Fastighets AB Balder (publ)

Welcome to the Boulder Q3 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 Balde's presentation of the year-end report for 2022. Here from us today is me, Eva Wasberg, CFO at Founder, and Erik Selin. After the presentation there will be a Q&A session.

Yes, thanks Eva. So we present the year-end figures, but first we have some short information about Balder as a company. We are listed real estate companies since 2005. We have properties predominantly in the Nordic countries, and we have roughly half residential and half commercial properties. At the year end, the property value was 217 billion, 96% occupancy rate, On the longer leases, the biggest leases are on average 10 years for our largest single leases. We have a rating at S&P that is a triple B flat. Net debt to total assets, 47.9%. We have cash, 25 billion cash and facilities at year end. And NAV per share stands at 92 compared to 84 last year. And the average NAV growth since inception of 2005 has been 29% per year. Looking at the Q4 figures, rental income was up 16%. Profits from property management decreased slightly, or 5%. The reason behind that decrease was in the financial cost, that we had an extraordinary financial income last year. So the underlying earnings were slightly better. But quarter on quarter, we have a decrease. Looking at the full year, rental income is up 17%. 11% and then looking a bit at the current status and looking forward the earnings capacity stands at 5.39 per share at year end and that is 4% better than one year ago and so this means that we have been able to offset increased interest rate costs with more income from the underlying business Net debt to assets, 47.9%, and we had a life-for-life rental growth of 3.9%. Looking a bit more at the portfolio, the characteristics is that it's very diversified, both in property type and in geography. and in property categories Resi is by far the biggest and then we have Office, some retail logistics and also other properties that can be mixed properties and hotels for example. We also invest in development of properties in the Nordic countries and we have basically two categories of the development. One is where we build and we keep it. Mostly residential, but can also be pre-let commercial properties. And we have also then another business line, predominantly in Sweden, but some cases in Finland and Denmark as well, where we build residential properties and sell to consumers. And this shows up a bit differently in the P&L. The properties we keep will be unrealized value changes. as we go along with the projects. The properties that we sell or the apartments that we sell, then the result is booked after completion. So the results from properties that we sell or apartments that we sell will be more irregular if we look at it quarter to quarter. But of course, the long-term trend can be interesting to look at, but quarterly figures will be irregular in that segment. But the most important thing has always been to, over time, increase the earning, the cash flow. We are a long-term owner and so profits from property management is the single most important thing that we focus on. And since inception, we have had an upward trend there over the years. Hasn't been the same increase every year, obviously, so it's been a bit irregular there as well. but the long-term trend has been good over time. But things can happen in different years that sort of affect this trend a lot. So in 2008 we had a small decrease, and then you might think it was the financial crisis, but it actually wasn't, because we sold a lot of properties in 2007. But then it took off again, and you can also see here on this slide, between 19 and 20, and that was the pandemic that made things slow down a bit. It was still an increase, but not that fast. And then last year, as I said before, was 11%. And on the next page, you can see from the beginning that portfolio value has been increasing since we started in 2005. And at the same time, we have lower the debt to assets, so the trend is down there also on a longer time horizon. Occupancy has been very stable and of course we have a very spread portfolio of different areas, cities, asset classes, so it makes it very sticky. So my forecast is that there will never be any big changes up or down the occupancy rate. year end as well. And then we have what we call earnings capacity and this is sort of how the situation is every quarter and it's updated every quarter in the quarterly reports. So there is how it looks on that particular quarter end. So here you see And then what's new for this year is that we also make a forecast for the profit from property management for the full year 23. We never did that before but we felt it could have a value this year since there seems to be a lot of uncertainty from an operational standpoint. So our forecast is that And as you can see, the last figure here, 31st December is 6 to 20. So it's more or less the same. And what we then see in this year is that we will have some more rental income from projects that will be completed. And we'll most likely have some more interest costs. So net financial will be likely more than 2.9. our forecast as of today. And now I hand over to Reva again.

Yes, over to ESG. Here you can see our sustainability work, and sustainability is a prioritized issue for Bandar and an integrated part of our strategy and operation. On this slide you can see our framework for the sustainability, which is based on the international goals of Agenda 2030. and also commitment that the company strives to achieve. Other sustainability work focuses on the issues where the company has the greatest opportunity to influence and at the same time manage the risk affecting real estate companies in various sustainability issues. Examples of sustainability issues are reduced emissions of greenhouse gases, environmentally certified properties, sustainability in social, in our property area, assistance ethics, together with a good working environment for our employees. Yes, and on the next slide, you can see a little bit what we have been focused on during this year and also a glance on the focuses for 2023. So 2022 is the first year in which we must report the proportion of green activities in the business, the focus on our existing properties. We have recruited to strengthen the team around social sustainability and area development. We've also carried out a group-wide climate calculation and completed screening of scope three. We have started the transition conversion to a fossil-free vehicle fleet. in the Swedish management organization, as well as initiatives undertaken for sustainable travel to and from our properties. For example, 120 charging points in Sweden. And when we look ahead of 2023, we will focus on updates of other green framework. We will compile climate accounts for scope one, two, and three. which will also form the baseline for our science-based targets. We will carry out screening of Scope 3, that is indirect emissions, which includes our subsidiaries at group level. We will also use their climate calculations to set the climate roadmap and submit our climate targets for validation at the science-based target initiative. We will continue work with climate risk analysis and action plans as part of the EU taxonomy course. And as many new trends will affect sustainability reporting, we are making a review to meet this as well. And over to financing. Having a balance sheet that satisfies the criteria for an investment grade is very important to us. and the board of directors have decided to introduce an additional financing goal regarding net debt EBITDA with a target of maximum 11 times over a period of time. We will achieve this goal through a combination of reduced net debt and increased income from our existing property portfolio and the completion of the project. We have this. manage our balance sheets and maturity structure. During the fourth quarter, we have, for example, entered five new term loans to a value of just over 6.1 billion SEK. And all of the banks that we have had contact with have been very positive and have believed this. As you can see in the graph, we are very well equipped for the coming year. And you can also see some other things that we have been performing during the year. The direct share issue, of course, of 1.8 billion. We have conducted a number of tender offerings during 2023 of 2.5 billion and 500 million euros, resulting in buybacks of 1.6 billion and 223 million euros. We have also called the hybrid. We first called it in March 2023, amounting to €320 million. As of year-end, the available liquidity, including confirmed loan commitments, was €26 billion, which is 92% of our future maturities of interest-bearing liabilities within 18 months. and 80 percent within 24 months. Seventy percent of the loans is hedged while interest rate changes have a limited impact on the cost of borrowing. And all financial targets are met. It is not so that we have introduced a new financial target of 11 times over time. And that is, of course, not met at day one. You can also see in the graph the portfolio value and the net debt to total assets, as well as secure debt to total assets over time. At the next slide, you can see an overview of the debt maturity for bank, bond, and commercial paper. For 2023, the combined debt amounts are approximately 16 billion. And the bonds maturing in 2023 will be repaid after Q2. As you have seen, we have today announced the tender offer for all bonds maturing 2024 amounting to 4.5 billion SEK. And on the lower end of the slide, you can see our financial targets. Equity asked ratio of 40% in line with our target. Net debt to total assets, 47.9%, target of 50. And ICR of 4.7, where we have a target at 2. And also the new target, net debt to EBITDA, 13.4, with a long-term target of 11 times.

Yes, looking at the share, As you all know, share prices can be very volatile. They've been absolutely so for the last year or two or three, not at least in real estate stocks. The long-term trend is anyhow there that over a long time period, most likely the share price will follow there. NAV but you can have these short times where we have substantial premiums or substantial discounts and as investors you all know that this happen every now and then and year end there is a discount of almost 50% if you look at the share price compared to NAV and as the the P&L and the balance sheet where you can see all the specifics and also where you can see how the shareholder structure is by year end. And with that we thank you all for listening in.

If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Jan Eyrefeldt from Kepler Chuveryux. Please go ahead.

Good morning, Kepler Chevreux. I actually have a couple of questions. First one is, in your earnings capacity, you raised the contribution from associates by 100 million. Could you just explain a little bit about the reasons behind it?

No, the reasons behind this, we always try to think what's reasonable. And so it's a small adjustment. Nothing special reason, actually.

And could you comment on which company that contributes with the upgrade or?

No we summarize all of them I don't actually know those all the parts there Jan but okay small adjustment.

Yeah and then a question on the bond market you want to be in the bond market and could you just comment upon What kind of spreads you would like to see to enter that market on a broader view?

We basically think that we compare with banking markets and it could make sense to have some premium or pay a slightly higher interest rate in the bond market but if it's much higher we think it's better to have bank financing so a bit depending on how the bank market is but let's say right now we would like a price maybe maximum 200 or preferably a bit lower and we're not there right now so that's why we're focusing on bank financing for the time being but long term we think it's interesting and we want to be there long term but it's more of a timing issue and we think it will be better further on.

Value changes, you took down your property values by 0.8%. Were there any large differentiations between different segments behind that?

In general low yielding residentials in Sweden is more under pressure value wise than other segments I would say. Otherwise there are not any big changes. this quarter but of course if every quarter is like this and over time it will be a big change and also interesting to see that we will follow this for example Copenhagen I mean we own more or less only Resi and its owner's apartment and the prices there are actually increasing quite fast we haven't done any changes but it's an interesting observation that it's I think year over year it's eight percent plus

Question on Entra. We saw that Castellum took down the value of Entra but you didn't as far as I could see. Could you comment upon your need to write it down?

We have it booked in line or slightly lower than Entra's NAV. So the long-term value we agree with Entra is NAV. I don't know how Castellum had it booked before. They probably had it booked over NAV. That is my guess. So most likely we have the same value now. I haven't looked at Castellum, but I would guess so. And this is because it's a long term holding. You have the long term value in the books. So you don't take mark to market up or down unless you think it's a permanent loss. So that's the accounting principles, you know.

Okay. And a final one from my side regarding the project Carlatonet. Could you just explain how much in percentage wise it is sold and are there any risk that you will lose money on that project?

No we don't think we will lose money. I think it's extremely small likelihood because it takes that you know they make very big losses Because it's like a waterfall structure so we have a fixed result on that one. But anyhow it's sold about 80% of the apartments right now. And for 2023 it's very few left and then there are apartments to sell next year. But I actually feel less and less worried about it because it's so close to be finished now. So I think if there was a risk, it was maybe one or two years ago because the construction could have been more expensive and other things could have happened. But we are approaching the finish line.

Okay. Thanks for taking my questions. Thank you.

The next question comes from Marcus Henriksen from ABG Sundal Collier. Please go ahead.

Thank you very much. Good morning, both. First, a question on the condominium projects. If we look at the different projects, some have very good sales ratio, while others, I've noted, for example, Korallen, Frölunda Park, Fabrik 46 on Kungsholmen have quite a lot of apartments still for sale. Could you give us a bit of an overall update on the strategy going forward? We have seen JM lowering its prices, for example, in order to safeguard cash flow.

Yes, if you take Frölunda, that was originally supposed to be a rental project. But then we changed our mind and make it into a condominium to sell. So that's why it's a bit late. We will see how it goes soon. It will be sold in parts you know. So worst case we can always go back and rent it out anyway. But we think it will work out as a project to sell instead. And as you said in Stockholm it's been a slow market. So we will see what we do there. But the remaining projects for 23 years sold. So that is stable. And then there's only those two left 24. So I think it actually went quite well overall. And it's very, very small parts for us. It will not move the needle in any direction to projects.

Fair enough. Thank you. Dan, did you get any electricity support here in Q3? And if so, how large was the effect on NOI, positively affected?

I think it's very small because we don't get that much. And part of it goes to the tenants, you know, because we have in the contract that you sort of pay for it. And if you get money back, we also adjust in that way. So I don't remember the figure, but you know, it's very small. Negligible.

All right, then did you have any positive contribution from bond or hybrid bond repurchases here in Q3? And if so, what's the figure? Sorry?

If it was a positive.

Did you have any positive contribution in net interest from repurchased bond or hybrid bonds in Q3?

Yes, there was a little effect there.

And do you have the figure?

No, I don't exactly. I think we have some plus, some minuses. So it's a smaller plus overall in the financial net, but not any big numbers.

All right. Then a bit of a follow up to Jan's question before on Carlatonet. First, you have the priority dividend of 600 million, but you have also signed to acquire around 1400 apartments and I think it's 10 or 12,000 square meters of commercial assets. And you also have an option to acquire the hotel and offices in Kalatorna. Could you give us a bit of a more brief update on potential capital in and out flow?

No, we have a call option. So we can buy, but we don't have to buy. So if we want to, we can buy. We don't have to buy the commercial premises. So it's voluntary for us. And we haven't decided yet, by the way. And the other projects in Karl-Atomnöt that is in a JV, we have them on hold because we think we want a stronger resi market before we do anything there. So they are on hold for the time being.

Thank you for that. And last question. a bit on Entra. If we look at your rating, you're well within your threshold of the investment grade rating. Is that something you think is the way forward also for Entra being a main shareholder in that company?

I think it's actually better you ask Entra directly to have a more precise answer than me answering for them.

All right, thank you. That's all my questions.

Thank you very much.

The next question comes from Neeraj Kumar from Barclays. Please go ahead.

Morning, everyone. I have just a quick question on your rating from S&P. I see the rating was put on negative outlook like almost a year ago, given that you have recently even bought hybrids. Is it fair to assume that you feel comfortable that the negative outlook will be resolved without any negative implications or any color around that?

That's our view, yes.

Okay, that's helpful. Thank you.

Thank you.

The next question comes from Andres Toom from Green Street. Please go ahead.

Hi, good morning. I just wanted to inquire a little bit more on your reported valuations. Firstly, just looking at it, the change hasn't been that material over the last sort of almost a year. So when looking at your peer group, you know, valuation declines are somewhere in the 10 plus percent range for the most part. And then also the data that comes from, you know, some of these companies that do appraisals from you suggest that yields are out quite a bit in your markets. So can you help us square that against just your own reported valuation that just doesn't seem to move at all?

I mean this is a lot of different parts you know so I don't know exactly the peer group and I mean I think it's always different companies and maybe you should have it over a longer time period but I mean for example you have the Danish market where prices actually are plus eight percent year on year so it's a big differences within the portfolio if you look at owners apartments you know so it's a lot of different sums you know and I think it will never happen that all the companies have the same up writings or downright things. I mean, there are always big differences if you look at short time periods.

So are you saying that in Denmark, your valuation is anchored to owner occupiers apartments, not in investment product institution?

No, I know I'm not saying that, but we own only owners apartments. And looking at that market, the prices are actually up. But we don't take that in. But it's an interesting observation because if we want to, we can still sell it at the owner's apartment.

Sure, but you operate them as rental apartments, right?

Yes, but it is owner's apartment because we operate them as rentals.

And then I guess other parts of Nordics, I mean, in Helsinki, there's some comparables or pending comps where sort of yields are in the high 4% in Sweden, obviously, as well. Just looking again on some of these companies that do your appraisals, they've moved out yields quite a lot. So these are not in conjunction, I guess, with their own reported yields then. And I'm just wondering why is that?

We have the same external valuation in our company as in, for example, Koyamo. So it's the same firm, the same persons.

But Koyamo have marked down their values by about 10%, right?

Yes, but they also marked it up a lot more before. So we still have lower valuation compared to them if you look at the numbers.

Okay. So my next question, maybe coming back to Jan's question again on the earning capacity, just trying to understand, I suppose, how is the profit from property management for the associated companies actually going up in your earnings capacity whilst your own profit from property management estimate in the earnings capacity is coming down? So What's different in your own company structure versus the associated companies that there is a diverging trend there?

It's a group of companies and it is very small changes, you know, so this is sort of our view when we look at it is very small changes.

Okay, and my last question is just trying to understand also a bit more on the financing side. How are debt financing spreads or credit spreads in the banking market? How have they evolved in sort of last three to six months as you are looking to increase your lending also towards the banking market?

I would say it hasn't happened that much actually for the last three to six months. It's pretty steady.

Can you give a bit of color insofar as where the margins stand for different property sectors at the moment?

It's actually a little bit different between both banks and portfolios. They look at it in a little bit different ways, I would say. And I mean, average margin for the bank loans that we make now are about 1.6.

Yeah, it depends also if it's a RECI commercial, LTV, how long time the loan, you know. So there's a lot of different parameters there.

Yeah, and from bank to bank.

Yeah. But I think that's maybe a good guess for the average.

Yeah. Okay. And the last question just around the development organization. Obviously, you've cut down quite a bit your project development ambitions as well. seeing elsewhere how developers are cutting headcount quite aggressively just wondering how much potential is there for boulder to reduce the size of your development organization and how much it could help on the cost side yeah that will be adjusted as we go along you know so if they if it's decreasing we decrease it and it's been decreasing a bit already but it's a i mean we adjust um

We adjust regularly if it's need to adjust.

Okay, that's it from my side. Thank you. Thank you very much.

As a reminder, if you wish to ask a question, please dial star 5 on your telephone keypad. There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thank you all for listening in and have a nice day. Bye.