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Intrinsic Value is all-important and is the only logical way to evaluate the relative attractiveness of investments and businesses.
Hello, and welcome to the conference call in connection with Interim Report January to September 2022. My name is Priscilla, and I'll be your coordinator for today's event. Please note, this call is being recorded. [Operator Instructions] I will now hand you over to your host, Mr. Erik Selin, the CEO; and Ewa Wassberg, the Head of Finance, to begin today's conference. Thank you.
Hi. Good morning. This is Erik Selin, and I also have with me Ewa Wassberg, who will introduce herself. We will go through our report today. And afterwards, we have Q&A, and we have Q&A only with analysts and other questions can be e-mailed to me or Ewa or to media at Balder, if it's media questions. So Q&A only with equity analysts, so...
Yes, I would like to take the moment to introduce myself as the new Head of Finance at Balder, Ewa Wassberg, since September. So this is my first presentation of many to come.
Very good. Looking at Q3, we had rental income up 16% compared to last year, and profits from property management, basically stable due to higher financing costs net than last year. Otherwise, there were quite strong development on all the result lines.
Earnings capacity is also flat from the quarter before. And obviously, it is an increasing interest rate that affects us and to mitigate that, we have actually higher NOI and other income. So far, we are handling the increased interest rates with our own increased underlying earnings. Net debt, 47.7% and like-for-like rental growth, 2.5 and NAV stands at SEK 93 per share.
Moving on to Page 3. You can also see comparison from last year at this time, rental income costs and so on. So it basically shows the same thing, but it's an easy way to get the numbers fast, and you can see we're 17% ahead of last year. And you also have the years before as a -- whole year as a comparison. And on Slide 4, you can also see the earnings capacity quarter-by-quarter from this quarter, obviously, and then going back 2 years in time. So you can see if we look back 1 year or maybe the beginning of this year, what's happening is that everybody knows, increased interest rates because hikes from central banks. But so far, we managed to keep our earnings capacity despite this much higher interest rate cost.
The portfolio, Page 5, really no material change from last quarter or from any quarter, more or less. It's always concentrated to the capitals and bigger cities in the Nordics. Residential is a bit over half of the portfolio and then office, some retail and other properties. And it's been a stable development this quarter in general in the rental market.
Property Development. As you most likely know, we have 2 categories, one is that we build to keep them have under our management for a long time. And the other segment is that we build residential and sell to consumers primarily in Sweden. We do some in Finland and some in Denmark as well. And right now, we think it's the most rational thing to be very careful with new developments because we have higher construction costs but you don't have higher sale prices, rather lower and rent cannot be increased to compensate higher construction cost. So if we look at '23 and '24 combined, if we sum up all the investment that we needed to complete all the projects and then if we look at what will the amount that we will receive selling a lot of these assets, in fact, a lot of them are already sold, but they have to be completed.
Then the sum of that is around 0, actually, best guess now is minus SEK 100 million. So net investments in property development right now with the things ongoing is combined actually 0 for the years '23 and '24. And then we think in general, there will be smaller investments, but that can also be driven by customers. So of course, it's a very strong demand from tenants. That can be investment that makes sense to do. But there will be much lower activity in general for us, and I think this goes for most of the companies as well.
Over to financing on Slide 7. To left, you can see a graph with net debt to total assets over time in combination to portfolio value. As you can see, it is 47.7% as of Q3, well in line with our long-term target of 50%. And our available liquidity and credit facilities amount to SEK 26 billion, which is an increase from year-end of about SEK 13 billion, and the liquidity will be used to cover maturing bonds. 70% of the debt is hedged to the interest costs and fixed rate loans and all our financial targets are met which you will see on the next slide.
On Slide 8, you will see our debt maturity structure. As you can see, we have a great portion naturally in '22 which available liquidity we will cover. And to the right, you have our interest maturity structure with an interest rate swap. Yes. Average interest rate about 1.9% due to our 70% fixed. As you probably have seen in our press release, we will repurchase bonds in 2023. And to our key figures, our equity asset ratio, 40.4%, well in line with our long-term target of 40%. ICR, 5.2%, well above our targets of 2.0%. Net debt to EBITDA, 13.5, a key ratio, which we expect to improve over the next coming years. Yes.
Yes. And that will be improved by 2 things. We will have higher NOI from existing portfolio. And on top of that, as I mentioned, development and projects, they will be completed and give us NOI, but on the other hand, no more debt since we will have the same cash flow from completed projects that we sell. And we think this is an important metric to be a bit stronger on because that will give us the capacity to handle a bit higher interest rates. So that ratio will come down a bit as we go along. And then looking at share prices, that is not such a funny story nowadays. And it has gone down quite a lot. And this is -- you can see the ratios on Page 9. But of course, we think the long-term trend is if we continue to manage our assets and have strong cash flow over time, NAV will follow and over time, share price will follow as well. And then after this, you have 2 slides with the income and balance sheet, and I don't think I will go through that. It's more of an appendix, but -- and again, it's not a big difference from the previous quarter. So with this, we can have Q&A. And as we said, equity analysts Q&A and other questions, we can take through email. If it's financing, Ewa primarily. And if it's media, you go through Balder media. And if there's something else, you can email me. So now we go for Q&A if there are any questions.
[Operator Instructions] It appears there is no further questions from the analysts.
I think there must be something wrong with this most likely. If the system doesn't work, you have to look at it. I get text here that someone is trying, but it doesn't work.
Can you please repeat the procedure for them to how to handle. They press star 1 and it doesn't work.
[Operator Instructions] We will take our first question from Fredric Cyon.
So a few questions from my side. There was another company reporting yesterday, making quite an interesting move, whereby they intend to just separate the residential portfolio since you have quite a large proportion of the asset in residential, and I would assume that you would have the means to fund that through the banking system, which could be an option for you since you can then reduce your secured lending. Is that an alternative for you? Is that something you're considering to evaluate?
Good question. Yes, that is also something that we can do if we find it positive for us. So it is an interesting idea to spin off a part, of course. We are not looking at it now, but we will see later on. And obviously, it's important to think about that. If you think size as such is a big problem, you can always spin off parts of companies. So it's very relevant to have that track as well. So yes, it's possible for us, and let's see what happens.
That's clear. And then moving over to the fixed and top portfolio of interest rates, you state that 70% is either fixed or with swaps. And some companies do report the swap agreements in a slightly different fashion. So I just wanted to be clear on the swap maturities. So the table you had in the presentation of about, what is it, let's say, it's about SEK 18 billion of interest rates maturing until year-end 2024. Is that the proportion of swaps also that will mature? Or is -- do I have to look at the different table then?
The interest maturity structure that is fixed loans and swaps combined. In our case, it's a big part, actually the ones but we don't separate. So this is sort of -- it can be either way. But in general, we don't have that. We have a lot of fixed loan, but not so many swaps. So the net is what you see in the maturity structure. Then, of course, during quarters, we also make new ones and change them somehow. So it changes from quarter to quarter, obviously.
Yes. So perhaps I can rephrase the question. So if you do know new fixed loan -- fixed rate or new swaps, the 70%, what will it exactly likely look like in, let's say, 1.5 years' time? It kind of differs substantially from that?
Okay, then it will be like 55%, 60%, if we do nothing, '23 and nothing, '24. So we say that we do nothing for 2 years, then the 70% would be 55%, 58% maybe.
Okay. And then 2 more questions, if I may. On the S&P risk assessment with their rating outlook, what are the key ratios that you would like to have more wiggle room compared to their assessment? Or are you just happy with the current ratios -- key ratios you have?
Yes. Rating is a hot topic these days. And if we look at our S&P rating, you have different metrics that you sort of follow or measure. And in our case, if you look at metrics like ICR, we have a very big headroom compared to the rating. If we look at business risk, it's actually much stronger rating than our rating because it's diversified portfolio where basically nothing happens. So -- and then they look at liquidity and other things. But the thing -- the metric that is sort of what that we watch most carefully is LTV basically. They measure it in another way, so they measure debt compared to debt plus equity. But it is an LTV-like metric. So that metric for us should be in the range of 55 to 57, their way of counting LTV. And I think right now, we are around -- I have calculated this report actually. But I think it maybe around 53-ish and the range 55 to 57. And then you also have -- that you can read from S&P that if the LTV goes above 60, there will be rating pressure then for lower rating with higher LTV, of course. And on the other hand, if LTV goes, let's say, well below 50, then you will have rating pressure for a higher rating.
So in our case, LTV is actually the one that is what we have to think about operating that. We have good headroom in the other metrics. And I think we will continue to have because interest rates are fixed in a big way. And also we will have higher NOI that also will have a better interest rate coverage. However, we will be able to handle some higher interest rate. So it's quite easy to follow action.
I'm glad to hear. And then the final question on investments. I appreciate you mentioning the development -- investments -- net investments going into 2023 and 2024. The big chunk of investments historically has been within the property management portfolio. And in the first 9 months, you invested about SEK 6.2 billion, if I'm not mistaken. So let's say, that end the year at SEK 8 billion. I appreciate that, that is a function, of course, of the tenant demand and their own plans, but can you shed some light on what that number will look like next year?
Yes. I think our guess is that it will not be so much CapEx or investment. So maybe SEK 200 million per quarter, if you look at the existing portfolio, something like that, can be less, can be more. And then otherwise, to buy and sell assets, I mean, that's something you can do if you want to. You don't have to. So we have very few deals actually ongoing, but that will not be 0. So we will buy something and sell something. For the time being, we can also -- if we basically don't do anything, then we will have reduced debt automatically with the cash flow. So we will have a lower activity. But then if you look at the reports, all investments go sort of under one line. So that's why I think it's important to know that development pipeline net will be 0. So that's 0. And on top, you have some investments for portfolio and otherwise it's buy and sell. And we have very, very few commitments buying or selling. It's a fraction actually. So it will be a bit boring for a while, but I think it makes sense right now to have headroom in general.
But on the positive side is that it's good demand from tenants and everything is working well. Otherwise, I think it's just good to have some headroom in the volatile times. And maybe you also saw that today, we made an offer to buy back all the Swedish '23 bonds for those who want to sell their bonds maturing in '23. So we offered to buy back 100% of them without issuing any new bonds.
We will now take our next question from Neeraj Kumar from Barclays.
So just continuing on what you just said regarding your tenders. We see that it's just for SEK bonds and the Eurobond is not included. Do you have any comments for that?
No, we do 1 transaction at a time. So a while ago, we tendered some hybrids. And today, we do the SEK bonds, and we will do bond transactions as we go along for a long time.
Okay. And talking about hybrids, clearly, the environment has changed a lot over the past couple of months. I know there are restrictions on what you can and what you can't say, but do you see any change in your expectations regarding calling hybrids in 2023 beginning from what it was last quarter?
No. As you said, it's -- you have to communicate about it at the same time in a structured way. So it's a bit difficult to talk about in general. So -- but we haven't basically changed anything ourselves.
Okay. And coming on to valuations. Just trying to understand a bit over here. So I guess, around 25% is externally valued and 26%, the second party opinion is taken. Can you please help us understand how this work, like because we are seeing a few companies sort of marking the yields higher whereas a few companies sort of keeping the use same. So can you please help us understand the dynamics a bit over here?
Normally, we don't do so many external valuations. It can be good to know that now we've been making a lot because we are active in financing and increasing facilities and so on. So that's why we've done much more external valuation than the normal too. And if you sum all these external valuations that there are slightly higher than our internal valuations. But my view is that if you have, let's say, 5 properties in a block, and then you make an evaluation on 1 of them, you know actually the yield and everything for the rest of the 5. So to get 100%, you don't need to do 100% actually. It will just cost a lot of money. So that's why we don't think it makes sense to do 100% really. So in this case, 50, I think in -- I think actually, you can see that, I would guess it sums up maybe 90 or something in [indiscernible] almost everything.
And also well in line with our own internal...
Yes, slightly higher, I think, 0.5% or something like that. So it's very similar values they come up with. But also good to know, it's mentioned in the Q3 report that we haven't sort of -- in the yields, we haven't calculated any indexation, and there are different methods. So you can say that if you think indexation is a certain percent, you can sort of put it in the valuations quarter-by-quarter. We have always said that when we have the figure, we put it in. So there is sort of a lag between our valuation and what happens year-end because now we have so high indexation that we always do the same that we have 0 until we have it and then we put it in. So if everything expect values, the yields will automatically then come up next quarter, but different companies, though it's in a different way. So we could, of course, say that we anticipate 8% and then we could have said that we have higher yield requirements. So yes, it's a different -- it's different approaches.
Got it. That's very helpful. Hopefully, last question from my side. We know that Moody's rating is unsolicited, but last -- in their last publication, they put the rating and review for downgrade. That means it's probably going from IG to high yield, if they were to downgrade. Do you have any implications from that event, if there is any?
I think it's -- as a company, I mean there's no link for us between Moody's unsolicited rating and bonds or something like that. Of course, it's not good. And I know very many bond investors are very upset about this. But I don't know if we can stop anyone from rating us if they want to on their own behalf, so to speak. It's not good, obviously, but I don't know if we can do anything about it.
Have you tried to engage with Moody's in terms of like whatever their concerns are or getting in discussion with them or something like that?
Now we talked a little with them, but then they said everything looks good. So we were very surprised actually that you can say that everything looks good and come to a totally different conclusion later on. And so we really -- it's like a black box in a way.
And also the evaluation was done on the Q2 figures. Hopefully, our report really shed some light on some of the assumptions made by Moody's.
Yes, let's hope so. I saw that they were guessing high net debt-to-EBITDA, and it will actually be lower. So we can see that some other guesses are, for sure, wrong. But yes, let's see.
We will now move on to our next question from Tobias Kaj from [indiscernible].
If we include your hybrids, you have some SEK 36 billion in bond maturity until the end of 2025, while you now have SEK 26 billion in on these credit facilities. Does that imply that you would need more facilities if you're not able to refine anything in the bond market? Or do you think that your cash generation of the investments over the next 3 years will kind of cover the remaining SEK 10 billion?
I think we -- the cash generation can cover, but we will have more facilities anyway. So we're having good discussion about even more facilities as we speak. So I think we will have some more facilities. But then, of course, you are right that if we just stay still, the cash generation will automatically -- make it -- be able for us to just pay back SEK 25 billion without borrowing money at all.
And regarding your development, you have almost SEK 12 billion in total investments for own management. How are they funded today? Are they already funded with secured facilities? Or will you be able to fund them at secured facilities as they are completed?
It's a combination. So some of them are paid in cash with our own money so to speak. And in some cases, we have construction financing, and then when it's completed, you convert the construction financing to term loan normally. So it's a mix actually. But the liquidity effect net -- if we complete everything, will actually be a bit more cash because we have some construction financing, and that will be bigger up until completion, and the net investment is 0. So net, if you include the financing we have today and then complete '23, '24 net, we will have cash output.
Okay. And regarding those developments for own management, if you make any development gains on those, how are they booked? Do you recognize those gradually? Or are they on completion?
It's different. So the one that we keep, we have to do gradually. If we go back in time, we just kept it at book value, but then the [ PWC ] said that actually have to sort of reevaluate as we go along with those. But the other 1 that we sell to consumers, there we don't do anything. So when we hand over the keys, we book the profit. So there, you have a lag between actually -- yes, the profit shows up at the quarter when we hand over the keys. So there will be some big profits showing up in '23 upon complete. So there's 2 different systems for 2 different categories. So I understand it can be a bit tricky to keep track of, but we just have to follow IFRS accounting rules.
Yes. And regarding your planned starts, you reduced them quite a lot in this quarter. And I understand that the construction costs are rising and so on. But have you also been kind of burdened from a rating perspective when you have written that you expect to start a lot of new development?
Yes, it can be. Actually, it can be. Good point. Can be. I don't have an answer on that, but that can be the case.
Do you know if Moody's, for example, in their recent negative outlook have that as a worry with continued investments?
I don't know for sure, but most likely, they would have guessed on big investments. And yes, most likely. That's right.
And one final question, if I may, regarding your co-op development. How big part of that portfolio is already sold?
In general, you can say that the '23 completions are more or less sold. Everything is maybe 2%, 3% or I mean almost nothing. So we have some to sell for the '24 completions, but '23 year's we can consider sold. So it's just that time has to pass by, and then we complete, hand over the keys, book the profit and get the money out to the system. So I don't see any big risk there even if the co-op market is weaker. And also in our case, let's say, that some consumer actually cannot pay because something happened. We sold these projects some years ago. So actually, I think they are still sold below current market price, even though condominiums have gone down 10%, 15%. So we never sold at peak prices. So I think it's very well under control.
We will now take our next question from Jan Ihrfelt from Kepler Cheuvreux.
Yes, Jan Ihrfelt from Kepler Cheuvreux. Actually, I have a couple of questions. The first one is regarding your net debt-to-EBITDA ratio, you're talking about coming down considerably, do you have any -- I mean, any targets you could express here? Or how should we think about this?
This is just my thinking then, Jan. And if we make new financial targets, I think we will adjust them year-end most likely, and we will have a Board decision and so on. But I think it would be reasonable that over time, go for something like 12 maybe. We are at 13.5, 13 flat, something like that today. And I think it would be good to maybe over time come to 12 or perhaps a bit lower or even. But it will happen gradually.
If we have stable NOI and debt automatically shrinks, then you have a stronger metrics. But we have a big effect in the coming years in higher NOI from indexation and so on, and then completed projects will give us like SEK 500 million NOI. So we can see in front of us like maybe SEK 800 million, SEK 900 million more NOI, but combined with lower debt, that will make a good move for us. But as a firm target, I think we will -- maybe we can come with something in the year-end report. Let's see.
Okay. Great. And then turning to value changes. Do you expect that the positive effect that the cash flow will offset the -- maybe somewhat higher yield requirements? So there's pretty stable property valuations in the fourth quarter?
Unfortunately, Jan. I think even if we have 10% higher rents for some assets, unfortunately, I think the values will not come up. So everyone expects higher yields, so the question is how much higher. But -- so if it was like before, you could have seen a big value change in a positive way, but we don't -- yes, don't think that will happen.
Okay. I understand. And final question, just a clarification of the interest maturities that slide and I think it's on Page 8. Do I understand it correctly that the portion of fixed and swaps are 70%. And did you mention that 55% out of the 70% is fixed and the rest is...
No, the 70% is the total, Jan, but then we got the question and if we sort of look ahead a couple of years and if we do nothing, let's say, we just let swaps expire and fixed loans will turn into floaters. And then the question was how much will be fixed in a couple of years, if we just stand still? And then I think our [indiscernible] depending on if we pay back some of the debt, so even if it's floating, but then we take cash flow and pay it, it sort of increases the fixed part automatically. So that's why we can't say exactly that. So that was the question.
We will now take our next question from Andres Toome from Green Street.
So I have few questions. Firstly, can you give a bit of color around like-for-like rental income? It has come down about 40 basis points over the quarter, so 2.5% versus 2.9% reported in the second quarter. Maybe a bit, just clarification, what's driving that decline just thinking that indexation rents are coming in pretty strong? And how do you see that evolving through the year-end?
The indexation for us mostly comes year-end. So that's -- you will have a jump in that figure in the next quarter. So that's why it can be -- you compare a year back. But normally, we have indexations year-end. There are some exemptions, so some Norwegian assets can be other dates. And then you also have residentials in Sweden where actually it can be, I know this, but for those who don't know, it can be 1st of January, but it can be 1st of May, March is local negotiations. So -- but obviously, if everything goes as you could guess with index and so on, the figure will be much higher next quarter.
But in general, it's a bit low because we have finished resi that is flat, and that takes down our average. However, I think maybe in middle of next year or in the year, we think that the Finnish resi will be stronger and give us some like-for-like growth as well. It's been quite a lot of construction in Helsinki with oversupply, but now construction activity goes down a lot, but you still have the underlying demand. So we think that will pick up as well, but maybe in 3 quarters or 4 quarters. Let's see.
And then just thinking about capital allocation and you're trading at a pretty big NAV discount today. And obviously, there are challenges in the debt market and also credit trading sort of pressure that's coming through. So are you thinking about larger disposals, maybe to make the balance sheet a bit better in terms of the capital structure and alleviate some of those concerns and also just capture that public private market arbitrage?
Yes, maybe we look at everything that we long-term positive for shareholders.
And my final question is around bank refinancing conditions in Sweden at the moment. How have these evolved over the last quarter? If I think about your latest signing in the second quarter, that was a pretty favorable terms just thinking about the bank margin. Has that expanded now if you were to take on new debt?
I think in general, it's not huge differences actually. But it can, of course, be very big difference, client to client or asset to asset. I mean you have a different margins depending on who is the borrower and what is the asset and LTV and so on. So you can never say an exact figure, but my impression is it's quite stable. And if you look at the Nordic banks, they are extremely profitable right now, and they are very well capitalized. So all of them are like 500, 400 points above the requirement from finance inspection or SEC. So you have very strong well-capitalized banks and their real estate lending portfolios on average are very low LTVs.
So I think that is something that we shouldn't forget that it's a very positive factor that you have a super strong banking system. Because normally, if you ought to have a crisis, you most normally have to combine that to build too much without any customers. You have sort of a building boom speculation. And then something happens. And then on top of that, you have banks that are weak with high LTVs and then you have a mess as it was in the '90s and to some extent, in late '09. But now if you compare banks with '09, I think they have roughly twice the equity per risk-weighted assets compared to before.
And on top of that, they have much lower LTVs than before. So I think that is explanation that banks have record profits with the margins they have today. So maybe it goes up a bit, but if it goes up much, I think there will be -- I think it will be extremely attractive for them. And we also have discussions with new banks actually that want to do senior secure that hasn't -- that's not in the market today. So I think it's a very interesting market if you are a bank.
We will now take our next question from [ Anton Wilen ] from Bloomberg News.
Bloomberg is media, so they can send through media.
We will now take our next question from Megi Leka from PGIM.
Just 1 question for me. Can you please talk about access to bank financing? And why you intend to cover maturities with available liquidity rather than the bank loan?
I didn't get the question.
We didn't hear you. If we?
My question was around why you intend to cover maturities with your already available liquidity rather than accessing new bank loans and leasing that liquidity as it buffer?
I didn't think we said that.
It was my understanding that the 2023 maturities will be covered with your credit facilities already committed?
We can -- we don't say that we will. We can have a calculation to [indiscernible]. Okay. Then I think we had the last question, and thank everybody, and have a good day.
Thank you. You may now disconnect.