Welcome to Neobo Q4 report 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions-and-answers 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.
Thank you very much, and welcome everyone to the presentation of Neobo's year-end report January to December 2023. My name is Ylva Sarby Westman, and with me here today I have our CFO, Maria Strandberg. We have an intense year behind us with several challenges such as sharp interest rate increases, high-cost inflation, and declining market values. However, everything has exceeded expectations, and operations have performed positively. In the like-for-like portfolio, rental income increased by 5% and net operating income by 3.8%. Profit from property management decreased to SEK 148 million due to higher financial expenses and one-off costs of SEK 18 million related to the startup of Neobo. Unrealized value changes in properties amounted to -8.8% as a consequence of higher yield requirements in the market. Our vision is to create attractive and sustainable living environments where people can thrive and feel secure.
Sweden needs more residential properties that people can afford to live in, and by managing and refining our properties and adapting them on the basis of people's needs, we want to contribute to a more sustainable residential property market in Sweden. Neobo is a residential-focused company with a property portfolio of SEK 14 billion. We have 8,400 apartments. Residential properties account for 95% of the property value, and the remaining value mainly consists of community service properties. Our rental value has increased by 4.9% during the last 12 months, and as of today, 36% of our residential rents have been negotiated for 2024 with an average increase of 5%. The increases are in the range of 4.5% in Karlskoga to 5.5% in Umeå. Increasing the occupancy rate has been top priority since we started Neobo, and we are very happy to note that our efforts are paying off.
Occupancy rate in the residential portfolio has improved by 1.2 percentage points since the beginning of the year and by 0.5 percentage points in the total portfolio. We have targeted specific efforts toward areas with high vacancy, such as refining outdoor environments and renovating apartments. We are very grateful that the result in the customer survey that we carried out in December shows a strong improvement in all areas, and based on this result, we can now take the next step to increase attractiveness and customer satisfaction in our areas in order to further reduce the vacancy. We operate in a market with a long-term positive trend. We see continued 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 situation, combined with a historically low level of new constructions, gives us an opportunity to increase the occupancy rate in our portfolio further. Liquidity in the transaction market remains low, and the volume decreased by 52% compared to last year. However, we are very pleased to share that we have now completed our first transaction: a divestment of six residential properties in Eskilstuna at an underlying property value of SEK 113 million, which is in line with the latest external valuation. The buyer is Klara Bostad i Eskilstuna AB, a local investor, and closing will take place in March. The six properties are low-yielding due to vacancy and low surplus ratio, and they are also facing significant investments during the coming year, which means that the divestment will contribute to strengthen Neobo's cash flow going forward.
During the year, we have developed a sustainability strategy based on the requirements in CSRD, and the strategy is based on the following two perspectives: sustainable living environments where people can thrive and feel secure, and corporate social responsibility with consideration and respect for employees, investors, and the society in which we operate. We have done a Double Materiality Assessment according to CSRD, and we have identified 12 material sustainability aspects on which our entire sustainability agenda is based. Our targets in this area will be communicated during the spring, and we are now working on calculating Neobo's emissions to be able to complete our first climate report. We have, during the year, carried out value-creating investments of SEK 177 million in our property portfolio with good financial return.
We have done 17 renovations of apartments, various sustainability investments to reduce energy consumption and decrease costs, and finally investments to increase customer satisfaction, such as raising the standard of outdoor environments and improving safety in stairwells and laundry rooms. A summary of the 2023 result: rental income increased to SEK 888 million and in the like-for-like portfolio with 5%. Property management costs increased by SEK 13 million due to a net effect of lower operating costs and increased costs for maintenance and property administration. Net operating income increased with SEK 37 million and with 3.8% in the like-for-like portfolio, excluding non-recurring income. Central administrative costs decreased with SEK 9 million, excluding non-recurring costs of SEK 18 million related to the separation and listing of Neobo and startup costs for the company.
Net financial items increased as a result of higher underlying interest rates, and profit from property management decreased to SEK 148 million due to higher financial costs and one-off costs in central administration. After the balance sheet date, final settlement of the separation from SBB was completed, and Neobo's financial receivable from SBB that was announced earlier has now been settled. The earnings capacity: it's not a forecast and does not include any assessment for future trends. Rental income is up 5.4% compared to the earnings capacity in the beginning of 2023, attributable to rent increases and higher occupancy rate.
Property management costs have increased to SEK 390 million related to higher costs for maintenance, electricity, and property administration. Net operating income has increased by SEK 20 million since the beginning of the year due to higher rental income, and the yearly run rate for central administration still amounts to SEK 55 million.
Net financial items is based on existing credit agreements and STIBOR on the last of December. Profit from property management sums up to SEK 177 million, and net initial yield in the earnings capacity has increased from 3.0%-3.5% during the year. The value of the property portfolio declined by 8.3% during the last 12 months as a result of increased yield requirements in the market. Average yield requirement in the valuations has increased from 4.1%-4.7% during the year. We have a strong financial position with a low LTV of 50.2% and 100% of the financing from banks. The average debt duration amounts to 3.3 years, and as you can see to the right, we have almost no maturities before 2025.
Our average interest rate has increased to 3.4%, but since we have a high hedge ratio of 74%, our interest costs are not fully affected by increased interest rates, and we have a good predictability of profit from property management going forward. The average fixed rate period was prolonged from one point eight years in January to two point two years in December, and the ICR amounted 1.7x during the period. In order to secure future cash flow and reduce the financial risk, we use interest rate derivatives, and at the end of the year, the aggregated nominal value of the swaps was SEK 5.4 billion, and this slide shows the maturity structure and the average interest rate in the swaps. After long-term interest rates fell sharply at the end of last year, we took the opportunity and entered into new swap agreements of SEK 600 million.
The average maturity of these swaps is five years with an average interest rate of 2.6%. Riksbanken's announcement in February to leave the rate unchanged and at the same time as they open up for a first interest rate cut in the spring indicates that we most likely have reached the peak and that interest rate cuts now are in sight. Here you can see our largest shareholders in the end of January, and according to Euroclear, the total number of shareholders amounted to 134,000. In January, we also became members of EPRA, the European Public Real Estate Association, to improve transparency in our reporting and increase visibility towards investors.
And finally, some key takeaways from our first year: we have improved important key figures, residential occupancy increased by 1.2 percentage points during the year, we have continued positive development of rental income + 5% in like-for-like portfolio and positive outlook, average fixed rate period prolonged from one point eight years to two point two years during the year in a favorable market situation with falling long-term interest rates, and finally, we have established a platform to create value going forward. We have increased the return from our properties, we have a sustainability strategy in place, and we have a tailwind of strong underlying market trends. And with this, we would like to open up for questions.
Thank you. 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 Jan Ihrfelt from Kepler. Please go ahead.
Okay. Good morning. I have a couple of questions here. Starting off with your covenants, could you comment upon that in terms of ICR, just to get a feeling where it is?
Yes. I mean, we have a financial goal that the ICR shall be about 1.5x , and even if we haven't communicated the exact figure in the covenants, maybe it's an indication. So we have a good headroom with an ICR of 1.7x during the last 12 months and a positive prognosis going forward since interest rates are now the long rates have now fallen.
Okay. For this year, what do you expect to spend on renovations?
I think that for 2023, we had an investment volume of about SEK 177 million, and on top of that, also a lot of maintenance, of course, in the NOI. So for this year, we think that probably value-creating investments of SEK 150 million and that the level of maintenance will be a little bit lower during the coming year.
Okay. What portion is renovation from this SEK 150 million?
Renovations of apartments?
Yes.
Yes. I think that we will probably renovate 100 apartments during the coming year. So it's, yeah, maybe one-third of the total investment volume, and then we will also prioritize sustainability investments with a good return.
Okay. And what kind of return on investment do you have on these renovations?
On the renovations, we have between 5% and 7% yield on cost, and in the sustainability investments, we see even higher return.
Okay. And in your earnings capacity, on the rent side, what kind of rent increases are included on that line?
Yeah. On the 1st of January, we only have the rent increases due to the indexation in the commercial lease agreements and no assessments regarding rental increases in the residential part of the portfolio. So as I said, now we have negotiated 36% of the residential rents, and probably when we communicate the Q1 report, this level will be higher, and then you can see that in the rental income for the 1st of April. So it's only the income that we are 100% sure of at the 1st of January in the earnings capacity.
Okay. Thanks. If you start looking at 2025, are there any arguments why you should receive or establish a higher rent increase than inflation for next year?
Absolutely. It's a lot of arguments for that. I mean, since we didn't yet, residential property owners didn't get full compensation for the high inflation during 2023. It will be increases during the coming year. So we are convinced that we will see a good increase in rental income during the coming year, even if the inflation slows down.
Okay. A final one from my side. I'm a little bit puzzled about your yield, 4.7%. If I look at the earnings capacity and back out all the vacancies, I land on a net operating income of SEK 555 million, and if I relate that to your property values, I end up with 3.9% or almost 4% yield. How do I get to the 4.7%?
You need to use the same assumptions as our external valuation does when it comes to development in rents, development in costs, and development in vacancies, of course, and also assumptions regarding value-creating investments that can further trigger the NOI.
Okay. Thanks for taking my question.
Thank you.
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 written questions from the web, and I will start with one from Björn. What are the prognoses for the occupancy rate in the end of 2024? What is a realistic number to expect? The vacancy is still higher versus the number for Sweden, isn't it?
Yes. A good question. Yes, the occupancy rate is lower than the average and the market vacancy if we look in the market that we are present in. But it's a combination of vacancy in the residential properties that we have and also a high vacancy that we have in our commercial premises. So the occupancy rate that has improved from 92% to 92.5%, I mean, it's a combination of both vacant residentials and apartments and also vacant commercial premises. So we are focusing very hard on this year as well, and we think that it we really think that it's possible to lower both the vacancy rate in the residential part and also in the commercial premises. So we haven't communicated any figure, but it will our target is that it will absolutely be a lower vacancy rate at the end of the year.
Yes. And the next question is from Joel. You stated that refinancing margins raised. Could you elaborate on the reason why this is, and what do you expect going forward? How do Neobo's margins compare versus peers?
Also very good question. I mean, when we report the full year of 2023, we have to compare it to 2022. Of course, the major impact in financial nets is that the underlying rents have increased. That's the biggest explanation, of course, to the higher financial costs. But we have also seen an increase in margins if we compare to 2021 and 2022 as an effect of interest rate increases. I mean, I think it's no huge changes. We have I mean, we can see that the average margin in our loan agreements is approximately below 180 basis points at this point. Maybe it's better to ask the banks what they will give us today, but probably a bit higher, but it's no major increases as we see it.
Yes. Thank you. And the next question is from Björn. Can you please elaborate more regarding vacancy in non-residentials?
Yes. We have, during the year, analyzed all the commercial premises that are vacant, and it's somehow a little bit different work to do when it comes to the commercial premises. So we have started to work on marketing and have help from some local advisors in some cases. I mean, some of the vacancies are commercial premises in entrance floors in residential properties, but we also have some community service properties with high vacancy. So we are really focusing on that right now, and hopefully, we'll see improvements during the year.
Yes. The next question is from Lars. What was the yield on the six properties sold in Eskilstuna?
Also a good question. When we analyze the portfolio and look at the return that we have received during the years, we land on a normalized NOI corresponds to a yield around 4.6%. But since that portfolio, we have a high vacancy, and it's also a very low surplus ratio in these properties. So the yield today is significantly lower than that.
Yes. The final question. Expectations for the evolution of real estate values in 2024, probably again a bit down. What about your LTV if values decline a bit further?
Yes. I mean, the values have decreased with 8.3% during 2023, and as interest rates are now probably more stable for the coming year, the yield requirements on properties will also be more stable. I mean, it's a perfect correlation between them, of course. So we think that we have the high decreases behind us, and since we are now increasing the return and the NOI from the portfolio, it will also counteract further yield decreases. So I mean, we will let our external valuators do the valuations for every single property every quarter going forward. But my guess is that it will be a more stable situation in the valuation for this year. And since we have a low LTV of 50.2%, so we are not worried about that at all.
Okay. No further questions from the web?
We can see that it's one more queued question from the telephone conference.
The next question comes from Jan Ihrfelt from Kepler. Please go ahead.
Okay. Thanks. Just to follow up, of your non-residential rents, what's the portion community service properties in it?
Good question. Without having the exact figure in front of me, I would say that it's probably definitely a larger proportion in the residential properties, commercial premises in the residential properties. But maybe one-third of the total vacancy rate is from non-residential properties, so to say.
Okay. What kind of vacancies do you have in the community service properties segment?
Yeah. For example, we have this vacant property that I mentioned before in Sollentuna, north of Stockholm, with a high vacancy rate. That's not any apartments in that property, so it's been education and care and so on in that property before. So that's a.
I was just looking for some kind of average for that segment, the community service properties. Is it possible to get that?
Yeah. I would say that it's a low vacancy. I mean, we have a couple of elderly livings and LSS residentials, but they are fully occupied. So the majority in the commercial vacancy is in residential properties, vacant areas in commercial premises in residential properties.
Yeah. Yeah. Okay. Thanks.
Okay. Thank you very much for listening in, and have a nice day. Bye-bye.