Fastighets AB Balder
STO:BALD B
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Fastighets AB Balder
Earnings Call Analysis
Q3-2024 Analysis
Fastighets AB Balder
Balder's portfolio holds a property value of SEK 215 billion, split with 55% in residential properties and 45% in commercial. As of Q3, the occupancy rate remains strong at 96%. The overall debt to assets ratio stands at 49.6%. Rental income and net operating income (NOI) both saw a 7% increase year-over-year, while profits from property management slightly decreased to SEK 1.36 per share due to higher financing costs. The earnings capacity shows a profit of SEK 5.16 per share, with a like-for-like rental growth of 3.6%. Over the long term, NAV per share has seen consistent growth, reflecting a healthy operational performance.
Balder's diversified portfolio includes residential, office, retail, and logistics, effectively hedging against market fluctuations. Moreover, the company achieved an upgrade in its ESG rating from MSCI to BBB, showcasing progress in environmental sustainability initiatives, while Sustainalytics rating reflects a slight deterioration from 12.3 to 14.9, attributed to methodology changes but still remaining in a low-risk range.
The company issued SEK 4.5 billion in bonds during the quarter, indicating a strategic focus on capital markets. Available liquidity reached SEK 20 billion, primarily from committed lines of credit and cash. The management expressed confidence in decreasing net debt levels, aiming to enhance the capital structure while managing ongoing financial obligations.
While recognizing current market challenges, particularly in regions like Finland with high vacancy rates, there are signs of improving rental growth. Management anticipates that by next year, conditions should stabilize, enhancing occupancy and rental rates across their portfolio. The CEO noted that with stabilized property yields, growth in net operating income (NOI) should positively impact property values, offering a substantial long-term upside.
Looking ahead, Balder’s capital allocation strategy is shifting towards growth, with a combination of acquisitions and developments anticipated. The leadership underscored a cautious approach, asserting that financial metrics will not be compromised. They expect to observe clearer opportunities in both acquisition and development spaces as market conditions improve, specifically targeting high-potential areas across the Nordics.
Balder's resilient performance metrics and proactive management approach position it as a compelling investment opportunity. The stable occupancy, long-term NAV growth, and improved ESG standing are impressive. Continued vigilance in debt management and capital allocation to growth initiatives, alongside anticipated market stabilization, suggests potential for attractive returns in the coming years.
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Welcome to the Balder Q3 report presentation. [Operator Instructions] Now I will hand the conference over to IR Jonas Erikson.
Hi, everyone. Welcome to Balder's call for the third quarter results. With me, I have Erik Selin, CEO; and Ewa Wassberg, CFO, and we'll take you through some slides briefly and then open up for questions. Please, Erik.
Thank you, Jonas. Looking at Balder at a glance, we had, as of Q3, a property value of SEK 215 billion. Occupancy rate, 96%. We had debt to assets of SEK 49.6 million. NAV stands at SEK 85.6 per share. And the portfolio is Nordic exposure, with 55% residential and 45% commercial.
Looking specifically at Q3 numbers, the rental income is up 7% compared to last year, and NOI also up 7%. Profit from property management decreased marginally to SEK 1.36 per share. And the reason is higher financing costs compared to the same period last year. Profit from property management in earnings capacity is up 4% and now at SEK 5.16. And we had rental growth like-for-like 3.6%.
Next slide here shows the earnings capacity. This is a figure we show every quarter and it's just the numbers exactly for that date. So it's not a forecast. It's how it looks on those specific quarter end. And here, you can see then the earnings and also earnings per share. And as you can see, we are in, at least, flat or hopefully a bit upward trend now.
The property portfolio, as I mentioned, is very well diversified between the Nordic countries and also diversified if we look at the property category. Residential is by far the largest, roughly half of the portfolio. And then we have office, retail, hotel, some logistics as well. So important to remember the diversification.
And looking back, we have a long-term track record of, over time, increasing NAV per share and also earnings per share. This slide shows back to '15. And if you're interested, you can also look up all the way back to '05. So we have had a long-term positive trend if you look at the long time horizon.
And also looking at other metrics. Net debt to assets was obviously much higher in the beginning, and then it trended down and been a bit up last year due to lower values. But the short term -- very short-term trend is lower LTV. And occupancy rate been very stable for many years at 96%.
In the quarter, we have received an updated ESG ratings from both MSCI and Sustainalytics. In the MSCI rating, we got upgraded to BBB, which is primarily a result of our work in environmental sustainability, including green leases and environmentally certified buildings. Regarding Sustainalytics, our rating has been adjusted from 12.3 to 14.9.
Even if we are still well within a low-risk range, and so this is not necessarily a big deal for us, deterioration is a little confounding for us. Sustainalytics has introduced a new methodology, and it seems that there is no fundamental change in how we come out per se, but the relative weight they put on different metrics explain the change. But the results are quite different from what we had a run through of the preliminary outcome versus the final outcome. So we need to understand a little bit more details here.
Boverket has released preliminary limits for energy performance per property type for commercial properties in preparation of the EPBD implementation. When mapping our properties within each segment, it all feels fairly undramatic. The proportion of our portfolio not meeting the criteria is quite small. And we see no upcoming CapEx needs, which falls outside our regular investment in energy efficiency that we want to do for ROI reasons.
Funding condition has continued to improve, and we have a slightly higher portion of debt in the capital market versus last quarter. It's up by 2% due to bond issuance in the third quarter. Swap rates have been attractive during the quarter, and we have continued to roll or even slightly increase swaps in the quarter. Worth noticing is that the majority of these new hedges were done during the later part of the quarter. So we'll not see a full effect from them in Q3.
During the quarter, we issued SEK 4.5 billion in the bond market, both in SEK and in euro through our Finnish subsidiary, SATO. Our available liquidity is SEK 20 billion. Normally, most of that is either in committed lines or invested. But this quarter, we have had a little bit higher cash liquidity due to prefinancing of upcoming maturities, which is costing us a bit temporarily. This is not a great planning from our side. We had hoped to be able to do some further bond buybacks and early debt redemptions, but it should improve in the coming couple of quarters.
We have a net financial position that is roughly in line with what we show in the current earnings capacity, and this is a level that we will pick up. And during '25, it will gradually decrease. Net debt to total asset has continued to decrease a little bit and is at 49.6%. And with the bond issuance, our encumbrance continues to be at very comfortable levels.
Here is the usual overview of the debt maturities split by bank loans and capital market funding. It has been business as usual, rolling maturities and prefinancing some of that have been '25 maturities as well.
And if you look at the asset liability management work that we're doing, we obviously spent some time during this year to establish a curve in the Swedish bond market, and now we have maturities all the way out to 5 years. And so far, it seems to be fairly well received by investors. I think we have been fairly cautious in terms of how we do things. So trying to be very transparent and predictable, having 9 months in between each maturity note and also not issuing in between the various public transaction so that the pricing is very transparent.
We get a lot of questions nowadays about when we will do the next Eurobond issuance as well. And there's obviously been a very sharp tightening of pricing in the Eurobond market, I think for the whole sector, but in particular for our name. And we're now, for the first time in a long time, in a situation where Eurobond spreads in the 5-year space is actually tighter than the Swedish krona spreads.
But what we've said is that we have not wanted to rush out in the bond market in euros. We already have a lot outstanding there. And as you can see in our maturity profile that Ewa showed before, a lot of that is obviously Eurobonds still outstanding. And so we look at that market early next year, probably, as we approach that.
And there's also a little bit currently less transparent pricing in the Eurobond market than what we see in Sweden, making a transaction a little bit harder. So I think it's been good so far to wait and focus on the Swedish market, and that's what we continue to do in Q4 as well. And then next year, we'll look in a more broad sense.
As Ewa mentioned as well, I mean we will also focus on a little bit further deleveraging until we now see valuation yields stabilize. And that we're seeing, I think this quarter. And so going into next year, I think it's fair to assume that a more balanced capital allocation would be quite visible. And I think Erik mentioned that in the CEO letter as well today. And I think that's -- we now come to a point where we look forward, both from a finance perspective, but also being able to tilt the focus a little bit more to the asset side again after some hard work on the liability side for a few years.
I think I'll stop there, and then we'll open up for questions.
[Operator Instructions] The next question comes from Lars Norrby from SEB.
Okay. I think you may have partly answered my first and maybe only question by what you stated at the end of the presentation. But just looking at you've been in a mode of sort of holding back on growth for quite a while, hardly any acquisitions, not starting in a lot of projects. So thinking about at what point in time you can shift into more of a growth mode. Is it primarily that you like to see property values stabilize first and net debt to EBITDA, which is obviously moving in the right direction, coming all the way down to your target of 11.0? Or is there something else holding you back?
I think what we've said for a few quarters, Lars, is that once we see yields stabilize, which we feel now has pretty much happened, then any increase in the net operating income will translate into value increases. And with our current -- the current size of our balance sheet, if you take that value increase on the NAV and you add the cash flow that we are generating, which is ex CapEx for SEK 4 billion, SEK 5 billion a year, that gives such a large room that we feel like we can both make material investments and we can also continue deleveraging journey. So once we're now in this position, we can be a lot balanced in the cash level going forward. That's what we're saying.
And just a follow-up on that. To get even more sort of ammunition for growth, would you -- can you rule out that you would like to strengthen your balance sheet at some point in time through a directed share issue?
You can never rule out anything because no one knows what's going to happen a year from now. So I think we -- it's always unwise to do that. But we're trying to keep a very rational capital allocation. And I think our message here was that now we see yields have stabilized. And with that, we get a lot more freedom in how we allocate capital in 2025. And that will be a capital allocation that's going to be a lot more growth oriented and [indiscernible].
The next question comes from John Vuong from Van Lanschot Kempen.
Just a follow-up on the capital allocation for next year. Where do you see the opportunities? Is this more on the acquisition side or on the development side?
It's hard to know before actually, because the opportunities come when they come. So I think it will be some, in that case, a little of both, if I'm guessing. But a bit hard to predict.
John, [indiscernible] that we -- if you look at our development portfolio, we've obviously downsized that quite a bit over the last 2, 3 years. And so quite a lot of our development capacity that is still remaining, if you look at what is sort of starting have started or can be started pretty imminently, a lot of that is in our JVs and partly owned companies. And in terms of sort of ramping up investment spend in Balder, that is not something that we will do or can do in like a quarter. So that will always take some time because you need to get everything in order before you actually start the CapEx spend.
So that's worth keeping in mind that our JVs, we can have a fairly decent investment agenda through projects in Balder, it will take a little bit more time on acquisitions, obviously. Let's see what comes up and what we think is interesting.
And then just talking about the development portfolio that you downsized, do you still see opportunities in those where the cost of capital makes sense in the current point in the cycle?
Absolutely. It's just a matter of time. We have a fantastic portfolio with very low book values. So it's just a matter of time. But we don't feel any stress to do it, sort of say, too early. So we have this long-term horizon on this, but it's a very good potential over time.
The next question comes from Andres Toome from Green Street.
My first question was about your earnings capacity. And I think you partly sort of answered the question, but I'm seeing that your interest expense line is fairly stable. And as you noted, you've taken on more debt during the quarter. So I was just wondering, obviously, interest rates have come down on the variable rate debt. So how do you see that progressing maybe into the next year? In terms of the debt amount that you have in the books, is that going to burn off when you do buybacks? Or how should we think about that?
Yes. So I would say in this quarter, we're -- if you look at our available liquidity, it's a little bit higher, but it's not that much higher than what we've had before. I think the main difference that is costing us a little bit in this quarter is that instead of just having some available committed lines from banks that we pay commitment fee for, we've been stuck with a bit of bonds and other financing where we actually pay the full interest rates on both the prefunded leg and what still remains in the short end. And so that is costing us a little bit more.
If you look at the earnings capacity, it's important to note that, that is a snapshot for how things look exactly right now. So if you look at the interest rate curve, what's priced in terms of interest rate cuts for the coming 12 months, that is not something that's factored into the earnings capacity. Just to be clear on that, it's the current interest rates on all levels sort of.
Understood. So yes, basically, the variable rate that's coming down hasn't -- a variable interest rate coming down hasn't had the impact basically yet properly on the interest expense line there.
No. Not yet. No.
Okay. And then my second question was about, as you talk about external growth. Are you actually seeing on the development side that if you were to start a project today -- and I'm not thinking about with your current land bank because obviously, as you say, you think about it as carried out costs, so it's at a low cost base. But if you were to go to the land market today and start developments, do you think it would be actually profitable?
Depending on the location, I would say, Andres. If you have a good location in Stockholm, Gothenburg, it can work. But if you don't have a location, it's too early yet on a broader view. Then I think also Copenhagen will soon make sense. Finland will be a bit later. And you can have a reasonable deals in Norway also, but it's very hard to actually find any land. So a bit different situation in different part of the Nordics.
All right. Perfect. And then I guess -- yes?
I think it also depends very much on sort of what you're developing and how you're developing. I mean if you look at our -- we have a few things in the pipeline that we're working on right now, like the GoCo science park outside of Gothenburg. That is a concept development as much as we're actually building a building. And so the tenants moving in there, they do that to be part of that community and that whole infrastructure. That's very different from just saying, okay, let's find a plot and buy an office building like any other one, right?
So I think you need to be mindful of what type of development you're working on. And if you look at what we still have in the pipeline that we're working on now. And if look at what we still have in the pipeline that we're working on now, it is, to a fairly large extent, those type of very conceptualized pre-let, and it's a very different thing from just any office space sort of.
The next question comes from Fredric Cyon from Carnegie.
A couple of questions, starting off with the CEO comment regarding fairly material investments if the opportunity arises. Can you help us quantify how you think about it long term? And second of all, related to that, perhaps, how should we view that in light of the negative outlook from S&P?
Good question, Fredric. No, but I mean, we will never risk the financial metrics. So obviously, S&P metrics is #1 here. But what we're trying to say is that if values stabilize and start to go up in line with rental growth and NOI growth, it will be quite substantial amounts if you calculate it. But it's hard to say an exact amount and exact time, but we will not risk the credit metrics. And we don't have to, by the way, because once it stabilizes and values goes up, we will have a very, very strong tailwind, as you know.
And do you think they will stabilize now? Are we there already?
We think so. It looks like that right now. But I mean we have to look at it as we go along. But the feeling right now is that we are roughly around that level that seems to be working. I mean yields coming up and interest rates going down and -- yes, that's the feeling right now at least.
Then with regards to the cost of debt, it was flat quarter-over-quarter. We do have a positive development of the STIBOR. At the same time, you do have fixed rate favorable loans maturing next year. So assuming that the STIBOR moves down 100 bps until year-end 2025, where will the 3.0 be approximately? Is 2.8 a good guess, for instance?
I think that sounds about right when we're talking to the year-end 2025. So as you pointed out, there are a number of moving parts here. So we have a fixed rate bond portfolio, but that is rolling off very, very slowly. Most of that is in euros and that goes off sort of continuously until 2031. And then you have old bank loans that we replaced with new bank loans, and there is a mix of really old ones at attractive rates and quite a lot of it is taken up 2022 and '23 where rates were not as favorable. And then we obviously have the variable short-term rate fixings that we're now rolling to lower levels.
So I think what you will see is that, I think Ewa mentioned that as well, that we will peak around this level where we are now. And then you will see it starting to come down during next year, all else equal. And I think the -- it's going to be a little bit more visible reduction in the second half of next year than in the first half, but you will probably start seeing it already in the first half.
And then my final question relates to the Finnish resi market. Obviously, it's been high vacancy there due to a number of factors. What's your current outlook on improvement in the occupancy rate for the SATO portfolio?
Yes. For the time, if you look at it now, we have slightly lower vacancy than 1 year ago and also like-for-like rent is every month getting a bit better. So it's going slowly in the right direction. And our hope is that next year will be a bit better. So you still have a big overhang of supply of apartments because you have so many starts in '21, '22 that is completed now. But it looks actually more promising than it's been doing for a long time.
And we have -- in SATO, we have the final completions of a new building in October and December. And then we have a few apartments in our other company in Finland. But -- and I think the situation is pretty much the same for other companies. So I hope that it's actually passed the lowest point and slowly getting better. It looks like that anyway. Like-for-like is getting better every month for us.
The next question comes from Jan Ihrfelt from Kepler.
Okay. I actually have 2 questions. The first one is related to Fredric's latest question here. Do you see rental growth in Finland on resi?
Yes. Now we have like-for-like rental growth. It was -- I mean, at the worst point, this was actually a fraction negative like-for-like, and then it turned positive. I don't remember exactly, but it was some quarters ago maybe. And now we can see if we compare month to month that the like-for-like is slowly getting better. So the like-for-like in September, it was quite a long time ago, it was that good. So I think it will continue. I hope so. I think so it looks like that.
But is it fair to assume that the rental growth will be lower in Finland compared to Sweden?
You mean next year or what time period?
Yes, yes.
I think it will be a close call, Jan. Difficult to guess.
Okay. Okay. Second question, the office market, we have seen some early signs of maybe lower interest from companies in terms of new lettings and so on and also some kind of, I mean, risk for vacancies and so on. Could you just give us a broad picture of your view on the office market right now?
Yes, sure. We have office mainly in Stockholm, Gothenburg, as you know, so -- and very few in other places. So that is the big part. And what we can see is that it's, of course, a competitive market, but we don't feel that it is really bad. We have a very a lot of leads and sign a lot of contracts. So for the time being, I think the rental level is pretty flat. If you have a rental contract, and the tenant leaves and you find a new tenant, it seems to be flattish. But if I'm guessing, I think Stockholm is a bit tougher than Gothenburg actually, but that can turn quickly.
So for us, it will not have a big impact anyhow because office is, I think 16%. So maybe Stockholm can be 7% in our case. So it will not move the needle in Balder. But I think it will be a bit competitive in the short run and long term, it's still, of course, interesting with Stockholm offices. But -- and also rent has gone up 20% in a couple of years, so it's natural that it's going to stay where it is for a while, I think. But I think also company by company, you can analyze it and see, Jan, if you have the top rents, absolute top rents. I think it could be a bigger risk if you have SEK 12,000 or SEK 10,000 per square meter than if you have the lower rents, if I'm guessing.
[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Thank you very much for listening in, and appreciate that. If you have any further questions, you know where to find us. Just let us know, we're available the whole day, of course. Thank you.