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

Hello, and welcome to the conference call of the 2021 year-end report for Balder. My name is Jess, and I'll be your coordinator for today's event. [Operator Instructions] I will now hand over to your host, CEO, Erik Selin, to begin today's call. Thank you.

Thank you, and welcome, everybody, for this quarterly call for Q4 Balder. During the Q4, we bought 43% in our -- one of our associated companies, Serena, from Varma, the other owner, so we now consolidate that. We also will propose a split of the shares to get a bit more attractive share price. Completion of apartments was 800 in Finland. And on ESG, we updated the rating from Sustainalytics. It's now 13.8, which is very well within the low-risk section of this rating. And also in the beginning of the year, we refinanced some of our outstanding debt. So for the remaining of '22, there is not much actually to refinance at all. So very stable financing situation. Moving on to the figures on next slide. In Q4, profit from property management was up 44%. Earnings capacity, which is actually more important, 24%. NAV, 30% compared to last year, and we had a small rental growth. This quarter, property from property management was boosted a bit by financial income. Then we look at next slide. You see the development from '18 and going forward. So you see a slowly up moving trend in both profit from property management and then NAV per share. And then on Page 5, the earnings capacity is also updated, as we always do. So you have all the figures. And at the bottom line, you can see that per share, the earnings capacity is 24% above the level from 1 year ago. And compared to last quarter, I think it's 6%, 7%, something like that. And this comes from more rental income, more income from associated companies mostly. And of course, this is our long-term job to always make this increase over time. And looking at the total result, there was a good result in Q4 from cash flow and from value changes. So profit before tax was SEK 9 billion, and that was compared to SEK 4.7 billion last year. Looking at the balance sheet, a big change -- 2 big changes is properties value is higher because of investment and some value changes, and also, associated companies is larger investment than last year. And most of that is explained by more Entra shares in the associated -- among the associated companies. And as I mentioned, on next slide, sustainability. We updated the rating from Sustainalytics just recently. So now it's 13.8. If I remember right, it was around 20 before this, or 21, perhaps. Looking at the property portfolio, not any big changes quarter-to-quarter here, as always, and 80% of the value is in larger cities and capitals. And residential is dominating with 56%; and then we have office, other and retail online, including the Serena acquisition. Property development, that runs quite smoothly, and we have a very large pipeline of both building to keep and rented out and also building to sell. In general, we have a strong market for selling apartments in Sweden. We sell also a few in Finland and we'll do in Norway, but it's okay in those markets as well. If we go to rentals, it's overall good demand for rentals with one exception, and that is the Helsinki region that is temporarily having a bit too much construction going on compared to the take-up. So there is the market with slightly higher vacancies and flat rents. We believe though it's a temporary weakness due to high construction and temporarily less demand from students and so on. So long-term outlook is -- hasn't changed. But if you just look at small details as of today, there is a bit softer market. And otherwise, it's strong in all the other places. Looking at financing, as I mentioned in the beginning, we did a Eurobond beginning of January, 5 and 9 years with fixed rate. And of the debt in '22 that is maturing, SEK 7 billion is already refinanced partly because of the Eurobond, of course. In the total portfolio, 70% is hedged with fixed rate or, in some cases, swaps. The financial targets are met at year-end. On the next slide, you can see we had for '22 like SEK 12 billion, SEK 13 billion. And SEK 7 billion is already done, so there might be SEK 5 billion, SEK 6 billion, and that's basically nothing. So stable situation on the financing side, both in terms of access to capital and on the cost of capital. And you can see equity ratio is above 40%; and net debt, 47%. And you also have the interest maturity structure specified there. And finally, looking at the share price. This, you already know, but over time, it will most likely follow NAV and earnings capacity. So that will always be the case in the long run as we believe. We also have a component that we didn't have a couple of years ago, and that is the development part that comes in profits quite irregularly. So on top of the normal earnings, there will be some development profits from selling of condominiums. And of course, that would have a value as well. But -- so in general, nothing special in this quarter. It was stable, and things are moving along quite smoothly. So now we open up for questions.

[Operator Instructions] And the first question comes from the line of Markus Henriksson from ABG Sundal Collier.

A few questions from me. I'll start off with the valuation yield. It's almost flat here Q-on-Q. Could you highlight for us what adjustments have been done in the portfolio, and how you view the residential valuations relative to what we've seen in the direct market here during the fourth quarter?

Thank you, Markus. The big change is that we have, of course, consolidated Serena and ABP during the year. So and they have a bit -- on average, they have higher yields than we do in the previous portfolio that Balder had. So that has, of course, increased the yields on the total level. So that's why it's flat on year-on-year. And if you look at the residential part, I think, approximately 60% of the value changes is from residential properties in this quarter, and that is down approximately 10 basis points on year-on-year.

Perfect. Then looking at Stenhus Fastigheter to an associated company and also, as you mentioned, consolidated Serena Properties, if we look at the earnings capacity here, it's up 6.4% Q-on-Q. Could you highlight for us what is the underlying increase in the portfolio versus Q3? I see the rental income is also up around -- a little bit up more than 6% Q-on-Q.

You have an indexation, which of course, helps it up. And also in Q3, you didn't have Serena in there. So that is, of course, a positive as well. And you can see that the JVs are continuing to deliver, and the profit is increasing even in the current earnings capacity from the results from joint ventures. So that's most of the changes related to that.

All right. Then what's your take here on like-for-like growth for 2022? It's been around 1%. We have a strong CPI figure in Sweden, Norway. We have a potential rebound in Finland occupancy maybe also for hotels with lifted restrictions. Could you elaborate a little bit on like-for-like growth going forward?

It's what we expect it to be higher than it has been in the last couple of years, mainly due to indexation, but also that we have residential property in Sweden. Of course, we don't always get the residential from year-end. So we have an effect that comes in later in the quarter. But we do expect it to be higher. We can't really guide on the like-for-like, what we expect, but it will be higher than what we have seen in previous years.

Last question, I know that Balder acquired some shares in Castellum here in the beginning of 2022. What's your take there?

Now we just had it as a financial investment.

The next question comes from the line of Andres Toome from Green Street Advisors.

I had a question regarding the Helsinki residential market. I'm just wondering, are you seeing any improvement already in leasing inquiries in Helsinki after the government announced the restrictions there will be lifted?

No. It's -- there is a time lag, I would say. So I think you should expect the market there to be quite competitive at least for the first half of '22. Nobody knows for sure, but I think it's at least 6 months more of quite competitive market. And then hopefully, after the summer, it can be better.

Okay. Perfect. And then I guess another question regarding hotels, and what sort of recovery are you seeing in the hotel market at the moment?

This is also very -- it went -- I mean it's been a week or a couple of days, so it's too early to see that, I think. But if you look at what happened in the autumn, it recovered quite fast actually in regions, but not in capitals. So when it recovered last time, you had a -- regions were actually at '19 levels almost immediately, but you have a lag in Stockholm, Helsinki and Copenhagen, and that is because of international business travelers and so on. So there is a time lag even in that. Even if they lift all restrictions in the whole world tomorrow, you have a time lag. And it's impossible to say that maybe 1 or 2 quarters. So -- but the good thing was it actually seems to rebound quite quick when -- once they lift restrictions. So that's a positive thing to have in mind.

Then it's also a positive that Q1 is always a bit weak on the hotel side, and that is the worst performing quarter. And as they lift restrictions already in the first quarter, that is, of course, a positive.

Perfect. And I'm just wondering also on the residential asset value trends, what are you seeing in kind of real time in live bidding processes? What are the pricing trends at the moment? And I'm particularly curious about Helsinki residential because there's a lot of large portfolios in the market at the moment.

What we noticed there is there is still a huge investor demand. So even though the figures are weaker, if you look at the NOI rentals and so on, there are all of investors. So I would say that the value is up, but the underlying earnings is down. But I think it's because of -- it's still stable, and the long-term trend is still favorable. So if you want to invest there, you basically don't get scared because it's weaker if you know the -- why it's a bit weaker. But we've been actually surprised by the strong investor demand for resi in Helsinki and in Finland, in general. But there's a lot of investors from all over, the big names, Germans, BlackRock, Blackstone, whatever. So a lot of capital looking to get exposure to the resi market.

Okay. Perfect. And well, a little technical, I guess, just wondering about the financial -- sorry, the gains that you made on financial investments. It seems to be coming in for the second quarter now. Is this something that we should consider as a recurring item? Or is it going to fade out?

No, it was actually higher than what we expected or planned. So it was more accidental. It's almost flat. We have to say we're sorry that we had so much income, but it happened. So over time, it will not be that high. It is higher than what you should expect going forward. So you have -- all in all here, you have higher financial income and sort of normalized figures, and you have lower income in the hotel and the Helsinki portfolio. So you have 1 plus and 2 minuses if you look at the whole company.

The next question comes from the line of Erik Granström from Carnegie.

I have a few questions. First off, just the earnings capacity. When we look at the net financials, are you assuming that returns on financial investments are included in that figure? That's correct, right?

Yes, that's correct.

Okay. But could you give us some sort of help here? Because, I mean, obviously, you do have financial investments, and it would be a situation where you will always have lower net financials than the earnings capacity as long as you do have, for example, dividend from these holdings. I mean, what are the major holdings? Could you give us some sort of guidance on that, so we get a sense going forward?

We don't really guide on that, Erik. It's the same with the property development. We don't guide on what kind of returns we will have from that either. So in the earnings capacity, it's mainly running business and what we guide there. So regarding property developments and financial investments, we don't really guide.

Okay. And perhaps, could you also give us a little bit of information on these -- the unrealized changes in the long-term financial assets in the quarter, what did that figure mainly relate to?

The big change was Stenhus Fastigheter, of course, which we changed from financial investments to associated company, and that will not be included in financial investments anymore. That has been contributing for the last quarter. That's where you've seen the biggest change. So I would say the main part is related to that.

So that's actually good. It makes it less volatile.

Okay. All right. Fair enough. And also in terms of transactions, I mean, you were quite active in the market in Q4, even though we didn't know about it because you quietly acquired shares. What is the outlook for 2022? How do you see the market? Have you seen any change in liquidity in the transactions market due to sort of long-term interest rates coming up? Or what's your outlook there?

No, not yet. But you could guess if the long-term interest rates continue to go up that there could be perhaps better buying opportunities, but it's too early to say, Erik, actually. But we hope for that.

Okay. But you haven't seen anything so far?

No. I mean, it's just a couple of weeks. It's not that -- real estate is more slow-moving than share prices, as we all know.

Okay. And in terms of project development, you mentioned previously that rental apartments in Sweden have become a more viable investment strategy for you. How do you view this situation going forward? Is it mainly co-ops for Sweden? Or do you think that you can increase your residential rentals as well?

We can increase both, I think. And we have an estimate in the report in the back of it under property development, where you can see roughly building starts, completion, and what is rentals and what is for sale. And...

So we do expect to complete for next year about 1,900 apartments on the rental side and the same for the coming years. And you can see a larger part of that comes from Swedish residential.

Okay. Good. And then -- and finally, a clarification perhaps just so that I didn't miss anything. When you were talking about the earnings capacity, did you say that the CPI for 2022 was included in that figure, even though it was from the year-end?

Yes, it was. It was included for the ones that we received indexation. So when it comes to Swedish resi, not all is included. But on the commercial side and the indexation that we received for residential that will kick in from 1st of January is included.

Okay. But the CPI figure from towards the end of '21 is included for the commercial part?

Yes, it is. It is. But then on resi in Sweden, you have a lag. So normally, you adjust like March, April, depends on negotiations.

The next question comes from the line of Jan Ihrfelt from Kepler Cheuvreux.

Great. I actually have 3 questions. The first one is regarding property uplift in your associates that were rather high. Could you just elaborate a little bit on where that comes from?

You have one part from Entra, obviously, and what are the other big part markets?

Trenum and also Centur has -- and Tulia has the remaining part, more or less.

And next question is regarding resi. We have seen rather high energy prices. Do you feel that you could compensate that increase in cost on your rent levels going forward, so there will not be a margin squeeze, so to say?

Very good question. My guess is that long term, you can do it, but it could be time lag because energy prices is volatile, and they can move dramatically from day to day basically. And rental levels is a slow-moving income change. So on a quarterly basis, there could absolutely be irregularities. Long term, it's fine.

I think -- so the highest price was in Q4 -- was -- the prices were substantially higher than they were in -- had been so far in Q1. And of course, we have fixed approximately 70% of the electrical prices, so we were not so affected by it. But of course, there is a small part that is affected.

Okay. And the last question is regarding hotels. Did you increase your hotel values in the fourth quarter?

No we haven't.

The next question comes from the line of Clark McPherson from Clearance Capital.

Yes. So question on the balance sheet. Next March, you've got a hybrid, which is callable, I think, on the 7th of March. Just wondering, ahead of that, how you're thinking about the call. Is it something you're likely to exercise? And in terms of replacement or refinancing that hybrid, how would you go about that? Would you finance it with a similar debt instrument, possibly equity? And in general, how are you thinking about hybrids as part of your capital structure going forward?

Relating to that maturity, we haven't decided yet. We will look at that during the year and see if we're going to refinance it. And -- but we do see hybrid as part of the capital structure. You see that the same way as all other kind of capital, more or less then. I think it could be good to always have the part of hybrids in the capital structure. And so we expect that to be part of the balance sheet going forward as well.

We currently have no questions in the queue. [Operator Instructions]

You can always e-mail afterwards if something comes up. But thank you very much for listening in, and have a nice day.

Thank you for joining today's call. You may now disconnect your lines.