Fastighets AB Balder (publ)

Hello and 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 1 on your telephone keypad to register your questions. 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 Eva Wasberg, the head of finance to begin today's conference. Thank you.

Hi, good morning. This is Erik Selin and I also have with me Eva Wasberg who will introduce herself. We will go through our report today and afterwards we have Q&A. And we have Q&A only with analysts. And other questions can be emailed to me or Eva or to media at Valder if it's media questions. So Q&A only with equity analysts.

Yes, I would like to take the moment to introduce myself as the new head of finance at Valder, Eva Wasberg, since September. So this is my first presentation of many to come.

Very good. Looking at Q3, we had rental income up 16% compared to last year and profits from property management basically stable due to higher financing costs net than last year. Otherwise, there were quite strong developments on all the result lines. Earnings capacity is also flat from the quarter before and obviously it is the increasing interest rate that affects us and to mitigate that we have actually higher NOI and other income. So far we are handling the increased interest rates with our own increased underlying earnings. 47.7%, like-for-like rental growth 2.5 and 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. So it basically shows the same thing, but it's Easy way to get the numbers fast and you can see we're 17% ahead of last year and you also have the years before as a whole year as a comparison. On slide four you can also see the earning capacity quarter by quarter from this quarter obviously and then going back two years in time. So 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. But so far we managed to keep our earnings capacity despite this much higher interest rates cost. The portfolio, page five really knows 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 and 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. and right now we think it's the most rational thing to be very careful with new developments because we have higher construction cost but you don't have higher sale prices rather lower and rent cannot be increased to compensate higher construction cost so if we look at 23 and 24 combined if we sum up all the investment that will be needed to complete all the projects. Then we look at 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 zero. Actually, the best guess now is minus 100 million. So net investments in property development right now with the things ongoing is combined actually zero for the years 23 and 24. And then we think in general there will be smaller investments but that can also be driven by customers. So of course if there's a very strong demand from tenants that can be investment that makes sense to do but there will be much lower activity in general for us and 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 percent as of Q3 when in line with our long-term target of 50 percent And our available liquidity and credit facilities amount to 26 billion, which is an increase from year end, about 13 billion. And 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. And slide eight, you will see our just maturity structure. As you can see, we have a rate portion maturing in 23, which available liquidity we cover. And to the right, you have our interest maturity structure with an interest rate swap. Yeah. 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. And 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. NEP debt to EBITDA 13.5 a key ratio which we would expect to improve over the next coming year.

Yes and that will be improved by two things we will have higher NOI from existing portfolio and on top of that as I mentioned development and projects they will be completed and give us NOI but 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. And this is, you can see the ratios on page nine. But 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. And then 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. And again, it's not a big difference from the previous quarter. So with this, we can have Q&A. And as we said, equity analysts, Q&A, and other questions we can take through email If it's financing, Eva primarily, and if it's media, you go through Ballard Media. And if there's something else, you can email me. So now we go for Q&A if there are any questions.

Thank you. Dear Equity Analyst, 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.

I think there must be something wrong with this, most likely.

All right.

If this system doesn't work, you have to look at it. I get text here that someone is trying, but it doesn't work.

Please repeat the procedure for them to have to handle. They press star 1, and it doesn't work.

OK. 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 Thion.

Good morning, Erik and Eva. Good morning.

Your line is open.

Lovely. So a few questions from my side. There was another company reporting yesterday making quite an interesting move whereby they intend to separate list residential portfolios 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 that something you considering to evaluate?

Good question. Yes, that is also something that we can do if we find it positive for us. So 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. And 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. So it's very relevant to have that track as well. So yes, it's possible for us. And let's see what happens.

That's clear. And then moving over to the fixed and swapped portfolio of interest rates. You state that 70% is either fixed or with swaps. Some companies do report the swap agreements in a slightly different fashion. So I just wanted to be clear on the swap maturities. So the table you had in the presentation of about what is it let's see it's about 18 billion of interest rates maturing until year end 2022 2024 is that the proportion of swaps also that will mature or is do i have to look at a different table than the interest material interest maturity structure that fixed loans and swaps combined in our case is a big part actually loans but we

don't separate it so this is sort of it can be either way but in general we don't have that we'll have a lot of fixed loan but not so many swaps so the net is what you see in the maturity structure but then of course during quarters we also make new ones and you know change them somehow so it's a it changes from quarter to quarter obviously but perhaps yeah

So perhaps I can rephrase the question. So 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 going to differ substantially from that?

Okay, then it will be like 55, 60. If we do nothing, 23 and nothing, 24. So we say that we do nothing for two years. than the 70 with 55, 58 maybe.

Okay, excellent. And then 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 rating is a hot topic these days and if we look at our S&P rating you have different metrics that you sort of follow or measure and 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 so and then they look at liquidity and other things but the thing that the metric that is sort of that what that we watch most carefully is LTV basically they measure it in another way so they measure debt compared to debt plus equity but it is an LTV like metric So that metric for us should be in the range 55 to 57, their way of counting LTV. And 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 to 57. And then you also have that you can read from S&P that if the LTV goes above 60, there will be rating pressure than for lower rating and with higher LTV of course and on the other hand if LTV goes let's say well below 50 then you will have rating pressure for a higher rating. So in our case LTV is actually the one that we have to think about. 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 rate. So it's quite easy to follow actually.

glad to hear um and then 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 has been within the property management portfolio and in the first nine months you invested about 6.2 billion if i'm not mistaken so let's see we perhaps end the year at 8 billion um i appreciate that that is a function of course of the tenant demand and your own plans but Can you shed some light on what that number will look like next year?

Yeah, I think our guess is that there will not be so much capex or investment. So maybe 200 million per quarter, if you look at the existing portfolio, something like that can be less, can be more. And then otherwise to buy and sell assets. I mean, that's something you can do if you want to. You don't have to. So we have We have very few deals actually ongoing, but there will not be zero. So we will buy something and sell something. But 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. So we'll have a lower activity. But then if you look at the reports, all investment goes sort of under one line. So that's why I think it's important to know that development pipeline net will be zero. So that's zero. Then on top you have some investment for the portfolio and otherwise it's buy and sell. We have very, very few commitments buying or selling. It's fractions actually. So it will be a bit boring for a while, but I think it makes sense right now to have headroom in general. But on the positive side is that it's good demand from tenants and everything is working well. Otherwise, I think it's just good to have some headroom in volatile times. And maybe you also saw that today we made an offer to buy back all the Swedish 23 bonds for those who want to sell their bonds maturing in 23. So we offered to buy back 100% of them without issuing any new bonds.

Thank you very much for all my questions. Thanks.

Thank you, Frederick. We'll now take our next question from Neeraj Kumar from Barclays. Please go ahead. Your line is open. Hello.

Thank you for taking my questions. So just continuing on what you just said regarding your tenders, we see that it's just for SDK bonds and the Euro bond is not included. Do you have any comments for that?

No, we do one transaction at a time. So a while ago we tended some hybrids and today we did these SEC bonds and we will do bond transactions as we go along for a long time.

Okay, thank you. And 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, you have to communicate about it at the same time in a structured way. So it's a bit difficult to talk about in general. But we haven't basically changed anything ourselves.

Okay, thank you. And coming on to valuations, just trying to understand a bit over here. So I guess around 25% is externally valued and 26% the second party opinion is taken. Can you please help us understand how this works? Because we have seen a few companies sort of marking the yields higher, whereas a few companies sort of keeping the yields same. So 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, but 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, they are slightly higher than our internal valuations. but my view is that if you have let's say five properties in a block and then you make a stern evaluation on one of them you know actually the yield and everything for the rest of the five so to get 100% you don't need to do 100% actually it will just cost a lot of money so That's why we don't think it makes sense to do 100% really. So in this case 50, I think actually you can see that. I would guess it sums up maybe 90 or something in real life, almost everything.

And also well in line with our own internal values.

Yes, slightly higher, I think half a percent or something like that. So it's very similar values they come up with. But also good to know, it's mentioned in the Q3 report, but we haven't sort of, in the yields, we haven't calculated any indexation. And there are different methods. 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. But we always the same that we have zero until we have it and then we put it in. So if everything values, the yields will automatically then come up next quarter. but different companies do it in a different way you know so we could of course said that we anticipate eight percent and then we could have said that we have higher yield requirements so yeah it's a different it's different you know approaches got it that's that's very helpful got this last question from my side we know that Moody's rating is unsolicited but last

In their 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 as a company, there's no link for us between a moody unsolicited rating and bonds or something like that. but of course it's not good and I know very many bond investors are very upset about this but I don't know we can stop anyone from rating us if they want to on their own behalf so to speak but 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 in getting in discussion with them or something like that?

We talked a little with them, but then they said everything looks good. So we were very surprised actually that you can say that everything looks good and come to totally different conclusion later on. And so we really, it's like a black box in a way.

And also the evaluation was done on the Q2 figures. Hopefully our report will shed some light on some of the assumptions made by.

Yeah, let's hope so. I saw that they were guessing higher, you know, net debt EBITDA and it will actually be lower. So we can see that some of the guesses are for sure wrong. But 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 Karch from Lennebo Fonder. Please go ahead. Your line is open.

Thank you, and good morning. If we'll include your hybrids, you have some $36 billion in bond maturities until the end of 2025. while you now have 26 billion in unused credit facilities. Does that imply that you would need more facilities if you're not able to refine 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 10 billion?

I think the cash generation can cover, but we will have more facilities anyway. So we're having good discussion about even more facilities as we speak. So 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 be able for us to just pay back 25 without borrowing money at all.

And regarding your developments, you have almost 12 billion in total investments for own management. 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. So some of them are paid in cash with our own money, so to speak. and in some cases we have construction financing and then when it's completed you convert the construction financing to a term loan loan normally so it's a mix actually but 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 so net If you include the financing we have today and then complete 23-24 net, we will have cash out.

Regarding those developments for our 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. If we go back in time, we just kept it at book value, but then the PWs said that actually have to sort of revaluate as we go along with those. But the other one that we sell to consumers, there we don't do anything. So when we hand over the keys, we book the profit. So there you have a lag between actually. Yeah, the profit shows up at the quarter when we hand over the keys. There will be some big profits showing up in 2023 from Compete. 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 IFRS accounting rules.

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. But has 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. It can be. Good point. Can be. I don't have an exact answer on that, but that can be the case. Can be the case.

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.

And 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 23 completions are more or less sold. Everything is maybe 2-3% or almost nothing. So we have some to sell for the 24 completions. But 23 years, you can consider sold. So it's just that time has to pass by. And then we complete and over the keys, books a 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 and also in our case let's say that some consumer actually cannot pay because something happened we sold these projects some years ago so actually I think they are still sold below current market price even though condominiums have gone down 10-15 percent so we never We never sold at peak prices. So I think it's very well under control. Okay, thank you very much.

That's all for me. Thank you.

Thank you, Tobias. We'll now take our next question from Han Felt from Kepler Chevron. Please go ahead. Your line is open.

Yes, hello. Jan Felt from Kepler Chevron. I actually have a couple of questions. The first one is regarding your net debt to EBITDA ratio. You're talking about coming down considerably. Do you have any targets you could express here or how should it think about it?

This is just my thinking then, Jan. And 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. 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 and I think it would be good to maybe over time come to 12 or perhaps a bit lower or even but it will happen gradually you know if we have stable NOI and debt automatically shrinks and then you have a stronger metrics but 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 500 million NOI so we can see in front of us like maybe eight nine hundred more NOI but and combined with lower debt that will make a good move for us but as a firm target I think we will maybe we come with something in the year-end report let's see.

Okay great and then turning into value changes do you expect that the positive effect with that the cash flow will offset the maybe somewhat higher yield requirements so there's some pretty stable 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, 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 think that will happen.

I understand. And the final question, just the clarification of the interest maturities, that slide, and I think it's on page 8. Do I understand it correctly that the portion of fixed and N-swaps are 70%? And did you mention that 55% out of the 70 is fixed and the rest is?

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 and then the question was how much will be fixed in a couple of years if we just stand still and then I think out and it was 65 to 58 depending on if we pay back some of the debt you know so even if it's floating but then we take cash flow and pay it it sort of increases the six part automatically so that's why we can't say exactly but so that was the question okay thanks for taking my questions thank you thank you we'll now take our next question from

Andrew Tomei from Green Street. Please go ahead. Your line is open.

Hi, good morning. So I have two questions. Firstly, can you give a bit of color around life-to-life 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 and how do you see that evolving through the year end?

The indexation for us mostly comes year end so that's you will have a jump in that figure in the next quarter so that's why it can be you know you compare a year back but normally we have indexations year end There are some exceptions. Some Norwegian assets can be other dates. And then you also have residentials in Sweden where actually it can be, I know this, but for those who don't know, it can be 1st of January, but it can be 1st of May, March is local negotiations. So, but obviously if everything goes as you could guess with index and so on the figure will be much higher next quarter but 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 it's been quite a lot of construction in Helsinki so it's a bit oversupply but now construction activity goes down a lot but you still have the underlying demand so we think that will pick up as well but maybe in three quarters or four quarters let's see.

And then just thinking around capital allocation and you're trading at a pretty big NAV discount today. And obviously there are challenges in the debt market and also credit trading sort of pressure that's coming through. So are you thinking about larger disposals maybe to 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?

Maybe we'll get everything 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 big difference client to client or asset to asset. I mean you have different margins depending on who is the borrower and what is the asset and LTE and so on. So 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. So all of them are like 500-400 points above the requirement from finance inspection or SEC. So 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 normally have to combine that you build too much without any customers. You have sort of a building boom speculation. And 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 90s and to some extent in 08-09. But now if you compare banks with 09, I think they have roughly twice the equity per risk-weighted assets compared to before. And on top of that, they have much lower LTV than before. So I think that is the explanation that banks have record profits with the margins they have today. So maybe it goes up a bit, but if it goes up much, I think there will be extremely attractive for them. And we also have discussions with new banks actually that want to do senior secure that's not in the market today. So 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 Willen 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 Maggie Lejka 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.

If we... 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 maturity 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 maturity will be covered with your credit facilities already committed?

We can. We don't say that we will. We can cover more than a calculation. We can cover it with existing facilities. Okay, then I think we have the last question and thank you everybody and have a good day.

Thank you, you may now disconnect.