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

Hello, and welcome to the conference call in connection with Interim Report January, June 2022. My name is Ben, and I will be your coordinator for today's event. [Operator Instructions]. I will now hand you over to your host, Mr. Erik Selin, CEO, to begin today's conference.

Thank you. Good morning, everybody, and welcome to this conference call for Balder Q2 interim report. If we look at some figures for the first half of '22, we can see that in Q2, isolated, the rental income was 20% better, 20% increase from last year and the profit from property management was SEK 1.5 billion, and that is increase of 29% and also 29% per share. And for the whole of the first half of '22 is similar figures, we have rental income up 19% and profit from property management up 28% compared to last year. Now I'm at Page 2 now. And if we also then compare 1 year ago and see how it looks, and we can see that the earnings capacity is 11% better than 1 year ago. And we have net debt to assets around the same level as previous quarter 46.5%. Like-for-like rental growth is at 2.9% this quarter and NAV per share, SEK 92. Now if we go to Page 3, we have the current earnings capacity. And what you can see there is if you -- if we compare the last quarters, we can see an upward trend in rental income. But you saw also an upward trend in, of course, net financial cost because we have increased interest rates from Riksbank and will also have from ECB, but all in all, the increased rental income covers increased financial costs. So we have a slightly better earnings capacity compared to last quarter. So far, we are absorbing higher interest rates with the underlying business. Page 4, the property portfolio. No big changes there. It's 80% is in capitals and larger cities and the split between residential and commercial is also very similar. So roughly half is residential and the other half is commercial properties of different kinds. Its office, retail, some industrial, logistics and some other properties. And now moving to Page 5, Property Development. In our property development, we have basically 2 categories of property development or new construction that we built. So one is properties where we intend to keep it long term under our own management. The majority of that is residential, but we also have a few pre-let properties. We have one school. We have an office building. We have a hotel. And then we also have the other category that is properties that we build to sell and we sell them to retail flat by flat. And it's mostly in Sweden, but some projects even in Denmark, Finland and Norway. So you have in this development, 2 different categories. And if we look ahead a bit and see how will this look like in '23, '24 because 'right now, it's not likely that we start a lot of projects near term because of higher construction costs and also uncertainties about construction costs. And we also had some uncertainty about prices for apartments and also higher interest rates that make it less attractive to develop rental residentials. So just an example, we looked at what happens if we from now, don't start new projects. And then how will this play out then in '23 and '24. And then we can see that the net investment for us in that case will be slightly negative. And how can that be? And the explanation is that development properties for sale, the amount we are then going to receive will be actually higher than the amount it takes to complete properties that we will keep for management. But then we will have the effect that NOI from projects will, on a yearly basis once they are all completed, increase our NOI with SEK 500 million per year. So this is an interesting thing to know. So we will actually then have SEK 500 million more NOI, but no net investment, actually slightly negative when we look at it, but everything can change. They can be better, maybe circumstances if we are far ahead. But interesting to see how this will be. And we have no project that we have to start. So it's absolutely up to us. If we think its positive or advantageous, we can start. Otherwise, we can just wait. So I thought it was interesting to look at those figures. And then if we take Page 6, financing. We have increased the credit facilities lately with SEK 10 billion. So we now have available liquidity and credit facilities of SEK 23 billion as of this half year report, 70% of the debt is hedged for fixed rate loans, and we meet all our financial targets, as you see in this graph as well. Page 7, we'll continue with financing there. There, you can see the interest rate maturity structure. And if we look at that, to begin with, we can see that -- if we look at '22, '23, '24, combined, it's roughly SEK 55 billion. And so then we roughly have SEK 50 billion net debt. We have some cash commercial papers and so on that we own. And those SEK 50 billion will most likely be at higher cost than we have now, given the outlook for interest rate hike. But on the other hand, we most likely get higher indexation on our rental contracts. So we have this SEK 50 billion will be more expensive, but we have yielding assets of [ 200 ]. So it's an interesting comparison. And of course, we don't know the outcome, but we have [ 200 ] working for us in a higher pace, most likely and seems to be getting more expensive. Looking at debt maturity structure. You have it there on every year, and this is the total structure. So this is not the bonds. If we look at '22 first, we have one bond, but that was actually paid back 1st of June. So from now and the rest of '22, we have no bonds expiring. Then in '23, we have roughly SEK 14 billion, SEK 15 billion, if we take everything. So if we compare the bond that expires with liquidity, we already cover all of those maturities. And then, of course, we have the cash flow as well on top of that. And then you can see it continues more or less the same amount every year going forward. So a stable situation there, and I've been increasing the liquidity, as you can see lately in the last 1, 2 months. Just to have the optionality, if the bond market is not attractive, then we can just wait with that for a while. And I also think we can increase liquidity even more if we think its -- if we think it will not be interesting even in '24, then we -- I think we can increase and then wait even 1 more year if we think it's better to not go to the bond market. But hopefully, things will normalize and we would like to be in both markets obviously, but I think it's always good to have alternative and optionality. Looking at Page 8. Here, I have some different things I wanted to give some update on. And also, I have been talking to a lot of investors lately, so I picked up some questions that is often asked. So if we start with the recent events, that was 1.5 months ago. There have been some misunderstanding that Balder was actually a part of this sort of insider thing, that is not the case. It is former employees that is a part of it, and they have left their positions, but there's been some misunderstanding. Nevertheless, we have tightened governance anyhow. And we are now, you can say, basically in line with how banks and fund managers work. So you basically have to have permission to do anything. And this is not Balder shares only. We want people to have Balder shares, but if it's other companies where someone in the Balder management have an insider position normally through a Board position or through a big ownership, then we say that they don't buy and sell those shares unless you get permission. There can always be reasonable things for actually -- there can be good reasons to own a share, but then we have to have a process for it that is in place now to avoid that anything like this can happen. And on top of companies where we have insider positions, we also added companies where the perception can be that we have it, even though we don't because it can cause the same damage actually. So it's very similar to banks right now, and that's been well received. I also got some questions about associated companies. For us, it's always been the case that, that is a part of the normal investment activity and capital allocation strategy. So if there's a market where -- that I think is interesting, but I don't have access to direct bill flow or don't find this that this is attractively priced, we can consider to be owners in a company, if we like the other owners. So it's not more complicated and it's a part of the capital allocation process to reach interesting markets where we might not have the same possibility ourselves. And we also get good input from our partners and increases our network and deal flow. Also, it is worth to mention that we have never made any transactions between Balder and associates because I got those questions as well, but we never bought or sold from Balder to associate or the other way around. So I think it's interesting to be clear on that as well. And in these associated companies, we have no obligation to buy and sell anything. So we have no put to call options or nothing like that. So it's based on a good cooperation with good partners. I think it's also interesting to mention a bit about indexation and rent increases going forward. Of course, this is a guessing game and nobody knows. Inflation figures is very high all over the world right now, but I think it will also be very volatile. So I'm not the right person to make forecasts for this. But I think in our portfolio, it can be good to know that there are different kinds of rental adjustments or indexation. So in general, with few exceptions, it is like this that commercial properties and Danish residentials, they are linked to the CPI in their respective country, obviously. So commercial properties, Danish resis in the contracts you normally follow CPI. Yearly negotiation, that is for Swedish residentials. It's a regulated market, so you have yearly negotiations with the tenant association. And normally, the outcome is -- over a longer time period, you can see that the outcome is slightly higher than inflation. But on a yearly basis, they can be decoupled. So typically, if you have severe inflation, you still get some rental income. And my guess is that if we now have very high inflation, we will not get that high rent increases as inflation. So you can say the results sort of smooth out different years with extremely high or low inflation. But over a longer time period, it's been actually a bit higher increases than inflation. And that is not so surprising because over time, you should have some real GDP growth. And then you have the salaries and purchasing power growing faster than CPI. And that also leads that you have -- you can afford to pay slightly higher rents even in real terms over time. And that is even if you have market rent or CPI link when contract expires over time, I guess, this would have a slightly higher trend than CPI. And then we have another category market rent and perhaps that is Finnish residentials. So there, the rent level and the rental movement is much more, of course, than dependent on how is the market? How is supply demand? How is the economy? And in Finland or in Helsinki, in particular, there's been a bit much -- a bit too much supply perhaps last 1, 2 years, very much construction going on. What we saw earlier was that they forecasted that, that will slow down. So you will have less supply compared to before. And if I'm guessing, I think it will be slowing down a bit more due to the same reason that we think that construction costs are higher and it's a bit messy. And if you have higher interest rates, that also squeezes the margin. So my guess is that the supply will be less than forecast, and that will be, of course, supportive for the market and vacancies are slowly getting better, actually. So we have a slow positive trend already now. We guess before that, that was maybe for next year. But as of today, it's actually a bit better than we might have guessed lately. Let's see if it continues. And then we also have another category that is turnover rent. And in our case, it's mostly hotels. A few retail contracts can also be turnover rent. And we have one fixed part and then a turnover rent on top of that, but very, very small part for us. But in our case, it's hotels, but it's only some of the hotels that has rental floor and then turnover rent on top of that. Some of our -- many of our hotels have actually fixed rent, but some of them has this combination. And I think one or two has pure turnover rent. So this covers basically our portfolio in these 4 categories. And the biggest is then CPI-linked because it's all commercial properties and Danish residential. So that is over 50%. So then the question is what will the average of all of this be? And I don't have an exact figure for that because when you have to guess about inflation, you have to guess about negotiations and so on. But right now, maybe you can guess inflation, perhaps 7%. It was higher. It came a figure yesterday or day before yesterday. And the negotiation is very difficult to know actually. I think it will be not that much, maybe 2%, 3%. And if it will be something like this, then the average perhaps can be 4%, 5%. But it's very hard to predict actually. So this is more of a wait to see roughly how is the total thing developing. So right now, you can say CPI is high, negotiations, I think, a bit lower. Finnish residential will be better, but I think next year more than this year. And in cases with turnover rent, hotel and retail, there will be much bigger increases in percent, but that is not such a big category for us, but they are moving a lot faster and you also saw that in [ Pandox ] figures today. So that was an update. And then next slide, you have the share long-term development where you can now see that there's a big discount and lower valuation price compared to cash flow and so on. And the Page 10, 11 is the P&L. And I don't think I'll go through that, it's easy to read anyhow. So the overall situation is this is quite stable right now in the market. They still predict some real GDP growth for next year and beyond that, even though interest rates move up. We have a stable portfolio, extremely diversified, and we increased liquidity to be able to be flexible and it comes to bond maturities. And all in all, this can be that higher interest rates most likely roughly will be compensated with index and completed projects if we look at it, but it can be a bit irregular between quarters and so on an indexation is year-ended, but the long-term trend right now looks that higher interest rates will roughly be absorbed by higher income. So that was the presentation, and now let's see if there are any questions.

[Operator Instructions] The first question comes from the line of Fredric Cyon calling from Carnergie.

As mentioned for 2023, some of them are hybrid related. What do you see as opportunities to switch some of the bond loans into bank facilities during next year?

In general, I think that is very doable. We already now have available facilities to take care of all the bonds '23. So we don't even need more. But I think it's -- if we want more, it's not a problem. So it can be the case that bank financing will increase the part and lower part of bonds, but it's a very volatile market. So anything can happen. But for the moment, it looks much more attractive with bank financing, and we have big headroom there because we also want to keep this unencumbered asset level good, but there's a big headroom for us to have another mix in the funding.

And with regards to investments in the existing portfolio and projects, it was SEK 4.1 billion during the first half of 2022. I'm aware of the long lead times. But I mean it's a very high level historically for Balder. Moving into 2023, you talked about investments probably going to be a lot lower. Can you quantify that?

Yes. I tried to explain that we will invest complete projects that is ongoing. But on the other hand, a lot of properties will sort of go out of the balance sheet because we build and sell to consumers. And it's basically just time that has to pass by. Most of it is already sold. So it just has to be completed. So if we don't do anything, the forecast now is that investment will be less than we receive when we sell the apartments. So that's why I tried to highlight that in '23, '24, I mean we don't have to start any more constructions, if we don't want to. And if we don't do that, that will be roughly the same sum. Right now, if we guess it looks like a negative investment of SEK 200 million that's improvement quarter-to-quarter also. So you can't say really exactly, but how it looks like negative. So this is slowing down '22 and then '23, '24, if we don't do anything new, it will actually be nothing. But then we have the properties being completed and that will generate NOI. So we will get SEK 500 million more NOI but no debt.

Then my final question relates to acquisition opportunities. There seems to be some foresellers in the market, do you foresee opportunities near term for Balder? Or do you think it's still a wait-and-see game to see where property yields are heading?

I think it can be the right thing to wait and see. And so far, I haven't had any foresellers that called me at least, but maybe there will be or maybe there are, but I haven't seen anything. So the latest processes that we have been into, there actually has been very strong demand still and price is more or less the same level as before. So -- but I think we will see in the autumn or when we come to year-end, how this plays out. So -- but I think you can expect quite low activity from our side. That is my guess.

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

I had a first question about just general credit conditions and also the credit facility you have drawn. Maybe you can give some guidance insofar as what are the terms of the available liquidity you have at the moment insofar as the interest rate goes? And what sort of period you can use that facility for? You mentioned that you can cover next year bond maturities, but could it go beyond that?

Yes, it's normally longer than 1 year. So normally, we borrow money for 2, 3, 4, 5 years, sometimes. And bank loan, I mean, the thing is that you always prolong them. So, so far, I never experienced a bank loan that you don't prolong. So it's more a question of the terms, if you think it makes sense to take longer duration or shorter and sometimes it's not a big difference in pricing and sometimes there are. So this is something that we always have to look at the total portfolio and see what makes sense and what doesn't make sense. So -- but we increased bank facilities to be able to -- let's say that the bond market is dysfunctional or if the interest rate is too high, then we can simply pay the bonds back and don't use bond for a while. But hopefully, it normalizes. I mean, sooner or later, it always does. So we want to be long term in the bond market but right now, I think, it can make sense to have headroom to be able to wait for a year or 2 if it's a tough situation out there.

And the interest rate on these available facilities, it's not agreed upon yet right then, you will agree?

Yes, you have the interest rate disagreed the margin, but then it's different if you take floating fixed and so on. So I mean, you don't know that before. But you can say in the banking system, they are the same as before. I would say that I haven't seen any big changes there. But then, of course, you have to guess about what is the interest rate later on. So obviously, it's higher. The question is how much higher.

Understood. And then maybe you can add some color so far as what happened to like-for-like rent growth pace? I mean, it's accelerated quite a bit. And just a question on what's driving that, what sort of sectors, geographies?

Now it is general better than last quarter, but there can be movements from quarter-to-quarter also because, for example, in residentials, you don't have the adjustment at the same time. So that's why it can be -- it can move from one quarter to another sometimes. Sometimes you adjust 1st of February, sometime 1st of May, 1st of April. So this moves around the long-term trend, it's much easier to focus on. But these short-term things, they can be sort of better figures sometimes and less good sometimes, but I wouldn't pay too much attention to that. So -- but of course, if you look last year, you have higher indexations in general and a very strong rental market in general. So it's reasonable to believe like-for-like will continue to improve. If we're guessing that -- I mean next year will probably be a couple of percent higher, something like that.

And my last question pertains to valuation changes in the second quarter. Just wondering what is driving that? Is it mainly project completions? Or is it something also on the stabilized asset side?

Yes, it's a bit better for NOI forecast and then it's also completed projects, but it's a very small change in general. But there are no yield changes. It comes from project and forecasted a bit better NOI going forward. But we haven't put into valuations forecasted CPI for this year. You can do that, but we haven't. So that effect will be later.

The next question is from Jan Ihrfelt calling from Kepler Cheuvreux.

First one regards your equity ratio is currently at 40.8% at the same time as your target is above 40%. So pretty close there. Is there anything you adjust for to make that figure better? Or could you just comment upon that effect?

You mean going forward or?

Yes. If you do something -- if you consider it when you do certain decisions.

I mean, we want to be over 40%. So -- but going forward, if we change that target, that can be but we haven't changed it this quarter. But you can say if we don't do anything and everything, it's just flat and it improves automatically with earnings. So if we want it to be higher, we can basically be just still and then we will have earnings coming in, and that will drive that figure upward slowly. And we also will have earnings from all the completion of projects, '23, '24 because also when we sell to retail consumers, the profit is booked when we actually hand over the keys. So it's now -- it's 0 until we do that. So those profits will be irregular, but they will show up '23, '24. And that will, of course, automatically if everything else is equal, give us a bit higher equity ratio.

Okay. My second question relates to your yields on Swedish residentials. If you just could comment upon what kind of yields do you have for your Swedish residentials or -- and if you see any risk that the yields are expanding in this segment?

I think -- I don't have the exact number, I think it's around 4%, and it is expanding or not, I think it's a bit difficult to have forecast on yield actually. I mean, the system is more or less we always see how is the market, and then we make valuations that is as close to market as we can do, so to speak. But I think maybe the lowest yield that we've seen in the market last year that has been [ 2%, 2.5%]. I think that level will not be possible to get, actually, unless you're in Central Stockholm, Gothenburg because then it's not yield the case, it's more of a square meter case or a trophy case. But if you take mid-size cities where the same transactions were [ 225 ] 2.5% I think that will be very hard to achieve. But on the other hand, those transactions were made way above valuations because what it used to be was that you have a big premium, especially for bigger portfolios. So this portfolio premium, I think, will not be there anymore. But on the other hand, the external valuations didn't take in portfolio premiums. So if those values comes down, it's not necessarily so that they are lower than the current valuations. So you had sort of 2 markets before, one that is the valuation for, let's say, x and then a big portfolio was sold for x -- 1.3x or 1.2x. And I think that will not be the case going forward. That is my guess.

Okay. So your -- on a total basis your Swedish residentials are booked at around 4%, is that correct?

Yes.

The next question comes from Jaafar Ibaraghen calling from Lombard Odier. Please ensure your line is unmuted.

Can you hear me?

Now we hear you.

You heard that [indiscernible] Did recently an operation to reduce debt and increase its equity. You said that you have confirmed from your bank. Could you comment on that recent operation as a good opportunity that they used to take in front of the bond market price mostly? And after, could you give us some more detail regarding the interest rates, if you draw in full your available credit line to cover need in 2023, please?

I'm not quite sure I heard the question completely, but I think you asked about if we sort of exchange bonds for bank loans and use credit lines, was that the question and the cause for it?

Yes, it's an angle to see the question. But I mean, if you have available credit line, why don't -- I mean it could be an opportunity to reduce your bond exposure at a good price opportunity if they are able to be drawn now? And what could that step of interest rate, if you draw your credit line?

Yes, I understand the question. Yes, we can draw the credit lines tomorrow, today, any time. And I agree that they can be interesting buying opportunities in the bond market for us, actually buying back bonds. And we also wrote that in the report, if you read the full report, we mentioned that, that, that can be the case.

Okay. And so to be much clear, so if you draw your credit line, what could be the margin in full?

The margin -- I think, roughly margin is around 1% area, it can be slightly higher, slightly lower, the margin. And if you have those fixed [indiscernible] but around there.

Okay. So if we imagine that you're drawing full your available credit line and if you increase this available credit line amount, what is the commitment bank ask you to -- I mean to cover them somewhere? What is the commitment in terms of increasing cash position in hand on your balance at the target?

No, banks don't require cash on hand. So bank loans are basically 2 different categories. So we have secured bank financing and unsecured bank financing, so you can just take mortgage loan with the security in the real estate. And we have a lot of good assets. So it's not a problem to make that kind of financing, if you want to. But then we also have a lot of unsecured bank financing. So it's a mix between unsecured and secured bank. We can do both. So we are doing both actually.

Okay. And so what's the target in terms of increasing secure and unsecured loan in the next 2 years?

No, we don't have a target for it, actually, but we have a big headroom to increase security, if we want to compare to where we sort of supposed to be given the bond rate we have a big headroom. So if we want to, we can do much more secured, but we don't have a target.

If you increase your secured loan, you will rise more unsecured debt holder. So it could be interesting to buy back them before the maturity at a good price.

Exactly.

Okay. In terms of asset which I just -- so if I heard very well, you are looking forward to sell some of the flats to your rental. Could you go bit more in details what is the target you have in mind to -- in terms of asset sales to increase cash position?

No, it's already sold more or less as we sell the consumer. So most of it is already sold, but we get the money once it's completed. So it's not the sale has to do going forward. So the normal thing is in the Nordic countries at least, that you sell the apartments 1 to 2, sometimes even 3 years before completion. So then it's just time has to pass by, and also construction has to run accordingly. So that's why the asset that will be sold, they are basically already sold, the majority of it is just that time has to pass by. It's actually very simple. So it will automatically leave us, and then we complete building projects. So then the net investment will be around 0 for the projects, '23, '24 unless we do new projects. But then the completed cash flow properties will start to generate on a yearly basis, around SEK 500 million NOI. So those -- that is already sort of -- that is already done. It's just time has to pass by.

Okay. And in front of that, you have available credit line or more liquidity from banks?

Yes, we have increased credit lines SEK 10 billion just lately. So we have '23. And then we have the cash flow. If we don't do anything, we have cash flow since we don't pay dividend. But of course, we will buy and sell something if we look at years to come. We always buy and sell something. So this is more an example that you can say ongoing projects, we can't really stop them. It will be totally crazy. And then it's interesting to see, okay, what can happen in '23, '24 with projects already ongoing. And there, you can see that the net investment will be let's say, 0. And it can be good to know since many investors are focused on funding. So I think it was interesting information to know that projects, '23, '24 don't require funding. It can be quarterly uneven, but if you take the whole period because it's much focused now on bond that's expiring -- and of course, if you have to invest, you have to fund that on top of that. So in our case, the net investment, if we don't do anything new, it's around 0. We have bonds expiring, but then we have cash flow and we already have the credit facilities.

Okay. In terms of loan-to-value and in terms of cash position for [ '23 ], what is the target you have, new commitments you have?

Now right now, we have a target to be below 50% loan-to-value. And once we have a new target, we will communicate it obviously, but we've been saying that over time, we will trend for slightly lower LTV and higher equity ratio. But if we adjust the target, then we'll communicate it. So right now, the targets are 40% equity ratio and below 50% LTV. But if I'm guessing, the trend over time will be lower. But as I said, new targets will be communicated when or if they come.

Okay. And in cash in hand, what is the target you would like to reach?

No, we don't have a target for cash in hand. I really prefer actually to have facilities rather than cash on hand. It's normally more cost efficient, but we sold some properties. So we also even bought commercial papers because we had a bit too much cash. But the ideal situation is to really have a little cash on hand but then have facilities instead, normally, that is more cost efficient, if you understand what I mean, to optimize on costs, it's normally better not to have cash and then you borrow the money on the other end. But it's on the other hand, very hard to get it to 0 because I mean we have different companies in different countries and so 0 is hard to get, but we don't like to have too much cash on hand because it's expensive. It's better to have facilities.

Okay. My last question should be perhaps more on the liquidity, on the bond markets. Nordic real estate companies are very silent. And that's a big issue because it's transfer, I would say, big liquidity on, I would say, senior unsecured and senior bonds. What you guys -- are you going to increase communication and to -- in terms of your day-to-day business or doing a JC with your bank adviser in order to communicate much better to increase liquidity and to help you to refi in due time?

Yes, I can't -- I don't know what other companies will do, but that is my ambition to improve this communication and also to be able to reach out to more international investors and also to explain more things because lately, when I talked with a lot of different international bond investors, I can see that there's a big knowledge gap actually. So I think I talked with a lot of them that actually -- I mean it's not so strange if you're a bit far away. I mean, how can you have all the knowledge but I realize it's a knowledge gap and an information gap that will be very positive to make that less. So I have an ambition to improve this significantly in our case, at least. I don't know what other companies will do, but that is my ambition.

Your bank adviser [indiscernible] to that?

No, I don't need a bank adviser to understand that actually. I think it's pretty obvious when I talk to investors that there's a need for improvement in information. Then banks help me to find all the different investors because that is a bit complicated because it's maybe, I mean, 100 different or perhaps even more. So in that, I need the banks help to find all relevant potential investors. That is important. But otherwise, to make better information, I think that is pretty obvious that, that will be good for everyone for us and for the investors, obviously.

The next question is from Simen Mortensen calling from DNB.

All my questions has been answered already. So I can take the next guideline.

Next question comes from Clark McPherson from Clearance Capital.

All my questions have been answered as well.

The next question is from [indiscernible ] AB.

[indiscernible] maybe some questions on different subjects than before. First of all, Erik, maybe you answered this already, but just a clarification on property development with this new situation across the world with increased interest rates and inflation. How do you handle that? Will you put planned development projects on hold or [indiscernible].

We already did. So I think now to start construction for rental apartments is not that advantageous for us because we have higher construction costs and also very volatile construction cost and hard to get fixed prices. And then you have -- you can't increase rent nearby increased cost and then you have higher funding costs. So in my view, it doesn't seem attractive to invest in rentals in general right now. So we will wait for that. We will postpone for -- I mean until it will be more favorable. And then if you take the market to sell co-ops [indiscernible], then I think projects in good locations in Stockholm, Gothenburg, they will still be -- makes sense to do them. But I think it could be also good to wait because I think it's more likely that we get better construction cost later on than now, and you also have uncertainty in the pricing in the market for co-ops and so on. So I think it makes sense to wait for a while. I don't see any big advantages with starting now compared to waiting. And for us, it's not a problem to wait. I mean, the bulk for us is cash flow generating properties. So -- and we have a lot of projects to be completed in '23 and some '24. So I mean, for us, I think it makes more sense to postpone building starts.

Okay. Perfect. This has been a quite special month for you and not Balder as you clarified earlier. First of all, Ewa Wassberg was recruited as new Head of Finance. Can you talk anything about that recruitment and why she was a perfect match?

Kind of a strange question. She starts after the summer, and she had the same position at Fabege. So I think she's well qualified.

Okay. Do you want to elaborate anything on the recent events, including Marcus Hansson and Magnus Björndahl?

No, what is the question?

The question is you said in a statement that you were shocked about this and surprised over the verdict. Are you still in that?

Yes, nothing new happened.

Okay. But why you are surprised? Do you think they are innocent.

I really don't understand you. Nothing new happened, and they are replaced and we have new -- they don't have their positions. So we are not part of it.

Okay. Do you know say anything about your emotions during this quarters at all about the recent events?

I think you have a weird question. But the surprise came from 10 different lawyers and nobody believed in this outcome. So if I wasn't surprised asking 10 experts that would be kind of strange if I thought I knew better than 10 different other guys. But maybe you would have.

No, the thing is we're trying to reach you by phone, but we couldn't reach you. So that's why I asked those questions in this event. So yes, it's pretty strange asking now, but this is due to...

Yes, it's strange and I have no new information.

The next question is from David Johnson, Private Investor.

My questions have all been answered.

Next question is from [ Ria Gandhi ] calling from [ Mizuho International ].

In terms of accessing funding, how are you currently evaluating the trade-off between senior bonds, hybrids and any other terms of funding?

Right now, you can say that bank facilities, bank market is functioning extremely well and the bond market is volatile and a bit complicated. And that's the reason why we increased facilities a lot lately, so we can have the flexibility between bonds and using facilities. But this is -- I mean this can also -- I mean, this is a volatile market. So I hope long term and I think long term we will use all sources as before. But I think right now, it makes sense to have more flexibility than you normally perhaps have. So that's why we increased available facilities a lot to have the optionality to take bonds or do not take bonds.

So are you looking to expand further in the bond market in the future when it's a bit more stable?

Yes. If we think it makes sense, we can do it. And otherwise, we will not.

Okay. And I just had another question. So the CFO in the first half of 2022 was, I think, around SEK 1.5 billion versus the CFO of, I think, minus [ 6.8 ] billion. So in this environment of tricky capital markets, are you going to continue to invest in this heavily?

No. That's not likely. So I think investment activity will slow down dramatically. And also, I tried to explain ongoing projects that we already -- I mean, they are being built. So I mean, we'll complete them. And that's why I also tried to explain that. If you take all those combined and look ahead '23, '24, the net investment is actually 0 because we will be selling as much as we will spend on new construction. But then we will, of course, buy and sell something on top of that. We always sell something and buy something but the big picture is that we will -- my guess is this will be a low activity. And then we have strong cash flow generating capacity that can reduce debt if we want to and the net investment for projects will be, let's say, 0. And then there can be some investments for tenants and so on, but I think it will be less activity.

The next question is from Pranava Boyidapu calling from Barclays.

So my first question is around hybrid. So as you said, the current bond markets are kind of dysfunctional. And as I can see, the nearest hybrid in Jan 2023. So if market continues to stay this way, like how do you plan to kind of work on that? Because if I can see the current yield to convention is around like 32% on that hybrid. So how you're thinking about it like? And to kind of equity raise to be paid? Or what you're thinking about it?

I think we will come back to that later on. It's a bit hard to communicate about hybrids because there are special rules linked to them from S&P. So it's hard for everyone to talk about it. Everyone is more or less pegged in the corner in this case, but the equity content in a hybrid, that's the probably important thing to think about generally. So -- but what you can say in Balder case is that we have 2 hybrids and there are combined, not that big amount compared to the total balance sheet. So that's why it's not a big issue as such. But we have to, I think, the call date is March next year. So we will come back to it.

Okay. And my second question is around external valuation. If I see like it's around like 20% is valued externally and another like some 20%, 25% is second part of your opinion on the extent of valuations you have done. I think for other companies, it's more like fully externally valued. Is there any reason that we have less amount of external valuations in case of Balder?

No, we actually never did everything externally. And I think my general thinking is that the company should have a good knowledge about their own assets and the balance sheet and have the knowledge to make correct valuations. But then we will always do it externally second opinion, you can say. And then you also have the situation, if you have 10 properties at the same place and you make valuation for one, then you actually know the other 9 if they are similar, but it will be very expensive to do 10 valuations more or less unnecessary. So that's why I think it doesn't make sense to evaluate 100% because you -- it will add no more information basically. But if we look back, we've been listed for 17 years, you can say the average has always been that external valuations are slightly higher than our internal -- if you take the average over a 17-year period, externals tend to be slightly higher than our internal valuation.

Got it. And probably my last question is given where the current share price is like -- and are you looking to disburse some properties and do probably share buybacks or something like that?

Yes, we will always try to do what makes sense in general. So that can be an alternative, of course, if we think it's good for the whole picture.

The next question is from [indiscernible] calling from [ Deka ] Investment.

So my question would be on your associated companies because you are invested in quite some associated companies. And I wonder, you have made analysis like which of the associated companies have publicly traded equities outstanding and where the publicly traded equity trades now below the price for which it is in the books?

Yes, we have a few of them traded publicly. And right now, there is a gap, but the principle is that if you think it's a permanent gap, you adjust the value, and if it's a temporary gap, you don't adjust it. And if you have a surplus value, you don't adjust it. But if you look at this as a group and time passes by, my guess is that the values will over time actually be a bit lower than the actual value because you always book just equity on top of the carrying value. So you, in effect, book 100% deferred tax as time goes along. I think the longer-term trend that will be slightly undervalued if you compare to the real value.

But can you tell how big this gap is?

No, I don't have the exact figure, actually, but I mean we follow the principles we have to follow since we listed in IFRS.

The next question is from [indiscernible]

I have a few questions. The first one is, could you share the percentage of the portfolios that are really turnover based and whether the rent flow is CPI-linked or not?

Yes. I actually talked about that before. Turnover rent is very little for us. It's just -- it is one category. And in our case, it is some of the hotel properties that is turnover rent. Normally, we have a floor and then turnover rent on top of it, and a few retail leases are turnover. So I would guess in our portfolio, maybe 3%, 4%, perhaps, if not much, but it is a category. So that's why I mentioned it. And the biggest part is CPI-linked because normally, our commercial leases, even if it's Norway, Finland, Denmark, Sweden is CPI-linked. And on top of that, you have Danish residential linked to Danish CPI. So that is the biggest category. And then you have market trends for [ SC ]Finland and you have negotiations yearly in Sweden resi. So we have sort of 4 categories. There can be some exceptions even in this actually, but to get the big picture for systems.

Fully understood. It's just for the turnover base, I'm just curious whether the rent flow is also CPI-linked or maybe it's based on the contract.

Yes, good question. That is true. The floor is CPI-liked. The idea is not to beat the floor, but it is sustaining a bit at times.

Okay. Understood. And also under the current situation, is there any chance -- I mean even though you've answered it before, is there any chance that you might consider have your full portfolio like external valued that you reassure the market is like you gave a number of external valuation versus your own internal valuation so that the market could better understand your like internal model, et cetera?

We have the same model internal or external. So it's not -- and as I said, over time, we are normally slightly lower than the external valuations. So never any big discrepancies. I mean we do this 24/7, I've done it for 30 years. So I think it would be not good enough if I didn't have an opinion about value since I -- this is all I do.

Okay. And also on the hybrid I'm not sure to what extent you can comment also because of the rating consideration. So because some other peers, they comment like what scenario, they might just issue -- replace the hybrid with 50% of debt and 50% equity. And for you, whether maybe issuing a bit more Class B shares could be an option for you? Or it's not something like in your considerations for the moment?

No. I mean it's very hard to communicate about it before we actually decide something because this is important to do the right way because there are quite strict rules. We have S&P rating. It's actually a bit is to have Moody or Fitch hybrids because then they look at the hybrids separately. But S&P look at all hybrids as more or less one part of the capital structure. So we have to be very -- we have to be very careful and do it very thoroughly before we do or say anything about it. So I think it's a bit unfortunate that it is this way, but actually I have to sort of follow the guidelines from S&P, how to handle it. So it is a bit difficult for all companies having these hybrids because -- but I mean, I think March is the call date for us. So it's not that far away until we have to say anything on the rules and concerns.

Okay. Understood. And my final question is when I talk to the Swedish banks, they basically decided that they can support the corporates. I mean, real estate companies follow in the near term, but they might not be able to refinance everything in the coming 1 or 2 years. So I'm just curious, like even though you have secured some credit facilities, but do you see like if the market condition remains at the current stress level, would continue to have a lot of assets to the bank loans? Or maybe at what one moment the bond will be closed as well?

If the situation is like it is now, then this will not be a problem. That means you will next hear a bank say that they take all outstanding bond loans that will be a crazy thing to say because it might not even be their customers. So they can't say anything. It could be very weird if they did actually. So they look at it case by case. So I think it's a big I mean it's different borrowers, companies, different sort of assets and so on. So I think they look at it case by case, they should do. And then actually, they do. So as a general statement, they can't say that they take all bonds, that would be crazy of them to say.

The next question is from Jan Ihrfelt calling Kepler Cheuvreux.

Okay. Just 2 more questions that was cut away. The first question relates to your apartment that you're going to sell, the co-ops. How large portion is already sold in that portfolio, currently construct?

The absolute majority, I don't have the exact figure, but the absolute majority is already sold. I think for '23 more or less everything and '24, we've already started to sell as well. So -- but the most is '23, but some goes into '24. So I think average maybe, I don't know, 75%, 80%, 85%.

My last question regards to your -- the cost structure of your projects. Have you -- I mean, kind of...

Very good question, Jan. And you can say the absolute majority is fixed prices with few exceptions. So the cost side is well under control. But if we are to start new things now, it's much more difficult -- and if you have...

Why you don't do it?

No, that's why I think it's not advantageous for us to do because you have high cost and uncertain costs. And on top of that, you have uncertain values when you're going to sell it or if you keep it, the yields will be lower than before and interest rates higher. So I think you can perhaps find better alternatives. So for the time being, I think it makes sense to wait, but things can change later on, and that can be lower construction prices or if there are other changes, it can also come subsidiaries from the government, you don't know. From time to time, that shows up as well. And maybe if it slows down the last '23, there can be some subsidies in '24, perhaps, but nobody knows. But I think it's important to always be able to change if the circumstances change.

The next question is from [ Tobias Kaj ] from Lannebo Fonder.

I have a couple of questions. First of all, thanks for the clarification regarding net investments in the development. But you also have some ongoing developments in your JVs. Do you think there is a risk for any requirement of capital injections to any of the JVs?

No, no. The big thing is [indiscernible] with the AP fund and it's already funded.

Okay. Excellent. And then the second question regarding buybacks of bonds. Do you think it's possible to do like significant volumes of buybacks in the market, so say? Or do you need to make a general offer to be able to do buybacks in the bond market?

I don't know exactly. I think it remains to be seen I get the signals that there are perhaps low quotes on prices, but not necessarily a lot of sellers, but I don't know actually. I think nobody knows, but I think it's at least an interesting alternative to look at from time to time. It doesn't used to be like that. But I mean now you can consider to buy a bond rather buying anything else actually. So I think it's interesting to look into that. But volumes, I don't know actually. I don't know.

The next question is from David Shnaps calling from CreditSights.

Just again on the hybrids really. And I know you can't wait too much or you're not giving us too much. But can you just confirm that there's everything still on the table in terms of calling, extending, probably not replacing?

Yes, I mean we can do anything, obviously. I mean it's our choice. So -- but I think the thing is that we have to be very careful with communication about this, and we have to have it -- do it in collaboration or with S&P informed and so on. So that's why it's a bit difficult for all companies with S&P hybrids to do a lot of statements and say a lot of things about it. So it's hard to communicate about it. Unfortunately, it is not -- I wish it was in another situation. But since they look at all hybrids more or less as one thing and part of the capital structure, which it is, we have to be extra careful how we handle it. If you have Moody's or Fitch hybrids, then it's not the same because then you can handle them separately. So that's why it's complicated for companies with these hybrids.

Sure. I would say it's a kind of less complicated view because you don't have as many hybrids outstanding as some of your peers?

Absolutely correct, we have very little. So it's less complicated for us, absolutely correct.

Next question is from Bart Reidsma calling from PGGM Investments.

Just one question to check. Previously, you had the press release on the sale of Trenum, which I think was at a very good level. That one is not included in these statements yet, right? Is that was effective 1st of July?

You mean the sale in -- that we made in Trenum?

Yes.

That is included. The decision was 06/30 actually. So -- but there was a government decision. So it was a very special situation. So the government actually communicated before they even had their decision. So it was a very different situation. I never actually experienced anything quite like that, that you can have a communication before you take the decision, but that was actually what they did. So the minister was out the day before they had their meeting. So for us, it was very complicated having a minister saying that they have bought it and we were waiting for the decision at the same time. But it is included.

Because then I would have expected that the change in value properties realized, but that would have been somewhat higher.

In that case, it was SEK 450 million in the JV structure.

Okay. That makes sense. Yes. So that's not directly into the realized portion.

No, it's actually -- we owned it together with the Swedish state with the equity fund.

Yes, exactly. Okay. Thanks for the clarification. And then one follow-up perhaps on this equity to asset ratio. You mentioned before that this will basically go up naturally, if you don't do anything, you have a bit of comfort now of 40.8% versus 40% target. Of course, well, there are a ton of questions on these hybrids, right, with the [indiscernible] in March '23. Can you basically elaborate a bit on how fast it is growing naturally also considering what you have said on basically stalling most of the development? The impact is, indeed, the upcoming hybrid wouldn't be replaced?

You mean what the effect will be if it's not replaced or?

Yes, if it just would be called and not replaced within the 50% equity portion.

Okay. Then I understand the question. If you call it and not replace, then if you have S&P hybrid, then they consider all hybrids called even if you haven't. If it is a Moody hybrid and you call it, they don't consider other hybrid calls. So they look at it separately, while S&P looked at it as sort of one part of the capital structure. But as we said in the last question, we have very little hybrid in comparison to the total. So for us, it's not a big difference. I mean the alternatives is not that big different. But if we call one and don't do anything, then they would consider the other one called as well. And if we don't call the first one, then they will not consider the other one called obviously. So there are lots of different combinations in this case, even though it's only 2 hybrids and a lot of different combinations. That's very big deal.

So basically, you would lose the SEK 4.5 billion of equity, right? Because 50% of the hybrid coverage equity. And given this natural improvement in the equity asset ratio, like would that be -- would that lead towards a big or a ratio that is below your target of 40% or will basically the natural improvement be sufficient to still be above?

I haven't-- I mean there are a lot of things you have to calculate in that case. So I don't know exactly about that.

Okay. And would it be like a huge deal if it would be slightly below? Or I mean, is it more like a target where you roughly want to be? Or is it really something that you want to be fairly above?

You mean the equity target?

Yes, the equity to assets target of 40%.

We have -- the target is to be above 40%. But I mean, I don't mind if it's more over 40%, but I mean the target to be above 40%.

yes, exactly. I mean if -- I mean my point was that if this removal of equity credit of SEK 4.5 billion would lead to, say, this target being 39.5% with the issue as such? Or would you say, okay, it's still fairly close to 40%?

I haven't thought about it that exactly actually, but you have a point in that it's not a big change I mean, independent of what alternative there is not a big change in the numbers.

The next question is from [indiscernible] calling from PGIM.

I wanted to ask about the optionality to raise equity. And is that something you'd do in the current environment? And also related to that, how would you look at a preference ranking of raising bank debt versus raising equity?

I think we have to evaluate that more or less from day to day and see what is the best alternative for the overall situation and options going forward. So I think it's very hard to have a fixed opinion about it. But in general, it's not good to raise equity if you have a big discount in the share price. So I think it's -- then you have to have very good reason to do it. And maybe in some cases, you have. So -- but I mean we always have all alternatives and compare them. I think that is the way to handle it, as you always consider all alternatives all the time, more or less. And then trying to come to a wise conclusion for what is the best for the total, if you understand what I mean.

Okay. So at least short term, we should expect you to sooner raise bank debt than go out to raise common equity?

Yes, short term, yes, absolutely.

We currently have no questions coming through. [Operator Instructions] There are no further questions, so I will now hand you back to your host to conclude today's conference.

Okay. Thank you very much, everybody. And if something pops out of your mind then afterwards, you can always send me an e-mail, [email protected]. Thank you, everybody.

Thank you for joining today's call. You may now disconnect. Host please stay connected on the line and await further instructions.