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

Hello, everyone, and welcome to the Diös Interim Report January to September 2022. My name is Alex, and I will be coordinating your call today. [Operator Instructions] I'll now pass over to your host, Knut Rost, CEO, to begin. Please go ahead.

Good morning, and welcome to this presentation of the year's results for the third quarter 2022. My name is Knut Rost. I'm the CEO of DS. Together with me today is our CFO, Rolf Larsson. We will present the results, major events and highlights and give you an outlook. If you have any questions, there will be a Q&A session in the end of the presentation. Listen for instructions on how to ask questions. We continue our solid performance and present yet another strong operating results. The occupancy rate continues to increase. The rental income is up, and we have a very good control of our operating costs. Active leasing work together with renegotiations, acquisitions and completed projects is the basis for the strong development in our results. And if you just should go into the result in short. For the first, the net letting continues to be strong, and the third quarter totaled to SEK 20 million. For the period, the net letting summons to SEK 59 million, which is bedded well for the near future. Second, the surplus ratio was 70% for the third quarter. Increased occupancy rate, transactions and new projects are raised in the total income, and we managed to do this in a very profitable and efficient way. Due to higher market rates and financial costs, we have raised the valuation yield by 15 basis points between Q2 and Q3. We have also raised the inflation assumption for 2023 to 8% to reflect the latest development in CPI. This has resulted in unrealized value change of minus SEK 432 million for the quarter. For the period, we have a positive figure for unrealized value changes of SEK 207 million. Financing cost is up due to higher STIBOR and large interest-bearing liabilities. More on that later. We are leaving a low interest rate environment for new business climate and new financial conditions. We find ourselves in a solid financial position with a strong and stable cash flow and the fact that Northern Sweden, our market as sales in a major investment both due to the green transformation puts us in a very good position to continue to create shareholder value. In this new environment, it is especially important to be close to our tenants, something I with the pandemic years close to my mind, know that we do very well. The major events during the quarter is first and foremost. We have completed a new hotel in Umea. It totals 14,500 square meter and also an investment of SEK 480 million. The hotel is fully led to Nordic Choice Hotels and on a 15-year lease. The project has been completed according to plan and pre-calculated cost and yield as a yearly rent of SEK 22.3 million. We have acquired a property in Sunsol compromising hotel and residential for SEK 177 million. We have signed several new leases where side of the lease agreement for the hotel, new contract with, for example, Swedish tax agency, which is particularly good in terms -- we have signed a green lease agreement of 2,500 square meter on a 6-year term, filling and vacant space in central as well. We have a very good relationship with public tenants, and this new agreement is another evidence of that. I will now hand over to Rolf, who will present the results in more detail.

Thank you, Knut. We're presenting a very strong third quarter on an operating level. This is a proof of high activity, a strong rental market and that we have good control of our property-related costs. And as Kai said, our net letting was strong, SEK 20 million for the quarter and SEK 65 million for the last 12 months, and we continue to strengthen our occupancy ratio. Like-for-like rental growth was up 6.5% due to indexation, renegotiations and new lettings. And this operating surplus increased by 19% compared to last year and amounted to SEK 388 million, corresponding to a surplus ratio of 17%. We have higher financial costs due to increased interest-bearing liabilities and highest STIBOR. The average paid interest rate for the quarter was 1.9%, which is 0.7% higher than last quarter. Income from property management increased by 10% compared to last year. And as Knut said earlier, property revaluation amounted to minus SEK 432 million, and I will comment on that later. As you can see, our property portfolio is well diversified in terms of both segment and geography. 28% of our rental income comes from public-related tenants and 8% from residential, which means that we have low risk in our cash flow. We have a low tenant concentration risk. Our 10 largest tenants, of which 7 are tax finance accounts for 18% of our total rental income with an average lease term of 7.1 years and average lease term for all commercial premises amounted to 4.3 years. Of our commercial leases, 97% have indexation. We're 95% around with CPI adjustment and 2% with the fixed enumeration. The market value of our properties amounted to SEK 31.1 billion, an increase of SEK 3.1 billion since the turn of the year. SEK 2.9 million is due to acquisitions, divestments and investments and the rest is a result of property revaluations. And property revaluations for the third quarter amounted to minus SEK 432 million, which corresponds to 1.4% of the property value. The average yield was 5.6%, which is 15 basis points higher since last quarter because of increased interest rates. All segments and cities have been affected. Retail and restaurants have been affected the most, while offices and residentials have been less affected. The change in GE corresponds to a negative value of SEK 1.2 billion. But the value has been positively affected by improved future cash flows due to renegotiated leases, reduced vacancies and increased the index, which has affected value positively by SEK 800 million. We have raised the inflation assumption from 5% to 8% for 2023 and from 2.5% to 3.5% from 2024 to reflect the current IPA figures. Finance by that will be based for 2023 indexation will be published on November 15. With an average yield of 5.6% and an average interest rate at the end of the period of 2.5%. This means that we have a yield of 3.1% and that's a continued strong cash flow. Here are some examples of our major projects with an investment volume of SEK 2.5 billion in total. Most of the rental income in these projects come from tax finance operations and all projects will be certified according to BREEAM SE very good or excellent. The hotel in Umea opened in September and 2 old projects will be completed this year, which will positively affect our operating surplus. 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 the safe projects, we always have 100% signed leases. We currently have around 100,000 square meters under construction with a total investment volume of SEK 2.8 billion, were remaining investments amount to SEK 900 million. In addition, we have another 200,000 square meters in existing or possible building rights in enter locations, which will either develop ourselves or sell to other developers. We currently have 77% of our outstanding loans with banks and 7% in covered bonds. The remaining 16% consists of unsecured bonds and commercial payers. Today, we have 18% green financing, where commercial papers and bonds account for the majority. We are actively working to increase the proportion of green assets, and our goal is to have a 55% green assets by 2026. We have refinanced all our bank loans maturing in 2022, and margins have been at the same levels as before Covid. Over the next 12 months, we have loan maturities, commercial papers excluded of SEK 5.5 billion, which corresponds to 33% of interest-bearing liabilities. 20% related to bank as 5% or bonds and the remaining 8% of unsecured bonds. We have very good relations with our banks. We feel that they are confident in how we run a business and they are willing try on our journey and offer us competitive terms. With 70% of our financing in banks, SEK 1.4 billion in unused credit facilities and a secured loan-to-value rate of 43%. And we'll also add additional borrowing capacity through completed projects during the fourth quarter. This, together with our strong banking relationships, makes us feel comfortable to face our refinancing in the next year. As you can see, our net debt-to-EBITDA is standing between 11 and 12x. Our loan-to-value ratio was 51.8% and the average interest rate at the end of the period was 2.5%. And which is 0.7% higher compared with last quarter. The increase is explained by the fact that we have replaced commercial paper with bank loans and that driver has continued to increase. We see higher funding costs going forward, primarily driven by increased STIBOR, but also slightly higher bank margins. As I said before, we have a strong financial position. In addition to existing loans, we have liquid funds, unutilized overdraft facilities and unutilized credit facilities available, corresponding to SEK 1.4 billion. As you can see, most of our key ratios are improving. Return on equity amounted to 17.1% and ICR remained strong at 5.7x. The growth in income from property management per share amounted to 6.3% and EPRA NRV increased by 14%. Yet again, I feel comfortable with our current financial position. Our strong cash flow we serve operating expenses, committed CapEx and dividend. I will now leave the word back to Knut.

Thank you, Ross. Access to energy and energy prices is a hot topic in the market, and we get a lot of questions how this affects us. We have secured our electricity purchase and the electricity prices for up to 5 years ahead. This strategy has been served as well in the current volatile market. All our electricity comes from renewable sources, hydropower. We only purchased green electricity to reduce our carbon footprint. Sweden is divided into 4 bidding areas. We have 74% of our properties in the 2 most northern areas where we have excess of green electricity. The great access to green energy is one of the main reasons why we see major companies like Northvolt, H2 Green Steel SSR via Facebook is focusing their investments in the this region. I will continue to show the strong net debiting figures in this presentation. We have a strong net letting history, which is a result of a very active property management team, teams with high local knowledge and ambitions acting on an attractive market where we have a unique position. Our letting is also broad-based in our region, which gives comfort that the green revolution is happening in all our cities. I have already mentioned the green revolution that is going on in our market. More than SEK 1,000 billion is expected to be invested in our region into battery factories, sulfide free steel production and development and production of non-fossil energy. To be more specific, only in Lulea, we have new investments and establishments going on for over SEK 70 billion last year. These investments are estimated to create 1,100 new jobs in a city with 79,000 people. Our market has a great outlook. Businesses are transferring to more sustainable business models and many exciting things are happening as I just gave the sample. Together with a favorable climate and access to land, growing industries that choosing Northern Sweden to be a key area for their future green production. I'm convinced that we are just in the beginning of this development. The transaction market has been fairly quiet after the summer due to the new final conditions with higher funding cost and volatile market. So let's come back to the transactions. We are closing in on the finishing line regarding 2 of our major projects. The project in Bolena, where we already built for the Swedish Transport Administration will be completed during the fourth quarter. This project was prolonged due to the tenant activated predefined option where they are taking more leasable area into position. The new [indiscernible] in me will be finalized in the end of this year. It's almost 10,000 square meter and with a 15-year lease contract. Overall, our ongoing projects are proceeding according to plan. We do not experience any major delays or complications. We are presenting a very strong third quarter on an operating level. This is a proof of high activity and a strong underlying market. And at the same time, we manage the cost pressure very well. Net setting is very strong with many new leases and it continues. Financing cost is up due to higher market rates. We have the main part of our financing within banks, which is comfortable in the current bond market. We also have a solid main shareholders. Our market is something special. The green revolution is happening in our cities and in our region. The economic activity continues to be high, and the optimistic outlook have not faded. That's a more uncertain macro picture. The operation is going very well, and the yield gap, which is one of the highest in the Swedish real estate sector generates a strong and stable cash flow. We have a long-term sustainable business model. Our business model is creating long-term value for our tenants and our shareholders. At the same time, we take responsibility for a sustainable future and for our cities, long-term growth. We have very good market conditions. The business activity in our market continues to be very high. The 15-minute city, we accept the clean green energy and accessible land are some key factors for people and business to invest in our region. I see no sign of the market slowing down, given that the financial circumstances are more challenging today. We have a value creation through 3 revenue streams. I'm convinced we are in the right market with the right attractive tenant offering to be able to successfully navigate through new challenges and continue to create shareholder value. We have stable main shareholders, which is very important today. We have local teams with great knowledge in their markets. No one can beat them. And we have good banking relationships, very important. So in the end, I'm proud of our ability to act. We will continue to live close to both our tenants and our banks. Our strong owners, our competent business-oriented teams and our unique position in the expensive market in Northern Sweden, give us the condition for a positive future where our focus on a continued strong cash flow creates value for our tenants, our shareholders and ourselves. Thank you for listening. This takes us to the end of this presentation. We are now ready for questions.

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

So my first question would be on the slide yield expansion noted in the valuations during Q3. How do you view that? Is that actual transactional evidence of that happening? Or do you see some kind of a position? Or how should we view that?

You mean the higher yield in the third quarter, 15 basis points?

Correct.

Yes. We have had all our properties evaluated by external value there. And it's an assumption related to higher interest rates, from our external value.

And your own view, do you agree with that? Do you see that actually happening on the transaction?

No, we haven't seen anything in the transaction market and it hasn't been any deals during the third quarter, but we agree with their view. So it's a result of the higher interest rate that goes into the yield.

Yes. And if we assume that the policy rate continues up, would you expect further yield expansion as we move ahead now in the coming quarters?

As of today, I think it will be at this level.

Great. And then Rolf, you made some comment there which I didn't fully get. So if you just could clarify I think you referred to good financial position covering committed CapEx, dividend and so forth. Does that include a forward-looking statement on the dividend? Or were you referring to, for example, last year's level or.

Yes, last year's level, we haven't any decision about the coming dividend.

So were made assuming the same that dividend, you would say Yes. That's what the point are making. Yes. Perfect. And then yes, obviously, you touched upon the energy stuff and so on. And just your resilience among your tenant base in order to be able to absorb all the potential rental increases and cost increase being passed on to them, how you view basically their ability to pay you next year.

Hello, this is Knut. We are pretty sure that when it comes to the office aspect that will be no problem because we think our rents are lower than in the bigger cities. So we think that the concern the office GPI that would be not that big of a problem. Maybe we have some small cafe, small restaurants that have some problems with the CPI level, but we don't see any problems now. So we are pretty positive on that raise of rent. So yes, there we are.

Yes. And my final question, just the overall seal of your core markets and you've spoken before about the investment level of activity going on in Northern Sweden and so on a quite positive note. I mean, if we look at the most recent sequential development there, I mean, are we still increasing? Is it stable or we have reached such a high level of these, let's say ongoing investments that it's hard to see increasing from here? Or what's your take maybe versus in Q2 and then Q1.

Do you mean our investment in our project? Or do you mean the green revolution, so to speak.

Yes. I mean, the way I've been to give you is that thanks to the strong regional economy that you are part of, if it enables you to find new investments and so on. And I'm just wondering if we have seen any sort of time we are getting a lot of signals and other parts of the economy may slow down. But what's the latest in all your core cities.