Fastighets AB Balder (publ)

Welcome to the Boulder Q1 Report 2024. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing £5 on their telephone keypad. Now I will hand the conference over to the speakers. Please go ahead.

Good morning, everyone. Thanks for listening in to this presentation of Valder's Q1 results. My name is Jonas Eriksson, and with me I have Alex Selin, CEO, and Eva Vasberg, CFO. The full presentation is available on our website. In our introduction here, we'll focus on some of the key points of the financials for the quarter, and then we'll open up for Q&A. Please, Erik.

Thanks, Jonas. Yes, in the Q1 report today, we have a quite stable development. The rental income is 8% better than last year, same period. And the NOI is a bit even more, plus 8% increase compared to last year. But then looking at profit from property management, we have a decline of 8% and per share 10% due to more shares outstanding. And then the obvious explanation is higher financing cost since we have a good development in the NOI. And I think it's kind of interesting to look at one year. If you go back one year in time, you can see that the profit before interest costs is 800 million better. And we have roughly the same net debt. So the underlying performance is very strong in the portfolio and in the company, generating more returns before interest costs. So looking at earnings capacity, it's quite stable compared to last year and last quarter. It's slightly better compared to last quarter, but we have a few more shares outstanding. then we're basically flat from previous quarter and the same thing there that we have more money coming in but a bit higher financing costs. And looking at the other metrics like debt to asset and so on is kind of similar development. In different markets, not much happened last quarter, obviously, but in brief, you can say that Swedish resi is around 4-5% in the negotiations in general, a bit depending on geography and if it's new or old apartments and also small and big apartments can have different percentage changes. And on the commercial side, in our case, we have very stable performance in the quarter as well. In general, we think the office market is doing okay as well as hotel and retail. I think the only part of the market where you can see some pushback if you have the absolute highest rents and then had them indexed 20% since you wrote the contract, then you can have a risk of some pushback in rents. But in general, stable development and quite good demand in Stockholm Gothenburg. In Finland we have mainly residentials and as you all know they've been quite a big supply side for resis. We think that that is going to be better and we see some signs of that already but maybe we will do more so next year. We are at least back to positive light for like rental growth even if it's not big. But we think it looks promising and we have a big inflow of people to Helsinki region. So the underlying demand continues to be very strong and the forecast is less supply and a better market going forward. Denmark, we had small rental increases due to very low CPI and rents in Denmark is linked to CPI. But then if we write new contracts, when a contract is terminated, we get a bit better new rent than the incoming and outgoing rent. So actually in Denmark, a higher churn would be a bit positive for the income. But as you all know, Denmark is a strong economy and the Copenhagen region is performing very strong, both if you look at number of inhabitants and the business environment in general. It's also interesting to look at the cost for if you compare renting an apartment with actually buying, owning it and funding it with present interest rates. And now you have a big gap that is much cheaper to rent an apartment than to buy one. And that was long time ago we had this big gap if it ever was like that. And we think that that also points to a good market for rental apartments in Copenhagen region long term. NAV per share is slightly down but we also gave some detail in this report that is worth to just know the metrics of the convertible bond that we have. Because a bond is basically a loan and then we have warrant so to speak and if the share price go up that part is worth more and in our p l it turns out as a negative and it might be that you don't think about that so actually higher share price means lower lpv in the calculation so that's a bit funny and if you look at balder's derivatives this quarter is negative and that stands out but the explanation is that interest rate derivatives is positive and the part of the convertible that is a derivative is negative but that part will go to zero if it doesn't convert it zero and if it converts it don't longer exist we also made some extra information about that And we can also say a few words about the property development. As you all know, it's decreasing quarter by quarter. And if we go ahead a couple of quarters, there is very few development projects ongoing for us. Long term, we think the land bank is very interesting and promising, so we continue with zoning and preparing that obviously that we see no building start in Sweden this year. Our feeling is that sales in apartments in Sweden is picking up a bit. We see more interest and also more business being done so we think there's a better trend there. and looking at financing it's also getting much better in the bond market domestically so investors have better appetite and spreads are lower and long term we want of course to be in the bond market so this is positive for us and the banking system is also very well capitalized and open for business i would say and if you look at banks in general the loan books is flat year on year or even negative and that combined with very high return on equity makes it a very strong system and we think that is positive long term for the market and some more financing detail maybe eva you can go into that thanks eric

As Eric mentioned, funding conditions have continued to improve through the start of the year, and the spreads for our new funding agreements are now only marginally above our back book average. During the first quarter, we did a couple of smaller transactions in the bond market, corresponding to roughly 30% of all Valdez bond maturities for 24 and 25. We now have 47% of our financing in bonds. We have been fairly active in our interest rate hedging, rolling or increasing swaps during periods when rates have come down. Our average interest rate fixing is pretty constant since year end, but the proportion of debt with fixings rolling over in 24 and 25 has decreased by three percentage points. Our available liquidity is almost 21 billion SEK, and as we have mentioned before, this number will fluctuate a bit between quarters. And it's a bit elevated now to cover for bond maturities in Sato during this year and Valder in Q1 2025. Let me also mention a few hedging related items that I think are worth noticing to understand our accounts. Those of you who look a little bit more closely into the details know that we saw a 4% weakening of the Swedish krona versus the euro during this quarter. But the average exchange rate was 1.6% stronger versus Q4. causing a headwind for our NOI. Our focus is to hedge the equity in relation to assets, not equity in absolute amounts. That means that we will see fluctuations in both equity and P&L in absolute terms, but also in metrics like net debt to EBITDA and also cause some noise from quarter to quarter in the financing costs.

Thanks Eva. And with that, we open up for questions.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Jan Eierfelt from Kepler-Covriux. Please go ahead.

Okay, thanks for that. A couple of questions from my side. First one is on guidance. You had some kind of light guidance in the former report, but I don't find anything here. So could you just comment upon why it's not there?

No, we thought that last year was kind of exceptional in the uncertainty of basically all parameters, FX, interest, rental market, everything. Then we thought that the guidance could have value. Otherwise, we'd never had guidance before. But the good observation, Jan, that we had it and don't have it now. We think it's more stable situation now in general.

Okay. The second question relates to your rental income and your residential rental income has all come in in the first quarter or is there something remaining in the second quarter?

You mean the actual rental income? I think it's something some of them will be better Q2 and Q1 because not everything is from 1st of January. So a small positive effect in Q2, but not very big.

And the full effect, is that reflected in the earnings capacity?

Yes, I would say so. Okay.

And your LTV is just slightly above 50%. And in what kind of range do you feel comfortable going forward?

Long term, we want to have it below 50%. So this quarter was a bit inflated by currency movements and we also used the call option. But otherwise it will trend down again as we see it.

But it isn't necessary to sell assets to bring it there? No. Final question from my side. You were talking about higher yield requirements, slightly higher. In what segment do you see higher yield requirements?

We saw a bit higher in Swedish residentials. Otherwise, it was the same in Finland. Denmark was stable. The Swedish resid was a bit higher. And maybe, I don't know, something more that you can remember. that I know, but it's just small adjustments. Yeah, I know. Seven points and three points and points one in some asset. So it's slightly higher on average, especially in the Swedish RECI.

Okay, thanks for taking my question.

Thank you.

The next question comes from John Vong from Van Lanshot Kempen. Please go ahead.

Hi, good morning. Thank you for taking my questions. Just as a follow up on the guidance, maybe to ask it differently. Last quarter, you also mentioned in your management commentary that you expect to keep profit from property management stable for this year, that that should be attainable. Do you still believe that this is an attainable goal? I mean, looking at your earnings capacity, it did improve compared to last quarter, but it's still below last year's results.

Yes exactly but it's very I mean this is a very how should I say stable portfolio where not that much happened but of course a couple of percent is that precise you can never be right. I mean interest rates can vary something and FX can vary something so stable for us is a range of some percent up or down. But I mean, it seems to be very stable, actually. I mean, it's just one month and we invoice Q3 rents. So, yeah, we feel comfortable about that.

Okay, that's right. Thank you. And maybe we'll come to the life-like mental growth. In the past 3.7%, you had different drivers.

Sorry, John, you're breaking up a bit. Would you mind repeating that question, please?

Oh, yes. On the like-for-like rental growth, it came in a bit weaker at plus 3.7%. You highlighted different drivers. Just to understand whether I understood it correctly, is this mostly driven by Finland and Denmark?

Correct. Correct. So Finland you have like for like at least we are in positive territory now like 1%. But it's been improving slowly for a while but it was negative if you go back maybe one year or something like that. But we are optimistic about it now. I think it will improve because everything points to that direction. So I think we can finally be and that will finally be better. And Denmark residentials is the rents are linked to CPI and Denmark had just like one 0.5 or something like that in CPI so it's very low index but when we make new contracts they are higher rents than the expiry so but that's why like for like it's a bit low it is 3.7 so Finland Denmark lower and then you have of course much better in commercial properties in Sweden, for example, with maybe like 6%. And I will guess Norway is four or five, Swedish rest is four or five. So they're basically, you have the mix.

Okay. That's clear. And then basically you are seeing that 3.7, uh, improve over the year.

Difficult to know exactly, but I think Finland will be better. Denmark will be better on the other hand I think Swedish inflation is much lower so I think Swedish commercials will be slower if we look forward so but I mean if inflation comes down to two three percent and we can have like for like a bit above that level I think that will be good in the long run okay thank you and that's it from my side thank you

The next question comes from Fredrik CYON from Carnegie. Please go ahead.

Good morning. I have three questions for you, starting off with property PNP per share. We have been spoiled by solid growth historically. However, this year, it looks like it might decline somewhat. When do you expect Balder to be back in growth mode on that metrics?

I hope next year, Fredrik. This is very painful to have negative numbers. We don't like that.

Yeah, I feel with you. Moving over to occupancy rates, we've had it steady at 96% for a number of years now. Given what you're seeing in the electric market, one year from now, do you expect it to be lower or higher or about the same?

I would guess about the same, because if you look at us, we have, for example, 5%. vacancy in Finnish resi that's quite a big part and I think that one can improve if we look one year ahead but on the other hand we have very low vacancy in the commercial properties and as of today it feels stable and strong but I mean you never know we have nothing that we know negative but perhaps something so I would guess the same it's hard to go to But I don't think we should go down either if we look one year ahead. So I think it will be the same if I'm guessing.

Perfect. And then my final question, based on your experience of external relational properties and what you're seeing in transaction market, how many more quarters do you think we'll see negative fair value adjustments?

Then it's also a bit of a guess on interest rates. But if the interest rate curve, I think what is expected there may be that they will lower rent maybe two times or something like that. So let's say if the interest rate comes down, then I think values will not go down so much from this level unless the economy overall gets weak. But if we have the combination with present economy that is actually starting to grow everywhere and interest rate comes down, I think property values will be, as an average, quite stable. But maybe there can be a quarter or two. Who knows? It's always some lagging effect, you know, up and down. It's not like stocks. This moves slower.

Thank you. Those were all my questions.

Thanks, Fredrik.

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

Hi, good morning. So I only had one question and I was just trying to understand the component in your P&L profit from property management from associated companies. So when I look at the earnings capacity, That line item hasn't really trended down over the last 18 months. In fact, it's actually trended up. But it's quite counterintuitive, I guess, versus your own sort of profit from property management. And then a big part of those associated companies is, of course, Entra, where actually earnings are also trending down. So can you just give a bit more color around what's happening in that line item?

yeah yeah how is it actually turning up absolutely andres i think if you look back one or two years profit from property management excluding associated it's also stable so i think it's quite similar development if you compare the two and what we see now is that in many of the companies if you look one year back quarters a quarter I think there will be an upward trend actually in some of them already Q1 and some will be Q2, Q3. So that's why we have this earnings very flattish and not much happening. Entra is a bit down compared to one year, but it's actually up compared to last quarter. So it depends a bit if you compare quarter to quarter or year over year. But I think it's quite similar development as the other portfolio. And even in those companies, there will be less construction activity going forward. They are very reminiscent of Balder as well. So you have the effect of more rental income and less investments. And so as a group, they are kind of similar.

Okay, I guess the answer is that Entra is a sort of a headwind, but then the other parts of those associated companies are actually on a positive growth trajectory and therefore it's flattish.

Exactly, exactly. Right now that's the situation. Correct.

Okay, thank you. Thanks.

The next question comes from Lars Norby from SEB. Please go ahead.

Well, good morning. I think in connection with the Q4 call, I asked you about what 2024 is going to be like compared to 2023. And I believe your answer was something that it's going to be similar, but calmer. Is that still the picture? Or is there any change compared to, let's say, two to three months ago in terms of the market situations?

You have a very good memory, Lars. Thank you. I would say that the market situation is... I mean, I think the view is similar as three months ago, but the market situation is better in the sense that the bond markets is not strong, I would say, but it's quite okay right now. So, I mean, it's not more expensive to borrow bonds than bank loans right now for us. I mean, that is a good sign. And also that in general, the banking system is, as everybody knows, super strong with low demand for credit. We also feel that banking system in general is more positive to do business. So all in all, a bit better sentiment, Lars. Still, I think it will be for us kind of similar. Not much will happen.

And in terms of how you act in terms of pushing the accelerator or not. I mean for example if you look at capex it's down quite sharp in the first quarter some 800 million versus some 2.4 billion.

It will continue down this year.

So for the full year what's a reasonable assumption in the context of you having some Seven and a half last year something like that. What are you expecting for 24?

I don't have that number in my head but seven and a half maybe two and a half then or something like that. So it goes down quite deeply you know if you look at when this year ends for example Sato if you take that as an example they will have no ongoing new construction last of December so it would be actually zero. And the same for Balder Denmark. So it will go down gradually this year and we are not planning to start anything this year. But we developed the land bank so we have a good potential later on when we think it's the right timing. But of course it will be very little this year actually.

So if anything just to round it off from my side pushing the accelerator again if I'll phrase it that way. It's more a thing for early 25 than second half of 24. Yeah.

Exactly. Okay. Well, thank you. Thanks.

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

Good morning everyone. I have two questions. So first is in regards to the euro bond market. Are you looking to issue to pre-fund your debt maturities? I recall S&P was focusing a lot on the liquidity profile in their latest note.

I think we are not looking at euro bonds right now, but we get incoming calls, so we can do it if we want to. But we have a lot of facilities and liquidity, so our basic plan was to wait many years, but maybe it will be earlier, but we have no immediate plan. But we did some domestic bonds in Sweden and pricing is quite okay right now. Jonas?

Yeah, I would also say that we don't actually have that much bond maturity since 24 and 25. So if you look at the very small SEC bonds we did in Q1 was actually about 30% of our total bond maturity, so 24 and 25. So given that maturity profile, I think we are currently rather in a wait-and-see mode. But let's see how the year transpires.

Got it. And my second question is in regards to hybrids. Recently, you lost the equity content on them from S&P. It was a bit of an interesting event. Can you help us understand what led to that outcome? And how should one be thinking about that hybrid now from a call or non-call perspective?

we were a bit surprised as well you know because we yeah we thought it could still be a hybrid but on the other hand it's a very small amount now because we bought back another how much was it you must leave a hundred million yeah something like that so now it's basically just a loan okay yeah I think as

You know that we did a small share issue in Balder and another one in Satar subsidiary. And with that, we felt that even if we did lose the equity content, it would be a neutral matter from a capitalization standpoint. So then the buyback, the sort of continuing the buyback activity that we've been doing before felt like worth it. And then when we now lost the equity content, essentially it becomes an ordinary bond for us. I think from a sort of looking at our key metrics, I think we appreciate the long sort of formal maturity on that. And then as we come closer to the call date, I think we can become more clear on what our intentions are. But I think if you look at our past, we have so far always called on first call date. But let's see how things develop over the course of the next couple of years. Got it.

That's helpful. Thank you.

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

Thank you. Good morning, everyone. First, a question on net debt. It increased quite significantly here, Q and Q. Obviously, partly driven, you mentioned the hybrid bond and we have a bit of unfavorable FX. But I'm a bit curious on the 1.4 billion investment in joint ventures in the cash flow statement. Could you highlight what that is and also what's the capital need for JVs in 2024? Thank you.

We think the capital need for 2024 is I think from this date and going forward actually negative. So I think it will be more inflows to us than outflows. But we always do some smaller restructuring in it and we are looking at some changes there as well. So we increase the part in one of the companies and change some capital in another. small changes, but I think from now on, it's most likely to be we're getting more money than investing.

I think also Johan, I mean, when we look at the total number, so if you account for the 3.7 billion FX effect and the 2.2 billion like for like hybrid effect, we actually have a declining net debt. Obviously, we have the share issues as well helping us a bit. But it's worth pointing out when it comes to the associates as well, that there may be differences from quarter to quarter in how various transactions are booked. And so I would say that we view sort of from a net investment perspective in associates, we didn't have, you know, it was around zero this quarter, but then it might differ a little bit from when money are hitting the account and what's paid in cash versus sort of forward payments, et cetera. I wouldn't read anything too much into that.

All right. Thank you for that. Dan, you highlighted a bit of possibilities on the cost side ahead in the CEO statement. What type of improvements do you see? And could we see it already in 2024? Anything you can help out there?

No, I think it's more of a general, you know, little here and little there. That is still a lot of potential both on cost and income. This is not one big dramatic move. It's more that we can continue to improve the efficiency and the cost side totally, Marcus. So we have more potential on both ends there. But it comes slowly and gradually. Thank you. we have a good potential.

Could you, looking at kind of gross margin or NOI margin, you peaked in 2020 and then it's been a few tougher years for everyone here in the sector and you bottomed out in 2022 and then up a bit in 23. Are you confident it will increase in 2024 and 2025?

Yeah, that's the ambition.

Thank you. The last question, what type of spreads and maturities did you have on your most recent issued bonds? And also, if you issued something today, what do you think you would get if you accessed the capital market?

So we have done two bonds in the CX market this year. One two-year and one three-year with 200 basis points. And I think the pricing has changed quite rapidly since then so I think if you look at the two year now you're maybe looking at 125 basis points.

So you're actually below bank financing now?

Yes I would say so and we also got some incoming quotes in Finland that also was for longer durations lower than bank margins unsecured.

Very clear. Thank you for taking my questions.

Thanks.

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

Okay, thank you very much for listening to this call. If you have any further questions, you will find our contact details on the website. Just give us a call. Thank you very much.