Diös: No freeze in the North - ABG

Higher interest rate expectations lower CEPS
…but positive operational signs are encouraging
EPRA NRV down on higher yield expectations

New letting, project starts and higher rents
The strong new letting from Q1 (net letting of SEK 16m excl. the updated deal for Högskolan Dalarna i Borlänge) appears to have continued into Q2, based on press releases. In addition, two projects totalling ~SEK 700m in investments have started during Q2. Contracted projects are running according to plan, while prices on new projects are up and Diös’ stance is more cautious. However, the company sees increasing office rents (~+SEK 50-200 per sqm) in its regions and believes the increasing trend will prove lasting due to demand for central office properties. We have adjusted our interest rate expectations on the accelerated timeline from the Swedish Riksbank and updated Bloomberg consensus estimates, affecting CEPS; our forecasts now reflect hikes of +25bps in June, Sept. and Nov., respectively, adding up to +150bps until ‘24e (+100bp previously).

Incorporating declining property values
Interest rates and the Swedish 10y govt. bond have increased rapidly, which is why we now forecast property values (excl. inflation and value gains) to decline by ~10% up until Q4’23, with the first negative value changes in Q4’22. As a reference, property values in Sweden declined by ~8% in 2008 and another ~4% in 2009. We expect the last reported net LTV of 49.3% to remain intact by Q4’22e, helped by the SEK 737m divestment in Q3’22e. A strong cash yield (~7-8%) mitigates some increases to the net LTV, which is at ~51% in Q4’24e.

Fair value range of SEK 70-100 (80-110)
The share is trading at ~10x LTM P/IFPM and a ~25% discount to its last reported EPRA NRV. These metrics are below DIOS’ 5y averages (11x and 9% premium) although the current and expected activity in its cities is unprecedented. Moreover, it is ~-30% and ~+25% vs. the average of peers CAST, EAST, NYF and WIHL. We lower our fair ...
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