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

Welcome to the Balder Q4 2022 Presentation. [Operator Instructions]. Now, I will hand the conference over to the speakers CEO, Erik Selin; and CFO, Ewa Wassberg. Please go ahead.

Good morning, and welcome to Balder's presentation of the year-end report for 2022. Here from us today is me, Ewa Wassberg, CFO; Founder; Erik Selin. After the presentation, there will be a Q&A session.

Yes. Thanks, Ewa. So we present the year-end figures. But first, we have some short information about Balder as a company. We are listed real estate company since '05. We have properties predominantly in the Nordic countries. And we have roughly half residential and half commercial properties. At year-end, the property value was SEK 217 billion, 96% occupancy rate. On the longer leases, the biggest leases are on average 10 years for our largest single leases. We have a rating at S&P that is BBB flat. Net debt to total assets, 47.9%. We have cash, SEK 25 billion, cash and facilities at year-end. And NAV per share stands at 92 compared to 84 last year. And the average NAV growth since inception '05 has been 29% per year. Looking at the Q4 figures. Rental income was up 16% compared to last year. Profit from property management decreased slightly or 5%. The reason behind that decrease was in the financial cost that we had an extraordinary financial income last year. So the underlying earnings were slightly better. But quarter-on-quarter, we have a decrease. Looking at the full year, our rental income is up 17% and profit from profit management is up 11%. And then looking a bit at the current status and looking forward, the earnings capacity stands at SEK 5.39 per share at year-end. That is 4% better than 1 year ago. And so this means that we have been able to offset increased interest rate cost with more income from the underlying business. Net debt to assets, 47.9%, and we had like-for-like rental growth of 3.9%. Looking a bit more at the portfolio, the characteristics is that is very diversified, both in property type and in geography, but there is a concentration to the larger cities and capitals in the Nordic regions. So we have Helsinki, Gothenburg, Stockholm and Copenhagen dominating. And in property categories, resi is by far the biggest, and then we have office. Some retail logistics and also other properties that can be mixed properties and hotels, for example. We also invest in development of properties in the Nordic countries. We have basically 2 categories of development. One is where we build and we keep it mostly residential, but can also be prelet commercial properties. And we have also then another business line predominantly in Sweden, but some cases in Finland and Denmark as well where we build resi properties and send to consumer. And this shows up a bit differently in the P&L. The properties we keep will be unrealized value changes as we go along with the projects. The properties that we sell or the apartments that we sell, then the result is booked after completion. So there is some from properties that we sell or apartments that we sell will be more irregular if we look at it quarter-to-quarter. But of course, the long-term trend can be interesting to look at it but quarterly figures will be irregular in that segment. But the most important thing has always been to, over time, increase the earnings -- the cash flow. We're long-term owner. So profit from property management is the single most important thing that we focus on. And since inceptions, we have had an upward trend there over the years. It hasn't been the same increase every year, obviously. So it's been a bit irregular as well, but the long-term trend has been good over time, but things can happen in different years that sort of affect this trend a lot. So in '08, we had a small decrease. And then you might think it was the financial crisis, but it actually wasn't, as we sold a lot of properties in '07, but then it took off again. And you can also see here on this Slide 6, they were flattish between '19 and '20, and that was the pandemic that main things slow down a bit. It was still an increase, but not that fast. And then last year, as I said before, was 11%. And on the next page, you can see from the beginning, the portfolio value increasing since we started in '05. And at the same time, we have lowered the debt to assets. So the trend is down there also on a longer time horizon. Occupancy been very stable. And of course, we have a very spread portfolio of different areas, cities, asset classes. So it makes this very sticky, so my forecast is that it will never be in a big change, up or down the occupancy rate. So as you can see, it's been 96% for many years in a row now. Was 96% this year-end as well. And then we have what we call earnings capacity, and this is sort of how the situation in the quarter and is updated every quarter in the quarterly reports. So there is how it looks on that particular quarter end. So here, you see then, for example, the rental income on a yearly basis is SEK 11.6 billion at December 31. And then what's new for this year is that we also make a forecast for the profit from property management for the full year of '23. We never did that before, but we felt it could have a value this year since there seems to be a lot of uncertainties from an operational standpoint. So our forecast is that profit from profit management, '23, will be SEK 6.2 billion. And as you can see, the last figure here, 31st December is SEK 6,220 million, so it's more or less the same. And what we then see in this year is that we will have some more rental income from projects that will be completed and will most likely have some more interest costs or net financial will be slightly more than SEK 2.9 billion, but the rental income will also be slightly more than SEK 11.6 billion. So this is our forecast as of today. And now I hand over to Ewa, again.

Yes. Over to ESG. Here, you can see our sustainability work and sustainability is prioritized issue for Balder and an integrated part of our strategy and operations. On this slide, you can see our framework for the sustainability, which is based on the international growth of Agenda 2030 and also a commitment that the company strives to achieve. The sustainability focuses on the issues where the company has the greatest opportunity to influence and at the same time, manage the risk affecting real estate company, I think to various sustainability issues. Examples of sustainability issues are reduced emissions of greenhouse gases, environmentally certified properties, sustainability in social, in our property areas, business ethics together with a good working environment for our employees. Yes. And on the next slide, you can see a little bit what we have been focused on during this year and also a glance on -- the focus is for 2023. So 2022 is the first year in which we must report the proportion of green activities in the business, the focus on our existing properties. We have recruited to strengthen the team around social sustainability and area development. We've also carried out a wide climate calculations and completed screening of Scope 3. We have started the transition conversion to a positive free vehicle fleet in the Swedish management organization as well as initiatives undertaking for sustainable travel to and from our properties. For example, 120 charging points in Sweden. And when we look ahead of 2023, we will focus on update of Balder screen framework. We will compile climate count for Scope 1, 2 and 3, which will also form the base loan by -- baseline for our science-based targets. While we carry out screening of scope 3 that is in an indirect emissions, which includes our subsidiaries at group level. We will also use their climate calculations to set a climate road map and submit our climate targets for validation at the science-based target initiative. And we will continue to work with climate risk analysis and action plans as part of the EU Taxonomy report. And as many new requirements will affect sustainability reporting. We are making a review to meet this as well. Move over to financing. Having a balance sheet that satisfies the criteria for an investment grade is very important to us, and the Board of Directors have decided to introduce an additional financing goal regarding net debt to EBITDA with a target of maximum 11x over a period of time. Yes. We will achieve this goal through a combination of reduced net debt and increased income from our existing property portfolio and the completion of the projects. We have -- we manage our balance sheet and maturity structure. During the fourth quarter, we have, for example, entered 5-year term loans to a value of just over SEK 6.1 billion. And one of the banks that we have had contact with has been very positive as well in this. As you can see in the graph, we are very well equipped for the coming year. And you can also see some other things that we have been performing during the year, the direct share issue, of course, of SEK 1.8 billion. We have conducted a number of tender offerings, maturing bonds 2023 of SEK 2.5 billion and EUR 500 million, resulting in buybacks of SEK 1.6 billion and to EUR 220 million. We have also called the hybrid with first call late March 2023 amounting to EUR 320 million. As of year-end, the available liquidity, including confirmed loan commitments was SEK 26 billion, which is 92% of our future maturities of interest-bearing liabilities within 18 months and 80% within 24 months. 70% of the loans is hedged by interest rate changes have a limited impact on the cost of borrowing, and all financial targets are met. Please note though that we have introduced a new financial target of the net debt to EBITDA of 11x over time. And that is, of course, not met at day one. You can also see in the graph the portfolio value and net debt to total assets as well as secured debt to total assets over time. At the next slide, you can see an overview of the debt maturity per bank, bond and commercial paper. For 2023, the combined debt amounts to approximately SEK 16 billion, and the bonds maturing in 2023 will be repaid after Q2. As you have seen, we have today announced a tender offer for all bonds maturing in 2024, amounting to SEK 4.5 billion. And on the lower end of the slide, you can see our financial targets. Equity assets ratio of 40%, in line with our target. Net debt to total assets 47.9%, target of 50% and ICR of 4.7, where we had a target at 2 and also the new target net debt to EBITDA 13.4, with the long-term target of 11x.

Yes. And looking at the share. As you all know, share prices can be very volatile, been absolutely so for the last year or 2 or 3, not at least in real estate stocks. The long-term trend is anyhow there that over a long time period, most likely the share price will follow their NAV, but you can have this short times where we have substantial premiums or substantial discounts. And as investors, you all know that this happens every now and then. And year-end, there is discount of almost 50% if you look at the share price compared to NAV. And as the last page, is also in more detail the P&L and the balance sheet where you can see all the specifics and also where you can see how the shareholder structure is by year-end. And with that, we thank you all for listening to me.

[Operator Instructions] The next question comes from Markus Henriksson from ABG Sundal Collier.

All right. So I have a few questions. First off, when do you think you will reach this new financial target of below 11x? I can't hear you.

We think that we will do that next year.

All right. Then also on the -- you have externally valued your portfolio here, 64% and 90% of this was done in Q4 here, so almost 60% valued in Q4. Could you highlight a bit how the external prices have risen given low transaction volumes and obviously, significantly higher interest rates. [Technical Difficulty]

Sorry, we didn't hear the question. Can you please repeat?

Yes. I'll take it again. So you have externally valued 64% of the property portfolio and 90% of these were in Q4 so around 58% valued here in Q4. Could you highlight how the external appraisers have risen given low transaction volumes and obviously, significantly higher interest rates. [Technical Difficulty]

So we're having a little bit of technical issues here. Can everybody hear us now?

Yes, I can hear you.

Sorry. Technique is not my strong suit. I will have to ask you to address the question one last time. I'm very sorry. Now we can hear you.

Can you confirm you can hear me now?

Yes. Now, I can hear you. Thank you.

Perfect. No worries. So you have externally valued around 65% of your portfolio and 90% of this was in Q4. So almost 60% valued externally. Could you highlight a bit how the external appraisers have recent interest rates are up. We have very low transaction volumes. Could you elaborate a bit on that? And when what -- how they have risen?

I think in some cases, they actually do assumptions of the right value. I mean, it's the same in the market in total. If there are a few transactions, they -- I think they basically look at the past transaction and maybe make some forecast of increased yields. But I mean, it's not exactly precise until you sell an asset, of course. So I mean -- but it's the same. It's the same everywhere, obviously.

With that, I will do a follow-up on my first question regarding your new financial target. You mentioned you will reach it in 1 year's time if I was not misunderstanding you, hopefully. Then will the EBITDA, will it be boosted by co-op divestments here in 2023 as it's included in the EBITDA definition.

Yes, we will have that '23 and '24. So we think during '24, and the reason for also including co-ops is because the capital employed is included in the debt, and we have cost for it. So the alternative would be to make a calculation and exclude that segment, but we think that will be also complicated with a lot of adjustments. But it's important to bear in mind that, that business has cost and debt also. And that's why we take in the income from it. Otherwise, it would be a bit -- it wouldn't really match, then we haven't had to make a lot of other adjustments.

Sounds reasonable?

We think during '24, it's reasonable, yes.

And have you discussed this together with S&P and/or Moody's when you set that new target?

No. No, the target is reasonable to have in this higher interest rate environment in general because before if interest rates are around 0, it doesn't really matter that much. But now if we think that interest rate will be around this level, then we think it makes sense to look at net debt-to-EBITDA going forward. So we think this reasonable no matter if S&P thinks it or not.

Last question. In Skanska's Q4 report, they have negative sales in their residential development business as consumers have canceled their purchases. This was in Sweden. Could you give us an update and a bit more insight into the core project. How much sales ratio do you have in 2023? And what does the pipeline look for 2024? Any insight here would be helpful.

Absolutely. '23, we have sold almost 100%. I think it's at least more than 95 and '24, not yet that much, of course, because it's some time until then. And but -- so we don't have that much to sell. I don't know about Skanska specifically, but if they have negative sale, I guess, they have just reservation contract, not a firm contract because if their firm, you basically can't cancel unless you -- as a developer voluntarily says okay to cancel. And one interesting thing, by the way, is we launched a small project in Central Stockholm a couple of months ago on Birger Jarlsgatan, and there, I think we have only 2 apartments left to sell, and we didn't change prices. So parts of the market, at least in Stockholm, but you couldn't have done that on a massive scale, but still you can sell very expensive apartments actually. So that was kind of a positive surprise.

The next question comes from Jan Ihrfelt from Kepler Cheuvreux.

Okay. Jan Ihrfelt from Kepler Cheuvreux. I have actually 3 questions. And the first one is, you took down your property values by 0.4% in the fourth quarter. Could you elaborate a little bit on the difference between different segments, geographies, whether the large swings behind this rather modest 0.5% -- 0.4% negative revisions.

Yes. Sure, Jan. And I also think it's important to look at whole year figures, if you compare Balder with, for example, Västra Gatan Kungälv or some other company because there can be quarterly differences that are quite big. But for example, if you look at Västra Gatan Kungälv, I think we have slightly less increases in value for the whole of '22. So just to bear in mind that don't look only at quarters. Then otherwise, we can see that Danish resi's for us was quite stable, but that came from 2 things basically that we didn't push down the yield at bottom when it was at its lowest level and then completed projects also contributed. So there, we -- I think the yield was at 30, 40 points, but the value was still flat. Norway, we saw higher yield requirements. So value is a bit down, but also good indexations. We have commercial properties there. Finnish resi is stable. And I think the explanation there is prices basically haven't gone up much. So the market behaves in a bit different way. And it looks like it will be better later this year. The signs we have now is that still a lot of completions, '23, but very few starts. We think it will get better later this year. The signs are there. And then you have on the minus side is, for example, low-yielding resi in Sweden without the potential to convert into co-ops. Those we can see more decline in properties. With higher yield, we don't see any declines at all actually the yield comes up, and that seems to be enough for holding the value. So if you have for example, logistics with good yield, then I think values are not down at all as an example. So it behaves a bit different in different markets and categories. So I should say the strongest is if you have a good yield in the beginning, it holds up quite well and the risk is resi where you can't convert or, in general, very low-yielding properties seems to be more vulnerable to higher interest rates, which makes sense in a way.

Okay. And hotels, what kind of revisions have you done during the year for your hotel properties?

If they are indexed, the revision is indexed and it's a bit different in the different countries, as you know. But then for us, we got some turnover rents last year that we didn't get the year before. So there, you have a very good effect in Q4 like-for-like compared to last year when we didn't got turnover rents. So compared to last year, I don't remember the percentage, but it's a huge increase, obviously.

Okay. And the -- going back to the new target here, you need to sell some assets to reach the net debt-to-EBITDA target?

I think we will roughly make it anyway, but there will be some transactions, of course, there always are. But this combination of completed projects, more income in the existing portfolio, and if we don't do anything, that will slowly decrease in constant currencies. So you have a mix of basically 3 or 4 things that we think will end up around this level.

Okay. And my last question regards your bond and you launched a buyback program here this morning for your Swedish bonds. Could that also be possible for your Eurobonds?

In Balder, we don't have Eurobonds '24. We have '25. The Finnish company has 1 '24. So if you look at the combined, all the '23 bonds we bought back before and they will mature in this or next quarter. And now we try to buy back all the '24 in Swedish. So we take one transaction at the time, but maybe we go for the '25 as well, and then we are already on up to '26. So let's see.

The next question comes from Fredric Cyon from Carnegie.

A few questions. I'm not that imaginative, so I'll stick with the 11x net debt-to-EBITDA target. Are you aiming to be a net seller of assets apart from the co-ops during 2023 and beyond to reach that level?

Not necessarily. But nicely that way, but not necessarily Fredric.

And then moving over to the guidance on property management profit of SEK 6.2 billion that's in line with the earnings capacity. Obviously, there are moving parts when we move into 2023. There is some indexation, I hope, but also possibly some higher interest rates. What kind of indexation have you assumed in the guidance of SEK 6.2 billion roughly?

Yes, very good question. I mean the numbers happens to be the same in the guidance as in earnings capacity. But what we think then is that we will have a bit more interest rate cost. But on the other hand, we will also have more NOI from completed properties and also some indexation in resi that is lagging. But otherwise, in earnings capacity is updated for -- that is basically forward-looking or the exact date index in the rental income is included. So we think a bit more income from existing. And then we have completion of projects and our -- as it looks like, that will be roughly the same as a bit more interest rate cost.

Yes. In Swedish [indiscernible], I guess. Moving over to the rating agency. [indiscernible] had a comment on the risk associated with you owning shares in hidden. Do you understand the rationale for that comment?

No, I don't. And I haven't heard anyone else who understood it either actually. I think it's rather the other way around. I mean, in the beginning, if I -- when I was in the hidden board, I didn't own any shares in it. So in that case, it could be negative for hidden in theory, but not for us. And then I injected SEK 3.6 billion in that company. So it actually turned out to be a much stronger tenant than before. And even now I own 25 there and 35 in Balder. So I think it's actually 100% the other way around. And so -- no, it's hard to understand, actually. From an economical point of view, at least, you can't really come up with any other conclusion, I think.

Agree. My final question on investments. So I think 2020 was a record year. You invested SEK 9 billion in existing properties and projects. What kind of level are you forecasting in 2023?

'23 will be very slow. So you have all the ongoing projects will basically will be that we get money from cohorts that we've financed the existing developments and properties that we'll keep. I think it will actually be some surplus if we look at it now. And otherwise, there are much smaller investments in general. But if it picks up, it could be a good demand. In that case, it can be positive. But otherwise, it looks very slow for the time being. So it will be much less activity than you've seen the latest years.

[Operator Instructions].

This is Andres Toome from Green Street Advisors. So I have a few questions. Firstly, maybe you can just speak to the like-for-like rent growth print in Q4, which has accelerated quite a bit. Is that as a result of indexation in the commercial real estate segment already kicking in? Or is there anything else driving that?

No, that indexation will be next quarter. So the reason why Q4 like-for-like is very strong compared to last year Q4 is -- the strongest part of it is actually hotels where the turnover rent was 0, Q4 last year, and now we get turnover rents. We have most fixed rents, but there are not 0 turnover rent. And so that goes from 0 to this instable amount. And then last year, we had 2.8% indexation in, for example, in Sweden in commercial properties. So like-for-like is Q4, Q4, so that's why the figure looks maybe a bit better than you could have guessed. So I was a bit surprised myself I have to admit.

And with the indexations kicking in this quarter, that would mean potentially that the pace would be higher going into this year with the -- around results that 4%?

Yes, that's very likely.

And then I had a question around earnings guidance as well, just to get a sense of what sort of cost inflation you are assuming for property expenses and overheads?

You have it in earnings capacity, you can see, but I don't have a percent figure exactly. It's also big differences. But in general, it's not as bad here in some places in Europe where we had a lot of energy prices surging extremely much, for example, when you have gas and so on. But here, hitting is normally district hitting that doesn't move around that much, except for Malmö. So it's not as dramatic here as in other places in Europe.

Okay. I guess the cost inflation would be almost equal to the indexation as it seems from the earnings capacity that the surplus ratio is not moving roughly.

Something like that, I would guess. So something like that.