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

Hello, and welcome to the Dios Fastigheter AB Year-End Report 2022. My name is Alex, I will be the coordinator for today. [Operator Instructions] I'll now hand over to your host, Johan Dernmar, Head of Investor Relations. Please go ahead.

Good morning, and a warm welcome to this presentation of the year's year-end results for 2022. My name is Johan Dernmar. I'm Head of Investor Relations. With me today, I have our CFO, Rolf Larsson. We will present the results of the fourth quarter, major events, highlights and give you an outlook of 2023. As you heard in the intro, there will be a Q&A session in the end of this presentation. [Operator Instructions]. We summoned the year with a strong and solid operating results for the fourth quarter. The trend from previous quarters continued with higher occupancy rate, efficient within the operation and high activity, resulting in strong net letting figures. On the financial side, the interest rate is just up. Higher financing costs and market rates have pushed our valuation yield upward. That, with higher uncertainty regarding the macro development, gives us slightly negative unrealized property values. We have experienced a special year that has been highly affected by the war in Europe, energy crisis, high inflation and rapidly increased interest rates. We have also experienced an increased focus on the green transformation that is led by the Swedish industry in our market, Northern Sweden, and sustainable steel production is only one example of that. We will come back on that later on in this presentation. Going into the results, in short, net letting continues to be strong, and the fourth quarter totals SEK 18 million, and for the full year, the net letting sum was a record high, SEK 77 million. Surplus ratio was 66% for the fourth quarter, which is 1 percentage point better than fourth quarter last year. Increased occupancy rate transaction, new project raised the total income, and we have managed to do this in a very profitable and efficient way. For the year, the surplus ratio summed of 68%. We have raised the valuation yield by 18 basis points in the fourth quarter. The transaction market has been very silent, meaning that the actual evidence from where properties are changing hands are very few. Unrealized value changes is SEK 356 million on the quarter. And for the full year, the value change has been SEK 150 million. Worth mentioning is that we still have relatively high yield capital. Our strategy of short interest rate fixing has been very profitable for the, say, last 8 years, but it's now showing up on the income statement with higher financing costs during higher market rates. And as you can see on the slide, the Board proposes a lower dividend for this year. The business climate and the new financial environment means that we are more humble regarding new investment and taking on risk. But we are also, on the same time, always looking for good opportunity. Given the uncertain environment, it's really important to be close to our tenant, something I, with this pandemic years close to mind, know that we do very well. The major event during the quarter is that we continue to finalize major projects. In this quarter, we have completed both the new police station in Umeå of 10,000 square meters and a total investment of SEK 290 million, and we also completed a major renovation for the Swedish transportation agency in Borlänge of a total of 31,000 square meters and SEK 555 million in investments. Both these projects have been completed according to plan and the precalculated costs and a yield on cost of approximately 5.5%. As major project have been very successfully finalized, we continue to start new ones. Recently, we started a project in the property Vale 17 in Umeå. It's a 3-year project with mainly offices. The investment volume is around SEK 340 million, and we have signed a 5-year lease contract with the government related entity, Swedish Social Insurance Agency. And also worth noting is that we are proud now to be trading at NASDAQ Stockholm, Large Cap. We continue to grow the company and create shareholder value, and this we see as a proof of our success. I will now hand over to Rolf that will present the results in more detail.

Thank you. And as Johan said, we're presenting a strong quarter on an operating level. This is a proof of high activity, a strong rental market, and that we have good control over our property related costs. Our net letting was strong, SEK 18 million for the quarter and SEK 77 million for the last 12 months, and we continue to strengthen our occupancy rate. Like-for-like rental growth was up 6.7% due to indexation, renegotiations and new lettings. And the operating surplus increased by 14% compared to last year and amounted to SEK 365 million, corresponding to a surplus ratio of 66%. The cost for central administration have been affected by a one-off cost of SEK 10 million, which refers to a planned project in Östersund that will not be started. We have higher financial costs due to increased interest-bearing liabilities and high STIBOR. The average paid interest rate for the quarter was 2.7%, and income from property management decreased by 15% compared to last year due to the one-off cost I mentioned earlier and increased financial costs. And property revaluations amounted to minus SEK 356 million. I will comment on that later. Current tax has been positively affected by SEK 32 million due to a temporary tax deduction regarding inventory purchases in 2021. 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 9% from the residentials, 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 financed, accounts for 17% of total rental income, with an average lease term of 6.8 years. And the average lease term for all commercial premises has increased in recent years and amounted to 4.3 years at the end of last year. Of our commercial leases, 96% have indexation, with 93% funded with CPI adjustment and 3% with fixed enumeration. The CPI indexation for 2023 was 10.9%, which corresponds to increased rent of around SEK 170 million on an annual basis. And unpaid rents for the fourth quarter are at the same level as previous years, which means that our tenants have accepted the rental agreement. 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. Approximately SEK 3.3 billion is due to acquisitions, divestments and investments, and the rest is a result of negative value changes. And as I said earlier, property revaluation for the quarter amounted to minus SEK 356 million, which corresponds to 1.1% of the property value. The average yield was 5.74%, which is 18 basis points higher since last quarter, and all segments and all cities have been affected. Retail and restaurants have been affected most, while offices have been less affected. The increase in yield is offset by increased rental income through higher indexation, renegotiated leases and reduced vacancies. But we have slightly increased the long-term vacancy rate to reflect the more uncertain future, which explains negative change in value for the quarter. Our inflation assumption is 4% for the coming year and then 2%, with an average yield of 5.7% and an average interest rate at the end of the period, 3.2%. We have a [ GDP ] of [ 2.5 ], and thus a continued strong cash flow. Here are some examples of our major projects with an investment volume of SEK 2 billion in total. All of the rental income in this project comes from tax finance operations, and all projects will be certified in accordance to BREEAM SE, very good or excellent. We had, during 2022, finalized 3 major projects. We have rebuilt the headquarter for the Swedish Transport Administration. We have built a new police station in Umeå, and we have completed a new hotel in central location in Luleå. All in all, investments of SEK 1.2 billion with the yield on cost around 5.5%. On the GLA basis, we're currently investing just over SEK 1.3 billion in tenant improvements, property improvements and new builds. All our ongoing projects are proceeding according to plan. And before we start a project, we always have 100% signed leases. We currently have around 90,000 square meters under construction with a total investment volume of SEK 2.6 billion, where remaining investments amount to SEK 900 million and committed CapEx for 2023 amounts to SEK 700 million. And in addition, we have another 200,000 square meters in existing or possible building rights in central locations, which we either develop ourselves or we sell it to other developers. We currently have 80% of our outstanding loans with banks and 5% in covered bonds. The remaining 15% consists of unsecured bonds and commercial papers. Today, we have 18% green financing, where commercial papers and bonds account for the majority. But we're actively working to increase the proportion of green assets, and our goal is to have at least 55% green assets by 2026. We have refinanced all bank debt maturing in the first half of 2023 at slightly higher margins than before. Over the next 12 months, we have loan maturities, commercial papers excluded, of SEK 3.4 billion, which corresponds to 0.1% of interest-bearing liabilities, 11% related bank loans, 2% to secured bonds and the remaining 8% to unsecured bonds. And our ambition is to refinance our bonds on the capital market, but if this is not possible on reasonable terms, we have available credit facilities to handle this. We have very good relations with our bank. We feel that they are confident in how we run our business, and they are willing to be on our journey and offer us competitive terms. We have 80% of our financing in banks, SEK 1 billion in unused credit facilities and a secured loan-to-value ratio of 44%. We will also add additional borrowing capacity through completed projects during the first quarter. This, together with our strong banking relationships, makes us feel comfortable about future refinancing. As you can see, our net debt to EBITDA is stable between 11x and 12x. Our loan-to-value ratio was 51.9%. We have extended our loan duration during the year, while the fixed rate terms are unchanged. We have restructured parts of our derivatives during the year, and our focus is to extend our fixed rate term further. The average interest rate at the end of the period was 3.2%, which is 0.7% higher compared with last quarter, and the increase is mainly due to increased STIBOR. We see higher funding costs going forward primarily driven by increase STIBOR, but also slightly higher bank margins. And 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 billion. Our operational key figures, that is occupancy ratio and surplus ratio, are improving. If we look at all the key figures, we can state that most of them have been affected by higher financial costs and negative value changes. But yet again, I feel comfortable with our current financial position. Our strong cash flow will serve operating expenses, committed CapEx and proposed dividend. And I will now leave the word back to Johan.

Thank you, Rolf. Our operating result continues to be very strong and underlying basis is going very well. I can summarize 2022 as a good year with increased top line income and good contribution from transaction, finalized project and investment from our property management. Our business model gives us a broad base to build our value creation promise. The record high EPI indexation of 10.9% will expect the rent from first of January 2023. We have, as Rolf mentioned, 96% of the commercial lease agreement with an index [ cost ]. The indexation of commercial lease agreement in total will lift the rental value by approximately SEK 117 million in 2023. On the cost side, we are very proactive and dedicated to securing and improving operating cost, which is shown by improved surplus ratio the last 5 years, as you can see on the slide. We are active in the market with very good access to green electricity at a reasonable price. Having that said, we have also secured our electricity purchase and electricity prices for up to 5 years ahead, giving us a very attractive electricity price. We have also reduced our energy consumption by 3.3% in 2022. Also worth noticing is that all our electricity comes from renewable sources, mainly hydropower. We continue to only purchase green electricity to reduce our carbon footprint. We also continue to sign green lease agreements to engage our tenants to be more involved and to reduce the total carbon footprint. The continued strong net letting figures are a result of our very active property management team. Of the last 20 quarters, 17 have had a positive net letting figures, and the trend is clearly upwards since the beginning of 2021. High knowledge of the local market and high ambitions, acting on an attractive market where we have a very unique position, gives us a great business platform. For example, new lettings agreements in the fourth quarter has been made to NPCGYM, a 10-year contract in Skellefteå ABB, a 10-year contract in Umeå, and, as I mentioned before, the Swedish Social Security Agency with a 5-year contract in Umeå. Our net letting is broad-based among our cities, which gives us confidence in our offering as well as the confirmation of a good market demand. New investment in -- through the transformation of the Swedish industry towards net zero carbon emission continue to be announced. Green steel production, battery factories, electric fuel are just some of these areas raising capital last year. A great part of these investments are going to happen in the Northern part of Sweden. And as we stated before, we're just in the beginning of this revolution. We have a very positive outlook on the development in our cities, which is a result of these investments. The region and the industries will need more employees, more people, which is -- create the need for the cities to develop and grow. The industry and the national politicians are agreed upon that the moving of people into our -- to the Northern Sweden could amount up to 100,000 new inhabitants. Growing cities leads to economic growth. Economic growth leads to higher demand on premises, lower vacancies and higher rental rates. The great access to green energy and favorable climate, natural resources and [ accept ] the land is the main reason why we see major companies like Northvolt, H2 Green Steel, SSAB, Facebook are putting their investments into this region. As we stated earlier, during 2022, we have finalized 3 major projects. We have rebuilt the headquarter for the Swedish Transportation Administration. We have built a new police station, and we have completed a new hotel in Central Umeå. All in all, these investments of SEK 1.25 billion, we are very proud of our projects proceeding according to plan at pre-calculated cost. The yield on cost of this project is around 5.5%. During the year, we also started new projects, both in Umeå and in Luleå, both for the Swedish Social Security Agency, and also in Borlänge for the University of Dalarna. Great projects for us that will serve the demand for high standard, high quality offices at the right location. We see that these projects will increase the top rents in the local market. We are presenting a strong fourth quarter on operating level. This is a proof of high activity and strong underlying market, at the same time as we manage the cost pressure very well. Net letting continue to be very strong, with many new leases in 2022 that will show on the income line this year. Financing cost is up due to higher market rates. We have the main part of our financing within banks, 80%, which is added towards -- in the current bond market. Having that said, we have a humble -- we are humbled to the current market environment and what effect it will have on our financial situation. On property yields, we see them relatively stable from current levels. The green transformation is happening for real in our market. The economic activity continues to be high, and the optimistic outlook has not faded. On the contrary, it does have a more uncertain macro picture. We are proud of our ability to act where we continue to live close to both our tenants and our banks. Our competence and business-oriented teams and our unique position in an expensive market in the Northern Sweden gives us confidence to have a positive outlook and continue our value creation. This takes us to the end of this presentation. Thank you for listening. We are now ready for questions.

[Operator Instructions]

Let's start with the first question. I repeat the question, and we come back to the answer then. Have you fixed your cost in your projects? I leave the word to Rolf.

Well, the answer is no, but we have rental agreements that the rental level, if the cost is higher, then also the rental level will be higher and vice versa. If the cost is lower, then the rental level will be lower.