Earnings Call: Q3 2021

Oct 22, 2021

Hello, and welcome to the Diös Fastigheter interim report January-September 2021. Throughout the call, all participants will be in listen-only mode, and afterwards there will be a question and answer session. Today, I'm pleased to present Knut Rost, CEO, and Rolf Larsson, CFO. Please go ahead with your meeting. Good morning, and welcome to this web presentation of Diös results for the period January-September 2021. My name is Knut Rost, I'm the CEO of Diös, and I'm here today with our CFO, Rolf Larsson. In today's presentation, I will give you some of the key highlights and major events of the quarter. Rolf will then dive into more details, and I will finish by talking about how we focus on our market, how we will create more shareholder value, and give you a market outlook. If you have any questions, there will be an Q&A session at the end of this presentation. Listen for instructions how to ask questions. If you are listening on replay, you can always reach out to us with your questions. Contact details will be shown at the last slide and on our website. High activity is a good summary of the 3rd quarter, which is shown in both the high net letting figures and the strong value changes. We are in a post-pandemic phase with tenants showing great belief in the future and are ready to develop and do business. The net letting for the quarter summed to SEK 29 million, which is really strong. This comes from, for example, our new hotel in Sundsvall and the letting to ICA in central Gävle, Once Upon in Skellefteå, and to NCC in Östersund, to give you some examples. Our surplus ratio was 68%, which is strong. Rolf will do a breakdown on both the income and the cost later on. Unrealized value changes for the property portfolio summarized to SEK 242 million. Both our own activities in form of new lettings and projects as well as a strong underlying market have impacted the values positively. We have positive value changes in all segments on all our markets. The high activity is consistent for the whole company. The net letting is strong. We have many active dialogues within transactions. We have sold building rights. We are investing our cash flow in both larger and smaller projects at a high pace and with good return. We have our climate goals approved by Science Based Targets initiative. We are putting a lot of effort in mapping our climate impact so we can put our resources where it gives the most effect. We see a transaction market with very high activity. More players are showing interest for our cities. Deals are closing at higher pace. We have deals with residential properties going through under 4%, and there was an industrial and office portfolio closing at around 5% in our market. These deals have affected the yields on the market, pushing our property values up. We have finalized our first major project, the hotel in Sundsvall, during the quarter. I'm very pleased how we have managed the project and looking forward towards the coming year where we will finalize three major projects. I will now hand over to Rolf, who will present the results in more detail. Rolf? Thank you. As Knut said, our results for the 3rd quarter was strong with a very strong net letting figure of SEK 21 million. The operating surplus amounted to SEK 325 million, which is slightly lower compared to last year due to non-recurring cost increases and slightly higher costs for heating. For example, we have increased insurance costs as a result of the floods that hit Gävle in August. The surplus rates for both the quarter and the period was 68%. We have reduced our financial cost compared to last year, even though interest-bearing liabilities have increased. Better financing terms and a larger share of capital market financing have had a positive effect. Property revaluations amounted to SEK 242 million for the quarter, which represent 1% of the market value. Profit after tax amounted to SEK 402 million, which is an increase of 75% compared to last year. Our property portfolio is well-diversified in terms of both segment and geography. We have a clear concentration of our properties towards the city center in cities with good growth and the right characteristics. We have a low tenant concentration risk. Our 10 largest tenants, of which 7 are tax-financed, account for 16% of our total rental income, with an average lease term of 6.1 years. 31% of our total rental income comes from tax finance operations and 8% from the residentials. This means that we have a low risk in our cash flow, and the average lease term for all commercial premises amounted to 4 years. The market value of our properties amounted to SEK 26.6 billion, an increase of SEK 2.1 billion since the turn of the year. Approximately SEK 1.1 billion is due to acquisitions, divestments, and investments, and just over SEK 900 million is a result of property revaluations. The value was positively affected by lettings and investments in primarily offices and a very active and strong market with lower yield as a result. Building rights has also had a positive effect on the property value. As Knut said earlier, the interest in investing in our cities is increasing. During the past year, we have seen several completed transactions regarding offices, housing, community service properties, and industrial properties. These transactions have been carried out on a much lower yield level than before, which also affects the value of our existing properties. On a yearly basis, we're 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. Before we start our projects, except for residentials, we always have 100% signed leases. We currently have around 100,000 sq m under construction with an investment volume of SEK 2.3 billion. The positive cash flow effect will mainly come over the next two years. In addition, we have more than 200,000 sq m in existing or possible building rights in central locations. Just over 60% refers to residential. Here are some examples of our major ongoing projects with an investment volume of SEK 1.8 billion in total. All rental income from these projects comes from tax finance operations. Most of these projects will be completed next year and thus will have a positive effect on net operating income. As Knut mentioned earlier, we have completed the hotel project in Sundsvall with a total investment volume of SEK 442 million. The property is fully let with Nordic Choice as the tenant. The grand opening was on September 1st, and they have signed a 15-year lease with a minimum rent of SEK 21 million per year. The property is certified according to BREEAM-SE Very Good. According to the tenant, the bookings for both conferences and accommodation have exceeded their expectations. As you can see, our net debt to EBITDA is stable between 11 and 12 times. The ratio has increased slightly over the past years because of increased investments in new builds with negative cash flow during construction. Our loan-to-value rate at the end of the period was 52.7%, which is far below our covenant levels. The average interest rate at the end of the period was 1.1%, which is lower compared with the turn of the year, thanks to better financing terms and a larger share of capital market financing. During the next 12 months, we will refinance 29% of our outstanding loans, corresponding to SEK 4.2 billion, commercial papers excluded. In the beginning of June, we launched our new MTN program with a limit of SEK 3.5 billion. We have since issued green bonds corresponding to SEK 1.2 billion. With the current market conditions, we plan to increase our capital market financing further. Overall, we have a strong financial position. In addition to existing loans, we have liquid funds and utilized overdraft facilities and unutilized credit facilities available corresponding to SEK 1.2 billion. As you can see, our key ratios are improving. Return on equity amounted to 19.1%. ICR remains strong at 6.6 times. EPRA NRV increased by 17% to SEK 8.3 per share. The growth in income from property management per share amounted to 4.9%. That was all from me. I will now leave the word back to Knut. Thank you, Rolf Larsson. I will now cover some points about our strong market, how we should utilize the opportunity arising, and a brief market outlook. As I mentioned in the beginning of this presentation, we are experiencing a strong market in our 10 cities. Both the rental market, the demand for new projects and investments, and the transactions market are really picking up pace after the summer. I would state we are in a post-pandemic situation where all restrictions are released and people are finding their way back to their offices and to the city centers. This increases the turnover and revenues for all actors in the cities and gives great hope for the future. What we are seeing in the north part of Sweden is the market-driven era of green industrial investment into our region, driven by increased demand of sustainable alternatives. Approximately EUR 100 billion is expected to be invested into battery factories, fossil-free steel production and development, and production of non-fossil energy. We will definitely benefit from all the surrounding effects these investments will bring. We are already seeing clusters of technical consulting companies establishing and increasing their presence in our cities. You might call it an industrial service sector that is prospering, and I'm sure that we are in the beginning of a wave of new establishments. The rental market is showing great strength, which is demonstrated by a strong net letting figure of SEK 29 million for the quarter. An obvious trend within office tenants is that the importance of the right location is increasing even more. The right address, surrounded by other growing companies and urban services such as restaurants, cafes, shops, and even residential, grow the attraction of a certain block or district. The office should have high-standard areas for creativity and innovation and also functioning technical facilities and meeting rooms. We are the market leader in these kind of premises. Our offering and knowledge is exactly what these businesses request. That, together with increased flows of people, lead to higher rental levels. An example is a centrally located property, Jokeln, in Skellefteå. Skellefteå is the city where Northvolt is establishing, that we have developed to be an attractive location for a cluster of the biggest technical consultant companies, a bank, and a fast-growing company in the digital world. We have grown the rental level by 75% and the property value by 40%. In connection with the development, we have certified the property in BREEAM In-Use, Good. Our market is seeing increased competition from other real estate companies. The increased competition of the transaction market is shown in lower property yields and higher pace in closing deals. The interest has been primarily for residentials and residential building rights, office, and community service properties. We are now seeing increased interest for retail property. We take that as a sign that the market has turned upwards. We have sold a residential building right in central Sundsvall, divided into two separate deals, with change of possession in Q4 2021. The commercial rationale for us selling this property is multiple. The area was over 30,000 sq m and would require over SEK 1 billion in CapEx and would have taken us a couple of years to start. We have other projects in line that we want to develop ourselves, and therefore, it is better another developer can start construction immediately. A lot of residential constructions are going on in Sundsvall at the moment. We saw an increased risk in this project, both for letting or selling the apartments and for the cost of construction. It is also a good objective that more companies are investing in our cities where we can grow the cities together. That will benefit us all in the end. Going forward, we have an active dialogue with several counterparties for potential transactions, both buying and selling. We can grow in all our cities with focus on offices and residential. If an opportunity arise, we can divest some retail assets. All our ongoing projects proceed according to plan. Our newly opened hotel, as we showed earlier in this presentation, is a milestone for us. We succeeded in finalizing the project with expected return and on time. Our project team has proven themselves for coming projects. We are also looking at new construction projects for both commercial premises and residential on our current building rights, which we intend to make official in the near future. To conclude this presentation, we have a unique position in a strong growing market with great business potential, where we see a healthy business climate again. We act on the current and coming sustainable demands with our attractive tenant offer and our competent and driven employees, which lead to appealing green financing solutions. I can assure you that we will continue to increase our profitability and thereby create additional value for our shareholders. This takes us to the end of this presentation. Thank you for listening. We are now ready for questions. Thank you. Ladies and gentlemen, if you do wish to ask a question, please press 01 on your telephone keypad. If you wish to withdraw your question, you may do so by pressing 02 to cancel. The first question comes from Albin Sandberg from Kepler Cheuvreux. Please go ahead. Yes. Hi, all. I have three questions. First, I just want to understand the quarterly impact from this, I understood it was an insurance claim from Gävle and potential remaining risk heading into Q4. If you could maybe give some numbers or just some more color on that, please. Yeah. Hi, Albin. Rolf Larsson here. Total amount for Q3 was between SEK 5 million and SEK 6 million, and we don't know what the insurance will cover yet, so it's too early to say. Going into Q4, maybe SEK 1 million or SEK 2 million more, and that's all that we see today. Yeah. That's great. Now with you being more active on property development side, and I can imagine using subcontractors and so forth, the discussion about cost inflation in general, what you're seeing, your way to tackle it, and do you think that's a threat to your future development or that you have to accept lower yields? Hello, Albin Knut here. I actually don't understand the question. I understand your English but not your question. Now, if the cost for construction go up. as the inflation goes up, how do you handle that and how do you tackle that? Can you push that extra cost onto your future tenants, or how do you see that develop? Okay. Now, thank you. Let's say it like this. I'm more concerned of the lack of commodities and material to our new construction and new build than I am for the inflation. Inflation, I think the inflation are here to stay, but on a rather controlled level, about 2%, 3% per year, maybe. That's an assumption. I'm really concerned about the material, the lack of material and the cost for it. We often in our lease contracts, we have a sort of floating rent, so to speak, that follows the construction cost. That's how we handle it. If it gets cheaper, the rent go down a little, and if it gets more expensive, it gets more expensive concerning the rent. That's how we handle it. On your sub-supplier, do you have any problems there in your supply chain as of yet? Are they turning your offers down or you have committed agreements with all of them? I think that differs in what city and market you are actually working in at the moment. Let's say it like this. In some cities, for instance, in Sundsvall, there is a lot of activity going on and a lot of new constructions. In Sundsvall, we have to work in partnership with the contractors so we can go forward, and that's probably the only way. In other cities like Luleå or Östersund, we still have a competition about the construction work. It differs a little from city to city, but I think the partner thing is going to be more actually. I think so. Okay. Great. My final question on your investment side and maybe specifically on the tenant adaptations CapEx. Can you just walk us through a little bit how convinced you are that you're actually getting return on that investment and a little bit on the timing of those investments? Are they seen immediately or are they pushed into a new rental contract? Just a little bit more flavor on that, please. Let's say that we have growth in 3 different parts of the company. 1 is of course the project and the big projects are now giving results. For instance, the hotel in Sundsvall it's finalized and the tenant is very satisfied with that product. We have also some new build in Umeå, for instance, that are finalized and we'll get rent from them and that's the most important thing. We are glad to say that the yield for those projects are in line with our budget, so that's very nice. Let's say during the pandemic, it was less investment concerning the CapEx when we talked with our tenants, but now that has increased again. We have a lot of questions and offerings for our tenants that want to rent more. They want more designed premises and so forth. The near future looks very prosperous because this area and this market we're working in is very. It's a lot of high activity all around us, and we will not build any industrial premises, but everything else we do. It looks good, and the yield from those projects is approximately the same as they were before the pandemic. We are very hopeful, so to speak. Moreover, of course, when we talk about this activity, we have seen the unrealized value changes that are close to SEK 1 billion. We are very happy to see that we are not the only ones that are driving the market. It's a lot of competitors now, and of course, the sort of green revolution that we see in the northern part of Sweden is very helpful for us. Okay. Thank you for that. Since you said you were going to announce to the market a little bit more detail on your building rights, as far as I understood you, is that before Q4 or is it in connection with that? Talking about our building rights, we have finalized the selling of building rights in Sundsvall to two different companies, and we have approximately around 200,000 sq m of building rights now. I think very soon in Q4 we will announce what we are going to do with some of them. Yes. Great. Thank you very much. That was all from me. Thank you. Thank you. Ladies and gentlemen, there are no further questions over the phone. I now give back the floor to the speakers for the webcast questions. Yes, there's a couple of questions from the written questions here. The first one, can you please give the figures for the non-recurring cost on the flooding in Gävle, and how this has impacted, and how insurance will be paid? I think we touched upon that. I don't know if you all have something additional to say on that. No, I think I gave the answer to Albin about the cost and also what we expect from the insurance company. The final question with regard to financing and refinancing, would you choose to extend the duration beyond the current average duration? Yeah, as I said before, we have accepted certificates of commercial papers SEK 3.3 billion to renegotiate in the coming 12 months. Our goal is still to prolong the duration when we refinance this debt. Well, we don't have any more questions. We say thank you very much for listening to us and giving us some questions. Hope you have a nice weekend. Thank you very much. See you soon. Bye-bye.