CREDIT RESEARCH June 4, 2021, 11:31 CET Real Estate

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[3,533 CREDIT RESEARCH June 4, 2021, 11:31 CET Real Estate | Sweden

Diös No recommendation

Heading for the Northern Lights MARKETING COMMUNICATION . A leader in stable and growing cities of northern Sweden . Strengthening credit profile . Handelsbanken has a mandate to issue bonds for Diös

Leading market position in a growing, dynamic region Diös Fastigheter AB (Diös) has a market-leading position in 10 larger, growing cities in northern Sweden, as well as in Gävleborg County and Dalarna County. In our view, its property portfolio is well-diversified in terms of regional presence, property types and tenants, of which around 31% are related to government and municipalities, and 8% are residential rental properties. Based on data from Statistics Sweden and the regional municipalities, we expect the markets where Diös is active to continue to show healthy population and economic growth, which should in turn support the local property markets. About the company Strengthening credit profile We expect Diös to continue to strengthen its credit profile, including a sustained Profile: LTV of less than 55%, a lengthening of the debt maturity profile and an increased Diös Fastigheter AB, owns, manages and develops share of unsecured capital markets funding. Thanks to its cash-generative property commercial and residential properties, primarily in the larger cities of northern Sweden. The company was portfolio, we find that Diös’ credit metrics, such as debt-to-EBITDA and interest founded in 2005 and is headquartered in Östersund. coverage, are typically stronger than many of its Swedish real estate peers’. Total assets amounted to SEK 25bn as of March 31, 2021. SEK-denominated senior unsecured notes contemplated Diös is contemplating issuing a senior unsecured green bond with an estimated Data: size of about SEK 500m and a two-year maturity. Handelsbanken has a mandate Web address: http://www.dios.se to issue bonds for Diös and is a lender to the company. CEO: Knut Rost CFO: Rolf Larsson Andreas Stattin Berg Michael Andersson, +4687011399, [email protected] Treasurer:

Key figures Public ratings:

SEKm 2016 2017 2018 2019 2020 Q1-21LTM No public ratings Op. net (NOIRE) 806 1,080 1,140 1,187 1,219 1,218 Income fr property mgmt adj 539 822 894 952 958 959 Net income adj 832 1,029 1,341 1,050 913 1,245 Rental value distribution, Q1 2021 Property value 13,683 19,457 20,802 22,938 24,512 25,340 Industry, Other, Gross debt adj 8,028 11,104 11,297 12,404 13,461 13,660 6% 8% Net debt to prop value adj (%) 58.7 56.9 54.3 54.1 54.9 53.9 Hotel/restaurant, Total debt to total assets adj (%) 57.7 56.3 53.6 53.5 54.1 52.9 6% FFO/gross debt adj (%) 7 7 7 7 7 7 Gross debt/EBITDA adj (x) 10.7 11 . 0 10.5 11.1 11.7 11.9 EBITDA/interest expense adj (x) 3.7 5.5 6.1 6.9 6.2 6.3 Dividends/FFO adj (%) 39.5 35.8 48.5 46.2 25.0 24.6 Office, Vacancy rate (%) 10.0 9.0 9.0 10.0 11 . 0 10.0 53% Pledged assets to total assets (%) 89.9 81.6 79.7 74.1 80.1 n.m Residential, Secured debt to total assets (%) 57.6 53.3 47.5 44.5 46.0 43.5 8%

Source: Company reports and Handelsbanken Capital Markets Retail, 17% This marketing communication has not been prepared in accordance with legal requirements designed to promote the independence of Source: Company reports investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research. This marketing communication is commissioned and paid for by the corporate issuer to promote a new issuance by the company and is made available at the same time to any investment firms wishing to receive it. This report is deemed to constitute an acceptable minor non-monetary benefit as defined in MiFID II.

For full disclaimer and definitions, please refer to the end of this report Credit Comment, June 4, 2021

Credit highlights

In our view, Diös’ credit profile is supported by its market-leading positions in its 10 growing home markets, primarily located in northern Sweden. Based on data from Statistics Sweden and the regional municipalities, we expect these 10 regional centres to show steady economic and population economic growth ahead, which should in turn support healthy local property markets. In addition, we expect Diös to continue to strengthen its credit profile in terms of leverage, debt maturity profile and capital market funding, thereby bolstering its strong operational track record further. In terms of restrictive factors, we find that these strengths are somewhat offset by Diös’ smaller size and scope, higher leverage and higher share of secured debt compared with many Swedish real estate peers that have longer track records on the capital markets. Overall though, we would classify Diös’ credit profile as solid.

Key credit considerations

Supportive factors for Diös’ credit profile – our view

In our view, Diös has • Leading market positions in the larger, growing cities in northern Sweden a well-diversified • Solid fundamentals supporting the local property markets property portfolio and a long track • A regionally well-diversified property portfolio, with properties typically located centrally record of controlled in cities growth and • A large, well-diversified tenant base, with around one third of rental value coming from retained leverage government or municipality-related tenants

• A long and solid track record of controlled growth while retaining stable credit metrics

• Good access to liquidity and capital through banks and through debt and equity markets

• Credible sustainability targets covering environmental, social and governance issues

Restrictive factors for Diös’ credit profile – our view

We consider its • The company is relatively small compared with many established Swedish real estate relatively small size peers on the capital markets and somewhat • In terms of property value, about 20% exposure, albeit declining, to retail, hotels and higher leverage as restaurants; these segments have been burdened by the pandemic, and their longer-term restrictive factors outlook is still somewhat difficult to assess

• Somewhat higher, albeit declining, leverage compared with larger peers on the capital markets

• A relatively high share of short-term and secured debt, although we would expect this to be refinanced with longer-maturity, unsecured debt ahead

• An increased share of development projects in its portfolio

MARKETING COMMUNICATION 2 Credit Comment, June 4, 2021

Company description

Diös Fastigheter AB (Diös), headquartered in Östersund, is a listed, Swedish real estate company that owns, manages and develops commercial and residential properties, mainly in the larger cities in northern Sweden, as well as in Gävleborg County and Dalarna County. The portfolio consists of 331 properties spanning over 1.5 million m2 and is valued at about SEK 25bn. With the exception of the three largest shareholders AB Persson Invest, Backahill and Nordstjernan (controlling a combined 36% of k and capital), we find that the shareholder structure is diversified and includes Swedish and international institutional investors, equity funds and private investors.

The leading real estate company in northern Sweden Diös is today the Diös was founded in 2005 on the initiative of Erik Paulsson (who remains a key leading real estate investor in Diös, as well as in Fabege, Wihlborgs, Catena and Brinova). The strategy company in was to acquire, manage and develop cash-generative properties in northern northern Sweden Sweden. Initially, 36 properties were acquired from AP Fastigheter (which later merged with Vasakronan). Following several acquisitions, including the acquisition of Norrvidden in 2011, and Castellum’s Norrporten portfolio in 2017, Diös is today the leading real estate company in northern Sweden. In recent years, the company has increased its focus on project development, including residential properties.

Figure 1: Rental value distribution by type, as of the end of Q1 2021

Industry/warehouse, Other, 6% 2% Community service, 6% Hotel/restaurant, 6%

Residential, 8% Office, 53%

Retail, 17%

Source: Company reports

Diös has a diversified In our view, Diös has a relatively diversified property portfolio spanning across most property portfolio, real estate segments, including office, retail, residential, community service and in our view industrial properties (Figure 1). Today, offices account for the majority of Diös’ rental value, at 53%, followed by retail properties, at around 17%. We expect that offices continue to represent the largest share of the portfolio ahead, with an increased share of residential properties, primarily through development projects.

Diös is the market leader in each of the 10 cities where it is active (Figure 3). The properties are typically located centrally in these cities. In our view, the property portfolio is well diversified across the larger, growing cities in northern Sweden, as well as in Dalarna, Gävleborg and Jämtland counties. The typical “Diös city” has a population of 60,000-150,000, one city centre, established universities, good transportation links, and dynamic and growing business/entrepreneurial environments.

MARKETING COMMUNICATION 3 Credit Comment, June 4, 2021

Figure 2: Rental value distribution by region, as of the end of Q1 2021

Luleå, 17% Dalarna, 17%

Skellefteå, 7% Gävle, 11%

Umeå, 14%

Sundsvall, 15%

Åre/Östersund, 19%

Source: Company reports

Figure 3: Map of Sweden and Diös’ 10 cities

Diös is the market leader in each of the 10 cities where it is active

Source: Company reports

31% of its tenants are Diös’ tenant base is relatively diversified, in which 31% of tenants are government government or or municipality-related entities that also account for the majority (seven) of its 10 municipality-related largest tenants (Table 1). Overall, its 10 largest tenants make up around 17% of its entities total rental value, with an average lease term of 6.3 years. The average lease term for the whole portfolio was 3.9 years at the end Q1 2021. We find that the company has experienced relatively limited knock-on effects from the COVID-19 pandemic, although there has been some pressure on retail properties in secondary locations.

MARKETING COMMUNICATION 4 Credit Comment, June 4, 2021

Table 1: Diös’ largest tenants, Q1 2021 Rental value Avg. lease term (SEKm) Share (%) (years) Swedish Transport Administration 73 3.9 8.5 Swedish Police Authority 36 1.9 8.4 Östersund Local Authority 34 1.8 2.0 Swedish Public Employment Service 33 1.8 2.5 Falun Local Authority 27 1.5 8.4 Swedish Social Insurance Agency 27 1.5 3.8 Åhléns AB 23 1.2 4.1 Swedbank AB 22 1.2 3.1 Telia Sverige AB 22 1.2 8.1 Internationella Engelska Skolan 19 1.0 9.7 Top ten tenants 316 16.9 6.3

Source: Company reports

Steady growth since Diös has steadily grown its rental and property value, as well as operating margins, the company was since the company was founded in 2005. Continuous, smaller acquisitions have founded in 2005 been supplemented by some larger strategic acquisitions in 2011 and 2017, resulting in a property portfolio valued at around SEK 25bn, and rental value of SEK 2bn, as of the end of Q1 2021.

Figure 4: Property value and rental income, as of the end of Q1 2021

30,000 2,000 1,800 25,000 1,600 1,400 20,000 1,200 15,000 1,000

SEKm 800 10,000 600 400 5,000 200 0 0 2014 2015 2016 2017 2018 2019 2020 Q1 2021

Property value (LHS) Rental income (RHS)

Source: Company reports, Handelsbanken Capital Markets

All eyes on the North Historically regional cities, including cities where Diös is present in northern Sweden, have not enjoyed the same growth in rents and property values as larger metropolitan areas, such as Stockholm and Gothenburg. On the other hand, rents in these regional cities have been significantly more stable (Figures 5 and 6).

MARKETING COMMUNICATION 5 Credit Comment, June 4, 2021

Figure 5: Stockholm vs. Sundsvall, prime office rent

9,000 8,000 7,000 6,000 Office and retail 5,000 rents in Diös’ home markets have 4,000 historically been SEK/sqm/year 3,000 growing with 2,000 little volatility 1,000 0 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016 2018 2020

Stockholm Sundsvall

Source: Diös, Pangea, Castellum, Statistics Sweden

Figure 6: Average prime office rent in regional Swedish cities

2,500

2,000

1,500

1,000 SEK/sqm/year 500

0 2012 2013 2014 2015 2016 2017 2018 2019 2020

Falun Gävle Luleå Skellefteå Sundsvall Umeå Östersund

Source: Diös, Pangea

While we find that the outlook for office and retail rents in Stockholm is somewhat unclear, we believe that rents in e.g. Sundsvall, Umeå, Luleå and Skellefteå, where Diös is present, should continue on their steady upwards trajectories (slowly but surely). Moreover, we expect that property values in these cities will remain stable, but they could even increase somewhat faster than historically, as we find that investor interest in northern Sweden has increased in recent years.

Based on data from Statistics Sweden and the regional municipalities, we expect that most of Diös’ prime markets (cities) will enjoy good population and economic growth ahead. With established and growing universities, and dynamic business environments, we expect Diös’ home property markets to remain healthy.

MARKETING COMMUNICATION 6 Credit Comment, June 4, 2021

Figure 7: Property yield, Stockholm CBD vs. Sundsvall

4 % 3

0 2012 2013 2014 2015 2016 2017 2018 2019 2020

Stockholm CBD Sundsvall

Source: Diös, Pangea

SEK 1,000bn will be In addition, the Norrbotten Chamber of Commerce estimates that SEK 1,000bn will invested in northern be invested in northern Sweden for the manufacture of fossil-free steel, batteries and Sweden over the renewable energy over the next 20 years. The industrial investments by LKAB, coming decades, SSAB, Northvolt, Facebook, SCA and H2 Green Steel, among others, are expected according to the to create around 25,000 jobs. In our view, these investments should create multiplier Norrbotten Chamber effects throughout the regional economy, materialising in other segments in e.g. of Commerce Luleå, Skellefteå, Umeå and Sundsvall. All in all, we have a positive view on Diös’ primary markets.

Table 2: Population and expected population growth Diös’ cities City Population growth 2027 Inhabitants 2020 Falun 4% 59,530 Borlänge 6% 52,390 Mora 6% 20,500 Gävle 7% 102,900 Sundsvall 4% 99,440 Åre 14% 12,050 Östersund 8% 63,990 Umeå 11% 130,220 Skellefteå 8% 72,840 Luleå 7% 78,550

Source: Statistics Sweden, regional municipalities, Diös, Handelsbanken Capital Markets

Controlled project development strategy should strengthen the portfolio further Diös’ controlled Diös has increased its investments in existing properties, as well in project development development and newbuilds. Of the SEK 1.5bn that the company spent on strategy should investments in 2020, around 60% was related to tenant improvements and 40% to further strengthen projects and newbuilds. This can be compared with its total capex of SEK 500m in its property portfolio 2017, which was mainly related to tenant improvements. Diös’ current projects span over 100,000 m2 (compared with its total portfolio size of 1.5 million m2). Major ongoing projects, typically targeted at government-related tenants, include offices for the Swedish Pension Agency in Luleå, the police authority in Umeå, the transport authority and university in Borlänge, as well as two hotels in Umeå and Sundsvall respectively. Another 200,000 m2 have been identified for future projects, including both commercial and residential properties. One recent example of tenant adaptation is telecom operator Tele2’s move to the shopping mall IN:Gallerian in Sundsvall, where less attractive retail space was converted into 3,800 m2 of attractive office space, thereby mitigating potential vacancies and loss of rental income.

MARKETING COMMUNICATION 7 Credit Comment, June 4, 2021

Integrated sustainability strategy Diös has set several Sustainability (ESG) activities and targets are being increasingly integrated into Diös’ measurable strategy. The company has identified four focus areas: environment and climate; the ESG targets sustainable city; fair business; and, dedicated and healthy employees. Several targets have been communicated including a net-zero CO2 impact by 2045 and climate-neutral construction by 2030, as well as a goal to become 100% reliant on renewable energy by 2025 (98% of its energy consumption is already from non-fossil sources). By the end of 2020, 41 of Diös’ properties (21% of the total area) were environmentally certified. Another 14 properties are targeted for certification during 2021, and Diös plans to achieve BREEAM-SE Very Good certification for its larger projects. Diös’ green bond framework, under which its green bonds and commercial paper will be issued, has been deemed Medium Green by CICERO’s second opinion.

Stable ownership structure With the exception of the three largest shareholders, AB Persson Invest, Backahill and Nordstjernan (controlling a combined 36% of votes and capital), we find that the shareholder structure is diversified and includes Swedish and international institutional investors, equity funds and private investors. We do not foresee any major changes to the shareholder structure.

Table 3: Ownership structure (as of March 31, 2021) Shares (mill) Capital and votes (%) AB Persson Invest 20.7 15.4 Backahill Inter AB 14.1 10.5 Nordstjernan AB 13.6 10.1 Pensionskassan SHB 8.1 6.0 Avanza Pension 3.1 2.3 BlackRock 2.5 1.9 Swedbank Robur 2.4 1.8 Karl Hedin 2.4 1.8 PriosNilsson Fonder 2.3 1.7 Sten Dybeck w. family 2.2 1.6 Others 63.2 47.0 Total 134.5 100

Source: Company reports

MARKETING COMMUNICATION 8 Credit Comment, June 4, 2021

Stable credit quality in the Swedish real estate sector

Generally, we find that Swedish real estate companies presented solid credit metrics and sufficient liquidity throughout 2020. While some uncertainty remains owing to the ongoing pandemic, we view the downside risk to credit quality as limited. Moreover, we believe that the Riksbank’s bond purchasing programme limits upside risk to credit spreads. To date, the negative economic effects from the pandemic have been primarily borne by companies with activities linked to restaurants, hotels and retail. While we acknowledge that real estate companies are exposed to these segments to various degrees, that is not enough to alter our stable overall view of the sector.

The primary credit metric, loan-to-value, remains stable Loan-to-value (LTV), a highly watched credit metric, has steadily been falling over the past ten years in Sweden, which we primarily attribute to lower interest rates (and consequently lower property yields) boosting property values. The largest rises in property values in Sweden have occurred in bigger metropolitan areas; however, most geographical areas (and sub-sectors) in Sweden have enjoyed the benefits of falling interest rates. In recent years, rising rents have increasingly contributed to strong growth in property values. During 2020, rents and property yields remained broadly stable, which we believe should persist throughout 2021.

We expect LTVs to After analysing changes in property values in Sweden during 2020, it is quite clear remain stable that the negative impacts that may have been feared in March 2020, at the outset of throughout 2021 the COVID-19 pandemic, did not materialise. To date, the only writedowns recorded relate to sectors directly affected by the pandemic, such as hotels, restaurants and retail. Office property values have typically been stable, whereas the values of residential and community services properties are rising. Diös has also retained its LTV over the last two years, at 54%, although we find that this is somewhat higher than the ratios of many peers that are active, and rated, on the capital markets.

Figure 8: Swedish real estate, average adjusted LTV

50%

48%

46%

44%

Adj. LTV (%) 42%

40%

38% 2015 2016 2017 2018 2019 2020

Source: Handelsbanken Capital Markets, company data Note: Companies included are Atrium Ljungberg, Balder, Castellum, Fabege, Fastpartner, Hufvudstaden, Humlegården, Kungsleden, Vacse, Vasakronan, Wallenstam and Wihlborgs

Interest coverage remains strong We find that interest coverage ratios (ICRs) have remained strong throughout the Swedish real estate sector. Falling interest costs, rising rental income and higher profit have resulted in average EBITDA-to-interest costs of about 5.0x, which is typically twice what most issuers outline as their minimum in their financial policies

MARKETING COMMUNICATION 9 Credit Comment, June 4, 2021

and what rating agencies demand for current ratings. Given continued low interest rates, well-functioning capital markets and stable profit generation, we believe the trend will persist throughout 2021. We find that Diös has reported a strong ICR of around 6x in recent years, thanks to its cash-generative property profile, as well as its relatively short debt maturity profile.

Figure 9: Swedish real estate, average EBITDA-to-interest costs, adjusted

2 EBITDA/interest (x) EBITDA/interest

0 2015 2016 2017 2018 2019 2020

Source: Handelsbanken Capital Markets Note: Companies included are Atrium Ljungberg, Balder, Castellum, Fabege, Fastpartner, Hufvudstaden, Humlegården, Kungsleden, Vacse, Vasakronan, Wallenstam and Wihlborgs

Vacancy rates remain low, but are rising slowly We find that ICRs In 2020, the average vacancy rate in the Swedish real estate sector increased by remain strong around 1 p.p., primarily within the retail segment, but with some increase in parts of throughout the the office segment. While vacancy rates remain relatively low in Sweden, they are Swedish real estate increasing owing to the economic impacts of the pandemic and behavioural changes sector (average within the retail and office segments. We believe real estate companies will have to close to 5x) focus even more on tenant demand; vacancies could differ significantly between attractive and less attractive properties, thereby affecting rents and valuations. However, for residential apartments, we believe vacancies will remain quite low, as they are not impacted by these trends in the same ways.

Figure 10: Swedish real estate, average vacancy rates

10% 9% 8% 7% 6% 5% 4%

Vacancy rate (%) 3% 2% 1% 0% 2015 2016 2017 2018 2019 2020

MARKETING COMMUNICATION 10 Credit Comment, June 4, 2021

Market funding continues to grow in a crowded SEK market We expect real estate issuers’ share of market funding to continue to rise. The proportion of secured debt (typically bank debt) relative to total assets is currently below 20%. We do not expect an increasing number of real estate companies to tap bond markets. The number of public ratings is also increasing rapidly: more than 80% of bonds issued by real estate companies are from rated issuers, a figure we believe will continue to rise ahead.

As Nordic and global capital markets are swamped with liquidity and as central banks (including the Riksbank) are buying bonds, we expect the trend to continue. In our view, the Swedish bond market is starting to become crowded; during the first five months of 2021, the share of real estate issuers in the SEK market grew to more than 60%, which negatively affected credit spreads compared with other sectors.

Figure 11: Swedish real estate, average secured debt-to-total assets

35%

30%

25% Share of market funding continued to 20% grow at the expense 15% of bank debt, 10% we believe 5%

0% 2015 2016 2017 2018 2019 2020 Q3

Economic recovery expected, but interest rates likely to remain low We expect interest Handelsbanken’s macroeconomists expect the Swedish economy to rebound in rates to remain low, 2021 and 2022, and fears of a large recession have eased. While consumption is thereby supporting expected to increase and unemployment to recede slowly, the view on Swedish and property values global interest rates (i.e. rates will remain very low) remains firm. Low interest rates have been, and will likely remain, positive for the real estate sector. The ‘yield gap’ (Figure 12: the difference between long/typically government interest rates and property yields) is at its highest yet; in our view, this should result in continued investor interest in Swedish real estate assets. We also believe international interest in Swedish real estate properties will continue to increase, as the country is deemed to be more stable, politically and economically, than others in Europe. Diös reported an average yield requirement of 5.65% at the end of Q1 2021. As this is about 2 p.p. higher than central Stockholm, we believe this should support Diös’ property values ahead.

MARKETING COMMUNICATION 11 Credit Comment, June 4, 2021

Figure 12: Property yield gap

7.0

6.0

5.0

The property yield 4.0 gap should provide a % 3.0 valuation cushion 2.0 even as the economic outlook slows, 1.0 we deem 0.0 01/01/2000 01/01/2004 01/01/2008 01/01/2012 01/01/2016 01/01/2021

Yield gap Yield Stockholm Office CBD 10-year Swedish government bond Average yield gap

Source: Handelsbanken Capital Markets

MARKETING COMMUNICATION 12 Credit Comment, June 4, 2021

Financial profile and funding

We find that Diös has a long track record of growth and solid cash flow generation while improving its credit metrics. While operating with somewhat higher LTV compared with Swedish real estate peers on the capital markets, we find that Diös’ cash flow-based metrics, such as debt-to-EBITDA and interest coverage, are typically better than peers’. We expect Diös to continue to strengthen its credit profile, primarily through a lengthening of its debt maturity profile, and by increasing its share of unsecured debt through capital market funding.

Historical growth and improved credit metrics Diös has steadily In the last 10 years, Diös has steadily grown its property portfolio, rental income, improved its credit cash flow and earnings while continuously improving its credit metrics. We expect metrics while the company to continue on its growth path, with a higher share of own development growing its compared with acquisitions, while retaining stable credit metrics. Diös’ operational, property portfolio financial and environmental targets include: • LTV of less than 55%

• An equity ratio of more than 35%

• 10% yearly growth in income from property management

• Return on equity of more than 12%

• Climate-neutrality by 2045

• Zero reliance on fossil energy by 2025

Figure 13: Diös’ property value and rental income

30,000 2,000 1,800 25,000 1,600 1,400 20,000 1,200 15,000 1,000

SEKm 800 10,000 600 400 5,000 200 0 0 2014 2015 2016 2017 2018 2019 2020 Q1 2021

Property value (LHS) Rental income (RHS)

Source: Company reports, Handelsbanken Capital Markets

While its LTV has fallen significantly over the last 10 years (Figure 14), Diös continues to operate with a somewhat higher ratio than larger peers that have been active longer on the capital markets (and typically being publicly rated). To a large extent, we attribute this to many larger real estate peers having enjoyed stronger growth in property values, primarily thanks to significant property yield compression in the metropolitan areas of Stockholm and Gothenburg.

MARKETING COMMUNICATION 13 Credit Comment, June 4, 2021

Figure 14: Diös’ LTV and interest coverage (ICR)

64 8 62 7 60 6 58 5 x

% 56 4 54 3 52 2 50 1 48 0 2014 2015 2016 2017 2018 2019 2020 2021

LTV(LHS) ICR(RHS)

Source: Company reports, Handelsbanken Capital Markets

Diös’ cash flow- and Nevertheless, Diös’ cash flow- and earnings-related credit metrics are stronger than earnings-related peers’ due to its higher-yielding and cash-generative property portfolio. Its interest credit metrics are coverage ratio, which has stayed above 6x over the last four years, is among the typically stronger stronger of listed (bond and equity) real estate companies’ in Sweden. The same than peers’ can be said about Diös’ debt-to-EBITDA, which stands at around 12x compared with the Swedish real estate average of around 14x (Figure 15).

Figure 15: Debt-to-EBITDA (x), end-2020

30.0

25.0

20.0

15.0

10.0 Debt/EBITDA (x) Debt/EBITDA 5.0

0.0

Source: Company reports, Handelsbanken Capital Markets

We expect longer and more unsecured funding to strengthen the credit profile In our view, two key steps that would strengthen Diös’ credit profile are: 1) lengthening the relatively short debt maturity profile (Figure 16), which was 2.4 years on average as of March 31, 2021; and, 2) decreasing the high share of secured debt funding (Figure 17). We believe the contemplated bond issuance would allow for substantial progress on both of these fronts.

MARKETING COMMUNICATION 14 Credit Comment, June 4, 2021

Figure 16: Diös’ debt maturity schedule, as of the end of Q1 2021

8,000 7,000 6,000 5,000 4,000 SEKm 3,000 2,000 1,000 0 2021 2022 2023 2024 >2025

Debt maturity Interest fixing

Source: Company reports, Handelsbanken Capital Markets

Figure 17: Diös’ debt funding breakdown by type, as of the end of Q1 2021

Commercial paper, 17%

We expect Diös to Secured bonds, 8% reduce its share of secured debt

Bank, 76%

Source: Company reports, Handelsbanken Capital Markets

MARKETING COMMUNICATION 15 Credit Comment, June 4, 2021

Key figures

P&L accounts, annual data SEKm 2016 2017 2018 2019 2020 Revenues 1,340 1,719 1,810 1,854 1,878 Total op expenses -597 -712 -741 -740 -735 EBITDA 748 1,009 1,071 1,119 1,148 EBITDA adj 748 1,009 1,071 1,119 1,148 EBIT 743 1,007 1,069 1,114 1,143 Interest expense -204 -185 -175 -162 -185 EBT 957 1,261 1,597 1,302 1,152 Paid tax 11 -43 -90 -79 -75 Net income 832 1,029 1,341 1,050 913

Source: Company reports and Handelsbanken Capital Markets

Balance sheet, annual data SEKm 2016 2017 2018 2019 2020 Total tangible assets 13,724 19,503 20,856 22,966 24,586 Other current assets 196 173 201 221 304 Cash and equivalents - 32 - - 0.0 Total assets 13,920 19,708 21,057 23,187 24,890

Equity 4,313 6,887 7,839 8,484 9,148 LT interest-bearing debt 5,706 9,038 8,681 6,287 10,276 ST interest bearing debt 2,322 2,066 2,616 6,117 3,185 Other current liabilities 561 5 11 559 766 582 Total equity and liabilities 13,920 19,708 21,057 23,187 24,890 Total equity and liabilities adj 13,920 19,708 21,057 23,187 24,890 Total debt 8,028 11,104 11,297 12,404 13,461 Total debt adj 8,028 11,104 11,297 12,404 13,461

Source: Company reports and Handelsbanken Capital Markets

Cash flow, annual data SEKm 2016 2017 2018 2019 2020 Funds from operations (FFO) 539 751 804 875 884 FFO adj 539 751 804 875 884 Change in working capital -57 -60 -4 33 -171 Operating cash flow (OCF) 482 691 800 908 713 Cash flow from investments 27 -2,843 -495 -1,331 -1,415 Capex -452 -502 -557 -1,027 -1,518 Dividends paid -213 -269 -390 -404 -221 Discretionary cash flow -183 -80 -147 -523 -1,026 New equity - 1,802 - - - Net change in debt -296 651 53 827 952 Cash flow from financing -509 2,184 -337 423 702 Net cash flow 0.0 32 -32 0.0 0.0

Source: Company reports and Handelsbanken Capital Markets

Key metrics, annual data % 2016 2017 2018 2019 2020 EBITDA adj margin 55.8 58.7 59.2 60.4 61.1 EBIT adj margin 55.4 58.6 59.1 60.1 60.9 Equity ratio 31.0 34.9 37.2 36.6 36.8 Equity ratio adj 31.0 34.9 37.2 36.6 36.8 Net debt/equity (x) 1.9 1.6 1.4 1.5 1.5 Net debt/EBITDA (x) 10.7 11 . 0 10.5 11 . 1 11 . 7 Net debt/EBITDA adj (x) 10.7 11 . 0 10.5 11 . 1 11 . 7 Debt/EBITDA (x) 10.7 11 . 0 10.5 11 . 1 11 . 7 Debt/EBITDA adj (x) 10.7 11 . 0 10.5 11 . 1 11 . 7 EBITDA/net interest adj (x) 3.7 5.5 6.1 6.9 6.2 EBIT/interest (x) 4 5 6 7 6 FFO/net debt 6.7 6.8 7.1 7.1 6.6 FFO/total debt adj 6.7 6.8 7.1 7.1 6.6 FFO/net debt adj 6.7 6.8 7.1 7.1 6.6 FOCF/debt 0.37 1.7 2.2 n.m n.m

Source: Company reports and Handelsbanken Capital Markets

MARKETING COMMUNICATION 16 Credit Comment, June 4, 2021

Credit marketing communication disclaimer

This marketing communication has not been prepared in accordance with legal requirements designed to promote the independence of investment research, and it is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This marketing communication is commissioned and paid for by the corporate issuer to promote a new issuance by the company and is made available at the same time to any investment firms wishing to receive it. This report is deemed to constitute an acceptable minor non-monetary benefit in accordance with Directive 2014/65/EU of the European Parliament and of the Council of 15 May 2014 on markets in financial instruments (“MiFID II”) and the Commission Delegated Directive (EU) 2017/593 of 7 April 2016 supplementing MiFID II.

Unless otherwise specified, prices and spreads mentioned in this report refer to the closing price of the previous day.

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Valuation and methodology Projections, forecasts or estimates are based on one or more methods of valuation, such as cash flow analysis, recovery assignments, sector performance, market movements, etc. Projections, forecasts or estimates reflect the analyst’s assessment of the expected total return on the instrument compared to the relevant benchmark (i.e. the expected return on a relevant benchmark with regard to similar credit quality, sector, currency, maturity, seniority, documentation, etc.). This assessment is not based on a proprietary HCM model and the basis for the analyst’s assessment is dependent on the characteristics of the sector and the company and a multitude of fundamental and timing factors are incorporated. For more detailed information about the valuation and methodology please consult the Handelsbanken Capital Markets website: https://www.researchonline.se/desc/creditdisclosure.

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MARKETING COMMUNICATION 17 Credit Comment, June 4, 2021

inducements are paid to or received from a third party, it is required that the payment must aim to improve the quality of the service, and the payment must not prevent the Bank from safeguarding the customer's interests. The customer must be informed about such remuneration that the Bank receives. When the Bank provides investment recommendations, the Bank receives minor non-monetary benefits. Minor non-monetary benefits consist of the following: • Information or documentation about a financial instrument or an investment service that is general in character. • Written material produced by a third party that is an issuer to market a new issue. • Participation at conferences and seminars regarding a specific instrument or investment service • Corporate hospitality up to a reasonable amount.

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When distributed in the UK Handelsbanken plc is incorporated in England and Wales with company number 11305395. Its registered office is at 3 Thomas More Square, London, E1W 1WY, UK. Handelsbanken plc is authorised by the Prudential Regulation Authority and regulated by the Financial Conduct Authority and the Prudential Regulation Authority. Financial Services Register number 806852. Handelsbanken plc is a wholly- owned subsidiary of Svenska Handelsbanken AB (publ).

UK customers should note that neither the UK Financial Services Compensation Scheme for investment business nor the rules of the Financial Conduct Authority made under the UK Financial Services and Markets Act 2000 (as amended) for the protection of private customers apply to this marketing material and accordingly UK customers will not be protected by that scheme. This document may be distributed in the United Kingdom only to persons who are authorised or exempted persons within the meaning of the Financial Services and Markets Act 2000 (as amended) (or any order made thereunder) or (i) to persons who have professional experience in matters relating to investments falling within Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005 (the “Order”), (ii) to high net worth entities falling within Article 49(2)(a) to (d) of the Order or (iii) to persons who are professional clients under Chapter 3 of the Financial Conduct Authority Conduct of Business Sourcebook (all such persons together being referred to as “Relevant Persons”).

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Diös Fastigheter AB The preparation and publishing of this report are related to Handelsbanken Capital Markets having a mandate to issue bonds for Diös Fastigheter AB. This report has been submitted to the subject company prior to publication to approve the accuracy of the facts presented. Comments received from the subject company have not affected the analyst's recommendation or estimates. This report has been prepared on an ad-hoc basis, which means that Handelsbanken Capital Markets is not taking up full coverage of Diös Fastigheter AB as a creditor.

June 2, 2021: Diös Fastigheter AB - Handelsbanken's analyst Michael Andersson has no position in Diös Fastigheter AB or a related instrument. .

MARKETING COMMUNICATION 18 Credit Research

Credit Research Johan Sahlström, Head of Credit Research +46 8 701 1174 [email protected]

Erik Salomonsson +46 8 701 1231 [email protected]

Peter Wallin +46 8 701 2534 [email protected]

Michael Andersson +46 8 701 1399 [email protected]

Jussi Nikkanen +358 10 444 2408 [email protected]

Credit Sales

Sweden Linda Piper +46 8 463 4577 [email protected] Tommy Antic +46 8 463 4548 [email protected] Utta Wester +46 8 463 2586 [email protected] Ronny Gustavsson +46 8 463 3701 [email protected] William Ekblom +46 8 463 3607 [email protected]

Finland Marko Kassinen +358 10 444 6243 [email protected]

Norway Lars Walvig +47 22 82 3072 [email protected] Morten Ihler +47 22 82 3059 [email protected] Lotte Marie Andersen +47 22 82 3003 [email protected]

Svenska Handelsbanken AB (publ) Stockholm Copenhagen Helsinki Oslo London New York Blasieholmstorg 11 Havneholmen 29 Itämerenkatu 11-13 Tjuvholmen allé 11 Handelsbanken Plc Handelsbanken Markets Securities, Inc. SE-106 70 Stockholm DK-1561 Copenhagen V 00180 Helsinki Postboks 1249 Vika 3 Thomas More Square 875 Third Avenue, 4th Floor Tel. +45 46 79 12 00 London GB-E1W 1WY Tel. +46 8 701 10 00 Tel. +358 10 444 11 NO-0110 Oslo New York, NY 10022-7218 Fax. +45 46 79 15 52 Tel. +44 207 578 8000 Fax. +46 8 611 11 80 Fax. +358 10 444 2578 Tel. +47 22 39 70 00 Tel. +1 212 326 5153 Fax. +47 22 39 71 60 Fax. +44 207 578 8300 Fax. +1 212 326 2730 FINRA, SIPC