Samhällsbyggnadsbolaget i Norden AB (publ) (SBBB) Earnings Call Transcript & Summary

Hello, everyone, and welcome to the SBB Q4 Report 2019. Today, I am pleased to present CEO, Ilija Batljan. [Operator Instructions] I will now hand the call over to your speaker. Please begin.

Hello, everyone. My name is Ilija Batljan, and I'm the CEO of SBB. And thank you very much for attending. Let me start to point out that SBB is today the largest player in most safe asset class in the world, in Nordic social infrastructure. We are largest in Nordic. And we are probably among the largest in Europe. Slide 2, please. If you look at the development, the last 12 months, I think the best way to describe it or the best way to understand where SBB is heading is to first look what we have been delivering. Last quarter, we are delivering profit of SEK 1.3 billion, which adjusted for nonrecurring costs relating both, to transaction, the refinancing. And the repurchase of bonds amounts to SEK 1.4 billion, which is strong increase compared to the corresponding quarter of the previous year. And at the same time, you can see that we are delivering strong net operating income that is following by increase in cash flow on -- for the last 12 months with more than 200%. And on top of that, the most important message is our earnings capacity rolling 12 months with very strong performance. You can see that we have a rental income of SEK 5.2 billion and NOI of SEK 3.7 billion. And then at the end of the day, adjusted operating profit of SEK 2.8 billion or SEK 2.29 per share. If you then look and take into account the dividends from -- dividends to the B shares and preference shares and take into account the run rate synergies after tax from Hemfosa, you will see that we are seeing that we will be able to deliver at the end of the year, profit after all dividends, excluding dividends to A and B shares of SEK 3.34 per share on 12 months rolling. Next slide, please. We are, as you know, long-term reliable partner for municipalities. Throughout the Nordics, just 2 weeks ago, we did our first deal in Denmark with a Danish municipality. And you see that still 9 of 10 of our clients are coming either from government direct or indirect or a CD insurance regulated residentials. Next slide, please. Financial performance, SEK 596 million in income in the quarter, strong increase comparing to the Q4 2018, continuing to increase in net operating income, still very -- relatively very high yield. This 4.8%, I could sell all of the asset, probably at the value that is between 20% to 30% over this. 4.8% is not appropriate yield for this kind of debt. Property value, SEK 79 billion, SEK 70.5 billion -- SEK 24.9 billion in EPRA NAV. And as I said before, very strong earnings capacity on 12 months rolling. And we still continue to improve our credit metrics. Earnings per share for last quarter, after all dividends, SEK 1.51 per share. Next slide, please. Just 2 slides about the assets. As I said before, 94% of the portfolio is social infrastructure; 77%, community service properties; and 17%, residentials; 6%, mainly our land bank. And I will come back to that. That is very important point, a very strong portfolio of the building rights. And if you look at our presence in 4 countries, you will see that 65% of our assets is in the largest regions and larger cities in the Nordic with Stockholm on the top with 77% of total property value. Next slide, please. Just a big dive slightly deeper in the different parts of portfolio, social infrastructure or community service properties, which means elderly care homes, school, LSS-housing. We are largest player in the Nordics in these spaces and municipal and governmental agencies, 77% of total value or SEK 61.5 billion. Rent-regulated residentials, 17% of total value. We own those assets only in Sweden because of the low rent and regulated market and good upsides on refurbishments. SEK 13.2 billion in total value, 17% of the value. And then finally, as I said, an amazing portfolio, as I will come back to comment that even more, amazing portfolio of building rights in best locations. You are at slide of city of Nyköping, where we own like quarter of city center with own entrance to central station. So you can just get strong about how much upside potential there is. Next slide, please. What is then in the long run, the main driver behind our business? And those are 3 underlying mega trends that are shaping our business now, and it will continue to shape in next 30 to 50 years. The first one is, of course, demographic change, combined with urbanization. We see that our cities are growing, Stockholm and Oslo, that are our larger cities are the most growing cities in Europe the last 5 years. And on top of that, we see a force that is going to change the industry, that is also going to change financing and -- which is issue of sustainability. And we have been pioneer of working very hard with sustainability across the perspectives, both ecological, social and economic. And now we are also launching our sustainability Vision 2030, where we are promising to be 100% climate neutral, but also focusing on different areas of social sustainability, both in our neighborhood, but also within our space. For example, we will do investments in providing shelter for refugees, but at the same time, we will continue to invest mostly in our neighborhoods, among others, offering young kids summer jobs. And in that way, connected them to the labor market and finally, concluding with an important goal for us that we are heading to BBB+ within short time and having -- emphasizing our long-term goals to be A- rated companies. Next slide, please. So I have been talking about our bonds like or I should say, municipal bonds like income from property management, which represent is after all dividends, SEK 2.2 per share, which is giving you a sense about what kind of multipliers we are trading on. And on top of that, we have an amazing team working with property development that has been delivering last 10 years every year. And right now, we have -- after the acquisition of Hemfosa, 1.8 million, 1.8 million square net is building rights. This is corresponding to 20,000 to 24,000 new residentials. So please compare that with, for example, GM. GM is something like 30,000 to 32,000. So on top of this municipal bond, we have like a GM in house. So just think about that. And please contact us and please e-mail us and we will be happy to provide you with more information on that. And we will be happy to provide you that those building rights are already this year going to deliver extra income from us. I think we, right now, are running 7 to 10 LSS buildings, few elderly care homes that are going on top of the profit from building rights also going to deliver a recurring income. Next slide, please. So try to summarize, SBB is now the social infrastructure champion in the Nordics and being one of the largest players in Europe, and we are not going to stop here. We are a growth company. We see that this kind of social infrastructure is needed in the Nordics, and we see large opportunities to continue to grow our relationship with municipalities. And we also see that municipalities want us to help them to have long-term player investing in social infrastructure. If you look at the bullet #1, as I started with, which is -- I should say, most amazing performance in this report, this strong increase in 12 months rolling earnings capacity that is landing at SEK 2.855 million, corresponding to an increase of 126% per ordinary A and B shares since the end of 2018. Next bullet, showing that in the past 12 months, we have had one of the largest increase in NAV for the large real estate businesses ever seen increasing NAV with SEK 16.1 billion corresponding to 73% per ordinary A and B shares. Net asset value EPRA NAV was at the end of the year at SEK 20.04 per ordinary A and B shares at the end of the fourth quarter. We also continued to deliver a strong profit.. Profit before tax was SEK 3.1 million and the profit after tax, SEK 2.6 million, which is, if we adjust for nonrecurring costs and adjust for dividend sales to D shares and hybrid bonds, we are delivering at the last line, earnings for 2019 of SEK 3.36 per ordinary A and B shares. Bullet #3, we have continued to build a cash flow machine. As I said, municipal bond, like increasing cash flow for the year with more than 200%. But on the top of this cash flow machine, we have this amazing performance, building a new company inside SBB that is very strong -- doing very strong delivery of building rights as we have today, building rights of 1.8 million square meters, which can be compared to or it corresponds to 20,000 to 24,000 homes. And as I said before, and I'm going to repeat this next few weeks because I was stuck to this myself, comparing this to GM having like 30,000 homes in their portfolio. Number 4, we are launching our sustainability Vision 2030 today. We are very proud of this. We are also in the Board have a committee that we will continue to focus, reach sustainability and this committee is chairing by one of the most experienced people in Swedish real estate, [indiscernible] -- this is, from our point of view, very important space. We are going to be leader in this, and we see us to be the leading company in the world, delivering on sustainability. And we are presenting goals on every perspective, ecological, social and economic and emphasizing all our goals of -- to manage the company in accordance with the UN's global sustainability goals: goals; 5, 7,8, 11, 13 and 15. Minimize the climate risk for our assets, and that is the job that we are actively investing in, being 100% climate neutral by 2030. That is a job that is fully in the way but also regularly improve, follow-up and report our sustainability efforts and making sure that company's code of conduct, which is based on the UN Global Compact must be followed and understood by all employees and partners. Then 2 last bullets. The first one, of course, very important for us, we see that we already by today according to our measurements, as I'm writing in in my CEO word, we are at 54% according to S&P's measurement, that's through the -- this equity, which should give us already today, it's a little bit flat, but that is not at all the target. We are targeting to be BBB+ within short time, and that is important prerequisite for our continuing growth. And the Board is emphasizing that in the long term, SBB is an A rating -- rated company. And finally, just to remind you, SBB has been delivering from the day 1, and last year, we communicated in CEO letter that we, for 2019, 2020, '21, see that our assessment is that we will be able to deliver the highest annual increase in net asset value among all Swedish listed property companies. And now we have the outcome for 2019. And it is amazing, 73% we increased per ordinary A and B shares. So we see the strong quarter, we see the strong market, we see the still undervalued assets in SBB, we see company, in company as regards to our huge land bank and huge player within building right space that is going to deliver the extra value to us in the many years forward. Thank you very much for listening, and please questions. Thank you.

[Operator Instructions] The first question is from Simen Mortensen from DNB Markets.

Congratulation with the solid results, it seems. I just have a few questions in terms of some technicalities to the report you just released. I will start off with the NAV. I'm just wondering, how are you treating in reported NAV, your goodwill, which is now on the balance sheet? And the D shares, which is deducted, but is it deducted on the issued price or on the market value?

I can start with D shares. D shares are not included in NAV. So that is the...

But how are they deducted? Is it on the issued price? Or is it on the market price? Because you can see in the report how...

They are deducted at the balance sheet value.

Okay. And how are the -- how are you handling the goodwill in your reported NAV?

The goodwill that is -- and this is important, SEK 4.3 billion of the goodwill that is goodwill, that is going to be there forever. And it's related to extra cash delivered from the company is part of NAV, and it is the same as in all other businesses.

So the goodwill is part of the reported NAV, if I'm understanding correctly?

The goodwill is not the part of NAV, Simen. As I said, the total goodwill of SEK 6.7 billion, the sort of goodwill is SEK 6.7 billion, of the SEK 6.7 billion, SEK 4.3 billion that is going to stay there forever is part of NAV. And that goodwill, it's going to be impairment tested every time as it's for all other businesses.

The other one is on your earnings capacity guidance. How does that include the sale of 46 LSS homes, and I've seen you buying some schools in Stockholm recently as well. How -- are they included in the Q4 earnings capacity guidance?

There are nothing of this is including. Our earnings capacity is strictly mathematical. That is what we have at the balance sheet at the end of the quarter, that is included. So as I said, that in that way, our earnings capacity is very conservative.

Okay. And just a few other questions. We see in the Swedish local media, in the real estate world that you have had some vacancies in a few properties, the police house in Eskilstuna and [indiscernible].

Yes. We have properties for SEK 80 billion. And those -- some of those properties, I never comment properties one-for-one with respect to other companies, but our focus is not these kind of properties as we have been very, very clear in our communications. So you can understand what that message is.

Yes. But my question was, is the Eskilstuna property and the Västerhaninge vacancies, are they part of what is sold to Hemfosa? That was my question.

I'm not going to comment. I'm not going to comment at property level. But as I said before, that kind of office like properties is not SBB's core business.

Okay. And can you give us a few details on what you have actually sold to Hemfosa in terms of the assets and expected rent levels on those assets?

I can -- I'm not going to comment the properties because we have not sold only to Hemfosa. We are doing larger sales than that. And we have communicated that we are selling the total portfolio of over SEK 11 billion on 15% over latest valuation. And I should say without any comments on Hemfosa, but from SBB's perspective, the total value of sales and -- is affecting very marginally our earnings in 2020. And the main reason for this is that Hemfosa has had relatively high financing cost. So we will give more the details of different companies that we have sold to announce that they have bought from us.

But in terms of the yield on those SEK 11 billion, which is sold, is it above or below the company's average?

I'm not going to comment on that. But my message is that the effect of sales is marginally affecting our earning capacity. And probably, if we recycle a part of it, probably our earnings capacity will increase. And the market yield minus financing costs, and we will summarize that after -- we will summarize that after the different companies that we have sold to announce that they have bought from us.

And my last question, in terms of the share count, which you used in report, you have one element which you have in the listed share count and you used a different number of B shares in the EPRA NAV calculations. Based on this difference, my question...

Different counts of -- I didn't hear, B shares or...

No. Different number of A and B shares. You listed A and B shares in reports at the end of the quarter at 839 million, while in the EPRA, the evaluation you used one...

We do not do that. I will explain that. We do not do that. The total number of registered shares is the number of the shares that are used for EPRA and used for the ratios. And that's numbers you can find in our key ratios. And that is 1,240,526,587 shares. And that is the number of registered shares registered by Swedish company registration office. However, we didn't have the name of the shareholders because of distribution to -- because Euroclear didn't have the name of the shareholders at the end of the year. So that is -- how to say, the information of the shareholders is just for legislative purposes because that has not been possible technically because the Euroclear didn't have information, who were the shareholders owning shares through selling or through acquiring shares to help themselves out.

Okay. And then I assume that the 1.241 billion shares is the completely issued shares after the Hemfosa settlement adjusted for what you bought in the direct end market? That was my last question on it.

Yes. That is the exact number of the shares that was by 30th of December.

Exactly. And can you say something about the B shares versus what you have in the report versus what is -- will be issued in the book also there?

As I said, B shares are of exactly 104,425,359 is the exact number of B shares that was issued by -- on the 30th of December. And also there, we didn't have the names, but the shares that was pronounced unconditional on 23rd of December were registered by last December. And those are also the assets used in the report.

Congratulations on the solid results.

Thank you. Next please?

Next question is from Niclas Hoglund from Nordea.

Niclas Hoglund from Nordea here. Just quick questions from my side. Firstly, if we start off with revaluations. Could you comment on this sort of Class A share of the, sort of, external and internal revaluations in the end of the year and then maybe split the revaluations between SBB and Hemfosa and possibly between segments, please?

Just to be clear, in SBB profit, there is no revaluation from Hemfosa. So that is important. So SBB profit is just a revaluation of SBB. And in -- if you look at the segments, then you will see that -- and we provide the information, it provides information on this at Page 9. And you will see that we have SEK 1.2 billion in value changes on residential. So SEK 1.1 billion on community sales properties and SEK 122 million on added properties. And if you look at our published results, then you would see that we have delivered profits from building rights on -- for the year at a level of SEK 338 million.

Okay. So it's only SEK 338 million for the full year in building rights? And [indiscernible].

The part of the building. All our properties are externally valued. And it has been 2019 every quarter because we have been in different processes. And almost under -- all the thing every day a year and publishing prospectus, almost every month, I should say. So that is why all of the properties are being valued by external valuers. Because I think the bidding right's important message there is that this is profit from the building rights. So there is additional profits from those building rights that are in delivering

And then looking at the sort of consolidated numbers on NAV and assets, could you clarify if the evaluators have, sort of, taken into account the, sort of, the pending transactions. You're talking about 15% above book values for the SEK 11 billion properties that are coming to be sold. Have those -- how do you value these?

Our numbers are the numbers that are in the properties, as I said, the SPV properties. And that is what it was at the end of the year. I said this morning, I -- and I will repeat that our assets should not be valued at 4.8%. And you can never buy our assets at 4.8%. So that may give you a flavor what will happen going forward.

I mean, the 4.8% in [indiscernible] at the moment, that's including, clearly, into the Hemfosa as a part of the consolidated numbers, right? I mean it used to be 4% before.

That is including Hemfosa as a part of consolidated numbers. And I'm saying that on top of those numbers, there is still a large potential. And we have to follow-up to see that, but that is my sense of where the market is right now.

Right. But just to be clear that we don't sort of double count the, sort of, upside here. In the SEK 80 billion plus property value. Have the valuators taken the conditional divestments of the SEK 11 billion revaluation into account?

Yes. Yes, absolutely. Yes, that is absolutely right. But that is also, Niclas, affecting -- that is also affecting 4.8% in yield.

Yes. Yes, exactly. And I hear you. Just wanted to sort of -- because I was sort of expecting that in the first quarter. So -- but okay, fair enough. And then going over to the goodwill. I mean you were clear now that you have sort of allocated the...

I'd like to -- important point to -- coming back to these sales. But those sales are not affecting SBB's profit. Those sales are affecting SBB's value of the buy -- of the acquired company. So that is important. When SBB's reporting according to, as I summarized before, for the full year, SEK 3.4 billion in the increased value based on the krona that are coming from Hemfosa.

Okay. So we're not...

We're not there either.

Yes, okay. And then moving over to goodwill. You were clear now that you have allocated the goodwill to synergies from lower funding and administration costs. I understand you -- yes, yes.