the low-rise building in the France that contains 5,000 square meters of modern offices. We have signed a 6-year lease for the entire building with the Swedish Social Insurance Agency. In the next stage, we will build residents, the 2 buildings directly behind the office building. And in the building to the right, it's possible to build both commercial premises and residents. And we have a total investment volume of approximately SEK 650 million for all 3 stages. As you can see, our net debt-to-EBITDA is stable around 11x. Our loan-to-value ratio at the end of the period was 48.6%, which is far below our covenant levels. The average 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. During the next 12 months, we will refinance 17% of our outstanding loans corresponding to SEK 2.4 billion, commercial papers excluded. In the beginning of June, we launched our MTN program with a limit of SEK 3.5 billion. And we have since issued green bonds corresponding to SEK 1.8 billion. With the current market conditions, we plan to increase our capital markets financing further. 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 2.8 billion. As you can see, all our key ratios are improving. Return on equity amounted to 21.1%. ICR remained strong at 6.4x. The growth in income from property management per share amounted to 6.5% and EPRA NRV increased by 23% to SEK 97.7 per share. That was all from me. I will now leave the word back to Knut.

Thank you, Rolf. And I will end this presentation by talking a bit more about our strong market, how we are utilizing the opportunity arising and a brief market outlook. Diös is a fully fledged real estate company, creating shareholder value through 3 aspects. With a local presence and knowledge, a market-leading position in our cities and a great coworkers both locally and at the headquarter, we are in the right position to profit from and act on the growth of our market. We see an increasing demand for premises, both existing and new builds in our cities where the right location and adding sustainable values become crucial for our tenants. We can state that we're in a very, very interesting market. Our business model is based on creating long-term value for our tenants and our shareholders. We invest in a sustainable future and thereby ensure an attractive return and increase property values. We do this through tenants and property management, project development and transactions. Our offer is primarily about offices, premises for urban service and housing. As I mentioned in the beginning, we closed an acquisition of 5 properties in Skellefteå this quarter. The transaction complement, as you can see on the map, our existing portfolio very well, where we can scale up our business when we integrate the properties into our management. Skellefteå, Sweden Fasted Global City, it's one of the cities where we are focused on growing and strengthening our position, and I see good possibilities to grow even further. If we look at the properties in more detail, we see that they have a high quality and there are good chances for further value creation. We have a building right for residential. Skellefteå demands more residential development and the local authority has encouraged developers to build more. There are also great opportunities to increase rental levels in the portfolio based on the most recent lettings we have done. We continue to experience a strong market in our 10 cities, both the rental market, the demand for new projects and investments and the transaction market are all showing strength. What we are seeing in the northern part of Sweden is a market-driven era of green industrial investments and an increased demand of sustainable energy alternative. SEK 1 billion is expected to be invested into battery factories, fossil-free steel production and development and production of nonfossil energy. The main catalyst for this -- these investments or the access to nonfossil energy, mainly through hydropower and the cold climate we have in the north of Sweden. We will definitely benefit from all the surrounding effects. These investments will bring the people move into our cities, new jobs are created, investments in improved infrastructure and so on. 2021 was a record year in terms of the volume of transactions in Sweden. This is also the case in our market. More real estate companies are interested in our market and as shown in lower property yields and higher pace in closing deals. The interest has been primarily for residential and residential building rights, offices and community service properties. But we are now seeing increased interest for retail properties. We take that as a sign that the market has turned upwards. Going forward, we have many active dialogues with several counterparties for potential transactions, both buying and selling. We can grow in all our cities with focus on offices and residential. Our ongoing projects continue to proceed according to plan. We released during the fourth quarter, our plan for [indiscernible], as Rolf mentioned, project divided in 3 stages where the first stage has been let out, as Rolf mentioned earlier. With our financial strength and unique position, we are a few that can take on these kind of projects. We will also continue to create more building rights. We have many possibilities with our existing portfolio, and we are always looking into new regulation plans. Either we develop ourselves or sell to other developers. We will always evaluate every business opportunity to be the most beneficial for our long-term value creation. To conclude, our business model is based on creating long-term value for our tenants and our shareholders. We invest in sustainable future and thereby ensure an attractive return and increased property value. We do this through leasing and property management, project development and transaction. Our offer is primarily about offices, permissive for urban service and housing. This takes us to the end of this presentation. Thank you for listening. We are now ready for questions.

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

I had three questions. The first one, Knut, you're mentioning that you're looking into deals as we speak, as I understand you. And in Q4, you decided also for any rights issue. If looking at potential deals out now, could you consider moving up your leverage proceed with M&A? Or should we expect that they are accompanied by rights issue?

Yes. We made the rights issue now for SEK 800 million. And if we look at our LTV and look at our financial position, I think we, just for now, are fully financed and we can do a lot of acquisitions, and we can work in the progress of having more projects, and we can, of course, raise our LTV a bit. It's under 50% for us now. And of course, that has due to value changes and a good cash flow, of course. But we see that we are pretty fully financed what we are looking at just now. And we have a lot of acquisitions in the pipeline.

Okay. And then if I look at your occupancy rate, it has been quite stable at 89% throughout the year. And then I guess looking at your development pipeline, it's 100% left, that will be sort of a positive mix impact once that comes into the portfolio. But it seems like you have some kind of a tail in the portfolio that I don't know if it's hard to let and so on. And I just wonder what's the outlook for that? Any hopes that we would see a pickup in occupancy as we move into 2022?

Yes. We have -- we are aiming for 92% in 2 years. So we are putting a lot of effort in lowering our vacancy rate, of course. But as you say, we have a tail in -- we are in 10 cities or 10 markets now then -- but we are still -- we have still properties in small cities like [indiscernible] and so forth, Malung, low values, but concerning -- when we talk about square meter in vacancies, it's a sort of tail that's very difficult to fix in short term. So either we will sell those properties or we will find something -- some tenants who want to have the premises. But we have -- I see that as a positive challenge that we will lower our vacancy rate. And considering that rental level when we build new properties, we can see that we are closing to SEK 3,000 per square meter, and that's sort of a breaking point for even the older premises. So it looks very good, but it's a positive challenge that we have to know where our vacancy rate.

And if you were to go to the market and sell those assets in [indiscernible] and so forth, do you feel that you will be able to fetch the price that you have in your balance sheet? Or is it more a problem of finding the right buyer for those areas?

Rolf here, I would say it's more of a problem to find the right buyer maybe. The values in our books are very low. So I think if we would sell them, it would be on at a least book value. But there's not so many to buy properties in this kind of all small cities.

Knut is back. You have to find a local entrepreneur or someone who can benefit from the vacant space. But as Rolf said, we haven't given those properties so much time. We think that the value is so low. And when it happens, it will happen.

And I think the value represents maybe between 1% or 1.5% of our total book value.

Question for Rolf, on the financing side. Both what do you think about this kind of upcoming refinancing, I mean your [Technical Difficulty] going up, depending on what we're seeing.

Sorry, Albin, we lost you. Could you take it from the beginning?

Yes, on the financing side, 2 questions there. I mean, one, what do you think this upcoming refinancing of the current debt portfolio will mean for your average cost of filings for the total group because you're at quite low levels, I would say. And obviously, we have seen a bit of movement here on the market at the start of the year? And then also your comment about potentially increasing the capital markets portion of the financing. Is that because you still feel that you are getting better terms on the bond market and then you get on other reasons why you want to raise that to your total financing?

If we start with the refinancing, the indications we have today is that the margins are somewhat lower than we have within the current loans, so the rates will go up, maybe it's because of the Stibor. So the margins look pretty well and the capital market finance is, I would say, a couple of things were -- the price is one thing. We have quite a lot of commercial papers. We have our own MTN program opportunities to issue green bonds, which we like. So the price is one thing. And then it's sometimes easier to finance the project development to the capital markets to the unsecured debt, so that's another reason.

Great. And just a follow-up there when you say about the lower margins at your initial loss [Technical Difficulty]. Do you...

We lost you again, Albin. I am sorry. So could it take about the margins again?

Yes. Yes. The net impact of the low and the higher Stibor, will that -- do you think that you will be able to keep your current cost of financing the way it is?

Yes. For this year, we think so. Then for next year, it's harder to say. We don't see any rate hikes from the rigs bank this year. So for this year, I think we'll keep this around this level, 1.1 as well there.

[Operator Instructions] There will appear to be no further questions. I will turn the conference back to your speakers.

Yes. There has been some written questions sent in. So I will read them and then we will answer them on the line. The first one is about like-for-like growth on the rental income. What do you expect for like-for-like rental income growth for 2022?

Well, when we talk like-for-like, it's a matter of renegotiation of our lease contract. That's one thing. And another thing, it's our new build when we actually can get impact on like-for-like in the future. So we see that the like-for-like this year was 1.8%, I think. And I think that will raise in the future when we can remain more self-confident in our renegotiations. So that's something we work very much with. And we work -- together with that, we work on the vacancy rate, of course.

And next question is about the surplus ratio, which was 68% for the full year. Is that a higher sustainable level? Or would you expect that to go to lower because looking back a couple of years, the surplus ratio has not been at these high levels?

Of course, the surplus ratio said something about how efficient you are actually driving the company. Q4 as a period is often the worst because it's colder and snowing and so forth. But I'm rather proud to say that my staff, my people, my employees are very good in working with entrepreneurs concerning snow and so forth. And we are, of course, working a lot of the -- lowering the energy side of the company. So I think this surplus reached 68% for the full year is rather good. We can do a little better, but I think it shows the efficiency of this company. And you must remember that talking about surplus ratio, if you're working only with residential, the surplus ratio will be much lower, do work with only logistics, it's much higher. And we work in all segments, so that's why I think 68%, maybe a little better, it's very good.

Then a question around finalizing projects. There are some projects to be finalized during 2022. Are they expected to be completed in the beginning or in the end of the year?

We have a lot of projects that will be finalized this year. But 3 -- I can mention 3 of those projects is the hotel in Umeå, it's a police authority in Umeå and it's in [indiscernible], where we have a big tenant...

Swedish Transport Administration.

Yes. Thank you, Rolf. The transport Administration, it's a long lease. And we will finalize those projects in Q3 and the amount of the project, it's SEK 1.2 billion, and the yearly contribution to our rents is 54%. Sorry, it's not the rent, it is [indiscernible].

That is operating surplus.

The operating surplus contributed with SEK 54 million on a yearly basis.

Yes. And then a specific question on a tenant in one of our cities in Sundsvall. We announced on the 21st of January, a new letting to Sundsvall in one of our properties in Sundsvall. What's the time frame of that tenants moving in? And is this connected with a lot of refurbishment? The basic question is when will we see operating surplus from that tenant?

From day 1. They have already moved in, and there's no refurbishment from us. They are doing all theirselves. There are 4 local companies who has gotten together and doing this. So this is actually a rent from day 1, and I I'm nearly sure that they already moved in. And I think they will do a lot of refurbishments themselves. But you have to remember that this property was built for this sort of business. So it looks very good, and the value for that property is stable as well. So that's a good question.

And the last written questions, are there any of the latest acquisitions that you have -- that we have made that is not around the average NOI margin?

I think we are not that good buyers when it comes to residential. Residential lowered that margin, but we have a lot of acquisitions in the pipeline, and we mainly look at buying commercial premises -- commercial properties. It's better yield. And the competition is so much harder talking about residential. And when we talk about residential, we work more with our own building rights. So we have about 200,000 square meters of building rights, both concerning residential and commercial. So we are better biased when it comes to commercial properties. But of course, again, we are sort of a company that owns both urban service, offices and residential, and they can be in the same building. That's the thing we are best at. Well, we don't have any more questions. So thank you very much for listening and taking part and giving us good questions. Have a nice weekend from a sunny in Sweden. Bye-bye.