Welcome to the Balder Q3 report presentation. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing pound key five on their telephone keypad. Now, I will hand the conference over to IR Jonas Eriksson. Please go ahead.
Hi, everyone. Welcome to Balder's call for the third quarter results. With me, I have Erik Selin, CEO, and Ewa Wassberg, CFO, and we'll take you through some slides briefly and then open up for questions. Please, Erik.
Thank you, Jonas. Looking at Balder at a glance, we had, as of Q3, a property value of SEK 215 billion, occupancy rate 96%. We had debt to asset of 49.6. NAV stands at 85.6 per share, and the portfolio is Nordic exposure with 55% residential and 45% commercial. Looking specifically at Q3 numbers, the rental income is up 7% compared to last year, and the NOI also up 7%. Profits from property management decreased marginally to 1.36 per share, and the reason is higher financing cost compared to the same period last year. Profit from property management in earnings capacity is up 4% and now at 5.16, and we had rental growth like for like 3.6%.
Next slide here shows the Earnings Capacity. This is a figure we show every quarter, and it's just the numbers exactly per that date. It's not the forecast. It's how it looks on those specific quarter end. Here you can see then the earnings and also earnings per share. As you can see, we are at least flat or hopefully a bit upward trend now. The property portfolio, as I mentioned, is very well diversified between the Nordic countries and also diversified if we look at the property category. Residential is by far the largest, roughly half of the portfolio, and then we have office, retail, hotel, some logistics as well. Important to remember the diversification.
And looking back, we have a long-term track record of over time increasing NAV per share and also earnings per share. This slide shows back to 2015. And if you're interested, you can also look up all the way back to 2005. So we had a long-term positive trend if you look at the long time horizon. And also looking at other metrics, net debt to assets was obviously much higher in the beginning, and then it trended down and been a bit up last year due to lower values. But the short term, very short-term trend is lower LTV and occupancy rate been very stable for many years at 96%.
During the quarter, we have received an updated ESG ratings from both MSCI and Sustainalytics. In the MSCI rating, we got upgraded to BBB , which is primarily a result of our work in environmental sustainability, including green leases and environmentally certified buildings. Regarding Sustainalytics, our rating has been adjusted from 12.3 to 14.9. Even if we are still well within a low-risk range, and so this is not necessarily a big deal for us, deterioration is a little confounding for us. Sustainalytics have introduced a new methodology, and it seems that there is no fundamental change in how we come out per se, but the relative weight they put on different metrics explain the change.
But the results are quite different from when we had a run-through of the preliminary outcome versus the final outcome, so we need to understand a little bit more details here. Boverket has released preliminary limits for energy performance per property type for commercial properties in preparation of the EPB implementation. When mapping our properties within each segment, it all feels fairly undramatic. The proportion of our portfolio not meeting the criteria is quite small, and we see no upcoming CapEx needs, which falls outside our regular investment in energy efficiency that we want to do for ROI reasons. Funding condition has continued to improve, and we have a slightly higher portion of debt in the capital market versus last quarter. It's up by 2% due to bond issuance in the third quarter.
Swap rates have been attractive during the quarter, and we have continued to roll or even slightly increase swaps in the quarter. Worth noticing is that the majority of these new hedges were done during the later part of the quarter, so we'll not see full effect from them in Q3. During the quarter, we issued 4.5 billion in the bond market, both in SEK and in EUR, through our Finnish subsidiary, Sato. Our available liquidity is 20 billion SEK. Normally, most of that is either in committed lines or invested, but this quarter we have had a little bit higher cash liquidity due to pre-financing of upcoming maturities, which is costing us a bit temporarily. This is not a great planning from our side.
We had hoped to be able to do some further bond buybacks and early debt redemptions, but it should improve in the coming couple of quarters. We have a net financial position that is roughly in line with that we show in the current earnings capacity, and this is the level that we will peak at, and during 2025 it will gradually decrease. Net debt to total asset has continued to decrease a little bit and is at 49.6%, and with the bond issuance, our encumbrance continues to be at very comfortable levels. Here is the usual overview of the debt maturities, split by bank loans and capital market funding. It has been business as usual, rolling maturities and pre-financing some of the upcoming 2025 maturities as well.
And if you will look at the asset liability management work that we're doing, we've obviously spent some time during this year to establish a curve in the Swedish bond market, and now we have maturities all the way out to five years. So far, it seems to be fairly well received by investors, I think. We have been fairly cautious in terms of how we do things, so trying to be very transparent and predictable, having nine months in between each maturity node, and also not issuing in between the various public transactions so that the pricing is fairly transparent. We get a lot of questions nowadays about when we will do the next Eurobond issuance as well.
And there's obviously been a very sharp tightening of pricing in the Eurobond market. I think for the whole sector, but in particular for our name. And we're now, for the first time in a long time, in a situation where our Eurobond spreads in the five-year space is actually tighter than the Swedish krona spreads. But what we've said is that we have not wanted to rush out in the bond market in Euros. We already have a lot outstanding there. And as you can see in our maturity profile that Eva showed before, a lot of that is obviously Eurobonds still outstanding. And so we look at that market early next year, probably, as we approach that.
And there's also a little bit currently less transparent pricing in the Eurobond market than what we see in Sweden, making a transaction a little bit harder. So I think it's been good so far to wait and focus on the Swedish market, and that's what we'll continue to do in Q4 as well. Then next year, we will look at it in a more broad sense. As Ewa mentioned as well, I mean, we will also focus on a little bit further deleveraging until we announce the valuation yield stabilize. And that we're seeing, I think, this quarter, and so going into next year, I think it's fair to assume that a more balanced capital allocation will be quite visible.
And I think Erik mentioned that in the CEO letter as well today, and I think that's... We now come to a point where we look forward, both from ALM and finance perspective, but also being able to tilt the focus a little bit more to the asset side again, after some hard work on the liability side for a few years. I think I'll stop there, and then we'll open up for questions.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad. The next question comes from Lars Norby from SEB. Please go ahead.
Present. We had debt-to-asset of 49.6-
Good morning.
Good morning.
Morning, Lars.
Okay, so I think you may have partly answered my first and maybe only question by what you said at the end of the presentation. But just looking at, you've been in a mode of sort of holding back on growth for quite a while. Hardly any acquisitions, not starting a lot of projects. So I'm thinking about at what point in time you can shift into more of a growth mode. Is it primarily that you like to see property values stabilize first and get that EBITDA, which is obviously moving in the right direction, coming all the way down to your target of 11.0 , or is there something else holding you back?
I think what we've said for a few quarters, Lars, is that once we see yields stabilize, which we feel now has pretty much happened, then any increase in the net operating income will translate into value increases. And with the current size of our balance sheet, if you take that value increase on the NAV, and you add the cash flow that we're generating, which is, you know, ex-CapEx, what, 4-5 billion a year, that gives such a large room that we feel like we can both make immaterial investments, and we can also continue the leveraging journey. So once we're now in this position, we can be a lot more balanced in the catalog going forward. That's what we're saying.
Just to follow up on that, to get even more sort of ammunition for growth, can you rule out that you would like to strengthen your balance sheet at some point in time through a direct or share issue?
You can never rule out anything because no one knows what's going to happen, you know, a year from now, so I think it's always unwise to do that, but you know, we're trying to keep a very rational capital allocation, and I think our message here was that now we see yields have stabilized, and with that, we get a lot more freedom in how we allocate capital in twenty 2025, and that will be a capital allocation that's gonna be a lot more growth-oriented and forward-looking.
Perfect. Thank you.
The next question comes from John Vuong from Van Lanschot Kempen. Please go ahead.
Hi, good morning. Thank you for taking my questions. Just a follow-up on the capital allocation, for next year. Where do you see the opportunities? Is this more on the acquisition side, on the development side?
It's hard to know before, actually, because the opportunities come when they come. So I think it would be some, in that case, a little of both, if I'm guessing. But a bit hard to predict.
But John, I think it's worth mentioning that we if you look at our development portfolio, we've obviously downsized that quite a bit over the last two, three years. And so, quite a lot of our development capacity that is still remaining, if you look at what is sort of starting, have started or is, you know, can be started pretty imminently, a lot of that is in our JVs and partly owned companies. And in terms of sort of ramping up investment spend in Balder, that is not something that we will do or can do in like quarters. That will always take some time because you need to get everything in order before we actually start the CapEx spend.
So that's worth keeping in mind, that our JVs, we can have a fairly decent investment agenda through projects. In Balder, it will take a little bit more time, and then acquisitions, obviously, let's see what comes up and what we think is interesting.
Thanks. And then just talking about the development portfolio that you downsized, do you still see opportunities in those where the cost of capital makes sense at the current point in the cycles?
Absolutely. It's just a matter of time. You know, we have a fantastic portfolio with very low book values, so it's just a matter of time. But we don't feel any stress to do it, sort of, say, too early. So we have this long-term horizon on this, but it is a very good potential over time.
Okay. That's clear. That's it from my side. Thank you.
Thanks.
The next question comes from Andres Toome from Green Street. Please go ahead.
Hi, good morning. My first question was about your earnings capacity, and I think you partly sort of answered the question, but, I'm seeing that your interest expense line is fairly stable, and as you know, that you've taken on more debt, during the quarter. So I was just wondering, you know, obviously, interest rates have come down on the variable rate debt. So how do you see that progressing maybe into, the next year in terms of, the debt amount that you have in the books? Is that gonna burn off when you do buybacks, or, how should we think about that?
Yeah. So I would say in this quarter, we're, if you look at our available liquidity, it's a little bit higher, but it's not that much higher than what we've had before. I think the main difference that is costing us a little bit in this quarter is that, instead of just having some available committed lines from banks that we pay a commitment fee for, we've been stuck with a bit of, bonds and other financing, where we actually pay the full interest rates, on both the pre-funded leg and what still remains in the short end. And so that is costing us a little bit more. If you look at the earnings capacity, it's important to note that is a snapshot for how things look, exactly right now.
If you look at the interest rate curve, what's priced in, in terms of interest rate cuts for the coming twelve months, that is not something that is factored into the earnings capacity. Just to be clear on that, it's with current interest rates on all levels sort of.
Understood. So yeah, basically, a variable rate interest rate coming down hasn't had the impact basically yet properly on the interest expense line there.
No. Not yet, no.
Okay. And then my second question was about as you talk about external growth, are you actually seeing on the development side that if you were to start a project today, and I'm not thinking about with your current land bank, because obviously, as you say, it's you know, you think about it as carry that cost, so it's at a lower cost base. But if you were to go to the land market today and start developments, do you think it would be actually profitable?
Depending on the location, I would say, Andres, if you have a good location, Stockholm, Gothenburg, it can work, but if you don't have a location, it's too early yet on a broader view, then I think also Copenhagen will soon make sense. Finland will be a bit later, and you can have reasonable deals in Norway also, but it's very hard to actually find any land, so a bit different situation in different part of the Nordics.
All right, perfect. And then it goes to. Yeah.
But I think it also depends very much on sort of what you're developing and how you're developing. I mean, if you look at our we have a few things in pipeline that we're working on right now, like the GoCo Science Park outside of Gothenburg. You know, that is a concept development as much as we're actually building a building. And so the tenants moving in there, they do that to be part of that community and that whole infrastructure. That's very different from just saying, "Okay, let's find a plot and buy an office building, like any other one," right? So I think you need to be mindful of what type of development you're working on.
And if you look at what we still have in the pipeline that we're working on now, it is to a fairly large extent those type of very conceptualized pre-let, and it's a very different thing from just any office space, sort of.
Understood. Thanks very much. That's it from my side.
The next question comes from Fredric Cyon from Carnegie. Please go ahead.
Good morning, Eva, Erik, and Jonas. A couple of questions, starting off with the CEO comment regarding fairly materially investment if the opportunity arises. Can you help us quantify how you think about it long term? And second of all, related to that, perhaps, how should we view that in light of the negative outlook from S&P?
Good question, Fredric. No, but I mean, we will never risk the financial metrics, you know, so obviously, S&P metrics is number one here. But what we're trying to say is that, if value stabilize and start to go up in line with rental growth and NOI growth, it will be quite substantial amounts if you calculate it. But it's hard to say an exact amount and exact the time, but we will not risk the credit metrics. And we don't have to, by the way, because once it stabilizes and values goes up, we will have a very, very strong tailwind, as you know.
With regards to real life, do you think they will stabilize now, or are we there already?
We think so. It looks like that right now, but, I mean, we have to look at it as we go along. But the feeling right now is that we are roughly around that level that it seems to be working. I mean, yields coming up and interest rates going down and yeah, that's the feeling right now, at least.
With regards to the cost of debt, it was flat quarter over quarter. We do have a positive development of the STIBOR. At the same time, you do have fixed rate favorable loans maturing next year. Assuming that the STIBOR moves down 100 basis points until year end 2025, where will the three point zero be, approximately? Is two point eight a good guess, for instance?
I think that sounds about right when we're talking sort of year end 2025. As you pointed out, there are a number of moving parts here. We have a fixed rate bond portfolio, but that is rolling off very, very slowly, and most of that is in euros, and that rolls off sort of continuously until 2031. And then you have old bank loans that we replaced with new bank loans, and there's a mix of really old ones at attractive rates, and quite a lot of it is taken up to 2022 and 2023, where rates were not as favorable. And then we obviously have the variable or short-term rate fixings that we're now rolling to lower levels.
I think what you will see is that, and I think Eva mentioned that as well, that we will peak around this level where we are now, and then you will see it starting to come down during next year. All levels are equal. I think it's gonna be a little bit more visible reduction in the second half of next year than in the first half, but you will probably start seeing it already in the first half.
Thank you. And then my final question relates to the Finnish resi market. Obviously, it's been a high vacancy there due to a number of factors. What's your current outlook on improvement in the occupancy rate for the SATO portfolio?
Yeah, for the time, if you look at it, now, we have slightly lower vacancy than one year ago. And also, like for like rent, is every month getting a bit better. So it's going slowly in the right direction. And our hope is that next year will be a bit better. So you still have a big overhang of supply of apartments, because you have so many starts in 2021, 2022, that is completed now. But it looks actually more promising than it's been doing for a long time. And we have in SATO, we have the final completions of new build in October and December, and then we have a few apartments in our other company in Finland. But... And I think the situation is pretty much the same for other companies.
I hope that it's actually past the lowest point and slowly getting better. It looks like that anyway. Like for like, it's getting better every month for us.
Perfect. Sounds promising. Thanks for all the questions, answers.
Thank you.
The next question comes from Jan Ihrfelt from Kepler. Please go ahead.
Okay. Good morning. I actually have two questions. The first one's related to Fredrik's latest question here. Do you see rental growth in Finland on Resis?
Yes. Now we have like-for-like rental growth. It was, you mean, at the worst point, this was actually a fraction negative like-for-like, and then it turned positive. I don't remember exactly, but it was some quarters ago maybe. Now we can see if we compare month-to-month, that the like-for-like is slowly getting better. So, the like-for-like in September was quite a long time ago. It was that good. So, I think it will continue. I hope so. I think so. It looks like that.
But is it fair to assume that the rental growth will be lower in Finland, compared to Sweden?
You mean next year, or what time period?
Next year. Yeah. Yes. Yes.
Hmm, I think it will be a close call, Jan. Difficult to guess.
Okay. Okay, and second question. The office market, we have seen some early signs of maybe lower interest from companies in terms of new lettings and so on, and also some kind of, I mean, risk for vacancies and so on. Could you just give us a broad picture on your view on the office market right now?
Yeah, sure. We have office mainly in Stockholm, Gothenburg, as you know, so and a very few in other places. So that is the big part. And what we can see is that it's of course a competitive market, but we don't feel that it is really bad. We have a very lot of, you know, leads and sign a lot of contracts. So for the time being, I think the rental level is pretty flat. If you have a rental contract and the tenant leaves and you find a new tenant, it seems to be flattish. But if I'm guessing, I think Stockholm is a bit tougher than Gothenburg, actually. But that can turn quickly.
For us, it will not have a big impact anyhow, you know, because office is, I think, 16%, so maybe Stockholm can be 7% in our case, so it will not move the needle in Balder. I think it will be a bit competitive in the short run, and long term, it is still, of course, interesting with Stockholm offices. Also, rent's gone up 20% in a couple of years, so it is natural that it can stay where it is for a while, I think.
Okay.
But I think it's also company by company, you can analyze it and see, Jan, if you have the top rents, you know, absolute top rents, I think could be a bigger risk if you have 12,000 or 10,000 per sq m than if you have the lower rents, if I'm guessing.
Yeah. Okay, thanks for taking my questions.
Thanks.
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