Good morning, and a warm welcome to this presentation of the Diös half-year result of 2023. My name is Knut Rost. I'm the CEO of Diös, and together with me, our CFO, Rolf Larsson, we will guide you through the result, major events, and highlights. If you have any questions, there will be a Q&A session after the presentation. You can always reach out to us with your question afterwards. Contact details are available on the last slide on our website. The operational performance is very strong, with improving figures, strong demand, and new business being announced. On the other side, financing rates have continued to increase due to higher market rates. To be more specific, the occupancy rate was 92%, and the surplus ratio was 71%, which shows a good and solid development.
The positive net letting of SEK 16 million is a proof of an active organization and a continued strong market. Our interest costs are increasing due to rising market interest rates. The Swedish Riksbank raised another 25 basis points last week. That means they have implemented an interest rate increase from 0 to 3.75% in just 12 months. I'm proud to say that we have successfully managed to refinance our upcoming bond redemptions during the quarter. Add to this that we have, after the turn of the quarter, refinanced the remaining part of maturing bank debt in 2023. It means we have removed the refinancing risk for the rest of the year. In May, we divested a hotel property in Borlänge for SEK 200 million, above latest book value.
The green transition, led by the Swedish sustainable industries, are starting to generate a footprint in our cities, with increasing demand for premises and demand for services, such as hotel beds, restaurants, long stay, et cetera. The developments differ between our cities, it is evident that these investments of over EUR 100 billion and new establishments, new job opportunities, population growth, will generate strong economic growth in our market. Going into the result in more detail by looking at the income statement, we can confirm the total income is up 14% to SEK 620 million. Like for like, rental growth was 10.6% in the quarter and explained by mainly CPI indexation. On the cost side, all in all, we have satisfying cost control despite the inflationary pressure.
We continue to invest in our properties, developing them to be more resilient and future-proof when it comes to energy efficiency. We are going to reduce our carbon footprint by 50% by 2030, to be carbon neutral by 2050 at latest. It is satisfying to see that our day-to-day optimization gives an increased energy efficiency by 2% by end of Q2. We have increased the valuation yield by 6 basis points during the second quarter to reflect the rise in market rates. On the positive note, we have more new leases and renegotiations, giving higher property values. The unrealized value changes of properties amounted to SEK 117 million. Our property portfolio is well diversified in terms of both segments and geography.
We also have 30% of our rental income from public-related tenants and 9% from residentials, which means that we have low risk in our cash flow. That is our focus. Looking at the rental growth on offices, it has had a stable trend upwards, with further potential, as it is a relatively low square meter rent. For 2023, we have more of a hockey stick development, with the indexation and a good development in new letting and renegotiations kicking in. We are signing a bit over 2 new leases contracts every day. To be exact, 2.34 leases every day. We repeat that the CPI indexation for 2023 was 10.9%, which corresponds to increased rent of around SEK 170 million on annual basis.
The net letting for the second quarter amounted to SEK 16 million and has been positive 19 out of last 22 quarters. More and more businesses and researchers are concluding that WFH, work from home, is not the way to run a successful company or to attract employees. On this note, we see that the demand is very good for high quality and modern offices in location close to urban services and commuting centers. This gives us comfort that we have the right properties and premises to capitalize on this trend. I will now hand over to Rolf, who will go into the portfolio and our financing. Rolf?
Thank you, Knut. I will begin by looking at the market value of our properties, which amounted to SEK 31.1 billion. As Knut mentioned earlier, property valuation in the second quarter has resulted in negative valuation changes of SEK 170 million, corresponding to 0.4% of the property value. The average yield was 5.91%, which is 6 basis points higher since last quarter. All segments and cities have been affected in the range of 3-9 basis points, which shows that the yield change is primarily driven by higher market rates. The increase in yield is mostly offset by positive net letting, renegotiated leases, and higher cash flow.
With an average yield of 5.9% and an average interest rate at the end of the period of 4.6%, we still have a yield gap of 1.3, and thus a continued strong cash flow. On a yearly basis, we are currently investing just over SEK 1.3 billion in tenant improvements, property improvements, and new builds. All our ongoing projects are proceeding according to plan, both in terms of cost and time, and before we start our projects, we always have 100% signed leases. Most of the rental income in these projects comes from tax finance operations. All projects will be certified according to BREEAM, at least level Very Good. We currently have around 90,000 sq m under construction, with a total investment volume of SEK 2.5 billion, where remaining investment amounts to SEK 600 million.
We have another 200,000 square meters in existing or possible building rights in central locations, which we either develop ourselves or sell to other developers. The demand for modern premises and housing remains high, prevailing market conditions may mean that we will postpone pro-project starts, especially regarding housing. During the quarter, we have successfully refinanced bonds of SEK 900 million, maturing in June and September, respectively, as well as at the beginning of July, another SEK 1.7 billion in bank financing maturing in September. This shows continued strong confidence from both the capital market and our banks. Over the next 12 months, we have additional loan maturities, commercial paper excluded, of SEK 5 billion, which corresponds to 30% of the interest-bearing liabilities. 26% relate to bank loans, the remaining 4 to unsecured bonds.
We have initiated discussions with our banks regarding all loan maturities within the next 12 months, and the discussions are positive, and our goal is to refinance all loans within 6-9 months before maturity. We also have unsecured bonds maturing in September of a total of SEK 680 million. Our goal is to refinance all or part of our bonds on the capital market. If this is not possible at reasonable levels, we have credit facilities available, and our good banking relationships and available liquidity makes us feel secure in the face of future debt maturities. We currently have 81% of our outstanding loans with banks, 3% unencumbered bonds, 3% in commercial paper, and the remaining 12% consists of unsecured bonds.
Our loan-to-value ratio was 53.3%, which is under our target of 55% and far below our covenant of 65%. The interest coverage ratio amounts to 2.3 times. After the financing of SEK 1.7 billion bank loans at the beginning of July, our debt maturity amounts to 2.5 years. After the end of the period, we have added additional interest rate hedges as protection against rising market interest rates. This means that the fixed interest period now amounts to 2.8 years. The average interest rate at the end of the period was 4.6%, which is 0.5% higher compared with last quarter. The increase is due to rising market rates and slightly higher margins.
As I said before, we have 81% of our financing in banks, SEK 1.4 billion in unused credit facilities, and a secured loan-to-value ratio of 45%. We will also add additional borrowing capacity during the year through completed projects. This, together with good relationships with our banks, makes us feel comfortable about future refinancing. As you can see in the graph, the yellow bar, we have gradually reduced our share of commercial paper over the past year in favor of bank financing. Our ambition is to be a recurring issuer of both green unsecured bonds and commercial paper, and today, 53% of our total debt consists of green loans or sustainability-linked loans.
We are actively working to increase the proportion of green assets, and our goal is to have at least 55% green assets by 2026. Our net debt to EBITDA is stable between 11 and 12 times, where net debt has grown in pace with EBITDA over the last years. Yet again, I feel comfortable with our current financial position. Our strong cash flow will serve operating expenses, committed CapEx, and proposed dividend. I will now leave the word back to Knut.
Thank you, Rolf. The macroeconomic situation in the northern part of Sweden is something different than the rest of Sweden. We have probably the fastest-growing market in the whole of Europe right now, thanks to all the new investments in the transition towards a greener industrial production. The risk capitalists are already here with direct investments in companies like Northvolt and H2 Green Steel. The infrastructure companies, both private and public, are speeding up their plans, for example, developing railroads, electric transmissions, and existing hydro plants. The municipalities putting a lot of effort in how to meet the demand for housing, healthcare, and schools. Challenges are still there. However, we see a very positive development and progress where companies, municipalities, and the government are working together to accelerate this growth and to create the right conditions. Where are we in all this?
As the market leading real estate owner in the regional cities, where all of these companies will have their hubs, fly in, fly out, have meetings, wine and dine, and so on, we are on a sweet spot to capitalize on the increasing demand for new offices and urban services. For example, in Skellefteå, where Northvolt have their 71 football field large factory developed for producing batteries, is the city that is experiencing a true effect on demand and rental levels. The start of the construction was back in 2018. It has taken 2-3 years for this establishment to set a real footprint on the property market. We use Skellefteå as a proxy for how the progress can look like in cities like Luleå, Sundsvall, Östersund, and Umeå, where similar investments have been announced in the last couple of years.
Skellefteå is the city where we have had the fastest growth in rents and property values last three years and the highest total return in the portfolio. For example, in the property Jotten, in central part of the city, we have managed to raise the rent by over 100% to SEK 2,000 per square meter. We have made new lettings to tenants like AFRY, WSP, Nordea Bank, Aspia, Link, and Once Upon, who are companies that benefits from being in the center of the city. More action are needed. Building permits process has to speed up. Decision makers need to move faster. Residential needs to be built at a higher speed, and so on. Sweden, as a country, need to come together and act on this opportunity.
We are in the beginning of something huge regarding the green transition. The transaction market continues to be relatively slow, with few transaction accomplished. We are seeing some deals going through. However, they are made mainly from stressed sellers. We successfully sold 1 hotel property in the city of Borlänge during the quarter, above latest book value. It was an attractive transaction, where I'm convinced that the new owner will be a good landlord for this property and continue to develop for the city. The ongoing major projects are proceeding according to initial plan, both in terms of cost and time. The cost of the new office building in Luleå in the property Porsön, we recently finalized. Even got under calculated budget, which is a success in current inflationary environment. On the residential developing side, we are pending at the moment.
We see the demand, and we have the building rights, but it's not profitable enough right now to start new projects. We are not willing to take the risk that some kind of government stimulus package will come in in near term, destroying a market pricing. We are pending at the moment. We will be more cautious on starting any new major projects this year. We have dialogue with several tenants that requires new production or major renovation, so the demand is still there. For tenant adaptations, the pace is still good, and the yield on cost remains around 8%. We will balance our investment with our financial covenants and cash flow. To summarize in short, we are presenting a strong quarter on operating level. The vacancy levels are going down, and we have a strong net letting of SEK 16 million.
This is a proof of high activity and strong underlying market. Financing cost is up due to higher market rates. We have acted to secure ICR at acceptable levels by restructure and new derivatives. We are, on the same note, more cautious on putting on more CapEx due to the risk that interest rates continue to increase. We have successfully refinanced both unsecured bonds and bank debt during the quarter, taking away the refinancing risk for 2023.
I feel comfortable with our current maturity profile and the relationship we have with both banks and investors for upcoming future redemptions. I am convinced that we have only seen the beginning of what reflects an interesting market in our geography, and I look forward to an intense and exciting journey ahead. Together with our stakeholders, such as the industry sector, municipalities, investors, and others in northern Sweden, we are creating new businesses in the biggest green growth revolution of our time. With my employees, our secure and stable owners, and a very interesting investor market, we will deliver continued shareholder value. This takes us to the end of this presentation. Thank you for listening. We are now ready for questions.
Thank you. If you would like to ask a question, phone keypad. You can also send written questions, are followed by two. When preparing to ask your question, please ensure your phone is unmuted locally. Our first question today goes to Albin Sandberg of Kepler Cheuvreux. Albin, please go ahead. Your line is open.
Yes, hi there. Thanks for the presentation. A few questions for me. The first, Knut, you were referring to, securing ICR at an acceptable level. If you say a number on that acceptable level, what is that you want to be about?
Thank you, Albin. I think I pass that question to Rolf. That is special field.
Yeah. Hi, Albin. well, acceptable level for us is about two times.
That is your target also for the rest of 2023?
Yeah.
Yeah. When you have had your discussion with banks now on refinancing and so on, I think you were talking about a little bit uptick in margins. Do you feel that there have been any sort of comments from the financing side about dividends and so on? I mean, you lowered your dividend a bit last year, and also we see that the income from property management is going down, as you said, of course, because of the rising interest rates. Do you still feel that your dividend policy is relevant for this year?
Can I answer, Knut, or?
Yes, it's your question.
No discussions with our banks about the dividend policy so far. I think the policy stands as it is even for this year. It's not our
Okay.
thing to decide about the dividend policy. We have no indication of advice.
Yeah, yeah. I mean, obviously, the positive to see the pace of property value decline was a little bit slower in Q2 versus Q1, and of course, it can be on timing and so on. What's your feel on your property values today, is there any kind of cushion, let's say, in that valuation? If the, let's say, STIBOR continues to increase here during H2, do you see a continuing risk on your yield assumption for further expansion?
There's always a risk, of course. Can someone mute? Because it's hard to speak. It's always a risk, of course, when we don't see where the rate is going. Since at least I think that we are reaching the peak very soon, maybe they raise 25 points again and maybe some more. I think that it's obvious that the yield in our property valuation has a great impact from the rate, of course. I think we are...
You know, I'm very positive, but I think we are at the lowest level approximately now, maybe for the next quarter, but then I think slowly we will go up again in valuation, but it all comes down to what the Riksbanken is doing. That's my assumption. We have very few transactions in the market to prove anything. We sold a hotel property in Borlänge, 11% above booked value. I think that's some sort of strength in the market. That's only one transaction. I think we need more transactions to prove something. I think we need some more positive figures from the Sveriges Riksbank. That's my assumption.
Yeah. No, thanks for that. And my final question is just, as I understand it, the occupancy actually seem to have improved, if I look at period end figures.
I guess vacancy now economic at 7%. I just wonder what's the reason for that? Is the mix of developments being completed, or are there other things happening in the portfolio that explains that improvement? Rolf?
Well, it's a combination of completed projects. As we said in report, we finalized the project in Luleå for the Swedish Pensions Agency, and also we have made new lettings to reduce vacancies.
Great. Thank you very much. Those were my questions.
Thank you. As a reminder, if you would like to ask a question, please press star followed by one on your telephone keypad. You can also send written questions via the webcast. Our next question goes to Stefan Andersson of Danske Bank. Stefan, please go ahead. Your line is open.
Thank you. Yeah, really, just one additional question, maybe, touching on what I've been asked about as well. I sense a little bit of a frustration, very good demand on the commercial side, let's leave the rest on the side. You know, good yield on cost on projects that you could do, and then you can't really, protecting the balance sheet. I got the sense that you can't really do it. What's your thinking? It wouldn't make sense to cut the dividend, wouldn't it make sense maybe? I mean, when I look at your owners list, it consists of what should be rather strong owners.
Could there be a situation where it would actually make sense to ask for more capital in one way or another, and in combination with that, cutting the dividend?
Yeah, that's a sort of board question, of course. Since we are in this market, all opportunities will be valued, and we will, we look into it, of course. Let's see where the rate is going. Is it going up even more and more than we can expect, then we have to do something, of course. To make issues to raise more equity, that's the thing we can do when we have a more, when we have some business ahead, some transactions that we can do. I think the question, the answer on your question is actually for the board. Let's just see what will happen in the future, but everything is on the table here, of course.
Yeah. I'm just thinking, but you're commenting on a very strong market where you have clients who want to do things, and you say that the returns are pretty good, that you mentioned yield on cost at 8%. That's why, you know, it, I'm asking how to capture that. I guess an alternative could be to divest more properties. If you don't want to go that route, with issuing new shares.
Mm-hmm.
Could divesting more properties be.
Yeah
one thing on the agenda as well?
Yeah, of course. That, I mean, to be able to work with our projects, that gives us a high yield. They are very prosperous, you could say, and prolong our leases with our existing tenants. That's our main business. That's the thing, the first thing we do every day. Maybe we have to divest properties that are low yielders and with little or no opportunities in. That's that thing we are talking about every day. But since we have to be honest, the transaction market is very slow. It's very, it's a low transaction activity.
Again, everything is on the table. We are still building a secure company that shall live for a long time. We have everything on the table to be even more prosperous and to capitalize on the strong market, of course.
Perfect. Thank you very much for answering the question. I fully understand it was a difficult one, given it's more a board-
Yeah
board decision than anything else. Thank you.
Yeah.
Thank you so very much.
Thank you, Stefan.
Thank you. We have no further audio questions. I'll now hand back to Johan for any written questions.
Yes. Thank you. I will state the questions. Knut and Rolf will then answer the questions. First one: Can you give a split of the net letting during the quarters between offices, retail, and or between the cities?
Maybe that's a tricky one. It's the net letting is actually everywhere, but you can say that our strongest cities are, of course, the cities where this green transition is strongest. Luleå, Skellefteå, Umeå, Sundsvall, Östersund. That's our strongest cities right now. The interesting part of when we're talking about net letting is that it comes from mainly from offices, but also from retail, actually. We have reduced the square meter premises for retail, and therefore, the retail premises that we have vacant is very attractive. The SEK per square meter is actually raised. We can see a little astonishing for us and for the market, is that the restaurant, the cafes are going really well. We have this CPI indexation, where we had nearly no complaints.
Complaints we had, but no one was actually wanted to negotiate with us, so that was a good one, and maybe we have another one, 5%-6% CPI indexation this year. We see that I never seen this before in my 36 years, that the real estate market or the rental market is so strong. We can see that the SEK per square meter is going up, especially for offices and A-location for retail. The answer on the net letting is spread over the strong cities, and it's mainly offices, since the demand for office in A-location is very high. I haven't seen this before, and the SEK per square meter is going up. That feels very good.
Great. Next question. Maybe I could answer that one. It says in the report that we divested 2 properties. One was the one referring in the presentation in Borlänge. The other one is a plot, so it has no rental value, so it's a very small book value added to the figures, and there was no rental value connected to that one. It's a small plot in a business area or Östersund. The last written question for now for Rolf. Your secured LTV is currently around 45%, stated in the presentation. How much more bank debt are you able to add if you want to refinance bonds in the banking system?
How much more debt? I would say somewhere between SEK 1 billion and SEK 1.5 billion.
That was all the written questions.
Thank you, Johan. As a final reminder, if you would like to ask a question, please press star, followed by one on your telephone keypad. You can also send written questions via the webcast. We'll pause for just a moment.
Well, it seems that there's no more question, we wish you all a nice weekend and a very nice and warm summer in Sweden or wherever you are. Thank you very much. Bye bye.
Thank you. This now concludes today's call. Thank you so much for joining. You may now disconnect your lines.