Hello, welcome to the conference call in connection with interim report January to September 2022. My name is Priscilla, and I'll be your coordinator for today's event. Please note this call is being recorded and your lines will be on listen only. However, the analysts will have the opportunity to ask questions at the end during the Q&A session. This can be done by pressing star one on your telephone keypad to register your question. 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, the CEO, and Ewa Wassberg, the Head of Finance, to begin today's conference. Thank you.
Hi, good morning. This is Erik Selin, and I also have with me Ewa Wassberg, who will introduce herself. We will go through our report today, and afterwards we have Q&A. We have Q&A only with analysts, and other questions can be emailed to me or Ewa or to media@balder if it's media questions. Q&A only with equity analysts.
Yes. I would like to take the moment to introduce myself as the new Head of Finance at Balder, Ewa Wassberg, since September. This is my first presentation of many to come.
Very good. Looking at Q3, we had rental income up 16% compared to last year. Profit from property management basically stable due to higher financing costs net than last year. Otherwise, there were quite strong development on all result lines. Earnings capacity is also flat from the quarter before. Obviously it is increasing interest rate that affects us. To mitigate it, we have actually higher NOI and other income. So far we are handling the increased interest rates with our own increased underlying earnings. Net debt 47.7%. Like-for-like rental growth 2.5%. NAV stands at 93 per share. Moving on to page three.
You can also see comparison from last year at this time, rental income costs and so on. It basically shows the same thing, but it's easy way to get the numbers fast. You can see, we're 17% ahead of last year. You also have the years before as a whole year as a comparison. On slide four, you can also see the earnings capacity quarter by quarter from this quarter obviously, and then going back two years in time. You can see if we look back one year or maybe the beginning of this year, what's happening is that everybody knows increased interest rates because hikes from central banks. So far we managed to keep our earnings capacity despite this much higher interest rates cost.
The portfolio, page five, really no material change from last quarter or from any quarter more or less. It's always concentrated to the capitals and bigger cities in the Nordics. Residential is a bit over half of the portfolio, and then office, some retail and other properties. It's been a stable development this quarter in general in the rental market. Property development, as you most likely know, we have two categories. One is that we build to keep and have under our management for a long time. And the other segment is that we build residentials and sell to consumers, primarily in Sweden. We do some in Finland and some in Denmark as well.
Right now we think it's the most rational thing to be very careful with new developments because we have higher construction costs, but you don't have higher sale prices, rather lower, and the rent cannot be increased to compensate higher construction costs. If we look at 2023 and 2024 combined, if we sum up all the investment that will be needed to complete all the projects, and then we look at what will the amount that we will receive selling a lot of these assets, in fact, a lot of them are already sold, but they have to be completed, then the sum of that is around SEK 0. Actually best guess now is minus SEK 100 million.
Net investments in property development right now with the things ongoing is combined actually zero for the years 2023 and 2024. We think in general there will be smaller investments, but that can also be driven by customers. Of course, if there's very strong demand from tenants, that can be investment that makes sense to do. There will be much lower activity in general for us. I think this goes for most of the companies as well.
Over to financing on slide seven. To the left, you can see a graph with the net debt to total assets over time in combination to portfolio value. As you can see, it's 47.7% as of Q3. Well in line with our long-term target of 50%. Our available liquidity and credit facilities amounts to SEK 26 billion, which is an increase from year-end about 13 billion. The liquidity will be used to cover maturing bonds. 70% of the debt is hedged with interest swaps and fixed rate loans, and all our financial targets are met, which you will see on the next slide. Slide eight, you will see our debt maturity structure. As you can see, we have a great portion maturing in 2023, which available liquidity will cover.
To the right, you have our interest maturity structure with an interest rate swap. Average interest rate about 1.9 due to our 70% fixed. As you probably have seen our press release, we will repurchase bonds in 2023. To our key figures, our equity asset ratio 40.4%, well in line with our long time target of 40%. ICR 5.2, well above our target of 2.0. Net debt to EBITDA 13.5. A key ratio which we expect to improve over the next coming years.
Yes. That will be improved by two things. We will have higher NOI from existing portfolio. On top of that, as I mentioned, development and projects, they will be completed and give us NOI. On the other hand, no more debt since we will have the same cash flow from completed projects that we sell. We think this is an important metric to be a bit stronger on because that will give us the capacity to handle a bit higher interest rates. That ratio will come down a bit as we go along. Then looking at share prices, that is not such a funny story nowadays. It's gone down quite a lot. This is. You can see the ratios on page nine.
Of course, we think the long-term trend is if we continue to manage our assets and have strong cash flow over time, NAV will follow, and over time, share price will follow as well. After this you have two slides with the income and balance sheet, and I don't think I will go through that. It's more of an appendix. Again, it's not a big difference from the previous quarter. With this we can have Q&A. As we said, equity analysts Q&A and other questions we can take through email. If it's financing, Ewa primarily, and if it's media, you go through Balder Media. If there's something else, you can email me. Now we go for Q&A if there are any questions.
Thank you. Dear equity analysts, as a reminder, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. We'll pause for a moment to allow the analysts to have an opportunity to signal for questions. It appears there is no further questions from the analysts.
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Okay. Dear analysts, if you would like to ask a question or make a contribution on today's call, please press star one on your telephone keypad. We'll take our first question from Fredrik Cyon.
Good morning, Erik and Ewa.
Good morning.
Good morning. Your line is open.
Are you there?
Yeah.
We hear you.
Lovely. A few questions from my side. There was another company reporting yesterday, making quite an interesting move, whereby they intend to separately list residential portfolio. Since you have quite a large proportion of the assets in residential, and I would assume that you would have the means to fund that through the banking system, which could be an option for you, since you can then reduce your secured lending. Is that an alternative for you? Is this something you considering to evaluate?
Good question. Yes. That is also something that we can do if we find it positive for us. It is an interesting idea to spin off a part of course. We are not looking at it now, but we will see later on. Obviously it's important to think about that. If you think size as such is a big problem, you can always spin off parts of companies. It's very relevant to have that track as well. Yes, it's possible for us, and let's see what happens.
That's clear. Moving over to the fixed and swaps portfolio of interest rates. You state that 70% is either fixed or with swaps. Some companies do report this, the swap agreements, in a slightly different fashion. I just wanted to be clear on the swap maturities. The table you had in the presentation of about 18 billion of interest rates maturing until year-end 2022-2024. Is that the proportion of swaps also that will mature? Or do I have to look at a different table then?
The interest maturity structure, that is fixed loans and swaps combined. In our case, it's a big part actually loans, but we don't separate it. This is sort of, it can be either way. In general, we don't have that. We have a lot of fixed loan, but not so many swaps. The net is what you see in the maturity structure. Of course, during quarters, we also make new ones and, you know, change them somehow. It's it changes from quarter to quarter, obviously. The total
Perhaps I can rephrase the question. If you do no new fixed loan, fixed rate, or new swaps, the 70%, what will it likely look like in, let's say, one and a half years' time? It's gonna differ substantially from that?
Oh, okay. It will be like 55-60. If we do nothing, 2023 and nothing, 2024. We say that we do nothing for two years, then the 70 will be 55-58 maybe.
Okay. Thanks a lot. Two more questions, if I may. On the S&P risk assessment, with their rating outlook, what are the key ratios that you would like to have more wiggle room, compared to their assessment? Or are you just happy with the current ratios, key ratios you have?
Yeah.
The upgrade of the rating.
Yeah. Rating is a hot topic these days. If we look at our S&P rating, you have different metrics that you sort of follow or measure. In our case, if you look at metrics like ICR, we have a very big headroom compared to the rating. If we look at business risk, it's actually much stronger rating than our rating because it's diversified portfolio where basically nothing happens. Then they look at liquidity and other things. But the thing, the metric that is sort of that we watch most carefully is LTV, basically. They measure it in another way. They measure debt compared to debt plus equity, but it is an LTV-like metric.
That metric for us should be in the range 55%-57%, their way of counting LTV. I think right now we are around, I haven't calculated this report actually, but I think it's maybe around 53%-ish, and the range 55%-57%. You also have that you can read from S&P that if the LTV goes above 60%, there will be rating pressure then for lower rating, with higher LTV, of course. On the other hand, if LTV goes, let's say, well below 50%, then you will have rating pressure for a higher rating. In our case, LTV is actually the one that is that we have to think about correctly.
They are. We have good headroom in the other metrics, and I think we will continue to have because interest rates are fixed in a big way, and also we will have higher NOI, and that also will have a better interest rate coverage. Or we will be able to handle some higher interest rates.
Mm-hmm.
It's quite easy to follow actually.
I'm glad to hear. Then the final question on investments. I appreciate you mentioning the development investments, net investments going into 2023 and 2024. The big chunk of investments historically has been within the property management portfolio.
Mm-hmm.
In the first nine months, you invested about SEK 6.2 billion, if I'm not mistaken. Let's say we perhaps end the year at SEK 8 billion. I appreciate that that is a function, of course, of the tenant demand and your own plans. Can you shed some light on what that number will look like next year?
Yeah. I think our guess is that it will not be so much CapEx or investment. Maybe SEK 200 million per quarter. If you look at the existing portfolio, something like that. Can be less, can be more. Otherwise to buy and sell assets, I mean that's something you can do if you want to. You don't have to. We have very few deals actually ongoing, but there will not be zero. We will buy something and sell something. For the time being, we can also. If we basically don't do anything, then we will have reduced debt automatically with the cash flow. We'll have a lower activity. If you look at the reports, all investment goes sort of under one line.
That's why I think it's important to know that development pipeline net will be zero. That's zero. On top you have some investments for portfolio and otherwise it's buy and sell. We have very, very few commitments buying or selling. It's fractions actually. It will be a bit boring for a while, but I think it makes sense right now to have headroom in general. On the positive side is that it's good demand from tenants and everything is working well otherwise. It's good to have some headroom in volatile times. I think it's just good to have some headroom in volatile times. Maybe you also saw that today we tendered. We made an offer to buy back all the Swedish 2023 bonds for those who want to sell their bonds maturing in 2023.
We offered to buy back 100% of them without issuing any new bonds.
Thank you very much, Fredrick Cyon . Those were all my questions.
Thanks.
Thank you, Fredrik. We'll now take our next question from Neeraj Kumar from Barclays. Please go ahead. Your line is open.
Good afternoon. Hello. Thank you for taking my questions. Just continuing on what you just said regarding your tenders. We see that it's just for SEK bonds and the Euro bond is not included. Do you have any comments for that?
No. We do one transaction at a time. A while ago we tendered some hybrids, and today we did the SEK bonds and we will do bond transactions, you know, as we go along for a long time.
Okay. Thank you. Talking about hybrids, clearly the environment has changed a lot over the past couple of months. I know there are restrictions on what you can and what you can't say, but do you see any change in your expectations regarding calling hybrids in 2023 beginning from what it was last quarter?
No. As you said, it's. You have to communicate it, communicate about it, you know, at the same time in a structured way. It's a bit difficult to talk about in general, you know. We haven't basically changed anything ourselves.
Okay. Thank you. Coming on to valuations, just trying to understand a bit over here. I guess around 25% is externally valued and 26%, the second party opinion is taken. Can you please help us understand how this works? Like, because we have seen few companies sort of marking the yields higher whereas few companies sort of keeping the yields same. Can you please help us understand the dynamics a bit over here?
Normally, we don't do so many external valuations. It can be good to know. Now we've been making a lot because we are active in financing and increasing facilities and so on. That's why we've done much more external valuations than we normally do. If you sum all these external valuations up, there are slightly higher than our internal valuations. My view is that if you have, let's say, five properties in a block, and then you make just a valuation on one of them, you know actually the yield and everything for the rest of the five. To get 100%, you don't need to do 100% actually. It will just cost a lot of money. That's why we don't think it makes sense to do 100% really.
In this case, 50. I think actually you can see that. I would guess it sums up maybe 90 or something in real, almost everything.
Well in line with our own internal.
Yes. Slightly higher. I think 0.5% or something like that.
Yeah.
It's very similar values they come up with. It's also good to know it's mentioned in the Q3 report, but we haven't calculated any indexation in the yields. There are different methods. Some you can say that if you think indexation is a certain percent, you can sort of put it in the valuations quarter by quarter. We have always said that when we have the figure, we put it in. There is sort of a lag between our valuation yield and what happens year-end because now we have so high indexation. We always did the same that we have zero until we have it and then we put it in. Every
If everything is the same values, the yields will automatically then come up next quarter. Different companies do it in a different way, you know. We could, of course, have said that we anticipate 8%, and then we could have said that we have higher yield requirements. Yeah, it's different, you know, approaches.
Got it. That's very helpful. Probably the last question from my side. We know that Moody's rating is unsolicited, but in the last publication, they put the rating on review for downgrade. That means it's probably going from IG to high yield if they were to downgrade. Do you have any implications from that event if there is any?
I think it's as a company, I mean, there's no link for us between the Moody's unsolicited rating and bonds or something like that. Of course it's not good, and I know very many bond investors are very upset about this. I don't know, we can't stop anyone from rating us if they want to on their own behalf, so to speak.
Right.
Yeah. It's not good obviously, but I don't know if we can do anything about it.
Have you tried to engage with Moody's in terms of like, whatever their concerns are or in getting into discussion with them or something like that?
We talked a little with them, but then they said everything looks good. We were very surprised actually that you can say that everything looks good and come to a totally different conclusion later on. We really. It's like a black box in a way.
The evaluation was done on the Q2 figures. Hopefully, our report will shed some light on some of the assumptions made by-
Yeah.
The, uh-
Yeah. Let's hope so. I saw that they were guessing higher, you know, net debt to EBITDA, and it will actually be lower. We can see that some of the guesses are for sure wrong. Yeah, let's see.
Okay. Thank you very much for taking all of my questions.
Thank you.
Thank you, Mr. Neeraj. We'll now move on to our next question from Tobias Kaj from Lannebo Fonder. Please go ahead. Your line is open.
Thank you and good morning. If we'll include your hybrids, you have some SEK 36 billion in bond maturities until the end of 2025, while you now have SEK 26 billion in unused credit facilities. Does that imply that you would need more facilities if you're not able to refinance anything in the bond market? Or do you think that your cash generation after investments over the next three years will kind of cover the remaining SEK 10 billion?
I think the cash generation can cover, but we will have more facilities anyway. We're having good discussion about even more facilities as we speak. I think we will have some more facilities, but then of course you are right that if we just stay still, the cash generation will automatically make it able for us to just pay back SEK 25 without borrowing money at all.
Regarding your developments, you have almost SEK 12 billion in total investments for own management.
Yes.
How are they funded today? Are they already funded with secured facilities or will you be able to fund them at secured facilities as they are completed?
It's a combination. Some of them are paid in cash with our own money, so to speak. In some cases we have construction financing and then when it's completed, you convert the construction financing to term loan normally. It's a mix actually. The liquidity effect net, if we complete everything, will actually be a bit more cash because we have some construction financing, and that will be bigger up until completion, and the net investment is zero. Net, if you include the financing we have today and then complete 2023, 2024, net, we will have cash out of.
Oh, okay. Regarding those developments for own management, if you make any development gains on those, how are they booked? Do you recognize those gradually or are they on completion?
It's different. The one that we keep, we have to do gradually, in. If we go back in time, we've just kept it at book value, but then PwC, he said that we actually have to sort of reevaluate, as we go along with those. The other one that we sell to consumers, there we don't do anything. When we hand over the keys, we book the profit. There you have a lag between actually the profit shows up in the quarter when we hand over the keys. There will be some big profits showing up in 2023 from completions. It's two different systems for two different categories. I understand it can be a bit tricky to keep track of, but we just have to follow, you know, IFRS accounting rules.
Oh, yeah. Regarding your planned starts, you reduced them quite a lot in this quarter, and I understand that the construction costs are rising and so on. Have you also been kind of burdened from a rating perspective when you have written that you expect to start a lot of new development?
Yeah, it can be, actually. Good point. I don't have exact answer on that, but that can be the case.
Yeah. Do you know if Moody's, for example, in their recent negative outlook, had that as a worry with continued investments?
I don't know for sure, but most likely they would have guessed on big investments and yeah, most likely. Most likely.
One final question, if I may. Regarding your co-op development, how big part of that portfolio is already sold?
In general, you can say that the 2023 completions are more or less sold. Everything is maybe 2%-3% or almost nothing. We have some to sell for the 2024 completions, but 2023 you can consider sold. It's just that time has to pass by, and then we complete, hand over the keys, book the profit, and get the money out of the system. I don't see any big risk there, even if the co-op market is weaker. In our case, let's say that some consumer actually cannot pay, because something happened. We sold these projects some years ago. Actually I think they are still sold below current market price, even though condominiums have gone down 10%-15%. We never sold at peak prices.
I think it's very well under control.
Okay. Thank you very much. That's all for me.
Thanks.
Thank you, Tobias. We'll now take our next question from Jan Ihrfelt from Kepler Cheuvreux. Please go ahead. Your line is open.
Yes. Hello. Jan Ihrfelt from Kepler Cheuvreux. Actually I have a couple of questions. The first one is regarding your net debt to EBITDA ratio. You're talking about it coming down considerably.
Yeah.
Do you have any, I mean, targets you could express here or how should we think about it?
This is just my thinking then, Jan. If we make new financial targets, I think we will adjust them year-end most likely, and we will have a board decision and so on. I think it could be reasonable that over time go for something like 12 maybe. We are at 13.5, 13 flat, something like that today. I think it would be good to maybe over time come to 12 or perhaps a bit lower or even. It will happen gradually, you know. If we have stable NOI and debt automatically shrinks, then you have a stronger metrics. We have a big effect the coming years in, you know, higher NOI from indexation and so on, and then completed projects will give us like SEK 500 million NOI.
We can see in front of us like maybe SEK 800-SEK 900 more NOI. Combined with lower debt, that will make a good move for us. As a firm target, I think we will maybe come with something in the year-end report. Let's see.
Okay. Great. Turning into value changes, do you expect that the positive effect with the cash flow will offset the maybe somewhat higher yield requirements so there's pretty stable.
Yeah.
Property values in the fourth quarter?
Unfortunately, Jan. I think even if we have 10% higher rents for some assets, unfortunately, I think the values will not come up. Everyone expects higher yields, you know, so the question is how much higher. If it was like before, you could have seen a big value change in a positive way, but we don't.
Yeah.
Don't think that will happen.
Okay. I understand. Final question, just a clarification of the interest maturities, that slide, and I think it's on page eight.
Yeah.
Do I understand it correctly that the portion of fixed and swaps are 70%. Did you mention that 55% out of the 70 is fixed and the rest is.
No, no, the 70 is the total, Jan. But then we got the question, and if we sort of look ahead a couple of years and if we do nothing, let's say we just let swaps expire and fixed loans will turn into floaters. Then the question was how much will be fixed in a couple of years if we just stand still.
Okay.
I think our estimate was 55-58, depending on if we pay back some of the debt, you know. Even if it's floating, but then we take cash flow and pay it sort of increases the fixed part automatically. That's why we can't say exactly, but. That was the question.
Okay. Thanks for taking my questions.
Thanks, Jan.
Thank you. We'll now take our next question from Andres Toome from Green Street. Please go ahead. Your line is open.
Hi, good morning. I have two questions. Firstly, can you give a bit of color around like-for-like rental income? It has come down about 40 basis points over the quarter, so 2.5% versus 2.9% reported in the second quarter. Maybe a bit just clarification what's driving that decline, just thinking that indexation prints are coming in pretty strong. How do you see that evolving through the year end?
The indexation for us mostly comes year end. You will have a jump in that figure in the next quarter. That's why it can be. You know, you compare year back, but normally we have indexations year end. There are some exemptions. Some Norwegian assets can be other dates. Then you also have residentials in Sweden where actually it can be. I know this, but for those who don't know, can be first of January, but it can be first of May, March. It's local negotiations. Obviously, if everything goes as you could guess with index and so on, the figure will be much higher next quarter. In general it's a bit low because we have Finnish resi that is flat, and that takes down our average.
However, I think maybe in middle of next year or in a year, we think that the Finnish resi will be stronger and give us some like-for-like growth as well. There's been quite a lot of construction in Helsinki, so it's a bit oversupply. Now construction activity goes down a lot, but you still have the underlying demand. We think that will pick up as well, but maybe in three quarters or four quarters. Let's see.
Then just thinking around capital allocation and you know you're trading at a pretty big NAV discount today, and obviously there are you know challenges in the debt market and also a credit rating sort of pressure that's coming through. Are you thinking about larger disposals maybe to you know make the balance sheet a bit better in terms of the capital structure and alleviate some of those concerns and also just capture that public-private market arbitrage?
Yeah, maybe we look at everything that we've long-term positive for shareholders.
My final question is around bank refinancing conditions in Sweden at the moment. How have these evolved over the last quarter? If I think about your latest signing in the second quarter, that was pretty favorable terms, just thinking about the bank margin. Has that expanded now if you were to take on a new debt?
I think in general it's not huge differences, actually, but it can of course be very, you know, big difference client to client or asset to asset. It's, I mean, you have different margins, depending on who is the borrower, what is the asset and LTV and so on. You can never say an exact figure. My impression is it's quite stable and, if you look at the Nordic banks, they are extremely profitable right now, and they are very well capitalized. All of them are like 5,400 points above the requirement from Finansinspektionen or FSA. You have very strong, well-capitalized banks, and their real estate lending portfolios on average are very low LTVs.
I think that is something that you shouldn't forget that it's a very positive factor that you have a super strong banking system. Because normally, if you are to have a crisis, you most normally have to combine that you build too much without any customers. You have sort of a building boom speculation. Then something happens, and then on top of that, you have banks that are weak with high LTVs, and then you have a mess like it was in the nineties. To some extent in 2008, 2009. But now if you compare banks with 2009, I think they have roughly twice the equity per risk-weighted assets compared to before. On top of that, they have much lower LTV than before. I think that is the explanation that banks have record profits with the margins they have today.
Maybe it goes up a bit, but if it goes up much, I think that will be extremely attractive for them. And we also have discussions with the new banks actually that want to do senior secured that's not in the market today. I think it is a very interesting market if you are a bank.
Thank you. That's all from me.
Thanks.
Thank you. We'll now take our next question from Anton Villen from Bloomberg News. Please go ahead. Your line is open.
Bloomberg is media so they can send through media.
All right. We'll now take our next question from Megi Leka from PGIM. Please go ahead. Your line is open.
Hi, just one question for me. Can you please talk about access to bank financing and why you intend to cover maturities with available liquidity rather than accessing new bank loans? Thank you.
Sorry, I didn't get the question.
We didn't hear you.
Hello?
Hello?
Can you hear me now?
Hello? Yes. Say again, please. Yes. Say again, please.
Yes. My question was around why you intend to cover maturities with your already available liquidity rather than accessing new bank loans and leaving that liquidity as a buffer?
I didn't think we said that.
It was my understanding that the 2023 maturities will be covered with your credit facilities already committed.
We can. We can.
Yeah.
We don't say that we will. We can have more or less than a, you know, calculation to where this and cover it with existing facilities. Okay. I think we have the last question and thank you, everybody, and have a good day.
Thank you. You may now disconnect.
Bye.