Hello, and welcome to Wihlborgs Fastigheter webcast for teleconference Q2 2022. For the first part of this call, all participants will be in a listen-only mode, and afterwards there will be a question-and-answer session. Today I'm pleased to present Ulrika Hallengren, CEO, and Arvid Liepe, CFO. Please begin.
Thank you, and welcome to the presentation of Wihlborgs Q2 report 2022. If you want to manage well in good and worse times, and also be able to reach out far, it's always a benefit to have a strong core. Working with that core gives stability during rough conditions and ability to be flexible and fast when opportunities come by. We continue to work on our core, and the results keep coming. Our core is our position in our region, our culture, and our dedicated employees. Our core is also our strong cash flow, and that we like records. I start with some figures. SEK 109 million is a new record for new leases in one quarter. SEK 41 million is the net letting for Q2. This continues to build our cash flow.
7.5% is rental income growth in like for like, a record and a very strong number, also building our cash flow. This is before indexation 2022, of course. 7.2 is the multiple for interest coverage ratio. The cash flow is behind this strong figure. 10.5 is borrowings relative to earnings, net debt divided by EBITDA, also result from strong cash flow. A part of financial stability is access to capital. As of end of June, we have SEK 3.3 billion in available funds, and our average interest rate is 1.35%. Now, let's go back to the standard presentation mode, a summary of Q2 2022. As mentioned, strong letting, increased rent levels also in the industrial portfolio, solid increase in rental income and profits, stable balance sheet, continued access to financing, and by that also good position to meet future opportunities. Results for the first half 2022.
Rental income increased by 8% to SEK 1,599 million. The operating surplus increased by 9% to SEK 1,135 million, and income from property management increased by 11% to SEK 950 million. The result for the period amounts to SEK 1,549 million, which corresponds to 5.04 SEK per share after the split in May, and EPRA NRV increased by 4.9% to 87.60 SEK per share adjusted for paid dividend. A comparison between rental income first half 2021 and first half 2022. Acquisition +SEK 18 million, indexation +SEK 27 million, currency effect +SEK 11 million, income from canteens in Denmark +SEK 10 million, lower vacancy +SEK 23 million, and other increase from new leases and higher rents excluding indexation +SEK 33 million.
On the cost side, we are still struggling to reach break even at our canteens in Denmark, but we have focus on that question, and the canteens are an important service for our tenants. Overall, a good growth in rental income, and this is before the indexation coming up for 2022. We have signed new leases for the quarter of SEK 109 million and SEK 163 million for the period. The positive net letting for the quarter is SEK 41 million and SEK 69 million for the period. The activity among our customers continues to be high, and we see many new inquiries coming up. As always, even if we have been able to sign some larger leases, it's in the large number of many growing tenants that build these figures. I will keep on mentioning this every quarter.
Here are some of our new tenants that we have signed during Q2 2022, a mix of different segments as usual, and a good contribution from all our regions. Nederman in Helsingborg and Via Syd in Malmö are among the largest, but MAX IV Laboratory in Lund at Nya Vattentornet 4 and Green Landscaping at Grustaget 1 in Helsingborg are also very important, filling up areas that for some time have been a bit more difficult for the market. Here we have the net letting in a historical perspective, 29 positive quarters in a row and only one quarter with a negative number for over 14 years. Fifty-eight positive quarters out of 59. A good score, I would say. I would claim that this has not happened accidentally, and it's not only luck behind this.
Letting in light green, termination in light blue, and dark blue stacks are the net letting. The number of new leases is 270 for the period. As always, no guarantee that we will never be below zero. Q3 has also started well, even if the number of leases in Q3 normally is lower than rest of the year. A list of our 10 largest tenants in alphabetical order. They contribute with 20% of our rental income, and also the rental income from public tenants continues to be high, 24%. Just a reminder once again, it's the wide diversity across many sectors in a region that is the strength that brings this stability over time. Rental value is now SEK 3,537,000,000 per year, and rental income SEK 3,239,000,000 + 9%.
A good signal of growth, partly a result of our successful project portfolio, but also being close to the market, knowing our tenants, and being willing to make room for their growth. Of course, when they have demands for upgrading their workspace, we are there. Sometimes we move around in two or three stages to make changes possible. Looking at like-for-like figures, we can see that the rental value is up, + 6.3%, and rental income is up 7.5%. A record high level, and again, beating our ambition to exceed index by at least 1 percentage point. Vacancy will continue to improve as a result of high positive net letting. A summary of our portfolio. The market value is now SEK 42,408,000,000 for the office portfolio, and overall, the occupancy rate is 92%.
It's 94% in Malmö, 90% in Helsingborg, 92% in Lund, and 93% in Copenhagen. The operating surplus from offices summarize to SEK 2,086,000,000 and a running yield of 4.9%. Also worth mentioning again, running yield is not the same as valuation yield. Maybe you can say that we actually perform a bit better in our portfolio than our appraisers' expectations. In this valuation method, there are calculation models for future vacancy, but we work with our properties so that the vacancies should be decrease rather than increase. When our vacancies increase in the property stock, it's usually because we have bought something with vacancy or emptied a property and created vacancy for development. The demand for logistics and production continues to be good.
Occupancy 94% in Malmö, 91% in Helsingborg, and 92% occupancy rate as a whole, with a running yield of 6.2% and a total value of SEK 6,563,000,000. For the entire property stock, the occupancy rate is 92%, excluding project and land, and an operating surplus of SEK 2,493,000,000, which gives a running yield of 5.1%. Total value of the portfolio, SEK 51,760,000,000. Changes in market value of our properties. We started the year with SEK 50,033,000,000. In accordance with our external valuation, which we do once a year with 100% of the stock at the same time. We have acquisitions for SEK 377,000,000, primarily Österport in Malmö. We have invested SEK 568,000,000 and divested a small piece of land at Helsingborg for SEK 1,000,000. Together with changes in valuation, they amount to SEK 372,000,000. The increase in value comes mainly from new leases.
Expectations of inflation during 2022 and 2023 have gone up, and we have increased the yield requirements somewhat. These two changes basically offset each other in the valuation. Together with the currency translation of SEK 411 million, that summarizes our property value of SEK 51.76 billion. The value of the portfolio has developed, as you can see in the slide, since 2005. A bit flat 2020 due to the largest investment in the Nyhamnen of Malmö, but now back on track, and we continue to be ready for further transaction possibilities. Once this morning we announced. I'll get back to that. First, a short summary of our portfolio in our four cities. A catalog of our value and properties here, 42% of the value in Malmö, 23% in Helsingborg, 17% in Lund, and 18% in Copenhagen.
These are the main cities in the Öresund region, and together they create a good mixture of possible development and attractiveness for living, education, and work. The differences between the cities are large enough for them to have their own character, but at the same time, so close that people can commute between the towns efficiently. There is still more to be done to integrate the labor market between Sweden and Denmark, but today there is a strong need for labor in Denmark while we have unemployment in Sweden. This combination can stimulate our governments to increase cooperation further and make it easier for people who want to live on one side of Öresund and work on the other. Something about acquisitions. It continues to be important that we find both the right price and the right location for long-term ownership.
We prefer when we can contribute with something, maybe a vacancy to work with or some technical improvements that we can so that we can increase the rent over time. We have bought Österport 7 in Malmö, a very attractive spot, both close to the central station but also with a good parking possibility. 11,000 square meters today fully let to Sweco. Property value of SEK 390 million, but we know that this property needs some technical improvements. A good possibility for us and also for Sweco. We can give them an even better workspace for their employees. The building can be used both for single and multi-tenant. We have also acquired Vermundsgade 107 in the northern part of Copenhagen, 3,600 square meters with an operating cash flow of some SEK 3 million.
The plan is to invest a bit, make it more energy efficient, and add some extra modern touch. By that, we calculate to get a higher operating surplus. Not the largest deal, but a good example on how we can add value. This morning, we announced an acquisition that is a bit larger but worth mentioning, even though it will affect the accounts on the Q3 period. 52,000 square meters in South Copenhagen, a new area for us, closer to the city center, and just beside two metro stations, one each. We can also offer good parking here as well. The location is also very close to Copenhagen Airport and the Öresund Bridge, a good spot to be. Modern and very refurbished premises, but 25% vacancy where we can contribute.
Further investments are planned in the area, which further will also strengthen the activity here over time. Initial rental value of DKK 40.8 million, but we expect improvements. Date on transfer is agreed to first of September, and we fully finance the requirement via the Danish mortgage system. Over to you, Arvid, for finances.
Thank you very much, Ulrika. Good morning, everybody. If we move to the next slide, you can see the income statement for Q2. Rental income amounted to SEK 804 million +9%. Operating surplus was SEK 578 million +8%. On the cost side, we have had slightly higher costs in our Danish operations than we would have liked to. That relates partly to the canteens, as Ulrika related to earlier, but also that energy costs in our Danish operations have increased. We are not able to fully pass those along to our tenants. Income from property management amounted to SEK 483 million +9%.
The value changes in the quarter was +SEK 151 million, a positive value in derivatives stemming from rising market interest rates, and a profit for the period of SEK 733 million. Looking at the balance sheet, you can see that the property value versus 12 months previously has gone up by SEK 4.7 billion. At the same time, equity has gone up by SEK 3 billion, despite our paying a dividend of SEK 922 million in Q2. Borrowings are up SEK 1.5 billion in the same period. Translating these numbers into some key ratios, the equity/assets ratio now stands at 42.1%, and our LTV at 48.0%. The interest cover ratio is still at extremely high levels at 7.2 times.
Looking at per share numbers, I would like to highlight the EPRA NRV at SEK 87.6 per share. Versus twelve months previously, that is up 17%, adjusted for dividends. On the next slide, we can see the development of EPRA NRV since 2009. The growth of 17% per year has actually been the same since 2009 on average, which I think is a very strong and consistent number. Looking at the historic development over the past five-year period of the equity assets ratio, you can see that it has gradually gone up and well above the limit that we've set for ourselves of a minimum of 30%.
The loan to value has at the same time gradually come down, and that's well below the limit we've set for ourselves of a maximum of 60%. The interest coverage ratio at 7.2 times is very much stronger, of course, than the minimum interest coverage ratio target that we've set for ourselves at 2.0 times. Looking at financial stability, we think it's very relevant to look at how the net debt in relation to EBITDA has developed. Over the past few years, we have gradually strengthened this ratio, and this now stands at 10.5 times.
Looking at our financing situation, we have now just over 50% of our external borrowing from the Swedish bilateral bank agreements. About 30-36% from the Danish mortgage system and 13% from the bond market. Given the instability of the bond market currently, it's of course a strength to have a limited exposure to financing from the bond market. We have bond maturities of just over SEK 800 million in Q3, which we are able to fully repay via existing bank facilities if need be. I think it's also worthwhile mentioning that the Danish real mortgage system continues to work in a very consistent way. That is still a very attractive source of financing for us.
Looking at the next slide, you can see the structure of our interest and loan maturities. Our average interest rate is 1.3%, 1.35% including costs for credit facilities. We have an average fixed interest period of 2.5 years and an average loan maturity of 6.2 years. In the current interest environment, it's of course important to look at the interest rate sensitivity. On the next slide you can see a graphic picture of how that looks for us as of end of June. The graph on the left, you can basically say that an instant increase in market rates of 2 percentage points would basically affect our average interest rate by 1 percentage point.
On the next slide you can see the historic development of our fixed interest period and our loan maturity. We continue to follow the financial policy that we set for ourselves a number of years back in time, the end of 2018. Of course, over time we will be affected by rising interest rates. Our interest, our financial financing policy and financial interest rate risk management policy gives us a reduced volatility in financing costs. Lastly, looking at available funds, which of course also is a very important number to follow in these days. We have unutilized credit facilities plus liquid funds amounting to SEK 3.3 billion as of end of Q2. With that, I hand back the word to you, Ulrika.
Thank you. I give you an update on sustainability. Strong financing is of course a most important part of sustainability, but I will also give you some example of lower cost as an additional part. First, since the last report, another seven properties has been approved and classified as Miljöbyggnad iDrift. All of them from the running portfolio, and in total additional 45,300 square meters. The forecast that is that we might reach 75% of the offices in Sweden in 2022, and then we will just continue. Last report, I talked a bit about Scope 3, which is our largest and most important challenge. Our goal for the highest carbon dioxide equivalent per square meters in all our new construction projects, together with a new model where we actually put a price on carbon dioxide impact also in our refurbishment projects.
They are steps on that path that we all have to go, trying to find the best solutions. There are also things that we can do in existing buildings, and I will give you a short example of that. Torrdockan 6, one of our first buildings in the Dockan area in Malmö. 12,000 square meters, built the year 2000. Of course, by working with the control and optimization system for ventilation and heating and cooling in buildings, we can reach good operating values in our buildings if we design them strictly and we put up the demands for the systems, of course. We always put up a demand for open source and flexible system. It's a basic requirement for us. There is so much more we can do. We have worked for many years trying to reuse and recycle both heating and cooling in our buildings.
Actually, when we have buildings where we have tenants, where some of them contribute with extra heat over the year, for example, a restaurant or a server hall, and some of them needs that heat. We can exchange these needs with reversible heat pumps. You cannot buy these things at the level of efficiency that we ask for. We actually design the compressors and the reversible heat pumps ourselves. We have tried this system for some years, and now we can see the results. In Torrdockan 6, we save 55% of the total energy consumption, heat, cooling, and electricity together. The energy class went from class E to B, better than many new buildings, and with almost no new carbon dioxide impact. A very good model that we hope can improve many buildings in the future, and a good investment of course.
Even if E.ON for this moment decided that if we use less energy from the district heating system, they raise the price per unit. We still get a short payback time for this investment. Let's go to all our investment in progress. We have during first half 2022 invested SEK 568 million in ongoing project, and it remains SEK 2.576 billion to invest in ongoing projects. In total, almost SEK 3.5 billion in ongoing projects. Overall, the projects in production generally meet both schedule and budget forecasts, with one exception at Raffinaderiet 3 in Lund. Otherwise, despite the troubled world with the war in Ukraine, high energy prices, lack of materials, higher prices overall, and problem also with logistics and production times of materials, we are actually quite protected from that so far. Working very close with our contractors and tenants.
That helps us finding solutions, and sometimes we can change construction methods or material. Now we see several signs that the price levels go down later on this year, and that is good of course, not at least for our contractors. We can actually see that the tension drops a bit from their shoulders at the moment. A quick review of our largest projects. The large one in production is Pulpetten 5 in Hyllie. Kvartetten as we call it. SEK 804 million including VAT for the part where Trygg-Hansa is our tenant. Return on investment 6%, and the project includes 16,000 square meters lettable floor area and the highest certification standard with Miljöbyggnad Gold, WELL, and zero carbon dioxide. 85% pre-let and completion Q2 2023, and the rest of the tenants will move in from Q2 and forward. Also in Hyllie, Bläckhornet 1, the project we call Vista.
A large mobility hub with 400 parking spaces. Although the block is right beside the train station, parking is still an important sales factor. On top of the mobility hub, there will be 16,600 square meters offices and restaurants. With no other vacancy in the area and Kvartetten almost filled up, the timing is good since there will be a long construction period. Also important that we get the best offer from our contractors. Procurement is ongoing, and I can just say that I'm optimistic. We have many trustful and dedicated contractors. Good for us in these times. Estimated completion in Q1 2025, but the mobility hub will be ready earlier. In total, at least 5.7% yield on cost. In Tobygården 7, Malmö, we're doing a project for Beckhoff Automation. State-of-the-art office at a good transport location in Malmö.
Investment SEK 59 million and completion in Q3 2022. Raffinaderiet 3 in Lund will also be the state-of-the-art office, right beside the central station. A bit of delay is expected. First tenant can move in in Q1 2023. Conversion projects in old industrial buildings can sometimes always give you some extra surprises in several ways. The result will be very good, and we sign new leases at really good levels. 5,800 sq m offices at best location might be worth a touch of extra patience, even if I must say it is not my best skill, to be honest. I keep on practicing. Posttornet 1, phase II. A new office building of 9,900 sq m right beside Raffinaderiet and the central station also, of course. Investment SEK 448 million, and completion is planned to Q4 2024.
Procurement is ongoing, but we will give it some extra time also so that we can make a good plan not to interfere with Raffinaderiet. At Science Village, right beside research facilities MAX IV and ESS, we have started our project Space, where Oatly will be the main tenant. They will have their research and development team here. We have more building rights just beside this one. We invest SEK 244 million, and the building will be completed in Q3 2023. Follow the plans very well. In Helsingborg, we are building a multi-tenant office project at Huggjärnet 13. 65% pre-let, and both phases have now started. Completion in Q2 2023. At Snårskogen 5, also in Helsingborg, we build a facility for Doka. 2,200 square meters, investment SEK 60 million, and completion Q1 2023.
Another larger one for Nederman, and a 20-year lease we signed in Q2. 25,000 square meters at Rausgård 21 in Helsingborg. Investment SEK 420 million, and completion in Q1 2024. A really long-term investment that also gives a good boost to the surroundings of this building. A large ongoing portfolio, but let's also mention something about future investments. Four possible projects in our three Swedish cities. Vetskapen 1, just beside Kunskapen 1 at the Science Village area. Ideontorget, here we can build approximately 16,000 square meters just beside the tram station in several phases. Polisen 7, offices in the city center of Helsingborg. Naboland 3 in Malmö, where we can offer 8,000 square meters gross floor area here in Dockan. Zoning plans are approved for all these projects, and we can start when we have the right customer.
A few other possibilities from the industrial and logistics segment. Plåtförädlingen 15 and 18, 22,000 square meters in Helsingborg. Tomaten 1 in Lund, just a lease of the land at the moment. But with the right tenant, we are allowed to buy this property, and we can build approximately 17,000 square meters here. Industrial land in Lund is hard to get, so here is a good potential. We also have Bildrutan 5 in Landskrona, 14,000 square meters logistics and right beside the highway. A zoning plan that will allow us a 20-meter high building. In Sunnanå in Malmö, where we have built for Region Skåne and WH Bygg, we can add on 17,000 square meters logistics or production.
We continue the planning on Nyhamnen, but the municipality still struggles a bit with the overall infrastructure planning. I think I said something about patience earlier. However, we can continue our design and planning for projects in line with ongoing zoning plans. For example, Smörkajen, a design for 13,000 square meters. Kranen 15, just at the entrance to the Dockan area from Nyhamnen. We work with a zoning plan, and it's still to be started, as well as the architectural competition for the design that is part of that process. Together with JM and Peab, we also continue our joint venture for new zoning plans in the Dockan area, workspaces, school, and housing in a mixture. At Västerbro in Lund, the work with the zoning plan continues, and we can develop approximately 70,000 square meters here.
We also continue with several city development projects in Copenhagen. At AG Industrivej 41, we work with our plan for a new structure at this large area, very close to the new tram station, Letbanen. We can possibly develop something like 100,000 sq m housing, school, and workplaces. The only thing we can be sure of in this moment is that it will not look exactly like this. It's still an early phase, of course. Let's summarize Q2 once again. Strong letting, increased rent levels, solid increase in rental income and profits, +8% and +9%. Stable balance sheet, continued access to financing, and by that, also a good position to meet future opportunities. I would like to end with another figure, 100. 100 as in 100 years.
In 2024, Wihlborgs will celebrate 100 years. It's a long time. Stability and growth have always been in the DNA. We have our strongest time right now, and it's my definite ambition that we will be even stronger at our birthday party. All of you, of course, will be welcome to celebrate. By that, we are open for questions.
Thank you. If you do wish to ask a question, please press zero one on your telephone keypad. If you wish to withdraw your question, you may do so by pressing zero two to cancel. Our first question comes from the line of Markus Henriksson from ABG. Please go ahead.
Thank you, and good morning. A few questions from me. First off, looking at the NOI margin, it decreased around 0.8 percentage points year-over-year. At the same time, occupancy rate is up at 92.4% versus 90.8% last year. You highlight the increases in energy costs and also increased costs for the canteens. On the back of that, how should we view operating costs going into the coming quarters?
I think, as Ulrika said, we are working hard on getting a balance in the results of the canteens in Denmark. They are important in our offering towards tenants, but we can do better in improving profitability. We have in our Danish operations what we call warm rent, so to speak. I don't know if that is the correct English expression, but basically where we cannot pass on energy costs to the tenants. In our Danish operations, that type of contracts account for between 15% and 20% of our total contracts.
That means that with rising energy costs, we can assume that we will have SEK a few million higher costs per quarter, from the Danish operations, presuming that energy costs remain at the levels where we are at present.
Very clear. Thank you. Regarding the recent transactions, first off, I haven't seen when the deal in Helsingborg is closed, so that would be good to get that date. Also regarding the-
The first of July.
First of July. Okay. Thank you. Then also on the acquisition press release this morning, you highlight a vacancy of around 25%. You also mentioned that it's the both properties are modern. Are you able to start with the leasing activity directly?
Yes.
Very clear. Thank you. On your balance sheet, net LTV at slightly above 47% now, increasing a little bit more now with the announced acquisitions. You mentioned during the conference that you are ready for more acquisitions. Should we expect you to continue to be a net buyer here for the rest of 2022? Or how do you view the transaction market versus your balance sheet at the moment?
We will continue to look at every possibility and make long-term good decisions.
Do you see a lot of deals in the market?
No, not significantly different in any way. I think it's important for us to be true to, as we mentioned before, that we will find the right spot to be and the right quality we can add value and find the right price for that. I hope that there will be more possibilities, of course, but we will do it in a sustainable way.
Thank you for that. Last question. You mentioned that the bilateral bank market and the mortgage system in Denmark remains stable. Could you give us some details or flavor regarding margin spreads and what they are saying to you?
I'd say if you look at the Danish mortgage system, recent financing discussions indicate stable margins. I mean, basically where we've been before, around 70 basis points. Swedish bilateral bank agreements during the quarter, we've had a couple of discussions, and I'd say that you've seen a marginal increase in the margins from the banks in those discussions, say 10 basis points or something. I think our average bank margin in our Swedish krona loan portfolio is around 130 basis points.
Very clear. Thank you for taking my questions.
Thank you.
The next question comes from the line of Stefan Bühler from Nordea. Please go ahead.
Yes. Good morning, and thank you. I have a couple of questions on transactions as well. You have done a couple of acquisitions within the last month, and is this a consequence of less competition or that the yields have become more attractive by increased, or how come that you've increased the pace in the last month?
I think it's more of a timing effect, actually. If you look at Österport, we can add some value there, so it's not for everyone to go in there, I think. It was a good deal for us and also for the seller. At the same time, we have seen other transactions at higher prices, of course. I would say that those deals we have done now, it's more of a kind of a before the summer effect, I would say.
Okay. Thank you. I understand. So I interpret it as yields are relatively stable compared to previously. What is the outlook for yields given that the interest rates have come up so much? We see a transaction market which appears to be rather stable, but for how long do you think that it can sustain?
It's of course only speculations, but I think that the yields could be quite stable, but we might not see the wildest deals to be done in the future, for some time. I think that it's good for everyone that we have a stable market that's healthy. We still see.
Yeah.
We still do see deals that we think is very high prices. Definitely.
Okay. Thank you. Yeah, like
Despite this, I think that you wrote in the report that you have changed your yield requirements a bit and also the inflation assumption, and that the net effect was zero from this. How come that you increased the yield requirement, if I understood correctly?
Well, the valuations we've generally done those internally as of end Q2 as usual. We have, of course, given the changing market conditions, had a dialogue with our appraisers as well, not to get any future surprises and also use their input in our internal valuations. As I believe we also wrote in the report, making the assumptions in the valuation model, I mean, putting in the right assumptions is probably more tricky than it has been for many years. We have adjusted the inflation assumptions in the models.
Given what we see in the market and the transactions we've done ourselves, we've felt that it's been prudent also to change the real yield requirements somewhat, not to get any extreme valuation changes. Again, the way we think the momentary valuation changes is actually not the primary focus. Our primary focus is to do well in our core operations and to continue to generate a strong cash flow.
Okay. Thank you. That's clear. Thank you for taking my questions.
The next question comes from the line of Niklas Wetterling from DNB. Please go ahead.
Thank you. Firstly, I wonder if the three press releases on new lettings that you sent out in the beginning of July, if those are included in the Q2 net letting figure?
Via Syd is a part of it. What was the other one?
IO Interactive
Yes
That, that's also in Q2.
Yes. What was the last one?
Luckily enough, there have been plenty of new lettings, so it's hard to keep track of them.
I'm not sure if we have announced any from the Q3 actually.
No.
We have signed new leases in Q3, but I think we haven't announced them yet.
Okay, great. Thanks. I wanna go back to Staffan's question there on acquisitions. Among peers, you've been much more active on acquisition lately, and I just wanna hear your view if you believe the market prices has adapted over the six months here, following what has happened in the funding market.
As I said, I think that the most wild investors that we have seen maybe will have a period where they are a bit calmer. But we still see things that we think is out of our league, of course.
Okay. Perhaps a theoretical question here, but, how much more would you have been willing to pay for, say, six months ago for these assets?
No, it's the same price, I would say.
The same price? Okay.
Yeah.
That's all on my question. Thank you.
The next question comes from the line of Erik Granström from Carnegie. Please go ahead.
Thank you. Good morning. I would also like to ask a few questions about the latest transaction that you announced this morning. 25% vacancy, you mentioned that you're working with leasing now. What is. Has this been a structural problem with this asset, or is this something that have come up recently, the increase in vacancy? In terms of lease terms, are there any other leases that you expect to run out going forward short term?
If we start with the Danish those two assets they have been working with these assets and modernize them for some time. We continue that work. I think it's more of a. There's more to do and the market will be stronger there. I think it's just a matter of timing in that. The COVID period has of course affected the ability for these assets a bit. As soon as we take over 1st of September, we will put a lot of energy there. I know that one new lease is signed just a few weeks ago. The assets are attractive, definitely. The other question was?
Lease term risks relating to the acquisition in-
Okay.
Copenhagen.
Yeah, I would say that, of course, in Denmark, many tenants have shorter periods, so they can make terminations in six months announcement. Yes. That is a part of that market.
Okay. Fair enough. In terms of financing, I assume this is financed through the Danish mortgage system and-
Yes
The terms for financing, could you say something? You mentioned that you have about 70 basis points margin, but sort of what would be the all-in cost in the Danish system for these two assets, just to get an understanding for what kind of yield spread you're working with.
Adding to the 70 basis points, you have the six-month CIBOR, or in some cases a three-month CIBOR.
Okay. All right. I was just wondering in terms of going back a little bit on what you mentioned about increased assumed inflation as well as higher yield requirements in your internal valuations. In terms of increased inflation, could you mention where you started from and where you ended up? Meaning how much did you change and to what did you change your inflation expectations or CPI?
We increased the inflation assumption for the October 2022 number to approximately 6%. Bringing that down to, I believe it was around 3% or 3.5% the year after. We increased the yield requirements and the valuations by approximately 20 basis points.
Okay. I assume that, given what you said before, that the move of the yield requirement that you did internally allows, it seems like it's more a situation that you are sort of making headroom for what you think external evaluators will look at in Q4. Is that a pretty good understanding of your thinking, or am I completely wrong here?
I think you're right in the sense that we of course have a continuous dialogue with our external appraisers and we do not wish to have significant surprises. From that perspective, you're right. At the same time, I mean, we're obliged of course to make an as correct market valuation of our assets as we can each quarter.
Yeah. Okay.
as always.
Okay. Fair enough.
The valuation number will always be somewhat uncertain. I mean, it's not an exact science.
No, that is for sure. My final question is regarding your average interest rate. It came up just a little bit in here in Q2 versus Q1. You gave us a sensitivity table there. Given what we've already seen, should we expect the increase to be slightly larger in Q3, given that market rent movement sort of started quite late in Q2? Is that what you expect or something else?
That's a fair assumption, given what we've seen in primarily CIBOR over the past couple of months.
Okay. Thank you very much. Those were my questions, and I would also like to thank you for the birthday party invitation. That was very nice of you.
The next question comes from the line of Albin Sandberg from Kepler Cheuvreux. Please go ahead.
Hi there. Two questions from me. On the development exposure, I saw some minor delay in Raffinaderiet at three if I just compare completion, Q1 versus Q2 report. In more broadly speaking terms, cost inflation during Q2 versus Q1 and your exposure to that.
Yes, we made a change in the budget between Q1 and Q2. Now we also changed the time for the project. So we have been changed both figures, but we also get higher rents. For the investment, I think we still are on a very good yield on cost level. Not as high as we expected from the beginning, where we were a bit above 6%. Now we'll be touched down of that. Still a good investment. Surprises comes along the way. In a very large investment portfolio I think sometimes you have to accept that. Some projects are a bit delayed.
If you look at the portfolio in total, and potential exposure for other projects.
No. As I said, I think we have a very good control over the rest projects. We haven't put up a fixed date for the projects that are going into construction phase at the moment. We follow that a bit. For example, Posttornet just beside Raffinaderiet, maybe we put that a quarter further or something to make sure that we can have a good construction phase for that one. Otherwise in our running portfolio, of course, we struggle together with our contractors and our tenants to make the right decisions and such. We find our ways and we follow both the time schedule and budget for the rest of the portfolio in a good way.
It's also interesting to see that, for example, those really large project that we are now trying to figure out who is the right contractor for us, we get good answers, I must say. Quite positive.
Okay. Sounds good. My final question is, I guess for Arvid primarily, but, and I know you might refer to the board, but I know you know numbers very well, and it's interesting to hear your hypothetical thinking around potential share buybacks, and you refer to the NRV as the relevant metric to look at. I guess at what point in time does it make more sense to buy back shares than start new development projects?
Well, I think it's of course interesting to keep monitoring that and looking both at EPRA NRV and currently also at EPRA NDV is of course a relevant metric to see how to use our capital in the best way. At the same time, I mean, we're here not to make financial investments, but we're here to manage and develop commercial properties. That will always be the first priority. If we can find good investment opportunities, that is what we shall do first.
Of course, you should also not least now that the bond market is not functioning in a very good way. You always have to look at the liquidity situation, of course, and the access to capital. Having good access to capital today is more, in a sense, more valuable than it was a year ago. That's you have to bear in mind as well.
Great. Thanks for that.
Thank you.
The next question comes from the line of Alexander Totomanov from Green Street. Please go ahead.
Good morning and thank you for taking my question. Could you please provide more color around the Copenhagen market, given the relatively high occupancy in your office and retail properties in Copenhagen? What would have to change for the surplus ratio in the region to get in line with your other regions? I assume the warm rent that Arvid mentioned earlier would continue to be a drag at least until energy costs stabilize.
If I just can mention something about the market first. First of all, it's two different markets in Sweden and Denmark. Higher vacancy overall in Copenhagen than in Sweden. We are doing very well for the letting and signing new leases. We have also added on some extra organization for that so we can even further strengthen to lower the vacancy even further. I think it's a good mixture to be there. We also actually see that the rents are moving in the right direction also in Copenhagen. Not in the same path as in Sweden, but it's more of a stable market in Copenhagen, not moving so much.
We can add on value and create earnings from that.
Regarding the surplus ratio, we already touched upon the warm rent. We've also touched upon the effect of us actually running canteens in a few of our Danish properties, which basically give a zero result or even a negative result, which obviously affects the operating surplus ratio for the total. You can also. I mean, the way we run our Danish business is also slightly different from how we do it in Sweden, in the sense that we have our own people doing a lot of work around our properties, like managing the or the green areas. From that perspective, you should expect a slightly lower surplus ratio in the Danish operations over time.
We have of course consciously made the choice to have those people employed by ourselves, and we've made the conscious choice to run canteens in a number of properties because we feel that we can control which type of service is actually given to our tenants and that is a selling point towards the tenants. The way the business is structured, you should thereby expect a slightly lower surplus ratio.
Okay. Thank you very much.
We have one final question from the line of Tanya Lilonga from First Sentier. Please go ahead.
Yes. Thank you, and thank you for the presentation. I do have a few questions which are mainly clarifications of what you've presented so far. Going back to the valuation yield requirements where you said you've increased them by about 20 basis points. Would you be able to tell us where they are now?
Yeah. We've historically and continue to choose not to give the exact number of the average valuation yields, basically because we feel that it gives the reader a false sense of accuracy. I don't want to give the exact number.
A rough number? Or not even.
It varies per city, per part of the city, depending on the type of property.
Yeah.
I mean, it doesn't make much sense giving the average number of a total portfolio.
Let's say that we think that the valuations are stable and.
Okay. Moving on to the next one. Occupancy is roughly stable this year, around 92%, but you've had positive net lettings for quite a number of quarters. I'm trying to get my head around when we would see that impact more significantly into occupancy going up, not by ten basis points or five basis points, but.
We also buy.
you know, more significantly.
We also buy occupancy, so we can add on something to our business. We have bought occupancy, and we create occupancy when we empty buildings.
No. You mean vacancy.
Vacancy. I mean, we buy vacancy so that we can continue with our positive net letting.
Our new constructions also give us the possibility to have a continued positive net letting.
I would say it's healthy for us to have some vacancy to work with.
Right. Okay. Going to the energy cost issue. I'm trying to understand how much you are able to pass on to tenants and how much percentage-wise you don't. You explained that in the Danish market, about 15%-20% of contracts, that's of Denmark or at the group level, that are warm rent and effectively you can't control. Sorry, not can't control, can't pass on the energy. In Sweden, I'm just trying to understand your exposure.
Of course.
to further increases in energy costs overall.
Yeah, the 15%-20% relates to the contracts in our Danish operations. In Sweden, we have a larger proportion of cold rent contracts. Approximately 5% of the contracts in Sweden are so what we call warm rent. That is where we cannot pass on the energy costs.
I would say 5% or less, actually. It's a very small part in Sweden.
Okay. 5% in Sweden, about 15%-20% in Denmark. The average for the group, about 10-ish%?
Uh.
No.
I'm going to be-
Bit less.
average myself.
Yeah.
A bit less. Okay. Right. I think lastly, with the financing and the interest costs and the bonds, you did say you have SEK 800 million bonds maturing in Q3. I think I'm trying to recall exactly what you said, that you could use the credit facilities to repay those if need be.
Yeah.
I'm trying to understand what this if need be means. As in you are trying to refinance the bonds? Are you clear you want to use the credit facilities or-
Well.
What's the uncertainty around it?
What I mean is that we have available credit facilities so that we can amortize the bonds that fall due during the rest of the year. The reason I use the phrase if need be is really that if the bond market starts functioning better again, we feel that having different sources of capital, where the bond market is one source of capital, is good for us over time. If the bond market recovers and starts functioning well again, we could, of course, imagine ourselves issuing bonds to refinance the bonds that fall due. We are not forced to do that.
Right. Okay. No, I understand. I know I said the last question, but since now I think that opens up another one if you can disclose.
Right.
No, this SEK 800 million of bonds, what is the interest rate on them? If you were to go now into the bond market to refinance them, what interest rates you would get?
Hang on a second. It's actually three different bonds which have maturities during Q3. The margin that we're paying on those is 105%, 103%, and 1.25%.
Very exactly. Mm-hmm.
Yeah.
The next question was, what do you think we should pay if we go today?
Well, that-
It's a guessing one.
That's trickier.
I think-
I think, I mean, a three-year bond today, if we would issue that via our own MTN, unsecured MTN program.
Mm-hmm
I would guess 250 basis points or something. That's just a guess. I mean, we've not tried to,
Margin
Do something in the markets, over the past couple of months.
Sure. Okay. Well, that's good. Thank you for all that information. As there are no further questions, I'll hand it back to the speakers.
Okay.
Okay.
Thank you for that. Of course, as usual, you're always welcome with questions, also outside of this forum.
I'd like to wish you all a good summer as well.
Good summer.
Okay. Thank you very much.
Thank you.
Bye.
This concludes our conference call. Thank you all for attending. You may now disconnect your lines.