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

Welcome to the Balder Q4 Report 2024. [Operator Instructions] Now I will hand the conference over to the speakers, CEO, Erik Selin; and CFO, Ewa Wassberg. Please go ahead.

Hi, everyone. Welcome to this call around Balder's Q4 results for 2024. We will first have a brief presentation and then open up for Q&A. And with that, I'll leave the word to Erik Selin, CEO of Balder.

Hi, everybody, and welcome to this Q4 and results for 2024. The first slide here, Balder at a glance. We are, as you know, a listed real estate company with a focus on the Nordics. We have a few assets in Germany, U.K. as well. A little bit more than half of the portfolio is residential and the other half commercial. The portfolio is very diversified, both in terms of category and geography. Looking at the last quarter, the rental income grew 8% as well as the operating income. Profit from property management per share compared to last year Q4 increased 3%. So this was the first quarter for a while that we have an increase year-over-year. And in the earnings capacity, profit from property management is 9% better than last year for the same period. Net debt to assets, 49.4% and like-for-like rental growth a bit slower, now 3.5%, but still okay level. And NAV stands at SEK 88.3 per share. Looking at the current earnings capacity, this is a slide that we update every quarter. You can see now that the rental income is up quite a bit from last -- from Q3, and that is a combination of acquisition from the joint ventures Centur, completed projects and indexation. And looking further down, we have profit from property management, SEK 6.5 billion compared to SEK 6.05 billion the quarter before. And per share, that is increased from SEK 5.16 to SEK 5.46. We also issued some shares in Q4. You might remember that. So -- but still per share, we now have the highest earnings capacity so far. And combined with relatively slow growth in balance sheet, we now have -- if you look at earnings capacity, we now have debt EBITDA 11.8 and then we exclude projects, but we include financing for projects. And if you compare one year back and count it the same way, where we then have the hybrid as debt that came from 12.6. So it's quite a big improvement in 1 year. We still have a target of 11, but the strong cash flow now and improvement gives us the possibility to actually do some investments and at the same time, strengthen the balance sheet and the debt EBITDA number going forward. As I said in the beginning, a diversified portfolio. You can see here regions, Helsinki, Gothenburg, Stockholm, Copenhagen and resi is by far the biggest, and then we have office, retail and hotel, other properties. So no single category or geography or tenants can make a huge change in the company. So -- and that is our intention that is diversified with a very low risk on the asset side. Looking at the longer term, here is a graph from 2015. We can actually go back to '05 also, if we take a longer period, but then you can see the long-term trend is, of course, we want to increase earnings per share. That is what this is all about. We have had for a couple of years, a downward trend because of the rate -- interest rate increases. But now since interest rates are coming down, our financial net is stabilized. And so now if you compare earnings capacity to outcome, you can see the high probability of an upgoing trend again. And here, we have from back '05 also the longer term with value, debt to asset and occupancy and occupancy has been extremely boring for almost 10 years, more or less always 96%.

Regarding ESG, we continue our work with meeting the requirements of EPBD as well as adapt to CSRD. Our ESG ratings are BBB with MSCI and 14.9% with Sustainalytics, which places us within low risk. Funding condition has continued to normalize. And during the quarter, we have refinanced a couple of more expensive bank loans that were taken up during '22 and '23 with lower credit margins. The net financial position has improved a bit. And with the balance sheet we have today, we should be able to continue to improve the financial cost a bit during the year. Not necessarily a linear improvement. It can bounce a little bit between quarters. And as you can see here, net debt to EBITDA is now at 12.2 compared to 13.5 when we introduced the target of 11x. And also, as Erik mentioned, if you look at the earnings capacity, we're now down to 11.8, which, to some extent, shows where the trend is heading. We continue to have a high level of available liquidity. Per year-end, we have available liquidity of SEK 21 billion, which corresponds to 1.2x rolling 12 months. During the fourth quarter, S&P confirmed our credit rating BBB and changed the outlook to stable. And we have, in general, good margins in our metrics.

So looking a bit more at the -- sorry, the financing side. We have long-term trend, as you've seen of a slightly decreased net debt to total assets. At the same time, you've seen in the last couple of years, the incumbents coming up a little bit due to the shift from a very high level of bond financing into a slightly more balanced picture between bank and bond financing. You might recall that we've talked about before that we want to have roughly 50-50 split between banks and bonds. And that will take us to an encumbrance around about the current levels we are. It might be a couple of percentage points higher or lower from time to time. And I think this is a fair assessment of where we will be going forward as well. Looking at the maturity structure of our bank and bond financing, for those of you who have followed Balder for some time, you know that the Swedish banking market tends to be fairly short term in its nature. Typically, we issue 3-year loans, and then we roll them continuously as we go along. And we tend to always try to roll them a little bit before maturities as well to keep our liquidity metrics intact. It's a fairly undramatic process. And so far, since Balder was started, we've never failed to roll bank loan where we want to. So -- on the bond side, there you see that we have 2 years with a little bit higher maturities. And here, what we've said is that we would like to maintain the maturities below SEK 10 billion per year, if we can keep it that way going forward. So that might give you an indication of where our issuance will be focused going forward as well. But overall, I think we are pretty happy with our current maturity structure and hedging structure as well. It's nothing to be expected that we will sort of change that going forward. So looking at a slight more structural way of talking asset liability management. So we have an operating profit that has increased in the earnings capacity by around 10%, with net debt only increasing by 4%. That's obviously according to the outlook that we've given before that we want to both invest and reduce leverage somewhat. And I think that Erik and Ewa talked about the net debt to EBITDA, both rolling 12 months, but also in the earnings capacity, and it's reasonable to expect that trend to continue. We do now -- we are in a position where we have a much more balanced capital allocation, as you've seen in Q4 as well, where we've done total investments that we've signed of more than SEK 7 billion, even if not all of those are already in the balance sheet. And I think that's a testament to also our ability to both invest and reduce the leverage. And then as we have pointed out before, it's worth noting that the convertible bond will obviously, at some point, have a pretty large impact on our balance sheet so just to be aware of that and remind you of it. I think we're pretty well placed in terms of our bond presence currently. We will continue to issue bonds in the Swedish market, as we started doing more actively in 2024. We have an ambition over time to increase that from the current levels that we have outstanding. And at the same time, we will entertain our European bond market presence as well. Overall, I think it's fair to say that with the financing cost of bank financing having come down quite a lot, we will obviously look at the market from time to time and decide where we feel that we want to tap financing when we need it. But structurally, I think the current mix between bonds and bank is fairly reasonable to expect, and then we will have slightly more tilt to the SEK market than to the euro market than we have today. That's a sort of more long-term picture, I think. I think I'll stop there and then we open up for questions.

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

A couple of questions from my side. First of all, on the residential portfolio in Sweden. How much of the negotiations have you completed regarding 2025 rent adjustments? And how big on average is that adjustment?

I think all the negotiations are completed and the average, I'm not 100% sure. Do you know, Ewa?

5%.

Around 5%, yes.

Okay. And obviously, is that then the completed negotiations, that's been taken into account in the earnings capacity as shown in the report?

Yes, the absolute majority anyway. You can consider it that it's included.

Okay. And second point, to me, you very much shifted into more of a growth mode in the second half of last year, illustrated by the acquisitions from Centur in particular. Looking forward, do you expect continued expansion to be primarily through acquisitions? Or will there be a gradual ramp-up in projects as well?

If I'm guessing, it will be more to acquisition. Some projects maybe that takes a long time also to ramp up that. And I think we're still a bit cautious on projects. So I think we are more likely to do some acquisitions.

The next question comes from Othman El Iraki from Fidelity International.

First, a few questions for me on your hybrid outstanding. How do you think about it in the kind of longer term? Is this an instrument that you want to keep in your capital structure? Or given the fact that you lost the equity from S&P, is it an instrument that kind of no use for you going forward?

I think when it comes to the hybrid, we've said that we -- when we did the last tender offer, we've said that we don't see ourselves as long-term issuers of hybrid instruments. We felt that it's cost us a lot of hassle during the last few years. And even if on paper, the sort of cost of equity implicitly looks attractive, then in reality, it never is as attractive because of the cyclicality of the pricing of hybrid instruments. So we've said before that when we did the last tender that we will probably not be long-term issuers of hybrids at least not the way things look today.

Okay. And just a follow-up on this. Do you think your intention to call this hybrid at the call date is something that you question at some point? Or do you think you follow the market norms?

I mean we've always called on first call date in the past. At the same time, given that we don't have any equity credit from S&P on this bond, it's a neat very long maturity bond to have in our capital structure at the moment. From a contractual standpoint, from a liquidity planning standpoint, the maturity is very long. But in the past, we've always called on first call date.

The next question comes from Jan Ihrfelt from Kepler Cheuvreux.

I have 2 questions. We've been talking -- discussing about the rent uplift for Swedish residentials and including in your earnings capacity, what kind of rent increase or decrease have you put in for your Finnish resi?

Finnish resi, we don't forecast in that way, Jan, because it's market rent so that is moving as we go along.

And what do you see for this year when it comes to Finland? There has been a lot of overproduction -- over construction in the last couple of years...

No, we hope and think that the second half of '25 can be -- situation can improve. It's still quite competitive, but it's not getting worse, but we think second half can be better because now if you look at statistic on construction starts, it's been very low for a while and -- but completions has been high until maybe half a year ago. So we think second half of '25 looks -- yes, we can be more optimistic there. I think maybe 1 or 2 quarters will be slow and then better.

Okay. And is it more when it comes to bringing down vacancies? Or do you even see rent uplift in the...

Yes, both. They are very linked together actually. So if vacancies come down, then rent will come up. So I think you will have the double effect. Once it come, you will have on both sides actually. But we have kept the vacancy a bit lower than the average. So we had a strategy to sort of not maximize price totally. So maybe in our case, you have some potential in vacancy and then rents. But if you look at, for example, Kojamo, they have been more moving around. So they were more positive on rents, had higher vacancy. And now I think they will go for lower vacancy and maybe a bit lower rents. So -- but we've been more stable.

Jan, in the second half of '24, you already saw a positive movement both on our occupancy rate and like-for-like rental growth. It's very small numbers still. I think we ended the year at 95.5% occupancy in SATO and you have a positive like-for-like in both Q3 and Q4. on the rental side. But it's very small numbers, obviously. So the more noticeable movements might take another few quarters.

Okay. And my last question regards the hotel market. We have seen some quite promising statements from both the Strawberry and Pandox and so on. Do you agree on this more positive view on the hotel market?

In general, we agree on that view, but then you should look at city by city because there can be quite big difference. So in Sweden, you have Gothenburg as the slowest market with a lot of new capacity. Stockholm is very good. Malmö is absolutely okay. Copenhagen is good. So -- but overall, absolutely, I agree. It's better. It's stronger.

The next question comes from [ Vance Iliev ] from Kempen.

First one on net debt to EBITDA. So you would like to get to 11x. Is there a period over which you want to get there? Because it can be, let's say, one year when you take into account the convertible, it can be over a 5-year period. And second one, I appreciate that it is limited what you can share, but can you share anything on Norion Bank?

Let me start with the net debt to EBITDA. We've said that we have that target, and we're moving continuously towards it. We haven't given the time frame. I don't think it's going to be 5 years. But I think for us, the important thing is to ensure that we move in that direction sort of, if not quarter-by-quarter and year-by-year. So you will see a gradual movement to the 11x, definitely so.

Yes. And in Norion Bank, I think, I guess you're wondering about the question from the FE and they are looking at the routines and processes and policies and in different kinds of things. So it's not an actual case of money laundering or something like that. It's linked to routine processes. And for example, with AML, PEP and KYC and that kind of thing. And it's a survey among a couple of banks. So it's not just us.

The next question comes from Stefan Andersson from Danske Bank AS [indiscernible].

Just a few questions from me. First, the Q4 has had relatively warm weather, a little snow. Has that had any material impact, I guess, particularly on the Swedish resi side for you?

Truth is I don't know exactly the number.

Okay. Looking at the vacancy, I guess we talked about decimals moving here up...

Sorry, can you please speak up a little because we have a little bit hard time hearing you.

Absolutely. Is it better now?

Yes, a little bit. Yes.

Okay. I'll try as much as I can. Okay. So on vacancy, maybe you touched on that, but could you elaborate on -- I guess small movements, of course, decimals here. But is it only Gothenburg Commercial? Or do you see also on the resi side that you have some movements?

I think overall, we have slightly lower vacancy in the whole portfolio if you compare the years. We don't see any big movements actually in general. I think our actual vacancy in office, for example, is very small changes. So -- and resi in Sweden, we have no vacancy basically. So it's Finland, some vacancy in resi, as you know, but not in Sweden, Denmark.

Okay. Good. And then on the valuation, there's very small value changes here, I guess. But when you -- on that valuation, what kind of rent increase on the resi side have you incorporated? Have you already incorporated the 5%? And what are you using for further on '26? Is that 2%?

Yes, correct.

And finally, on the transaction market, I guess you're in a situation where people call you up on opportunities. Have you seen any change more activity, less activity, change in price expectations, if there's anything you can elaborate on that versus what we saw half year ago?

Absolutely. I think in general, it is more positive in the way that it's more likely to be transactions. Before it was sort of a gap and very low willingness to actually go into a transaction. Now I think it's more activity. I think pricing is not a big difference actually. So the deals that are done are normally on quite, how should I put it, good prices or there are not many companies selling cheap, if you understand. So -- but I mean, you can always find one asset at a time that makes sense to buy and so on. But my guess is also that second half of this year can be more activity. It's still a bit wait-and-see mood. But now you have stabilized interest rates, hopefully. And a lot of companies are more in the position that they can buy if they want to. Also some funds have raised equity and so on. So I think -- second half, I think, there will be more transactions. But we have a deal flow. There will be -- they come new deals every day.

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

Okay. Thank you very much for listening in, and you know where to reach us if you have any follow-up questions. Thank you.