Hello, welcome to the conference call in connection with interim report January-June 2022. My name is Ben, and I will be your coordinator for today's event. Please note for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad. If you require assistance at any point, please press star zero, and you will be connected to an operator. I will now hand you over to your host, Mr. Erik Selin, CEO, to begin today's conference. Thank you.
Thank you. Good morning, everybody, and welcome to this conference call for Balder Q2 interim report. If we look at some figures for the first half of 2022, we can see that in Q2, isolated, the rental income was 20% better, 20% increase from last year, and the profit from property management was SEK 1.5 billion, and that is increase of 29% and also 29% per share. For the whole of the first half of 2022, it's similar figures. We have rental income up 19% and profit from property management up 28% compared to last year. Now I'm at page two.
If we also then compare one year ago and see how it looks, we can see that the earnings capacity is 11% better than one year ago. We have net debt to assets around the same level as previous quarter, 46.5. Like-for-like rental growth is at 2.9% this quarter and NAV per share SEK 92. Now if we go to page three, we have the current earnings capacity. What you can see there is, if we compare the last quarters, we can see an upward trend in rental income. You see also an upward trend in, of course, net financial cost, because we have increased interest rates from Riksbank and will also have from ECB.
All in all, the increased rental income covers increased financial costs. We have a slightly better earnings capacity compared to last quarter. So far we are absorbing higher interest rates with the underlying business. Page four, the property portfolio, no big changes there. It's 80% is in capitals and larger cities. The split between residential and commercial is also very similar. Roughly half is residential and the other half is commercial properties of different kinds. It's office, retail, some industrial logistics and some other properties. Now moving to page five, property development. In our property development, we have basically two categories of property development or new construction that we build. One is properties where we intend to keep it long-term under our own management.
The majority of that is residential, but we also have a few prelet properties. We have one school, we have an office building, we have hotel. We also have the other category that is properties that we build to sell, and we sell them to retail flat by flat. It's mostly in Sweden, but some projects even in Denmark, Finland and Norway. You have in this development two different categories. If we look ahead a bit and see how will this look like in 2023, 2024. Because right now, it's not likely that we start a lot of projects near-term, because of higher construction costs and also uncertainties about construction costs.
We also have some uncertainty about prices for apartments and also higher interest rates that make it less attractive to develop rental residentials. Just an example, we looked at what happens if we from now don't start new projects and how will this play out then in 2023 and 2024. We can see that the net investment for us in that case will be slightly negative. How can that be? The explanation is that development properties for sale, the amount we are then going to receive will be actually higher than the amount it takes to complete properties that we will keep for management.
We will have the effect that NOI from projects will on a yearly basis, once they are all completed, increase our NOI by SEK 500 million per year. This is an interesting thing to know. We will actually then have SEK 500 million more NOI, but no net investment, actually slightly negative when we look at it. Everything can change. There can be better, maybe circumstances, if we are far ahead, but interesting to see how this be. We have no project that we have to start. It's absolutely up to us if we think it's positive or advantageous, we can start, otherwise we can just wait. I thought it was interesting to look at those figures.
If we take page six, financing, we have increased the credit facilities lately with SEK 10 billion. We now have available liquidity and credit facilities of SEK 23 billion as of this half year report. 70% of the debt is hedged for fixed rate loans, and we meet all our financial targets as you see in this graph as well. Page seven, we continue with financing there. There you can see the interest rate maturity structure. If we look at that to begin with, we can see that if we look at 2022, 2023, 2024 combined, it's roughly SEK 55 billion. We roughly have SEK 50 billion net debt. We have some cash commercial papers and so on that we own.
Those SEK 50 billion will most likely be at higher cost than we have now, given the outlook for interest rate hike. On the other hand, we most likely get higher indexation on our rental contracts. We have this SEK 50 billion will be more expensive, but we have yielding assets of SEK 200 billion. It's an interesting comparison. Of course, we don't know the outcome, but we have SEK 200 billion working for us in a higher pace, most likely, and SEK 50 billion getting more expensive. Looking at debt maturity structure, you have it there on every year, and this is the total structure. This is not the bonds. If we look at 2022 first, we have one bond, but that was actually paid back first of June.
From now and the rest of 2022, we have no bonds expiring. In 2023, we have roughly SEK 14-15 billion if we take everything. If we compare the bond that expires with liquidity, we already cover all of those maturities. Of course, we have the cash flow as well on top of that. You can see it continues, more or less the same amounts every year going forward. A stable situation there, and I've been increasing the liquidity, as you can see, lately, the last 1-2 months. Just to have the optionality if the bond market is not attractive, we can just wait with that for a while.
I also think we can increase liquidity even more if we think it will not be interesting even in 2024, then I think we can increase and then wait even one more year, if we think it's better to not go to the bond market. Hopefully things will normalize and we like to be in both markets obviously, but I think it's always good to have alternative and optionality. Looking at page eight, here I have some different things I wanted to give some update on. Also I have been talking to a lot of investors lately, so I picked up some questions that is often asked. If we start with recent events, that was one and a half months ago.
There had been some misunderstanding that Balder was actually a part of this sort of insider thing. That is not the case. It is former employees that is a part of it, and they have left their positions, but there's been some misunderstanding. Nevertheless, we have tightened governance anyhow, and we are now you can say basically in line with how banks and fund managers work. You basically have to have permission to do anything. This is not Balder shares only. We want people to have Balder shares, but if it's other companies that where someone in the Balder management have an insider position, normally through a board position or through a big ownership, then we say that they don't buy and sell those share unless you get permission.
There can be good reasons to own a share, but then we have to have a process for it that is in place now to avoid that anything like this can happen. On top of companies where we have insider positions, we also added companies where the perception can be that we have it even though we don't, because it can cause the same damage actually. It's very similar to banks right now, and that's been well received. I also got some questions about associated companies. For us, it's always been the case that is a part of the normal investment activity and capital allocation strategy.
If there's a market that I think is interesting, but I don't have access to direct deal flow or don't find deals that is attractively priced, we can consider to be owners in a company if we like the other owners. It's not more complicated, and it's a part of the capital allocation process to reach interesting markets where we might not have the same possibility ourselves. We also get good input from our partners and increases our network and deal flow. It's worth to mention that we have never made any transactions between Balder and Associates, because I got those questions as well, but we never bought or sold from Balder to Associate or the other way around. I think it's interesting to be clear on that as well.
In these associated companies, we have no obligation to buy and sell anything, so we have no put to call options or nothing like that. It's based on a good cooperation with good partners. I think it's also interesting to mention a bit about indexation and rent increases going forward. Of course, this is a guessing game and nobody knows. Inflation figures is very high all over the world right now, but I think it will also be very volatile. I'm not the right person to make forecasts for this. But I think in our portfolio, it can be good to know that there are different kind of rental adjustments or indexations. In general, with few exceptions, it is like this, that commercial properties and Danish residentials, they are linked to the CPI in the respective country, obviously.
Commercial properties, Danish residentials, in the contracts, you normally follow CPI. Yearly negotiation, that is for Swedish residentials. It's a regulated market, so you have yearly negotiation with a tenant association. Normally, the outcome is, over longer time periods, you can see that the outcome is slightly higher than inflation. On a yearly basis, they can be decoupled. Typically, if you have zero inflation, you still get some rental income. My guess is that if we now have very high inflation, we will not get that high rent increases as inflation. You can say the results sort of smooths out different years with extremely high or low inflation. Over longer time period, it's been actually a bit higher increases than inflation.
That is not so surprising because over time, you should have some real GDP growth, and then you have the salaries and purchasing power growing faster than CPI. That also leads that you can afford to pay slightly higher rents, even in real terms over time. That is even if you have market rent or CPI linked when contract expires over time, my guess is you will have a slightly higher trend than CPI. We have another category, market rent. For us, that is Finnish residentials. There, the rental level and the rental movement is much more, of course, than dependent on how is the market, how is supply, demand, how is the economy.
In Finland or in Helsinki in particular, there's been a bit too much supply, perhaps, last 1-2 years, very much construction going on. What we saw earlier was that the forecast is that that will slow down, so you will have less supply compared to before. If I'm guessing, I think it will be slowing down a bit more due to the same reason that we think that construction costs are higher and it's a bit messy. If you have higher interest rates, that also squeezes the margin. My guess is that the supply will be less than forecast, and that will be, of course, supportive for the market. Vacancies are slowly getting better, actually.
We have a slow positive trend already now, where we guessed before that was maybe for next year. As of today, it's actually a bit better than we might have guessed, lately. Let's see if it continues. We also have another category that is turnover rent. In our case, it's mostly hotels. A few retail contracts can also be turnover rent. We have one fixed part and then a turnover rent on top of that. Very small part for us. In our case, it's hotels, but it's only some of the hotels that has a rental floor and then turnover rent on top of that.
Many of our hotels have actually fixed rent, but some of them has this combination, and I think one or two has pure turnover rent. This covers basically our portfolio. These four categories. The biggest is then CPI linked because it's all commercial properties and Danish residential. That is over 50%. The question is what will the average of all of this be? I don't have an exact figure for that because then you have to guess about the inflation, you have to guess about negotiations and so on. Right now, maybe you can guess inflation, perhaps 7%. It was higher. There came a figure yesterday or day before yesterday. The negotiation is very difficult to know actually.
I think it will be not that much, maybe 2-3%. If it will be something like this, then the average perhaps can be 4-5%. It's very hard to predict actually. This is more of a way to see roughly how is the total thing developing. Right now you can say CPI is high. Negotiations, I think a bit lower. Finnish residential will be better, but I think next year more than this year. In cases with turnover and hotel and retail, there will be much bigger increases in percent. That is not such a big category for us. But they are moving a lot faster. You also saw that in Pandox figures today. That was an update.
Then next slide, you have the share, long-term development where you can now see that there's a big discount and lower valuation, price compared to cash flow and so on. The page 10, 11 is the P&L. I don't think I go through that. It's easy to read, anyhow. The overall situation is this is quite stable right now in the market. They still predict some real GDP growth for next year. Beyond that, even though interest rates move up, we have a stable, portfolio, extremely diversified, and we increase liquidity to be able to be flexible, when it comes to bond maturities. All in all, this can be that higher interest rates most likely, roughly will be compensated with index and completed projects if we look at it.
It can be a bit irregular between quarters and so on. Indexation is year-end. The long-term trend right now looks like higher interest rates will roughly be absorbed by higher income. That was the presentation. Now let's see if there are any questions.
As a reminder, if you would like to ask a question, please press star one on your telephone keypad. To withdraw your question, please press star two. Please ensure your line remains unmuted locally. You will be advised when to ask your question. The first question comes from the line of Fredric Cyon, calling from Carnegie. Please go ahead.
That you mentioned for 2023, some of them are hybrid related. What do you see as opportunities to switch some of the bond loans into bank facilities during next year?
In general, I think that is very doable. We already now have available facilities to take care of all the bonds 2023, so we don't even need more. I think it's if we want more, it's not a problem. It can be the case that bank financing will increase the part and lower part of bonds, but it's a very volatile market, so anything can happen. For the moment, it looks much more attractive with bank financing. We have big headroom there because we also want to keep this unencumbered asset level good. There's a big headroom for us to have another mix in the funding.
With regards to investments in the existing portfolio and projects, it was SEK 4.1 billion during the first half of 2022. I'm aware of the long lead times.
Mm-hmm.
I mean, it's a very high level historically for Balder. Moving into 2023, you talked about investments probably going to be a lot lower. Can you quantify that?
Yeah. I tried to explain that we will invest complete projects that is ongoing. On the other hand, a lot of properties will sort of go out of the balance sheet because we build and sell to consumers. It's basically just time that has to pass by. Most of it is already sold, so it just has to be completed. If we don't do anything, the forecast now is that investment will be less than we receive when we sell the apartments. That's why I try to highlight that 2023, 2024. I mean, we don't have to start any more constructions if we don't want to. If we don't do that will be roughly the same sum.
Right now, if we guessed it looks like a negative investment of SEK 200 million. But it can boom on quarter- to- quarter also. You can't say really exactly. That's right. It looks like negative. This is slowing down in 2022 and then 2023, 2024, if we don't do anything new, it will actually be nothing. Then we have the properties being completed, and that will generate NOI. We will get SEK 500 million more NOI, but no debt.
My final question relates to acquisitional opportunities. There seems to be some for sellers in the market. Do you foresee opportunities near term for Balder, or do you think it's still a wait-and-see game to see where property yields are heading?
I think it can be the right thing to wait and see. So far I haven't had any forced sellers that call me at least, but maybe there will be or maybe there are, but I haven't seen anything. The latest processes that we have been into, they actually has been very strong demand still, and prices more or less the same level as before. We will see in the autumn or when it comes to year-end how this plays out. I think you can expect quite low activity from our side. That is my guess.
Okay. Thank you very much. Those were all my questions.
Thank you.
The next question comes from the line of Andres Toome, calling from Green Street. Please go ahead.
Hi, good morning. I had a first question about just general credit conditions and also the credit facility you have drawn. Maybe you can give some guidance in so far as what are the terms of the available liquidity you have at the moment, in so far as the interest rate goes and what sort of period you can use that facility for. You mentioned you could cover next year bond maturities, but go beyond that.
Yes, it's normally longer than one year. Normally we borrow money for two, three, four, five years sometimes. Bank loan, I mean, the thing is that you always prolong them. So far I never experienced a bank loan that you don't prolong. It's more a question of the terms, if you think it makes sense, longer duration or shorter. Sometimes it's not a big difference in pricing, and sometimes there are. This is something that we always have to look at the total portfolio and see what makes sense, you know, and what doesn't make sense. We increase bank facilities to be able to...
I mean, let's say that the bond market is dysfunctional or if the interest rate is too high, then we can simply pay the bonds back and don't use bond for a while. But hopefully it normalizes. I mean, sooner or later it always does. We want to be long-term in the bond market, but right now I think it can make sense to have headroom to be able to wait for a year or two if it's a tough situation out there.
The interest rate on these available facilities, it's not agreed upon yet, right? You will agree
Yeah, yeah.
with time.
Oh, yeah, you have the interest rate is agreed the margin, but then it's different if you take floating fixed and so on. I mean, you don't know that before. You can say in the banking system that they are the same as before, I would say. I haven't seen any big changes there. But then, of course, you have to guess about what is the interest rate later on. Obviously it's higher. The question is how much higher.
Understood. Maybe you can add some color insofar as what happened to like-for-like rent growth pace. I mean, it's accelerated quite a bit. Just question on what's driving that, what sort of sectors, geographies?
No, it's general, better than last quarter, but there can be movements from quarter- to- quarter also, because, for example, in residential, you don't have the adjustment at the same time. That's why it can be, you know, it can move from one quarter to another sometimes. Sometimes you adjust first of February, sometime first of May, first of April. This moves around. The long-term trend is much easier to focus on, you know. These short-term things, they can be sort of better figures sometimes and less good sometimes. I wouldn't pay too much attention to that, so. Of course, if you look last year, you have higher indexations in general and a very strong rental market in general. It's reasonable to believe like for like will continue to improve.
If we're guessing that, I mean, next year will probably be a couple of percent higher, something like that.
My last question pertains to valuation changes in the second quarter. Just wondering what is driving that. Is it mainly project completions or is it something also on the stabilized asset side?
Yeah, it's a bit better for NOI forecast, and then it's also completed projects. It's very small change in general. There are no yield changes. It comes from projects and forecasted a bit better NOI going forward, but they haven't put into valuations forecasted CPI for this year. You can do that, but we haven't. That effect will be later.
All right. Thank you.
Thank you very much.
The next question is from Jan Ihrfelt, calling from Kepler Cheuvreux. Please go ahead.
Okay. Thanks for taking my questions. First one regards your equity ratio, which is currently at 40.8% at the same time as your target is above 40%, so pretty close there. Is there anything you adjust for to make that figure better or could you comment upon that fact?
You mean going forward or?
Yeah. If you consider it when you do certain decisions.
I mean, we want to be over 40%. Going forward, if we change the target, that can be. We haven't changed it this quarter. You can say if we, if you don't do anything and everything is just flat, then it improves automatically with earnings. If we want it to be higher, we can basically be just still, and then we will have earnings coming in, and that will drive the figure upward slowly. We also will have earnings from all the completion of projects 2023, 2024. Because also when we sell to retail consumers, the profit is booked when we actually hand over the keys, so it's zero until we do that.
Those profits will be irregular, but they will show up 2023, 2024, and that will of course automatically, if everything else is equal, give us a bit higher equity ratio.
My second question relates to your yields on Swedish residentials. If you just could comment upon what kind of yields do you have for your Swedish residentials or and if you see any risk that the yields are expanding in this segment.
I think I don't have the exact number. I think it's around 4%. If it's expanding or not, I think it's a bit difficult to have forecasts on yield, actually. I mean, the system is more or less, we always see how is the market, and then we make valuations that is as close to market as we can do, so to speak. I think maybe the lowest yield that we've seen in the market last year that has been 2.5%, I think that level will not be possible to get, actually, unless you're in central Stockholm or Gothenburg, because then it's not a yield case, it's more of a square meter case or a trophy case.
If you take mid-sized cities where there have been transactions for 2.25%, 2.5%, I think that will be very hard to achieve. On the other hand, those transactions were made way above valuations, because what it used to be was that you have a big premium, especially for bigger portfolios. This portfolio premium, I think, will not be there anymore. On the other hand, the external valuations didn't take in portfolio premiums. If those values comes down, it's not necessarily so that they are lower than the current valuations. You had sort of two markets before. One that is the valuation for, let's say, X, and then a big portfolio was sold for X, 1.3X or 1.2X. I think that will not be the case going forward.
That is my guess.
You're on a total basis, Swedish residentials are booked at around 4%.
Yes, that's true.
The next question comes from Jaafar Ibaraghen, calling from Lombard Odier. Please go ahead. Please ensure your line is unmuted.
Hello, can you hear me?
Now we hear you.
Okay. Thank you very much for taking my question. First you heard that [audio distortion] did recently an operation to reduce debt and increase its equity. You said that you have the contract from your bank. Could you comment on that recent operation as a good opportunity they used to take in front of the bond market price mostly? After, could you give us some more detail regarding the interest rates if you draw in full your available credit line to cover need in 2023, please?
I'm not quite sure I heard the question completely, but I think you ask about if we sort of exchange bonds for bank loans and use credit lines, what's adequate and the cost for it?
Yeah. It's an angle to see the question. I mean, if you have available credit line, why don't... I mean, it could be an opportunity to reduce your bond exposure at a good price opportunity.
Yeah.
If they are able to be drawn, huh?
Yeah, yeah. Yep.
It could be the
Now I understand.
the step-up
Yeah.
of interest rate if you draw your credit line.
Yes, I understand the question. Yeah, we can draw the credit lines tomorrow, today, anytime. I agree that there could be interesting buying opportunities in the bond market, for us, actually buying back bonds. We also wrote that in the report, if you read the full report, we mentioned that that can be the case.
Okay. To be much clearer, if you draw your credit line, what could be the margin in full?
Oh, the margin. I think roughly margin is around 1% area. Can be slightly higher, slightly lower. The margin. [audio distortion]
[crosstalk]
Around there.
If we imagine that you're going through your available credit line, and if you increase this available credit line amount, what is the commitment the bank asks you to, I mean, to cover them somewhere. What is the commitment in terms of increasing cash position in hand on your balance sheet?
Oh, no.
What's the target?
No bank don't require cash on hand. Bank loans are basically two different categories. We have secured bank financing and unsecured bank financing. You can just take mortgage loan, you know, with a security in the real estate. We have a lot of included assets, you know, so it's not a problem to make that kind of financing if you want to. We also have a lot of unsecured bank financing. It's a mix.
Okay.
Between unsecured and secured bank. We can do both. We are doing both actually.
What's the target in terms of increasing secured loan in the next two years?
No, we don't have.
We don't have a target for it actually, but we have big headroom to increase security if we want to, compared to where we're sort of supposed to be given the bond rate. We have a big headroom, so if we want to, we can do much more secure, but we don't have a target. I mean,
If you increase your secured loan, you will generate more unsecured shareholder. It could be interesting to buy back them before the maturity at a good price.
Exactly.
In terms of assets, if I heard very well, you are looking forward to sell some flats to your renter. Could you go a bit more into details, what the target you have in mind in terms of asset sale to increase cash position?
Now it's already sold more or less, you know. We sell to consumer, so most of it is already sold, but we get the money once it's completed.
Okay.
It's not the sale after they're going forward. The normal thing is, in the Nordic countries at least, that you sell the apartments 1-2, sometimes even 3 year before completion. Then it's just time has to pass by. Also construction has to run, you know, accordingly. That's why the asset that will be sold, they are basically already sold, the majority of it. It's just the time has to pass by.
Okay.
It's actually very simple. It will automatically leave us, and then we complete yielding projects. The net investment will be around zero for the projects 2023, 2024, unless we do new projects. The completed cash flow properties will start to generate on a yearly basis around SEK 500 million NOI. Those that is already sort of done. It's just time has to pass by.
Okay. In front of that, you have available credit line or more liquidity
Yeah.
from banks.
Yes, we have increased credit lines SEK 10 billion just lately. We have SEK 23 billion. We have the cash flow. If we don't do anything, we have cash flow since we don't pay dividend, you know. Of course, we will buy and sell something. If we look at years to come, we always buy and sell something. This is more an example that you can say ongoing projects, we can't really stop them. It would be totally crazy. It's interesting to say, okay, what could happen in 2023, 2024 with projects already ongoing? There you can see that the net investment will be, let's say, zero. It can be good to know since many investors are focused on funding. I think it was interesting information to know that projects 2023, 2024 don't require funding.
It can be quarterly uneven, you know, but if you take the whole period, because it's much focus now on bond that's expiring, and of course, if you have to invest, you have to fund that on top of that. In our case, the net investment, if we don't do anything new, it's around zero. We have bonds expiring, but then we have cash flow, and we already have the credit facilities.
In terms of loan to value, and in terms of cash position for 2003, what is the target you have, new commitment you have?
Right now we have a target to be below 50% loan-to-value. Once we have a new target, we will communicate it obviously. We've been saying that over time we will trend for slightly lower LTV and higher equity ratio. If we adjust the target, then we communicate it. Right now the targets are 40% equity ratio and below 50% LTV. If I'm guessing the trend over time will be lower. As I said, new targets will be communicated when or if they come.
Okay. In cash in hand, what is the target you would like to reach?
No, we don't have a target for cash in hand. I really prefer actually to have facilities rather than cash on hand. It's normally more cost efficient, but we sold some properties, and so we also even bought commercial papers, because we had a bit too much cash. The ideal situation is to really have a little cash on hand, but then have facilities instead. Normally, that is more cost efficient, if you understand what I mean.
Yes.
It's normally better not to have cash and then you borrow the money on the other end. It's on the other hand, very hard to get it to zero because, I mean, we have different companies in different countries and so on. Zero is hard to get, but we don't like to have too much cash on hand because it's expensive. It's better to have facilities.
Okay. My line of question should be perhaps more on the liquidity on the bond markets. You know, Nordic real estate company are very silent. That's a big issue because the transfer and I would say big liquidity on senior unsecured and junior bonds. What you guys are you going to do to increase communication and to in terms of your day-to-day business or doing a GIC with your bank advisor in order to communicate much better, to increase liquidity and to help you to refi in due time?
I don't know what other companies will do, but that is my ambition to improve this communication and also to be able to reach out to more international investors and also to explain more things. Because lately, when I talked with a lot of different international bond investors, I can see that there's a big knowledge gap actually. I think.
Yeah.
I talked with a lot of them. I mean, it's not so strange if you're a bit far away. I mean, how can you have all the knowledge? I realize there's a knowledge gap and an information gap that will be very positive to make that less. I have some ambition to improve this significantly in our case at least. I don't know what other companies will do, but that is my ambition.
Your bank advisor list a way to that?
No, I don't need a bank advisor to understand that actually. I think it's pretty obvious when I talk to investors that there's a need for improvement in information. Banks help me to find all the different investors because that is a bit complicated because it's maybe, I mean, 100 different or perhaps even more. In that, I need the bank's help to find all relevant potential investors. That is important. Otherwise, to make better information, I think that is pretty obvious that that will be good for everyone, for us and for the investors obviously.
Thank you.
The next question is from Simen Mortensen calling from DNB. Please go ahead.
Well, thank you, but all my question has been answered already. Take the next guy in line.
Okay. Thanks, Simen.
The next question comes from Clark McPherson from Clearance Capital. Please go ahead.
Morning. All my questions have been answered as well. Thank you.
The next question is from [Anton Näslund] calling from [Fastighetsverket AB]. Please go ahead.
Thank you. [Anton Näslund], reporter, maybe some questions on different subjects than before. First of all, Erik, maybe you answered this already, but just a clarification on property development.
Mm-hmm.
With this new situation across the world with increased interest rates and inflation. How do you handle that? Will you put planned development projects on hold, or are they quite just?
Yes. We already did. I think now to start construction for rental apartments is not that advantageous for us because you have higher construction costs and also very volatile construction costs, and hard to get fixed prices. Then you can't increase rent in line with increased costs, and then you have higher funding costs. In my view, it doesn't seem attractive to invest in rentals in general right now. We will wait for that. We will postpone until it will be more favorable. If you take the market to sell co-ops, for some sector. And I think projects in good location, if they will still be makes sense to do them. But I think it's good to wait, because I think it's more likely as we get best term and construction cost later on than now. And we also have uncertainty in the pricing in the markets for co-ops and so on, so I think it makes sense to wait for a while. I don't see any big advantages with starting now compared to waiting. And for us, it's not a problem to wait, I mean we have a cash flow generating properties, and we have a lot of projects to be completed 2023 and some 2024. For us, I think it makes much more sense to pospone building projects.
Okay, perfect. It's been a quite special month for you and not Balder, as you clarified earlier. First of all, Ewa Wassberg was recruited as new head of finance.
Yeah.
Can you say something about that recruitment and why she was a perfect match, as you say?
Kind of strange question. She starts after the summer, and she had the same position at Fabege, so I think she's well qualified.
Okay. Do you wanna elaborate anything on the recent events, including Marcus Hansson and Magnus Björndahl?
No. What is the question?
The question is, you said in a statement that you were shocked about this and, surprised with the verdict. Are you still that?
Yeah. Nothing new happened.
Okay. Why are you surprised? Do you think they are innocent?
I really don't understand you. Nothing new happened, and they are replaced. They don't have their positions, so we are not a part of it.
Okay. You don't wanna say anything about your emotions during these quarters at all about the recent events?
No, I think you have a weird question, but the surprise came from I asked 10 different lawyers, and nobody believed in this outcome. If I wasn't surprised asking 10 experts, that would have been kind of strange if I thought I knew better than 10 different other guys, but maybe you would have.
No. The thing is that we're trying to reach you by phone, but couldn't reach you, so that's why I asked those questions in this event. Yeah, it's pretty strange to ask me now, but it's due to.
Yeah, it's strange, and I have no new information.
Okay. Thank you.
Thanks.
The next question is from David Johnson, Private Investor. Please go ahead.
My questions have already been answered. Thank you.
Thanks.
Next question is from Ria Gandhi, calling from Mizuho International. Please go ahead.
Hi. Thank you for taking my question. In terms of accessing funding, how are you currently evaluating the trade-off between senior bonds, hybrids, and any other terms of funding?
Right now you can say that bank facilities, bank market is functioning extremely well, and the bond market is volatile and a bit complicated. That's the reason why we increased facilities a lot lately, so we can have the flexibility between bonds and using facilities. I mean, this is a volatile market, so I hope long term, and I think long term we will use all sources as before. I think right now it makes sense to have more flexibility than you normally perhaps have. That's why we increased available facilities a lot, to have the optionality to take bonds or to not take bonds.
Are you looking to expand further in the bond market in the future when it's a bit more stable?
Yeah. If we think it makes sense, we can do it, and otherwise we will not.
I just had another question. The CFO in the first half of 2022 was, I think, around SEK 1.5 billion versus the CFI of, I think, SEK -6.8 billion. If in this environment of tricky capital markets, are you going to continue investing this heavily?
No, that's not likely. I think investment activity will slow down dramatically. I tried to explain, you know, ongoing projects that we already I mean, they are being built, so, I mean, we'll complete them. That's why I also tried to explain that if you take all those combined and look ahead 2023, 2024, the net investment is actually zero because we will be selling as much as we will spend on new construction. Then we will of course buy and sell something on top of that. We always sell something and buy something. The big picture is that my guess is this will be low activity, and then we have strong cash flow generating capacity that can reduce debt and if we want to.
The net investment for projects will be, let's say, 0, and then it can be some investment for tenants and so on. I think it will be less activity.
Thank you so much.
That's all my questions.
Yes, thanks.
The next question is from Pranava Boyidapu, calling from Barclays. Please go ahead. Please ensure your line is unmuted.
Accordingly, if the scheme becomes effective, those Uniti shareholders who are on the Uniti register on the permitted dividend record date and who continue to hold the Uniti shares until the scheme record date at 7 P.M. on Thursday, 28 July 2022, will receive the scheme consideration of $5, comprising a fully frank dividend of 10.5 cents per Uniti share.
Payable by Uniti plus $4.895 cash per Uniti share payable by MBC BidCo.
Depending on individual shareholder circumstances.
[crosstalk]
The franking credit attaching to the dividend will deliver additional value of up to approximately $0.045 per share.
I think we will come back to that later on.
The rollover shareholders, being Uniti's managing director and chief executive officer, Mr. Michael Simmons, and Chief of Infrastructure Networks & Technology, Mr. Geoffrey Aldridge, and entities controlled by them respectively, where applicable, have elected to receive a predetermined portion of their scheme consideration as shares in the ultimate holding company of MBC BidCo, which I will refer to as the scrip consideration, being an entity named MBC TopCo Pty Ltd, with the remainder to be received as cash consideration. Under the voting and rollover agreements, which are described in further detail in section 10.7.
I think the call date is March next year. We will come back to it.
Okay. Thank you. My second question is around external valuations. If I see like, it's around like 20% is valued externally and another like some 20-25% is second party opinion on the external valuations we have done. I think, for other companies, it's more like fully externally valued. Is there any reason that we have less amount of external valuations in case of Balder?
No, we actually never did everything externally. I think my general thinking is that the company should have a good knowledge about their own assets and the balance sheet and have the, you know, knowledge to make correct evaluations. We all do external as a second opinion, you can say. You also have the situation, if you have 10 properties at the same place and you make valuation for one, then you actually know the other 9 if they are similar. It will be very expensive to do 10 valuations, more or less unnecessary. That's why I think it doesn't make sense to evaluate 100% because it will add no more information, basically. If we look back, we've been listed for 17 years.
You can say the average has always been that external valuations are slightly higher than our internal. If you take the average over a 17-year period, externals tend to be slightly higher than our internal valuations.
Got it. Probably my last question is, given the current share prices, like, are you looking to dispose some properties and do property share buybacks or something like that?
Yeah, we will always try to do what makes sense, you know, in general. That can be an alternative, of course, if we think it's good for the whole picture.
Got it. Thank you.
The next question is from [Philip Pillar], calling from Deka Investment. Please go ahead.
Hello. Thanks for taking my questions. Can you hear me?
Yes, I hear you.
Great. My question would be on your associated companies, because you are invested in quite some associated companies, and I wonder, do you have main analysis like which of the associated companies have publicly traded equities outstanding and where the publicly traded equity trades now below the price for which it is in the books.
Yes, we have a few of them traded publicly, and right now there is a gap, but the principle is that if you think it's a permanent gap, you adjust the value, and if it's a temporary gap, you don't adjust it. If you have a surplus value, you don't adjust it. If you look at this as a group and time passes by, my guess is that the values will over time actually be a bit lower than the actual value because you always book just equity, you know, on top of the carrying value. You in effect book 100% deferred tax as time goes along. I think the long term,
it will be slightly undervalued if you compare to the real value.
Can you tell how big this gap is?
No, I don't have the exact figure actually, but I mean, we follow the principles we have to follow since we listed in IFRS, you know.
Okay. Thank you.
The next question is from Yi Qian from Atlanticomnium . Please go ahead.
Hi. Thank you for the presentation. I have a few questions. The first one is if you wonder, could you share the percentage of the portfolios that are really turnover-based, and whether the rent flow is CPI linked or not?
Yeah. I actually talked about that before. Turnover rent is very little for us. It's just that it is one category, and in our case, it's some of the hotel properties that is turnover rent. Normally, we have a floor and then turnover rent on top of it. A few retail leases are turnover rent. I would guess in our portfolio maybe 3-4% perhaps. It's not much.
Okay.
It is a category.
That's why I mentioned it. The biggest part is CPI link, because normally all commercial leases, even if it's Norway, Finland, Denmark, Sweden.
Mm.
It's just CPI linked.
Okay.
On top of that you have Danish residential link to Danish CPI, so that is the biggest category. Then you have market rents for SC Finland, and you have negotiations yearly in Sweden Resi. We have sort of four categories. That there can be some exceptions even in this actually, but to get the big picture.
Okay.
Four systems.
Yeah. Fully understood. It's just, for the turnover base, I'm just curious whether the rent flow is also CPI linked or maybe it's?
Yeah, yeah.
Based on your contract.
Yeah.
Okay.
Yeah, the rent is CPI linked. Yeah, good question. That is true. The floor is CPI linked.
Okay.
But hopefully-
Okay. Okay.
The idea is not to be but it-
Mm-hmm.
Is the same in COVID times.
Okay. Understood. Also under the current situation, is there any chance, I mean, even though you've answered it before, is there any chance that you might consider having your full portfolio like external value that you reassure the market, like, you give a number of the external valuation versus your own internal valuation so that the market could better understand your, like, internal model, et cetera?
Oh, we have the same model, internal or external.
Yeah.
So it's not-
Okay.
Not a difference actually. As I said, over time we are normally slightly lower than the external valuations.
Okay.
Over time.
Okay.
There are never any big discrepancies. I mean, we do this 24/7. I've done it for 30 years, so I think it.
Yeah.
It would be not good enough if I didn't have an opinion about values since this is all I do.
Okay. Also on the hybrid, I'm not sure to what extent you can comment also because of the rating consideration. Because some other peers, they comment like what scenario they might just replace the hybrid with a 50% of debt and 50% equity. For you, whether maybe issuing a bit more Class B shares could be an option for you, or it's not something like in your considerations at the moment.
No. I mean, it's very hard to communicate about it before we actually decide something, you know, because this is important to do the right way, because there are quite strict rules. We have S&P rating. It's actually a bit easy to have Moody's or Fitch hybrids because then they look at the hybrids separately. S&P look at all hybrids as more or less one part of the capital structure. We have to be very careful and do it very thoroughly before we do or say anything about it. I think it's a bit unfortunate that it is this way, but actually I have to sort of follow the guidelines from S&P, how to handle it. It is a bit difficult for all companies having these hybrids because-
Okay.
I mean.
Yeah.
I think March is the call date for us.
Yeah.
It's not that far away until we have to say anything under all circumstances.
Oh, okay. Understood. My final question is, when I talk to the Swedish banks, they basically said they can support the corporates. I mean the real estate companies for the near term, but they might not be able to refinance everything in the coming 1 or 2 years. I'm just curious, like, even though you have secured some credit facilities, but do you see like if the market condition remains at the current stress level, would you continue to have a lot of access to the bank loans or maybe at one moment the door will be closed as well?
If the situation is like it is now, then it will not be a problem.
Okay, okay.
That means you will never hear a bank say that they take all outstanding bond loans. That would be a crazy thing to say because it might not even be their customers, you know. They can't say anything. It would be very weird if they did, actually. They look at it, you know, case by case. I think I mean, it's different borrowers, companies, different sort of assets and so on. I think they look at it case by case. They should do. Actually they do. As a general statement, they can't say that they take all bonds. That would be crazy of them to say, you know.
Okay. Yeah, just to make sure I say. Okay, thank you very much. That's all my questions for the moment.
Thanks.
Thank you.
Thank you.
The next question is from Jan Ihrfelt calling from Kepler Cheuvreux. Please go ahead.
Just two more questions. I was cut away. The first question relates to your apartment that you're going to sell, the co-ops. How large portion is already sold in that portfolio that you currently construct?
The absolute majority. I don't have the exact figure, but the absolute majority is already sold. I think for 2023, more or less everything, and 2024 we've already started to sell as well. The most is 2023, but some goes into 2024. I think average maybe, I don't know, 75, 80, 85% perhaps.
My last question regards to your, the cost structure of your projects. Have you, I mean, kind of-
Very good question, Jan. You can say the absolute majority is fixed prices with few exceptions. The cost side is well under control. If you are to start new things now, it's much more difficult. If you have-
That's why you don't do it.
No, that's why I think it's not advantageous for us to do it because you have high cost and uncertain cost. On top of that, you have uncertain values when you're going to sell it, or if you keep it, the yields will be lower than before and interest rate higher. I think you can perhaps find better alternatives. For the time being, I think it makes sense to wait, but things can change later on, and there can be lower construction prices or if there are other changes. It can also come subsidiaries from the government, you don't know. From time to time, that shows up as well. Maybe if it slows down a lot in 2023, there can be some subsidies in 2024 perhaps, but nobody knows.
I think it's important to always be able to change if all the circumstances change.
Okay. Thanks for taking my questions.
Thank you.
The next question is from Tobias Kaj from Lannebo Fonder. Please go ahead.
Thank you. Good morning, everyone.
Good morning.
Hope all is well with you. I have a couple of questions. First of all, thanks for the clarification regarding net investments in the developments. You also have some ongoing developments in your JVs. Do you think there is a risk for any requirement of capital injections?
No.
to end of JV?
No, no. The b ig thing is Trenum with the AP Fund, and it's already funded.
Okay, excellent. Thank you. Second question regarding buybacks of bonds. Do you think it's possible to do like significant volumes of buybacks in the market, so to say or do you need to make a general offer to be able to do buybacks in the bond market?
I don't know exactly. I think it remains to be seen. I get the signals that there are perhaps low quotes on prices, but not necessarily a lot of sellers. I don't know, actually. I think nobody knows, but I think it's at least an interesting alternative to look at from time to time. It doesn't used to be like that, but I mean, now you can consider to buy a bond instead of buying anything else, actually. So I think it's interesting look into that. But volumes, I don't know, actually. I don't know.
Okay. Thank you very much.
Thanks.
Next question is from David Shnaps calling from CreditSights . Please go ahead.
Yeah. Hi, thank you. Just again on the hybrids, really. I know you can't say too much or you're not giving us too much, but can you just confirm that there's everything still on the table in terms of calling, extending, probably not replacing?
I mean, we can do anything, obviously. I mean, it's our choice. I think the thing is that we have to be very careful with communication about this, and we have to do it in collaboration or, you know, with S&P informed and so on. That's why it's a bit difficult for all companies with S&P hybrids to make a lot of statements and say a lot of things about it, you know. It's hard to communicate about it. Unfortunately, it is not. I wish it was in another situation, since they look at all hybrids more or less as one thing and a part of the capital structure, which it is, we have to be extra careful how we handle it.
If you have Moody's or Fitch hybrids, it's not the same because then you can handle them separately. That's why it's complicated for companies with these hybrids.
Sure. I would say it's a kind of less complicated view because you don't have as many hybrids outstanding as some of your peers.
Absolutely correct. We have very little, so it's less complicated for us. Absolutely correct.
Okay. Thank you very much.
Thank you.
The next question is from Bart Reidsma, calling from PGGM Investment. Please go ahead.
Hi, Erik. Thanks a lot for the call today and, good to see-
Hi, Bart.
The Q2 results were good.
Right.
Just one question to check. Previously, you had the press release on the sale of Trenum, which I think was at a very good level. That one is not included in these statements yet, right? As that was effective first of July.
You mean the sale in, t hat's made in Trenum?
Yeah, indeed. That is not in the Q3 results.
That is included. Decision was 6:30, actually. It was a government decision, you know, so it was a very special situation. The government actually communicated before they even had their decision, so it was a very different situation. I never actually experienced anything quite like that you can have a communication before you take the decision, but that was actually what they did. The minister was out the day before they had their meeting. For us, it was very complicated, you know, having a minister saying that they have bought it and we were waiting for the decision at the same time. It is included.
Okay, I see.
Yeah.
Okay, it is included. Because then I would have expected that the change in value of this realized, that would have been somewhat higher.
In that case, it was SEK 450 million in the JV structure.
Okay. That makes sense. Yeah.
Mm-hmm.
That's not directly into the realized portion.
No, it's actually, we owned it together with the Swedish state, you know, with the AP Fund.
Yeah, exactly. Okay. Yeah. Thanks for your clarification. Yeah. Then one follow-up, perhaps on this equity to assets ratio. You mentioned before, right, that this will basically go up naturally if you don't do anything. It's you have a bit of comfort now of a 40.8% versus 40% target.
Mm-hmm.
Of course, well, there are a ton of questions on these hybrids, right? With the series call in March 2023.
Mm-hmm.
Yeah. Can you basically elaborate a bit on how fast this grow naturally, also considering what you have said on basically stalling most of the development, versus the impact if indeed the upcoming hybrids wouldn't be replaced or
You mean what the effect will be if it's not replaced or?
Yeah, indeed. If it just would be called and not replaced
Uh-huh.
with indeed a 50%
I see.
Yeah, 50% equity portion.
Okay, I understand the question. Yeah. If you call it and not replace, then if you have S&P hybrids, they consider all hybrids called, even if you haven't. If it is a Moody hybrid and you call it, they don't consider other hybrids called, you know. They look at it separately, while S&P look at it as sort of one part of the capital structure. As we said in the last question, we have very little hybrid in comparison to the total. For us, it's not a big difference. I mean, the alternatives is not that big different, but if we call one and don't do anything, then they would consider the other one called as well.
Yeah.
Uh.
No, I understand that.
If we don't call the first one, then they will not consider the other one called, obviously. There are different-
Okay.
There are lots of different, you know, combinations in this case, even though it's only two hybrids. Lot of different combinations and yeah.
Yeah.
But-
Yeah.
Number one.
Basically, you.
That's not a very big thing.
Yeah. Basically you would lose then SEK 4.5 billion of equity, right? Because 50%-
Yes.
of this hybrid covered equity.
Yeah.
Given the natural improvement in the equity asset ratio, like, would that lead towards, well, a ratio that is below your target of 40% or will basically the natural improvement be sufficient to still be above?
I mean, there are a lot of things you have to calculate in that case, so I don't know exactly about that.
Okay. Would it be like a huge deal if it would be slightly below? Or is it I mean, is it more like a target where you roughly want to be, or is it really something that you want to be firmly above?
You mean the equity target?
Yeah, the equity to assets target of 40%.
We have the target is to be above 40. I mean, I don't mind if it's more over 40, but I mean, the target is to be above 40.
Yeah, exactly. I mean, my point more is that if this removal of equity credit of SEK 4.5 billion-
Mm-hmm.
would lead to, say, this target being 39.5%
Yeah, something like.
Would that be an issue as such? Or, would you say, "Okay, it's still fairly close to 40%"?
I haven't thought about it that exactly, actually. You have a point in that it's not a big change. I mean, independent of what alternative there is, it's not a big change in the numbers.
Yeah. Okay. Thank you. Thanks, Erik.
Thank you.
The next question is from Megi Leka calling from PGIM. Please go ahead.
Hi. Thank you for taking my question. I wanted to ask about the optionality to raise equity and is that something you'd do in the current environment? Also related to that, how would you look at a preference ranking of raising bank debt versus raising equity? Thank you.
I think we have to evaluate that, you know, more or less from day to day and see what is the best alternative for the overall, you know, situation and options going forward. I think it's very hard to have a fixed opinion about it. In general, it is not good to raise equity if you have a big discount in the share price. I think it's. Then you have to have very good reasons to do it. Maybe in some cases you have. I mean, we always have all alternatives and compare them, you know.
I think that is the way to handle it, that you always consider all alternatives all the time, more or less, and then try to come to a wise conclusion for what is the best for the total, if you understand what I mean.
Okay. At least short term, we should expect you to sooner raise bank debt than go out raise common equity?
Yeah. Short term, yeah, absolutely. Yeah.
Thank you.
We currently have no question coming through. As a final reminder, if you would like to ask a question, please press star one now. There are no further questions, so I will now hand you back to your host to conclude today's conference.
Okay. Thank you very much, everybody. If there's something that pops up in your mind afterward, you can always send me an email at erik.selin@balder.se. Thank you, everybody.
Thank you for joining today's call. You may now disconnect. Host, please stay connected on the line and await further instruction.