Entra ASA

OSE:ENTRA

Earnings Call Transcript 2022-Q2

[Sonja Horn, executive]

Good morning all, and welcome to Entra's second quarter presentation here in Oslo. So let's move directly to some highlights in the quarter. Rental income came in at NOK 783 million, that's 30% up from NOK 602 million same quarter last year; and net income from property management of NOK 445 million, 20% up from NOK 370 million same quarter last year.

Net value changes, minus NOK 857 million in the quarter. The result is mainly driven by the external appraisers having increased their return requirements in our property portfolio, although not yet evidenced in the transaction market, leaving us then with a negative result of NOK 413 million in the quarter.

Key events. It's been a very high letting activity in the quarter, and happy to see that our net letting came in at NOK 64 million. And we also had a very strong operational performance in the quarter. And pleased also that we were able to announce that we now are planning to start 2 new refurbishment projects in the third quarter, one in Nedre Vollgate in Oslo and one at Brattørkaia in Trondheim.

Moving on to operations. And as I said, pleased to see that some of the leasing processes, which we have been working on for quite some time, actually materialized in new contracts in the second quarter, and we also continued to sign some contracts in July. So it's been a very active quarter, and we signed new and renewed leases on a total of 54,000 square meters, with a rental income of NOK 134 million. And out of that, around NOK 62 million in our project portfolio.

In total, contracts of around NOK 35 million were terminated in the quarter. And out of that, NOK 20 million was related to contract with Amedia, which we now are moving into our project in Schweigaards gate 15. So this left us then with a net letting of NOK 64 million in the quarter.

Now if you take a look at the list of largest contracts at the bottom here on the slide, you can see that the contract with Amedia was the largest in the quarter. This is, again, an evidence that we're very happy to see that the size of Entra enables us to solve the changing requirements of our customers within the portfolio of Entra. And they will be moving from Akersgata to Schweigaards gate 15, and we've also been helping them here with our advisory service, working with their workplace strategy. So they have now signed 8,500 square meters and have an option to potentially increase with 700 square meters within the year if their workplace strategy concludes with them needing more space.

In Nedre Vollgate, a building we acquired from Oslo Areal, we have also signed a lease contract for 5,900 square meters. This is a building which we acquired with vacancy of part of the building. It had been prepared for refurbishment. And happy to see that we now are able to sign lease contracts at attractive terms, enabling us to start their refurbishment also in the current market environment with increased construction costs.

The 3 following contracts here are all the renegotiations in the management portfolio: 4,900 square meters with Manpower and 2,700 square meters with the SATS and also slightly about 2,000 meters with the municipality of Bærum. Top-right graph shows you the occupancy rate in portfolio -- in the portfolio. Over time, it's been high and stable. Currently at 97%, that's slightly down from 97.3% in the last quarter.

Now in these slightly more turbulent times, our very high-quality tenant base with long lease duration and also a well-staggered lease maturity profile provides us with a very resilient and robust cash flow. Entra has a very solid tenant base with approximately 57% of our tenants' rental income coming from public tenants. If you take a look at the list of tenants on the right side here, you can see our top 20 tenants, representing around 44% of our rental income.

The lease structure here is also very well diversified, where you can see that the largest tenant, the Norwegian Tax Authority (sic) [ Norwegian Tax Administration ] represent only 4.3% of rental income, and this is, again, a split across 4 different buildings and contracts. And the second largest here, the Municipality of Oslo, representing 3.9%, is split across 11 different buildings.

If you look at the pie charts in the middle here, you can see that our geographical exposure, close to 80%, is located in the Greater Oslo region. This is by far the largest job market in Norway, where we also have, over time, seen the most stable employment growth. And we're pleased also to see that several of our largest tenants signed with us in also the other cities where we are located.

At the bottom, you can see our lease maturity profile. The 6.5 years is well staggered, and we have approximately 10% of our rental income to be renegotiated every year for the next 3 years. This also provides us opportunity -- an opportunity to chase the market rental growth which we are seeing, particularly in the Oslo market now. And finally, our contracts are 100% CPI linked.

Before we move on to these ongoing projects, just a few words on the current market environment in the construction market. The supply chain challenges we experienced through COVID were further challenged following the war in Ukraine, and this led to increased construction costs in also Norway. Now the increase in material costs seems to have flattened out now. However, we've not yet seen any effect of that in the ongoing negotiations, which we have on with contractors. We do however expect that it will be a lag and take some time before we see these effects in the negotiations.

This means that the increase we're seeing in construction costs will have to be financed through rent increases, and how much time it will take to bridge that gap will vary a lot dependent on the local market balance between demand and supply in each project's micro market location. We were pleased to see that we this quarter could announce that we will start one refurbishment project in Oslo and also Trondheim, seeing that we had managed to get rental income slightly up to finance the increase in cost.

Now if you take a look at the list of ongoing projects, first of all, you can see that there's around NOK 1.9 billion left of CapEx. Out of that, Entra has already contracted approximately 75%, and we have sufficient cost buffers to handle the remaining within the estimated project costs.

You can see that there's only one change, one green arrow on this list from the last quarter. That's related to the occupancy ratio in Schweigaards 15, where we, following the contract signed with Amedia, has increased occupancy from 34% to now 73%. And we were also pleased to see that the rent levels we achieved here reconfirms that we will be able to maintain the profitability and yield on cost in this project, even though we increased the cost of this project in the last quarter.

I'd also like to comment on our ongoing project in Trondheim in Holtermanns 1 to 3. We had hoped to see that we, at this time, would have reached a higher occupancy rate. We do, however, have several ongoing letting processes with high activity on this building, and one of the tenants we have been discussing with chose to sign an intention agreement with us for the third phase in this project, where we're now working in an exclusivity period to formalize the terms and also reconfirm that we will be able to build the third phase within the estimated project costs which we have calculated in the current market environment.

Okay. So a few words on the market situation. First of all, economic activity picked up very quickly in Norway after COVID. And the increase in energy prices following the war in Ukraine and international sanctions has provided further stimulus to the already exceptionally strong Norwegian economy. Higher oil prices and gas prices have also increased the activity within the oil and gas sector.

Now for 2022, the central bank of Norway has put forward an estimated GDP growth of 3.5% and employment growth is expected to be as strong as 3.3% for 2022. This is according to their latest monetary policy report, which was released in June. In the same report, they also estimated that CPI for 2022 would come out clearly 4.6%, clearly also stating that there's uncertainty to these estimates. And just this week, we saw that the 12 months rolling CPI for June came in at 6.3%, clearly above expectations.

Now if we move on to the commercial real estate market, Entra's consensus report where the 11 leading market specialists provide their estimates on rental development, vacancy, yield expectations and also new build volumes. And here, we can see that the expectations for vacancy is that it will trail down to 5.9%, and it's also already been fairly low for quite some time. And from the bottom right graph here, you can see that the expected new build volumes coming into the market for the next couple of years is pretty limited. And the increase in construction costs, which I already described, will probably also postpone some of the planned projects. So this means that we will have a fairly tight supply side going forward.

And on the other hand, we've experienced extremely high letting activity both in the first quarter and also through the second quarter, and this is also expected to continue going forward, seeing also that we have a fairly strong employment growth in the time to come. As a result of this, the market specialists have now an estimated rental growth in the Oslo market of 6.5% on average. However, the leading -- some of the leading experts expect to see much higher levels, 10% and above.

The transaction activity was pretty high through the first quarter. We experienced that the volume came in at NOK 50 billion for the first half of 2022. From the bottom right graph here, you can see that the transaction volume last year was extraordinarily high, around NOK 160 billion, while more normalized levels would be around NOK 100 billion, meaning that the first half was actually pretty normal. Now there is currently concern among investors in respect of the volatility we're seeing in the debt markets and also increasing interest rates and credit margins, however, this has not yet been evidenced in expanding yields in the transaction market.

If you look at the investor environment, we recently saw that one of the leading experts came out with an investor survey, where you could see that as much as 69% of all office tenants actually are still net buyers of office in the current market environment. And the underlying interest for centrally located office buildings, particularly with a value-add dimension, remains very strong.

According to the consensus report, you can see that our market consensus here is that yields are expected to expand towards pre-pandemic levels, with some 30 to 50 basis points over the next 2 to 3 years. And it's also fair to say that the low supply of new volumes coming into the market and the pressure on market trends should also have some balancing effects on potential yield expansions. So I'll leave it to you, Anders, to go through the numbers. Thank you.

[Anders Olstad, executive]

Thank you, Sonja. This has been one of the more intense half year that we have seen. I mean government bond volatility and credit spread soaring. We have the U.S. dollar at 20-year high. We have equities having one of the worst 6 months ever. We have equities and bonds correlating, something we haven't seen -- it hasn't been an issue since last time inflation was an issue. We do see recession warnings, including yesterday's inversion of the U.S. Treasury 10- and 2-year bond, and we see central banks stepping in to curb inflation.

In this environment, Norway stands out in a positive way. Norway has a solid GDP and employment growth, it's actually benefiting from the higher oil, gas and energy prices. We have a massive trade surplus. And we have a strong central government with the means and the willingness to act as they did in 2008, 2009 and also during the COVID crisis. So for Norway, as such, it's -- we're in as good a position as we can.

Entra's second quarter results came in, as Sonja said, better than expected. Revenues were smack on, and costs -- operating costs were a tad lower than expected. So I'll just briefly go through the operational figures. There are 2 things that we will spend some time on. One is the value development or value changes, which was negative in the quarter; and also on the financing market, which is important for everybody at the moment.

Looking at the revenues, coming in at NOK 783 million, so NOK 2 million above the first quarter and a full NOK 181 million above the second quarter last year. Compared to the second quarter last year, where NOK 139 million of the additional revenue come from acquisitions. Then we divested 2 assets, so we're down to a net of NOK 118 million. Then we have the projects -- new projects coming into the -- since second quarter last year at NOK 49 million. And then we took one asset out of operations, so a net of NOK 45 million.

The last ingredient is like-for-like, which came in at 4%. So it's 1.1% lower than the CPI. The reason for that is basically that we have higher vacancy now in signed contracts, tenants moving in, that is not yet included in the revenue figures. If we adjust for that, we're positive like-for-like additional to CPI, not impressively positive but still positive.

Net income for property management coming at NOK 445 million, so -- which is up from the NOK 433 million in the first quarter and a full 20% above second quarter last year. You see that revenues go up by 30%. Net income from property has gone up by 20%. The reason is higher interest cost in this quarter. And then we have the profit before tax at minus NOK 413 million.

If you look at the second and the third quarter last year, we had revenue -- value changes on the assets on about NOK 700 million to NOK 800 million per quarter. For the fourth quarter and the first quarter this year, we had, on both quarters, NOK 2.8 million in value uplifts. This quarter, we had NOK 1,040 billion with a downward value change, a negative value change. I'll come back into that later, but that explains why we now have a net -- or profit before tax at minus NOK 413 million.

Cash earnings coming at NOK 9.2, so slightly up from the NOK 8.8. NRV at NOK 230, so we're down NOK 5 per share compared to the first quarter. And NTA at NOK 227, still 15% CAGR since 2014 when we were IPO-ed.

On the P&L, a few comments. Operating costs coming in at [ NOK 60 million ]. That is 7.7% of the revenues. That is lower than we expected. We said in previous quarters we would be happy or content or comfortable around mid-8% of revenues. So there will be some quarterly fluctuations from quarter-to-quarter. So this quarter is unusually low. Then you have net revenues -- or net other income, other costs at 4, basically pretty normal.

Admin costs coming in at NOK 44 million, also a bit lower than we initially expected. We expect to end up slightly north of NOK 200 million for the year. Please bear in mind that we had a NOK 14 million in extraordinary admin costs in the first quarter this year. I'll come back into the financing costs later and the value changes.

Then we have tax payable of NOK 21 million. We have the normal NOK 4 million from one of the subsidiaries where we're not able to offset our tax loss carryforward in the group as this is a partly owned company. And we had a one-off tax payment this quarter of NOK 17 million. This is a case that stems back from 2019, where we had expected to spread the tax for 15 years in line with the contract that we made back then, and the tax authority decided otherwise.

So we decided to accept that, we call it, verdict and pay the tax now. It's basically a timing effect. We would have paid it anyway, but instead of paying it over 15 years, we will pay it now for this quarter. So otherwise, there's nothing that really stands out on this P&L.

Looking at the rental income bridge, basically saying how does revenues look like in the next 6 quarters, basically taking all public information into account. And as you can see, the only thing that I saw from this quarter to the next is basically the introduction of St. Olavs plass 5, one of our redevelopment projects that we put into operations in the third quarter. Then we see revenues slightly ticking upwards towards NOK 800 million in Q4 and then coming up to about NOK 850 million, NOK 860 million during or in 2023.

In this, call it, forecast or overview, we have put in 4% CPI. Given the -- what we learned yesterday with a CPI at 6.3% June to June, that is probably on the conservative side. So there's some upside on that one, but we will -- if we will update that on the third quarter presentation.

Going into the property value development and that's where we'll go to the value changes, kind of normal investment of NOK 681 million on the quarter. And then we have the negative value changes of NOK 140 million -- sorry, NOK 1.040 billion. We have tried to show that on the waterfall graph to the right, and you can see that the 3 sort of normal ingredients, net letting, market rent and projects, coming in a NOK 142 million as a positive. Then we have 2 negatives. We have a NOK 200 million negative of estimated higher CapEx on the management portfolio going forward.

Please bear in mind that Entra do our valuations on all assets quarterly by 2 external appraisers, and we take the average of those 2 appraisers into our books. So there's nothing -- this is not our own, it's basically external assessment of it. So that is a bit different from what we see in many other real estate companies do. That additional CapEx is roughly 8% increase, basically takes the value of the -- our portfolio down because we have higher CapEx than previously expected. I think that basically pretty much reflects the construction market as we have seen it over the last 3 quarters. So [ it's ] basically catching up with the cost increase.

Then we have the -- what now says as yield effect. And Sonja said it in her part, we have not seen an evidence in the transaction market that yields have come up. Transactions are continuing and we do see sort of the normal or old price levels still in the Norwegian market. There is interest on different assets. What we have seen here is that one of our appraisers decided not to change any return requirements, while the other appraiser took up the return requirement of 13 bps in Oslo and 25 bps in the other cities. And that has led to the negative value change of NOK 980 million for this quarter.

Good. I'll move into the financing part, which is I'll spend 3 exhibits on that one. Debt of about NOK 40 billion spread pretty evenly between bank and bond debt. And as you can see on the graph to the left, 46% of that is green funding. Then we have an LTV at 49%, so slightly up from last quarter, and an ICR at 2.7%. The LTV is the EPRA definition. If we use the Moody's definition, we're at 47%.

On the financing market, we use 3 sources: CP, bonds and bank. On the CP market, we see that it's still open. It's less liquid. We did -- we rolled about NOK 600 million in the quarter, most of it during May, and then we did that at an all-in cost of 2.3%. So that market is still available, it's still there, but we feel it's less liquid than previously.

The bond market has seen material changes during the last half year. We see spreads widening out. For some real estate companies, massive widening out of spreads. Normal 5-year spread on an Entra bond would be between sort of 70 to 80 basis points. If we did a 5-year today, the estimate from the market is a margin of about 200 basis points. So significantly more expensive for us, but still significantly cheaper than what we see in most of the real estate companies in the Nordic sphere.

We do have interest, in Entra, issuing bonds. We had incoming calls from investors saying we would like to invest in Entra. We have, so far, decided not to go there due to the current spreads. We rather like lower spreads than the higher spreads. But the market is still there and it's still open for Entra.

Banks are becoming more and more important and companies with long-term relationship with their banks are in a more favorable position than those that do not. Entra has been with our 5 partner banks for as long as we can remember, as we said, we've been working with them for 20 years. So that is -- we are comfortable that also the banks will provide a sufficient and competitive funding situation -- funding provider for Entra going forward.

Then on the last part of this exhibit on the right-hand side, we have -- by using the appraisers' valuation models, try to show what does it look like with an increase on the yield, on the X axis, basically percentage points up; and what is the -- what is the mitigating factor that additional rental income will provide or market rent increases will provide, including CPI.

And as you can see, the -- as we move out towards NOK 230, a starting point for NRV and 49% as the LTV, then we use the EPRA definition, not the Moody's definition by the way. That will have a negative impact on our balance sheet and our key figures. But as you can see, the mitigating factor of higher rent or higher income and CPI growth is quite important. And you can see for yourselves that it has not a full balancing effect, but at least a large offsetting effect on the negative effects of the yield increase.

Going over to the interest rate. This graph shows the average nominal interest rate for Entra as of quarter end. And our interest cost is basically based on 2 factors, it's base rate or the NIBOR and then the margin. When we're looking at the base rate, it's 50% hedged. If we take the time to maturity on the hedge portfolio, i.e., that part that is hedged, we have a 5 years term to maturity. If we include the full portfolio of debt, the time to maturity is 2.8 years. So that is the bottom part, the NIBOR part.

Then we have the margin, and that is -- has a fixed of a term to maturity of 2.6 years. Clearly, all of the bonds and the CP are fixed for the duration of the instrument. And the bank debt, the margin is secured. It's a mix from 5 years and down to sort of 14 days. So on average, it's a 2.6 years' time to maturity on the credit margin as well.

The graph shows sort of the -- what will interest cost of debt be going forward -- or historically and going forward. Then we have used the forward rate. We have used the existing hedges and existing debt portfolio. And we have assumed that the margins will remain the same as they have been. That's one important distinction. That takes it up to 3.47% in the first quarter of next year, and then you see the cost of debt trailing down slightly as it follows the forward curve, NIBOR 3-month forward curve.

If we refinanced all debt falling due in the next 2 years at sort of market margins now, which are higher than what we have in our -- currently, that would take up our average margin by somewhere between 5 and 10 basis points. So there was no material uplift in the cost of debt, even though we should refinance the debt that matures in the next 2 years. Finally, we'd like to show you the maturity profile on our debt. And Q2 and Q3 last year, we issued around NOK 11 billion of new bonds, long-term bonds, and we bought back about NOK 4 billion, which has made this maturity profile, which we find very favorable. There is limited debt maturing in the next 12 months, total of NOK 3 billion, and we have NOK 3.2 billion in undrawn RCF to cover that. The total term to maturity on the debt portfolio is 4.2 years. Finally, Entra do not have any sort of hybrids or pref shares or D shares or those kind of instruments, what you see in Entra is really what you get, and we like this maturity profile a lot. Thank you.

[Sonja Horn, executive]

Okay. Thank you, Anders. So a few closing remarks before we go to Q&A. First of all, the Norwegian economy is solid and it has proven very resilient through previous challenging market environment. Secondly, the transaction market has held up very well through the first half of 2022 in spite of pressure both in inflation and interest rates and credit margins.

Thirdly, the activity in the letting market has been extremely strong and the tight balance on supply and demand also provides a positive sentiment for market trends going forward. And finally, Entra has a very strong balance sheet, solid balance sheet with well-staggered maturity profile and also an average time to maturity of 4.2 years.

So I think that leaves it for now. And I believe we do have some questions, Tone. And Anders will join me up here, and we can start with the questions.

[Tone Omsted, executive]

Okay, so the first question. Your LTV of 49% is higher than the 45% that your current credit rating requires you to have over time, how are you planning to reduce your LTV and what are your options?

[Anders Olstad, executive]

Firstly, we have a -- on the credit rating part first, we have a Baa1 rating with stable outlook from Moody's, equivalent to the BBB+ from S&P. The definition of LTV in Moody's is slightly different from the EPRA LTV definition. So when we give, say, 49%, that would be 47% in the Moody's calculation. And as the question stated, there's a 45% sort of trigger on the Baa1 rating from Moody's.

In addition to the LTV trigger, there is a number of other factors that Moody's look into. They look at the business fundamentals, they look at the ICR, look at liquidity, look at public tenants. I mean they take a holistic view of the company. When we acquired Oslo Areal back in -- we signed in December, closed it in January, we knew that our LTV would slide above the 45% threshold. And when we discussed that with Moody's, they gave us an 18 months grace period to put sort of all triggers into the right place.

That said, a 47% LTV trigger -- sorry, 40% LTV and other factors being on the right side, there's always a judgment call from Moody's and we are discussing with Moody's on that. We have seen -- noted that there are increased focus on the commercial real estate sector in the Nordics and Scandinavia, and there has been some rating changes in -- for some other companies. And we are discussing that with Moody's as well on us. It's only fair that they take -- that they will review our situation in light of the recent market conditions. But the LTV as such, being above the 45%, it's not sort of a major trigger point.

In terms of how we -- the second part was how we plan to take the LTV down. There aren't -- I mean, let me take it conceptually first. I mean there aren't that many ways to take the LTV down. You can sell assets or you can raise equity. Those are basically the 2 triggers. We do not have any plans to raise equity. Any real estate company would evaluate the sort of asset rotation and acquisitions and divestments of assets. And that is also part of our toolbox, so to say. So I think it's fair to say that it's -- that's always something that is our agenda. And we will look into any acquisitions or divestments in this case as -- if that is a good opportunity for us.

But clearly, Entra's value development is in the project development part. And for example, when Sonja mentioned that there's NOK 1.9 billion left of CapEx in the portfolio, when we look at the value creation in those projects alone, that should be close to almost NOK 1 billion. We have -- those projects are very profitable. And give or take, about 25% margin on those, and -- that will also help us getting the key figures into place.

[Sonja Horn, executive]

Having said that, we've also planned for doing some asset rotation when we did the acquisition of Oslo Areal. So that's clearly on our agenda.

[Tone Omsted, executive]

Are there any projects that are going to be postponed because of the higher cost environment?

[Sonja Horn, executive]

Well, as I highlighted in my presentation, we will have to see that we can mitigate the increase in costs through higher rents. And we'll have to assess that on a project-by-project basis, basically seeing if we can manage to get higher rents and how much time it will take. Maybe you'd like to add something or...

[Anders Olstad, executive]

I think the -- when we start up new projects, just to add, it's basically part would be new builds and part will be major redevelopments. On the redevelopment part, we've been through, the last 2 years, a very active and sort of high-intensive project development. And that is pretty much done now. So in our pipeline, there aren't that sort of many large redevelopments needed. So in that, we have flexibility in terms of running the assets longer than we could -- like we otherwise could have. So I think it gives us optionality and flexibility.

In terms of the new builds, it's clearly on a case-by-case basis. I mean we do projects when it's profitable for us. It's -- we don't -- I mean, we don't want to do negative projects. So that's why it's -- that's also what we see in the market with the fairly low expectations on new builds in the market in Oslo going forward because the real estate developers, they want to see profitability, and that means basically you're waiting -- rather wait for rental income to pick up to defend the higher costs.

[Tone Omsted, executive]

What is the long-term financing of Oslo Areal going to look like?

[Anders Olstad, executive]

Well, long-term financing of Oslo Areal. When we financed Oslo Areal, that was NOK 13.5 billion transaction. That was done purely bank financing. We had a 2.5% bridge loan, which was 18 months that we actually extended with another 12 months in this quarter. So that's part of the sort of the solution. It's not long term, but it's medium term. And then we had -- went to 4 of our banks and secured another NOK 2 billion from each of them. The average term to maturity on the bank financial we got in Oslo Areal was 2.9 years, which is now extended somewhat towards 3.4, 3.5, probably with the extension of the 2.5.

So in that way, we are in the medium -- short and medium term, we're are comfortable with the financing of the acquisition. But clearly, I mean, now we have a 50/50 split between bonds, commercial paper and bank. And normally, we would like to see 75%, 80% in the bond market and 25% in the bank market. So our long-term plan will be to roll part of this bank debt into bonds, but that is not an option on the current market -- sorry, market conditions with the credit spreads up to like 200 basis points.

[Tone Omsted, executive]

You mentioned margins and all-in costs of commercial paper and bonds. But what would you say the all-in cost of bank debt is currently?

[Anders Olstad, executive]

I really -- that is an ongoing negotiations with our banks, and I think it would not be fair to the banks and not smart of us to discuss those margins. But what we previously has seen is that the bond market was more favorable than the bank market in terms of credit spreads or great margins. Currently, the bank margins are more favorable than the Entra bond margins, which also is reflected by the funding cost of the banks. But I mean, also the bank cost of funding have come up, and that will be reflected in our bank funding as well.

But that only would apply to the new bank financing. We had -- I mean, we have now NOK 20 billion, give or take, of bank funding plus the NOK 3 billion in undrawn RCFs. And there has not been any discussions with any of our banks in stepping up the margins on the existing debt. We're only talking about the new debt that we might secure into the [ autumn ]. So we are -- I think it's -- it wouldn't be right to disclose those kind of ongoing negotiations with our 5 dear partner banks.

[Tone Omsted, executive]

And then the final question. Higher yields haven't been seen in the market. Do you think that this is a lagging effect? And is the fact that you took one of the values increasing yields into your books because you assume that the expansion will happen in the transaction market?

[Sonja Horn, executive]

That one...

[Anders Olstad, executive]

One more, because there was 2 questions in 1 there, so I just need to start to start my thought.

[Tone Omsted, executive]

The higher yields haven't been evidenced in the transaction market, do you think that this is a lagging effect?

[Anders Olstad, executive]

I'll take that one first. I'm getting old now. So in terms of when we're looking at what drives yields, clearly, the cost -- the interest cost is a contributor. I mean there has to be some parity between the source of funding costs and the actual yields. When we look at sort of the mega data on this, it's actually more -- and due to [ regressions ], it's actually more to do with liquidity into the market than the actual cost of debt. Just sort of a side step, but that is that is a side step.

There has to be parity between -- long term, between cost of funding and the real estate yields. When -- if the existing interest rate schemes continue, it's natural to believe that, that would have an impact on yields also going forward. When we're looking at the, I mean, the expert or the real estate specialist, this thing is 29 bps up this year, another 18 bps or 19 bps next year. That was sort of their best estimate on what what's going to happen.

When we're looking at the stock market with, I mean, median Nordic real estate stocks going down 40% from the NAV. Clearly, it's a discount of a yield expansion of more than that. I mean who's going to be right, it's going to be -- it's difficult to assess. But gravity also works in the real estate market. And if cost of funding goes increasingly up, that means also cost of equity will go up, and that will have an impact on the total return, which again should impact the yields.

But there are some mitigating effects in real estate, which we -- which most clearly, the CPI and the market rent growth. And there are sort of very good dynamics on that. That will -- it will not offset it. It's our best estimate, but it will at least mitigate to a larger medium to large extent. Second part of the question, yes, please.

[Tone Omsted, executive]

I think you've more or less covered it. But is the fact that you took one of the values increase into your books, is it because you assume that this expansion will happen in the transaction market also?

[Anders Olstad, executive]

No. As Sonja made it clear as well, there is no evidence in the transaction market today that yields have come up. That is an expectation from one of the appraisers. In terms of how we handle our books, as I also stated, the 2 external appraisers value each asset every quarter on a DCF basis and make their own assessments of each asset. We take the average of those 2 assessments and put into our books. And that is a principle that we have been using since 2014, when we were IPO-ed.

The only time we did not take that into account was due to the first quarter of 2020 -- or the second quarter, I can't remember now, or it's first quarter, during the COVID-19, where actually their appraises wrote up our books by a couple of billions. And then we said, well, that is probably a bit -- a little bit too optimistic. We'll put at 0 for that quarter.

But I mean Entra, we want to be a transparent company. As I said, what you see is what you get. And I think it's -- that is the -- especially in turbulent times like this, it's -- the only thing to do is to sort of respect the sort of the appraisers' view on the market. We can disagree or not agree, but we have to respect it.

[Sonja Horn, executive]

Good. Okay. Thank you. Thank you all for joining us.