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

Welcome to Diös Fastigheter AB Interim Report January to March 2022. My name is Kieran, and I'll be coordinating the call today. [Operator Instructions] I'll now hand over to Knut Rost. Please go ahead.

Good morning, and a warm welcome to this presentation of Diös' results for the first quarter 2022. My name is Knut Rost, I'm the CEO of Diös. And together with our CFO, Rolf Larsson, I will present our first quarter, which is record strong. I will start by going through highlights and major events for the quarter. Then Rolf will dig into the results and the key figures. And at the end, I will finish by giving you an outlook on the future. If you have any questions, there will be a Q&A session after the presentation. Listen for instructions how to ask questions. If you're 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 result for the first quarter of 2022 is the strongest first quarter ever and a nice follow-up of the strong performance from full year 2021. We are improving almost all figures. We have continued to be very active in the transaction market, and the net letting bodes well for even stronger cash flow. First of all, the net letting for the first quarter sum to SEK 22 million. Last year's total was SEK 30 million. This is a result of very active property management with high local knowledge and ambition and based on a strong market. We have managed to let out several larger vacant spaces, both in Sundsvall and Gävle, that will increase their occupancy rate. I'm also very happy that many new contracts are green leases. Also on the good side, we have fewer lease terminations than we had before. Number two, our surplus ratio was 65%, which is very good for the first quarter, considering the period with higher costs for snow and cold weather. We have had some positive effects from winter-related costs, but we have also lowered our energy takeout. Third, our property values have continued to increase. The unrealized value changes in the property portfolio for the first quarter was SEK 533 million, which gives us a total property value for the whole portfolio of SEK 30 billion. We are in a position of horrible events going on in Ukraine, first and foremost, the humanitarian catastrophe followed by obvious changes within Europe and the world with rising inflation, higher interest rate and disruptive trading channels that will affect us and our stakeholders. I will get back to that later on. We have been very active in the beginning of this year on the transaction market, something we promised during last year. We have put most of the capital from our direct share issue in December into work. But due to strong value uplift, we have more money to put to work. We have also got 2 major zoning plans approved. For example, first, we accessed 6 new properties in early January that we communicated previous quarter. These properties are lifting the rental income by SEK 13 million during the first quarter. And we also accessed 2 properties in Luleå 1st of March. We also released 2 new acquisitions, residential in Skellefteå, and a portfolio in Falun-Borlänge. In March, we released the divestment of 6 retail properties. With these transactions, we are shifting out assets who we see have limited potential, and we are creating liquidity to take advantage of new opportunities. We got approval from the zoning plan for our new block, Västra Stranden in Luleå. It is currently a parking space, which we will develop gradually. The first step includes office premises for the Swedish insurance authority. In step 2, we plan to build 2 residential buildings. More details on that project will be published later. In Umeå, we got the zoning plan approval for the property in Vale 17. We already have an anchor tenant for the commercial areas, and they -- join that, we plan to build more centrally located residentials. I will now hand over to Rolf, who will present the results in more detail. Rolf?

Thanks, Knut. And as Knut said, the first quarter was very strong. Like-for-like rental growth was up 3% due to indexation, renegotiations and new lettings. The operating surplus increased 16% compared to last year and amounted to SEK 336 million, corresponding to a surplus ratio of 65%. We have somewhat higher financial cost due to increased interest-bearing liabilities. And the average paid interest rate for the quarter was 1.1%. Income from property management increased by 17%. And property valuations amounted to SEK 533 million, which represents 1.8% of the market value. And I will comment on that later. And profit after tax was strong and amounted to SEK 708 million, which is 36% better than last year. As you can see, our property portfolio is well diversified in terms of both segment and geography. We have previously said that we want to grow in Skellefteå. And as Knut said before, we took over 5 properties in Q1, which means that the rental value per business area increases from 7% to 10%. And we have also acquired 3 more properties in Skellefteå with access during Q2. We have a low tenant concentration risk. Our 10 largest tenants, of which 6 are tax-financed, account for 16% of our total rental income, with an average lease term of 6.6 years. And the average lease term for all commercial premises amounted to 4.3 years. 30% of our rental income comes from tax-financed 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 29.8 billion, an increase of SEK 1.8 billion in turn of the year. Approximately SEK 1.3 billion is due to acquisitions, divestments and investments, and SEK 0.5 billion is a result of property revaluations. The value was positively affected by higher market rents and higher operating surplus. And the average yield was 5.47%, which is 3 basis points higher compared with the turn of the year. And with an average interest rate of 1.2%, this means that we still have a yield gap of 4.3%. On a yearly basis, we are currently investing just over SEK 1.6 billion in tenant improvements, property improvements and new build. All our ongoing projects are proceeding according to plan. And before we start up projects, except residentials, we always have 100% signed leases. We currently have around 90,000 square meters under construction, with an investment volume of around SEK 2.3 billion. In addition, we have 200,000 square meters in existing or possible building rights in several locations, and 55% of these refers to residential. Here, you can see some example of our major ongoing projects with an investment volume of SEK 2.1 billion in total. Note that the rental income comes from tax-financed operations. All these projects will be certified according to BREEAM-SE Very Good or Excellent. And 3 of these projects will be completed in 2022 and will, therefore, have a positive effect on our operating surplus. We currently have 65% of our outstanding loans with Nordic bank and 7% in covered bonds. The remaining 28% consists of unsecured bonds and commercial papers. And today, we have 17% green financing, where commercial papers and bonds account for the majority. And we're actively working to increase the portion of green assets. And our goal is to have at least 55% green assets by 2026. As you can see, our net debt to EBITDA is stable between 11 and 12x. And during the next 12 months, we will refinance 28% of our outstanding loans corresponding to SEK 4.2 billion, commercial papers excluded. And the majority of these 3.8 -- SEK 3.6 billion consists of bank financing. Our loan-to-value ratio was 49.3%, which is far below our covenant levels. And the average interest rate at the end of the period was 1.2%, which is 7 basis points higher compared with the turn of the year. 2 basis points are explained by the fact that we have replaced SEK 400 million in commercial papers with bank finances, and the rest is due to increased LIBOR. We see higher funding costs in a short-term perspective, primarily driven by increased LIBOR. The refinancing we have done during Q1 and the price indication we received from our banks regarding the maturities that will come in the autumn indicate margins in the same level as before COVID. And thanks to our strong cash flow, an LTV below 50% and an interest coverage ratio well above 6x, we still continue to choose a shorter interest rate fixing. We are currently more focused on extending our average loan maturity. Overall, we have a strong financial position. In addition to existing loans, we have layered funds, unutilized overdraft facilities and unutilized credit facilities available, corresponding to SEK 1.8 billion. As you can see, all our key ratios are improving. Return on equity amounted to 22.6%. ICR remains strong at 6.8x. The growth in income from property management per share amounted to 9.7%. And EPRA NRV increased by 22% to SEK 103.1 per share. And that was all from me. I will now leave the word back to Knut.

Thank you, Rolf. The net letting figure for the first quarter is strong and is a sign of our high activity and a strong underlying margin. For instance, look at the 12-month trailing 4 years back, you can clearly see we are picking up our activity post COVID. Our market has a great outlook. Businesses are transferring to more sustainable business models and production. Our market is in the epicenter of providing clean and green energy to these companies. Together with a favorable climate and access to land, many industries are choosing Northern Sweden to be a key area for the future green production. We are saying in the east that this is a green revolution. Over SEK 1,000 billion is expected to be invested into battery factories, fossil-free steel production and development and production of nonfossil energy. Northvolt battery factory in Skellefteå have now produced their first battery. LKAB has started to adapt their business to manufacture fossil-free steel. H2 Green Steel announced that they are building a new factory to produce fossil-free steel last February. The first quarter, Northvolt also announced that they will acquire Stora Enso's old factory in one of our cities, Borlänge. This is great news for Borlänge since it will create approximately 1,000 new jobs. And of course, it's also great news for us. We see many scale effects coming from the green revolution. New jobs are created, and people need new residentials. There is a growing demand for social infrastructure, like schools and kindergartens. There is also many new businesses created to serve these new establishments and, of course, many consultants that are in need of premises. All in all, the future for our market looks very exciting. To achieve our goals, meet the Paris Agreement and to be net zero in CO2 emission by 2045, we must be very active and also invest for the future. Today, we have 100% nonfossil electricity and 98% nonfossil energy. We are working closely with our suppliers of district heating to reduce the large part of the fossil emission. We see increased involvement from tenants, and we are signing more and more green lease agreements where we cooperate with the tenants to reduce energy, water or [ like ] waste. We have around 8% of our rental value for commercial lease agreements as green. We have been very active on the transaction market in the last 6 months. We have closed acquisitions of net SEK 1.8 billion and one divestment of SEK 750 million in total of 8 transactions. All these transactions have been off-market transactions at attractive yields with a lot of potential in both rental renegotiations as in building rights. We have increased the share of residential in the portfolio. And with the divestment taking place in June, we will reduce the share of retail. We have been very focused on strengthening our position in Skellefteå since we see great growth in the city coming years and potential in both rental development and creating new building. This is what we have accomplished so far. Having that said, we can grow even further. We are still net buyers at the right deal levels. The current situation with rising interest rates has made us more cautious and risk-conscious. However, when the right properties are out for sale, we will act. As I mentioned in the beginning, we have 2 new zoning plans that got legally binding during the quarter: [ Västra Stranden ] in Luleå of approximately 30,000 square meters and Vale 17 in Umeå of approximately 8,500 square meters. We have anchor tenants in place for both these developments as we do not build on speculation. Construction start for [ Västra Stranden ] will be in Q2 and for Vale 17 in Q3 this year. Our ongoing projects are proceeding according to plan. We do not experience any delays or complications from the Ukraine situation as of yet. When we are negotiating rental agreement for our major projects, we include an incentive for the contractor and tenant. To simplify, if the project will become more expensive, we get a higher rent. And if it gets cheaper, we'll get a lower rent. We remain the same return on investment independent of the total cost. Of course, there is more details in this agreement, but it is our way to protect our returns from higher cost. We are presenting the strongest first quarter in Diös' history. We have very solid financials, with lower-than-average LTV and very good ICR. We have accessible liquidity of SEK 1.8 billion that gives us opportunities to act. The horrible situation in Ukraine has affected us all in so many ways. We have no direct or indirect exposure towards Ukraine or towards Russia for that matter, but we are affected of what is happening with the commodities, energy prices, transportation and so forth. We have experienced higher inflation figures for some time now, and we are seeing a higher cost pressure. We are getting offers on new builds and major developments now 10% higher compared to 6 months ago. Within the ongoing business, the effects are relatively small as of today. However, we are following the development closely and have an active dialogue with suppliers and tenants. We have 97% protection towards inflation in our lease agreements. We have 90% -- 93% of commercial rental agreements are inflation-based and 4% with fixed adjustment. Worth noticing is that time lag [ fixed price ] adjustment on these lease agreements. Higher inflation usually leads to higher rates. And as we can see during the quarter, we have had major increases in interest rates. We have a short maturity profile on our liability side and short interest rate binding. We did hedge part of the portfolio with interest swaps -- interest rate swaps 1 year ago. To conclude this, we have a good financial situation with relatively low LTV and strong ICR, together one of the higher yield gaps in the business and a very strong cash flow. Add to that good relationship with banks, diversified funding sources and a good liquidity position. Let's talk about the market. The business activity in our market continues to be very high. The 15-minute cities, the access to clean green energy and accessible land are some key factors for people and business to invest in our region. The Northvolt establishment in Borlänge is the main event during the quarter, but we also see many smaller businesses looking for premises. What we expect in the -- is the increased funding for Swedish defense and military capacity that will have a positive effect on our region and cities. We have a long-term view on our business, and we invest long term. Although the near future has a lot of uncertainties, I'm convinced our business model and strategy will create good shareholder value over time. The trend of tenant requiring higher quality, centrally located and flexible office premises remains and will do so going forward. To be an attractive employer, you need to offer your employees inspiring and well-functioning social areas to attract people to the office. This is something that is core for us, and our local teams are experts on their home market. We also have the cash flow to invest for our tenants. To conclude, our business model is based on creating long-term value for our tenants and our shareholders. We invest for a sustainable future and for our cities' long-term growth. We are humbled to the current situation. Still, I'm convinced we are in the right market with the right attractive tenant offering to be able to successfully navigate through new challenges. This takes us to the end of this presentation. Thank you for listening. We are now ready for questions.

[Operator Instructions] We have our first question from Victor Krüeger from ABG.

First question, when do you estimate that the net leasing for the quarter of SEK 22 million will generate rental income for your company here?

Okay. Thank you for the question. It's during this year, of course. And we can see that the transaction, for instance, have an impact on this year, at least this quarter with SEK 13 million. And of course, this SEK 22 million is a mix of rental income in the near future and -- but I think most of it is in this year.

And is it possible to have a proxy for Diös overall? I'm thinking for the coming quarters when net leasing has effects in general on your rental income.

Well, in total forecast for the next 3 quarters this year.

Okay. So within 9 months usually?

It's hard to say, but since we are active, we have strong local teams, and we can see that the underlying market is growing even stronger. So we have a very good feeling for the next year -- for this year, I'm sorry, for the coming 9 months, of course. So I think this SEK 22 million in net letting for the first quarter is an implication of how it's going to look for the near future.

All right. And then, Knut, you mentioned in your CEO comment that you have modeled for purchasing energy far in advance. So my question is, for how far off in the future have you currently secured energy prices?

We work in a sort of portfolio way that we, for the next coming 6 years for -- in 6 years, we have bought our fossil-free energy for about 25%; and then 4 to 5 years, about 50%; 2 to 3 to 4 years, it's about 75%; and for this year, it's 90%. So that's how it works with the portfolio. And moreover, our energy price is much lower than the rest of the Sweden. So I think that looks very good for us for the next coming 6 years.

And it was a strong surplus ratio also here in Q1, as you have alluded to. And -- but we are in a scenario with higher cost inflation and raw material costs. My question, therefore, is do you have an approximation of how much of the cost increase that you can forward to tenants? Or what, in contrast, make you soak up yourself?

Well, I think what our operating costs today, we forward around 70% to tenants. And then, as Knut said, for the energy, there will be no major cost increases, that's not affected by the inflation right now. And then we must bear in mind that we also have index clauses in our leases. So if the inflation goes up, we'll also have higher rental income. But in the short term, it affects the costs more. But we have no calculation on the inflation, how it will affect our operating costs.

That's clear. And then lastly, just considering the changed macro situation, again, from beginning of Q1 until today in terms of the transaction market, did I understand you right, one is that your message here is that the activity is intact and sort of unchanged from when we talked in the previous quarter or from the previous quarter's presentation?

Well, we are in a financial position. We have the underlying strong market that gets even stronger. I think when the right opportunities appear, we will and we can act into that, but we still -- we can see that so far, the yield is going down. And -- but we are very interested in paying the right properties for the right price, of course. But my forecast is that there will be lower transaction in the near future because of -- I think market is waiting a little for the -- today, we heard that the Riksbanken is raising the rent and -- the rate, and I think we have to wait a little. And maybe in the summer, the activity will go up again. But so far, we have acquired properties for about SEK 1.8 billion. And I think it will be more transactions from our side, yes.

And is there any specific region where you're seeing transactions on the market right now?

It's too early. We can -- but we are interested in Luleå, Umeå, Skellefteå, Sundsvall, Östersund [ and Mora ]. So you will see more acquisitions that we have in the pipeline in the near future. So I think it looks the same as it has been this quarter, maybe a little less in the second quarter, but then it will go up again.

[Operator Instructions] We currently have no further questions. I'll now hand over to Knut Rost.

Well, thank you very much, everyone, for listening, and have a good day. And we'll see each other in the future. Bye-bye.

Bye.