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

Welcome to Samhällsbyggnadsbolaget Q3 report for 2020. [Operator Instructions] Today, I am pleased to present Ilija Batljan, CEO and Founder. Please go ahead with your meeting.

Thank you very much. Let me start with emphasizing SBB's strength in social sustainability field. Today, as largest owner of social infrastructure, SBB is one of Europe's most socially sustainable company. And that has been underlined during the third quarter where we offered 134 young persons summer jobs. We do have as a target to offer 100 jobs every year. However, this year, we did the extra investments in that in order to tackle or support young people through pandemic. However, if we go to the Slide 2 and look at our financial performance. This is showing why SBB is Europe's most resilient asset, no matter if it's pandemic or if it's economic crisis or whatever it is. And we are probably the only company in Europe that ever had 99.8% rent collection last 2 quarters. If you do look at the numbers for the period, you will see that we delivered strong interim profit of SEK 4.5 (sic) [ SEK 4.15 ] per share, which is related to our assets that still have a large potential. So you should -- or you should look at our profit per share that is SEK 4.15 per share. And also, at the same time, look that we have a yield of 4.5%, which is among the highest yields in Nordic real estate despite the lowest risk in the assets. We delivered EPRA NAV or long-term net asset value of SEK 30.9 billion, which is SEK 24.36 per share. And across the line, no matter if you look at rental income, if you look on NOI and/or if you look at our profit from property development that is delivering amazing this year. We are already -- as you know, we have, as a target, SEK 500 million to SEK 700 million already after 3 quarters. We have a profit of SEK 852 million. That is largely affected our value changes and contributing to the strong profit. Then if we go to the next the next slide, showing our 12 months rolling, you will see that we do have a rental income of SEK 4.8 billion. And after all costs, including financing costs, we do have adjusted operating profit of SEK 2.9 billion, which is SEK 2.29 per share. On top of this, you could add that we already have improved those numbers with additional SEK 130 million through acquisitions. And when I said SEK 130 million, then I talk of fully financed numbers. So operating profit given the announced acquisition is already today higher and passing SEK 3 billion on 12 months rolling. And after dividends -- and I used to say, you should observe that those dividends are not indexed. Those are D shares and other equity-like instruments that have fixed coupon. You will see that we are landing at -- including our extra income streams from property development, as I mentioned before, from refurbishments and from transactions at profit, the total profit on 12 months rolling of SEK 2.86 per share plus the SEK 130 million that I mentioned in the introduction. And this is, of course, supported with strong profit after tax that was delivered for the first 9 months this year of SEK 5.7 billion. One important ingredient here is that we are continuing to decrease our financing costs. In the quarter, we decreased financing costs with 20 basis points, and which, of course, affect cash flow. So cash flow for the first 9 months, adjusted for nonrecurring costs amounted to SEK 1.8 billion. Next slide, please. Slide 4. As I mentioned before, we delivered strong operating profit for SEK 4.15 per share. And at the same time, an important message for the quarter is, how to say, emphasis on even more low risk for the assets because we prolong our WAULT from 7 years to 9 years, which is really strong. You can also see that despite the prolongation of the WAULT, despite very strong operating profit, we still do have a net yield of 4.5%. And for our international listeners, this is important message, net yield of 4.5%, which is among the strongest yields in the Nordic real estate market. And that also means given -- and you can find some examples in the report, given the demand for our assets and given our low-risk assets that we will still have large upside potential on our valuations. Next slide, please. Slide 5. This is just to summarize pillars of our strategy. We have a unique and difficult to replicate long-term relationship with municipalities. And this is, of course, helping us now when everyone wants to have this kind of assets as a consequence of pandemics and when everyone wants to move to safety by buying community service properties, our relationships and our platform in terms of our team are a great advantage. We have properties for SEK 81.2 billion and are still fastest -- despite the size still fastest-growing low-risk Nordics social infrastructure, property portfolio. In this quarter, we also showed that we already have credit metrics for BBB+, and we demonstrate strong financial position. And then the numbers are talking by themselves. We have been delivering very strong NAV growth almost since inspection. And you can see NAV growth of 64% CAGR, and at the same time, growing portfolio by 51% CAGR. So it is strong growth story with value creation. Next slide, please. At the next slide, we are giving you some more flavor on the numbers that we follow and that we focus on. And the first, as I mentioned before, a strong increase in earnings per share for the 9 months, SEK 4.15 per share. And during the last almost 4 years, 46% CAGR, which is probably without competition, not only in Europe but worldwide. And this has been combining with messaging from the Board for the next General Meeting that they are aiming to propose a dividend of SEK 1 per A and B shares. And that means that we will have almost 70 -- 78% CAGR last 4 years. And the same line is, if you look at EPS, earnings per share, it is almost the same development across the line. And this is, as I mentioned in my CEO letter, this is combined with BBB+ credit metrics. Next slide, please. And when talking about BBB+, we have been asked among many investors to provide the numbers. And now we are providing detailed numbers concerning our LTV where you can follow line for line how we are counting that we will have or that we already have at 12 months forward-looking net adjusted LTV below 50%, which is SBB pro forma net debt and which should give us BBB+ given that we still, on top of that, also have stronger assets that our peers. And that is important in this very pandemic despite being tragedy has also given opportunity to people to see where you can find a safe assets. And we not only deliver on low net adjusted LTV below 50%, but we deliver across the line. We had, at the end of the period, ICR of 3.3x. I think in presentation, it is 3.3%. It is 3.3x and it's expected to end up at 3.7x for the full year to then pass 4x early next year. And on top of that, we have more than SEK 60 billion in unencumbered assets. We do have cash of SEK 6 billion plus liquidity from sold properties and the financial assets in totaling SEK 9.6 billion And on top of that, SEK 9.1 billion in available credit commitments. So our target to achieve BBB- (sic) [ A- ] is now visible, and we are expecting to move to BBB+ after we have fulfilled the key figures and given those being backed by probably Europe's most safe assets. Next slide, please. And why are those assets Europe's most safe. That you can see at Page 8. So you can see that of our income of 4.8 billion or we have added extra elderly care homes after that. So probably our income is passing -- right now, passing SEK 5 billion. So you can see that SEK 5 billion in rental income, 98%, almost 99% is coming from social infrastructure, is backing by Nordic welfare states and tax finance income and Swedish rent-regulated residentials. Those assets are also the assets that are highly affecting development goals and highly affected -- highly affecting social development in the Nordic countries. And we are the most important private delivery team on infrastructure in the Nordics and safety in the assets and safety in having almost 99% government backed income at the end of the day is what is giving us this kind of very high rent collection that we have been able to deliver through pandemic. Next slide, please. Concerning our portfolio, slightly more assets in Norway after acquisition of Læringsverkstedet, a transaction that we are very happy for. And we are very happy to be the largest provider of properties for preschools in the Nordics. And we like preschools, those are probably one of the most important impact on gender quality and also affecting poverty at the end of the day, and we are happy to deliver to this important welfare services. We are also today the largest owner of elderly care homes and LSS in the Nordics and. And after the quarter ended, we did the large transaction in Finland, following by long lease with municipality of Trelleborg. Next slide, please. Then to summarize, as you know, I used to say that SBB is not only real estate business, SBB is a platform with Nordic most experienced property development and M&A team and based on sound efficient property management that is today managing passing rent of, as I mentioned before, SEK 5 billion and with almost 100% rent collection. So on top of these strong passing rent, we are delivering profit from property development. We are targeting SEK 500 million to SEK 700 million. We should probably need to increase that target because we already, for the first 9 months, are delivering SEK 852 million in profits from property development. We do have strong renovation and investment teams that are delivering according to plan, SEK 600 million in refurbishment and the large potential with 75% of the rent-regulated residential portfolio not being refurbished yet. And finally, M&A, I mean, the last 3 years, we have done this for SEK 90 billion and the year is not ended yet. So SEK 400 million is very conservative, but just as a placeholder to remind the investor base about the experience and the executive strength in M&A team. Next slide, please. Slide 11. I mentioned before, property development. In the quarter, we have got a decision from the municipal council in Nyköping for one of the most urban development in the Nordics, rebuilding 1/4 of central city districts with all entrances to central station, and delivering 165,000 square meter in residential properties and community service properties. So very, very strong position. And in total, 2.2 million square meters building rights, approximately 29,000 apartments. And as you can see at the next slide, Slide 12, you can see proportions. This give us position as one of the largest property developers in the Nordic region. It's only Norwegian cooperation, OBOS, that have higher number of apartments, and I should say that is right now. So strong delivery from property development team. And you can see also proportion to some smaller Swedish and Nordic players. Next slide, please. I mentioned before, our M&A team, we deliver across the line, long leases, 35 years with Læringsverkstedet. Next year Q2, it's time for the more sustainable building in Europe to be presented in the Skellefteå, 26,000 -- 28,000 square meter completely built in the wood for cultural center. We are the largest delivery organization to police in the Nordics. We own police station in all 3 Nordic countries, And last few months, we have announced or in the quarter, we have announced 5 or 6 different deals both with -- both in Finland and Sweden. And finally, we continue to strengthen our position in elderly care space by signing new 25 years lease, which is Västerås municipalities. And also after the quarter ended, we have started new contracts, 15 years contracts for 2 or 3 additional LSS properties. And those are built as very environmentally-friendly buildings, 0 energy consumption house. Next slide, please. To summarize, as I mentioned in the introduction, strong quarter and profit after tax per ordinary share of class A and B increased to SEK 4.15 per share for the first 9 months. But even more important, continuing increase in 12 months rolling earnings capacity that is summing to SEK 2.8 billion, and given what I said before, probably passing SEK 3 billion in this quarter. And this has been underlined by new leases that are helping to prolong our average lease duration for community service properties from 7 to 9 years, and it is the factor much longer than that. We also showed strong potential from organic growth and continue to have high NOI margins, adjusted NOI markets, adjusted -- as I mentioned last quarter, are at 71%. And like-for-like NOI increase 3.4% which is very strong given that our contracts are indexed by inflation. Number two, profit before tax amounted to SEK 6.1 billion and after tax, SEK 5.7 billion, paid tax was about SEK 90 million. And adjusted for nonrecurring costs and after deduction for all dividends for D shares and hybrid profit for the period amounted to SEK 4.39 per A and B ordinary shares. We continue to deliver strong cash flow from operations and at the end of first 9 months, we landed at SEK 1.8 billion adjusted for nonrecurring, or I should say, for some nonrecurring costs. I mean we have -- given the large amount of transactions, we have nonrecurring costs that are both affecting central administration and affecting NOI, but we don't spend time to qualify those because we do have strong profit without spending time on that, and that is also tax efficient. And number four, property development. I'm really happy to see the delivery from the team, delivering like almost 70% or 60% of our target that is SEK 500 million to SEK 700 million, and they are delivering SEK 852 million for the period and a very strong quarter, SEK 594 million. And continuing to have high or large potential from 2.2 million square meters building rights for social infrastructure. I should just repeat that because this is a very important number. 2.2 million square meter for social infrastructure, mainly in Stockholm and Gothenburg regions, 29,000 apartments. And please spend a few minutes to look at the Appendix 3 in the report that is, how to say, illustrating the potential from that. Our renovation and refurbishment continues, and despite the pandemic, continues to deliver according to plan. And finally, one of the things that I'm most proud of is that we, through pandemic, have been staying up for our communities, have been helping both in our communities, have been trying also to support UNHR (sic) [ UNHCR ], but also offering 134 young people at summer jobs, which is one of the best investments in our common future. Number five, as I mentioned in the introduction, we already have the credit matrix in place to achieving a BBB+ rating, and we are not going to stay there. We do see that SBB with these safe assets should have A- rating. However, we are happy to show, as you can see in the last paragraph, Paragraph 6 that we already before having higher rating have interest rate costs that are decreasing -- continuing to decrease very fast. Our average interest rate ended up at 1.4%, which is 35 basis points lower than 12 months ago, 20 basis points lower than 3 months ago, And we do see that we have higher potential to higher rating. We also succeeded despite that we lowered our interest rate cost to increase average fixed interest rate duration to 4.9 years and average debt maturity to 4.7 years. And those 4.9 years average fixed interest rates, duration means that we don't have any exposure to variable interest rates, and we have probably the longest fixed interest rate in the Nordics. And finally, given how we are performing, given the nature of our assets, we are looking also to continue to invest more in sustainability. And a part of that is that we are planning to launch framework for social sustainable bonds because, as I said before, sustainability is basic of our business, and that is giving us a strong position to continue to deliver strong profit to our shareholders. Thank you.

[Operator Instructions] We have a question from Fredric Cyon from Carnegie.

A couple of questions from my side. So starting off with the value changes of SEK 3.5 billion in the third quarter. Can you break that down into various components? How much is related to projects, how much is yield and et cetera?

I should say that more than 70% of that is related to new leases, by prolonging new leases, and that is the biggest effect. The second biggest is profit from property development, and that is building rights. Concerning yields, we still do have relatively high yields, and if you look at 4.5%, that is in the same space as commercial real estate despite that those are very safe government-backed assets. So the main explanation behind the value increases are longer leases and profits from property development.

And you're specifying in the report how to calculate the rating or at least the net debt to EBIT, how the rating is we'll look at it. Based on that table, I would assume that a rating upgrade is just around the corner. What's your gut feeling on when that might occur?

You never know, particularly because the rating agency, they tend to be, how to say, more conservative when the markets are shaky. However, we do things that this should lead to higher rating in our future. And in this way, we are also giving investors opportunity to do the math by themselves. So we do think that we have a rating metrics for BBB+, and we are expecting to be upgraded in the first step at least to BBB+.

And then moving over to the balance sheet. You had cash of about SEK 6 billion by the end of the quarter. I acknowledge the deals that you have announced since then, but still, that leaves you with a large cash position. Should we expect that, that cash will be mainly used to buy back bonds or to make further acquisitions?

We do like cash. So we are in the first line, focusing on achieving a higher rating, but we will always do the deals. So -- but I should say that in the first line, we are focusing on higher rating.

Two more questions. Number one, in -- since the end of the quarter in the report, one can read that you did an external relation post the quarter, which should lead to SEK 624 million in write-ups. How much should we expect for that to take place already in the fourth quarter?

The -- we do not -- we did put in those numbers only if they will be effective in next 3 to 4 quarters. But we do not specify more than that. And as you could see, we did the same in Q2 and have large part of that, that was announced in Q2 to already in Q3. So we are trying to put in the numbers and the values that are important for investors right now.

And then my final question on the earnings capacity. Since the end of the quarter, as I mentioned earlier, you've both sold and acquired assets. If those have not yet been taken over possession, they have not been accounted for in the earnings capacity, i.e., one has to adjust for the transaction fourth quarter, right?

Yes, absolutely. And as we said, you should -- easy way to adjust these to round up our earnings capacity of SEK 2.8 billion, SEK 2.9 billion to SEK 3 billion adjusted operating profit because I think the net, including financing, is SEK 130 million for the transactions that will be in the balance sheet given -- or in P&L given how it looks right now. Yes, SEK 130 million-plus on operating profit after quarter end.

Our next question comes from the line of Simen Mortensen from DNB Markets.

I have a few questions on my part as well. Just to understand, I was -- also my first question was on the cutoff on the homes that had -- are included in the earnings guidance capacity. I understand that Læringsverkstedet portfolio is included, and the part of the portfolio in Finland is not included, the cutoff date is October 1 in terms of that guidance. Is that correct?

Yes, yes. It's -- cut off is 30th of September, and we take in possession Læringsverkstedet by last of August, and the Finland transaction has been signed after 30th of September.

Okay. And also in terms of the convertible bond, I see there's SEK 2.1 billion in account, it's roughly SEK 2.148 billion as equity, which, as per my understanding, is supposed to be roughly 70 million to 87 million shares issued in 2023. My question is, how are that equity treated in the current NAV, which is reported at SEK 2.1 billion? Because based on what I see on Page 40, it seems not to be adjusted that there's going to be an increase in the share count. I am correct in that observation?

Yes. You are correct in that. And in the same way, we are not even adjusted that we are already taking through the balance sheet all dividends despite that they are not paid out. So there are opportunities to do adjustments on both sides.

Yes, yes, but that's a debt. But in the equity, you have SEK 2.1 billion.

That is not issue on that. That is issue of equity because we decrease our equity with the dividends that are planned for the quarters, that are going forward up to next annual meeting. So that is just a flavor how the adjustments can be done on different ways, but that is -- this is how it's done according to IFRS.

Yes. So -- but those A shares will come in 2023, and it will be on the -- roughly on the same amount of equity adjusted for that dividend, if I'm correct.

Yes, yes, yes, absolutely.

My second question comes to the guiding, also earnings capacity. Based on that, you have an NOI margin of roughly 72.3%. which is extremely good. Although when I look at the Q3, you have 70.8%, roughly 210 basis points lower and you look at rolling 12 months, you're at 68% NOI margin. It's quite well below. The question I'm asking, in the guiding, it seems is a very high level compared to what we have seen in the reported figures. And this quarter, you have also reported below what consensus had expected. Could you please give us some flavoring in terms of the NOI margins and the guiding or in the earnings capacity versus the reported figures on that figure?

Absolutely. I can give you more flavor on that. If you look a year ago, then we were at 63%. So you can frame it in different phase. As I said, our NOI margin is in -- the dividend on our NOI margin is in line with our earnings capacity. So that is -- I said in Q2, we had this SEK 40 million that we spend time because we are tracking in detail the different heating and electricity and that kind of numbers, and we were just -- that is why we announced those extra costs, but we don't care to announce the extra cost. It is part of -- those are relatively small numbers for the numbers that we delivered and it should be understood that if we have large number of transactions that we probably could have some costs for those. And I used to talk more about this 3 years ago because I don't know if you have bought property anytime, but it's not only buying the properties. You obviously have people that have to push the numbers in the system, and you have to have the lawyers and you have to do a lot of other things that are -- so -- that are affecting. So -- but in short, our earnings capacity is in line with what we are delivering. That is our view.

Yes. So then consensus might be too high there. On -- in terms of...

Or we were catching up.

Yes. On your admin cost, you have SEK 150 million again, but you have -- a few times been over, you touched upon this. because of tax reason and doing a lot of transactions, et cetera. But how representative do you feel that SEK 150 million are based on that you have been well above this level for 4 quarters in a row now? Those central admin costs.

SEK 150 million is our normalized central admin cost that, if we are doing like average Nordic real estate. So -- and that is -- given the people that we have on salary, given that we do -- that we pay for our -- how to say, for our releases and given all costs, that is the normalized number. And then, of course, I mean, we have done prospectus. I don't know if you have been in that space sometimes, but I can tell you that lawyers are making money. And we are doing a prospectus almost every quarter. The latest prospectus were in August this year. So -- but we don't -- how to say, we don't complain about that. But that is what is explaining the difference.

Yes, it's fair enough. In terms of your payable tax, I see that's not part of your operating profit to your ordinary shareholders in terms of you -- you just talk about the guiding that you have make SEK 1.60 per A and B shares on Page 41 in the report. But I can't see payable tax in any way of this report. And in the P&L, I see, you have had SEK 92 million in payable tax year-to-date. If I analyze that, that's 6% of that figure. Can you please elaborate a bit on your payable tax ratios and talk about those year-to-date figures in payable tax?

Yes. We have had the -- we like to pay tax that is good for the welfare systems. So we have paid SEK 92 million up to now. And as we have said before that our payable tax should be between 8% to 10%, and we have not changed that.

Okay. Also, in terms of CapEx, based on -- I just look here that you aim for a dividend of SEK 1 per share and your earnings capacity is -- or earnings capacity guidance is SEK 1.60. You're going to have a 61% payout ratio, which means roughly SEK 760 million left for CapEx and investments. How do you look at that for both doing the CapEx level, which is, based on my estimate, 0.9% of your asset values and combine that with doing so much investments as you're doing? Based-- that does...

Just to remember, Simen, we do not have any CapEx. So that is a very easy one. We do not have any CapEx. That means that we can tomorrow stop refurbishments and no one will complain rather people will -- some people will probably be happy because they will have lower rents. So we do not have any penny of CapEx outside of that you can see in our report that we do take all of maintenance costs, which are included in this SEK 1.3 billion in property costs before accounting operating profit. So on top of that, we don't have any penny of CapEx.

No CapEx, no refurbishment project whatsoever?

No CapEx, no refurbishment, no whatsoever if we don't want to do. So it is the same like assuming that if we want to buy new properties, all investments have to fight in the same, how to say, in the same space. They have to fight for the money to be invested, no matter -- and the money to be invested in our case is we are saying that if we do have below 50% net debt to total capitalization, and if we do a profit of -- I mean, here we have, as I said before, SEK 3.8 billion in profit and if you assume at least value changes in accordance with our like-for-like growth, then you should land at a profit of around SEK 5 billion on yearly basis. So if you do SEK 5 billion on yearly basis, then that means that we can do SEK 8 million, SEK 9 million in new investments. And those have to be -- those have to fight, if they are organically -- or build on our building rights or if we will buy new properties.

Yes. But sorry, I understand, none of your assets has natural refurbishment needs, it's all taken through your P&L.

Everything is taken to P&L. And that is very important. And you can see in report now that we, for the first 9 months of this year, have already put SEK 220 million in maintenance.

I'll try to round those things. In terms of the currency impact, in the report you wrote that the exchange rate differences of 300 -- or SEK 103 million were reported due to differences in the loans what has been hedged in terms of euro debt. Could you please highlight a bit what -- how does your hedging work? Because you talked about hedging, but in this quarterly report, you write the 100...

Hello?

[Operator Instructions] Simen Mortensen from DNB Markets.

Yes, I'm here. Do you hear me? Do you hear me now?

Yes.

Sorry, I had a bit bad habit. The currency impact in terms of the hedging. In the report, you have SEK 103 million reported as the difference between what has been hedged and your asset, it's in the report. How do you do your hedging? And how does it come through as a cost in your P&L? Because we see SEK 103 million, which is kind of hard because you haven't given us that much information on how you do your hedging given that so much of your debt is in euros and your assets are in other other currencies.

I don't have any more information about that than I have said before. Our main focus on hedging is to have natural hedging and mainly through euro assets. And in the next step, we are hedging through FX forward in order to make sure that we always have the best outcome. And we are not -- as I said before, the reason why we do like to have loans in euro and why we are going to continue to have large euro positions is that we -- as a large company, we do think that the Nordic is problematic in terms of the crisis, and that has been shown in March, April last year when the Nordic bond market almost died. So that is -- and I have said before, those numbers may vary SEK 100 million, SEK 200 million up and down and -- but usually, they will be close to below SEK 100 million.

Yes. And my last question is in terms of time lines, giving us a property list, more details on your subsegments, in terms of yield valuation or rental levels, et cetera, in your portfolio square meters. You've talked about that is underway. Is there any time line to when we're going to get some more visibility on that and also more perhaps details on your development rights?

Yes, we are working already with focusing to give, how to say, extra material in annual report because it is difficult to do it in the quarterly reports to have 10 pages on property development. So in -- for the annual report, we are publishing all building rights and positions and a lot of information. So that is the day.

Congratulations on the solid value uplift and NAV.

Our next question comes from the line of Tobias Kaj from ABG.