Dios Fastigheter AB

STO:DIOS

Ladies and gentlemen, good morning, and welcome to this first quarter 2024 result presentation for the year. I'm Johan Dernmar, I'm Chief Investor Relations Officer at Dios. Joining me today are Knut Rost, our CEO; and Rolf Larsson, our CFO. They will review our results, major events and go through the strategy for achieving accretive growth in Europe's driving market. [Operator Instructions]. Thank you all for being here. I now leave the word to Knut.

Thank you, Johan. We are currently witnessing an improved environment in the Swedish real estate market compared to just 2 months ago. However, it's essential to acknowledge that the geopolitical situation remains challenging, and our thoughts go out to all innocent people affected by conflicts. Inflation is going down, and we expect the rate cut from the Riksbank before summer. As a result, the economic climate and overall mindset in Sweden are shifting toward more optimism. In response to the changing landscape, we have taken short-term actions to secure our interest coverage ratio, ICR, and reduce our loan-to-value LTVs. These actions positions us much better to capitalize on new business opportunities. Moving in on where we stand at the end of Q1, we have increased our revenues by 4% compared to Q1 last year. Even thus we have divested properties for SEK 835 million. Occupancy ratio and surplus ratio are stable at 92% and 65%. Interest rate cost is up here to last year due to higher market rates and some higher bank margins. Yield expansion, I believe, have reached its peak. We now see a stable yields for like-for-like and property values are positive flat. We have also announced a couple of more disposal, which strengthens our financial position even more. New investments in the green growth transition continued to be announced in our market. The rental market shows good resilience, and I believe the demand for centrally located offices will continue to grow, which will give us great business opportunities. We are the market-leading real estate company in Europe's most thriving market, which gives us great confidence in our ability to create shareholder value and accretive growth. Let's look into the details regarding the result. The total income for the quarter is up 4% to SEK 639 million. Like-for-like rental growth is 6.3% and occupancy rate is stable. The operating net for the quarter is up 5% to SEK 407 million, which is strong, although we have experienced fairly high winter-related expenses where property costs are affected by additional 4 million winter-related expenses compared to 2023. It is very satisfying to see that our day-to-day optimization of how we run our properties lead 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% by 2030 and to be carbon-neutral by 2050 at the latest. Yield changes was flat like-for-like. Asset disposals resulting in 2 basis points yield change to 6.13%. Unrealized value changes were positive by SEK 6 million, whereas realized value changes amount to minus SEK 69 million due to usual deduction for related tax, transactions costs and DD findings. Interest derivatives has positive change in value due to increased market rates affecting both unrealized values and deferred tax. Our well-diversified portfolio generates resilience in our top line. 30% of our rental income comes from public-related tenants, which creates a solid ground for passing on CPI. We have increased the share of offices in our portfolio due to disposals of retail and residential, which is in line with our long-term strategy. Like-for-like rental growth continues to be strong, mainly explained by indexation of 6.5%, but not to forget both CapEx and achieved rent reversions boost rental growth. We have worked very actively to successfully include CPI conditions in our rental agreements. 97% of all commercial lease agreements have indexation conditions, of which 94% have CPI indexation. 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 good position to manage upcoming adjustments. Net letting have been positive 19 of the last 21 quarters, with SEK 1 million in the last quarter. With the economic outlook improving and interest rates decreasing, I believe activity will pick up. The underlying market is very strong, and the need for the right premises in the right locations in Northern Sweden is significant. I will now hand over to Rolf, who will go into the portfolio and our financing. Rolf?

Thank you, Knut. I will begin by looking at the market value of our properties, which amounted to SEK 30.6 billion. Investments during the quarter amounted to SEK 240 million, and we have divested 6 properties with a book value of SEK 835 million. 85% of the property portfolio has been externally valued in Q1, which has resulted in a slightly positive unrealized value changes of SEK 6 million. And during the end of last year and the beginning of this year, we have seen an increase in investment activity. We also see that property yield and market values have stabilized, and our assessment is that yield adjustments have reached the peak. The average yield, as Knut said, was 6.3%, which is 2 basis points higher since the turn of the year. The change is mainly explained by the fact that we have sold low-yielding properties. And with an average yield of 6.1% and an average interest rate of 4.5%. We still have a yield gap of 1.6%, and thus, a continued strong cash flow. As I said earlier, we have invested SEK 240 million in tenant improvements, property improvements and new builds. And we currently have around 50,000 square meters under construction with a total investment volume of SEK 1.7 billion, we remaining investments amount to SEK 500 million. And all our ongoing major projects are proceeding according to plan, both in terms of cost and time. And this low risk in major projects where pre-let is a requirement and most of the rental income comes from tax finance operations and all our 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 disposal, and we target to develop 30,000 square meters of new building rights each year. If we look at the maturity profile, we can state that at the beginning of April, we have refinanced all loans maturing in Q2 with a maturity of 2 years and at margins at the same level as before. This means that in the next 12 months, we have additional loan maturities, commercial paper excluded of SEK 1.8 billion, which corresponds to 11% of interest-bearing liabilities. The loan maturities refer to both bank loans and bonds were SEK 1.1 billion are due at the end of Q4 and the remaining SEK 700 million in March next year. And we're actively working for a more prudent maturity profile with longer debt maturities. Bank financing is and will be our most important source of financing, and we currently have 74% of our outstanding loans with banks. The proportion of bank financing has decreased slightly since the turn of the year because we have increased the proportion of commercial paper and covered bonds through our partly owned financing company, SFF. Where we have issued a 3-year bond with a margin of 145 basis points. And during the last couple of months, we have seen a very active Swedish bond market with high volume and lower credit margins than what banks are offering. The average interest rate at the end of the period was 4.5%, which is the same level as the previous quarter. Our average cost of debt is now in line with the marginal cost of debt, meaning we have absorbed the increased interest rate, which will have a positive impact on our income from property management when rates start to decrease. During the last quarters, we have acted to secure IR at acceptable levels by signing new derivatives, and we are committed to keep ICR about 2x. Our hedging ratio now amounts to 84% due to 2 fixed rate bond issues and refinance of 2 bank loans with a fixed interest rate. We're therefore reviewing the possibility of reducing our interest hedging in a cost-effective way. We have disposed assets in the beginning of this year, and we have used the liquidity to reduce debt and thus lowering our financial costs and at the same time, improve our LTV and strengthen the balance sheet. Our loan-to-value rate was 53.9%, which is 0.5 percentage points lower than at the turn of the year. And as we said before, we're targeting an LTV of 50% over time. Our debt maturity now amounts to 2.5 years and the fixed rate maturity amounts to 2.8 years. We have 74% of our financing in banks, SEK 1.1 billion in unused credit facilities and a secured loan-to-value ratio of 44%. We will also add additional borrowing capacity during the year through completed projects. And this, together with good relationships with our banks makes us feel comfortable about future refinancing. We still have a conservative balance sheet approach, which reflects our commitment to financial prudence and risk mitigation. We have reduced our financial risk over time, lowering our LTV showing a stable net debt to EBITDA over time and prolonging our interest rate fix and debt maturity. We have improved our financial key figures through divestments and a more cautious strategy regarding new investments. This, together with available liquidity means that we now see opportunities for growth, which includes both start of new projects and acquisitions. And yet again, I feel comfortable with our current financial position and action taken. Our strong cash flow we serve operating expenses and committed CapEx. And as I said, we have positioned ourselves for future growth. I will now leave the word back to Knut.

Thank you, Rolf. Let's talk about the market. As I stated in the beginning, new major investments in Northern Sweden continue to be announced. Recently, the investment in Lulea, where SSB will invest EUR 4.5 billion in a new fossil-free steel production factory. I find it hard to oversee all this is happening, but one thing is for sure. These investments in the green transformation of Swedish natural resources industry will create growth for the cities, for the region and for Sweden. To be more specific, our market is witnessing 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. The fundamentals for all these investments are incredibly robust and enduring. In the northern part of Sweden, we are blessed with natural resources like minerals and forest and the primary goal is to transition into a net 0 environment. We have access to clean, green electricity through hydropower and wind power. We have 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. Sweden has recently joined NATO, a development that carries implications for investments in critical infrastructure and health care capacity. Several of our cities have a historical legacy of as military hubs connected to a strategic geographical positioning. As a result, we expect new investments aimed for transportation networks, including roads, railroads and airports. These investments will benefit the cities and further accelerate growth in Northern Sweden. Over the next 10 to 20 years, the region is projected to receive investments totaling of EUR 150 billion, excluding nature-related funding. Experts predict that this influx of capital will create approximately 100,000 new job opportunities. Additionally, there will be a demand for around 200,000 individuals to migrate into this region to support this economic expansion. All in all, this defines a thriving market. Keeping the expected population growth in mind, along with the investments being made in our market, we can analyze the developments over the past few years. The focus has largely been on inflation, geopolitical challenges, interest rates and a slowdown in economic growth resulting in an increased unemployment. However, in Northern Sweden, we are witnessing in a contrasting scenario. Economic activities demonstrating resilience and the 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 remains robust, and we are not seeing any increase in bankruptcies. We have now put ourselves in a better financial position. ICR is anchored above 2x and prorata LTV is now around 53%. We are still aiming towards 50%, and we will continue to dispose low-yield assets with low potentials. The transaction market is picking up and the number of potential counterparties is increasing. We have several ongoing discussions regarding disposals of all types of premises in most of our cities. With a more positive outlook and a better financial position, we are also looking into property swaps and acquisitions. We still see a demand for new builds, especially from government-related tenants. We are targeting higher return on investment today compared to 2, 3 years ago. I'm sure that we will announce some major projects during the year. However, I think there will be major refurbishments rather than newbuilds. 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 1.8%. We have increased our requirements regarding green assets to align with the latest levels, resulting in a somewhat lower share of green assets for the quarter. Our target is, however, intact despite higher requirements. We have 55% green assets by end of 2026. We have a very positive outlook on our market, and we will continue to invest for a more sustainable portfolio and accretive growth. To summarize what we have been going through. The overall sentiment has shifting during the last couple of months evidenced by a very active Swedish bond market with high volume and clearly lower credit margin and a higher activity in the transaction market. Among our tenants, we experience more optimism, and I believe the business activity will take off in Q2 or Q3 when we have seen the first rate cut which will drive domestic demand. The result for the first quarter is both strong and stable. We continue to see rental growth and the resilience of our tenants are robust. A surplus ratio of 65% for the first quarter is good. We have peak interest rate behind us, and we have acted to secure our financial KPIs. Refinancing of near-term redemptions are done at the same margin as previously. With average cost of debt in line with the marginal cost of debt, we are in a good position to grow income from property management per share. Office as a segment is our main business, and we will continue to increase our share of offices in the portfolio. The trend is clear. The office is key for a vibrant and growing city, especially in our 15-minute cities. Our markets continue to attract new companies and investments and now also NATO related investments in infrastructure, making a growth outlook even more promising. As the largest property owner in our market, we are in excellent position to capitalize on this growth. This takes us to the end of this presentation. Thank you all for listening. We are now ready for questions.

[Operator Instructions]. And our first question today is from the line of Markus Henriksson of ABG.

A few questions from me. First off, you highlighted that you expect major refurbishment projects to be announced in 2024? Are these properties already vacant? Or do you expect tenant terminations or tenant adaptations in 2024?

Since we have navigated the last years, short time, you can say that we have a very high tenant activity in our portfolio. And I would say that it's actually both vacant premises, but all in all, there's many of our existing kid tenants that want to have designed offices. We don't see that they shrink their demand for office space. We'd rather see that they want a higher quality. And that is, so to speak, they want flexible offices where you can as an employee work the whole day. Sometimes you want to sit in the project. Sometimes you want to sit on your own, some sometimes you want to sit in a landscape. So there's a lot of things going on, and we can see that the demand is taking off, so to speak, we have rather low activity half a year ago, but it's picking up now. So it's both actually existing tenants and vacant premises.

And just a follow-up. Do you then expect cash flow to be lost in 2024? And then I see that it's a long-term positive here, but will you then have terminations for this upcoming refurbishment projects? Or is there a negotiation that rents will be paid throughout? You mentioned that it's like a 50-50. It's both vacant and it's also current establishments with tenants, just trying to grasp the potential change in rental income here in 2024? Will we see a negative or we see a positive?

I'm a very optimistic person, and I'm sure that you will see a higher cash flow due to both lower vacancies rates. And we can see that the rent crowns per square meter is getting up. We have a lift from 2003 at 2004, about SEK 90 per square meter in average. So I'm sure you will see a higher cash flow in the near future and in the future.

Then my question on, you mentioned that you will continue to divest low-yielding assets. You have around 8% of your rental income is residentials and around 9% of property values. Do you expect to divest all of those properties during the next 1 or 2 years? Or will you keep some since, of course, you will have some because some are in other type of buildings, but your [ Pure Resin ] properties? Or do you expect to divest them already in the kind of in the near term?

I know that we are looking into divest low-yielding assets where we don't see that potential that we want to have. I'm also sure that we are looking into, and we will do our best to divest [ solitary reset ], and we are already looking into that. But of course, before we started this disposals, we had about 2,500 apartments in our portfolio. Now when we have divested about 30 properties, we have 2,100 apartments. So there's a majority in our so-called mixed-use properties. And it's essential for us to have these apartments still in our business to actually create vibrant cities that can live 24/7. So we will not divest or dispose all of our apartments because they are in mixed-use properties, and we think that's very important.

Then you highlighted the net LTV target to be around 50%. Do you expect to get there by continuing to divest. So that would be a leading clue to how much you want to divest? Or will it be a combination?

Rolf here. Well, it will not be a include, but we will, as it said, divest low-yielding properties and some of the liquidity to amortize debt for sure. So it's a combination on the cash flow we have in our business and the cash flow we get when we divest low-yielding assets.

Do you have any target on when you will reach 50% net LTV?

No, not a specific date. So no, but we're aiming for this for the end of this year or beginning of next year. That's the target but no specific date.

Last question on interest rates and refinancing. You highlighted that your margins come up somewhat. Could you help us out what is somewhat, is it 5 bps or 30 bps? Or what are we talking about? And how do the bank's reason overall incremental change versus 3 months ago or 6 months ago?

As we said in Q4, when we refine the loan maturities in the beginning of this year, SEK 4 billion. it was 20 to 30 basis points higher than before. And now we have refinanced the maturities in Q2. It's at the same margins as we had before. I think the discussions with banks, they are positive, and we see that margins are coming down somewhat when we compare to 3 or 6 months ago. So we have a positive outlook on margins. And as we said also in the presentation, we see that the capital market is coming to life, and we see better margins in secured bonds via SFF than in bank. So I think there's pressure on bank margins as well.

What do you think you would get if you would go out to the capital market today?

2-year unsecured just below 200 basis points.

Our next question today is from the line of Lars Norrby of SVB.

Thank you and follow-up questions on the balance sheet and transaction side. I seem to recall that in connection with the Q4 conference call, you mentioned that you had a pipeline of potential divestments of up to SEK 1 billion, then you sold some 200 million in Sundsvall. Maybe something more? Is it 800 more to go in that pipeline? Or what's the situation?

We really think that the transaction market is picking up. There are brokers and there are the companies that look us up and want to acquire properties from us. We are very picky in what properties we want to dispose. And you can say that, yes, it may be SEK 200 million, up to SEK 800 million in that pipeline. We are not into divesting to to clean the balance sheet. It's more like it's in our strategic portfolio for the future, for near future and a long future. So you can say that the main thing for us is to look into more high-yielding properties with a lot of potential. And we actually are very into divest or dispose low-yielding properties where we see very little potential or no potential. So that could be both refit or commercial. That's how we think.

And then a question on net letting, I think you mentioned that you've had positive net letting in 19 of the past 21 quarters, which, of course, is is impressive. At the same time, it's slowing down, roughly show a rolling 12 months line in that chart in the report. And in the first quarter now, yes, you had positive, but it's pretty close to 0. So in terms of annual net letting, what would you be happy with in 2024?

It's very easy to answer the question as high as possible. But I would say that a reasonable assumption would be that it's positive and it's more positive than plus 1, as you say, it's a very good question because this is something we talk a lot about. We know that the activity in our rental market or aspects is very high. I never seen so high rental activity. And that means that it's both negotiations about existing tenants that want to do something with a refurbishment or they want to have bigger premises or they want to shrink, that's both. But it's also the last 3, 2 to 3 months, the rental market has picked up and has improved. So I'm very optimistic that we will show net letting of that will be 2 figures in the end of 2024. I hope, and I'm pretty sure that we will see that. So I'm very optimistic.

Our next question today is from the line of Albin Sandberg of Kepler Cheuvreux.

Yes. So just 2 questions for me, a follow-up also on this discussion about your planning on the same growing while also maintaining your balance sheet. Should I read it that the overall target is to get down to 50% LTV before you, let's say, become a bit more aggressive or that is not really what you're saying.

No, I don't think that's really what we're saying. We see that we can grow our business -- we see business opportunities, and we will use the liquidity from divestments to both start new projects and even we're looking into some acquisitions with potential. But the 50% loan to value is very important for us. It will guide us what we can do with the investments and acquisitions, but we see a possibility to start looking into more acquisitions, but 50% LTV is important over time.

I think because you're saying that the transaction market appears to be picking up, so you can still be active, so to stay with an LTV of close to 54%.

Yes. That's right.

Good. And then I had the opportunity to ask Johan before. I understand that the actual tax was a little bit higher due to the clarity of the divestment and also the interest rate deductibility. Is it possible and who knows what's going to happen with interest rates. But if we compare, let's say, the 2023 actual paid tax rate with what's, let's say, normalized level for you the way it looks in Q1 and how much difference is there in terms of percentage of tax rate or incomplete management?

Yes. I would say there's a one-off in Q1 related to divestment of properties of SEK 4.5 million for the full year in the normalized in a normalized way, we could guide that tax would be around 8% to 10% of income from property management results.

[Operator Instructions]. Our next question today is from the line of Ventsi Iliev of Kempen.

So just one question from my side. As Lars just alluded to, towards 50% TV, you're starting to look more at acquisitions. But I guess there's 2 options. So one would be for you to dispose a bit more and reach the target? And the second one, of course, would be contribution in kind. Is that now a valid option given that the share price, at least compared to 6 months ago has rerated quite a bit.

I would say that we will always explore all options in the capital structure, but issue any shares at the discount is not on the agenda for now if the share price is at a more attractive level that could be the case. But as the AGM decided there is no dividend paid and we're also closing 2 major projects in near term, which will benefit or will contribute with additional cash flow. The cash flow in the operation will be stronger in the second part of this year and with no dividend paid, the available cash is higher this year than last year. So we would be in a better position to be more flexible on both acquisitions and major investments.

We have no further questions in the queue at this time. So I would like to leave the word to the company for any closing remarks.

Well, thank you all for joining this earnings call. We are now ready. We have no more calls in the web as well. So we wish you a happy Friday and a great weekend, wherever you are. Thank you very much. Bye-bye.

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