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

Good morning, and welcome to Balder's presentation for the year-end report. Presenting today is me, Ewa Wassberg, CFO; and Erik Selin, CEO at Balder. After the presentation, we will have a Q&A session. And on that note, I hand over to you, Erik.

Thank you, Ewa, and welcome to Balder year-end figures. The big picture is we have real estate value at -- stands at SEK 212 billion, 96% occupancy. The equity ratio is -- or the leverage ratio net debt is 50%. And we continue to have a high liquidity of almost SEK 18 billion and NAV year-end stands at SEK 85 per share. Over the long time, we had a good increase in NAV at 28% if you look back in time over the longer period. And we have a primarily Nordic exposure, roughly half residential and half commercial properties. Looking at Q4, specifically compared to last year, the rental income increased 10% as well as the operating income. Profit from property management saw a smaller decrease and that comes from higher financing cost. And -- but otherwise, it was very stable and increasing rent and NOI. Like-for-like rental growth was 4.9% and debt-to-asset 50%. Looking at the property portfolio, this has been looking more or less the same for many years, but the focus is on larger cities in the Nordics. So capital cities and Gothenburg, so we have Helsinki, Gothenburg, Stockholm, Copenhagen, dominating the portfolio. And looking at the categories, residential is by far the biggest of roughly half of the portfolio and then it's diversified between office, retail, hotel, warehouse and other properties. We also have some property development. This has been decreasing for a while due to the market situation with higher building costs and higher financing costs and also slower market for condominiums. We have 2 categories, one that we build and keep for the long term. And we also have development that we sell to consumers primarily in Sweden. So right now this is a declining part of the balance sheet. We are very careful in starting new projects and we don't see any building starts for resi this year. And the commercial projects is soon to be finalized. So this is an interesting part of the business for the long run. Right now it's decreasing, but we will keep working on zoning plans and other things for the long-term value creation. Otherwise, we are focused on cash flow or what we call profit from property management and that's been for the whole '23, more or less the same as '22. So -- but this is our long-term goal to, over time, increase this figure, of course. The long-term value of the company is the present value of the future earnings and that's why we have to increase earnings. At the same time, we want to have the financial stability. So looking at these charts, you can see that net debt-to-asset has gone up slightly in the last years and that is because values are coming down a bit, but we have a good resilience because we have strong cash flow. And so we have earnings that partly can meet these lower values. And occupancy been very stable around 95%, 96% for many years. We also have this slide called earnings capacity, where you can see basically what is the running rents and the cost and so on, on a 12-month basis. This is not a forecast. So it's just -- you can see the status as a specific date or a quarter. And so at year-end, this stands at SEK 5.8 billion earnings compared to last quarter was SEK 5.7 billion. And obviously, it's financial cost going up a bit and then rents going up that offset increased financial costs. And this is also in quarter-by-quarter can be a bit affected by currency moves as well.

Yes. And here, you can see an overview of our framework for sustainability, which is based on the international goals of Agenda 2030 and our commitments. There are no changes made to our goals. Here are some points that we would like to highlight regarding our ESG work. We are adapting our sustainability report for '23 to EU's new directive and we are affected by the new requirements in January '24. That is for the sustainability report for next year. But we have started the transition early on in order to prepare and implement changes. We hope this will make it easier for our stakeholders to get access to requested ESG data going forward. We have also implemented a new digital reporting system for sustainability reporting. With increased reporting requirements, the ambition is for the system to facilitate data collection, auditing, internal control and contribute to resilience. During the autumn, we carried out a double materiality analysis in line with ESRS to prioritize material sustainability issues and it was approved by the management and Board during the fourth quarter. Balder works actively to manage the risk that follows by climate change. And this work includes, among other things, climate risk analysis of the property portfolio. At the year-end, large parts of the property portfolio had undergone climate risk screening. Let's go over to some financial figures. The available liquidity as of year-end is a little less than SEK 18 billion and maturities of interest-bearing liabilities coming 12 months is SEK 12.3 billion, which means that available liquidity covers maturities for the coming 12 months with about 1.4x. When you look only at maturing bonds coming 12 months, which for us is more relevant since our bank debts are rolled forward continuously. We cover the maturities with over 3x. And we will 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 and this level of liquidity will be kept as long as we think the markets are strained. Here, you can see our ratio of secured debt to total assets, which is still low. And as of year-end, it's 22%, which is a large headroom to the 45% we have as a financial covenant. Net debt to total assets is a little bit higher than last quarter due to decrease in values. As of year-end, 74% of the loans are hedged with interest rate swaps and fixed-rate loans, which is a little bit higher than in Q3 when we had 70%. This is due to an increase in interest rate swaps made in the fourth quarter when we took advantage of lower long-term interest rates. Here, you can see the split between financing sources as well as the split between unsecured and secured finance. Balder is and will be a significant issuer on the bond market and we want to have a financing structure that provides stability to operations over business cycles. To the right, you can see the interest re-fixing structure, where the average interest rate for '24 includes the margin for the floating part of the debt portfolio. The average interest rate as of year-end was 2.9%. In regards to the goals, all financial targets are in line with our goals and the new financial targets of debt to EBITDA of 11x has come down to 12.3 from 13.4 of last year. This change is a combination of increased net operating profit and decreased net debt. Here, you can see an overview of the debt maturity for bank loans, bonds and commercial paper. For '24, the debt maturities amount to SEK 12.3 billion. Of this, maturing bank loans amounts to a little less than SEK 6 billion, outstanding commercial papers SEK 1 billion and maturing bonds in '24 amounts to SEK 5.4 billion. And if you look at the maturing bonds, which we think is most relevant, since maturing bank loans will be extended, you can see available liquidity cover bond maturities for '24, '25 and a large part of '26. Maturities for those 3 years amounts to SEK 19.7 billion in relation to available liquidity as of year-end, which was a little bit less than SEK 18 billion. The remaining slides are more as information for you. So this was all from us for now and we will open up the Q&A session. So thank you very much for listening in.

[Operator Instructions] The next question comes from Lars Norrby from SEB.

So I think 2023, if anything, has been a year of we've been finalizing ongoing projects, not starting many new ones. You had virtually 0 net acquisitions. You've been maintaining good liquidity versus bond maturities. Now we're into 2024. Is it still very much the same among all these factors? I mean, if anything, the bond market is improving, isn't it?

Yes. I think it's quite much as to say in the bond market, you are absolutely right, Lars. It's improving quite fast recently. So let's see where that leads. But otherwise, I think our '24 will be similar to '23, but less spending on construction, of course, because in a couple of quarters, there's not much left and we are not planning to start resi construction, at least in this year. So I think '24 will be similar to '23 actually with calmer and we think bond market will come back and we actually did some bonds in January, not that much, but it was an incoming call, so we did some bonds.

Okay. And just a follow-up on that regarding CapEx. I think you had some SEK 7.5 billion for the full year down from close to SEK 11 billion in '22 in the fourth quarter, it was basically cut in half compared to last year. Looking into this year on '25, '26, what kind of level are you aiming for or expecting?

I think it will maybe be cut in half again, Lars, or something like that. So it will be much slower on that side for '24 and probably even '25 actually because we have really no start plan. And even if we start something '25, it will not be much anyway. So I think '24 and actually '25 also will be very calm.

The next question comes from John Vuong from Kempen.

In the report, you state that you expect profit from property management to stay stable over 2024. Could you provide a bit more color on the drivers of this guidance, essentially it means that you're getting a guidance of SEK 6.1 billion compared to your earnings capacity of SEK 5.8 billion, which, I guess, means a 6% earnings growth from annualized levels.

We haven't said a specific figure, but we think it will be stable around these levels that we have been in '23 over the last quarters. We see no big changes right now actually. So I mean, rental income will probably be a bit higher because some negotiations are not done by year-end and so on, so that will come in a bit better if you compare to year-end. And then most likely financing costs can be maybe slightly higher, but now it looks like maybe interest rates come down during the year. So we think it will be small changes actually from how it looks year-end. And even '23, but '23 and '24, if you compare then there will be higher NOI in '24 and higher cost for interest rates because beginning of '23 was lower rates, obviously. But it seems to be -- that we will be around these levels.

Okay. That's clear. Does that imply that you're also taking some cost optimization measures?

Yes, and we continue with that. So we think we have some potential [indiscernible] as well. We hope so, we think so.

Okay. And on your discussions on renegotiations, essentially, are you seeing any pushback on the indexation you're getting this year?

No. Very little. In general, more or less nothing actually. So indexation was high, but at least it was lower than last year and I think that can have a effect that it's not as bad as it was the year before. And also it's very known before because there's a lot of newspaper writing about it and everything. So when the indexation come, no one is sort of surprised, so. But it's -- I can say it's been less dramatic than you could have guessed or we could have guessed if we would have guessed, I mean, long before. But -- and I think all the companies will say the same, by the way.

The next question comes from Andres Toome from Green Street.

So a couple of questions. And firstly, I guess, on capital allocation. You've been quite active this quarter, I suppose, selling some assets, buying some of them building grades. Just wondering in terms of direction of travel for this year and the next, I mean, you did mention that certainly no development starts, but in terms of acquisition disposal activity and thinking around that?

We've been selling some building rights and we made some small investments. But I think if I'm guessing '24, it will be the sum of transactions will be still very small. It will not be 0, but it will be very small. So I would guess we buy something, sell something. And we've been selling building rights this year. So -- but I think you can -- if you sort of make a forecast or something, you can assume that it will be very low activity. So we will be net selling building rights most likely and maybe do some investments, but not much.

And based on your experience being in the bidding [indiscernible] and on the selling side, how does the transaction market feel at the moment?

It's still very slow. So there are not much transaction, but what I feel right now is that I get more calls from investors that are interested to buy than I used to get actually. So I think it's -- maybe during the year, transaction will pick up a bit, but hard to guess. And I think also, when I talk to all the banks, they are also feel much more interested in new transaction in general because if you look at all the banks' balance sheet, they were basically flat lending in both the private segment and corporate segment. And you can have that for a while. But long term, if you're a bank and the loan book is flat, you end up having a problem with the cost side in that case. So I feel the banking system is -- I mean, I thought it was quite good all the time, but now it seems to be even more stable and better with big profits. So I think banks will be more supportive to transactions as well. So...

Understood. And then...

Yes.

Yes. And final question was just about rent growth potential and specifically in Finland, how do you see that market evolving at the moment? And what are your sort of projection for the next 1 or 2 years?

Good question. I think what we see now in Finland is that we have like-for-like positive at least. It was for a while negative and then flat and now it turned positive. Finland and especially Helsinki had a very big supply of apartments for many, many years. But now the situation there is like here that there are basically no building starts or very, very few. But you have a record level of migration to Helsinki and some other Finnish cities. So I think it was the highest population increase for, I don't know, for a very, very long time. So the underlying demand is strong. And now I think the supply side will during the year, get sort of better if you own properties. So I think you can be quite optimistic for '25 at least when it comes to Finnish resi. But maybe we need 2, 3 quarters more before you see it more clearly in like-for-like rents and so on. But I have a feeling that '25 can be very interesting there, maybe end of '24, but -- so -- but to be on the safe side, 1 year from now, I think it will have a very good trend there.

The next question comes from Neeraj Kumar from Barclays.

So I have few questions. To begin with, do you disclose the amount of unencumbered portfolio you have? I just wanted to know, given you're increasing your secured debt to total assets, how much more there is capacity around that?

We don't disclose it, but there are a lot left to go.

Got it. And regarding your S&P rating, I think in last earnings call, we were discussing that you are pretty comfortable that S&P will revise the outlook to stable or something of that sort, any progress on that side?

I mean the key figures in the markets are moving in the right direction and we fulfill all the metrics. But as you know, it's also forward-looking and other aspects that we can't say anything about. So let's see what S&P will do.

Got it. It's interesting that you mentioned about the opening of the bond market. Are you sort of keen to do another convertible probably backed by your [indiscernible] or something of that sort? Any thoughts around that?

No, we have nothing planned on that. We were actually not planning to do bonds now either then they came investors and we thought it was interesting to do some transactions, but our plan was actually to wait maybe 1 or 2 years more. But if it's opening up, we will be looking at it, but we have no plans now, no.

Got it. Makes sense. I think last question on my side is, it's very interesting to see that the asset values have been very resilient. I think the yields just moved by 30 basis points throughout the year despite the interest rate volatility. Do you expect devaluations to remain resilient going forward? Or I just wanted to get your thoughts around that.

It's a bit difficult to forecast because, I mean, there are a lot of different factors that can affect the yields. But if we're just guessing and I mean the economy overall in the Nordics seems to be doing quite okay despite all the things happening. And if it is like it is now that they think interest rates come down during the year a bit and nothing else happens, then I -- it's difficult to forecast, but values should stabilize. I would guess if we're guessing right now because you have quite good underlying trend, underlying demand. The underlying metrics are good. And then it's just a question of investor appetite and confidence and financing.

Yes.

So -- but right now I think it looks better and -- yes. Let's see what happens. Time will tell.

The next question comes from Jan Ihrfelt from Kepler Cheuvreux.

Okay. I have a couple of questions. The first one, going back to Finland. I just wonder if you could touch upon how high your vacancies are in Finland and if there is any potential of bringing down vacancies to top line?

Good question, Jan. Vacancies, if you look 1 year back, it's kind of the same. I mean, it can change a bit from month and quarter and so on. But the vacancies are still a bit too high, I would say. And that is because there's huge supply coming to the market for many, many years. And I mean, even if you say that now we stop building, it takes 2 years or even more before -- it's a long time when -- from start to completion and so on. So I think we have potential in vacancy for sure, but I think it will be more during the end of the year or 1 year from now or something like that. So I think there's double potential, rent levels and vacancy actually.

Okay. And what...

But I think more '25 than '24, Jan, if you guess on the year, so to speak.

Yes. And what kind of vacancy levels do you have? Is it like 7% or 8%, 3% to 4%?

No, we are around 5%-ish, but I still think that is too much. I mean 5% is too much. So I think we -- if I can choose, we would have, in a way, I always say 0, but in market rent, maybe you should have 3%, 4%. So there can be 1%, 2%, I think, better. That would be ideal. And then I think rental increases will pick up 1 year from now. So it can be a very good, the combination can be very interesting.

Yes, yes. Second question, just a confirmation maybe, but you have 10% of your portfolio is retail. And as you previously stated, do you see that you could put through the indexation also in all kind of retail assets you have?

Yes. On average, there will be no problem, then tenant by tenant, there can always be problems, but that's been the case for having, more or less. But if you take it as a segment or in general, it has not been a problem. But you have always retailers that are performing good and some in the middle and some less good.

Yes. And last question from my side. The property value changes you made here in the fourth quarter, what kind of segments were affected and what were probably not affected?

In general, I would say that low-yielding assets is more vulnerable than high-yielding. So you can say, low-yielding resi, maybe CBD properties and the things going much better in segments with higher yields or segments where actually figures improve like hotel where you get higher turnover and so on. So I think basically the same has been during the year that lowest yields are more affected than high-yielding assets.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you, everybody, for listening in and for your questions. Have a good day. Thank you.