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

Welcome to the Balder Q1 report 2025. [Operator Instructions] Now I will hand the conference over to IR, Jonas Erikson. Please go ahead.

Good morning, everyone. Welcome to Balder's call for the first quarter of 2025. We will have some introduction remarks from Erik and Ewa and then open up for questions. And with that, I leave the word to Erik Selin, CEO of Balder.

Thank you, Jonas, and good morning, everyone. Balder is a real estate company with the Nordic exposure. We are one of the largest and most diversified real estate companies in the Nordic region. We've been active for 20 years, more or less now. And we have a mixed portfolio with residentials and commercial property, roughly half of each. We manage our assets ourselves. That is one of our fundamentals and even normally, we buy and hold, but we can also develop and build and hold and obviously also build and sell, and we have had an average NAV growth of 26% per year since inception 20 years ago. We have S&P rating, BBB flat and net debt to asset of 49%. So that's Balder at the glance. Looking at the first quarter, rental income increased 9%, and the NOI, net operating income, increased 10%. If we then look at the profit per share, you can see an increase of 7%. And the missing piece is that we issued some shares during the year. So that's the difference from 10% to 7%. Looking at earnings capacity, which will be the next slide, it's now SEK 5.38. So that's 8% better than this quarter last year. Net debt to asset, as I said, 49% and like-for-like rental growth on average in the whole company, 2.9%, and NAV stands at SEK 89.55 right now. Earnings capacity is a slide that we show every quarter, and it's just more or less the figures on that particular date. So it's not a forecast, but it gives you a big picture of the overall figures in the company. And if you compare now year-end to quarter 1, you can see a small decrease in rental income and further down also in profit from property management, and that is because of the currency movement. So on constant currency, we would have had a small increase, but this is always currencies per quarter end. And if you compare quarter -- year-end with quarter end, the Swedish strengthened quite significantly if you compare with euro and even the other currencies. So that's why you have a small adjustment in earnings capacity. Apart from that is very stable numbers, as you can see. And looking more specific of the portfolio, 80% is in larger cities and capital in the Nordic region. So the biggest cities are then Helsinki, Gothenburg, Stockholm, Copenhagen. And if you look at property categories, we have resi with 53%; office, 15%; retail, 12%; and then we have some other properties, including hotels, and we have also a small part at this industrial and logistics property, 6%. And looking back on this slide, you can see the development of profit from property management going 10 years back in time. So you can obviously see a good improvement '16 until '22, and then a flat development, and that is the shift from 0 interest rate to gradually higher interest rate that makes the profit from property management to be flat. But in order to be flat, we had to have a very good development on the NOI and that has actually compensated for higher interest levels during these turbulent years. And looking at other metrics, you can see portfolio value last 10 years from roughly SEK 80 billion, SEK 90 billion to SEK 222 billion. The leverage have been around 50% or thereabout. An occupancy rate also very stable at 96%. If you look at even smaller numbers, you can see that it's 95.5%, 95.8% sometimes. 1 quarter, I think we also were below 95.5%. So we had 95% in the figures. But very a stable number over the years. And the explanation is we have a very diversified portfolio on asset classes, countries, geographies. So that makes it that it is a very, very small changes up or down. And that is on purpose. We like this to be a very low operational risk, and we think that this will continue to be stable over coming cycles as well.

Great. So a short ESG update. In February, the EU Commission presented simplified rules for sustainability reporting through the so-called Omnibus package. The proposal involved, among other things, changes in the CSRD and taxonomy as well as a 2-year delay in implementation for smaller businesses. These effects -- changes do not affect Balder at present as the size of the group is included in wave 1, which means that we shall continue to report in line with CSRD requirements for the fiscal year 2025. And our sustainability report has taken major steps towards the new reporting requirements in order to achieve full compliance in '25. Balder's sustainability work has developed during the past year, reduced energy use and greenhouse gas emissions, more charging points for electric vehicles, increased energy production from solar panel and larger amounts of environmentally-certified square meters. We also have a higher proportion of properties that has undergone climate risk analysis and are aligned with the EU taxonomy. And these are just some results that we have issued in '24. And over to some financial information and the equity asset ratio has increased by 0.7% up to 38.7% and net debt to total asset has decreased by 0.4% to 49%. The ICR is at 2.7, and in the quarter, it's 2.8. And if you look at net debt to EBITDA on a rolling 12-month basis is 12.0, down from 13.5 when we introduced at the end of 2023. And also, if you look in the current earnings capacity, we're now at 11.7x. So we are working our way down to the target of 11x. And if you look at available liquidity, as of Q1, it's a little bit more than SEK 23 billion, and is well above the criteria from S&P regarding 1.2x for the coming 12 months according to S&P's methodology and that level is unchanged since Q4. And to the right, you can see the interest refixing structure. Also worth noticing is that the average interest rate for '25 includes the margin for the floating part of the debt portfolio and the average interest rate is 3.1%. Here, you can see the long-term trend of the portfolio value in relation to net debt to total assets. As I just said, net debt to total assets has continued to decrease a little bit and secured debt to total asset is at 24.3%, and that current encumbrance level is reasonable expectations going forward as well. And here is the usual overview of the debt maturity structure, split by bank loans and bonds and commercial papers. And during the quarter, we have been active in both the Swedish capital market as well as the Eurobond market. We issued a 7-year EUR 500 million Eurobond at the same time, we repurchased EUR 250 million in maturities '26 and '27, as well as the hybrid. And we also did a 5-year [ SEK bond ] of SEK 1 billion. And if you look at the bank side, it's more or less business as usual, rolling maturities, and this has been done with slightly lower credit margins than last quarter. I think that was it from my side.

Thank you very much, Ewa. And then with that, we open up for questions.

[Operator Instructions] The next question comes from John Vuong from Van Lanschot Kempen.

In the report, you mentioned that the distribution of Norion Bank shares is dependent on the safe margin to credit ratios. Could you perhaps quantify this margin?

We've chosen not to do that in exact terms, but also because these metrics move a little bit up and down with currency movements and other things. But if you look at the important metrics that we have from S&P is our ICR, where we are -- have ample margin and that doesn't really -- is not really impacted by distribution of the Norion shares. And then we have the debt through debt plus equity measure where our limit is 60%. We're currently slightly below 57%. And so we have a good margin, but a Norion distribution will obviously worsen the debt through debt plus equity a little bit by about 1 percentage point. So let's see in time. We have chosen not to quantify exactly what headroom we want there. It might depend a little bit on other deals and transactions that we do as well. So it's difficult to give an exact forecast.

Okay. That's clear. Does it mean that you haven't really necessarily changed your -- the way you look at investments, given that you also at the same time want to distribute this Norion Bank shares? And has it changed your time line over which you see this delevering process towards an 11x net debt to EBITDA?

No, not big changes. This is more fine-tuning. So the big picture has not changed in our view. It's just that if you have credit metrics, you should always have some safety margin because otherwise, you could risk to be in an unnecessary stressful situation. So that's why we want to have some margin. So it's not a big thing, but we think it's better to communicate how we view this. So I mean, you can see that we could obviously sort of afford to distribute today that would not be a problem at all with the numbers. So it's just a matter of how much safety margin we want. So yes, so that's how we think.

Okay. Clear. And then just a last one on this topic. Have you explored other options that weigh less on your leverage such as a sale of the stake, for example?

I think our holding in Norion is more than 40% of the company. So I think a placement of that kind of stake is -- might be a bit challenging, but it's probably more disruptive market event for the Norion share than the distribution of the shares. And then each shareholder can choose to do what they want with their shares.

Yes, exactly. We think it's a very good company. And then if we distribute, everybody can do what they want. So it wouldn't feel right to sell at a discount.

The next question comes from Lars Norrby from SEB.

I see in the CEO statement when you were talking about the geopolitical and the economic uncertainty, you say you're not directly impacted. At the same time, I hear from a number of other real estate campaigns in Sweden, I would say that there is a -- among tenants, decisions take longer and are, in some cases, put on hold. Do you see any such effect out there?

Not very big, Lars. And it's always difficult to know why and what is the exact reason. But I think if you have a very large part of office in some places, it's much more affected. So that can be also why we don't see it in the same way. But yes, let's see what happens. We're quite optimistic in total, actually. But in short term, there is some maybe softness in office market in Stockholm, a bit in Gothenburg.

And a few other companies have experienced material terminations from tenants in the first quarter. I mean, you don't disclose your net leasing numbers. So it's not as explicit in your figures, but have you had any such experiences in the first quarter?

No, nothing material. But we don't have so many big sort of dangerous contracts. So I think it's also an explanation. It's a bit different composition in our case.

The next question comes from Jan Ihrfelt from Kepler Cheuvreux.

I have a couple of questions here. I'll start off with your earnings capacity. I see that the NOI margin comes up from 75% to 76%, a 1 percentage point increase. And my question is, have you, I mean, cut your operational costs? Or what is driving the uplift there?

It's a very small adjustment, but we think we can perform slightly better than if you go look backwards. But this is also very fine-tuning on where we think we can do a bit better. So that's why you have 1 percent. So nothing dramatic, but there are some...

Yes, but it's still -- it's 100 basis points, so.

Yes, but that not much.

Okay. Second question here, the Finnish residential market, how has that developed during the quarter? Has it been stable, better, worse?

Swedish, I think for selling...

Finnish, sorry. Finnish.

Finnish. Okay. Finnish resi market is still slow, we believe, more competition from Kojamo than before. So it's been a bit delayed in the improvement, but we still think for the second half of this year will be better. We thought that for -- have been thinking that for a while now. We still hope that we are right. And we have like-for-like plus in the Finnish portfolio. I don't remember exactly maybe 1.6% or 1.8%, something like that. And at the worst point, it was actually negative by -- I think it was 23 basis points or something. So it's not good, but it's not worse either. It's competitive, but we think it will be better second half.

Okay. And you made a comment in the CEO wording about the project starts, a little bit delay there. So this more a question for next year or will something happen late this year?

Let's hope that we do something this year, but we are a bit cautious because we have to feel that it's worth to invest. So -- and it will not be big a couple of years ago, but we hope we can do something, and that's our hope. But yes, let's see.

Okay. And your property revaluations, were there any specific there in terms of geographies or segments or...

No, very -- it's very, very, very small changes. But for example, when we made some assumptions year-end, and then we could see that the outcome is slightly better than the assumptions a quarter ago. So if we don't change anything, you have a small revision upwards. But it's like 0.3%, 0.4%. So it's very small, but it's performing slightly better than we thought year-end overall.

Okay. Final question from my side, bank margins, how has that developed during the quarter?

It has been slightly better than last quarter. I would say, on average [ 1.10. ]

The next question comes from Staffan Bulow from Nordea.

I have 3 questions. I'll ask them individually. Starting off, you mentioned in the CEO letter that you see opportunity in the transaction market, both as a buyer and as a seller. Should we view the comment as Balder being a seller as defensive or offensive, i.e., are you looking to sell to allocate to new investments or to reduce leverage?

Our leverage will reduce automatically. So if we don't do anything that happens sort of by itself with cash flow. So it's more that I see a lot of interesting opportunities in general. If you're a seller, you can actually sell at reasonable prices. And if you're a buyer, there are also interesting stuff out there. So I have a feeling that if you want, you can do some good transactions in general, but that might not be the case that we do a lot of transactions that we have to see. So it's more of a general statement. So if you start out, let's say that you have a fund or start a company or whatever, you have a lot of I think you can do good business now. And if you want to sell, there are actually buyers on quite okay price levels also. So it's more a general comment.

Okay. Understood. And another question on the capital allocation opportunities in Q4, you acquired properties from Centur. Do you see more opportunities to sort of acquire properties from JVs and dissolve those structures? And also, could you be open either to increase your ownership in SATO?

Yes. Yes, on both of those questions. We always try to look at it in a pragmatic and rational way like the Centur case when we could see it was better for both of the owners to split it. And so we are always open for that. We just try to create good values for the long-term shareholder. And as it comes to SATO's, I mean, it's just a question of price levels. So if we think it's interesting compared to other alternatives, we can increase there.

Okay. That's clear. And a question on Karlatornet. In the end of last year, you acquired all unsold apartments in Karlatornet. Is it possible to quantify the potential sales value of unsold apartments in Karlatornet?

You mean going forward or looking...

Yes, going forward, what could be the potential cash inflow?

Yes, I think it's SEK 1.3 billion roughly, if I remember correctly.

Okay. And one final question from me on like-for-like rental growth. It was 2.9% in the quarter. If you look into 2025, based on what you know today on resi and commercial, do you expect it to be higher or lower than that?

That was a tricky question. What shall we guess, Ewa and Jonas?

I would say that it would be in the same area.

The same area.

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

I have 3 questions. First, in the cash flow statement, you divested financial assets for SEK 1.5 billion and then there is a received dividend from joint ventures of SEK 1.1 billion. So I'm just a bit curious if you could give us a bit more details on those cash flow items?

Financial investments, I think, is basically bonds or certificate expiring. If we have over liquidity, we just don't have bank deposits, so we can buy commercial paper and bonds in other companies as a liquidity and that decreased. So I think that is the big part there. And what was -- the cash flow. Yes, that's Centur dividend.

Yes. Yes, right. And then liquidity is up around SEK 3 billion sequentially. You have almost SEK 24 billion in total liquidity. Any special reason for that? Any big upcoming refinancings or any other reason?

No. I mean we try to think about the liquidity as in relation to what maturities we have. So if you look at the upcoming 12-month maturities, the liquidity ratio between the two is fairly constant compared to last quarter. So there's no big changes there. It might go -- the available liquidity, and I think Ewa said this before, might go up and down by a few billion quarter-by-quarter as we try to match the liquidity with the upcoming maturities that we have 12, 15 months out. So this not...

[ Yes. I mean, ] that ratio is unchanged since last quarter.

Do you have any major bank refinancings to be done in second half or third quarter, near term?

No, I mean we do that on a regular basis. I mean we roll the bank loans all the time. So nothing major out of the normal.

All right. Yes. I'm just trying to fish if -- yes, because it seems like bank margins have continued to trend down. So nothing major there. All right. Then a follow-up on Finland. I heard your answer there before, Erik, but just a bit more details. I saw Kojamo really improved quarter-over-quarter from 91.6% occupancy up to 95% here in March, they highlighted -- and SATO down around 70 basis points. You mentioned high competition from them. Is it mainly pricing? Or any other things that they have been doing in the quarter and continue to do in the second quarter?

If I'm guessing, it's mostly pricing from their side, can also be how you select tenants, but I don't have details on their operations, but pricing and this quarter seeing -- I mean I think their occupancy is soon up to a level where they will be more comfortable. So -- but you have to ask them, I think, that -- I think they're more or less reduced their vacancy 50% from the bottom until today. And that's good. But of course, there are two big players, SATO, Kojamo. So if one is very active and aggressive, it should have some effect. I think we've been more stable for many years, not moving up and down as much as they have. And what is the best case, you never know until afterwards. So in hindsight, you can see that you should have done this or that, but yes, I think it's actually good for us that they have lower vacancies.

I agree with that. Do you think that they need to come up a bit further, they're at 93.5% now? Do they need to reach you around 95%, and then both of you together can continue to raise rents or are we currently at a positive enough level?

Something like that, but I don't know exactly how they calculate if vacancy is that you actually are in the apartment, let's say that you write the contract and then you move in 2, 3 months later. So I don't know if they have a time lag between the actual contracts and their reporting. Maybe you know.

I would expect that to be more of a kind of a spot figure...

And let's say, if it is a spot figure, my guess is that they will have an improvement in Q2 also, quite good improvement. That's very likely.

Last question. You touched a bit on that before, but we saw a negative top line growth here, of course, driven by FX, but it's not the norm in Balder. Do you see any anything particular in your portfolio that can help lift top line growth already in '25 or any -- foresee any decision-making near term that could help growth in Balder?

No, I think we will have some growth, but when currencies move a lot, it have a short-term effect. But in the long term, you don't have to bother about that. So I'm still very positive on long-term growth, but this was very big movements in currency for -- in our case. And we have a lot of exposure to other currencies. But now overall, I feel reasonably optimistic. You never know the very short term, but otherwise I think we have a lot of opportunities.

The next question comes from Andres Toome from Green Street.

Just a couple left. Well, firstly, I guess, can you give a bit more color on the performance of the hotel segment? And have you seen any impact in terms of just the macroeconomics on your hotel performance?

No, that is too short term to see anything special. In general, you can say the market is pretty good with the exception of Gothenburg, where we have a lot of new supply. Part of the supply is actually our own fault as well since we've been constructing hotels. But to be super specific, I don't know. We haven't seen anything special actually. And we have a big part that is fixed rent in Balder. So we have smaller swing factor than if you are a lot on variable rent. So you will not see the big swings in our P&L, as you can have in other companies. We have some turnover, but on a relative to other real estate companies, it's smaller. So we are long-term positive, short term. Gothenburg is competitive and the other markets are quite okay. Copenhagen is good. Stockholm, I think, will continue to be good. Helsinki as well.

And then my second question was just on the earnings capacity as well. And I was just wondering on the financing expenses, that's been fairly stable now for many quarters in a row. I guess with the short-term interest rates going down and then swap rates probably have also come in at least in the last year or so, on balance, do you see this item in terms of financial expenses coming down over the next few quarters? Or are, I guess, all the impacts you've seen just on lower interest rates already baked into this number?

No. So the earnings capacity is an eyeshot, when we release the quarterly report. And I think we also mentioned last quarter that it will come down during '25, but it will rather be in the later part of '25.

Okay. So that would be basically the variable rate, whatever 3-month, 6-month short-term fixes that are slowly rolling off?

Yes, and we also have some very low interest bonds and loans that is becoming more expensive for us as well. So you have 2 factors going against each other. We did a big Eurobond in, I think, it was February or March, something like that. And that was a higher coupon than the one we bought back. So you have -- yes, that's why it's sort of stable, even though short term is down a bit. And the average now is 3.1%. So if you compare that with the swap rates or Central Bank rates, we're more or less in line with what the market is now, maybe slightly lower, but...

But it's important to remember as well, because we said after both Q3 and Q4 that we felt that financing costs have peaked but we were also quite clear that it might vary from quarter-to-quarter. Like in Q1, we had a -- as Erik mentioned, a Eurobond expiring and replacing that with a new one, then it jumps up a little bit, and then we can get back to the trend. But also be mindful that this is -- obviously, when we talk about these things and give any kind of outlook, it's for the current portfolio of assets. And obviously, since we said it in Q3, we acquired both Centur and Doxa, et cetera. So it's -- just keep that in mind as well that if we do continue to make acquisitions, obviously, that will impact the financing costs as well.

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

Thanks, everyone, for listening in. We're obviously available if you have any follow-up questions afterwards, all of us. So just let us know. Thank you.