Fastighets AB Balder (publ)

Welcome to the conference call Fastites 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 5 on their telephone keypad. Now I will hand the conference over to the speakers, CEO Eric Sellin and CFO Ewa Wasberg. Please go ahead.

Good morning and 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 Eva Wasberg, CFO here at Balder. On that note I hand over to you Erik.

Thanks Eva and 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 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, 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. And if you look at categories, residential is dominating with around 50%, more or less, a bit more. And then 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. And there are basically two categories. One is that we build and keep it. And the other one is we build and sell condominiums to consumers. And what you can see is that that part of the balance sheet will decline over 23 and 24, since we are very careful with starting new projects. And the existing one is being completed as we go along. So you have a declining value in the balance sheet for projects in these two categories. And during Q1, we finalized one. uh property in the category to sale with a quite good sales result and we also finalize some properties for management and the long-term trend is and our goal is to over time increase earnings capacity and cash flow profit from property management so 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. And here on next slide, you can also see the development from inception at 05, portfolio value, debt to assets, and occupancy rate, where you can see that the occupancy is very stable for the last 18 years. And for the last, what is it, seven maybe, has been the exact same occupancy rate. So it tends 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. And here is the earnings capacity that we update every quarter. And now it's slightly lower than last quarter. And you can see the explanation is that we are spending more money on financial cost because of higher interest rates. Otherwise it's very small changes from the last quarter. And we have a forecast for 23 of the 6.2 billion as an outcome for property management profit. and the forecast is unchanged compared to last quarter.

Over to sustainability. Valet 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, Valder'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 target 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 risk based on future climate scenarios, vulnerability analysis and action plans. Balder has conducted approximately 100 climate risk analysis in Sweden, Denmark, 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. And 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 480 million euros, which has extended the maturity structure. We have also continued our buybacks of bonds during the quarter and have repurchased 2.6 billion SEK. The largest part has been bonds maturing 2024 to 2026. But we have also repurchased bonds with longer maturities. The hybrid with first call date March 2023 of 320 million euros has been repaid. And as you can see in the graph regarding available liquidity in comparison to maturities, we are well equipped for the coming year. And as I said, the available liquidity as of 31st of March was 25 billion SEK. And maturities rolling 12 months is a little less than 14 billion SEK. Out of these, 7.8 billion is related to maturing bonds. And the available liquidity corresponds to 111% of balance future maturities of interest bearing liabilities within 18 months. and 74% within 24 months. 70% of the loans is hedged as of Q1. And 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 assets 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 refixing 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 that the new financial target of net EBITDA of 11 times that was introduced ahead of 2023 is not met as of now, but has declined from year end, from 13.4 to 12.9 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 11 billion SEK. The bonds maturing in 2023 amount to 6.7 billion SEK and will be repaid during Q2. So 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 2.1 billion SEK. When these buybacks have been taken in consideration, the remaining maturities regarding bonds in 2024 amounts to 5.4 billion SEK and in 2025 to 5.9 billion SEK.

So looking at the share price development, you can see here from 2015 and forward the development and 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. And right now, as you can see, we are trading quite lower than the normal share price compared to the underlying metrics. And as an appendix, you also have the consolidated statement of income, balance sheet or financial position and you also have the shareholder structure. And with that, we thank you for listening in at this Q1 presentation.

If you wish to ask a question, please dial star 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star 5 again on your telephone keypad. The next question comes from Marcus Henriksen from ABG Sundal Collier. Please go ahead.

Thank you very much. Good morning, Eva and Erik. A few questions from me. First off, net interest coming at around 650 here in Q1. You had in the earnings capacity in Q4 around 725 per quarter. And Stibor and other companies underlying has increased since so 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 and historically the interest rates was zero more or less. So it really didn't matter. But now we have some positive results from, I mean, this is like 10, 15 billion in interest bearing assets.

Very clear. Then looking at the earnings capacity, it's now at 5940. And you reiterated the forecast from Q4. So first, is the CPI for residentials included here in the earnings capacity, as I presume most of it is from Q2? And 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?

Exactly, Marcus. We have some financial income, and you're also absolutely right that some adjustments on the resi side will occur after Q1, actually. So very well spotted and also 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 so we are a bit ahead after the first quarter. So and then we will get more income during the year from a lot of completions that will be very many projects completed in the next two, three quarter as well. So 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 residential 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. So it's a little bit of both actually.

All right. Then 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 and I think later on it will be the other way around because in the associates there are also some projects ongoing as you know and When they are completed, the cash flow will go the other way. So I think it looks stable. But maybe it's more like 24 we get money flowing in from that part. And the debt has been a bit lower actually in the JVs combined this quarter. So 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 Baldur's Need for Maintenance, CAPEX, if you can give us percent of property value or a rough absolute figure, what you think is needed to maintain your portfolio in good shape?

We have been guessing before maybe 200 per quarter but normally that will also give us some sort of return. We don't have an exact figure actually Marcus but normally CapEx gives you either reduced cost or some income. but so far it's quite good you know the tenant demand and still quite stable markets so then we can invest and get the written reasonable return on the investments all right thank you those were my questions thank you marcus please state your name and company please go ahead

Hi, this is .

Your line is now unmuted. Please go ahead.

We can't hear you.

Hi, can you hear me?

Yeah, now we hear you.

OK, sorry. So just a few questions, and yeah, Andres Tom from Green Street here. Firstly, on credit metrics, you know, obviously there was a credit downgrade from Moody's, which was sort of unsolicited, but just trying to understand also what sort of conversations have you been having with S&P on that front? And what are they sort of saying about your credit metrics? And 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. And basically nothing happened either. So there wasn't really a big reason to have a discussion. So we update every quarter and I don't see any changes there. If you look at their rating grid, we are very spot on. And we have headroom in the ICR. So even if it's a bit weaker, it's still... stronger than it has to be compared to the rating. So I think that looks stable they were more cautious about liquidity actually S&P and that improved a lot so that was more what they were looking at. And then buying and selling assets well our guess is that we will be Most likely some net selling in Q2. No, nothing dramatic, but that is our guess. And then 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. And so then we will have a return on those and the smaller part for projects in the balance sheet. And that is also, you can say, to some extent rating positive. They prefer cash flow properties compared to projects if we look at the rating.

Understood. Thank you. And my second question is around foreign currency exposure. Maybe you can give a bit of a color insofar as how your Euro and Norwegian Krona exposure is hedged. How much of that is naturally and how much sort of financial hedging do you need to use? And related to that also, you know, the like-for-like rent growth of 5.5%. What would that be, including those currency fluctuations?

The 5.5% is... adjusted for currency and otherwise it will be very complicated to compare you know so so that is adjusted for currency and if we look at the euro we have a small net position so you can say if the euro if the krona weakens against the euro we will have a small positive effect on the nav If everything else stays the same. If you look at the Norwegian krona, then we will lose when it's weakening. So there we lost some equity this quarter. On the other hand, we gained that equity last year. So it goes, you know, from time to time in different directions. So basically a small net exposure in euro, a bigger net exposure in Norwegian krona, right?

And then 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 evaluations. 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. I mean from quarter to quarter are not that much new information. But 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. And also in some cases with low RECI yields, we think that they should be a bit higher. So 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. So 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?

So 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.

OK. And margins, if you could provide only?

I mean, if we use them? Yeah. Yeah, I think it's more or less like a loan margin, isn't it? Yeah, it is.

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?

Yes, we are talking to them and we are still evaluating if it's if we should go with them as well or not. Maybe, you know, Fitch has a kind of different way of measuring. So we have to think about this if we can combine those in a good way or because S&P is more, you know, LTV, ICR, Fitch is more that EBITDA. We have to think so we don't do anything that will be complicated for us. But otherwise, we have discussions with them and they are very professional.

Got it. And my last question, it's more on a broader note. So the sentiment 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 but 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 and right now what we see is there are sellers, but not anyone who wants to sell, you know, sort of cheap. So if you get a good price, then you do a deal. Otherwise, you don't sell. So there seems to be a lot of buyers hoping for low values, but nobody is selling at low values. And I heard it's actually the same in Norway. Everybody says that we will buy if it's cheap. And if everybody says that, not much will happen. So I think it's more stable than the perception.

Got it. That's all from me. Thank you. Thank you.

The next question comes from Frederick Sion from Carnegie. Please go ahead.

Good morning, Erik and Eva. Yes, a few questions. So starting off with the investment. So I was a little bit puzzled and surprised by... the property management investments during the quarter. So they stood at 1.9 billion, according to report page nine, which is up versus the 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, Fredrik. And they will decline soon. quite rapidly. If you look ahead two, three quarters, there are not that much left actually. And also there have been some stages of development projects that was sort of, how to put it in English, all the requirements in the deal were fulfilled. So there are also some stages that were not in the list last quarter. So that is one of the explanations as well. Now there are nothing more that will come into that list. And then you have some investment that is not new build projects, you know, on top of that. But this will drive more income for us. So the level will go down. So the amount will go down and the projects in the balance sheet will go down and the rental income will go up.

Okay. So the 9 billion you have lost here, any... Any idea on what that will land for 2023?

Maybe if I'm guessing then maybe five, six perhaps if I'm guessing Fredrik. It's very hard to know exactly 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. So second question. So you have a negative outlook with a triple B 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. And I hope that they will feel secure about liquidity. Maybe they want to wait one more quarter in a while. difficult to tell exactly but their concern was liquidity and we didn't really was concerned about it because we know banks are not you know bank loans even if they expire you rob them you know but they have a sort of different angle on that so that was the thing that we had we made different projections actually but now even with their way of measuring, we have a very good liquidity position. So 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 where we should be for this rating that we have. We haven't talked with them lately, actually. We always update after quarters and in the meantime, If nothing special happens, then we don't update if there's nothing to happen.

As you can imagine, there's a lot of focus on liquidity right now, but just to understand their methodology, so how much unutilized credit facilities plus cash are needed for them to feel secure about not having any negative outlook on Balder?

They want to have a 1.2 for one year ahead, rolling 12 months.

Exactly.

So the one you report on page 11 in the presentation, that can compare with the 1.2 they're looking at. Exactly. Two more questions. Third one. Loans hedged 70% as of Q1. what will that be if you don't enter new swap agreements let's say two years out?

Then you add on 23 you know if you look at the slide with the loans then you add 23 and 24 that's roughly 50 billion and then you add if you said two years then you add 25 as well so maybe then it will be 36 perhaps if I'm sort of guessing, 35 to 37 or something like that.

Okay. And then my final question, rather nitty gritty, but if you look through the earnings capacity, Q1Q development, well, rental income increased slightly, but 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 so if you just take one percent or two it's you know 100 200 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 but That depends also on what happens with energy prices and everything. And also it can be that there will be subsidiaries to companies as well for energy. But when we did this, we haven't any... I don't know if we had a firm decision on that. But that can always be adjusted up or down, you know, a percent or something like that.

Yeah, certainly. Thanks a lot, Erik and Evald.

Thanks, Rik.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. The next question comes from Jan Eyrefelt from Kepler-Tjuvriux. Please go ahead.

Good morning, Eva and Erik. Just if we could Stick to that earnings capacity slide. If you look at the non-controlling interest that goes from 560 in the fourth quarter to 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 costs otherwise and a bit more vacancy. Okay.

And second question regards your central administration costs. They were, as I looked to it, on a high level for the first quarter. Should we expect that line to come down during the year?

I hope so. 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.

I don't know exactly on that actually. I don't have the exact number in my head on that.

Okay and fourth question really regards your EMTRA position. What's your long-term strategy for your EMTRA 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. But the share price is extremely cheap right now. And it looks good for them. They have a strong market in Oslo. They also have been selling some assets. So I think they are in a quite good position, Entra, that we will not do anything.

with that right now I think it will be even if it's cheap it will be not I mean it's a big move to actually do something there so we will be we will wait and see okay my final question regards your commercial properties offices etc do you see any signs of increased vacancies in that space

So far it seems to be more stable than we could have feared if we go back in time. But of course we follow it very closely. But now so far it's better than what we could have feared. Even in Stockholm. Because maybe there we could see these higher ends and what will happen and everything. But there's still very good demand. So let's hope it continues. Right now it looks like that and the economy is not that bad overall either. I mean it's also been better than what we could have guessed in general. But 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 John.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Okay, thank you everybody for listening in and have a nice day.