Earnings Call: Q3 2021

Oct 22, 2021

Hello and welcome to the D. S. Fast Together 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 am pleased to present Nat Rost, CEO and Rolf Larsson, CFO. Please go ahead with your meeting. Good morning, and welcome to this web presentation of the OEOS results for the period January, September 2021. My name is Nusos. I'm the CEO of DIRS, and I'm here today with our CFO, Ron Flarsha. 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, I will create more shareholder value and give you a market outlook. If you have any questions, There will be a Q and 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 Q3, which is shown in both the high net net netting figures and the strong value changes. We are in a post pandemic state with tenants showing great belief in the future and are ready to develop and do business. Which is really strong. This comes from, for example, our new hotel in Zunfoal and the letting to Ite in Centraliavelli, once upon in Schalepcio and to NCC in Atsushond 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 SEK242 1,000,000. 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 betting is strong. We have many active dialogues within transactions. We have sold building rights, and 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 target initiative, and 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 and 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 value up. We have finalized our first major project, the hotel in Zundshall during the quarter. I'm very, very pleased how we have managed the project and looking forward towards the coming years where we will finalize 3 major projects. I will now hand over to Rolf, who will present the results in more detail. Thank you. And as Knut said, our results for the Q3 was strong with a very strong Net letting figure of SEK 21,000,000. The operating surplus amounted to SEK 325,000,000, which is slightly lower compared to last year due to nonrecurring cost increases and slightly higher costs for heating. For example, we have increased insurance costs as a result of the floods that hit Jebel in August. The surplus ratio for both the quarter and the period was 68%. We have reduced our financial costs compared to last year, even though interest bearing liabilities have increased. Debt financing terms and the largest share of capital market financing have had a positive effect. Property revaluations amounted to $242,000,000 for the quarter, which represent 1% of the market value. And profit after tax amounted to SEK402,000,000, 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 finance, accounts 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 residential. This means that we have 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 26,600,000,000, An increase of SEK 2,100,000,000 since the turn of the year. Approximately SEK 1,100,000,000 is due to acquisitions, Divestment and investments. And just over $900,000,000 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. And 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 the industrial properties. These transactions have been carried out on a much lower yield levels than before, which also affects the value of our existing properties. On a yearly basis, we're currently investing just over SEK 1 200,000,000 in tenant improvements, property improvements and new builds. All our ongoing projects are proceeding according to plan. And before we start our projects, except for residential, we always have 100% signed leases. We currently have around 100,000 square meters under construction with an investment volume of 2,300,000,000 And the positive cash flow effect will mainly come over the next 2 years. In addition, we have more than 200,000 square meters in existing or possible building rights in central location, just over 60% refers to residential. And here are some examples of our major ongoing projects with an investment volume of SEK 1,800,000,000 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 Sonsool with a total investment volume of SEK 442,000,000. The property is fully let with no deep choice at the tenant. The grand opening was on September 1, and they have signed a 15 year lease with a minimum rent of $21,000,000 per year. The property is certified according to Brien S. Here, very good. And according to the tenant, bookings for both conferences and So EBITDA is stable between 11 times 12 times. The ratio has increased slightly over the past years because of increased investments in newbuilds 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 4,200,000,000 commercial papers excluded. In the beginning of June, we launched our new MTN program with a limit of SEK 3,500,000,000 And we have seen the issued green bonds corresponding to SEK 1,200,000,000. And with the current market conditions, we plan to increase our capital Overall, we have a strong financial position. In addition to existing loans, we have liquid funds and utilized overdraft facilities And our new credit facilities available corresponding to SEK 1,200,000,000. As you can see, our fee ratios are improving. Return on equity amounted to 19.1%. ICR remained strong at 6.6x and EPRA annual week increased by 17% to $88,300,000 per share. The growth in income from property management per share amounted to 4.9 That was all for me. I will now leave the word back to Knut. Thank you, Rolf. 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 ten 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 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 €100,000,000,000 is expected to be invested into battery factories, fossil free steel production and development and production of nonfossil 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 cost free. And I'm sure that we are in the beginning of a wave of new establishment. The rental market is showing great strength, which is demonstrated by a strong net letting figure of SEK 29,000,000 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 the certain block or district. The office should have high standards, areas for creativity and innovation and also functioning technical facilities and meeting room. We are the market leader in these kind of premises, and our offering and knowledge is exactly what these businesses request. That, together with increased flows of people, lead to a higher rental level. An example is a centrally located property, Joksen, in Silefjord. Silefjord is establishing that we have developed to be an attractive location for cluster of the biggest technical consultant companies, a bank and a fast growing company in the digital 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 Bremen in use. Good. Our market is seeing increased competition from other real estate companies. Increased competition of the transaction market is shown in lower property deals and higher pace in closing deals. The interest has been primarily for residential and residential building rights, Office and community service properties. But we are now seeing increased interest for retail properties. We take that as a sign that the market has turned upwards. We have sold residential building Right, in central terms, are divided into 2 separate deals, which changed our position in Q4 2021. The commercial rational for us selling these properties is multiple. The area was over 30,000 square meters and would require over $1,000,000,000 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. Also, a lot of residential contractions are going on in SunTrust at the moment. So we saw an increased risk in these projects, 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 an unique position in strong growing market with great business potential, where we see a healthy business climate again. We act on the current and current sustainable demand with our attractive tenant offers 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 The first question comes from Albin Sand Berg from Kepler Cheuvreux. Please go ahead. Yes. Hi, all. I had three questions. First, I just wanted to understand the quarterly impact from this. I understood it was an insurance claim from Jardle And potential remaining risk heading into Q4, if you could maybe give some numbers or just Some more color on that, please. Yes. Hi, Alvin Walsh. Total amount For Q3, it was between €5,000,000 6,000,000 and we don't know what the insurance will cover yet, so it's too early to say. And going into Q4, maybe $1,000,000 or $2,000,000 more and that's all that we see today. Yes, that's great. And then 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, let's say, a threat to your Future development or that you have to accept lower yields? Hello, Alwyn Knut here. I actually don't understand the question. I understand your English, but don't think that's the question. Now if Cost for construction go up as the inflation goes up. How do you handle that and how do you tackle that and can you push that extra costs on to 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 the committees and material to our new construction and new build Then I am for the inflation. Inflation, I think, the inflation are here today. But on the regard of control levels, about 2%, 3% per year, maybe that's an assumption. But I'm really concerned about the material, the lack of material and the cost for it. So We often in our lease contract, we have a sort of floating Rent, so to speak, that follows the construction costs. So 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 their rent. So that's how we handle it. And 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 from In what city and market you are actually working in at the moment. But let's say it's like this. In some cities, for instance, in Sonzval, there's a lot of activity going on and a lot of new constructions. In Tunstall, we have to work in partnership with the contractors, So we can go forward and that's the only way. In other cities like Kialujo, we still have Competition about the construction work. So it differs a little from city to city, but I think The partnering thing is going to be more actually. I think so. Okay, great. And then my final question on your investment side and 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 or yes, just a little bit more flavor on that please? Let's say that we have growth in 3 different parts of the company. One is of course the project and the big projects are now giving a result. For instance, the hotel in Zunval, It's finalized and the tenant is Very satisfied with that product. We have also some new builds in UEMEO for instance that are finalized and will get We'll get rent from them and that's the most important thing. And we are glad to say that The yield for those projects are in line with our budget, so that's very nice. So we still Let's say during the pandemic it was less Investment concerning the CapEx when we talk with our tenants, But now that has increased again. So we have a lot of questions And offering for our tenants that want to rent more, they want more designed premises and so forth. So 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. So it looks good and the yield from those projects is approximately the same as they were before We are very hopeful, so to speak. And moreover, of Of course, we talk about this activity. We have the value changes, the unrealized value changes that are Close to SEK 1,000,000,000. So we are very happy to see that. We are we're not the only ones that 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. And then since Pinochet 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 billing rights, we have done this. We have finalized Selling of the building rights in Sonzal in 2 different companies. And we have approximately around 200,000 square meters of building right now. And I think we very, 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 for 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. And there is a couple of questions from the written question here. The first one, can you please give the figures of the non return cost on the flooding in Gavle? And how this has impacted and how insurance will be paid. I think we touched upon that. I don't know if you also have Something additional to say on that? No, I think I gave the answer to Alban about The cost and also what we expect from the insurance company. And the final question with regard to financing and refinancing, would you choose to extend the duration beyond the Current average duration? Yes. As I said before, we have, except the certificate of commercial papers, SEK 3,300,000,000 to renegotiate in the coming 12 months. And our goal is to Long the duration when we refinance this Well, we don't have any more questions. So we say Thank you very much for listening to us and giving us some questions. And hope you have a nice weekend. And thank you very much.