Good morning, everyone, and welcome to the Diös Fastigheter Interim Report, January to June 2025. My name is Breeka, and I will be coordinating your call today. During the presentation, you can register to ask a question by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I will now hand you over to your host, Johan Dernmar, Chief Investor Relations Officer, to begin. So, Johan, please go ahead.
Good morning, and warm welcome to this Diös Q2 2025 result presentation covering the period January to June. My name is Johan Dernmar. I'm the Chief Investor Relations Officer. I'm joined today by our CEO, David Carlsson, and CFO, Rolf Larsson. In today's presentation, we'll begin with a brief overview of the performance in the second quarter, followed by the more detailed walkthrough of our financial results. We'll then provide a market update before opening up a Q&A session at the end. Thank you for joining us. With that, I hand over to David.
Thank you, Johan, and good morning, all. We are closing the books on the month of quarter, one marked by strong momentum across several fronts. We have seen a dynamic mix of transactions and new lease agreements, alongside successful refinancing of debt under highly attractive terms. These achievements reflect our continued focus on value creation and financial resilience. The growth in income from property management amounts to 12% for the quarter, which is very strong. We continue to see the average interest level declining and, once again, a positive net leasing. The rental market in northern Sweden remains resilient, where renegotiation and renewals are settled on CPI-indexed rents or higher. Economic occupancy stands at 90%, same as last quarter. Surplus ratio is reported on satisfying 73%, with stable cost and energy efficiency improved by 5.8%.
Credit losses now at 0.29%, compared to the historical average of approximately 1.40%, shows resilience in our business. Access to financing remains strong, evidenced by 15-30 basis points lower margins in both banks and bond market compared to six months ago. We have, during the quarter, refinanced SEK 5 billion debt, resulting in 5 basis points lower credit margin at portfolio level. 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 continued to gain momentum, with several deals being finalized. An encouraging indicator that reinforces the valuations recorded in our books. Our recent acquisition in Umeå, valued at SEK 1.66 billion, represents a strategic addition to our portfolio and is fully aligned with our long-term growth ambitions.
As part of our ongoing asset rotation strategy, we also divested the educational property Mimer 1 in Borlänge during the quarter at SEK 706 million, achieving a sale price above book value. We will elaborate further on our asset rotation approach later in the presentation. I see strong potential to deliver long-term shareholder value through profitable growth in our income from property management by share, targeting 10% annually. Our tenant offering remains highly attractive, and the solid recurring cash flow enables us to pursue value-creating investments. Owning properties in the right locations provides long-term revenue stability and minimizes vacancy risks. The outlook is bright. I will now leave the word to Rolf to go through the result in more detail.
Thank you, David. Let's get deeper into the result outcome. Rental income increased by 5%, and the economic occupancy rate was 90%, compared with 91% last year. The change is mainly explained by the divestment of fully 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 positive net lending in recent quarters and completed new builds. Property costs are at the same level as previous years, and we're pleased to observe that our daily effort to optimize property management has resulted in increased energy efficiency. All in all, this means that the operating surplus for the quarter increased by 7%, which corresponds to a surplus ratio of 73%.
Financial costs are at the same level as last year, and income from property management increases by 12% to SEK 268 million. We have had slightly negative value changes regarding properties, and I will come back to this later. Current tax is negatively affected by SEK 10 million due to withdrawal taxation in connection with property sales. Our well-diversified portfolio has strengthened the resilience of our top line. We tell 32% of our rental income derived from public sector tenants. We have a solid foundation for passing on CPI adjustments, and 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. Like-for-like rents decreased somewhat because of vacancies arising in Q1, now having full impact.
However, we continue to experience strong demand for premises in central locations and expect positive development in the second half of 2025. With lower financing costs and a more optimistic economic outlook for Sweden, we see great potential in our rental growth, both when it comes to rent aversion, the continued increased occupancy rate, and creating modern and effective offices in prime locations. As a 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 24 of the last 26 quarters, including SEK 2 million this 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 location in our cities, where we are well positioned, which means that the resilience of our portfolio is high. Currently, we have several dialogues underway with the existing and new tenants at good levels. We have a low tenant concentration risk. Our 10 largest tenants, of which 6 are tax financed, account for 20% of our total rental income with a vault of 5.3 years, and the vault for the whole portfolio is stable at 3.6 years. The market value of our properties amounted to SEK 32.6 billion. During the quarter, we have invested SEK 223 million in projects. 91% of the property portfolio has been externally valued in Q2, which has resulted in slightly negative unrealized value changes of SEK 130 million, corresponding to -0.4% of the market value.
The impairment is mainly due to reduced revenue from specific properties, such as turnover-based rents from a hotel and a few major tenant departures that we have previously guided on. We see no general impact-related yield requirements, market conditions, or similar factors. The average yield was 6.15%, which is two basis points higher since last quarter. The change in yield is a result of the transaction that has been made during the quarter, and we see that our transactions are made at book value, which supports our view that our property values are at fair value. As I said earlier, we have invested SEK 223 million in tenant improvements, property improvements, and new builds. 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 good. We currently have around 16,000 sq m under construction, with a total investment volume of SEK 530 million, where remaining investments amount to SEK 170 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. 50% of the building rights refers to commercial premises and the remaining 50% to residentials. During the quarter, we have refinanced SEK 5.2 billion in bank loans, with maturities from September this year to March next year, and at the same time, redeemed a bond corresponding to SEK 248 million.
This together means that we have lowered our average margin for the whole portfolio by five basis points and extended our debt maturity to 2.6 years, and we will get the full impact of lower margins in Q3. In the next 12 months, we have additional loan maturities, excluding commercial paper, of SEK 2.7 billion, which corresponds to 15% of interest-bearing liabilities. We are 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 73% 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 a three-year bank loan is currently around 125 basis points. In June, we updated our MTN program and our green framework.
At the beginning of July, we issued two- and three-year bonds of a total of SEK 850 million, and at the same time, redeemed the bonds maturing in May and October next year, corresponding to SEK 450 million. Today, a three-year bond has a margin of 175 basis points, which is 20 basis points lower than three months ago. Our average interest rate at the end of the period was 4%, which is 20 basis points lower compared to last quarter. The marginal cost of debt is now lower than our average cost of debt, which will have a positive impact on our income from property management when refinancing and taking out new loans. We have 73% of our financing in banks, SEK 1.7 billion in unused credit facilities, and a secured loan to value of 43%. 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 over time 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 improvements and acquisitions. As we mentioned earlier, in June, we acquired three centrally located properties in Umeå for SEK 1.6 billion. We have also sold a newly built school in Borlänge for SEK 700 million and used the proceeds to amortize debt to lower our leverage. 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. Let me remind you of the transformation we're witnessing in our market. Northern Sweden is experiencing a wave of investments tied to the green transition, a transition that is crucial for Sweden's climate goals, as well as the competitiveness of Sweden as a leading country of high-quality products for future demands of non-fossil products. We're seeing new factories being built to refine natural resources into sustainable products, alongside energy plants, infrastructure upgrades, and housing developments. This is happening now and for years to come. The fundamentals behind these investments are incredibly strong and long-lasting.
Northern Sweden is rich in natural resources, minerals, forests, and the overarching goal is clear: transition to a net-zero economy. We benefit from access to affordable, clean, renewable energy, to hydropower and wind power, a cold climate ideal for energy efficiency and vast areas of land available for development. To put this in context, the electricity prices in the northern part of Sweden have this year been one-third of the prices in Germany. Our high transaction pace continues, and we are delivering in line with our strategy. The acquisitions of SEK 3 billion and divestments of SEK 3 billion made over the past 18 months have contributed to an increase of more than 2% in income from property management. Our focus is clear. We want to own centrally located properties with development potential and/or synergies with our existing portfolio.
At the same time, we are divesting non-core assets, properties with limited potential, low returns, or those located outside city centers or in municipalities that are not part of our strategic focus. Our primary focus is on owning office properties in A and B plus locations, although we remain open to all segments where we see value. As earlier stated, we have over the past 18 months acquired properties worth approximately SEK 3 billion and divested assets for a similar amount, at or above book value. This represents a significant portion of our current portfolio, which totals SEK 3.6 billion. It clearly demonstrates the liquidity of our market and the reliability of our valuations. We're continuously working to streamline our property management through smart operational solutions, strong cost control, and ongoing investments. We also see economies of scale and synergies in larger units, ideally with multiple tenants across different segments.
One of the key strengths of our portfolio is its flexibility. The ability to repurpose and convert spaces allows us to adapt quickly when transcript or tenant needs change. This adaptability builds resilience and reduces vacancy risks. Looking ahead, we expect both acquisitions and divestments to remain at a high pace. It's a natural and essential part of how we create long-term value. Diös Fastigheter is fundamentally a cash flow-driven company where investors can expect stable growth and long-term development. We operate in a market characterized by lower volatility in property values and lower rental costs per employee for tenants, and therefore more reluctant to change premises. Our strategy is clear. We focus on centrally located properties in cities with a single well-defined center. This creates natural limitations in location options for tenants seeking urban qualities and brand alignment, making our locations highly attractive.
It also means our properties offer strong alternative use potential. Offices that no longer meet demand can be converted into residential and retail spaces in less optimal locations can be transformed into desirable office environments. Rental levels in our market make these conversations both feasible and profitable, which in turn reduces vacancy risks. A clear example of the alternative use case is our lease, the Hagströmska Upper Secondary School in Falun. Here, we are converting vacant former retail premises into modern and functional educational premises in the city center. We can reuse previous fixtures, fittings, and adaptations while the tenant can benefit from the city center's existing infrastructure, such as public transport, shops, and restaurants. Our current portfolio, excluding project properties and development rights, generates a running yield of 5.6%.
This provides a solid cash flow foundation, while we also see significant upside in well-located vacancies, value-adding investments, and operational efficiencies. Today, the cost of new bank financing is approximately three months' STIBOR plus 125 basis points, which means financing on 3.3% with STIBOR on 2.1%. A really attractive deal gap relative to a running yield. When we invest in tenant adaptations and energy efficiency upgrades, we on average achieve a gross yield on cost of around 9% and net above 7%, further enhancing total returns. Our average interest rate continues to decline, as stood at 4% at the end of the quarter. The marginal cost of financing remains 30-50 basis points below the average, indicating further potential for interest rate reduction.
As Rolf mentioned earlier, our recent refinancing activities have lowered the interest rate on our debt portfolio by approximately five basis points, while also extending our debt maturity and reducing financial risk. Looking ahead, the potential for increased earnings lies in raising our running yield, thereby widening the yield gap by reinvesting our cash flow, excluding dividends with 50% leverage. We have the capacity to deploy around SEK 1 billion annually. We also see considerable potential in leasing out well-located vacancies and gradually increasing average rents across the portfolio. In short, we are well positioned to continue delivering strong, sustainable returns. 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 are currently making very good deals through our adaptations and renovations. The gross yield on costs for ongoing investments is, as earlier mentioned, in average 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 a top-of-the-line cash flow generation from our business. With prime location assets on a running yield at 5.6% and financing costs 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 are now seeing vacancy levels bottoming out, and we expect a stabilization followed by a more positive trend going forward.
The unrealized value changes we recorded in the quarter are linked to specific properties that require more attention than previously anticipated. At the same time, we continue to make value creation, creating investments, and with stabilizing vacancies, we believe this will have a positive impact on property values. Our own transactions confirm the market valuations, as we constantly sold properties at or above book value. We are also seeing increased activity from the other market participants, and there is ample capital actively seeking investment opportunities. We will continue to grow by acquiring properties with potential, assets that complement our existing portfolio and are located in regions with strong growth prospects. To maintain financial strength, we will also divest properties that are not part of our core strategy or where we see limited development potential.
Our tenant offering remains highly attractive, and the strong recurring cash flow enables us to reinvest in value-enhancing projects. Owning properties in the right locations provides long-term income stability and reduces vacancy risk. With lower financing costs and a more optimistic economic outlook for Sweden, I am very confident in Diös as a company and in our ability to deliver sustainable long-term returns to our shareholders. That concludes my part. I will now hand it back to Johan.
Thank you, David, and thank you, Rolf, for the presentation. We will now open up for questions.
Thank you. If you would like to ask a question, you can do so by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two to remove the question. When preparing to ask your question, please ensure your device is unmuted locally.
First question comes from Elenci Elliff with Kempen. Please go ahead. Elenci , could you please ensure your line is unmuted locally?
Yes, sorry. Can you hear me now?
Yeah, we can hear you.
All right, great. Thank you for taking my questions and good morning. Two questions from my side. First, on the outlook for H2, I know you've talked about it and you're positive. I just want to ask you again, what gives you confidence that the operations will improve in H2? Second one, obviously, you've been a net acquirer. You've guided that you probably will be a net seller in the coming months. Given that there are more opportunities coming in the market, I just want to see would you intend to engage in them as well? Essentially keeping LTV a bit higher for longer.
Sorry, could you take a question again?
Because you were blurring in the middle there.
On the second question, is on the market. You've been buying quite a lot recently, and you have guided that you might be a net seller for the next 12 - 18 months. There are more opportunities arising. Would you consider maintaining LTV at a higher level for longer just to be able to engage in those opportunities?
I can take that question, David. We want to be below 55%, as we stated before. Now we divested in the property in Borlänge, about SEK 700 million. That was the one we were guiding, one of the properties that we were guiding on that we were on the selling list. That's the net selling post this quarter. We're happy to be on the level we're at today because we have a headroom for investments.
We are recovering, really turning the portfolio and selling non-core assets in the future also, and buying in the cities with the brightest growth prospects.
Okay, thank you. The other question was,
yeah, the first question, that was the blurred one. Take it again, please.
Oh, yes, sir. That is on the outlook for operations. I know you have talked about this in the past and that you are fairly positive that we have reached an inflection point or that we will see the inflection point at the end of H1. Has your view changed in any way? What gives you confidence that this is actually the case?
We see that the pace, David, we see that the pace continues to be better for our tenants when it comes to decisions. We have deals taking place at a higher pace than before.
We have some big investments that the tenants are moving into this autumn. That is going to be reflected in the occupancy rate. We are confident that we are on the bottom now and turning.
All right, thank you very much. That is all from my side.
Thank you. Just as a reminder, if you would like to ask any further questions, you can do so by pressing star followed by one. Your next question comes from Albin Sandberg with Kepler.
Hi, good morning. Two questions. The first, specifically on your property revaluation and property value changes this quarter. Was that part of a bigger review of the overall portfolio, or was there anything specific that led you to finding out about these higher CapEx needs during the quarter? I guess as a follow-up to that, any risk that we will see a similar comment for the Q2E report? Thanks.
I can take that, David here. Yes, there have been a thorough project review of these vacancies that the vacancies are known for us, as earlier stated, in the last two quarters. We have made a thorough project review and see that we have some more investments than previously anticipated. The answer to the second question, no, not on these vacancies do we see any more adjustments.
In general, when you discuss with your external valuer and so on about the general state of the market, is that very different Q2 versus Q1?
No, it's really much the same discussions. We're the same discussions in Q1 and Q2. The difference is that we have done our homework on these properties. That's the difference. The yields are flat, and the change from 613 to 615 is due to our transactions and not any change of yields.
Okay, thanks. Final question also, coming back maybe to the first one, asking questions about your state of the balance sheet and LTV target and so on. Do you feel you're in a situation now where, I mean, maybe compared to one or two years ago, that your financial flexibility is higher now, assuming that that value stabilized? Or do you feel that your balance sheet is still somewhat of a constraint for you in order to what you can or cannot do?
No, we don't see it as a constraint right now. We have so strong cash flow, and that's been proved by our negotiations now with defending and raising rents in spite of the 20% rise in the CPI, are giving us confidence that our strong cash flow remains. We are comfortable at this LTV level. We have a headroom for investments.
Yeah, thank you very much. That's all for me.
Thank you. One final reminder, if you would like to ask a question, please press star followed by one on your telephone keypads now. I can confirm we have no further questions. I would like to end the Q&A session and hand back to the management team for some closing comments.
Yes, thank you very much. Thank you all for participating in today's call. As always, we're here if you have any further questions. By that, we would like to wish you all a happy summer and a good vacation when it comes. Thank you very much.
Thank you all for joining. I can confirm that does conclude today's call. Thank you all for your participation. You may now disconnect.