Welcome to Neobo Q2 Report 2024. For the first part of the conference call, the participants will be in listen-only mode. During the Q&A session, participants are able to ask questions by dialing Star five on their telephone keypad. Now I will hand the conference over to CEO Ylva Sarby Westman. Please go ahead.
Good morning, everyone, and welcome to the presentation of Neobo's Interim Report, January to June 2024. My name is Ylva Sarby Westman, and with me here today I have our CFO, Maria Strandberg. Operations are continuing to develop positively, and rental income has increased by 7.3% in the like-for-like portfolio as a result of rent increases and reduced vacancies.
Net operating income increased to SEK 229 million, which corresponds to +3.4% in the like-for-like portfolio, and profit from property management totaled SEK 68 million. Unrealized value changes amounted to -SEK 260 million, which is a decrease of 1.5% during the period. The fundamental objective of everything we do is to create attractive and sustainable living environments where people can thrive and feel secure.
Sweden needs more residentials that people can afford to live in, and by managing and refining our properties and adapting them to people's needs, we want to contribute to a more sustainable residential property market. Our strategy is to manage and refine residential properties with inflation-protected cash flows to generate a long-term attractive total return. In order to succeed in this, optimization of the property portfolio is an important component of our business model.
We have a residential-focused property portfolio with a value of SEK 13.7 billion and 8,300 apartments. Residential properties account for 94% of the property value, and the remaining value mainly consists of community service properties. The rental value has increased with 5% over the past 12 months and constitutes 76% from residential apartments and 21% from commercial premises.
At the end of the period, we had completed all rent negotiations in the residential portfolio with an average increase of 5.1%, and the higher rents will take full effect during the Q3 of the year. Intensive work is in progress to increase the occupancy rate, which has improved by 1.3 percentage points in the last 12 months.
A positive example from Falköping, Sundsvall, and Örnsköldsvik, where we have succeeded in reducing the total number of vacant apartments from 144 to 42 since Neobo was founded, thanks to dedicated efforts from our employees. The work to refine our property portfolio continues, and during the first half of the year, we invested SEK 56 million in value-creating measures that generated an attractive return and contributed to increased property values.
We have renovated approximately 50 apartments during the spring, and as an example, we completed two apartment renovations in a property in Stockholm that led to an average rent increase of 62%. We continue to optimize our property portfolio, and at the end of June, we successfully divested a retail property in Falun at an underlying property value of SEK 75 million.
The price is 18% higher than the most recent external valuation conducted, and the transaction generated a positive earnings effect of SEK 10 million. Closing will take place during the Q3, and the divestment means that we have exited Falun and unlocked capital for reinvestment in strategic properties. We have taken several steps on our sustainability journey, and here are some examples from the Q2.
We have become members of the UN Global Compact, recruited 60 young people living in our residential areas as summer workers, analyzed insights from our customer survey, and arranged Neobo Days in several of our areas. We have also launched a Save Water campaign targeting our tenants. A brief market view: there is still a strong demand for rental apartments in Sweden, with a growing population, a very low market vacancy, and a majority of the municipalities reporting housing shortage.
This, combined with a historically low level of new construction, gives us good opportunities to further increase the occupancy rate. Liquidity in the transaction market has increased by 13% compared to the corresponding period last year due to lower interest rates and improved financing climate.
We are optimistic about the second half of the year and believe that activity will pick up further when interest rates and financing gradually stabilize. Some comments on our half-year results: rental income increased by SEK 20 million to SEK 454 million, which is a net effect of higher income and the absence of rental guarantees in the hotel operations, which exceeded last year of SEK 5 million.
The like-for-like portfolio showed an increase in rental income of 7.3%, and the increase is explained by higher rents, reduced vacancy rate, and rent increases as a result of apartment renovations. Property costs increased by SEK 16 million to SEK 224 million. The increase is a net effect of higher costs for operations and property administration, as well as reduced maintenance expenses. The increase in operating costs was mainly attributable to increased tariff-based costs and higher costs for snow removal during the Q1.
Property administration increased since Neobo's organization and operations are now fully in place, and since SEK two million in items affecting comparability were charged to the period relating to a reorganization. Maintenance expenses decreased by SEK 18 million during the period as the need for maintenance was lower than the preceding year. Net operating income increased to SEK 229 million during the period, and for the like-for-like portfolio, the increase corresponded to 3.4%.
Central administration costs amounted to SEK 38 million. Items affecting comparability of SEK 5 million were charged for the period to prepare Neobo for a switch to Nasdaq Stockholm's main list and due to a reorganization. Excluding items affecting comparability, central administration costs increased by SEK two million as Neobo's organization and operations are now fully in place. Profit from property management decreased to SEK 68 million as a result of higher property and financing costs.
The earnings capacity is not a forecast and does not include any assessment for future trends. Rental income is up 6.4% compared to the earnings capacity one year ago, attributable to rent increases and higher occupancy rate. Property management costs have increased by SEK 6 million since the Q1, attributable to high costs for operations and property administration. Net operating income has increased by SEK 30 million since the beginning of the year due to higher rental income.
Central administration costs amount to SEK 60 million and are based on budgeted costs for a normal year. Net financial items have improved by SEK 5 million as a result of lower interest rates, and profit from property management sums up to SEK 250 million, and net initial yield from the property portfolio has increased to 3.8%.
The yields have continued to rise slightly during the spring, and the average yield requirement used in the valuation has increased from 4.7% to 5.0% during the year. The unrealized change in value represented a decrease of 1.5% during the period, and our assessment is that the yields will now begin to stabilize after a period of rising yields, and we continue to carry out external valuations of all our properties every quarter to ensure accurate book values.
We have a strong financial position based exclusively on bank financing from banks in the Nordic region. At the end of the six-month period, we refinanced and extended bank loans for just over SEK one billion at a lower margin than the average margin in our existing loan agreements. This is a sign of strength for Neobo and a clear indication of improving market sentiment.
The average debt duration amounted to 2.8 years in the end of June, and our average interest rate amounted to 3.4% since we have a high hedge ratio of 75% that effectively has offset the upswing in interest rates that took place over the past years. The average fixed rate period was prolonged to 2.6 years in June, and the ICR amounted to 1.6 times on a rolling 12-month basis. In order to secure future cash flows and further reduce the financial risk, we use interest rate derivatives.
At the end of the period, the aggregated nominal value of these swaps was SEK 5.4 billion, with maturities of between one and seven years. In addition to this, there are interest rate derivatives with future starts at a nominal amount of SEK 1.4 billion.
During the Q2, the Swedish Riksbank cut the policy rate by 0.25 percentage points and thus commenced the downward interest rate trajectory anticipated by the market. This will improve our opportunities to carry out value-generating investments that will further increase the return from our properties. Here you can see our largest shareholders in the end of June, and the total number of shareholders amounted to 116,000. In this picture, you can see one of our properties in Oskarshamn.
We are, of course, happy to note that the total return in the share has been 95% over the last 12 months.
Finally, some key takeaways from the first half of 2024: continued positive development of rental income and positive outlook for next year, divestment of a retail property at a price level of 18% higher than the latest external valuation, refinancing of bank loans of SEK one billion at a lower margin than the average margins for our existing loan agreements. We have taken several steps on our sustainability journey.
After an intensive spring, we are now preparing for the next stage of our journey with the aim of realizing the potential in our property portfolio and thereby create shareholder value. With this, I would like to open up for questions.
If you wish to ask a question, please dial Pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial Pound key six on your telephone keypad.
The next question comes from Kavajan Shervanpur from SEB. Please go ahead.
I have some questions regarding the costs. We saw that the maintenance costs were down from SEK 15 million last year to SEK six million in this quarter, so it's quite a significant decrease. But I see that in your earnings capacity, we see that property management costs are actually up by SEK six million. I think, what should we expect in the coming quarters given that the costs were way below last year?
Yeah, we had high maintenance costs last year due to a rather large need for maintenance. So we spent SEK 66 million corresponding to SEK 90 per sq m last year in maintenance, which is a high level. And going forward, we see that the yearly maintenance affecting the NOI will be at a lower level than that.
I mean, the property costs in the earnings capacity is up with SEK six million from last quarter, but it's not related to maintenance. It's related to high costs for operating the properties.
Okay, but for, let's say, Q3, should we expect a similar run rate for maintenance costs, or how should we think there?
I think maybe if you take the half-year figure, and probably the full year will be the double. So it's better to look at the six-month figure.
Yes, and my second question is regarding central admin costs. I see they're also down quite a bit in the quarter, but you also have the upcoming list change. So I might have missed that, but if we exclude for these list change costs, how much are you expecting here if we were to exclude these?
Yeah, yeah.
I mean, on the full year, we have in the earnings capacity total central administration costs for SEK 60 million, excluding one-offs or costs that disturb the comparability between the years. So during the first half of the year, I think it was SEK five million that was costs that was not, it was one-off regarding both preparations for the main list, but also related to a reorganization in Neobo.
Okay, and my final question is regarding investments. You said that you have upgraded some apartments, and I see that you have invested some SEK 46 million in the first half year. What are you thinking about investments in H2? What are you planning on maintaining this pace, or?
Yes, we invested SEK 52 million during the spring. No, sorry, SEK 56 million. And it was approximately 50 apartments that we have renovated and also some sustainability investments, energy optimizing, and so on.
I mean, going forward, our ambition is to increase the pace with value-creating investments such as both apartment renovations and sustainability investments that contribute to increasing the return from the property portfolio. But for the second half of the year, we estimate probably the same volume as the first half of the year.
Okay, good. Those were my questions. Thank you very much.
There are no more questions at this time, so I hand the conference back to the speakers for any written questions and closing comments.
Yes, we have some questions from the web. Can you please give us an update on the progress and timing of the main market listing?
Yes, we are working very intensively to make all the necessary preparations for the list change, and the work is progressing well, and the plan is that the listing will take place during the autumn this year.
Yes, and another question. You are talking about opportunities, but given the high LTV, low ICR, and high debt EBITDA, I think the possibilities are limited. What about this?
Good question. I have to make a note here regarding all the KPIs. If we start with the ICR, we had in the Q2 an ICR of 1.9x and on a rolling 12-month basis, 1.6x . We think it's a good ICR regarding the market situation that we have behind us with high inflation on the cost side, lagging rent increases, and also a very sharp rise in interest rates.
So regarding that, we think that the ICR is good, and we can see in our analysis going forward that it will improve further now when we have the rent increases for this year, and we know the property portfolio better, and we have done a lot of maintenance during last year. And so we don't see any risks regarding the financial situation in Neobo.
We have a high hedge ratio of 75%, and as you can see in the maturity structure in the interest rate derivatives, we will keep that high hedge ratio during the coming years, which means that the interest rate will be lower gradually when the underlying market rents will decrease, but we don't see any risk on the upside, so to say.
So of course, the LTV is higher now than compared to when we started Neobo since the value of the properties has decreased, but we feel very confident with the values now. An average yield requirement in the external valuations of 5.0%. It's a high yield for residential properties in Sweden with inflation-secured cash flows. So we see a lot of opportunities since the cash flow will be better going forward due to higher rents and lower financial costs.
And this will give us an opportunity to increase the pace with value-creating investments in the portfolio in order to increase the rents, lower the costs, and increase the property values. So it's an optimistic future as we see it.
Yes, and the next question. Congrats to a fantastic stock journey.
Would it be possible to pin down the main difference between the initial yield of 3.8% and the valuation yield of 5.0%? Is it all different cost assumptions?
Thank you very much for the congratulations and also a very good question. We have the difference between the initial yield, the running yield from the property portfolio of 3.8%, and the average exit yield used in the valuation of 5.0%. It's assumptions that the rents will increase further during the coming years. Assumptions that the rather high vacancy rate in our property portfolio will decrease over the years.
And also an assumption that the costs, they have been on a high level, will be more in line with our peers in the market, so to say. So it's three different aspects that explain the difference, and it's our most important target.
All the members and coworkers in Neobo are working every day to really increase the return from the portfolio in order to meet the exit yield in the valuations.
Yes, and the last question. Your average this year was 3.4%. What average rate do you expect for H2?
For the second half of the year, yeah, good question. I mean, since we have a hedge ratio of 75%, it is only 25% of the total debt of slightly below SEK 7 billion who will be affected from the lower interest rates. Hopefully, there will be some more decreases of the underlying market rents during the autumn. And the hedge ratio will still be on the same level as I mentioned earlier during the second half of the year. So I will not give you a calculation here upfront.
I think I will probably need to think a little bit about that question. And of course, it's also related to what Riksbanken will do with the interest rate.
Yes, thank you. Okay, that was all. So thank you very much for listening in, and have a nice summer, everyone. Bye-bye.