Fastighets AB Balder (publ)

Hello and 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. Eric Selin, CEO, to begin today's conference. Thank you.

Thank you. Good morning, everybody, and welcome to this conference call for Balde Q2 interim report. If we look at some figures for the first of 22, we can see that in Q2, The rental income was 20% better, 20% increase from last year. And the profit from property management was 1.5 billion, and that is increase of 29% and also 29% per share. And 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 now. And if we also then compare one year ago and see how it looks, then we can see that the audience capacity is 11% better than one year ago. And we have net debt to assets around the same level as previous quarter, 46.5. Like-to-like rental growth is at 2.9 this quarter and NAV per share, 92. Now, if we go to page three, we have the current earnings capacity. And what you can see there is the If we compare the last quarters, we can see an upward trend in rental income, but you see also an upward trend in, of course, net financial cost because we have increased interest rates from Riksbank and we'll also have from ECB. But all in all, the increased rental income covers increased financial costs, so we have a slightly better earnings capacity compared to last quarter. So far we are absorbing higher interest rates with the underlying business. Page 4, the property portfolio, no big changes there. It's 80% in capitals and larger cities. The split between residential and commercial is also very similar, so Roughly half is residential and the other half is commercial properties of different kinds. Some industrial logistics and some other properties. And now moving to page five, property development. In our property development, we have basically two categories of property development or new construction that we built. So 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 pre-let properties. We have one school, we have an office building, we have a hotel. And then we also have the other category that is properties that we build to sell and we sell them to retail flat by flat and it's mostly in Sweden but some projects even in Denmark, Finland and Norway so you have in this development two different categories and 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. And we also had some uncertainty about prices for apartments and also higher interest rates that make it less attractive to develop rental residentials. So 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 23 and 24? And then we can see that the net investment for us in that case will be slightly negative. And how can that be? And 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 but then we will have the effect that NOI from projects will on a yearly basis once they are all completed increase our NOI with 500 million per year so this is an interesting thing to know so we will actually then have 500 more NOI but no net investment actually slightly negative when we look at it but everything can change there can be better maybe circumstances if we are far ahead but interesting to see see how this we and we have no project that we have to start so 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 and then if we take page six financing we have increased the credit facilities lately with 10 billion so we now have available liquidity and credit facilities of 23 billion as of this half year report 70 percent 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 7, we continue with financing there. There you can see the interest rate maturity structure. And if we look at that to begin with, we can see that if we look at 22, 23, 24 combined, it's roughly 55 billion SEK. And so then we roughly have 50 billion SEK net debt. We have some cash commercial papers and so on that we own. And those 50 billion SEK will most likely be at higher cost than we have now, given the outlook for interest rate hike. But on the other hand, we most likely get higher indexation on our rental contracts So we have this 50 billion will be more expensive, but we have yielding assets of 200. So it's an interesting comparison. And of course, we don't know the outcome, but we have 200 working for us in a higher pace, most likely, and 50 getting more expensive. Looking at debt maturity structure, you have it there on every year, and this is the total So this is not the bonds. If we look at 22 first, we have one bond, but that was actually paid back 1st of June. So from now and the rest of 22, we have no bonds expiring. Then in 23, we have roughly 14, 15 billion if we take everything. so if we compare the bond that expires with liquidity we already cover all of those maturities and then of course we have the cash flow as well on top of that and then you can see it continues more or less the same amounts every year going forward so a stable situation there and I've been increasing the liquidity as you can see lately the last one two months just to have the optionality if the bond market is not attractive then we can just wait with that for a while and I also think we can increase liquidity even more if we think it will not be interesting even in 24 then we 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 but 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 and looking at page eight here I have some different things I wanted to give some update on. And also I have been talking to a lot of investors lately, so I picked up some questions that is often asked. So 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. So you basically have to have permission to do anything. And this is not Balder shares only. We want people to have Balder shares, but if it's other companies where someone in the Balder management have an insider position, normally through a board position or through a big ownership, then we say that don't buy and sell those shares unless you get permission. There can always be reasonable things for actually There can be good reasons to only share, but then we have to have a process for it that is in place now to avoid that anything like this can happen. And 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. So it's very similar to banks right now. That's been well received. I also got some questions about associated companies. For us, it's always been the case that 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 it to be owners in a company if we like the other owners so 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 and we also get good input from our partners and increases our network and deal flow also this 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 so i think it's interesting to be clear on that as well and 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 so 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 getting game and nobody knows. Inflation figures is very high all over the world right now, but I think it will also be very volatile. So 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 indexation. So in general, with few exception, it is like this that commercial properties and Danish residentials, they are linked to the CPI in the respective country, obviously. So commercial properties, Danish res is in the contract 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. But on a yearly basis, they can be decoupled. So typically, if you have zero inflation, you still get some rental income. And my guess is that if we now have very high inflation, we will not get that high rent increases as inflation. So you can say that the result sort of smooths out different years with extremely high or low inflation. But over a longer time period, it's been actually a bit higher increases than inflation. And that is not so surprising because over time you should have some real GDP growth and then you have salaries and purchasing power growing faster than CPI. And that also leads that you can afford to pay slightly higher rents even in real terms over time. And that is even if you have market rent or CPI linked when contract expires. Over time, I guess, you will have a slightly higher trend than CPI. And then we have another category, market rent, and for us that is Finnish residentials. So 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. and in Finland or in Helsinki in particular there's been a bit much a bit too much supply perhaps last one two years very much construction going on what we saw earlier was the the forecast is that that will slow down so you will have less supply compared to before and if I'm guessing I think it will be slowing down a bit more due to this the same reason that we think that construction costs are higher and it's a bit messy and if you have higher interest rates that also squeezes the margin so my guess is that the supply will be less than forecast and that will be of course supportive for the for the market and vacancies are slowly getting better actually so we have a low positive trend already now we guessed before that that was maybe for next year but as of today it's actually a bit better than we might have guessed let's see if it continues and then we also have another category that is turnover rent and 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, very small part for us, but in our case, it's hotels, but it's only some of the hotels that have a rental floor and then turnover rent on top of that. Many of our hotels have actually fixed rent, but some of them have this combination, and I think one or two has pure turnover rent. So this covers basically our portfolio, these four categories. And the biggest is then CPI linked because it's all commercial properties and Danish residential. So that is over 50%. So then the question is, what will the average of all of this be? And 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. But right now, maybe you can guess inflation, perhaps 7%. It was higher. There came a figure yesterday or the day before yesterday. And the negotiation is very difficult to know, actually. I think it will be not that much, maybe 2%, 3%. And if it will be something like this, then the average perhaps can be four or five percent. But it's very hard to predict, actually. So this is more of a way to see roughly how is the total thing developing. So 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. And in cases with turnover and hotel and retail, there will be much bigger increases in percent, but that is not such a big category for us, but they are moving a lot faster. And you also saw that in Pandox figures today. So that was an update. And then next slide, you have the share long-term development where you can now see that there's a big discount and lower valuation. compared to cash flow and so on. And the page 1011 is the P&L. And I don't think I go through that. It's easy to read anyhow. So the overall situation is that it's quite stable right now in the market. They still predict some real GDP growth for next year. And beyond that, even though interest rates move up, we have stable growth. portfolio extremely diversified and we increased liquidity to be able to be flexible and it comes to bond maturities and 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 but it can be a bit irregular between quarters and so on and indexation is year-end and but the long-term trend right now looks that higher interest rates will roughly be absorbed by higher income. So that was the presentation and now let's see if there are any questions.

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