Earnings Call: Q3 2020

Nov 5, 2020

Morning, and welcome to the Interim Report January to September 2020. My name is Anna. I will be your coordinator for this conference. During this call, you will be on listening only. However, in the end of this presentation, you will have opportunities to ask questions by pressing star 1. I will now hand you over to CEO, Erik Selim, your host for this call. Thank you. Hi. Good morning, everybody. Thank you. We will have a short presentation of the Q3 report. And then as usual, we go over to Q and A after that. So we start right away here, Balde Q3. It was a bit calm quarter, obviously summer and also this calmer market because of COVID. In our daily operation, our COVID is not that bad as before. Rent collection is actually similar to last year this period. So right now, you can't see any differences. However, we have, of course, lower rental income from variable hotel rents and so on. But otherwise, it's surprisingly stable as we see it. In Q3, we agreed to acquire 50% of ABN in Norway. They have a separate homepage you can look at, but we are very happy for that acquisition because it's a very good platform for us to be able to invest more money in Norway and together with excellent people. The biggest asset there is a quarter in the CBD called the ABN quarter. We also made a deal with Hiddeldil to build their new head office. And then the picture at Page 2 is actually just showing how it will look like in a couple of years. We just started the construction. So but we hope it will be like this. We have long lease with Hidden in this and also Hidden is performing extremely well in this market. They have a better profitability and a lot of liquidity. So it's a super strong tenant, good to know. We completed some apartments in Finland, and we made some small divestments of development projects in Gathenburg and Carlsdales. Looking at the numbers, profit from property management in Q3 was 9% positive from the comparing period last year. NAV, 3.63 percent, net debt to assets, 47% and like for like rental growth 1%. And the low figure there is explained by hotel rents coming down because we have now only lower or fixed hotel rents and not the turnover part. And that makes that figure go down in the company, but still slightly positive. So obviously, if we didn't have this COVID effect, we would have clearly a higher increase than 9% in profit from property management. But still not that bad considering what's happening. Page 4, you can see the longer term development in cash flow and NAD. It's slowly moving upwards. And if we take Page 5, this is a more specified version of that. And you can see right now the earnings capacity is at SEK 4,200,000,000 in parent company or SEK 23 per share. So we are a bit ahead of the year end despite then corona and hotel rents not being the same as we would have hoped way back, obviously. So we're trending positive, but a bit slower than we used to. Page 6, there you can see more in detail the rents, costs and so on. And also value change is quite small. Residential prices still trending a bit up and other words, pretty stable. So the result net profit goes down from last year, and that is obviously then because of the smaller value changes in properties. But otherwise, pretty stable, I would say. And turning to Page 7, the balance sheet. That is worth to notice that we had a lot of cash and cash equivalents, financial investments. So maybe even a bit too much, but we've been playing it pretty safe having a lot of cash and liquidity on hand since the market is still a bit volatile with the funding market. So I think total liquidity is like SEK 16,000,000,000, SEK 17,000,000,000. So that's quite a lot, actually a bit too much. Page 8, we have the property portfolio, haven't changed, I think, since last quarter in the percentage of different categories and cities. You can I can just remind that in the other category hotel is 8%? So it's not to be mistaken that it would be 14%, but it's actually 8%. And then you have no bigger changes in geography. Turning to financing, Page 9. We believe right now or for the month, the financing market has been pretty stable, actually getting slightly better and better as we see it. And by that, I mean, the bond market, bank market has been performing normally actually through all this crisis. Nordic Bank is pretty strong, and we have that support all the time. So banks being very positive, supportive and stable. But as always, bond market and commercial paper moves much faster and down, and the spreads went up heavily and now been tightening again. So we think it's a pretty okay situation. And what you can say, there is liquidity a bit more costly than before COVID, but still, we think, reasonable levels. So let's hope that that continues. And our rate shows otherwise is pretty stable also compared to the last quarter or last year. So and you see the debt maturity profile and we can actually handle all the debt maturing this and next year without any special actions. And then Page 10 shows basically some of the same things, but you can also see then net debt to assets and how much secured debt out of total assets. And they are trending slightly down, and we are with a big margin inside of what is required for our current rating from S and P. And finally, you have the graphs of the share price way back, and you can always see that over time, the share price will correlate with earnings and NAV. And then that was a short brief of the quarter. And then if there are any questions, we can now move on to Q and A. And I also have Markus with me if there are specific questions about, for example, financing. So we move to Q and A now. Thank you. Please note that we need to take your name for your question. So the first question, I will open up your phone line privately and talk to you and then take your name. So please make sure your phone line is open locally. And the first question comes from Jan Ihrerveld from Kepler Cheuvreux. Please go ahead. Your line is now open. Okay. Good morning. Thanks for taking my questions. Actually, I have 3 of them. I'll start with the property value uplift, which was rather modest in the quarter, as you mentioned? And if you just could elaborate a little bit on the split between different segments? Are you maybe increasing your values on residentials and cutting it a little bit on hotels? Or just give us a feeling for how the movement has been during the segments. Yes. Thank you, Jan. You're absolutely correct. We have lowered the values on some of the hotel properties. And then we also had a negative currency effect from the St. Petersburg's asset. So that is on the negative side. And on the positive side is the residential properties that has had a positive effect, but most of the positive effect is actually that we have completed apartments and changed the values on them. And that is related to Finland for the largest part. So most of the uplifts are from the project portfolio, so to say? Yes. Okay. And my second question regards your costs here. If we look at the earnings capacity in the Q2 and compare with the outcome for this quarter, both financial costs and central costs were 15% lower. So are there seasonal effects? Or is there anything behind it? If you take the financial costs, I mean, STIBOR has come down. That is mainly related to that. And you can also see in the current earnings capacity that we have taken that down due to a lot of STIBOR effect. And central costs, are they becoming a little bit lower on the COVID times or Yes. The administration is really related to several different areas. You have both lower costs on consultants and marketing. And also personnel is a bit lower in Q3 normally. So it's on several lines there. So it's not one only it's not related to one area. It's several areas, which is much lower than earlier. And it's probably a bit related to COVID that we haven't had the same activity ongoing as we used to. Okay. And my third on that question regards your residential development And the contribution this quarter was EUR 6,000,000 and EUR 65,000,000 for the 9 months. When we forecast our figures here going forward, were they a rather lower figure in the Q3? Or was it rather high in the first half of the year? Just give us a feeling what the what we could expect for the future finalizing of the residential apartments? Yes. That was a pretty low figure, Arne. And what we think is that this some year by year will move up over time quite substantially, but it will be very irregular from quarter to quarter because we book when the people in possession of apartments. So we don't do it before. You will have quarterly very irregular figures. But if you compare year over year, you will have at least we hope you will have a very good performance. Yes. But the variation, I think, mostly is due to the volumes rather than so the contribution per apartment, so to say. That's totally volatile from project to project actually. Some are very profitable and some are not that profitable. So it will be very mixed. But if you see the long term trend and the big picture, you will have an increased contribution from that segment. But it will not be easy to forecast quarter by quarter. We are only picking up the results at completion. So we don't do any successive results. So the profit only comes at completion. So that's Yes. I know. But was the first half of the year rather high? Or just get a feeling for the COVID-nineteen? No, the time will be rather little conservative. We expect more over time. Okay. Thank you so much. Thanks. Thank you. The next question comes from Tobias Kai from ABG. Please go ahead. Your line is now open. Yes. Thank you. I would like to start to ask regarding your hotel portfolio. And Scannic has communicated after their report that they want to try to renegotiate contracts. Have they been in contact with you? And do you see any risk that you need to lower your rents? No, we don't actually see that as a big risk. Most of their contracts are fairly long. So I think we only have a couple of negotiations in the coming years. So that is not going to be notable for the island. We would also expect that the market will come back and performing in a few years' time as well. So we don't see that as a big risk. And we also prefer to talk with customers directly and not in media. Yes. Thank you. And just a detailed question also in P and L. You have other income and costs which came from plus SEK6 1,000,000 Q3 last year to minus SEK26 1,000,000. Even though it's quite small numbers, it has some impact on the total. Can you explain what this is related to? That is related to our own operations on hotel side. Okay. And the activity in the 3rd quarter remained quite low in terms of transactions, but it's normally much higher in the Q4. Do you expect that the transaction volume will improve in Q4 this year as well? And do you expect that Balder can capitalize out of this? Yes, we absolutely that is our ambition, and we hope that, that will be the outcome. One final question regarding your reserve development. It seems like you didn't start any new development projects in the Q3 while we have seen a quite high activity in some peers, you did postpone some planned starts during the spring. What's the outlook for Q4 and for 2021 in terms of starts? I think we expect just if you take Sweden and Denmark, we expect to make construction costs start for approximately 3,000 apartments. And then if you add Finland to that, I would expect at least around 500. So maybe around 3,500 partners will be constructed to start during Q4 and 2001. Q4 2021 combined, yes. Okay. Thank you very much for taking my questions. Thanks. There's some questions coming through. And due to people can't hear your questions and your answers, I'm just going to quickly take another person's name and then introduce the next person. So bear with me one second. I'll be back shortly. And the next question comes from Johan Hell from Svenska Dagblad. Go ahead. Your line is now open. Yes, hello. I'm wondering about in the report, you tell about your biggest customers and among them are Scandic Hotels and also Wynn Hotel. Could you specify a little bit more about the hotel situation? In our P and L now, we have the sort of the fixed or minimum rents. So we don't anticipate turnover rents if you look at the balance figures. So I mean that's good to know that our rental income is quite much lower than in a normal situation. Otherwise, Scandic is a big tenant and we in hotel and we have some other hotel operators as well. We had it for a long time. But how much lower than normal has it been? No, it's very it's very, very big difference because in some we have 1 or 2 extreme case with just turnover rent. In some cases, it's only fixed rent and some leases is a combination. So it's not one type of contract. So they are very different in this hotel portfolio. Scandic, you told that they are now from now, from this month, stopping full rent paying full rent to because of the pandemic. And then what do you how many hotels are concerned in Balder from this? I think maybe 10 or how many is currently do we have, Markus? Yes, something like that. What do you mean stop paying rent? I didn't read the cashier question there. Well, they are they're telling that they are not paying full rents anymore from they told yesterday. I'm just misunderstanding they will be paying full rents according to their agreement. Excuse me? I think it's a misunderstanding. Scandic is paying full rents according to their agreements. Well, they tell that in central biggest cities, in the Central positions, they will not. It's they're negotiating new deals in Central We have no information on that ourselves. So then I think we haven't seen that. So I don't think we should comment on what they might do. And if you think you ask in that case, but we don't know. Yes. But another question is that you're you have Nordic Choice Outters as a customer also and you're building a new hotel for them in Gothenburg. That deal was made just before COVID. Can you comment a little bit on that? The construction is doing going forward in Horizon Plan and it will be completed in mid-twenty 23. So there are no other news on that. There might be contraction. Now at the same time, as we are talking, Skanska was also reporting, and they tell that they think that there will be concerns for the offices. And they think it's probable that there will be a low demand in future. So both hotels and offices could be affected more longer time than we thought earlier this year. What is your picture of this? Our impression is that the activity is very high on the offices. I mean, we have signed a few leases this week, which is very big for our company. So we feel that the activity is just as it was before COVID, I would say. So we don't see any lower activities there. And just to guess what is going to happen with the office markets going forward, it's very difficult. So I think it's too early to have a view on that. Okay. Thank you so much. Thank you. The next question comes from Frank Smith from Prisma Investment. It's Markus Schmidt, but doesn't matter actually. Good morning. I have three questions, if I may. One is on your hotel assets. I think current market intelligence implies somehow that the total assets could be structurally valued lower by about 15% to 20% as a ballpark number post COVID. Is that a valuation you could agree to? Or is it a bit too early to comment on this, what's the consequence of the pandemic is for hotel assets? I think it's too early for us to comment on that. Okay. And then on your debt maturity profile, I'm wondering if you want to keep the debt maturity profile as it is or if you plan to shift it a bit more to the right, skewed to the right to avoid running into pressure in a crisis like the beginning of the year. I mean, the crisis did not hurt you really, but I would assume that extending the average maturity would not be so expansive for a company of your quality, given the interest rate compression for particularly for investment grade rated companies. So is it, let's say, a financial target for you to bring it more to the right? That's the question. I think we have on average almost 6 years today, and I think that is fairly long for a Scandinavian company. So I think we are fairly happy to be on leverage around 6 years. Okay. Because I'm just looking at the year 2020. It's very favorable terms. We don't mind having more to the right. I mean, we're not against it, but there's always this balance between pricing and how much to the right you want to be. But I agree that if it's very favorable conditions, we wouldn't mind going to the right. From my perspective, I mean, totally agree with the same. But from my perspective, I feel a little bit uncomfortable when I look on the years 2020 2021, and it's not a big number, but not a small number as well. So if you could shift that more to the right, bring it into 26%, 27%, 28% or so, it would be costly a little bit, but maybe would take pressure away from you and the people like me asking these stupid questions. So think it's very, very, very wise and normal questions actually. I mean, this is something we think about all the time, the debt structure. So I think it's very good to be on top of that. But you can say already today, we have available facilities and cash to cover all the maturities in 2020 and 2021. We don't have to borrow money until 2022, if worse comes worse. Okay. Understood. And finally, on your strategy, will you target also more central European markets and assets? Or is it or is this not on the agenda for you? I see companies like Akerlios going to Germany, for instance. Is it something you have in mind as well? Or do you feel comfortable in your geographies? Right now, we are not doing that. But I mean, we can always I mean, it's always interesting to see return compared to risk and also diversification. So I mean, we're not again right now, we're pretty focused on the Nordic countries still. I think we have a lot to do here. We're still small and we have a lot of opportunities. Okay. Good. Understood. Thank you very much. Thanks. Before we let the next person ask a question. The next one comes from Markus Henriksen from Pareto. Please go ahead. Your line is now open. Good morning, Markus and Erik. I have a question regarding like for like. What was it adjusted for the burden from hotels? So it was 1%, but if we adjust for that. I guess it would have been in the area 2.5% to 3% somewhere. All right. Thank you. And then a follow-up on the margin on co ops. Your first said was very strong, very strong margin, and now it's much lower. Should we expect 10% margin or 20%? You mentioned that, of course, it differs between all your projects. But what do you think would be the ballpark margin? It will be very irregular figures from quarter to quarter. So I think it's set as you look at this year by year even if it's very long. You have to have a long attention span in that case. But over time, we think 10 is too low for us. So we have higher ambitions. On the other hand, I think it will be hard to have more than 20%. So I would say more like 15 ish. That's very irregular from quarter to quarter. You can also say the margin looks a bit weaker than it actually is also in the quarter because we book marketing costs over every quarter. And if we have low income on sales, that is going to be effective, the margin, because of that. So we book marketing cost even if we don't have any projects that we are taking the results from. Understood. So long term perspective and then 15% margin is reached out. That's our ambition. Yes. And then also a follow-up on revaluations. I think Jan pointed at this, but several other companies have made significant uplifts on residentials during Q3. So you mentioned that as well, that you have uplifts on residential, but still you must have a lot of burdening on other parts, like you mentioned St. Petersburg and hotels. But could you highlight a bit more are you a bit more cautious than other companies for residential? I think so. I mean, the value changes you can see is more projects related. So we haven't really changed the yields on the overall portfolio there. So no change change. It's project related, the positive changes. So that actually means we're more cautious. That will be the conclusion. That's correct. And then last question regarding transaction markets. Do you rate Norway higher than London at the moment? No. We are always we don't want to decide beforehand what's good or bad. So we look at it always case by case. So my ambition is to always be neutral before I look at something. So we think the UK also can be interesting. But now we have a better platform in Norway because of this deal. So it's easier for us to look at more things in Norway than it was before the deal with ABN. So it will bring some positive effects for us over time. The next question comes from Filip Halvay from Danske Bank. Please go ahead. Your line is now open. Thank you, and good morning, Erik and Markus. I just had two questions here in regards to both the investment market and your investment activity. I think it was in your Q1 report that you, Eric, mentioned that you saw opportunities arising due to the ongoing situation at that time. Would you say that those opportunities are still around or have the general improvement in the economy and the markets, so to speak, reduced those opportunities or are there perhaps new opportunities now? I think to be to have the big picture, it's a bit reduced because it didn't turn out to be that bad as I might have feared in the beginning. But there are still some opportunities for sure. But I mean, everybody knows that this so far haven't been that bad in the real estate market. So of course, stronger market for us means actually less opportunities. So you have a bit of both, but there's still something that could be interesting. Okay. And to sort of allude to this, I think you mentioned in the last report here or on the last call that your feeling was that buyers needed to come closest to sellers to be able to close a deal. I would assume what you just said that that is still the case Or do you experience any shift in the market when you're looking for new assets? My guess is that Bayer, will need to sell it rather than the other way around because there are too many buyers or maybe not too many, but there aren't many buyers. So the market has been performing stronger than what I was guessing half a year ago. So and I mean, I think it's much driven by the all the companies are strong and have cash flow and investment capacity. Institutions are, I mean, selling and buying. And then you also have international investors with a lot of money. So and interest rates so low for so long time. So I think it's driven by very strong investor demand in general, and that sort of affects the whole market actually. So stronger than what I would than what I guessed quarter or 2 ago. Yes. Okay. But does that mean like if you look on the listed companies right now, there is quite a few companies trading at quite hefty discounts. So are you potentially looking at the stock market as well, not just in Sweden, but throughout the Nordics or maybe in some other countries as well? Yes. We look at everything. Yes. Okay. Thank you for taking my questions. Thank you very much. The next question comes from Frederic Sion from Carnegie. Please go ahead. Your line is now open. Good morning, Erik and Markus. I'll keep it short since there has been so many questions already asked. Your peer in Finland, Koyama, report this morning. And one of the things they stated was that there's been an increased supply in the rental housing market in Helsinki, and that has impacted their occupancy rate. How do you see the vacancy rate developing in Sato? And does that influence any decision making with regards to new project in Finland? You had the correct observation. There's been more a lot of completions in Helsinki and also a bit more complicated to actually make leases. They have been more locked down mood in Finland than in Sweden. So there are a bit softer figures from both Coimao and Sato. No, not dramatically, but I think in Sato, it's maybe 1% lower occupancy or something like that. Rent is stable. So my guess is that the market there will move sort of the sideline for maybe half a year or a year. And then the long term trend will still come back that everybody wants to move to Helsinki, Tampere and Turku. But Finland has been a bit weaker and there have been more locked down than other markets. But we will still start projects if we think it makes sense. And I mean new projects, perhaps even 5% or sometimes even more, and existing market could be at 4%. So it still makes sense to do developments. If we follow it closely and I mean if the markets turn out to be even softer, then we don't have to start new investments. So that's the good thing about it that then we can delay. So we're pretty confident about the long term trend, and we are flexible in our short term behavior. There is no more questions coming through, so I will hand the call. Oh, there was a late one coming. I'm so sorry. We have another follow-up question from Jan Ehrfeldt from Kepler Cheuvreux. The final one here. Have you any guidance for completions of apartments in the Q4? Thanks, Wijerik. If you take on the development for selling property selling apartments, is that what you're asking for? Or is it going to be easier? Yes. Yes. Around 150 apartments we expect to complete during Q4 on the selling side. 150? Okay. Thanks very much. Thank you. And thank you everybody for participating. We appreciate this and have a nice day. Thank you. Thanks. Bye bye. Bye bye. Thank you for joining today's