Hello everyone, and welcome to the Diös Interim Reports January to June 2022 conference call. My name is Victoria, and I will be coordinating your call today. If you would like to ask a question during the presentation, please press star one on your telephone keypad. To withdraw your question, please press star two. I'll now pass over to your host, Knut Rost, CEO, to begin. Please go ahead.
Good morning, and warm welcome to this presentation of Diös results for the second quarter 2022. My name is Knut Rost. I'm the CEO of Diös, and together with our CFO, Rolf Larsson, we will present the results of the quarter which is very strong. I will start by going through major events and highlights of the quarter, then Rolf will dig into the results and key figures.
I will finish by giving you an outlook of the future. If you have any questions, there will be a Q&A session after the presentation. Listen for the instruction on 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.
The results of the second quarter of 2022 is very strong, and we continue our solid performance from the first quarter. Vacancies are down, like-for-like income growth is up, and we have added 14 more properties in our portfolio. The net letting for the second quarter totals to SEK 17 million, and for the first six months to SEK 39 million.
We have managed to let out several larger vacancies in Falun and Umeå that will increase the occupancy rates. The new letting to Länsförsäkringar in Glädjen Fyra in Sundsvall is an excellent example of converting retail space into high-quality office space. We continue to sign green leases, and 9% of our yearly contract value now have green lease contracts. Two, our surplus ratio was 71% for the second quarter.
Last year in Q2, we had a major one-off compensation of an early termination affecting the comparison. The unrealized value changes in the property portfolio for the second quarter was SEK 106 million. This is an effect of higher cash flow and lower vacancies. Rolf will dig into property values later in this presentation.
The horrible events going on in Ukraine are a humanitarian catastrophe and have been followed by obvious changes within Europe and on a global perspective. Central banks have started to increase interest rates to fight inflation, and the bond market has been dysfunctional since mid-April, making business decisions very difficult.
We are, however, in a solid financial position with strong and stable cash flow that makes us confident in our business. We have continued to do transactions during the second quarter and taken earlier communicated acquisitions into possession.
We have also started 2 new major projects. First, we acquired 12 properties in Falun and Borlänge in early April that we communicated in the previous quarter. These properties are lifting the rental value by SEK 40 million. We have also taken possession of 3 properties in Skellefteå, mainly residential.
In March, we communicated a divestment of 6 retail properties. This transaction has been pulled back, and we will continue to own these properties. During the quarter, we have announced 2 new acquisitions, one in Skellefteå and one in Gävle. Total amount for both transactions is SEK 200 million with a yield above 6%.
We have started 2 new projects for government-related entities, and we are building new offices for Försäkringskassan, that's Swedish Social Insurance Agency in English, in Luleå and new university for Högskolan Dalarna in Borlänge.
Moreover, two new major green lease contracts have been signed during the quarter. First, to the Swedish Social Insurance Agency in the property Välle 17 in Umeå. Second, to Länsförsäkringar Västernorrland in the property Glädjen Fyra in Sundsvall. Both Välle 17 and Glädjen will be converted and developed to modern and flexible offices. I will now hand over to Rolf, who will present the results in more detail. Rolf.
Thank you. As Knut said, the second quarter was very strong. We have improved our occupancy ratio by 3 percentage points to 91%. Like-for-like rental growth was up 5.8% due to indexation, renegotiations, and new lettings. The operating surplus increased by 8% compared to last year and amounted to SEK 380 million, corresponding to surplus ratio of 71%.
We have somewhat higher financial costs due to increased interest-bearing liabilities and higher Stibor. The high average paid interest rate for the quarter was 1.2%. Income from property management increased by 8% compared to last year.
As Knut said, property revaluation amounted to SEK 106 million, which represents 0.3% of the market value, and revaluations of our derivatives amounted to SEK 27 million. Profit after tax was SEK 356 million for the quarter, which is lower than in the previous year due to lower unrealized changes in value.
As you can see, our property portfolio is well-diversified in terms of both segment and geography. 29% of our rental income comes from tax finance operations and 9% from residential, which means that we have low risk in our cash flow. We have a low tenant concentration risk. Our 10 largest tenants, of which seven are tax finance, account for 15% of our total rental income with an average lease term of 6.2 years.
The average lease term for all commercial premises amounted to 4.1 years. The market value of our properties amounted to SEK 31 billion, an increase of SEK 3 billion since the turn of the year. Approximately SEK 2.3 billion is due to acquisitions, divestments, and investments, and the rest is a result of property revaluations.
The value was positively affected by higher market rents and higher operating surplus. The average yield was 5.41%, which is 3 basis points lower compared with the turn of the year. The lower yield is explained by reduced vacancies and through changes in the property portfolio due to acquisitions. We have an average interest rate at the end of the period of 1.8%, which means a yield gap of 3.4% and thus a continued strong cash flow.
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, and before we start the projects, except residentials, we always have 100% signed leases.
We currently have around 100,000 square meters under construction with an investment volume of SEK 2.9 billion. In addition, we have another 200,000 square meters in existing or possible building rights in central locations.
Here are some examples of our major ongoing projects within the investment volume of SEK 2.5 billion in total. Most of the rental income in these projects comes from tax-financed operation. All projects will be certified according to BREEAM SE Very Good or Excellent.
Three of the projects will be completed this year and will thus have a positive effect on our operating surplus. We currently have 73% of our outstanding loans with Nordic banks and 7% in covered bonds. The remaining 20% consists of unsecured bonds and commercial papers. Today, we have 18% green financing, where commercial papers and bonds account for the majority.
We're actively working to increase the proportion of green assets, and our goal is to have at least 55% green assets by 2026. As you can see, our net debt to EBITDA is stable between 11-12 times. During Q1 and Q2, we have refinanced most of our bank loans maturing in 2022. Margins have been at the same levels as before COVID.
Over the next 12 months, we have additional loan maturities, commercial papers excluded, of SEK 2.6 billion, which corresponds to 17% of the interest-bearing liabilities. Most of these maturities relate to bank loans. Our loan-to-value ratio was 50.4%, which is far below our covenant levels. The average interest rate at the end of the period was 1.8%, which is 63 basis points higher compared with the turn of the year.
Eight basis points are explained by the fact that we have replaced SEK 1.3 billion in commercial papers with bank financing, and the rest is due to increased Stibor. We see higher funding costs primarily driven by increased Stibor. Thanks to our strong cash flow on LTV around 50% and an interest coverage ratio well above 6 times, we continue to choose a short interest rate fixing.
We are currently more focused on extending our average loan maturity. Overall, we have a strong financial position. In addition to existing loans, we have liquid funds, unutilized overdraft facilities, and unutilized credit facilities available corresponding to SEK 1.3 billion. As you can see, most of our key ratios are improving.
Return on equity amounted to 22.1%. ICR remains strong at 6.9 times. The growth in income from property management per share amounted to 4.5%. The EPRA NRV increased by 20% to 102.2 per share. That was all from me. I will now leave the word back to Knut.
Thank you, Rolf. The net letting figure for the second quarter is strong. This is a result of a very active property management with high local knowledge and ambitions. This is also a proof of a very strong market where we see no sign of the market slowing down. I continue to state there is a green revolution going on in our market.
Over SEK 1,000 billion is expected to be invested in our region into battery factories, fossil-free steel production and development, and production of non-fossil energy. Last week, we got two exciting announcements strengthening the investment outlook.
First, Sundsvall Energi begins a collaboration with the company Liquid Wind, and will build a production plant for the green electric fuel e-methanol. Liquid Wind's technology produces climate-neutral marine fuel.
It's an investment of about SEK 6 billion, and the factory will be finalized about year-end 2025. This new factory has the magnitude to be the largest industrial investment made in Sundsvall ever. Secondly, H2 Green Steel got approval to start their production in Boden, which is located 30 minutes outside Luleå. It will be the first steelwork to be built in Europe in 50 years, and it will double the Swedish steel production.
We can state that our market has a great outlook. Businesses are transferring to more sustainable business models, and many exciting things are happening, as I just gave example of. Together with the favorable climate and access to land, many industries are choosing Northern Sweden to be the key area for the future green production. I am convinced that we are just in the beginning of this development.
We have been very active on the transaction market the last nine months, where we have closed acquisitions of approximately SEK 2 billion. All these transactions have been off-market transactions at attractive yields with a lot of potential in both rental renegotiations and in building rights. We communicated the divestment of six properties in March. The transaction was conditional on a financing reservation that was not fulfilled, why we continue to own and manage these properties.
We are also always looking for business opportunities. In the current market sentiment, we need to be humble and responsible of balancing risk and opportunities. I am convinced that properties with the right location in a growing market with high standard will have a solid performance. We have started two new large projects during the quarter.
In Borlänge, we developed an existing building into a modern university for Högskolan Dalarna in the city center. At Västra Kvarteret in Luleå, we developed a new building for Försäkringskassan, as you can see on the slide. These projects have total CapEx of SEK 700 million and will be completed in mid-2024. They are both fully let to government-related tenants.
We are using known and stable entrepreneurs and have secured a return in the projects by an incentive for the contractor and the tenant. In Umeå, we developed the property Välle 17. It will be partly a development for existing building, for commercial tenants and partly a new build that will be residential. A green lease contract has been signed with the Swedish Social Insurance Agency. Completion is estimated to Q1 2025.
In the third and fourth quarter of 2022, we will finalize two major projects, the development for Trafikverket, the Swedish Transport Administration in Borlänge, and a new hotel for Nordic Choice Hotels in Umeå. These had a total CapEx of SEK 1 billion and gives a yield on cost of approximately 5%. Our ongoing projects are proceeding according to plan. We do not experience any delays or complications.
Let's talk about the outlook and the future. We are presenting a very strong second quarter and half-year result, which is a sign of our high activity and strong underlying market, as you can see on page 16. Net letting is very strong with many new leases and higher rental levels. We have many ongoing dialogues, which bodes well for coming quarters.
We have, however, a new situation with higher interest rates, high inflation, lower share price, and a dysfunctional capital market to navigate in. We live close to those challenges and continue to run the company efficient and act on good business opportunities. We have experienced higher inflation figures for some time now, and we are seeing a higher cost pressure.
We are getting offers on new builds and major developments now 10% higher compared to 9 months ago. Within the ongoing businesses, the effects are relatively small as of today. We are following the development closely and have an active dialogue with suppliers and tenants. We have 97% towards inflation in our lease agreements. We have 94% of commercial rental agreements are inflation-based and 3% with fixed adjustments.
Worth noticing is that there is a time lag, the CPI adjustment on the lease agreements. Since last interim report, the Riksbank has increased rates by a total 75 basis points, and more is expected to come. We have a fairly short maturity profile on our liability side and short interest rate findings, and we'll see higher interest rate costs going forward.
We have a good financing situation with relatively low LTV and strong ICR, together with one of the highest yield gap in the business and a very strong cash flow. Add to that good relationship with banks, diversified funding sources, and a good liquidity position. I'm convinced we will stand strong and be able to make business opportunities as they arise. The business activity in our market continues to be very high, and we see clearly a higher activity in new lettings.
The 50-minute city, the access to clean green energy, and accessible land are some key factors for people and business to invest in our region. The new investment in Sundsvall I told you about is one of the great example of good things that are happening. In the end, to conclude this presentation, our business model is based on creating long-term value for our tenants and our shareholders.
We invest for a sustainable future and for our city's long-term growth. We have a very stable financial position, very good relations with our banks, and the majority of our loans in banks and stable and long-term shareholders. That gives great confidence in uncertain times. I am convinced we are in the right market with the right attractive tenant offerings to be able to successfully navigate through the new challenges and continue to create shareholder value. This takes us to the end of this presentation. Thank you for listening. We are now ready for questions.
Thank you. We will now start our Q&A session. If you'd like to ask a question, please press star one on your telephone keypad. If you'd like to withdraw your question, please press star two. When preparing to ask a question, please ensure that your line is unmuted locally. Our first question comes from Niklas Wetterling at DNB. Please go ahead.
Thank you. Your asset values were roughly flat in Q2. While I noticed you have updated the rent indexation forecast, where you've gone from 2% flat to 5% in 2022 and 2.5 next year. I just wonder how come that hasn't come through in the asset valuations. Has something else offset this positive effect?
No, I don't think so. We have a good cash flow generation, and then we had the quite high inflation assumptions even in the first quarter. It's nothing major happening that's has affected the valuation of our properties.
Okay. Because in Q1 it said that you assumed 2% flat.
Yeah.
That's not correct then.
Yeah. The 5% for the rest of this year will have little impact on the long-term value.
Okay. Yeah. That was my question. Thank you.
Thank you. Yeah, you also have an effect on the discount rate, if you call it, with the higher inflation assumption. The inflation assumption will have less or a little effect on the property's valuation because it is both the rent and the cash calculation rent at the end of the period.
Okay. I'm not really following you there, but if you increase the rent indexation assumption, shouldn't asset values go up?
It also. When you look at the cash flow at the end of the period, you have a calculation rent that also will be affected by the same inflation assumption. The effect on the inflation of the rents will not be that high.
Yeah.
Thank you.
That's my question. Thanks.
Thank you, Niklas, for your question. As a reminder, if you'd like to ask a question, please press star one on your telephone keypad. At this time, there are no further questions, so I'll pass back over to the management team for any webcast questions.
Okay. If there's no more question, Rolf, Johan, and I wish you a nice and warm summer, and thank you for listening, and have a good weekend. Thank you very much. Bye-bye.