Entra ASA
OSE:ENTRA
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Earnings Call Analysis
Q4-2023 Analysis
Entra ASA
In a strategic move to fortify its balance sheet, the company has significantly reduced capital expenditure on projects (CapEx) to below that of recent years, which ranged from NOK 1.5 billion to NOK 2 billion. Currently, the remaining CapEx is NOK 670 million, a disciplined decision aimed at long-term financial stability. Despite the tight hold on expenditure, the company is maintaining a strong development track record, with profitable projects yielding an average return of 24%. Furthermore, the Norwegian GDP is expected to grow by 2.2% in 2024, and although the employment rate may slightly rise, overall economic indicators suggest robust market conditions.
The Central Bank of Norway raised the key policy rate to 4.5% in September 2023, signaling the peak of the interest rate surge, and has adopted a cautious approach before considering any cuts. Inflation is on a descending path, with December figures at 4.8% and January at 4.7%. This downward trend indicates macroeconomic stability which can potentially encourage further investment.
The Oslo property market is witnessing low vacancies below 6% and contracted newbuild activity. Over 80% of large contracts signed in 2023 above 5,000 square meters were renegotiated, creating positive conditions for asset management. Furthermore, the transaction activity is showing recovery signs after a record low in 2023, thanks to clearer signs on inflation and interest.
Revenue figures reveal stability with NOK 860 million in the recent quarter, marking a slight increase from the previous quarter. Notably, the firm saw like-for-like growth at 7.4%, exceeding the Consumer Price Index (CPI) adjustment, which is 6.5% for 2023 and projected at 4.8% for 2024. Divestments did impact revenues negatively by NOK 34 million quarterly, but the company effectively managed to bolster revenues through asset operations, achieving net additional revenues of NOK 49 million.
Net income from property management was reported at NOK 296 million, indicating a slight decline from the previous quarters. The company's net profit before tax reached NOK 3,164 million, influenced by value changes in assets and financial derivatives. Consequently, the company expects a solid improvement in debt metrics, including a decrease in Loan to Value (LTV) by 5 percentage points and an increase in Interest Coverage Ratio (ICR) by 20 to 30 basis points, further bolstered by CPI adjustments and lower anticipated interest rates in the third quarter.
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Good morning, and welcome to Entra's Fourth Quarter Presentation here in Oslo. Before I start, I'd like to just say a few words on the illustration you can see on the front page here. This is one of our buildings in the city center of Oslo, next to the Central Station, also called Oslo City. This building has a shopping mall on the ground floor and the first 4 floors and Entra holds the offices from the fifth floor and upwards. This quarter, we have completed the first phase of the redevelopment of this entire quarter. And as you can see on the picture, the first phase is actually the right side of this building, all the way to the back; and the left part, we will continue on at a later point in time. The shopping mall is entrance from the center. This is the busiest shopping mall in Oslo with 11 million people visiting the mall on an annual basis.So let's move on to some highlights in the quarter. We have had a rental income of NOK 860 million in the fourth quarter. That is 7% up compared to same quarter last year or 8% rental growth compared to the full year of 22%. Higher interest costs and negative value changes on the portfolio are affecting our results. And net income from property management was NOK 296 million in the quarter, and net value changes came in with a negative of NOK 3,440 million in the quarter. Out of that, approximately NOK 3 billion is related to the property portfolio, which is then 4% down in the quarter, leaving us then with a loss before tax in the quarter of NOK 3.164 million.We have had an active quarter in respect of letting and signed net -- our net letting then came in with a positive of NOK 23 million. We have also, as I already mentioned, finalized the first phase of the redevelopment in Stenersgata or Oslo City. We were assigned a Baa3 rating with a stable outlook from Moody's. And we have sold 3 properties in the quarters. And we've also announced in the first quarter that we have signed a letter of intent to sell the entire Trondheim portfolio.Our Board's main priority is to strengthen the balance sheet, and they have also, therefore, decided to propose to the Annual General Assembly not to pay dividend for the second half of 2023 or the full year of '23.And finally, I'm also pleased that we, earlier this year, could announce that Ole Anton Gulsvik will join the Entra team, when Anders leaves us, as our new CFO. Ole has extensive experience from capital markets. He's worked as an equity and credit analyst with investment banking and also held CFO positions in other asset-heavy industries. So we look forward to welcoming him on board the team.So moving on to operations. We signed new and renewed leases of NOK 180 million in the quarter. That's around 84,000 square meters. If you look at the full year as a whole, we signed leases with a rental value of NOK 483 million or 200,000 square meters.In the quarter, contracts of NOK 40 million were terminated. Out of that, NOK 15 million is related to newly signed with the Norwegian Environmental Agency, as one of the largest contracts in the quarter, and our net letting, as I mentioned, of NOK 23 million.Our occupancy is currently at 95.3%. That is down from 96.5% same quarter last year. Half of this is explained by 2 factors. Firstly, we have completed 5 projects in the quarter. And all of this -- all of these projects are feeding into the management portfolio with some vacancy, somewhere between 5% and 15%. We have a solid track record of solving that type of vacancy within a year or so after the projects have been completed.Secondly, we do also have some older buildings in our portfolio, which are more or less ready for going into a project phase, Seeing that we now are postponing our project pipeline, this is buildings we are now working on letting. And the quality of these buildings are, of course, less, meaning that also the demand for these type of assets are less. We do, however, have an ambition to bring our occupancy up again, long term above the 96%.Our average lease duration is 6.3 years, and our share of rental income from public tenants currently at 57%. If you take a look at the largest contracts signed in the quarter, the Norwegian Police signed the entire building in Lagardsveien in Stavanger. In Helsfyr, the Norwegian Environment Agency signed 11,000 square meters. In Bergen, the Norwegian Tax Authorities have renegotiated 8,600 square meters. And here in this building, the Norwegian Post has renegotiated 8,400 square meters. And across the street from here, Galleri Akershus have signed 5,500 square meters. And also in Sandvika, The District Court signed 3,400 square meters. There we will now prepare to start the project. And in n Brynsengfaret 6, Roche Diagnostics have signed renegotiated 2,400 square meters. We've signed several contracts in that building. So also there, we are preparing to start the project. Same goes for the asset in Bergen, where Norwegian Tax has signed.If you take a look at the transactions we did in the quarter. We sold 3 properties with Cort Adelers gate 30, consisting of 2 properties and Marken 37 in Bergen. Gross asset value of these assets were NOK 1,020 million. They were sold 3.5% below the Q3 book values. The transactions were closed now in January, and the proceeds have been used to strengthen our balance sheet.We also announced earlier this year that we have signed a letter of intent to sell our portfolio in Trondheim. This is a portfolio consisting of 13 offices in Trondheim, totaling 187,500 square meters. The total value of these assets in the transaction is NOK 6.45 billion. That is 1% below the Q4 book values. We expect to close this transaction during the second quarter. And the letter of intent also includes the forward sale of a development project in Holtermanns veg Phase III, one of our ongoing projects, where closing is expected to take place sometime in 2026. This transaction is subject to customer due diligence and also clearance from the Norwegian competition authorities.This is a significant transaction for us and will strengthen our balance sheet and improve our debt metrics. So pro forma, this transaction and also including the transactions we already have signed, our effective leverage in LTV should be brought down with some 5% compared to the Q4 numbers.The Trondheim portfolio has been developed by Entra over the past 10 years and is now close to fully developed. Since we started reporting on Trondheim, as a separate segment, 8 years ago, we have increased the number of properties from 9 to 13. That includes the 5 new build projects, as you can see on the pictures below and also on divestments. The 12 months rolling rents have increased with 129% and our portfolio value, including investments, increased with 168%.Our project development has been very profitable in Trondheim. We have developed a total of 5 extraordinary buildings with a total investment of NOK 2.5 billion with a return on investment on average on these projects of 29%. The Trondheim portfolio is now almost fully developed, and we only have one ongoing project left, which you can see on the right-hand side, that's the third phase in Holtermanns [ veg ] 1-13. This project will also be completed by Entra. And when finalized as part of the transaction, it will be sold to the buyer.Over time, we have created greatest value when we can work with owning properties with some kind of development potential. And we have, therefore, decided that now it was right for us to sell Trondheim and continue the work on developing our projects and properties in our other clusters in and around Oslo and in Bergen.So as you saw on the first page, we finalized then the first phase of that project in Stenersgata Oslo City. This has been a challenging project for us. And I have in previous quarterly presentations, talked about how we underestimated the complexity of developing assets on top of a shopping center metro station, where you have 11 million people passing through on an annual basis.Combination of complexity, delays, cost inflation and also some quality increases to also comply with the taxonomy has increased the cost in this project. And our yield on cost here is down from originally planned 4.5% to 4.4%. The space here when we reported at closing is 15,100 square meters. The building has not shrunk. But when we started reporting at 15,800 square meters, we had planned for an infill project now -- which now has been -- was moved to the second phase of the project.We started reporting this project with a pre-let ratio of 57%. Now we are at 84%. I think this also demonstrates the value of our cluster strategy because this tenant, which signed in this building is actually the largest tenant in our existing building here, headquarter building, and we managed to accommodate for their growth by offering the neighboring building, and they have actually signed the entire 84% now. The remaining 16% are smaller floor plans, which we are starting to -- which we are working on in the market currently. The environmental qualities in this building has been lifted from originally planned. BREEAM-NOR very good to [ BREEAM-NOR ] excellent.If we move on to our ongoing list of development projects, through 2023, we have taken out 5 projects, and we've added only 2 new projects. The remaining CapEx for these ongoing projects is currently NOK 670 million. And out of that, around NOK 407 million is related to the project in Trondheim, which now has been forward sold.Our project CapEx is significantly below the NOK 1.5 billion to NOK 2 billion, which we have seen over the recent years. This is intentional from our part, as our disciplined approach to strengthening the balance sheet. We are now, however, also planning to start a few redevelopment projects following the lease contracts we have already signed, one project in Bergen, one smaller project in Sandvika, and also one in Oslo. So we will get back to that in the next quarter.So even if we have tightened up on the CapEx expenditure on projects, we continue to work on maturing our land bank to ensure that we also have projects ready to start when market fundamentals and also our capital structure allows for it. We have a very attractive project pipeline for future projects. The ongoing projects we've already been through at the top of this picture. Two of these projects were lifted up from the zoned box below the line to the left, where we have now 100,000 square meters ready sold. And we've also moved in 2023, 1 project from the long-term pipeline, 14,000 square meters were moved over to sold. And the volumes here of 100,000 zoned and close to 300,000 long-term, is all new square meters, which can be added to the portfolio when we are ready to start these projects.We have a solid track record of profitable project development. On the right-hand side, you can see that we have invested NOK 18.35 billion since the IPO. That's in 31 different projects with an average return of 24% on these projects. That's measured as initial value, including land and then the valuation in the first quarter after we completed the project.A few words on the market. We have seen that the Norwegian economy is holding up well. GDP is expected to be 2.2% in 2024. Low employment rates in Norway still expected to increase slightly from 3.6% to 3.9%. The key policy rate was increased to 4.5% in September. The Central Bank has communicated that we now are at the top, but they're still holding back on cuts until they see that they have control over the inflation. The inflation is on a downward curve. December came in at 4.8%, and the numbers for January just came in this morning at 4.7%.The market dynamics in the letting markets are also favorable. In the fourth quarter, we saw that contracts signed in the fourth quarter of '23 was the second highest fourth quarter since 2008, only beaten by 2022. We can thereby state that we're not seeing any impact on demand from work from home in respect of the volumes signed.Market trends have seen very strong growth in 2022 and also in the beginning of '23. Now market participants are expecting to see that the rental growth will be more moderate going forward, but still on a positive note.Vacancies are low in Oslo below 6%, expected to increase slightly going forward. Fair to say that also there are differences between the parts of the city, where we typically see that the part of the cities, where we have an older building structure or a group of buildings or also where you have, in some examples, buildings, which have been prepared for projects coming now back into the market, adding some vacancies, but then in the more low-quality segments.The building activity has been low since the pandemic, low volumes coming in also this year. But you can see from the bottom right graph that in '25, there is quite a lot of volume coming in. 65% of that volume is related to 2 projects. One is the government offices, which will be occupied by the government. They will move out from different parts of the city and the buildings they vacate will need some 18 months to 24 months of refurbishment before they come into the market. And the second project is Construction City, which already is somewhere between 70% and 80% pre-let. So the combination of low vacancies and low newbuild activity in Oslo clearly provides us with favorable market conditions for renegotiations.In Oslo, more than 80% of the large contracts signed in 2023, also contracts above 5,000 per square meter were actually renegotiated according to [ IDeaS ] statistics database. And for the segment below between 2,500 square meters and 5,000 square meters, 60% were renegotiated. So that is good news for us when we work on our renegotiations going forward.A few words on the transaction market. It was record low transaction volumes in '23, NOK 58 billion. We have seen that interest and activity picked up specifically in November when investors got some more clarity on inflation and interest looking forward. And we do expect that the transaction activity will be picking up also in 2024, now also supported by more favorable financing markets. We have seen significant interest for Entra's assets and also a lot of more intense interest after November as also demonstrated by the sales we notified in December and January.The Oslo Prime yield is currently somewhere between 4.5% and 4.7%. That has also now been evidenced by recent transactions and market participants do not expect to see further prime yield expansion. And then in respect of the secondary yields, there are less -- or more diversified yield expectations. So it's difficult to be more as firm on the expectations for the secondary yields going forward.The most recent investor survey, which came from [indiscernible] also now in January, also showed that the share of net buyers in the market has increased from 48% to 75%, which also tells us that the buyers now are more ready to act.From time to time, we find it interesting to look at how our property valuations compared to replacement cost. On this picture, you can see on the left-hand side, the replacement cost, first for the CBD prime assets in Oslo is somewhere between 100,000 per square meter and 120,000 per square meter. Next to that, an example of a high standard quality or high -- sorry, the more normal standard quality building on the East/Fringe of Oslo would cost somewhere between 45,000 per square meter and 60,000 per square meter.On the right-hand side, you can see Entra's high-quality, centrally located portfolio, 95.3% let, 6.3 years of duration is currently valued at NOK 48,300 per square meter for the management portfolio, NOK 30,600 for the ongoing projects and NOK 6,200 for our development sites.Now on the far right, you can see the current stock market pricing, where the share price of NOK 114 per share would imply an implicit valuation of our management portfolio of NOK 37,000 per square meter, which is actually less than the construction cost, excluding land.So on that note, Anders, the floor is yours.
Thank you, Sonja. In terms of the last years, we've really seen the strong correlation between the macro and commercial real estate. And if you look back now at 2022, clearly, the themes were -- I mean, Russia, Ukraine inflation, Central Bank responses into last year '23, it changed slightly towards sort of inflation peak. How is going to have a soft or hard landing? And what is the path to like a new normal?In 2024, we see another change again. And it's now more about what is the -- are they going to have a disinflation or not. In Norway, we started to see now this inflation coming in, which has a sort of a good impact on the interest cost and also in terms of the, again, rate cut, speed and debt. And of course, as well, I mean, a number of geopolitical topics like number of elections. We got protectionism. We have the sort of Middle East containment or spread and lately now, sort of China? And do they start growing again? Or do you see it as a continued decline.And in this macro environment, a changing macro environment -- a challenging macro environment, we actually see that Entra stands solid. We have an excellent quality on our assets. We have extra special good tenants, I mean, non-comparable to anyone in Europe, high-quality tenants, 58% public and not the least, a solid financial situation, which will be further enhanced and improved upon completing the transactions that we are currently working on.So on that basis, our operations are pretty much as expected. So I'll go quickly through the P&L. We will spend some time on 3 topics. Clearly, the value changes, the financing situation in terms of cost of debt, liquidity, debt maturities and such. And as well, the impact of the transactions that we have signed [indiscernible] and closed now in January and also the LOI regarding the sale of Trondheim portfolio and other divestment process that we are working on.So on that note, revenues coming in at NOK 860 million, basically dead on where we expected them to be with NOK 27 million, up from NOK 833 million in the third quarter. The reason is basically 2 projects put into our operations.If you compare to the fourth quarter in 2022 of NOK 806 million, we're up some NOK 54 million on quarterly revenues. Reasoning are three-fold. Firstly, we put 11 assets into operations from small and large projects. We took one asset out of operations that Sonja was talking about earlier, which -- and those project development gave us sort of NOK 49 million net additional revenues in the quarter.Then we have divested a number of assets throughout the year and the quarterly impact on revenues was NOK 34 million negative.Thirdly, net letting -- sorry, not letting -- like-for-like growth coming in at 7.4%, i.e., 90 basis points above the CPI, with CPI Norway was 6.5% into 2023 and another 4.8% now for 2024. On the full year basis, i.e., 2023 to 2022, the like-for-like, which was 5.8%, i.e., 70 basis points below the CPI of 6.5%. And the reasoning is basically that the occupancy -- or sorry, the vacancy in the portfolio went up 120 basis points in -- from 1 year to another.Net income from property management coming in at NOK 296 million, so NOK 26 million and NOK 24 million below the third quarter '23 and fourth quarter '22, respectively. And then net profit before tax coming in at NOK 3,164 million, of course, impacted by the NOK 3 billion or NOK 3.19 billion of value changes on the assets and NOK 422 million negative other changes on the financial derivatives.I think this exhibit really underlines the impact of macro on our numbers, both in terms of the P&L and cash flow represented by the cash earnings, now at 7.4% annualized 4 quarters rolling compared to the 9.2% at the peak in Q1, 2022, which was the pinnacle of happiness in commercial real estate, but also impacted clearly on the asset values. And NRV now at [ NOK 167 ], so down from NOK 235 at peak valuations, and which is still 8% CAGR back to 2015 and 11% if we include that, we paid out dividends of NOK 37 in that period. But again, clearly, a large decline in values. I'll come back to the value changes on the later exhibit.On the P&L part, as we talked about the revenues, basically no surprises at all. Operating costs coming in at NOK 71 million in the quarter, NOK 282 million for the full year, basically 8.3% of revenues, which is pretty much in line with where we expect to be. We said we're going to be between 8% and 8.5% and that sort of runs well. That's sort of a good -- that's a good figure in our type of business.Other revenues, other costs coming in at net NOK 6 million, NOK 25 million for the full year, again, pretty much as expected. Admin costs coming at NOK 44 million. That is lower than we expected, NOK 185 million for the full year. If you look at 2022, we were at NOK 210 million. But in 2022, we had NOK 16 million in one-off effects from the acquisition of Oslo Areal and also our support to the -- to Ukraine. So again, comparisons apples-to-apples, will be NOK 194 million in 2022 towards NOK 185 million in 2023. So still a bit lower than expected and happy with that.Again, financing cost being the largest cost factor, NOK 456 million in the quarter, [ NOK 1.620 billion ] in the full year, pretty much as expected, but still, of course, a significant step-up in financing costs driven by the increased interest rates.Our net debt is down by some NOK 1.5 billion between 2022 and 2023. But again, the cost of debt has come up by 59 basis points since from Q4 '22 to Q4 '23. So that, of course, has a great impact on our numbers with the NOK 40 billion or NOK 39 billion in debt.Okay. Looking at the next quarterly revenues, starting off with the NOK 860 million today or today is a fourth quarter, we're putting -- we sold 3 assets in January, or we closed 3 assets in January, net negative of NOK 11 million. We're going to have the effect of 2 projects that are -- have been put into operations and but will have increased revenues, as the tenants are gradually moving into those assets of NOK 5 million. We have a net negative let -- net letting of NOK 12 million, that's one asset that we are emptying and preparing for redevelopment.And then the CPI at NOK 40 million, 4.8% CPI adjustment. We basically have 100% CPI adjustment on [ all other ] contracts. And it was 4.8% for the 2024, we had in our estimate, 5%. So it's slightly below -- slightly below the -- our estimate, but still January to January, CPI just came in this morning, it ended up at 4.7%. So we do see some disinflation trends in Norway, which again is positive for further interest rate cuts.We also put in here the effect of the divestment of the Trondheim portfolio. As Sonja said, it's a letter of intent, but we are fairly certain that this transaction will go through, and it will have a negative impact of approximately NOK 400 million on our top line revenues and which parts of that comes in the second quarter. We have, in this case, estimated the closing in June 1, and the rest in Q3. And we also put in 3.5% CPI adjustment for 2025.Okay. In terms of the property value [ development or ] the asset side, I just want to make 2 comments. Firstly, on the CapEx part, we ended up at NOK 448 million for the quarter, NOK 1,765 million for the year. So slightly higher than we had expected. We had sort of put in mind our own spread sheet around [ 16 ] -- NOK 1,650 million, so marginally above. still significantly below previous years. We had NOK 2.2 billion in '21 and NOK 2.6 billion in '22 and now NOK 1,765 million in '23. For this year, we expect to be somewhere in the range of NOK 1 billion to NOK 1.4 billion. It really will depend on the number and the scope of our projects that we initiated during the year.The second comment, I would like to me is on the value changes. And as you can see, we are writing down our assets with NOK 3 billion for this quarter, so another 4% or 4.2% to be exact of the portfolio, and this might seem a bit strange. During the fourth quarter, I mean, what we saw was transaction market is opening up again, as evidenced by sort of pretty prime assets being sold in Oslo.We do see the bond market is opening up again. We see that the base interest rate has come down significantly, as also evidenced by our writing sorry -- writing down the value of financial derivatives with NOK 422 million in the quarter. And also important, the credit margins are -- the spreads are coming in on our credit margin on the bond. So like basically, it's been a number of positive factors during the quarter. Still, we are writing down our assets by 4.2%.The way Entra does appraisals, we use 2 external appraisers every quarter and on all assets. And then we basically take the average of those 2 appraisals down into our books. And what they did this quarter was basically stepping up the required rate of return by approximately 30 basis points. This means that Entra as a whole has written down our portfolio by approximately 16% since peak valuations in Q1 or 110 basis points yield expansion on our portfolio.During that part, as we have talked about before, because our yield was [ 388 ] back in Q1, and now it's -- now it's [ 498 ], so 110 basis points up. In that period, the CPI has also increased a lot more than expectations we had back in Q1 2022. So the real sort of yield expansion portfolio, taking CPI higher than expected CPI into account is actually 135 basis points. So it's been a significant write-down on our portfolios. And as we see our approach, we're having 2 external appraisers is different from what we see from many other companies.Okay. On the financing part, it has been 1.5 extremely active years on our financing. We have got NOK 5 billion in new bank debt. We have extended [ NOK 13 billion ] of bank debt, extending the debt maturities. And we also did 2 bond taps in January last year of about NOK 1 billion. So a very active 1.5 years. For the fourth quarter, we only extended NOK 280 million bank -- our bank facility. And I'll come back in the -- on a later exhibit for why we really didn't have the need to do anything more than this.What we see is that the -- our key debt metrics have deteriorated during the quarter, LTV now at 57% for the -- according to EPRA. According to the Moody's definition, which is kind of the important one, we're at an LTV of 54%. ICR now to [ 1.8 ] and clearly below where we wanted to be.What's going to happen now? It's with the divestments that we -- well, we closed NOK 1 billion in January and expecting to close another NOK 6.5 billion then during the second quarter, as well -- as well as getting about NOK 0.5 billion from some vendor notes that we issued last year. The LTV is going to increase by at least 5 percentage points -- sorry, not increase. It's going to improve by 5 percentage points, i.e., coming down.And we see that the ICR by the divestments alone will improve by 20 basis points to 30 basis points. That comes in addition to the effect of the CPI that will come into our revenues now for 2024 and also the expected lower interest rates that we will see the effect of starting in the third quarter this year. So clearly, our debt metrics now are not what -- how we want to see them, but we are on a positive trajectory and a strong one as well.In terms of the market, bond market is opening up. We see a number of Swedish CRE companies issuing new bonds. And we also margins are tightening. We're still not at the levels, where we want to issue bonds, and we don't need to issue bonds at above 200 basis points. So we expect the market to continue to improve from the issuer side, also on the bond market.And clearly, our stable outlook on our Baa3 rating also helps on the investor interest for -- in the bond market, as well as the expectations of the increased liquidity or improved in liquidity position from the future divestments.CP market is still fairly dry. Bank markets are open, but selective basically, as it has before. If you have good assets, if you got good tenants, if you're a good company, and if you've got long lasting relationship, the banks are with you, and I'm happy to say that we are in that category.On the interest rate development, this is a normal graph that we always use. We basically put in what's the forward neighbor curve, existing hedges. We got the refinancing at current market -- market rate bank market rates. And we do see that we -- according to the forward, we will be peaking our cost of debt, all in cost of debt to -- in the first quarter this year at 4.34%, then it will come down again.58% of our portfolio is hedged. When we now are closing the transactions, we're going to use that money to repay debt, bank debt, most likely. And what -- that has a significant impact on our cost of debt as well because what's going to happen then? Well, we're going to pay down on the debt that has a floating NIBOR, of course, is currently at 4.7% compared to the 2.17% that we have as an average hedge cost. So we're basically going to take down the most expensive floating NIBOR debt. In addition, we're going to repay the most expensive debt in terms of credit margins.So when you're looking at basically just the pure effect of the divestments, you see that the -- our cost of debt will go down by some -- average cost of debt will go down by some 30 basis points to 40 basis points, which has a massive impact, both on our cash flow, and also, of course, on the debt metrics. And that means, also the hedge ratio will go from today's 58% to in the low [ 70s ] somewhere, which basically also sets the ground for sort of further predictability in the future cash flows.The last exhibit is starting on -- ending on a happy note on this one is, of course, our debt maturity schedule. And we all know that in times like this, liquidity is key for companies within -- sorry, asset-heavy companies, and just -- so everybody understands the debt duration or maturities.A typical bank debt in Norway has [ return ] to maturity of between 3 years to 4 years. It used to be 5 years, then we to 4 years, now it's like 3 years to 4 years. A typical bond debt for us is in -- typically in the 5 years to 8 years range. That's our sweet spot in terms of the refinancing risk versus the cost of debt.So what we see here is a very healthy debt maturity profile that we are happy with. And of course, getting another NOK 8 billion, give or take in net proceeds from some -- on the planned divestments during the year will increase this position even further or enhance the position further. So this is without any divestments.So we are, as I summing up, liquidity is key in asset-heavy companies, especially in times like these. We are comfortable with the situation, as it is, and it will be -- we will be even more comfortable with another NOK 8 billion coming in through the door in -- during the first half of this year. Thank you.
Thank you, Anders. So a few closing remarks before we move on to the Q&A. First of all, we are seeing some more comfort on how inflation and interest rates are going. And we have seen positive signs in the transaction markets and also that the financing markets have opened more up.There is significant interest for Entra's assets, as we also have demonstrated with some of the transactions we now have announced. In respect of the letting market, we are experiencing that the demand is holding up well, specifically for high-quality offices with central locations. And we see favorable market dynamics going forward with the low vacancies and low newbuild activity we have in our markets.Our balance sheet is solid, and we have ample of available liquidity. And the transactions we now have of a total of NOK 7.5 billion, expecting to close in the first half will also strengthen our balance sheet further and improve our debt metrics, as Anders said, bringing our LTV down with some 5%.So I think we'll leave it at that and just check with Tone, if we have any questions coming in, and Anders join me.
We have a few quick questions to sum this up. Are there any further divestments in the pipeline?
So we have some other investments ongoing, which we will continue to proceed. But also, having done what we've communicated so far, we are more now back to the normal portfolio rotation activity, which we typically do as a real estate business.
So have you set a divestment target going forward?
I think I answered that business as usual portfolio rotation.
Can you comment on the difference between the 2 appraisers' valuations?
Anders?
Yes. It's 3.6% for this quarter. Normally it's between 1% and 4%, so to speak. So it's within the normal line basically the normal variance. So -- and to us, at least [ 3 points ], when [ you do ] an excel sheet on the value of an asset, the 3% is like you don't interchange much in terms [ of that ]. So we're happy with that. Yes. And it's always been like this except in 1 quarter. And then we -- in that 1 quarter, it's like 2 years ago, we added another third appraiser just to do a sanity check on those 2. But no, 3.6%, so it's well within -- well within the board exactly set.
What are the comments from the appraisers related to the value changes in this quarter? And also, what are their comments on the outlook?
Comments on this quarter. Well, they are positive in terms of the outlook for the rental market. I think that's sort of a fair fundamental for their assumptions. We haven't really seen any large effects of work from home in Norway, either in Entra's contract or in sort of general market. So I think they're positive in terms of the market rents. They did take up the rate of return requirements for about 30 basis points, which -- so the prime yield in their valuations are now [ 4.5 ] for one of them and [ 4.7 ] for the other, so -- which is basically well supported by the transactions that they had -- that we saw in December.In terms of the outlook, basically what the -- that was the second part of the question, right? Well, they're saying, as Sonja said, that prime yields seems well substantiated, well supported by at least 3 transactions in Oslo during the last couple of months. And then -- then there is sort of uncertainty or they're not quite sure what they're going to do with the secondary yields.So -- but on direct question is, are we now at the bottom of the sort of the -- of the cycle in terms of valuations, their response is, well, we -- if we're not at the bottom, at least we're very close to it. So -- and that's sort of their statement. So it's qualitative. But I think it's fair to say that we're getting close to the bottom in terms of the appraisals. Yes.
Thank you very much. That concluded Q&A.
Thank you. Thanks for joining us. See you again, next quarter.