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

Good morning, and welcome to the interim report January to September 2020. My name is Anna. I will be your coordinator for this conference. [Operator Instructions] I will now hand you over to CEO, Erik Selin, your host for this call. Thank you.

Hi. Good morning, everybody. Thank you. We will have a short presentation of the Q3 report. And then as usual, we go over to Q&A after that. So we start right away here, Balder Q3. It was a bit calm quarter, obviously, summer and also this calmer market because of COVID. In our daily operation now COVID is not that bad as before. Rent collection is actually similar to last year this period. So right now, you can't see any differences. However, we had, of course, lower rental income from variable hotel rents and so on. But otherwise, it's surprisingly stable as we see it. In Q3, we agreed to acquire 50% of ABN in Norway. They have a separate home page you can look at, but we are very happy for that acquisition, because it's a very good platform for us to be able to invest more money in Norway and together with excellent people. The biggest asset, there is a quarter in the CBD called the ABN quarter. We also made a deal with Hedin Bil to build their new head office. And then the picture at Page 2 is actually just showing how it will look like in a couple of years. We just started the construction. So -- but we hope it will be like this. We have a long lease with Hedin in this, and also Hedin is performing extremely well in this market. They have a better profitability and lot of liquidity. So it's a super strong tenant, good to know. We completed some apartments in Finland, and we made some small divestments of development projects in Gothenburg and Karlstad. Looking at the numbers, profit from property management in Q3 was 9% positive from the comparing period last year. NAV, SEK 363 million; net debt to assets, 47%; and like-for-like rental growth, 1%, and the low figure there is explained by hotel rents coming down because we have now only lower or fixed hotel rents and not the turnover part, and that makes that figure go down in the company, but still slightly positive. So obviously, if we didn't have this COVID effect, we would have clearly a higher increase than 9% in profit from property management. But still not that bad, considering what's happening. Page 4, you can see the longer-term development in cash flow and NAV. It's slowly moving upwards. And if we take Page 5, this is a more specified version of that. And you can see right now that earnings capacity is at SEK 4.2 billion in parent company or SEK 23 per share. So we are a bit ahead of the year-end. despite then corona and hotel rents not being the same as we would have hoped way back, obviously. So we're trending positive, but a bit slower than we used to. Page 6, there you can see more in detail the rents, costs and so on. And also value change is quite small. Residential prices still trending a bit up and otherwise pretty stable. So the result -- net profit goes down from last year, and that is obviously then because of the smaller value changes in properties. But otherwise, pretty stable, I would say. And turning to Page 7, the balance sheet that is worth to notice that we had a lot of cash and cash equivalents, financial investments. So maybe even a bit too much, but we've been playing it pretty safe, having a lot of cash and liquidity on hand since the market is still a bit volatile in the funding market. So I think total liquidity is like SEK 16 billion, SEK 17 billion. So that's quite a lot, actually a bit too much. Page 8, we have the property portfolio haven't changed, I think, since last quarter in the percentage of different categories and cities. You can -- I can just remind that in the other category, hotel is 8%. So it's not to be mistaken as it would be 14%, but it's actually 8%. And then we have no bigger changes in geography. Turning to financing, Page 9. We believe right now or for the last month, the financing market has been pretty stable, actually getting slightly better and better as we see it. And by that, I mean the bond market. Bank market has been performing normally actually through all these crises. Nordic banks pretty strong, and we have their support all the time. So banks being very positive, supportive and stable. But as always, bond market and commercial paper moves much faster down, and the spreads went up heavily and now been tightening again. So we think it's a pretty okay situation. And what we can say there is liquidity a bit more costly than before COVID, but still, we think reasonable levels. So let's hope that, that continues. And our ratios, otherwise, is pretty stable also compared to the last quarter or last year. So -- and you see the debt maturity profile that we can actually handle all the debt maturing this next year without any special actions. And then Page 10 shows basically some of the same things, but you can also see the net debt to assets and how much secured are the total assets and they are trending slightly down, and we are with a big margin inside of what is required for our current rating from S&P. And finally, you have the graphs of the share price way back. And you can always see that over time, the share price will correlate with earnings and NAV. And then that was a short brief of the quarter. And then if there are any questions, we can now move on to Q&A, and I also have Marcus with me if there are specific questions about, for example, financing. So we move to Q&A now.

[Operator Instructions] And the first question comes from Jan Ihrfelt from Kepler Cheuvreux.

Actually, I have 3 of them, and I start with the property value uplift, which was rather modest in the quarter, as you mentioned. And if you just could elaborate a little bit upon the split between different segments. Are you maybe increasing your values on residentials and cutting it a little bit on hotels? Or just give us a feeling for how the movement has been during the segments.

Yes. Thank you, Jan. You're absolutely correct. We have lowered the values on some of the hotel properties. And then we also had a negative currency effect from the St. Petersburg's asset, so that is on the negative side. And on the positive side is the residential properties that has had a positive effect, but most of the positive effect is actually that we have completed apartments and changed the values on them. And that is related to Finland for the largest part.

Okay. So most of the uplifts are from the project portfolio, so to say?

Yes.

Okay. And my second question regards your costs here. If we look at the earnings capacity in the second quarter and compare with the outcome for this quarter, both financial costs and central costs were 15% lower, so are there seasonal effects? Or is there anything behind it?

If you take the financial costs, I mean, STIBOR has come down. That is mainly related to that. And you can also see in the current earnings capacity that we have taken that down due to a lot of STIBOR effect.

And central costs, are they becoming a little bit lower on the COVID times or...

Yes. The administration is really related to several different areas. You have both lower costs on consultants and marketing and also personnel is a bit lower in Q3 normally. So it's on several lines, so it's not one only -- it's not related to one area. It's several areas, which is much lower than earlier, and it's probably a bit related to COVID that we haven't had the same activity ongoing as we used to.

Okay. My third and last question regards your residential development. And the contribution this quarter was SEK 6 million and SEK 65 million for the 9 months. When we forecast our figures here going forward, were there a rather lower figure in the third quarter? Or was it rather high in the first half of the year? Just give us a feeling what the -- what we could expect for the future finalizing of the residential apartments.

Yes, that was a pretty low figure, Jan. And what we think is that this sum year-by-year will move up over time quite substantially, but it will be very irregular from quarter-to-quarter, because we book when the people take possession of apartments. So we don't do it before. You will have quarterly very irregular figures. But if you compare year-over-year, you will have -- at least we hope you will have a very good performance.

Yes. But the variation, I think mostly is due to the volumes rather than -- so the contribution per apartment, so to say...

That's a bit volatile from project to project, actually. Some are very profitable and some are not that profitable. So it would be -- it will be very mixed. But if you see the long-term trend and the big picture, you will have an increased contribution from that segment, but it will not be easy to forecast quarter-by-quarter.

We are all -- we can have the results at completion. So we don't do any successive results. No. So the profit only comes at completion, so that's...

Yes. I know. But was the first half of the year rather high or just get a feeling for the coverage?

No. It will be a rather low conservative figure we expect more over time.

The next question comes from Tobias Kaj from ABG.

Yes. I would like to start to ask regarding your hotel portfolio, and Scandic has communicated after their report that they want to try to renegotiate contracts. Have they been in contact with you? And do you see any risk that you need to lower your rents?

No. We don't actually see that as a big risk. Most of their contracts are fairly long. So I think we only have a couple of negotiations in the coming years. So that is not going to be noticeable for awhile. We would also expect that the market will come back and performing in a few years' time as well, so we don't see that as a big risk.

And we also prefer to talk with customers directly and not in media.

Yes. And just a detailed question also in P&L. You have other income and costs, which came from plus SEK 6 million Q3 last year to minus SEK 26 million. Even though it's quite a small number, it had some impact on the total. Can you explain what this is related to?

That is related to our own operations on hotel side.

Okay. And the activity in the third quarter remained quite low in terms of transactions, but it's normally much higher in the fourth quarter. Do you expect that the transaction volume will improve in Q4 this year as well? And do you expect that Balder can capitalize out of this?

Yes. We absolutely -- that is our ambition, and we hope that, that will be the outcome.

And one final question regarding your resi development. It seems like you didn't start any new development projects in the third quarter, while we have seen a quite high activity in some peers. You did postpone some planned starts during the spring. What's the outlook for fourth quarter and for 2021 in terms of starts?

I think we expect -- just if you take Sweden and Denmark, we expect to make construction costs start for approximately 3,000 apartments and then if you add Finland to that, you would expect at least around 500. So maybe around 3,000 to 3,500 apartments will be constructed to start during Q4 and 2001 (sic) [ 2021 ].

Q4 and '21, so combined, yes.

Yes.

[Operator Instructions] And the next question comes from Johan Hellekant from Svenska Dagbladet.

I'm wondering about, in the report, you tell about your biggest customers and among them are Scandic hotels and also Winn Hotel. Could you specify a little bit more about the hotel situation?

In our P&L now we have the sort of the fixed or minimum rents. So we don't anticipate turnover rents if you look at the Balder figures. So I mean that's good to know that our rental income is quite much lower than in a normal situation. But otherwise, Scandic is a big tenant than Winn Hotel, and we have some other hotel operators as well. We had it for a long time.

But how much lower than normal has it been?

It's a very, very big difference because in some -- we have 1 or 2 extreme case with just turnover rent. In some cases, it's only fixed rent and some leases, it's a combination. So it's not one type of contract. So they're very different in this hotel portfolio.

Scandic told that they are from now from this month stopping full rent -- full rent to -- because of the pandemia. And what do you -- how many hotels are concerned in Balder from this?

I don't know. I think maybe 10 or how many Scandic do we have, Marcus?

Yes, something like that. What did you mean, stop paying rent, I didn't really catch your question.

Well, they're telling that they are not paying full rents anymore from -- they told yesterday. But is...

That's just a misunderstanding. They will be paying full rents.

Excuse me?

I think it's a misunderstanding, Scandic is paying full rents according to their agreements.

Well, they tell that in central biggest cities in this Central position, they will not -- it's -- they are negotiating new deals in Central....

We have no information on that ourselves. So then I think we haven't seen that. So I don't think we should comment on what they might do [ so ] if you ask in that case, because we don't know.

Yes. But another question is that your -- you have Nordic Choice Hotels as a customer also and you are building a new hotel for them in Gothenburg. That deal was made just before COVID. Can you comment a little bit on that?

The construction is doing -- going forward according to plan, and it will be completed in mid-'23. So there are no other news on that.