Welcome to the conference call Fastighets AB Balder. 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 star five on their telephone keypad. I will hand the conference over to the speakers, CEO, Erik Selin, and CFO, Ewa Wassberg. Please go ahead.
Good morning, welcome to Balder's presentation for Q1. After the presentation, there will be a Q&A session. Presenting today is Erik Selin, CEO, and myself, Ewa Wassberg, CFO here at Balder. On that note, I hand over to you, Erik.
Thanks, Ewa. Welcome, everybody. High level information about Balder you have on the first side, where you can see our high level number, property value, and other important figures. Moving over to Q1 2023, we released the figures today, and rental income was an increase of 15%, and profit from property management is an increase per share of 9%. A bit more, the absolute amount, but we have more shares outstanding than compared to last year. In earnings capacity, we have now updated as we do every quarter, and there we are at SEK 515, and that is a decrease compared to the same period last year with 1%.
Debt to assets, 48.2, and like-for-like rental growth in Q1 stands at 5.5%. NAV SEK 91.65. Looking at the property portfolio, this more or less always looks kind of the same. It's concentrated to larger cities and capitals in the Nordics. If you look at categories, residential is dominating with around 50%, more or less, a bit more. We have a diversification on the commercial side between office, retail, hotel, industrials, and other properties. We also have some development of properties, mainly residentials, but also, in some cases, pre-let commercial properties. There are basically two categories. One is that we build and keep it, and the other one is we build and sell convenience to consumers.
What you can see is that that part of the balance sheet will decline over 2023 and 2024 since we are very careful with starting new projects, and the existing one is being completed as we go along. You have a declining value in the balance sheet for projects in these two categories. During Q1, we finalized one property in the category to sale with a quite good sales result, and we also finalized some properties for management. The long-term trend is, and our goal is to, over time, increase earnings capacity and cash flow profit from property management. On this slide, you can see the development from 2015 and forward, and we also have the last figure there is the last four quarters.
Here on next slide, you can also see the development from inception at 2005, portfolio value, debt to assets, and occupancy rate, where you can see that the occupancy is very stable for the last 18 years. For the last, what is it? seven maybe, has been the exact same occupancy rate. It's tend to be very sticky and stable. Of course, in some parts, because of all the residential, but even the commercial assets have proven to be very stable over long time periods. Here is the earnings capacity that we update every quarter, and now it's slightly lower than last quarter.
You can see the explanation is that we are spending more money on financial costs because of higher interest rates. Otherwise, it's very small changes from the last quarter. We have a forecast for 2023 of SEK 6.2 billion as an outcome for property management profit. The forecast is unchanged compared to last quarter.
Mm-hmm. Over to sustainability. Balder strives to take long-term responsibility when we build, develop, and manage properties. Our framework for sustainability contains the company's material topics in respect of social, environmental, and economic sustainability. During the spring, Balder's sustainability policy has been updated, and the board of directors decided on higher ambitions regarding an increased portion of green financing, more environmentally certified properties in existing property portfolio, and the importance of measures to preserve biological diversity. Let's move on to see some sustainability activities that took place during the first part of the year. As property developers and property managers, we have an important role to play in reducing climate change. In order to prioritize measures that we need to take to reduce our impact, we have carried out group-wide climate calculations.
It is important to have a base year calculation when we apply to have our climate target validated by the Science Based Targets initiative by the summer. The EU Taxonomy has accelerated new processes in the business, including the launch of climate risk analysis in Balder's property portfolio. This includes screening of relevant climate risks based on future climate scenarios, vulnerability analysis, and action plans. Balder has conducted approximately 100 climate risk analysis in Sweden and Finland and Norway.
Balder works through social initiatives to create even safer and more pleasant residential areas. During the spring, we have expanded the coordination of area development, and we have developed five pillars for social area development, with the aim of working in a more structured manner with social sustainability and also to be able to follow up our social investments more clearly. Over to finance strategy.
We have conducted a number of activities to manage our balance sheet and maturity structure during the quarter. We have made a placement of a five year convertible bond of EUR 480 million, which has extended the maturity structure. We have also continued our buybacks of bonds during the quarter and have repurchased SEK 2.6 billion. The largest part has been bonds maturing 2024-2026, we have also repurchased bonds with longer maturities. The hybrid with first call date March 2023 of EUR 320 million has been repaid. As you can see in the graph regarding available liquidity in comparison to maturities, we are well equipped for the coming year.
As I said, the available liquidity as of 31st of March was SEK 25 billion, and maturities rolling 12 months is a little less than SEK 14 billion. Out of these, SEK 7.8 billion is related to maturing bonds, the available liquidity corresponds to 111% of Balder's future maturities of interest-bearing liabilities within 18 months and 74% within 24 months. 70% of the loans is hedged as of Q1. In the graph, you can also see that our net debt to total assets is 48.2% as of Q1, and secure debt in relation to total asset is 19.2%. On the next slide, you can see the split between financing sources as well as the split between unsecured and secured loans.
Balder is a significant issuer on the bond market and strives to have a financing structure that provides stability to operations over business cycles. To the right, you can see the interest rate fixing structure, and the average interest rate for the current year also includes the margin for the floating parts of the debt portfolio. When you look at the financial targets, all are in line with our goals.
Please note, though, that the new financial target of net debt EBITDA of 11x that was introduced ahead of 2023 is not met as of now, but has declined from year-end, from 13.4- 12 point now end of Q1. As we have earlier communicated, we will achieve this goal through a combination of reduced net debt and increased income from our existing property portfolio, as well as completion of projects.
Here is an overview of the debt maturity per bank, bonds, and commercial paper. For 2023, the combined debt amounts to approximately SEK 11 billion. The bonds maturing in 2023 amounts to SEK 6.7 billion and will be repaid during Q2. After Q2, there are no more maturities related to bonds during 2023. After the end of Q1, we have repurchased SEK bonds maturing in 2024 and 2025 of SEK 2.1 billion. When these buybacks has been taken in consideration, the remaining maturities regarding bonds in 2024 amounts to SEK 5.4 billion, and in 2025 to SEK 5.9 billion.
Looking at the share price development, you can see here from 2015 and forward, the development. What we believe is that over time, the share price will correlate with net asset value and profit from property management over the long time horizon. Sometimes the share is a bit over the curve and sometimes a bit below the curve. Right now, as you can see, we are trading quite lower than the normal share price compared to the underlying metrics. As an appendix, you also have the consolidated statement of income, balance sheet or financial position, and you also have the shareholder structure. With that, we thank you for listening in at this Q1 presentation.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Markus Henriksson from ABG Sundal Collier. Please go ahead.
Thank you very much. Good morning, Ewa and Erik. Few questions from me. First off, net interest come in at around SEK 650 here in Q1. You had in the earnings capacity in Q4 around SEK 725 per quarter. STIBOR and other underlying has increased since. What's the main drivers here for the deviation versus the earnings capacity in Q4?
Yeah. The driver basically is, Marcus, that we historically been very conservative when we look at financial income from cash and investments and also financial investments or borrowings to joint venture. Historically, the interest rates was 0 more or less. It really didn't matter. Now, we have some positive results from... I mean, this is like SEK 10 billion-SEK 15 billion in interest-bearing assets.
Very clear. Looking at the earnings capacity, it's now at SEK 5,940. You reiterated the forecast from Q4. First, is the CPI for residentials included here in the earnings capacity, as I presume most of it is from Q2? Secondly, what's the main drivers for the rest of the year to reach the forecast? I guess you mentioned that the financial income is one key thing, but any other to highlight?
Yeah, exactly, Markus. We have some financial income, and you're also absolutely right that some adjustments on the resi side will occur after Q1 actually. Very well spotted. The first quarter started out a bit better than the forecast. Let's say that everything would have stayed the same as first quarter, then we would actually have outperformed a bit because the forecast divided by four, normally Q1 is a bit weaker. We are a bit ahead after the first quarter. Then we will get more income during the year from a lot of completions. There will be very many projects completed in the next two, three quarter as well. That's why we think it's the forecast. We see no reason to change it.
Thank you. I didn't catch you there. Is the CPI for residentials included in today's earnings capacity?
In some cases it is, and some cases it isn't because the negotiations is not all at the same time. It's a little bit of both, actually.
All right. A question on capital injections. Do you see any potential needs in associates or JVs in 2023 supporting debt repayments or credit metrics, those entities?
Not that we know of right now, anyway. I think later on it will be the other way around because, in the associates there are also some projects ongoing, as you know. When they are completed, the cash flow will go the other way. I think it looks stable. Maybe it's more like 2024 we get money flowing in from that part. The debt has been a bit lower actually in the JVs combined this quarter. Right now we don't see any need for that.
Thank you. Last question. You have a lot of project completions that we can see in the tables. But if we exclude them, what's your view of Balder's need for maintenance CapEx? If you can give us % of property value or a rough absolute figure, what you think is needed to maintain your portfolio in good shape?
Yeah, we have been guessing before maybe SEK 200 per quarter, normally that will also give us some sort of return, you know. I think, we don't have an exact figure actually, Markus, but normally CapEx gives you either reduced cost or some income. So far it's quite good, you know, the tenant demand and still quite a stable market. We can invest and get a reasonable return on the investments.
All right. Thank you. Those were my questions.
Thank you, Markus.
Please state your name and company. Please go ahead.
Hi, this is Anders Wennberg.
Your line is now unmuted. Please go ahead.
We can't.
Hi. Can you hear me?
Yeah. Now we hear you.
Just a few questions. Anders Wennberg from Green Street here. Firstly on credit metrics, you know, obviously there was a credit downgrade from Moody's which was unsolicited. Just trying to understand also what conversations have you been having with S&P on that front, and what are they saying about your credit metrics? Secondly, just looking at your ICR, it's coming down pretty quickly now. Just wondering what is the debt reduction strategy to keep this contained, and are you now perhaps leaning a bit more towards disposals?
Good questions. If we start with the S&P, we are, you can say, in the middle of the range where we shall be for the BBB flat. We haven't had any discussion with them lately. We normally update after quarters. Basically nothing happened either, you know, so there wasn't really a big reason to have a discussion. We update every quarter, and I don't see any changes there. If you look at their rating grid, we are very spot on. We had headroom and we have headroom in the ICR, you know, so even if it's a bit weaker, it's still stronger than it has to be compared to the rating. I think that looks stable. They were more cautious about liquidity, actually, S&P, and that improved a lot.
That was more what they were looking at. Buying and selling assets. Well, our guess is that we will be most likely some net selling in Q2. No, nothing dramatic, that is our guess. We will have more income from completed projects, and the project part of the balance sheet will decrease quite rapidly the nearest two, three quarters because there are a lot of assets being completed. We will have a return on those and a smaller part for projects in the balance sheet. That is also, you can say, to some extent, a rating positive. They prefer cash flow properties compared to projects if we look at the rating.
Understood. Thank you. My second question is around foreign currency exposure. Maybe you can give a bit of a color insofar as how your EUR and NOK exposure is hedged, how much of that is naturally, and how much sort of financial hedging do you need to use? Related to that also, you know, the like-for-like rental growth of 5.5%, what would that be, including those currency fluctuations?
The 5.5% is adjusted for currency. Otherwise it will be very complicated to compare, you know. That is adjusted for currency. If we look at the euro, we have small net positions. You can say if the euro or if the krona weakens against the euro, we will have small positive effect on the NAV if everything else stays the same. If you look at the Norwegian krona, we will lose when it's weakening. There we lost some equity this quarter. On the other hand, we gained that equity last year. It goes, you know, from time to time in different directions. Basically a small net exposure in euro, a bigger net exposure in Norwegian krona right now.
Understood. My final question is just coming to the valuation, the reported valuation. You've done, I guess, internal valuations now two quarters in a row. Just wondering when will you take in a third-party appraiser for valuations?
We've been doing internal valuations since we started in 2005, but we always do external as well, as comparison, a second opinion. The last quarter was a lot of external valuations, more or less everything if you look at it. This quarter is not that much. Because if we do it every quarter, it's extremely a lot of cost that... I mean, from quarter- to- quarter, there are not that much new information. Our adjustments for yields are, you can say, the most low-yielding assets where we have discussions with the external evaluators where we think then that the yield should be a bit higher. Also in some cases with low res yields, we think that they should be a bit higher.
Our adjustments are on, you can say, low-yielding properties, on average.
Okay. Thank you very much.
Thank you very much.
The next question comes from Niroj Kumar from Barclays. Please go ahead.
Hello. Good morning, everyone. My first question is, if you could please provide us more color on your unutilized credit facilities. I mean, any details on margins or condition attached would be helpful.
Sorry, could you repeat that, please?
On your unutilized credit facilities, if you could provide any details on margins or any conditions attached.
No, there are no special conditions on those.
Okay. margins, if you could provide only.
I mean, if we use them?
Yes.
Yes, I think it's more or less like a loan margin, isn't it?
Yeah, it is.
Yeah.
Slightly higher.
Slightly higher, maybe. Yeah.
Got it. That's helpful. Also, do you have any update on the potential rating from Fitch? If I remember correctly, you're talking to them, right?
We are talking to them. We are still evaluating if we should go with them as well or not. Maybe, you know, Fitch has a kind of different way of measuring. We have to think about if we can combine those in a good way or. S&P is more, you know, LTV, ICR. Fitch is.
Mm-hmm
...more debt, EBIT that we have to think so we don't do anything that will be complicated for us. Otherwise, we have discussions with them and they are very professional.
Got it. My last question, it's more on a broader note.
Yeah.
On Nordic real estate market seems to be quite bearish. Do you think the presence of perceived for sellers in the market can take a toll on the valuations?
Very hard to tell actually. I mean, I guess that the yields will move up a bit more perhaps. On the other hand, we have higher rental levels as well, so maybe it's compensated in a way by more income. Right now, what we see is there are sellers, but not anyone who want to sell, you know, sort of cheap. If you get a good price, then you do a deal, otherwise you don't sell. There seems to be a lot of buyers hoping for low values, but nobody is selling at low values. I heard it's actually the same in Norway. Everybody says that, "We will buy if it's cheap." If everybody says that, it will not much will happen.
I think it's more stable than the perception.
Got it. That's all from my side. Thank you.
Thank you.
The next question comes from Fredric Cyon from Carnegie. Please go ahead.
Good morning, Erik and Ewa. Yes, a few questions. Starting off with the investments. I was a little bit puzzled and surprised by the property management investments during the quarter. They stood at SEK 1.9 billion according to report page nine, which is up versus the SEK 1.6 billion reported for the first quarter last year. Considering the remaining investments, I would have expected that to decline. Can you give some clarity on full year expectations on investments in existing properties and projects?
Yeah, good question, Fredric. They will decline, quite rapidly. If you look ahead, two, three quarters, there are not that much left actually. Also there have been some stages of development projects that-
Yes
...was sort of. How to put it in English? All the requirements in the deal were fulfilled. There are also some stages that were not in the list last quarter. That is one of the explanations as well. Now there are nothing more that will come into that list. You have some investment that is not new build projects, you know, on top of that. This will drive more income for us. The level will go down.
Is it also?
...on projects.
Yeah, sorry.
No, the amount will go down, and the projects in the balance sheet will go down, and the rental income will go up.
Okay. The SEK 9 billion you had last year, any idea on what that will land?
Uh-
2023.
Maybe if I'm guessing then maybe five, six perhaps, if I'm guessing, Fredric.
Yeah.
It's very hard to know exactly, you know, because, if there comes up reasonable things, then we want to do reasonable things.
I'm glad you say that. It's difficult for an analyst as well. Second question.
Mm.
You have a negative outlook with a BBB flat rating from S&P. What do you reckon are the key steps to remove the negative outlook from S&P?
I think they have been very focused on liquidity, because otherwise we are in the middle of the sort of figures that we should have for that rating. I hope that they will feel secure about liquidity. Maybe they want to wait one more quarter, you know. It is difficult to tell exactly, but their concern was liquidity. We didn't really was concerned about it because we know banks are not, you know, bank loans, even if they expire, you roll them, you know. They have a sort of different angle on that. That was the thing that we had. We made different projections actually. Now even with their way of measuring, we have a very good liquidity position. I think if the market doesn't.
If anything dramatic doesn't happen, then I think they will see that we are very in the middle of the, where we should be for the, for this rating that we have.
it's a lot of talk-
We haven't talked with them lately actually. We always update after quarters and in the meantime, if nothing special happened then we don't update, you know, if there's nothing to update.
As you can imagine, there's a lot of focus on liquidity right now, just to understand their methodology, how much unutilized credit facilities plus cash are needed for them to feel secure about not having any negative outlook on Balder?
What did you say?
They want to have 1.2.
For one year.
For one year ahead, rolling 12 months.
Exactly.
Okay. the one point-
We have 1.8 as of now.
Yeah. Okay. The one you report on page 11 in the presentation, that's that can compare with the 1.2 they're looking at.
Exactly. Exactly.
Okay, perfect. two more questions. third one. loans, hedged 70% as of Q1. What will that be if you don't, end the new swap agreements, let's say, two years out?
You add on, SEK 23. You know, if you look at the slide with the loans, then you add SEK 23 and SEK 24, that's roughly SEK 50 billion. If you said two years, then you add 25 as well. Maybe then it will be SEK 36 billion perhaps. If I'm sort of guessing. SEK 35 billion-SEK 37 billion or something like that really.
My final question, rather nitty-gritty, if you look through the earnings capacity Q- on- Q development, well, rental income increased slightly, the net effect on NOI is actually slightly lower than it was at year-end. What constitutes difference there? Why are property costs growing faster than rental income?
Yeah, we always, I mean, it's very hard to know exactly, you know. If you just take 1% or 2%, it's, you know, SEK 100 million, SEK 200 million. It's very, I mean, a small percentage makes big differences in money, and maybe we think the cost side will be a bit higher. That depends also on what happens with energy prices and everything. Also it can be that we be subsidiaries to companies as well for energy. When we did this, I don't know if we had a firm decision on that. That can always be adjusted up or down, you know, a percent or something like that.
Yeah. Certainly. Thanks a lot, Erik and Ewa.
Thanks, Fredric.
As a reminder, if you wish to ask a question, please dial star five on your telephone keypad. The next question comes from Jan Ihrfelt from Kepler Cheuvreux. Please go ahead.
Good morning, Ewa and Erik. Just if we could stick to that earnings capacity slide. If you look at the non-controlling interest that goes from SEK 560 in the fourth quarter to SEK 410 in the first quarter. What's the reason behind it?
Higher interest costs, basically, and, a bit more vacancy also, but higher interest costs, a bit higher cost otherwise, and a bit more vacancy.
Okay. Second question regards your central administration costs. They were, as I looked to it, on all-time high level for first quarter. Should we expect that line to come down during the-?
I hope so.
... year?
Yeah, that's our ambition, at least.
Okay. Third question regards your rent negotiations on your residentials, just to get a feeling for what kind of portion were negotiated in the first quarter and what remains, if you could give.
I don't know exactly on that, actually. No, I don't have the exact number in my head on that.
Okay. Fourth question really regards your Entra position. What's your long-term strategy for your Entra holding?
The long-term strategy is to have the holding. We will not buy the whole company. That will be too dangerous, and it will also be negative because change of control can make their funding less advantageous, so. The share price is extremely cheap right now, so. It looks good for them. They have a strong market in Oslo. They've also been selling some assets. I think they are in a quite good position, Entra, but we will not do anything with that right now. I think Even if it's cheap, it will be not... I mean, it's a big move to actually do something there. We will wait and see.
Okay. My final question regards your commercial properties, offices, et cetera. Do you see any signs of increased vacancies in that space?
Far, it seems to be more stable than we could have feared if we go back in time. Of course, we follow it very closely. No, so far it's better than what we could have feared even in Stockholm, because maybe there we could see these high rents and what will happen and everything. There's still very good demand. Let's hope it continues. Right now, it looks like that. The economy is not that bad overall either. I mean, it's also been better than what we could have guessed in general. We are very focused on occupancy and do everything we can to always try to rent out vacant spaces.
Okay. Thanks for taking my questions.
Thank you very much, Jan.
There are no more questions at this time. I hand the conference back to the speakers for any closing comments.
Okay. Thank you, everybody, for listening in, and have a nice day.