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

Welcome to the Balder Q3 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 of the year-end report for 2022. Here from us today is me, Ewa Wassberg, CFO at Balder; and Erik Selin. After the presentation there will be a Q&A session.

Thanks, Ewa. So we present the year-end figures. But first, we have some short information about Balder as the company. We are listed real estate company in '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 great [ team ] at S&P that is triple V 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 SEK 92 compared to SEK 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, rental income is up 17% and profit from property 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, and 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%. And looking a bit more at the portfolio, the characteristics is that it's 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, and we have basically 2 categories of development. One is where we build and we keep it, mostly residential but can also be pre-let commercial properties. And we have also then another business line predominantly in Sweden, but in some cases in Finland and Denmark as well where we build resi properties and sell to consumers. 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 a partner 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, 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 are a long term owner and so profit from property management is the single most important thing that we focus on. And since inception 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. You can also see here on this Slide 6, the very flat [ piece ] between '19 and '20, and that was the pandemic that made things slow down a bit. It was still an increase but not as 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 have been increasing since we started in '05. And at the same time, we have lowered the debt to assets. So the trend is down then 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 us very sticky. So my forecast is that there will never be in a big changes up or down the occupancy rate. And so as you can see it's been 96% for many years in a row now, and was 96% this year-end as well. And then we had what we call earnings capacity, and this is sort of how the situation is 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 '23. We never did that before but we felt it could have a value this year since there seems to be a lot of uncertainty from an operational standpoint. So our forecast is that profit from property management in '23 will be SEK 6.2 billion. And as you can see the last figure here in 31st December is 6, 2020, 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 cost or next 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 Wassberg.

Over to ESG. Here, you can see our sustainable of 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. On the sustainability work focuses on the issues where the company has the greatest opportunity to influence and at the same time manage the risk effective real estate company in various sustainability issues. Examples of sustainable issues are; reduced emissions of greenhouse gases, environmentally certified properties, sustainability in social in our property area, [indiscernible] together with a good working environment for our employees. 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 companies. We have recruited to strengthen the team around social sustainability and area development. We've also carried out to group wide climate calculations and completed the screening of Scope 3. We have started the transition conversion to a fossil-free vehicle fleet in the Swedish management orientation 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 an update about this green framework. We will compile climate count for Scope 1, 2 and 3, which will also form the base -- baseline for our science based targets. We will carry out screening of Scope 3, that is in -- and 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 force. And as many new [indiscernible] will affect sustainability reporting, we are making a review to meet this as well. And over to financing. Having a balance sheet that satisfies the criteria for 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 11 times over a period of time. 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. [indiscernible] and manage our balance sheet and maturity structure. During the fourth quarter, we have, for example, entered a 5 near-term loan to a value of just over SEK 6.1 billion. And all of the banks that we have had contact with has been positive and [indiscernible]. As you can see in the graph, we are very well equipped for the coming year. 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 net. We have conducted a number of tender offerings during August 2023 of SEK 2.5 billion and EUR 500 million, resulting in buybacks of SEK 1.6 billion and EUR 223 million. We have also called the hybrid with first [indiscernible] March 2023 amounting to EUR 320 million. As of the year-end, the available liquidity including confirmed loan commitments was SEK 26 billion which is 92% of future maturities of interest-bearing liabilities being 18 months and 80% of within 24 months. 70% of the loans is hedged by interest rate changes had a little bit of impact on the cost of borrowing, and all financial targets are met. Please note though that we have introduced a new financial target as the net debt EBITDA of 11 times over time, and that is, of course, not met at day one. You can also see in the graph the portfolio value and the 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 for bank bonds and commercial paper. For 2023, the combined debt amounts to approximately SEK 16 billion and bonds maturing in 2023 will be repaid after Q2. As you are seeing, 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 asset ratio of 40% in line with our targets. Net debt to total assets, 47.9% target of 50% and ICR of 4.7%, where we have a target that's 2. And also the new target net debt to EBITDA of 13.4%, with a long-term target of 11x.

Yes. 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 the real estate stocks. The long-term trend is anyhow there that over a long time period, most likely the share price will follow the 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 a discount of almost 50% if you look at the share price compared to NAV. And at the last page, this 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 in.

[Operator Instructions] The next question comes from Jan Ihrfelt from Kepler Cheuvreux.

I actually have a couple of questions. First one is, in your earnings capacity you raised the contribution from associates by SEK 100 million, could you just explain a little bit about the reasons behind it?

No. The reasons behind this, we always try to think what's reasonable and so there's a small adjustment. Nothing special is the reason actually.

And could you comment on which company that contributes with the upgrade or?

No, I will summarize all of them. I don't actually know all the parts there, Jan, but I said there's a small adjustment.

Yes. And then a question on the bond market, you want to be in the bond market, could you just comment upon what kind of spreads you would like to see to enter that market on a broader view?

We basically think that we compare with banking markets and -- it could make sense to have some premium or I mean pay a slightly higher interest rate in the bond market. But if it's much higher, we think is better to have bank financing. So a bit depending on how the bank market is. But let's say, right now, we would like a price maybe maximum SEK 200 or preferably a bit lower and we are not there right now so that's why we're focusing on bank financing for the time being. But long term, we think it's interesting and we want to be there long term, but it's more of a timing issue and we think it will be better further on.

Okay. Value changes, you took down your property values by 0.8%. Were there any large differentiations between different segments behind that?

In general, low-yielding residentials in Sweden is more under pressure value-wise than other segments, I would say. Otherwise, there are not any big changes this quarter. But of course, if every quarter is like this and over time it will be a big change. And also interesting to see that we will follow this, for example, Copenhagen, I mean, we own more or less only a resi and its owners apartment and the prices there are actually increasing quite fast. We haven't done any changes but it's an interesting observation that is, I think, year-over-year, it's 8% plus.

Okay. And a question on Entra. We saw that Castellum took down the value of Entra but you didn't, as far as I could see. Could you comment upon your need to write it down?

We have it booked in line or slightly lower than Entra's NAV. So the long-term value we agree with Entra's NAV. I don't know how Castellum had it booked before, they probably had it booked over NAV, that is my guess. So most likely we have the same value now. I haven't looked at Castellum but I would guess so. And this is because it's a long-term holding. If you have the long-term value in the books, so you don't take market-to-market up or down unless you think it's a permanent loss. So that's the accounting principles.

Okay. And a final one from my side. Regarding the project [indiscernible] to net, could you just explain how much in percentage was sold, and are there any risks that you will lose money on that project?

No, we don't think we will lose money. I think it's extremely small likelihood because it takes that they make very big losses because it's like the waterfall structure. So we have a fixed result on that one. But anyhow, it's sold about 80% of the apartments right now. And for '23, it's very few left and then there are apartments to sell next year. But I actually feel less and less worried about it because it's so close to be finished now. So -- so I think if there was a risk, it was maybe 1 or 2 years ago because the construction could have been more expensive and other things could have happened, but we are approaching the finish line.

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

First, a question on the condominium projects. If we look at the different projects, some have very good sales ratio while others have noted, for example, [indiscernible] and [indiscernible] have quite a lot of apartments still for sale. Could you give us a bit of an overall update on the strategy going forward? We have seen [indiscernible] lowering its prices, for example, in order to safeguard cash flow?

Yes, if you take [indiscernible] on that, that was originally supposed to be a rental project but then we changed our mind and make it into a condominium to sell. So that's why it's a bit late but we will see how it goes soon. It will be sold in parts. So worst case, we can always go back and rent it out anyway but we think it will work out as a project to sell instead. And as you said, in Stockholm has been a slow market so we will see what we do there. But the remaining projects for '23 is sold so that is stable and then there's only those 2 left '24. So I think it actually went quite well overall. And it's a very, very small part for us, it will not move the needle in any direction to projects.

Fair enough. Then did you get any electricity support here in Q3, and if so, how large was the effect on NOI positively affected?

I think it's very small because we don't get that much and part of it goes to the tenants because we have in the contract that you sort of pay for it and if you get money back, we also adjust in that way. So I don't remember the figure, but do you know Ewa?

No, I don't have that from the top of my head.

But it's a very small. No, it's negligible.

All right. Then did you have any positive contribution from bond or hybrid bond repurchases here in Q3, and if so, what's the figure?

If it was a positive?

Did you have any positive contribution in net interest from repurchase of bond or hybrid in Q3?

Yes, there was a little effect there.

And do you have the figure?

No, not exactly. I think we have some plus, some minus. So it's a smaller plus overall in the financial net but not any big numbers.

All right. Then a bit of a follow-up to Jan's question before on [indiscernible]. First, you have the priority dividend of SEK 600 million, but you have also signed to acquire around 1,400 apartments and I think a 10,000 or 12,000 square meter of commercial assets, and you also have an option to acquire the hotel and office that in [indiscernible]. Could you give us a brief update on potential capital in and outflow?