Fastighets AB Balder (publ)

Welcome to the Boulder Q2 Report 2023. 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 speaker's CEO Eric Sellin and CFO Eva Wasberg. Please go ahead.

Good morning and welcome to Balder's presentation for the second quarter. Presenting is me, Eva Wasberg, CFO, and Erik Selin, CEO at Balder. After the presentation, we will have a Q&A session.

uh yes hi everybody uh baldo the big picture is that we have a property value of 222 billion 96 occupancy rate it's been stable around there for many years we have a mix between commercial and resi and on the commercial side the biggest leases are on average 11 year long Net debt 49%, interest cover 3.6. We have 20 billion in liquidity and NAV stands at 91 per share. Moving over and looking at Q2, we had a rental income increase of 15% and even NOI on 15%. Profit from property management, though, didn't decrease that much, but 3%. And the explanation is that we have higher costs for interest rates, obviously. Profit from property management, looking at earnings capacity, now stands at 504, which is 4% lower than last year. Also, the explanation is higher interest rate cost. And like for like, rental growth 5.4, which we think is good. And NAV, as I said previously, 91 per share. Looking at the portfolio, this has been quite static for many years now. 80% is located in capitals and larger cities in the Nordic region. And then we have the cities Helsinki, Gothenburg, Stockholm, Copenhagen as the biggest in that category looking at property type it's a bit more than 50 percent is resident residentials and then we have a diversification on the commercial side so we have office retail hotel industrial properties so a little bit of everything so all in all a very diversified portfolio looking at categories and geography uh besides holding a management portfolio we have some property development we are focused on residentials we can do commercial if we have it pre-lit or to a special customer but the big part is residential development and this comprises two different categories one where we build to keep and one where we build to sell to consumers retail selling this part of the company is decreasing right now quite rapidly because of three factors basically we have higher construction cost and we also have higher interest rate and the rental level haven't gone up in the same pace so it makes it less profitable and also looking at selling apartments is a bit tougher situation with slightly lower prices and higher construction costs so this part has been declining or is in decline for the time being and right now we have a lot of completions done in q2 there will be a lot q3 q4 q1 and then there will be quite slow pace in this one but over time it holds a good potential later on so we will continue to develop the land bank sooner or later it can be interesting again and there are no big book values on it so long-term potential short term it will be a smaller part of the business looking back we have the main goal of increasing cash flow or as we call it profit from property management and the long-term trend has been promising there but year by year it can be very uneven increases and right now we're more at a flat level due to the higher interest costs but this is the long-term goal to actually increase earnings power and in that way increase the value of the company over time other metrics of course is important to think about debt to asset occupancy rate and so on occupancy rate been very stable for many years at 96 back in time it also happened it was 94 95 long time ago but normally a very stable level there and we don't see any big changes in the foreseeable future either net debt to asset is slightly increasing and that is more linked to a bit lower values than than that we increase the debt that much it's increasing in swedish kronor but that is uh that's weakened currency, so calculated to kronor is a bit more debt. But on the same exchange rates, it's not an increased debt in Q2. And we see the trend going down. With lower investment activity and good cash flow, it will automatically slowly decrease in constant currency. We also have a slide called earnings capacity. It's not a forecast. We have a forecast as well. We had a forecast for the first time in 23. It hasn't changed from previous quarter, but we thought it was a good idea to have a forecast since there were a lot of other uncertainties around. But this slide is updated every quarter. So this is more of how it looks at that particular day. So everything moves around, obviously. But here you can see how it looked at Q2 with rental income, cost, financial cost, and so on. And we have the profits from property management slightly lower than last quarter. And once again, it's the financial cost that is going up for obvious reason. Otherwise, the underlying business is performing well, as you can see, with increased earnings before financial cost. And that seemed to be a trend that will continue.

On this slide, you can see our framework for sustainability, which is based on the international goals of Agenda 2030 and commitments that the company strives to achieve. Balder's sustainability work focuses on the issues where the company has the greatest opportunity to influence. and at the same time manage the risk affecting a real estate company linked to various sustainability issues. Examples of sustainability issues are reduced emissions of greenhouse gases, environmentally certified properties, social sustainability in our property areas, business ethics and a good working environment for our employees. And here you can also see our goals, which, for example, is to reduce water use by 2% per square meter and year. On the next slide, we have a couple of points that has happened in the sustainability area during this quarter. In June, we published our impact report for 2022 containing a description of how the funds have been used and the amounts of green assets. which has increased compared to prior year. As I mentioned in the Q1 call, we have a focus on increasing the proportion of green financing, as well as more environmentally certified properties in the existing portfolio. We have also updated the green financing framework, which has been developed together with Handelsbanken and is based on ICMA's Green Bond Principles 2021. In the framework, we have raised ambitions for energy efficient and environmentally certified buildings, and we have aligned the requirements with the EU taxonomy. Cicero's shades of green issued a second opinion on the framework and assigned it an overall rating of medium green. We have now submitted climate targets for validation to the science-based target initiative with 2022 as a base year. We have set near-term targets to reduce climate emissions in our own operations by 55% in year 2030. The long-term target is to reach net zero emissions throughout the value chain by 2045. And the climate targets apply to Fastid Saber Balle's entire group, including consolidated subsidiaries. And according to the time schedule, the climate goals is expected to be validated during November. Balder prioritise summer jobs for young people and contributing to meaningful spare time for children in our residential areas. As an example, around 200 summer workers will be employed in our residential areas in Sweden this summer, and we also organise camps and sport activities during the summer. Over to financial strategy. We have continued to buy back bonds during the year and we have repurchased bonds of 5.5 billion SEK so far. And during the second quarter, the amount was 2.9 billion SEK. The largest part of this has been bonds maturing during 2024, but we also have repurchased bonds with longer maturities. We have also repaid maturing bonds during the quarter of almost 600 million euros during the second quarter. We have chosen to continue to maintain a conservative profile of liquidity risk in the company through a long maturity structure and a large reserve of liquidity and financing lines. The available liquidity as of Q2 is 20 billion SEAC and maturities rolling 12 months is approximately 15 billion. As I mentioned, the available liquidity as of Q2 is 20 billion and it covers maturities in 2023 as well as 2024. Our ratio of secured debt to total assets is still low and is as of Q2 20.8% and the net debt to total asset is 49.1. 70% of the loans are hedged with interest rate swaps and fixed rate loans. On this slide, you can see the split between financing sources, as well as the split between unsecured and secured loans. Valder is a significant issue on the bond market and strives to have a financing structure that provides stability to operations over business cycles. Worth mentioning is that the proportion of unsecured bonds has moved from 64% in Q1 2022, when the turmoil in the capital market started, to 49% as of this quarter. To the right, you can see the interest refixing structure, where the average interest rate for the current year includes the margin for the floating part of the debt portfolio. All financial targets are in line with our goals, except the newly introduced financial targets of net debt to EBITDA of 11 times. Over time, an increased net operating profit and a cash flow that can be used to repay loans will reduce the debt ratio. Here is an overview of the debt maturity per bank loans, bonds and commercial paper. For 2023, the debt amounts to 6.5 billion SEK, which is related fully to maturing bank loans and commercial paper. We have no more maturing bonds in 2023. The maturing bank loans will be extended, so if you look at the maturing bonds in the coming years and put it in relation to available liquidity, You can see that we have already covered the maturities in 2024, 2025 and a large part of 2026. Maturities for those three years amounts to 21.7 billion SEK.

Well, thank you everybody for listening in today. You also have some slides in the presentation with the share price, consolidated statement of income and financial position and shareholders. And now we move on to Q&A.

The next question comes from Lars Norby from SEB.

Please go ahead.

Good morning, Erik. Good morning, Eva. Good morning. Starting off with capex. So capex coming down a bit in the second quarter by some 600 million or so. Can you just give us an update on your outlook for the full year? For that matter, going into 24 and 25, what you're expecting?

I think it will decrease gradually. We still have a lot of completions Q3, Q4. Normally, a big part of the construction cost comes at the end of the project. But after that, it will be less and less. Actually, also worth to consider is that we build a lot of residue to sell to consumers. If you look at the net divestments, we actually, when all of the projects and the slides are completed, we will receive maybe one or two billion net. So it will go in and out.

Could you go below, say, six billion this year and down below three billion next year? Is that reasonable?

I think maybe you should look at the net rather than gross figure, you know, because we invest and then money comes in when we sell, you know, the property that we build to consumers. But if we look at the things we're keeping, it probably will go down to something like that. No, I think even less actually next year, if I'm guessing.

Okay, and then a quick question on the net that David talked about. 13.0, I believe, rolling 12 months, target of 11. When do you expect to get to 11?

We hope that we can reach that next year with a combination of more NOI, less debt, and also income from... In the calculation, we have not value changes in property, but realized result in property development, because that part ties up capital and cost, so that's why we also have the income included. So somewhere around there, but it also moves around a bit with currencies and stuff. But slowly we will have the trend of lower debt and higher NOI as we go along.

Okay, thank you. I'll leave the floor for other people to ask questions.

The next question comes from Frederick Sion from Carnegie.

Please go ahead.

Good morning, Erika Neva. Four questions from me. Let's start off with the S&P requirements on the terms for retaining the current rating on liquidity to maturities. It's now at 1.3. What threshold is there?

Well, the threshold is they want to see 1.2 for 12 months. And they also count in other parts than the available liquidity. So, I mean, if we look at all in all for us, we are more like 1.4, 1.5.

So.

Okay. We have a significant headroom that is 30% better than we need to be.

Okay. So the 1.3 in the presentation, actually, just for their requirements, it's rather 1.4 to 1.5.

Yeah.

Okay. Then moving over to bond repurchases in the quarter, how much was the positive contribution to net financials in Q2?

It was approximately 100 million.

Perfect. And then I noticed that you have started a couple of co-op projects in the quarter, which was a little bit unexpected for me. What's the reason behind that?

There are actually one project that was defined as a coming start in Gothenburg. And the thing was that we got the permits ready. It was an appeal on the permit. And then we have a lot of buyers actually with binding contracts. So we have to decide either to call it off even though we have buyers or to go ahead. And we also have a fixed contract with Skanska who will build it. So all in all, we thought it was quite small risk to actually go ahead with it. It's been delayed for, I don't know, maybe one, two years because of this process. And what kind of booking rate or selling rate did you have? I don't know exactly, but I think the risk is extremely low on that project. It's a very good location next to our office. And then we also have one other project, but that is not the new project. It's actually moved from rental to co-op. So the other one is not started now. It's just that we decided to not do it as rental, but to sell instead.

Perfect. And then final question on investments. I know Lars touched upon this as well. Well, I'll try as well. So you invested about 3.5 billion in property management projects during the first half. What kind of level do you expect for full year and how much can that decrease in 2024?

I don't know exactly, actually, that figure, I must say. I don't pay that much attention to it because the projects are running along quite smoothly. So I don't know exactly. And then next year, it will be much less. We have some completions next year as well. But then if we don't do anything, it also, I mean, it can also be tenant demand, you know, if that is stronger than we can invest more. So But under all circumstances, it is a downward trend because we don't see many building starts or maybe none actually in next year at all. So it will be a falling trend, but I don't have an exact figure in my head.

So let me try the question in a different manner. You have about 220 billion of assets, and what kind of level is needed for maintenance and tenant adjustments? Is 1% of the property value excluding about 2 billion, or is it less?

No, I think it's less, maybe half a percent, or maybe even that. I think maximum. Perfect.

Thanks a lot. Thanks.

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. First off, you stated in the Q1 call that you were supposed to be a minor net seller in Q2 and you are that so far into 2023. Then could we foresee you divest properties going forward? Do you foresee that you could divest properties around book value? And could you then use the proceeds and allocate that into bonds?

Yes, I think so. So it can be the case that we sell something more and in that case we can use it to whatever we want to, we can buy bonds or just have liquidity, whatever. I mean, no, that can happen depending on, you know, it's a very slow transaction market, but we have always some discussions going on, you know, so something might happen there. Let's see.

Thank you. And on the transaction market, you mentioned previously that you don't get as many

emails nowadays as you used to get but do you what do you hear and see on the transaction market here in q2 or slowly into q3 yeah in general it's a very slow market transaction market as you all know and i get not as many suggestions not at all as back in the days and i think it depends on sellers are a bit waiting on the sideline as well as buyers actually so if you don't have to sell then the timing might not be the best right now and you basically never have to buy so so that's why I think it's very slow and it's hard to tell but if I'm guessing it will be slow for maybe a year or so and then I think you know yields are going upwards slowly but surely and Sooner or later maybe there will be an area where it's easier to do transactions. But I actually don't think it will be that many transactions as we were used to the last years. I think that was maybe a bit extreme level that you buy and sell properties in that extreme pace.

And properties don't need to change owner that often actually either.

Thank you. Then a question on net interest. You gave a good answer that to Fredrik before, around 100 million. But could you also highlight a bit on the earning capacity here for Q2? It's around 900 million divided by four on net interest. Does that include any financial income or you continue to be quite cautious?

No, then we are cautious.

Thank you. Dan, looking at your largest joint ventures, Entra, Collector, Trenum, maybe the Norwegian one, Anton V. How do you view upcoming refinancing in these companies? And what do you think about the current financial situation?

If you look at Trenum with AP fund, there's not an issue at all, actually. It's residential and together with the AP fund. So there is no refinancing discussion whatsoever. We have only bank financing. Collector is a bank with high liquidity and high profitability, so there is nothing to finance there for us. And looking at Entra, they actually don't need the bond markets for the next three years or something like that. And that is assuming that they don't do anything. And of course, they can sell something if they want to, and they communicate that they might do it like that. But you should ask them directly. I mean, they will tell you more specifically, but from their reports, you can see that they don't need the bond market for at least three years if it's not advantageous for them. So I think many companies like us will be a bit passive in the short term, taking care of the business and taking care of refinancing and

be in a sort of wait and see mood or maybe slightly net selling you know so that's my best guess right now thank you uh last question regarding construction costs um not not the main focus here but Do you see any change in price during the first half of 2023 or any signs in tendering or any signs of stabilized pricing?

Good question. It's actually a mix. I can say prices are no longer rising. I'm very sure about that. Then the underlying materials in some cases is much cheaper than before. But then there's a time lag before you see that in actual construction prices. And you still have, I mean, wages is slowly going up and so on. So all in all, I think prices are flattish. But they are much higher than two years back in time. So I still think it's a bit demanding to see construction picking up because... the cost level is a bit too high actually and i mean if you build rentals you have high interest rate high construction costs but not that much higher rent so it makes it difficult to get it profitable and in the build to sell market you can build off obviously in expensive location because their construction cost is not a big part of the price to the consumer but otherwise it's very difficult to get that to be a good business as well. So I think construction will slow down very much in the resi segment for sure. And in the office segment. But if prices comes down or not, I hope they do. But right now it seems that there are more sidelines than the underlying raw material is cheaper than before.

Thank you very much. Thank you for taking my questions.

Thank you very much.

Please state your name and company. Please go ahead.

Hi, this is Andres Toner from Green Street. So my first question is just around your capital allocation strategy. And I guess there's been some conflicting reports from media that you perhaps would want to buy some assets. I think it was from the SBB pool. But at the same time, obviously, you stated quite clearly that you're pulling back on developments. You already commented on potential disposals as well. So how should we think about the balance of that insofar as your capital needs go?

Yeah, that's actually quite easy. I got a question if some of the properties in SPB would fit in Balder, you know, without taking anything else into consideration. And then I said, yes, they have properties that actually could be interesting. I mean, depending on price. that's quite an obvious answer and in the same month i also told them that we will not buy that ourselves in that case we need to have a financing partner you know like a pension fund or whatever so i think it was pretty clear but then you know media always do headlines that make people a bit confused so okay there was basically nothing new there actually but

And then my second question is just around the fact that you are pulling back development starts quite materially. How are you also then adjusting your development organization internally in terms of just having those costs associated with that platform?

Good question. That will be adjusted gradually because we still have a lot of things ongoing, so we can't adjust too fast because then we can have other risks but but otherwise it will be adjusted gradually for us and for similar companies i mean if construction is going down that much or to to be more or less nothing then of course the organization has to be adjusted so so that will absolutely happen

And then my last question just around the reported valuations. Are you planning to do a full sort of external valuation at one point or is it going to be sort of your current internal plus a second opinion that you've taken?

I think we will most likely do it the same way that we always have been doing. You can, of course, do everything, but it will not add much information. I mean, if you have 10 properties next to each other, you can evaluate one and you have the other nine. Or you can, of course, take all the 10, but it will be a lot more work and costs associated with it. So I think we try to be rational, you know, and see what really adds information and value. That's my best advice. Yes, actually, we always done it like this. And looking back in time, there are very small changes between our values and external valuations. It's very, very little. On a portfolio level, very little. It can be case by case, bigger deviations. But as a portfolio, it's normally come down to maybe one, two percent, something like that.

The external valuation that you're taking right now, the second opinion, what firm conducts that?

Oh, there are different countries. I don't even remember them. Do you know, Eva?

Mostly Nusek, I would say.

Nusek, okay.

It's the biggest one.

I think Denmark is Collier? Yeah, it is. And Finland is JLL. And Norway, I think it's what they are called. Some local firm and maybe some... I don't remember exactly.

Okay, thank you. That's all for mine.

Please state your name and company. Please go ahead.

Hello, this is Clark McPherson from Clarence Capital.

I just have a couple of questions on the financing and the bond repurchases. Based on the maturities that you provided in Q1 and Q2, it would appear that the repurchases have not been limited to Swedish kronor. I wonder if you can give us a bit more detail about the split of the bond repurchases between Swedish kronor and perhaps euros. Second question, do you have any intention to possibly do any bond tenders on the euro structure? And if you could give us an update on how you're thinking about the outstanding hybrid. I think in September of this year, you'll be at the one-year anniversary of the last tender, which means you have potential capacity to do another 10% tender on that if you would choose under the S&P methodology.

Yeah, I think tendering bonds, we will communicate when we do it, not before. It will not be really appropriate to... to not communicate at the same time to everyone. So we will leave that. Otherwise, there were two euro bonds maturing that we paid back in Q2. But the biggest sort of buyback was in Swedish krona, where we tried to get the bonds back before maturing. We bought some euros as well, but it was... mostly Swedish kronor in the buybacks, but maturing was only euros.

Yeah, that's true. So the almost 600 maturing was euros. And out of the 2.9 buybacks, 2.1 was in Swedish kronor.

Okay.

And the rest was euros.

Okay, that's great. Thank you.

The next question comes from Jan Eyrefelt from Kepler-Tjuvriax. Please go ahead.

Hello. Good morning, Eva and Erik. Two questions from my side, and both of them regards valuation. If we look at what kind of assumptions you have, my first question is what kind of assumptions do you have for rent uplift in your residentials, in your valuations for next year?

It's different in different places and countries, Jan. But I think on average maybe it can be four or five percent, but it varies between... Even in Sweden it varies, but it's also different countries. But I think overall it will be quite reasonable increases in residential rents. The slow part has been Finland, as you all know. But my guess is it will improve next year because construction will go down there as well. A lot of competition this year, but then it will decrease and you have the underlying strong trend. So we feel a bit more optimistic about that finally. Denmark is strong, so that will most likely be the, I don't know, 3, 4, 5%. And Sweden, I think something around 4, 5%, I think would be reasonable. Even though costs have increased more, you have to smooth it out during a couple of years.

Okay, thanks for that. And the second question also regards valuation. You took down your values by 1.2% this quarter. Could you comment a little bit upon how it is spread between different segments, the downward revisions on values?

One part was low-yielding RECI. They have a pressure to increase yields a bit. I think it makes sense as well. So there was, I would say, the biggest part. In general, lower yielding properties takes a bit more hits on values. High yielding assets seems to be performing better. So I think low yielding resi, low yielding commercial is the part that requires a bit higher yields right now. And that is for actually Denmark, Finland, Sweden. It's the same in all countries. So the yield's gone up a bit. And I think the lowest commercial yield's also gone up a bit. So that's a sort of big picture yarn, you know. Then there can be, of course, individual assets that moves around. But the big picture is that low yielding is some pressure upwards on yield.

Okay, thanks for taking my questions. Thanks, Jan.

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

Well, thank you everybody for listening in and for your questions.

I wish you all a great summer.

Thank you. Thanks.