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

Good morning, and a warm welcome to this presentation of Diös' year-end report of 2023. My name is Knut Rost, I'm the CEO of Diös. And together with me today is our CFO, Rolf Larsson. We will go through the highlights of the fourth quarter, give you an insight into the office market and how we will create accretive growth acting on Europe's most prosperous market. If you have any questions, there will be a Q&A session after the presentation. Also, you can always reach out to us with your questions afterwards. You can find our contact details on the last slide and on our website. Let's go to Page 2. In a world impacted by inflation, new financial conditions, war and uncertainty, we have delivered the strongest net operating income in Diös' history. Our occupancy ratio is at an all-time high level. We have maintained good cost control and we have shown improved energy metrics. However, financing costs have continued to rise due to higher market rates. For the quarter, the occupancy rate was 93%, up 2 percentage points from last year. And the surplus ratio was 70%, up from 66% last year, indicating a solid development. Interest costs have increased due to rising market interest rates. As we have had a strategy over the years with a short-term interest rate fixing, we have now absorbed the impact on financial costs and we see that the average cost of debt aligns with the marginal cost of debt. When interest rates are lowered, which they are expected to do already in the first half of 2024, it gives us a direct positive effect on our financial net. After the turn of the year, we have completed a refinancing of maturing bank loans in Q1 2024 of a total of SEK 4 billion. We have adjusted the average valuation yield by 10 basis points to 6.11%, resulting in an unrealized value change corresponding to SEK 496 million or 1.6% of the total portfolio value. In our last report presentation, we mentioned that we were in negotiation for asset disposals. We have now completed 2 transactions of a total of SEK 1.2 billion, reducing the loan-to-value ratio to 53.1 percentage pro forma. This proves that the transaction market is getting stronger again. New investments in the green growth revolution continue to be announced in our market. The rental market shows good resilience, and I believe that the demand for central-located offices will continue to grow, which will give us great business opportunities. We are prioritizing our CapEx by requiring higher returns on investments to manage the effect of higher interest rates. We are getting closer to the first rate cut from the Riksbank, and we believe we are getting close to the peak of yield expansion in our market. Please note, the Board of Diös proposes that no dividend will be paid for the financial year 2023. Let's go to Page 3. First, I would like to point out the historical high occupancy rate that corresponds to 93% for the whole year. The total income for the quarter is up 14% to SEK 646 million, mainly supported by like-for-like rental growth of 10.6%. And the operating net for the quarter is up with 20% to SEK 439 million. Property costs are stable. We have actively prioritized our expenses during the quarter to secure the ICR. It is very satisfying to see that our day-to-day optimization leads to increased energy efficiency as we continue to invest in our properties to be more proactive and future-proof. Our goal is to reduce our carbon footprint by 50% in 2030 and to be carbon neutral by 2050 at the latest. Page 4. Our well-diversified portfolio serves us well in times of uncertainty. Rental income is very stable, and the fact that 30% of our rental income comes from public-related tenants generates a solid ground for passing on CPI. Like-for-like rental growth has been solid throughout the year. Indexation of 10.9 explains the majority, but not to forget both our improved occupancy and rent reversion boost rental growth. Outcome of the CPI indexation for 2024 was 6.5%, which alone gives us an increased rent of around SEK 90 million on an annual basis. I see great potential in our rental growth, both when it comes to rent reversion, a continued increased occupancy rate and modern new builds. We believe that our tenants are in a good position to manage upcoming adjustments. Let's go to Page 5. Net letting continues to be positive with SEK 1 million in the last quarter and a total of SEK 19 million for the full year. On one hand, we observed that our tenants decision-making process is taking longer. On the other hand, which I will address later, there is an increased demand for attractive located offices. With the economic outlook improving and interest rates decreasing, I believe activity will pick up. The underlying market is incredibly strong and the need for the right premises in the right location in the Northern Sweden is strong. I will now hand over to Rolf, who will get into the portfolio and our financing. Rolf?

Okay. Turn to Page 6. Thank you, Knut. I will begin by looking at the market value of our properties, which amounted to SEK 31.2 billion. Investments during the year amounted to SEK 1.6 billion and yield expansion has resulted in negative changes in value. Property valuations in the fourth quarter has resulted in negative value changes of SEK 496 million, corresponding to 1.6% of the property value. The value changes are explained mainly by yield expansions of 10 basis points. The average yield was 6.11%, which is 37 basis points higher since the turn of the year. The deal expansion has the largest extent being offset by higher rents, where economic occupancy rate is at an all-time high of 93% and we see no signs of a shorter WAULT. With an average yield of 6.1% and an average interest rate of 4.5%, we steadily have a yield gap of a 1.6%, and thus, a continued strong cash flow. Go to Page 7. As I said earlier, we have invested SEK 1.6 billion in tenant improvements, property improvements and new builds. We currently have around 90,000 square meters under construction with a total investment volume of SEK 2.6 billion with remaining investments amount to SEK 300 million. All our ongoing major projects are proceeding according to plan both in terms of cost and time. There is low risk in our major projects where pre-let is a requirement, and most of the rental income comes from tax finance operations. All new projects are built according to BREEAM, at least level very good. And in addition, we have another 200,000 square meters of existing or possible building rights where we see great potential for further value creation. This will be used for both our own development and disposals. We target to develop 30,000 square meters of new building rights each year. And to conclude, the demand for new modern premises and housing remains high but prevailing market condition means that we will be more cautious on starting large projects in the coming quarters. And we have increased yield on cost requirements, which will result in a lower short-term CapEx volume. Turn to Page 8. If we look at the maturity profile, we can state that by the beginning of this year, we have refinanced all loans maturing in Q1 with a term of 2 to 5 years and an average margin 20 to 30 basis points higher than before. This means that in the next 12 months, we have additional loan maturities, commercial papers excluded, of SEK 2.3 billion, which corresponds to 13% of interest-bearing liabilities. And most of the maturities, SEK 1.8 billion, relate to bank loans. We have ongoing negotiations regarding all maturities during Q2 with a total volume of SEK 1.2 billion, and we have high confidence in refinancing these as banks have already provided soft commitment to roll over. And we're actively working for a more prudent maturity profile with longer debt maturities. We currently have 81% of our outstanding loans with banks, and financing through banks is and will be our most important source of financing. It's also gratifying that the capital market is coming back to life and offering competitive prices as our mission is to be a recurring issuer. And last week, our partially owned financing company, SFF, issued a 2-year bond with a margin of 135 basis points over STIBOR. The average interest rate at the end of the period was 4.5%, which is 0.3% lower compared with last quarter. And as Knut said, our average cost of debt is now in line with the marginal cost of debt, meaning we have absorbed increased interest rates, which will have a positive impact on our income from property management when rates start to decrease. During Q4, we have acted to secure ICR at acceptable levels by signing new derivatives, and we're committed to keep ICR above 2x. Our loan-to-value ratio at year-end was 54.4%, which is under our target of 55%. We have disposed assets in the beginning of this year and we are in discussions to dispose further low-yielding assets. We will use the liquidity to reduce debt and thus lowering our financial costs and, at the same time, improve our loan to value and strengthen the balance sheet. And as we said earlier, we are also limiting low yielding CapEx to further strengthen the balance sheet. We have 81% of our financing in banks, SEK 830 million in unused credit facilities and a secured loan-to-value ratio of 46%. We will also add additional borrowing capacity during the year through completed projects. This, together with good relationships with our banks, makes us feel comfortable about future refinancing. Turning to Page 9. Our conservative balance sheet approach reflects our commitment to financial prudence and risk mitigation. We have reduced our financial risk over time, lowering our loan-to-value, showing a stable net debt to EBITDA over time and prolonging our interest rate fixing and debt maturity. And in the short term, we're acting to manage financial KPIs, positioning the balance sheet for further growth by selling low-yielding assets. With disposals in the beginning of this year of SEK 1.2 billion and by using the liquidity to amortize debt, we have improved our financial situation and are now targeting a lower loan-to-value. Our pro forma loan-to-value after disposals is 53.1% compared to 54.4% by the end of Q4. Yet again, I feel comfortable with our current financial position and action taken, our strong cash flow with our operating expenses and committed CapEx. And I will now leave the word back to Knut.

Thank you, Rolf. Let's go to Page 10. Despite facing challenges such as inflation, new financing conditions and slower economic growth, in general, our market is witnessing significant new investments in the green transformation, such as new factories to refine our natural resources to green production, energy plants, battery production, infrastructure and housing. These investments are being made by both private companies with risk capital and public related companies. As we look forward to 2024, I am even more confident about the promising future that our cities are prepared to experience. The fundamentals for all these investments are incredibly robust enduring. In the northern part of Sweden, we are blessed with natural resources like minerals and forests, and the primary goal is to transition into a net zero environment. We have access to clean and green electricity through hydropower and wind power. We have a cold climate and a lot of available land for development. We also benefit from the strong and predictable governance in Sweden, characterized by a robust legal framework and a high degree of transparency. We anticipate that over the next 10 to 20 years, investment in the region will amount to EUR 150 billion. According to experts, this will generate approximately 100,000 new job opportunities and there will be a need for 200,000 people to migrate into the region. Let's go to Page 11. Keeping the anticipated population growth in mind along with investments being made in our market, we can analyze the developments over the past few years. The focus has largely been on the inflation, geopolitical challenges, interest rates and a slowdown in economic growth resulting in increased unemployment. However, in Northern Sweden, we are witnessing a contrasting scenario. Economic activity is demonstrating resilience and unemployment rates continue to improve. When we translate this into the context of our business, it means that our tenants are better positioned than those in many other locations. The turnover in hotels and restaurants remain robust, and we are not seeing an increase in bankruptcies. Again, I am proud to report an all-time high occupancy rate of 93%, thanks to our proactive property management and the success of our long-term investment strategies. Let's go to Page 12. We observe the most robust development and the highest potential for growth within our office premises and among our office tenants. As I mentioned in the Q3 presentation, we referred to the 2023 office report from the business organization, [Foreign Language]. In this report, our market is especially addressed and office is characterized as the city's engine and the social hub. We have now conducted a comprehensive AI study of the significance of offices in collaboration with industry peers, Fabege and Wihlborgs. The data comprises 10,800 social media post from the private individuals and Sweden's 50 largest companies as well as more than 2.1 million Google searches. The main takeaway from this report is that an office needs to fulfill 4 basic needs: cooperation, social togetherness, concentration and recovery. A well-managed office can serve as one of the employer's strongest competitive advantages and recruitment tool. Companies primarily highlight the office as a place for creative collaboration and socializing. However, they often overlook other important roles of the office, such as a place for concentrated work or recovery. These aspects seem to be particularly important for employees who prefer a hybrid way of working. You can find the report in Swedish on our website. Let's go to Page 13. Since the last report, we have taken action to reduce LTV and secure ICR above 2x. We have disposed assets for a total of approximately SEK 1.2 billion, taking down LTV by 1.3 percentage points. We find ourselves in a better financial position with ICR improving, and my belief is that we are post peak interest. However, we will continue to dispose low-yielding assets and property with low potential to reduce the financial risk with LTV at 54.4% at year-end and we are aiming towards 50% during the year. The demand for new builds continues to be high, especially from government-related tenants. We are still cautious as the return on investment is not that great and the financial environment is still a bit uncertain. I am sure that we will announce some major projects during the year. However, I think they will be major refurbishments rather than new builds. We continue to invest for a more resilient property portfolio with higher energy efficiency and lower CO2 emissions. It's encouraging to see that we are reducing the energy use like-for-like by 2.1%, and the share of green assets are increasing to 25% from 16% of the total portfolio value. Our target is to have 55% green assets by 2026. We have a very positive outlook on our market, and we will continue to invest for a more sustainable portfolio and accretive growth. Let's go to Page 14. This past year has been unique and challenging, bringing many things into new light. I'm extremely proud of how we have adapted to the new financial landscape and navigated short-termly to ensure our financial covenants are secured. We have also achieved a very strong net operating result. The net operating result for the fourth quarter is exceptionally strong. Our occupancy ratio of 93% is an all-time high, and we have effectively managed property, resulting in a surplus ratio of 70%. Financing costs have increased due to higher market rates. We have taken actions to manage the ICR by adding new derivatives. Our average cost of debt aligns with the marginal cost of debt, and with the peak interest rate behind us, we are well positioned to increase income from property management. Our markets continue to attract new companies and investments, making the growth outlook even more promising. As the largest property owner in our market, we are in an excellent position to capitalize on this growth. The Board has proposed that no dividend should be distributed with the reasoning that this creates the best condition for the company and its shareholders at present. The strengthened balance sheet result in more favorable financing conditions and thus lower costs. The Board of Diös considers the company's ability to resume the dividend in the coming years as very good. To conclude, on a personal note, I will be stepping down from my position as CEO of Diös within the year or when a new CEO has been appointed. The decision to leave my role as CEO of Diös after more than a decade feels both natural and a little bittersweet. It has been an incredible and successful journey where we have transformed the company into a market leader in Northern Sweden. This achievement would not have been possible without the excellent cooperation and trust I have received from the owners, from the Board and our employees over the years. Together, we have driven the company's growth, leading us to where we are today. I'm deeply grateful for all the years I spent as a CEO of the company. Now it's time for me to explore new opportunities in my professional life. I would like to finish by pointing out our business-driven Diös teams and our strong market. That gives us the conditions to further develop our business and take advantage of our times biggest green growth revolution. We continue to navigate in a turbulent time. With more experience and more clearly focus, we build a stable road towards the future. This takes us to the end of this presentation. Thank you for listening, and we are now ready for questions.

[Operator Instructions] Our first question today comes from Stefan Andersson of Danske Bank.

A couple of questions from me then. First, maybe if you could elaborate a little bit more on the surplus ratio. It's a big, big pickup in the quarter. So I'm just wondering if there is something you could help out with when it comes to the cost side that you have benefited from in a year-on-year comparison.

Thank you, Stefan. Knut here. I can start and maybe Rolf can fill in. Of course, we have a very effective organization. We work a lot with efficiency. That's one thing. One other thing, of course, is that we have sort of lowered our maintenance cost, that's sort of preliminary. We try to be as cost-effective as we can. And I think the maintenance will of course pick up in the future, but it's mainly that. And I think, Rolf, you have something more to say about that?

Yes. Our maintenance is a bit lower, but the difference from the year before is only SEK 4 million to SEK 5 million, so it's almost in the same level. But we have been more cost efficient over the whole organization. And also to remember, we have a nonrecurring income from electricity support, that also affects the net operating income.

Perfect. And then a little bit, I don't know how to ask this, but we'll see what you can say. Just you seem to be -- I mean, on one hand, you're talking about what we all can see that you're already at your -- I mean, interest rate seems to be coming down. You are already at the current level so you would benefit, ICR would improve in such a scenario. And still, you now decide to cut the dividend, you divest properties. There might be more of that. You are cutting investments. I'm trying to get -- I just see it's a little bit strange that you're so defensive given that things look a little bit better ahead. And the only argument I could see is that you want to get the LTV down to 50%. Is that the main reason? Or is there something else behind this?

Can I take this, Rolf, or Johan?

Yes.

Yes, you can fill in. Of course, it's a little of both. You can say that we have a sort of long scope in target to actually get under 50 in LTV. So let's say that's the goal for us this year. And since the value changes are not -- they are negative just now, I think they will pick up during this year, 2024. We want to strengthen our balance sheet, of course, by disposals. And since we are -- the purchase price and the underlying market value is in line with our book value, that is very good for us. And concerning this residential property we sold yesterday, we saw a lot of investments coming. And in our portfolio strategy, you can say that this is in line with our portfolio strategy when we talk about low-yielding properties and even -- we should own these sort of properties in the future. There's a lot of investments that we have to put in them and they're actually very low yielding. So there's no doubt about it, it's actually to lower our LTV, get our key figures in a better position to work with our growth in the company. And so we are strengthening our key figures. We are lowering our LTV. And this is actually very good, in line with our portfolio strategy. Rolf, you want to add something more?

I mean, maybe if I could just add. My question is -- I understand it's a very blurry and strange question, but I'm just -- I mean, you could also -- I guess my question is why is LTV so important right now? Because you could also say that, okay, let's leave that and look at the ICR and that's going to improve. So we wouldn't have -- it seems like you're more prudent now than you were a year ago. You did pay a dividend last year when things were much worse than they are right now. Now things are actually looking up. So I'm just trying to get -- just trying to understand why our LTV is so very important for you right now.

Well, let's just say, we are more prudent now than we were a year ago. And we think there's still a lot of uncertainty in the market. So this is a way to strengthen the balance sheet, just as Knut said, and to position ourselves better for the future.

Okay. Good. And then a question on rents. There's been some quite large indexations going through. Are you seeing that -- do you get that through the system also? Or do you see any pushback on the rent levels in general?

We are very positive talking about the rent levels both in the demand for office and for modern and flexible modern premises -- office premises, I'm sorry. And we can see that -- if you say that our rent levels was SEK 300 million better this year than last year, half -- a little more than half of it was CPI indexation and the rest was actually higher rent and lower vacancies. So I think it's a very wealthy market we look at. And if you look at our market rent, you can say in average, it's SEK 2,400 per square meter. And the average rent today is SEK 1,850. So there's a lot of potential in the rental market. It's up to us how active we are and how prudent, to use that word, and how bold we are. So I think there's a lot to do with this year and the next year.

And my final question, maybe you already touched on it. But just to be clear, when you start projects again, which I think you would prefer ahead of acquiring properties, I guess, would it be residential or commercial premises?

It's very clear for us that we are in the commercial side. We are focusing on office premises. That's very clear. And on the residential side, we will be very active in actually providing building rights. We will provide that residential are being built, but I don't think we will do it on our own, maybe in joint venture. But we -- the first time we will see to that residential are being built, but I don't think by us.

Our next question comes from Lars Norrby of SEB.

Just following up on transactions. I think you mentioned on the call now that you are in discussions to dispose some 30 low-yielding assets. What are we talking about in terms of million?

Let's say that we have disposals around -- we have disposed already for approximately SEK 1.2 billion and, let's say, I think we are looking at disposal for -- between SEK 200 million up to SEK 1 billion, around that.

Okay. So it's a pretty wide range.

Yes.

Let me just double check that. The pro forma LTV of 53.1%, is that after the SEK 1.2 billion?

Yes.

Okay. Good. Then I'll just move to the financial net, which improved between the third quarter and the fourth quarter. If I remember correctly, some SEK 21 million, even though the interest-bearing debt was virtually unchanged during the quarter. So can you break down the improvement of the financial net between Q3 and Q4, please?

We'll try. We took some new derivatives in Q3 that has full effect in the last quarter. And also, we have SEK 2 billion new derivatives in Q4. We have lower STIBOR fixing in Q4 than before. Then we have interest income from investments and some financial agreements that has a positive effect on our financial cost.

That final item, can you just quantify that in some way?

Sorry.

The final item you mentioned, the positive effect, not the derivatives, not the lower STIBOR but the final item.

Yes. We have some interest income from the investment and financial agreements of around between SEK 5 million and SEK 6 million for the quarter.

Is that sort of somewhat of a one-off in the quarter, it's not coming back in the first quarter?

That we'll be recovering in a few quarters, maybe 2 quarters in 2024 perfectly.

Okay. And then one question about the rental market. I'm just trying to understand your message about the market, I think you described it as being strong. And at the same time, your net letting is close to 0. So can you just say a few more words about that, please?

Yes. We still think and are convinced that the net letting will pick up. I mean, I often say that the net letting figures are sort of a temperature on the market. It says something about how strong market or how weak market are, but it says -- also says how strong we are and how bold we are in renegotiations and so forth. One quarter or 2 quarters, it can be a low figure. But overall, we have SEK 19 million in 2023. That's a rather good figure. But of course, we are not satisfied. We want more. And I'm sure that 2024 will pick up and be even better. But for 1 quarter or 2 quarters, it can be a little lower. That's natural. But of course, you can see, seeing this economic situation, that our tenants -- our existing tenants, we have a lot of discussions with them, of course, every day, every hour. And maybe their decisions are taking a little longer when we talk about building, new office premises for them and refurbished office premises with a better brand for them and so forth. It takes longer time, they are a little more cautious. We can see that. But there are not any sign of lower the rent, it's actually picking up. They want better design. They are not writing -- we are not -- have leases that are shorter. So we don't see that in our market. We see that the leases are 3 to 5 years, even longer. And we see that the krona per square meter is picking up. So there's a lot of indicators that shows that our rental market is resilient and actually very strong.

Our next question comes from Albin Sandberg of Kepler.

Yes, So just also for me to confirm so I understood the sort of one-offs that's happening in Q4. So we had SEK 12 million on NOI and then another SEK 5 million to SEK 6 million on the net finance cost, even though I understood from you that the positive one-offs on the interest line that would occur also in Q1 and Q2. So I sum it up to around SEK 17 million, SEK 18 million of one-offs in Q4. Is that correctly understood?

Yes, that's right.

Great. And then sale of assets, now that you announced, I guess, yesterday, and you referred to the fact that it was in line with book value, I guess, was that after some kind of adjustment of value versus Q3 as well? Or...

Johan, do we take that question?

Yes. Rolf, yes. The value of these properties was lower in Q4 than in Q3. Of course, we have a yield expansion in Q4, so it has affected these properties as well.

Okay. And then also, I guess, very hard to say, but I mean, assuming no change on the value, unrealized changes in value for 2024, your portfolio and the plan that you have, do you see yourself being a net seller or a net buyer or -- and with net buyer, I also mean the complete -- the completion of development projects? I guess I'm trying to ask whether you think your portfolio will grow or not in 2024 versus 2023.

I think the main task for us during 2024 is actually to be yield focused. We will be a little cautious with our CapEx. And of course, the main thing for us is the vacancies. The main thing for us is to be efficient. The main thing for us is to deliver more rents this year. And I think it's divided in two this year. I think the first 2 quarters in 2024, we will actually be net sellers, I think so. But we don't know. Let's see how everything picks up. And the second part of 2024, let's see what happens. We go from more yield-focused to growth-focused. But we are convinced that we are doing the right things now to be even more prepared for better times, so to say. And the economics is picking up during 2024. So let's see what happens. But that's the best answer we can give.

That's great. And then my final question also on the dividend, and for sure, I understand calling the market and the outlook is extremely difficult. I remember the discussion from last year and the fact also that while you pay the dividend, it was obviously lower than we spoke about possibly being able to come back. And when you say that the Board and you actually saying that we see good chances of, let's say, resuming dividend paid, is that back in line with the stated policy? Or are you seeing some kind of a comparison with 2022 in absolute terms?

Johan?

That's a tough question, for sure. Now the Board's proposal now is to strengthen the balance sheet in the short term. My guess is that we would be back on the same level as 2022, something like that. That's my personal guess.

Yes. And since we have -- we see that we have very good development in our earnings during 2023 and 2024. I think the possibility and opportunities are very good in our market, and I'm sure that the Board will be more keen on going back to the dividend policy in 2024. We have a very positive outlook on that.

Okay. Great. Knut, I guess you will be around for a quarter or 2. But anyhow, thanks for these years.

Thank you very much. I will.

[Operator Instructions] The next question comes from Ventsi Iliev of Kempen.

A follow-up on the energy efficiency improvements. I suppose there's a bit more to gain there. So could you in some way quantify the potential improvement in the surplus ratio?

Do you want me to take that, Johan, Rolf?

Please go ahead.

We have a goal of reducing our energy consumption with 3% each year. And some years, we have succeeded; in some years, we have not. And every year, when we don't reach our goal, we are even more focused on deliver it the next year. And this is actually one of the most -- actually the one -- the most important figure when you're talking about sustainability. And since we have 100% clean electricity, green electricity in our business, so it's extremely important for us to be sort of leading star when we talk about this. So we have actually reorganized our company to be even more concerned, focused and efficient when we talk about this question. So now we have, I think, it's 12 people in the company that only works with this matter. So it's very important for us to deliver both the key figures and to be a good citizen when we talk about this matter.

But just to clarify, it's clear that there's some more to gain in terms of the surplus ratio.

Concerning when you talk about -- and that's a sort of big question. Because when you work with mixed properties that we do, I mean, we just disposed about 400 rental apartments, which we had the release of yesterday. We still have 2,000 apartments in our portfolio in our mixed properties. Residential always delivers a lower surplus ratio than the commercial properties do. And so I think when we talk about surplus ratio around 70%, that's very good for us. But of course, I will never lie down before we improve that figure. Maybe we have something more to give, I think so. But of course, then you have the weather and then you have everything else, the price for electricity and so forth. But you should be -- you should know that we are on the question and very focused, yes, on our surplus ratio, of course.

Yes. Very clear. And then on the yield on cost, you mentioned that you raised your target. But then if I look at the Q4 figure, we report 6.8% return. Is it driven by lower-yielding new builds that you delivered throughout the year? Or is it something else perhaps?

Yes. That's mainly projects that we started sometime several years ago. And the larger projects, as you say, have lower yield on cost. So we changed the target on yield on cost from this spring. So you don't see the effect in the report as of now.

And then just one more follow-up question on the hedging. I guess, in the end, it provides near-term relief because you're able to lower the cost of debt because of the big gap between floating rate debt and fixed rate debt, but the downside is that you lock in the rate for 5 years. And with the Riksbank cuts closer, then you can say maybe even if they come in 12 months or 24 months, then at least for 3 years or whatever, you still get to the same lower cost of debt or perhaps even lower. So to me, it seems like in the long term, floating might be a small positive. So what's the rationale?

The rationale is to lower the cost in the short term, just as I said, and use the gap between floating and fixed rate to lower the cost in the short term and make sure that the ICR stays over 2x. And as I say, in the future, maybe it would have been better to not have these derivatives. But for now we think it's the best way for us to secure our ICR over time.

Thank you. We have no further questions in the queue. So I'll turn the call back over to Knut Rost for any closing remarks.

Sorry, we have some written questions that we could answer as well. The first one is regarding asset disposals. So I'll read the question and I hand over to you, Knut. When you're selling assets, you believe negative value changes are behind us and you assume will benefit from lower interest rate levels. So why are you selling right now?

Selling right now is actually most of all in line with our portfolio strategy, selling low-yielding assets and selling assets that stands alone, that don't give other properties any value. So this is actually the selling we released last -- yesterday, was actually in line with our portfolio strategy. So we are very pleased that sort of small acquiring companies, small companies, local companies, they are willing to pay the book value and actually, in some cases, above. So we have a lot of discussions with rather small buyers. They are not institutional structures, they are not other listed companies. They are small buyers that are very local. So that's very good for us. So it's in line with our portfolio strategy.

Yes. Thank you. And the next question, what's the need in terms of yield on cost for starting new projects, both commercial and residential?

Let's say that we have a very, very strong focus on our new lettings. For the first, we want to reduce our vacancies even more. The last 10 years, we have reduced it by 10 percentage points from 84 to 93 now. I think that's very -- I'm proud of that. I'm proud of my team. And now we can see that we want higher yields when using our CapEx. So say that we don't do any sort of refurbishment or investments for our tenants under 8%, 9%, rather more than 10% to 12%. So it's a jump upwards in our yields, yes.

Great. What is your expected CapEx budget for 2024, excluding the 4 large projects?

Rolf here. We think somewhere between SEK 600 million and SEK 700 million.

And the last question, can you give a range of NOI margins on the 2 divested portfolios?

That was a direct question. I think if you follow the key figures in our disposal yesterday, you would see that it would be around 4.3%, around that. And actually, if you talk about the disposal in Skellefteå a month ago, Rolf and Johan, you have to help me. I actually don't remember.

Let's say the divested assets in Skellefteå was low 5s in terms of...

5.3%, I would say, 5-point-something.

Yes.

That was all the written questions. And I hand over to you, Knut, to give you our final remarks.

Thank you very much for good questions. Thank you very much for being with us. And I'll be with you for at least 2024, I hope. And we hope to hear from you again. And of course, we are here to have your -- if you have any more questions during the day, and of course when you give us a ring, we'll answer. So have a good weekend, everyone, and thank you very much from us.

This concludes today's call. Thank you for joining. You may now disconnect your lines.