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

Good morning, everyone. Welcome to Balder's con call for the second quarter. Erik will first take us through some slides as per usual, about the developments in the quarter, and then Ewa will go through some financing, and we'll also talk some longer-term picture for the asset liability management side. But Erik, I'll let you start.

Thanks, Jonas, and welcome, everybody. Today, we have our Q2 results. Looking at Balder on a high level, we have SEK 215 billion in property value, 96% occupancy. We are, as you know, a Nordic company with Nordic exposure, both in resi and commercial properties. And looking specifically at Q2, we had a rental income increase of 8% and even the NOI is increasing 8% compared to the same quarter last year. Profit from property management decreased a bit. That is, of course, due to higher interest rate cost. Looking at net debt to assets, it's now 49.8%, so that is a slight improvement from year-end and previous quarter. Like-for-like rental growth is now 3.6% and the NAV SEK 85.44. Looking at the earnings capacity that we update every quarter, small changes from last quarter, but a small improvement even though. So we have a bit higher NOI income, stable on administration costs and also on financing costs. So all in all, it leads us to a slightly better earnings capacity than last quarter. So it's at SEK 5.9 billion compared to SEK 5.850 billion and per share, that's SEK 5.03 in this report. Our portfolio is, as I mentioned in the beginning, diversified in the Nordic countries and also diversified in property categories. So the largest exposure is towards capital and larger cities. Looking at categories, we have a resi for roughly half of the portfolio and the other half is commercial and then that is also diversified between office, retail, industrial, hotels and other properties. So all in all, Nordic exposure resi is the most dominant category and then it's diversified commercial properties. We also have property development, primarily in residential. We have it in Sweden, Denmark and Finland, a little of it in Norway as well. There are two categories: One is that we build properties and we keep them for the long-term holding period. And the other one is that we build and sell. Building and selling is primarily in Sweden, where we build apartments and sell as condominiums. While in the other countries, the normal is that we hold for a long time, the majority of what we build, not everything, but the majority. So it's sort of two different categories in the P&L. This quarter, you can see a decrease in investments and that is as expected since we've been very slow on starting projects for a while. So this will continue to slow even more. And the year-end, we have not that much actually under construction. Long term, we think this is an interesting segment to be in, and we continue with zoning plans. So we have a long-term view on it. Our building rights are concentrated to Stockholm, Gothenburg and Helsinki.

And so this is -- just to show you a little bit about the long-term development. And here, you obviously have the value creation, but perhaps even more, I think, interesting is the next slide showing that over time, we have not only increased the value of the company and our earnings capacity, but also there's been a slow but fairly consistent reduction of our debt-to-total assets, and we're also seeing a very stable occupancy rate. I think you heard us talk about before that we will prioritize deleveraging a bit in the coming quarters and years. I think that's really not in dramatic compared to what we already have seen going back a few years. I think occupancy rate as well remains very stable, which I think leads to the diversified portfolio that we have in Balder. And even in times like this when we see different developments in different segments and geographies, we are seeing a very uneventful development. I think in this context as well, we've talked about before as well that our Finnish portfolio have seen a slightly weaker development in particular on the rental growth side. In the quarter, we actually had a slight increase in occupancy in Finland, it's very marginal, but still it is, I think, stable sign. And as we've communicated before, we are now seeing the peak of new housing units coming to the market and we should see more stable development of rental growth and occupancy sometime next year probably. I think looking at the other segments, it's a fairly stable picture overall and nothing that really stands out.

Great. And over to some financing. Funding conditions have continued to improve and it seems that things are slowly but surely normalizing. The margins in our new finance contracts are on the same level as our average margins in all our loans. We have continued to be active in our interest rate hedging, rolling or increasing swaps during periods when rates have come down. And while our average interest rate fixing is pretty constant since last quarter, the proportion of debt with fixings rolling over in '24 and '25 has decreased with another 2%. And as you can see to the right, our average interest rate is at 3%. All financial targets are in line with our goals and the new financial target on net debt-to-EBITDA of 11x continues to improve towards our target. And here, you can see our available liquidity is SEK 19 billion. And as we have mentioned before, that number will fluctuate a bit between quarters, but the ratio between available liquidity compared to maturities within the next 12 months is unchanged since last quarter with 1.3x. During the first quarter, we issued a little bit over SEK 2 million in the debt market with maturities of 2 and 3 years. And during the second quarter, we have continued to increase our presence in the Swedish bond market with issues in 3 different maturities totaling another SEK 2 billion. And here, you can see our ratio of secured debt to total assets is still low. And as of Q2, it was 23.6%, which is a large headroom to the 45% we have as a financial covenant. Net debt to total assets, as Jonas mentioned earlier, it's 49.8% as of now, so slightly lower than last quarter and 71% of the debt is hedged with interest rate swaps and fixed-rate loans. Here, you can see an overview of the debt maturities per bank loans, bonds and commercial papers. For '24, debt maturities amounts to SEK 3.6 billion. Of these, maturing bank loans amounts to a little less than SEK 2 billion. Outstanding commercial papers is SEK 1.4 billion and maturing bonds is SEK 306 million. In '25, we have a larger bond maturity in euro. But as you can see, our available liquidity covers bond maturities in '24, '25, '26 and a big part of '27. And then I also would like to highlight that we have a slightly special situation in the euro market where we have benchmark bonds in euro that mature every year until 2031. And we have more euro debt than we had euro assets. So there is no need for us to issue in euro, yes, because we have a maturity in euro. The only thing that happens then is that we reduce our swap book a little bit. So that said, we can have every opportunity to look flexibly at the different markets and also the mix between bank and the capital markets.

And so taking the slightly longer-term view and a bit more forward. So starting off with the capitalization, we've mentioned that we're currently deleveraging a little bit. I think it's also interesting to note that quite a lot has already started to happen. So year-over-year, we have an increase of the operating profit that we show in the earnings capacity of 7%. While at the same time, the net debt has decreased if we adjust for the reclassification of the hybrid and currency movements. So it's already a fairly, I think, commencing trend, and we'll continue that for a few more quarters. And as you know, we have a net debt to EBITDA target of 11x, looking at a slightly less volatile metrics, so just take the opportunity in profit and the earnings capacity over the net debt. It shows a similar trend where we've come down from 13.7 to 12.2 in the last year, and we expect that to continue down as well. The way we look at things is really from a capital allocation standpoint that for as long as valuation yields remain a little bit more unstable than we've seen in the last couple of quarters, we need to channel more of the cash flow into amortizing debt, and that's also what you see in the first half. As soon as yields stabilize and net operating income translates into value increases, we can be more flexible and have a slightly more growth-oriented capital allocation going forward as well. And let's see how long that takes, whether that's early next year whenever it happens. We get quite a lot of questions as well on the funding strategy and Ewa has obviously talked about what we've done in the first half so far. Looking a bit more from a structural perspective, so we feel that roughly 50-50 split between bank and bond financing is where we are currently, and we probably will remain; however, as Ewa mentioned, we've been fairly active in the Eurobond market, which means that we already have an established curve that's pretty long in euros versus in the SEK market, where we've been a little bit more underrepresented and we feel that we want to increase that presence over time. So our aim is to establish a liquid curve in the Swedish bond market out to 5 years. You've seen us work on that in the first half already. That work we will continue slowly but surely, and we'll ensure to try and issue a certain maturity points. And then even if we do prior placements, we will do that on the same maturities [indiscernible] so that we get a liquid curve that is fairly transparent in its pricing as well. I think if you just backtrack the numbers, we have SEK 130 billion, SEK 135 billion of interest-bearing debt, we say all should be in the bond market. We already have quite substantial amounts outstanding in euros and then the remaining part will be in the SEK market. And I think we also have timely work to reduce the concentration of maturities in individual quarters and even years. And the picture that Ewa showed before, you can see that there's a little bit of a lumpy situation in the coming couple of years. I don't think that's a fairly big issue, but it's something that obviously costs quite a lot from a liquidity standpoint to hold the extra liquidity to cover the upcoming maturities and many of you know that we have a target to keep 1.25x to 1.5x the maturities that we have upcoming for the coming 12 months. I think in the Swedish banking market, as most of you know, that is, by its nature, a fairly short-term financing market. So I think that maturity structure will remain fairly similar to what it is today, but what we can work with is obviously the bond side. And yes, that's sort of how we envision our financing structure going forward, and that's how we will consistently work in the coming quarters and years as well. I think that concludes the presentation. So with that, we'll open up for Q&A.

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

I guess, for the sake of continuity, I'll ask a similar question that I asked in connection with the last interim report regarding expansion versus holding back on expansion. I see your CapEx is, of course, sharply down compared to the same quarter last year. At the same time, net debt-to-EBITDA is improving. How long do you think you will stay in this sort of holding back on expansion mode and when can we see you pushing the accelerator again?

Lars, Jonas here. I think what we tried to -- the way we try to think about it is that we have a certain cash flow that we can obviously allocate the way we want. And for as long as we see valuation yields creeping up as they have during the last year. We're not getting any leverage help from increased values, and that means that we will direct more cash flows to debt amortization. As soon as yields stabilize and net operating income translates into value increases, we have more equity creation, so to speak, to allocate and then we can have a slightly more growth-oriented capital allocation attitude as well. Now let's see whether that's a couple of quarters away or how long that's going to take. But that's sort of the way we're thinking about it. Does that make sense?

Absolutely. So one additional question. You may have mentioned this earlier in the call, but in the Eurobond market, when do you expect to get back in the Eurobond market issuing new bonds?

I think what I alluded to that we have a lot outstanding already in euros, means that we don't have to issue for a very long time. At the same time, if you're long term committed to market, you need to be present at some point. But we can choose when that point is, I think that's what we're trying to say. I don't think we can stay out for another 2 years of the euro market because then people will start wondering if we are committed for the longer term. But I think for this year probably, our focus will be on the SEK market, and then we'll see what happens towards the end of the year or early next year.

The next question comes from John Vuong from Van Lanschot Kempen.

Just in light of asset liability management, a follow-up question there. Could you perhaps talk about the investment markets. Do you see any scope for some asset rotation or perhaps some disposals on your side?

We don't feel the need for doing disposals. I think we will basically see in the short term, the same behavior as we had the last couple of years that we complete projects. There are still some completions to do. We get cash from selling condos and then maybe as Jonas said in a couple of quarters, we can see how the situation is. But I think it will be not so much activity in the short term from our side focusing on what we have and improving what we have.

So then debt amortization is really much more driven by retaining cash flow from my understanding?

Yes. And it goes pretty fast as you see the combination of debt amortization and growing NOI, the combination is quite effective. So if you just look at the earnings capacity. I mean that's not a forecast, but it's just a situation at a given point in time, you can see the improvement the last year from 13.7 to 12.2. So I mean, it goes both ways, cash flow and the increased NOI. So it's quite effective. But exactly how fast we cannot predict because we don't know exactly rent the levels, vacancies and also currencies can make it go a bit faster or slower, but time is on our side.

And then moving on to the Helsinki residential markets, which is a large exposure of yours via SATO. The market seems to remain soft. I think you mentioned that earlier in the presentation as well with peak deliveries right now, one of your peers also gave a profit warning earlier this week. Do you already expect any improvement over the summer given that, that is generally a seasonal effect? Or is this really much more of a '25, '26 story?

I think it's likely to be better '25, but I mean nobody knows exactly. But if you look at SATO specifically, we have slight lower vacancy than last year, but it's very stable compared to last year, but slightly lower vacancy and NOI is also better than last year. But the trend is not so strong yet. And I think next year, we'll be having better -- I think it's likely to be better in '25. And it's easy to forget if you think that all the companies more or less stopped building or start projects on a very low level, you have a time lag of about maybe 2 years approximately. So if you look now and now, you have a lot of completions more or less a record, but you have very low building permits. So I think the time lag is very easy to miss it. So but next year, the completions will go down dramatically.

There's a sharp fall of incompletions towards the end of this year and into next year. And if you look at new construction starts, I mean we're currently looking at probably 1/3 or even less than 1/3 of the number of units that we see. That's a pretty sharp decline, but there is obviously some inventory that needs to be worked out before the market finds a balance and clears at a better level from a ramp-up perspective. But I think it's worth pointing out as well that I'm not sure how much the timing matters here. I think it's also important to remember that during the last 4 years or so, we haven't really seen any rental growth in the Finnish market. At the same time, during that time, you've had, what, 25% disposable income increases. You have continued inflow of people to the regions where we are present. And so you have all the preconditions in place for a very healthy development once the market clears at a better supply and demand balance. And I think whether that takes 2 quarters or 4 quarters to 6 quarters, let's see. But once it happens, the fundamentals are in place for a pretty healthy development, I think, for some time because the [ schools ] are going to take a lot of time for new constructions sort of picks up again, the new supply comes to the market once it starts balancing out.

The next question comes from Jan Ihrfelt from Kepler Cheuvreux. The next question comes from John Vuong from Van Lanschot Kempen.

It seems like something went wrong with the auto voice there. Is someone on the line now?

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

I can take my questions while we wait for Jan. First on dividends from joint ventures were SEK 615 million in the quarter. Could you highlight a bit from which companies and also highlight any potential inflow in the second half of 2024 that could be good for us to know about.

Yes, it's a combination from a couple of companies, but we don't see the same big inflow in the second half of the year. But that can change, obviously. But right now, I think it will be more or less this level or maybe some small. We don't know exactly, Markus. But if you take the big picture that joint venture is a sort of a similar state as Balder you have complete projects, it gets cash flow instead of projects and late this year is not much construction ongoing in joint venture. So it's kind of similar, if you take the group that's Balder, kind of similar. Some projects in '25, but it's -- yes.

Then the current tax increased with [ SEK 116 million. ] It was SEK 42 million last year and SEK 37 million in Q1. So have you reached a new level? Or is this quarter more exceptional, so we should look at the first half as a better reference for going forward?

Yes. I think look at the first half is a better approximation.

Then there's been a few questions on investments. If you were to increase your investment base already in the second half of this year, where do you see best risk reward? Is it within projects? Would there be new constructions or renovations? Or would it be acquisitions?

I think, Markus, in that case, I will look for smaller deals in all our markets. There, I think you can actually find some value, especially if market is a bit illiquid, you can, as a buyer, get a better return, but it's very hard to predict before what will be the best, but it's very hard to guess that, actually, Markus. I wish I knew exactly what's the best to buy but if I'm guessing maybe you could find some sort of good yields in Finland and also in Norway, I would guess. Copenhagen is still very strong and high competitive but it's on the other hand, a fantastic economy there. And I feel in Sweden, we really don't see anything that cheap, actually, but not expensive either, but it's more of a mix here. And I think project we have so much building rights. If we look ahead, we already have and we are zoning a lot. So in the long term, we have a huge potential in our building rights for resi, especially in Stockholm/Gothenburg but also in Helsinki. So I don't think we will buy more of that. We have so much actually already.

The next question comes from Mary Pollock from CreditSights.

And the first one, I just want to ask a follow-up on the funding strategy and I appreciate the slide and the color. Just so I understand correctly, it sounds like you want to increase your presence in the kroner market likely out to the 5 year and also want to smooth your maturity profile. And I guess if I'm looking at your maturity structure today, I'm sort of curious what that will look like in terms of when -- what maturities you would look to issue in? Is it mostly like '25, '26, '29? And then also, I mean, if part of that leading maturity profile would that also include a long Eurobond to push out some of the '27, '28 maturities? And then I'll have one more follow-up.

I think to begin with, the statement was a little bit more of a strategic nature rather than exactly having planed, what our issuance plans are sort of going out a couple of years. But I think if you look at the maturity profile where it looks today, it's a little bit lumpy in '26/'27 with a fairly high concentration. Now partly that has to do with the fact that we still have some outstanding volume in the high grade with [indiscernible] in '26 and then we have 2 benchmarks outstanding in the coming few years per year as well in Europe. So the Swedish market works quite differently from the euro market in the sense that you don't do large book-to-bill transactions in one go, but rather you do a small issue to establish a new node on the curve and then you tap that node with -- by replacements. So your first transaction might be EUR 100 million, EUR 150 million and then you can sort of increase that over time quite a lot. And then you can even do buybacks in the shorter end of the curve to grow the entire curve in front of you on a more continuous basis if you compare to how you usually work in the euro market. So when we issue in the SEK market, we've done transactions on 4 different maturities so far this year. And all of those have been fairly small volumes per maturity but then we can obviously tap those going forward and establish new nodes on the curve as we go along. I think on the Euro market, I think you're right in your observation that we probably will target longer issuance there. I would say, though, that once you reenter market -- I mean, we haven't issued in the euro market for some time. Once you reenter market, you might not want to start with a 7-year your first transaction. So there might be more tactical considerations once we come back to the euro market as well as the most strategic ones. So I would say we need to do probably slightly shorter one the first transaction once we reenter. But over time, I think, the way we view it is that we'll probably issue new bonds in euro market of sort of 5 to 7 years continuously once we reach to a more steady state and the point where we want to be.

And then my other question was actually separate, sorry, not a follow-up. I just wondered -- I know you mentioned in the remarks there was no major changes in the portfolio outside of Finnish resi, but if just to ask again on the office portfolio, any changes in tenants demand, any tenants taking longer to sign leases, wanting smaller space, any impact from hybrid work? Or is it still business as usual?

No, I would say it's very much business as usual. We don't see any big trends anywhere actually. So what's been a bit weak spot, obviously, has been Finnish resi. We talked about that a while ago. We think it's better next year. And then we have office basically in Stockholm, Gothenburg, so some in Malmö, but mostly Stockholm/Gothenburg. And we haven't seen any big changes there actually at all. So the best guess is that not much will happen in our figures going forward. But it's a huge difference if you compare small cities in Sweden, for example, with L.A. or New York. I mean I think it's totally different actually, the whole material. So I think you will hear this from all the Swedish companies. You see in the figures, the same trend basically that it's very -- actually very stable with small changes from year-to-year. So No, I don't see any big changes in our portfolio.

I think it's important here to try and separate any to more temporary cyclicality that you might see in the office market with the more structural trends that have to do with sort of hybrid or remote work habits. And I think we obviously, in some locations, see that takes a little bit longer to close new tenant contracts, et cetera. So we can feel that there is a slightly different macro picture compared to a couple of years ago. But it's very small numbers that are not really visible on the totality. And the structural aspect, I don't think we are seeing in our markets to not at all to the same extent as you see in other markets around Europe and particularly in the U.S.

The next question comes from Jan Ihrfelt from Kepler Cheuvreux.

Could you hear me?