Good morning, everyone, and welcome to today's Diös Interim Report for January to March 2025. My name is Seb, and I'll be the operator for your call today. If you would like to ask a question during the Q&A session, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two . I will now hand the floor to Johan Dernmar to begin. Please go ahead.
Good morning and welcome to this Q1 presentation of Diös' results for the first quarter 2025. My name is Johan Dernmar. I'm the Chief Investor Relations Officer. I'm joined today by CEO, David Carlsson and CFO, Rolf Larsson. Today, we will begin with a brief summary of our performance, followed by a detailed update on the results. Then we will provide a market update and also discuss the recent transaction in Umeå. Finally, we open up the floor for a Q&A session. Thank you for your engagement. I now hand over to David.
Thank you, Johan. To give a short introduction of the development in the first quarter, I start by stating that it has been a quarter marked by increased uncertainty and turbulence in the global stock and capital markets. In our cities, we have noted Northvolt's bankruptcy, which primarily affects Skellefteå, while we have received clarification that over 1,000 new jobs will be created in Östersund and Falun related to defense-related initiatives. Operationally, the result for the first quarter is really stable. The growth in income from property management amounts to 10% for the quarter. The average interest rate decreases by 10 basis points from the turn of the year, and net leasing is positive again. The rental market in northern Sweden remains resilient. The increase in vacancies is due to asset rotation and the completion of new developments, both within our portfolio and the broader market, temporarily raising vacancy rates.
This is not unexpected, as it has been anticipated for some time. Access to financing remains strong, with lower interest rates and margins. The market now expects further interest rate cuts from Swedish Central Bank, Riksbanken throughout the year. The marginal cost of debt is lower than the average cost of debt in the portfolio, which will give lower average interest rates going forward. The transaction market has picked up, and we see several deals being completed, which is positive and proves the values we have in the books. Our acquisition in Umeå of SEK 1.6 billion is a great contribution to our portfolio and completely in line with our growth strategy. To finance this acquisition, we will be net seller in short term to balance our LTV.
I will return to the outlook at the end of the presentation, but what I can say is that our cities in northern Sweden have a good development with continued stable or rising rental levels and underlying growth. I will now leave the word to Rolf to go through the numbers in more detail.
Thank you, David. Let's get deeper into the result outcome. Like-for-like rental growth is 0.7%, supported by indexation and rent reversion. The economic occupancy rate is 90%, compared with 92% last year. The change is explained by the divestment of fully let residential properties and completed new construction, which has created short-term market vacancies. We see that the vacancy trend is turning in the second half of the year, as we see the effect of the positive net lettings in recent quarters. On the cost side, we have had a relatively mild winter, which has resulted in lower costs for heating and snow removal. At the same time, index adjustments to tariff-based costs have resulted in cost increases. We are pleased to observe that our daily efforts to optimize property management are resulting in increased energy efficiency, minus 6.6% for the quarter.
All in all, this means that operating surplus for the quarter is up 5% to SEK 427 million. Financial costs are at the same level as last year, which means that income from property management increases by 10% to SEK 221 million. We have had slightly positive value changes, with valuation yield one basis point lower than last quarter. Our well-diversified portfolio has strengthened the resilience of our top line. With 33% of our rental income derived from public sector tenants, we have a solid foundation for passing on CPI adjustments. We see that we can defend and increase our rental levels in connection with renegotiations and new lettings. Notably, 97% of all commercial lease agreements include indexation clauses, with 94% specifically tied to CPI.
As I said, like-for-like rental growth was 0.7%, which is under CPI of 1.6%, as we have slightly higher vacancies in the first quarter compared to the previous year. However, we continue to experience strong demand for premises in central locations and expect a positive development of vacancies in the second half of 2025. Despite subdued economic development in Sweden, we see great potential in our rental growth, both when it comes to rent reversion, a continued increased occupancy rate, and modern new builds. As the market leader with local management and being a company with strong cash flow, we have a competitive advantage over many other real estate companies in our cities. Net letting has been positive in 23 of the last 25 quarters, including SEK 1 million in the last quarter. The office's role as a brand builder and meeting place is becoming increasingly clear.
We continue to see a strong trend that tenants are looking for attractive locations and that the willingness to pay is high for modern and efficient premises. Vacancies are much lower in central locations in our cities where we are well positioned, which means that the resilience of our portfolio is high. Currently, several dialogues are underway with existing and new tenants at good levels. We have a low tenant concentration risk. Our 10 largest tenants, of which six are tax financed, account for 20% of our total rental income within a WAULT of 6.3 years. The market value of our properties amounted to SEK 31.6 billion. During the quarter, we have invested SEK 202 million in projects. 91% of the property portfolio has been externally valued in Q1, which has resulted in slightly positive unrealized value changes of SEK 6 million.
The average yield was 6.13%, which is one basis point lower since last quarter. We see that our transactions are made at book value, which supports our view that our property values are at fair value. With an interest rate of 4.2%, we have a yield gap of 1.9% and thus a continued strong cash flow. As I said earlier, we have invested SEK 202 million in tenant improvements and project properties. 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 commercial projects are built according to BREEAM, at least level Very G ood. We currently have around 21,000 sq m under construction, with a total investment volume of SEK 765 million, with remaining investments amounting to SEK 263 million.
All our ongoing projects are proceeding according to plan, both in terms of cost and time. In addition, we have around 200,000 sq m of existing or possible building rights, where we see great potential for further value creation. These will be used for both our own development and disposal. 50% of the building rights refers to commercial premises, and the remaining 50% to residentials. During the quarter, we have refinanced a covered bond of SEK 394 million, and at the same time, redeemed bond maturity corresponding to SEK 129 million. This means that in the next 12 months, we will have additional loan maturities, excluding commercial paper of SEK 2.3 billion, which corresponds to 14% of interest-bearing liabilities. Negotiations are underway regarding all bank loans, 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 69% of our outstanding loans with banks. We have a very good dialogue with all our banks, and they are clearly willing to join our growth journey and offer us good terms. The margin on our three-year bank loan is currently around 120 basis points. At the same time, we are experiencing that the bond market has been more volatile recently, with rising margins as a result. Today, a three-year bond has a margin of 195 basis points, which is 35 basis points higher than three months ago. Our average interest rate at the end of the period was 4.2%, which is 10 basis points lower compared to last quarter. The marginal cost of debt is now lower than the average cost of debt, meaning we have absorbed the increased interest rate.
This will have a positive impact on our income from property management when refinancing and taking out new loans. We have 69% of our financing in banks, SEK 2 billion in unused credit facilities, and a secured loan-to-value ratio of 41%. We will also add additional borrowing capacity through completed projects. This, together with good relationships with our banks, makes us feel comfortable about future refinancing. We have a conservative balance sheet approach, which reflects our commitment to financial prudence and risk mitigation. During the past year, we have reduced our financial risk and improved our key financial figures through divestments and a more cautious strategy regarding new major projects. This, together with a strong cash flow and available liquidity, means that we now see opportunities for growth, which primarily means an increased volume of tenant adaptions and acquisitions.
As we have mentioned earlier, in March, we announced that we have acquired three centrally located properties in Umeå for SEK 1.6 billion, with access in June. Umeå is a city where we expect good future growth. We will also sell non-core properties and amortize debt to ensure our long-term financial stability. Yet again, I feel comfortable with our current financial position and action taken. Our strong cash flow will serve operating expenses, committed CapEx, and further growth. I will now leave the word back to David.
Thank you, Rolf. Despite the challenging macroeconomic landscape and some setbacks in the green transition, now personalized by the Northvolt bankruptcy, the fundamental factors for a green industrial transformation still remain strong in our region. We have no direct exposure to Northvolt in Skellefteå, and we are experiencing limited impact on the rental market in the city. We believe in Skellefteå's long-term growth, where the construction of the Norrbotniabanan, which we mentioned last time, will positively affect the city. You also have to keep in mind that we have city-center located properties with mainly a location that will have good demand regardless of business sentiment. The International Maritime Organization, IMO, has approved a comprehensive climate package aimed to achieving net-zero greenhouse gas emissions from global shipping by 2050. Liquid Wind, a company established in northern Sweden with ongoing investments exceeding SEK 10 billion, focuses on producing renewable methanol.
This package could significantly increase demand for their products. Northern Sweden boasts a robust renewable energy infrastructure, primarily from hydroelectric power, which is essential for Liquid Wind's production processes. We continue to see significant investments from companies across various industries, positively impacting the growth prospects of our cities. Currently, Umeå, Luleå, and Gävle are leading the growth, with rising rental levels and a high investment pace. These are also the cities where we have focused our acquisitions and our willingness to grow. When examining population growth, we observe notable differences among various cities in Sweden. Population growth is a key driver of economic expansion and ultimately leads to increased rental rates. It's important to highlight that many of our cities experienced positive development even before the green transition. This underscores their attractiveness and factors that make people want to live and thrive in these areas.
Umeå stands out as the city that has grown the fastest in Sweden over the past 55 years, which is evident in the city's activity. Umeå continues to grow and grew by approximately 1% or 1,300 people in 2024, and both Luleå and Gävle also show growth figures. Skellefteå is growing the fastest, although a slower pace is expected in the near term due to Northvolt. Umeå, the largest city in northern Sweden and the fastest-growing city in Sweden, offers a well-diversified labor market and a strong university, providing excellent conditions for continued growth and profitable property management. I'm therefore very happy that we have strengthened our position as the largest commercial property owner in Umeå through the acquisition of a centrally located property portfolio valued at SEK 1.6 billion.
This portfolio includes Ume stan Business Park and two other office properties, totaling 73,000 sq m, with a rental value of SEK 134 million and an initial yield of 6%. The acquisition, set to be completed on the 2nd of June, involves properties with a high occupancy rate of 96%. This acquisition broadens our offering in Umeå and strengthens our position in northern Sweden's fastest-growing market. We anticipate an increase in our management result per share by approximately 4%, while also recognizing the advantages of economies of scale and the development potential within the portfolio. The transaction market is truly gaining momentum, and we are engaged in several advanced discussions on both the buying and selling sides. Opportunities like this are rare, which is why we accept a temporary increase in our leverage. As stated before, we will be net seller in short term to balance our LTV.
High CPI and subsequent rent adjustments have impacted our tenants' profitability. However, we have successfully renegotiated leases across all our cities at the same or higher levels, demonstrating that market rent levels remain stable or are increasing. We are observing a clear trend where more companies are implementing policies requiring employees to spend more time working from the office. This is welcome news for us as a major office owner. Unlike metropolitan areas, where a significant portion of the workforce works from home, our 15-minute cities do not face the same commuting challenges. We are now seeing increased activity in investments for office adaptations, which is very positive. We are emerging from a period of tenant hesitations due to significant uncertainty about long-term office needs.
It's important to remember that the cost of investment often does not justify changing offices, as the rent savings achieved are insufficient given the relatively low rental levels in our market. We have a unique position. Our property portfolio is concentrated in prime locations in cities with good growth aspects. Diös' strength lies in our local presence combined with the company's size, which creates economies of scale in terms of expertise, favorable financing conditions, and investment capacity. This provides competitive advantages that few other companies in northern Sweden have. However, we have not reached the ceiling in any of our cities and can continue to grow, especially in the cities with the brightest prospects. Our business model is future-proof at low risk. With primarily A location, our premises have alternative uses and conversions.
Offices that do not meet today's indoor environment standards can be converted into residential units, while retail spaces on the second floor can become attractive offices. With our rental levels, there are significant opportunities to make profitable deals through these changes, thereby maintaining a low vacancy rate. We're currently making very good deals through our adaptations and renovations. The yield on cost for ongoing investments is currently 9%, which in many cases also leads to an increase in value. With an improved economic outlook, we expect the volume of tenant adaptations to increase. We have top-of-the-line cash flow generation from our business. With prime location asset on an average exit yield above 6% and financing cost at investment-grade levels, we are generating strong and predictable cash flow. Our operations demonstrate stable performance.
We have observed significant resilience among our tenants throughout the recent economic cycle, with relatively few bankruptcies and rent losses. The real estate market in general also shows stability, with property values being less volatile than in metropolitan areas. Our cash flow is not only higher than in many other regions, but also more stable. Looking forward, we have some relocations of tenants to new constructions occurring in the first half of 2025, which will increase vacancies, but after that, we foresee a turnaround. We will continue to refine our portfolio through asset rotation. We will continue to grow by acquiring properties with potential that complement our current portfolio in regions with the best growth prospects. To maintain financial stability, we will also divest properties that do not belong to our core portfolio or where our development potential is limited.
We aim to maintain or strengthen our financial risk from this level. Net debt to EBITDA is strong at 10 times, and we are to prolong both fixed-rate terms and interest rate fixing. In the long term, LTV should be between 45% and 55%. The green transition has only just begun, and we have yet to see the effects of NATO membership. Fundamentally, there is underlying growth driven by an active business community, forward-thinking municipalities, education, culture, sports, proximity to nature, and urban qualities. These are fantastic conditions for living a simple, active, and sustainable life. This concludes my part. I now hand back to Johan.
Thank you, David, and thank you, Rolf, for the presentation. We will now open up for questions. Please go ahead.
Thank you. If you would like to ask a question, please press star one on your telephone keypad. If you would like to withdraw your question, please press star two. Our first question is from Oscar Lindquist at ABG Sundal Collier. Please go ahead.
Hi, can you hear me?
Yes, we hear you.
Perfect. On transactions, the announced transactions now in Q2 are LTV- neutral, as I understand. You say that you want to divest sort of non-core assets. Would that be, do you consider any geographies more non-core, or is it more individual properties in each geography?
I can take that question. As we stated, we will be net sellers in the near term to create room for growth when we are approached or approaches the right properties. Primarily, we are selling non-core assets all over in our cities, such as warehouses, light industrial properties, and in non-prime office locations, or low-yield properties that are fully developed. That is not any cities. It is more all over the line.
Perfect. Also on financing, you comment on lower bank margins, and current bank margin indications are around 120 basis points. How does that compare to the average in your portfolio today? What is coming up near term for renegotiation?
Rolf here. The margins now are lower when we refinance than in the current portfolio, so it will lower the interest rates coming forward. We have around SEK 2.3 billion to refinance in the coming 12 months, so we see somewhat lower interest rates going forward.
Could you give any indication to sort of the difference in margin?
It's between 5 and 20 basis points.
Okay, perfect. If you could, on rental income, could you bridge rental income Q4 to Q1? What's been the drivers behind the uptick?
I would say it's a combination, of course, but we see some increased vacancies that we have been talked about before. Vacancies take down the rental income by approximately SEK 13 million for the quarter, but the positive uptick is due to indexation and renegotiation and investments. Hopefully that will give some clarity on that bridge.
Okay, thank you. That's all from me.
Thank you.
Our next question is from Lars Norrby at SEB. Please go ahead.
Good morning, Lars Norrby from SEB. Follow-up question on divestments. You are very clear on that you are planning to be a net seller. What type of volume are we talking about?
In the near future, we are aiming at about SEK 500 million in the next six months.
Okay, thank you on that one. Regarding the big acquisition that is coming on board at the beginning of June, some SEK 1.6 billion, what's the average time to maturity on those leases?
Remind me, Johan, is that 2.3? Is that right?
Yeah, approximately, just about two years. It's a lot.
Yeah, it's about two years. It's two new builds that have a longer maturity, but in general, it's three-year lease agreements that's rolling over. 2.3 is the average of that one. They have not done a lot of renovation adaptations, so the lease agreements are just rolling over in three years' time all the time.
It sounds quite short. I mean, your average overall in the group, if I recall correctly, is some 3.8. How do you deal with 2.3?
You have to take into account that's high school in Borlänge 20 years, hotels 10 or 15 years, and so on. If you take the office portfolio 2.3 years and you take the new builds out of the picture, it's 2.3 is normal, I think.
Given the current tenant structure in those acquired entities, we're talking about a Sweco and AFRY and a few more. Are you confident of just extending those leases, or what's the situation?
Yeah, yeah, really confident. The rental level is very low also, so we anticipate that we could get the rental level up a bit, and we see that they are seeking for more spaces. The market for technicians, technical consultants, is really strong in Västerbotten right now. Northvolt has not affected the demand. The Northvolt factory is already built, so now the big demand is in Örnsköldsvik with BAE for the defense industry and the Norrbotten Line and so forth.
Okay, thank you. Very interesting. Thank you for taking my questions.
Thank you, Lars.
One final call. For any further questions, please press star one on your telephone keypad now. We have no other questions on the call. I'll hand back to the team for any closing remarks.
Yeah, we thank you very much for your engagement and listening to this call. As always, we're here if you have any questions after the call. Have a great day. Thank you.
Thank you. This concludes today's call, and you may now all disconnect.