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

Welcome to the Balder Q2 Report 2023. [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 for the second quarter. Presenting is me, Ewa Wassberg, CFO; and Erik Selin, CEO at Balder. After the presentation, we will have a Q&A session.

Yes. Hi, everybody. Balder, the big picture is that we have a property value of SEK 222 billion, a 96% occupancy rate, been stable around there for many years. We have a mix between commercial and resi. And on the commercial side, the biggest leases are on average 11 year long. Net debt, 49%. Interest cover, 3.6%. We have SEK 20 billion in liquidity, and NAV stands at SEK 91 per share. Moving over and looking at Q2, we had a rental income increase of 15% and even NOI on 15%. Profit from property management, though, didn't decrease that much, but 3%, and the explanation is that we have higher costs for interest rates, obviously. Profit from property management. Looking at earnings capacity now stands at SEK 504 , which is 4% lower than last year. Also, the explanation is higher interest rate cost. And like-for-like rental growth, 5.4%, which we think is good. And NAV, as I said previously at SEK 91 per share. Looking at the portfolio, this has been quite static for many years now. 80% is located in capitals and larger cities in the Nordic region. And then we have the cities, Helsinki, Gothenburg, Stockholm and Copenhagen as the biggest in that category. Looking at property type, it's a bit more than 50% is residential. And then we have a diversification on the commercial side. So we have office, retail, hotel, industrial properties. So a little bit of everything. So all in all, a very diversified portfolio looking at categories and geography. Besides holding management portfolio, we have some property development. We are focused on residentials, we can do commercial if we have its pre-let or to a special customer, but the big part is residential development. And this comprises 2 different categories: one where we build to keep and one where we build to sell to consumers, retail selling. This part of the company is decreasing right now quite rapidly because of 3 factors basically: we have higher construction costs and we also have higher interest rate and the rental level haven't gone up in the same pace, so it makes it less profitable. And also looking at selling apartments, it's a bit tougher situation with slightly lower prices and higher construction costs, so this part has been declining or is in decline for the time being. And right now, we have a lot of completions done in Q2. There will be a lot Q3, Q4, Q1 and then there will be quite slow pace in this one. But over time, it holds a good potential later on. So we will continue to develop the land bank. Sooner or later, it can be interesting again, and there are no big book values on it. So long term potential, short term it will be a smaller part of the business. Looking back, we have the main goal of increasing cash flow or, as we call it, profit from property management. And the long-term trend has been promising there. But year-by-year, it can be a very uneven increases. And right now, we're more at a flat level due to the higher interest cost, but this is the long-term goal: to actually increase earnings power. And in that way, increase the value of the company over time. Other metrics, of course, it's important to think about debt-to-asset occupancy rate and so on. Occupancy rate has been very stable for many years at 96%. Back in time, it also happened, it was 94%, 95% a long time ago, but normally very stable level there and we don't see any big changes in the foreseeable future either. Net debt to asset is slightly increasing, and that is more linked to a bit lower values than that we increased the debt that much. It's increasing in Swedish kroner, but that's weakened currency. So calculated the kroner is a bit more debt. But on the same exchange rates, it's not an increased debt in Q2. And we see the trend going down with lower investment activity and good cash flow, it will automatically slowly decrease in constant currency. We also have a slide called earnings capacity. It's not a forecast. We have a forecast as well. We had a forecast for the first time in '23, this hasn't changed from previous quarter, but we thought it was a good idea to have a forecast since there were a lot of other uncertainties around. But this slide is updated every quarter. So this is more of how it looks at that particular day. So everything moves around, obviously. But here, you can see it looks at Q2 with rental income, cost, financial cost and so on. And we have the profit from property management slightly lower than last quarter. And once again, it's the financial cost that is going up for obvious reasons. Otherwise, the underlying business is performing well, as you can see, with increased earnings before financial cost and that seems to be a trend that will continue.

On this slide, you can see our framework for sustainability, which is based on the international goals of Agenda 2030 and commitments that the company strives to achieve. Balder's sustainability work focuses on the issues where the company has the greatest opportunity to influence, and at the same time, manage the risk affecting a real estate company linked to various sustainability issues. Example of sustainability issues are: reduced emissions of greenhouse gases, environmentally certified properties, social sustainability in our property areas, business ethics and a good working environment for our employees. And here, you can also see our goals, which, for example, is to reduce water use by 2% per square meter in a year. On the next slide, we have a couple of points that has happened in the sustainability area during this quarter. In June, we published our Impact Report for 2022, containing a description of how the funds have been used and the amount of green assets, which has increased compared to prior year. As I mentioned in the Q1 call, we have a focus on increasing the proportion of green financing as well as more environmentally certified properties in the existing portfolio. We have also updated the green financing framework, which has been developed together with Handelsbanken and is based on ICMA's Green Bond Principles 2021. In the framework, we have raised ambitions for energy-efficient and environmentally certified buildings, and we have aligned the requirements with the EU taxonomy. CICERO Shades of Green issued a second opinion on the framework and assigned it an overall rating of medium green. We have now submitted climate targets for validation to the Science Based Target initiative with 2022 as a base year. We have set near-term targets to reduce climate emissions in our own operations by 55% in year 2030. The long-term target is to reach net zero emissions throughout the value chain by 2045. And the climate targets apply to Fastighets Balder's entire group, including consolidated subsidiaries. And according to the time schedule, the climate goals is expected to be validated during November. Regarding social sustainability. Balder prioritized summer jobs for young people and contributing to meaningful spare time for children in our residential areas. As an example, around 200 summer workers will be employed in our residential areas in Sweden this summer, and we also organized camps and sport activities during the summer. Over to financial strategy. We have continued to buy back bonds during the year and we have repurchased bonds of SEK 5.5 billion so far. And during the second quarter, the amount was SEK 2.9 billion. The largest part of this has been bonds maturing during 2024, but we also have repurchased bonds with longer maturities. We have also repaid maturing bonds during the quarter of almost EUR 600 million during the second quarter. And we have no maturing bonds during 2023. We have chosen to continue to maintain a conservative profile of liquidity risk in the company through a long-maturity structure and a large reserve of liquidity and financing lines. The available liquidity as of Q2 is SEK 20 billion and maturities rolling 12 months is approximately SEK 15 billion. As I mentioned, the available liquidity as of Q2 is SEK 20 billion, and it covers maturities in 2023 as well as 2024. Our ratio of secured debt to total assets is still low and is, as of Q2, 20.8% and the net debt-to-total asset is 49.1%. 70% of the loans are hedged with interest rate swaps and fixed-rate loans. On this slide, you can see the split between financing sources as well as a split between unsecured and secured loans. Balder is a significant issue on the bond market and strives to have a financing structure that provides stability to operations over business cycles. Worth mentioning is that the proportion of unsecured bonds has moved from 64% in Q1 2022 when the turmoil in the capital market started to 49% as of this quarter. To the right, you can see the interest refixing structure where the average interest rate for the current year includes the margin for the floating part of the debt portfolio. All financial targets are in line with our goals, except the newly introduced financial targets of net debt-to-EBITDA of 11x. Over time, an increased net operating profit and a cash flow that can be used to repay loans will reduce the debt ratio. Here is an overview of the debt maturity per bank loans, bonds and commercial paper. For 2023, the debt amounted to SEK 6.5 billion which is related fully to maturing bank loans and commercial paper. We have no more maturing bonds in 2023. The maturing bank loans will be extended. So if you look at the maturing bonds in the coming years and put it in relation to available liquidity, you can see that we have already covered the maturities in 2024, '25 and a large part of '26. Maturities for those 3 years amounts to SEK 21.7 billion.

Well, thank you, everybody, for listening in today. You also have some slides in the presentation with the share price, consolidated statement of income and financial position and shareholders. And now we move on to Q&A.

The next question comes from Lars [ Norby ] from SEB.

Starting off with CapEx. So CapEx coming down a bit in the second quarter by some SEK 600 million or so. Can you just give us an update on your outlook for the full year. For that matter, going into '24 and '25, what you are expecting?

I think it will decrease gradually. We have still a lot of completions Q3, Q4. And then normally, a big part of the construction cost comes at the end of the project. So -- but after that, it will be less and less. And actually also worth to consider is that we build a lot of resi to sell to consumers. So if you look at the net investment -- divestments, we actually -- when all of the projects and the slides are completed, it will actually be -- we will receive maybe SEK 1 billion or SEK 2 billion net. So it will go in and out.

Could you go below, say, SEK 6 billion this year and down about SEK 3 billion next year? Is that reasonable?

I think maybe you should look at the net rather than gross figure because we invest and then money comes in when we sell the property that we build to consumers. But if we look at the things we're keeping probably will go down to something like that. No, I think even less actually next year, if I'm guessing.

Okay. And then a quick question on the net debt to EBITDA, 13.0% I believe, rolling 12 months target of 11%. When do you expect to get to 11%?

We hope that we can reach that next year with a combination of more NOI less debt then also income from -- in the calculation, we have, not value changes in property, but realized result in the development because that part ties up capital and costs. So that's why we also have the income included. So somewhere around there, but it also moves around a bit with the currencies and stuff. But slowly, we will have the trend of lower debt and higher NOI as we go along.

The next question comes from Fredric Cyon.

I have 4 questions from me. Let's start off with the S&P requirements on the turn shop for retaining the current rating on liquidity to maturities. It's now at 1.3. What threshold is there?

Well, the threshold is they want to see 1.2 for 12 months. And they also count in other parts than the available liquidity. So I mean, if we look at all in all, for us, we are more like -- more like 1.5. We are -- have a significant headroom that is 30% better than we need to be.

Okay. So the 1.3 in the presentation, actually, you adjust for their requirements, it's really 1.4 to 1.5.

Yes.

Okay. Then moving over to bond repurchases in the quarter, how much was the positive contribution to net financials in Q2?

It was approximately SEK 100 million.

Perfect. And then I noticed that you have started a couple of co-op projects in the quarter, which was a little bit unexpected for me. What's the reason behind that?

There are actually -- 1 project that was defined as coming start in Gothenburg. And the thing was that we got the permits ready, it was an appeal on the permit. And then we have a lot of buyers actually with binding contracts. So we have to decide either to call it off even though we have buyers or to go ahead. And we also have a fixed contract with Skanska, who will build it. So all in all, we thought it was quite small risk to actually go ahead with it. It's been delayed for, I don't know, maybe 1, 2 years because of this process.

And what kind of booking rate or selling rate did you have?

I don't know exactly, but I think the risk is extremely low on that project. It's a very good location next to our office. And then we also have 1 other project, but that is not a new project. It's actually moved from rental to co-op. So the other one is not started now. It's just that we decided to not do it as rental, but to sell instead.

Perfect. And then final question on investments. I know Lars touched upon this as well, but I'll try as well. So you invested about SEK 3.5 billion in property management projects during the first half. What kind of level do you expect for full year? And how much can that decrease in 2024?

I don't know exactly actually that figure, I must say. I don't pay that much attention to it because the projects are running along quite smoothly. So I don't know exactly. And then next year, it will be much less. We have some completions next year as well. But then if we don't do anything, it's also -- I mean, it can also be tenant demand. If that is stronger, then we can invest more. So -- but under all circumstances, it is a downwards trend because we don't see many building starts or maybe none actually in next year at all. So it will be a falling trend. But I don't have an exact figure in my head.

So let me try the question in a different manner. So you have about SEK 220 billion of assets. And what kind of level is needed for maintenance and tenant adjustments? Is it 1% of the property value, excluding about SEK 2 billion? Or is it less?

No. No, I think it's less maybe 0.5% or maybe even not that, I think, maximum.

The next question comes from Markus Henriksson from ABG Sundal Collier.

First off, you stated in the Q1 call that you were supposed to be a minor net seller in Q2, and you are that so far into 2023. Then could we foresee you divest properties going forward? Do you foresee that you can divest properties around book value? And could you then use the proceeds and allocate that into bonds?

Yes, I think so. So if it can be the case that we sell something more, and in that case, we can use it to whatever we want to. We can buy bonds or just have liquidity, whatever. I mean that can happen depending on it's a very slow transaction market, but we have always some discussions going on. So something might happen there. Let's see.

And on the transaction market, you mentioned previously that you don't get as many e-mails nowadays as you used to get. But what do you hear and see on the transaction market in Q2 or slowly into Q3?