Fastighets AB Balder (publ) (BALDB) Earnings Call Transcript & Summary

Hello and welcome to the interim report January to June 2020. [Operator Instructions] I will now hand you over to your host, CEO, Erik Selin, to begin today's conference. Thank you.

Hi. Thank you, and welcome, everybody. It's me here and also Jesper Mårtensson, CFO of Balder. So welcome to this update of Q2 for Balder. Starting on Page 2, some comments about COVID. Obviously, we have close contact with tenants that are most affected of this, and that is the hotel segment and city retail. In some cases, we have give them some support, could be deferred rental payments or some rebates in some cases. But overall, the situation is quite much better than it was a couple of months ago, obviously. So for this quarter, it seems to be much calmer. On the investment side, we took possession of a couple of properties in Gothenburg and one in Oslo and also some land that we're going to build resis on. And we also divested some development properties in Gothenburg and Denmark, that is projects that we sell to customers, private customers, residential projects, where we have good margin in Sweden and lower in Denmark because that was the first project there of this concept of Bærum. And we also completed 400 apartments rentals in Finland and 130 in Denmark. That is also rentals. Moving to Page 3 and look at the Q2 number. The profit from property management was 2% plus, and that is obviously a very low figure, and that is affected by lower results from collectors. We have the lower rental income from hotels, the variable part, so including that and also the discounts, rebates because of COVID, of course. So this combined puts pressure on the increase of the profit from property management but still a small increase. And from this level, we obviously have potential on those segment that is pressuring us now. The NAV, SEK 355, is 19% better than last year. Net debt, 48.3%, came down a bit this quarter because we were not investing that much. And also currencies made the level to go down a bit. And then we have like-for-like rental growth, 1%, that is much lower than last quarter. And the explanation for that mainly is the hotel rents that we don't get the turnover part, and that makes the increase be just 1% for the portfolio. So the big explanation, the difference is the turnover rents in hotel that's actually not -- we didn't get that now. Page 4, you have these graphs for the long-term trend were profit from property management and NAV and nothing special there. We have an upward trend. And obviously, my goal is to, over time, increase cash flow as much as possible without taking any unnecessary risk and that will, over time, make this company worth as much as possible. If we look at Page 5, the earnings capacity, we update this every quarter, as you know. And now June, we are at SEK 4.075 billion, and that is up SEK 75 million from last quarter. On this slide, you can't actually see that. It's kind of a stupid slide actually. But if we compare to year-end, it's a small increase; and compared to last year, 10%. But even in these figures, we are affected by turnover rent and so on. So -- but still, we are in the increasing territory again. Page 6, we can see the income statement, and we focus, as you know, on profit from property management. And on these 6 months, we are up 4% compared to last year. And then we have much smaller value changes on the property portfolio, and that makes the total net profit for the period to decrease, obviously. But our main focus is always cash flow, and that is up some percent. And we still have some value changes mainly from projects, realized and unrealized projects. So after all in this environment, pretty stable, I would say. And looking at Page 7. The balance sheet, nothing special happened there. This quarter, we have lower value on investment properties than after Q1, and that is effect of exchange rates that the Swedish krona strengthened against the euro in particular. And that, of course, makes our balance sheet to shrink a bit if we count it in SEK. So then we had the property value, SEK 146 billion; and last year, SEK 126 billion, so it's still a good increase in pace. And we also in this quarter have a lot of liquidity and cash. We thought it could be a good idea to have extra much liquidity and cash around, and maybe that was unnecessary. Let's see, but we have a lot of liquidity, as you can see in this report and if you read the full report also. And then the portfolio, Page 8, this looks too similar every quarter. You have residential, 59%, including the project portfolio, and then office, retail and other. And other is 14%. And of that 14%, 8% is the hotels. So I think this is more or less exactly the same as after Q1 or year-end. And geography-wise, we have Helsinki, Stockholm, Gothenburg, Copenhagen as the big parts for us. And that will be the same also going forward, if I'm guessing. Looking at financing, you see the structure for debt and for interest maturity. And that is also in line with what we have been presenting the last quarters. And financing overall in this tough period, you could say -- or perhaps -- or I guess, you already know, but we experienced the banking system to be very supportive. So there were actually no problems to take up new bank loans even in the worst days of this crisis. The bond market and the CP market is also working. Right now, it's working pretty well actually, but the spreads gone up there. And like oil prices, spreads kind of boom in the beginning and then slowly normalizes depending on what happens in each specific company. So the situation right now is the bond, the CP market is open and quite strong, higher spreads than before COVID, but they are coming down as we see it. And as I said, the banking system is very supportive in all times. So there are good availability of financing overall. Page 10. You see financing. You can see the net debt to assets and also secured debt out of total debt and also secured debt out of assets. And secured debt out of total debt and assets, that is important figures for our rating. We are rated by S&P BBB flat. So that's why it's important to have these figures on a good level and also always present them. And we have actually a big headroom if you look at secured debt out of assets and so on compared to our rating. So we have a very good headroom, and that makes us, if we want to, we can take secured bank loans without sort of having -- coming out of the rating grid. Finally, you have a graph over the share and also compared to NAV you have the cash flow. And this just shows that over time, this will, of course, develop in roughly the same pace. Over time, if the profit from property management increases, it will take the share with it and also the NAV. But obviously, short-term swings can be huge, as we've seen this quarter, but kind of interesting. And also in our full report that you can read on the net, you have the presentation for the 15 years that we've been active where we can also compare share price and NAV, and they've actually been very tight, close to each other over time. But from year-to-year, quarter-to-quarter, it could be huge discrepancies. So that was a brief summary from us in the Q2. And if there are any questions, we welcome them now.

[Operator Instructions] We have a question coming from the line of Tobias Kaj.

I would like to start to ask you regarding your rental income. I mean they were flat quarter-over-quarter despite that you completed quite some few apartments. Did you have any further negative effects in the second quarter compared to -- in the first quarter? Or were some of the apartments completed late in the quarter, so they didn't really contribute to the second quarter?

Exactly, Tobias, they were completed, like, in June. And we also had some rental rebates not in Q1 but in Q2, so the COVID support for tenants is only in Q2 and not in Q1. These are the 2 things explaining why the rental income doesn't increase. So these are the 2 factors.

And the discounts related to COVID for the third quarter compared to the second quarter, can you say anything about that?

Yes. If we look right now, it seems to be much less or very little actually. But I mean we shouldn't be -- anything can happen, as we all know. But if we look at it just today, it seems to be small discounts, Q3, almost nothing. So automatically, we have an improvement Q3 versus Q2. If nothing new happens, we have some tailwind there.

And regarding revenue-based incomes from hotels, do you think you will see any improvement in the second half related to that? Or is that more for 2021 to look for?

I think it better to guess that's in '21, Tobias. If we are lucky, maybe we see in the last quarter, but I don't know. I think it's -- we are more calculating that hotels will have a very tough year all of this year, and then next year could be better. We are a bit on the low side there.

And I mean the NOI margin improved quite a lot year-over-year both in the first quarter and in the second quarter. Is that something that you expect to continue for the second half? And what's the reason for that?

I think it will be better than last year since we had a good start and so on. But also part of the improvement can actually be COVID-related because when everything sort of is locked down or still obviously some cost decrease also. So I don't know exactly how much, but I'm not surprised that the margin was higher. It will -- it becomes like that.

Okay. And regarding the drop in income from JVs, is that only related to collector?

Yes.

Or have you seen negative trends also for real estate holdings?

No. No. No. It's collector-related.

And your funding expenses increased quite a lot sequentially despite a lower net debt even if that is related to currency effects. What's the reason for the big increase in expenses on the funding side?

Could be -- sometimes it could be between quarters a bit bumpy for us because we have -- we count in SEK, but we have a lot of funding in other currencies. And then you sort of book it quarter-by-quarter what you think the outcome will be. But if you pay once a year, that could be between quarters some big jumps. So I don't know exactly what was the explanation this time, but it's better to look on the yearly rolling 12 months than quarter in our case. And then also, of course, we have unnecessary much liquidity, and that has been an extra cost. I don't know how big but it was something. We were a bit too cautious perhaps. So...

And on the call after the Q1 report, you were quite cautious regarding the outlook for acquisitions, saying that, I mean, sellers are waiting and buyers are waiting. So it's unlikely to see any major activity near term. Do you think that's still the case? Or do you think that the outlook for transactions has improved?

My guess is that this will pick up in the autumn or winter. So now it's a totally different feeling in the market. So I think there will be much more opportunities after the summer. That's my guess.

And do you think that the opportunities will be opened up because sellers are expecting -- or accepting lower prices, which they didn't until now? Or do you think rather that buyers are accepting kind of old prices?

I rather guess that buyer will have to accept old prices, Tobias. Everyone has too much money, and I think it could be quite strong actually. Then, of course, it will be different in different geographies and categories, obviously. But overall, I think it will be stronger than we guessed last quarter.

And regarding your revisions in the second quarter, it seems like in the segment other, you had some negative revisions. For apartments, values are down like SEK 1.2 billion, but that -- is that only related to currencies? Or have you also had some negative value revisions in that segment?

You mean property value for apartments?

Yes.

No, that is the currency-related because we have a lot of Denmark and Finnish holdings. So then you -- it is like this. The P&L, you have the average currency for the quarter when you count the P&L. But if you take balance sheet, it's also the -- it's always the currency price at the end of the quarter.

Yes. And have you actually had positive [ value revisions ] for apartments?

Yes, we had 4 completed projects and so on. So we have plus in the resi segment and maybe some minus in other. And in other, it's hotel included, so there could be some small negatives there.

The next question is coming from the line of Jan Ihrfelt.

Yes. I have one question regarding your -- the last topic we spoke about on the property revaluations. And looking at the hotels, the main driver for the lower values in hotel, was it on the cash flow side or was it on more like yields coming up? Or could you just give a little bit more flavor on that?

No, a very good question. Right now, we are more looking at the cash flow side, which is obviously affected. And we think it's a bit early to have a firm opinion about this because we haven't seen any transactions yet. So that will be much of a guessing game, but you can see that we have less, for example, it's the turnover rent. So there you get a small minus.