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

Ladies and gentlemen, welcome to the Samhällsbyggnadsbolaget Q4 report. Today, I'm pleased to present CEO, Ilija Batljan. [Operator Instructions] Ilija, please begin.

Thank you, thank you very much, and welcome, everyone. SBB presented Q4 numbers today showing that we are creating social infrastructure campaign in Europe. And next slide, please. Slide #2, you can see some of the highlights that we want to focus on through presentation. First, we have very strong, safe and stable cash flows backed by income that is at the end of the day ultimately government-backed from AAA-countries, Sweden, Norway and Denmark and AA+ Finland. We have very strong growth without competition in European real estate market, and the growth is fueled by our 3 value-add strategies that all of them deliver over the targets in the 2020 property development, renovations, investments and transactions. Slide #3, we are strong dividend delivery company. We have increased our dividend like 900% since 2017. And this year, we increase with 67%. So proposed dividend is SEK 1, A and B class shares. Slide #4, Rating, as you can see from the report, we have been doing strong de-leveraging, particularly during Q4. And we now count that we have delivered all key ratios to achieve BBB+ as we have set us a target and long-term target is A-. And finally, emphasizing strategic focus on sustainability as the core of our business model. Next slide, please. Here, you can see snapshot about SBB, as I said into introduction, operating in the world safest real estate classes, community services properties in the Nordics where the tenants are government funded and the highly regulated Swedish residentials. On top of this safe cash flow from property management, 3 value add strategies delivering growth and additional profit. We have sustainability in the core of our business model and we are also the first member ever of public house in Sweden. Also emphasizing our focus on sustainability and our relationship with municipalities in the Nordics. Strongest and safest cash flow in Europe, 99.8% rent collection during 2020. Looking at the property management assets, you can see the majority of the portfolio SEK 63 billion in Sweden and SEK 17 billion in Norway, SEK 9 billion in Finland and SEK 1 billion in Denmark. However, we see large opportunities to continue to grow both in Finland and Denmark. Looking at how the property portfolio has evolved during 2020, you can see that of our SEK 90 billion in assets, 75% is located in major cities and university towns in the Nordics with 22%, for example, in Stockholm. If you further look at our apartments, in project portfolio, meaning in production or prepared for the production, 5,600 additional apartments. 80% of those are located in Stockholm. Strong cash flow, 4.8 -- SEK 4.8 billion in passing rent profit for the year, SEK 9 billion, still relatively high, and you have old me emphasizing this before, still relatively high net initial yield at large potential for value increase, 9-year WAULT -- more exactly 9.2 years WAULT length in the Nordics, 5,600 apartments in project portfolio of which 1,700 apartments in production and 3,900 apartments prepared for the production and strong de-leveraging net LTV on total assets 35% as we will show on S&P's measures 40% to 45% on adjusted debt gross equity. Next slide. On Slide 4, you can see composition of our income. We are continuing to de-risk our portfolio even within our low-risk portfolio by having more elderly care homes, more income from special partners for people with disability, you can see 18% of income coming from residentials. And if you add elderly care and LSS facility, you will see that almost 40% of our income is coming from either residential or apartments for elderly and apartments for people with disability. Strong trusted partner for municipality is continue to do municipal transactions also in Q4 and important to emphasize for people outside of the Nordics that legislation in the Nordics, for example, Sweden and Finland prohibit local governments from declaring default. So at the end of the day, our ultimate risk is tenants sovereign risk. You can also see that we have increased our rolling NOI every quarter with very strong increase grown for example, Q3 '19, SEK 1.2 billion in rolling 12 months NOI to end of Q4 with SEK 3.5 billion in NOI. And this is to continue. Slide #5, please. Emphasizing keep periods of our strategy, as I said before, unique and difficult to replicate long-term relationship with municipalities, the rating stable -- AAA rated cash flows complemented with additional income from our value-add strategies that are fueling fastest-growing, low-risk European social infrastructure property portfolio with compelling growth in the earnings per share. So if you look at the slide, you will see that we have increased our profit with delivering SEK 1 in 2017 to delivering SEK 6.4 for 2020. At the same time, having unprecedented growth in property portfolio, with more than 40% CAGR last 4 years. And at the same time, combining this with strong financial position, demonstrated stability of the cash flows and also by this report credit metrics for BBB+. Next slide, please. Important to emphasize that we, during 2020, have almost doubled our team. We are today almost 300 professionals with the world-class team, focusing to unlock full potential to our shareholders through 3 value-add strategies beyond traditional property management. We have SEK 4.8 billion in passing rent very stable and safe cash flow from property management. And on top of that, we have a target to deliver SEK 1 billion to SEK 1.4 billion in income from property development. We are exceeding that in in 2020, delivering more than SEK 2 billion in profit from property development. We have a target to deliver SEK 600 million from the innovation and investments and part of that is targeting 600 apartments in innovation. We are also exceeding that in this quarter. And very strong team of real estate transaction. Just to give you a flavor, last 2 years, we have done transactions for SEK 90 billion. This is next largest real estate company in the value of the total assets of next largest real estate listed company in the Nordics. So from this business, we are expecting to deliver SEK 400 million on a yearly basis. We have always delivered much more than that. Next slide, please. On Slide 7, just to give you a flavor of how we are running our platform for value creation and how our value-add strategies are -- how to say built-in in our total value creation, maximizing shareholder value. At the next slide, I will go Slide 8 to give you some more details on property development. We have the strongest, probably the strongest property development team in in Europe now also enlarged with strong team from Sveafastigheter. And this team is to deliver a target of SEK 1 billion to SEK 1.4 billion on a yearly basis, and we have seen that in 2020, we have had a strong over-delivery from property development. Today, we are probably #1 Nordic property developer. And as I said, on top of portfolio of 34,000 building rights on all the balance sheet we have almost -- or more than 5,600 apartments that are either in production for own management or prepared for production within the project development. And we are also publishing scenario analysis in the report showing that our development property portfolio's estimated value, up on competition of zoning of SEK 8.6 billion, which is exceeding book value of SEK 3.3 billion. Next slide, Slide #9, please. As I said, #1 property developer in the Nordics with 34,000 apartments at the book an additional 7,600 apartments in in joint ventures. And on top of that, as I mentioned, strong delivery by almost 1,700 apartments right now in production and 3,900 apartments repaired from production. We have also through acquisition of Sveafastigheter have expand our focus on developing sustainable apartments throughout Stockholm region and are going to be probably the fastest-growing residential business in Stockholm in next few years. The estimate is recurring profit per year from property development, SEK 1 billion to SEK 1.4 billion, which was exceeded strongly through 2020. Next slide, please. Next slide, focusing our second value-add strategy on property renovation and sustainability with the team focusing on delivery through our Vision 2030 to make SBB more sustainable property company in the world and doing value-enhancing and innovation across community service and residential properties. We have the target to deliver -- renovate 600 apartments on a yearly basis in 2020, we exceed the target with 16% and renovated 695 apartments. We have highly experienced team with strong relationship that work close with our tenants to understand their needs and requirements. At the same time, delivering on sustainability with 100% renewable electricity, 95% total social impact of total rental income, sustainable financing through social and green bonds. And also in terms of life cycle sustainability values, investing in new production in food. Currently, 52% of new production in progress, buildings constructed in wood. Next slide, please. Giving you some more flavor on sustainability and renovations and investments energy reduction from renovation averaging 28%. Having a strong value creation with 8% yield on cost from energy reducing investments and also within our refurbishment projects where we republished 685 partners in 2020. We also, at the same time, done environmentally the contamination of the buildings by -- also in that way, improving environment for 86% of the refurbished apartments, that means all the partners that have been needed there have also all materials have been exchanged. And we still have large upside potential with 75% of property portfolio loan renovated which is both significant value upside potential, but also very good potential for decreasing effect on environment by energy reductions. You see that we are continuing to deliver strong margins from our refurbishment. And with 6% to 7% net yield and the cost, also delivering profit that is going to continue to fuel our growth with estimated total recurring earnings effect per year from the refurbishment and investment of SEK 600 million. Next slide, please. At Slide 12, some additional flavor on our sustainability work, our Vision 2030 we are, as you will see from the report, continuing to do large investments in sustainability through new installation of solar cells, through different industry reductions measures, through building in the wood and in that way, also offsetting CO2 emissions, but also building new buildings that are not only having very low CO2 emission, but even being passed and having one-off in one of the our buildings, the first largest energy positive building. So sustainability is important part of our business model and not only ecological in the environmental part, but also social part by us issuing the first, probably the first social bond in the Nordics and probably one of the larger social bond issue in the world and fueled by different investments that we are doing in our communities, all from offering summer jobs to young people in our communities to supporting UNHCR Better Shelter for refugee homes and collaborating with our municipalities to deliver affordable housing and housing for people with disability. On Slide 13, our third value-add strategy, focusing on real estate transaction, we have the #1 real estate M&A team in the Nordics. And as I said before, we have the local people in different markets that are long-term working, knowing markets and delivering good profit from transaction. And at the next slide, Slide 14, you can see that we have an [indiscernible] track record in both divestments and acquisitions. And the last 2 years, we have done SEK 90 billion in acquisitions. And last year, the second largest Swedish real estate company was valued -- has the value of total assets of SEK 90 billion. So that is just to give you a flavor are about the amount of the transactions that we are doing. And this is, of course, important value-add strategy for our continuing growth where we have before announced target of SEK 125 billion in property value by 2025, supported by BBB+ rating. Estimated recurring profit from transaction is SEK 400 billion -- SEK 400 million on a yearly basis. We have been delivering more than that every year since start. Slide #15, just to give you a flavor how this work in practice with different models with the life cycle of one of our properties that we acquired in 2016 and we applied this safe cash flow with rent-regulated residentials, we applied all of our 3 value-add strategies. And at the -- at property, we developed 27,000 square meter building rights that we still own and that we will use for new development. We did renovate with strong rent increases and strong reduction in CO2 emissions in this portfolio. We reduced CO2 emissions with 75%, and with total 10% yield on cost and then we sold the residential portfolio with great profit. So this is just giving you flavor how this works in practice. At Slide #16, a few more details on our earnings capacity rolling 12 months. We are estimating, having income of SEK 4.8 billion and having adjusted operating profit of SEK 3 billion from property management, $2.30 per share. And after profit from our value-add strategies of SEK 2.2 billion and after deduction of dividend to equity instruments like D shares, hybrid convertible bonds we are counting to have adjusted operating profit to ordinary A and B shareholders with SEK 4.2 billion or SEK 3.2 per share. And this has, of course, can be compared to our delivery in 2020 when we delivered profit after tax of SEK 9.1 billion and also having very strong cash flow with adjusted for nonrecurring costs amounting to SEK 2.5 billion in cash flow which is increase of 166% to 2019. So if you look at the earnings capacity 12 months then we are expecting to deliver SEK 3.2 per share, including income from add-value strategies. And after dividends paid to D shares, hybrids and convertible bonds. Next slide, please. At Page 17, we are elaborating and giving you opportunity to scan through the numbers showing that we are delivering numbers for BBB+ rating with adjusted net debt to total capital 12 months forward at 45% and in up the numbers for presented right now at 50%. So we have done very strong de-leveraging being particularly fourth quarter of 2020. And this is supported by high-quality, low-risk asset that -- during the pandemics have been proven to be Europe's most secured rent collection of almost 100%. At the same time, we are continuing to rise the interest coverage ratio at the end of 2020, we had ICR of front 4.1x. I see here, 4.1%. If this ICR 4.1x, we have the SEK 70 billion in unencumbered assets, and we have very strong cash position where we -- and continue to grow and combine the growth with having BBB+ rating in short-term and looking forward to achieve our long-term objective of A- rating. Next slide, please. To summarize, profit after tax per ordinary share of Class A and B increased to SEK 6.41, and this is with full dilution for converting to bonds. 3 points to be emphasized, our strongest stable cash flows backed by AAA countries. And here, just to give you a flavor, I mean if you look at we have a WAULT of 9.2 years for our community service properties, our elderly care homes, our schools, our special partners for people with disabilities. And just assume 20 years for residentials, despite that in the Nordics, you can assume much longer then you can see that we have more than SEK 50 billion in contracted income without break clauses. That is, I should say, unpresented number having this large amount of cash that is secured fully CPI-linked with strongest rent collection in Europe, and on top of that, 4.5 years in fixed interest rate duration. So very stable basis with [indiscernible] secured long-term boxing cash flows. Next highlight is that, that stable cash flow is combined with growth delivered and fueled by our 3 value-add strategies. Where project and property development delivered profits of SEK 2.2 billion in 2020, exceeding our targets of generating an average of SEK 1 billion to SEK 1.4 billion annually in profit from property development. Also continuing to focus on constructing an environmentally friendly rent-regulated residentials in Stockholm and Gothenburg, having 1,681 apartments in production and continuing to increase and expand our building life portfolio to 2.5 million square meters, approximately 34,000 apartments, making SBB one of the leading, if not leading, property developer in the Nordics. And on investment and establishment side, we exceeded our target of 600 apartments already by 16% in 2020, completed renovation of 695 apartments and of 695 partners between 2020, 86% have been also applied for different environmentally improvement measures. And the last highlight, I mean, starting with strong cash flows and topping with the growth and this combination is of course also delivering strong dividend to our shareholders, proposed dividend of SEK 1 per share, A and B classes is 67% increase since last year and 9% since 2017. And at last, SBB continues to deliver strong cash flow, profit and growth. And we have a best-in-class people that are ready to compete with what is out there. Thank you very much. Questions, please.

[Operator Instructions] Our first question comes from the line of Tobias Kaj from ABG.

I would like to ask you regarding Offentliga Hus. I think you owned 44% of Offentliga Hus at year-end. Does that mean that Offentliga Hus is booked as a JV? Or is it still consolidated in the balance sheet?

Offentliga Hus is booked as interest company and we are the -- our profit has been decreased a bit SEK 4 million because Offentliga Hus has negative profits for 2020. So it's decreasing our income a bit SEK 4 million.

Okay. And what has happened since year end, you own 54% today? Is that correct?

We will come with update on Offentliga Hus, but we feel pretty comfortable to complete the deal in next few months.

And have you had any indications from any of the larger of the other larger owners within of Offentliga Hus, whether they are willing to accept the bid or not?

Yes. We have -- and we think that people are selling the shares to us every day. So we will follow-up that in the next few days and update our numbers regarding how much shares we do own.

And can you say anything about the status for the bid on Entra. Have you had any indication there about interest from shareholders in Entra to accept your bid?

Yes. We have a few shareholders that we have active discussions and we -- at the same time, as we have said before, Entra is relatively small deal in our view. So we are seeing that as a long-term race. And as I have commented before, we have all time in the world to acquire the assets that we want.

And given that owners with almost 40% of the company has said that they are not willing to accept the bid. If you would get like, for example, 40% acceptance would you still continue with that and accept that? Or is it a requirement to get to 90% to buy any shares, I'd say?

We will come with update to the market on that in due time. However, we are pretty comfortable with the WAULTS that we have done on Entra and Entra share price has been completely driven by our bid. And we we have put very strong offer to all shareholders, and we have time to wait as long as it is necessary.

And you're saying that you are fulfilling the requirement for a higher rating, but still you haven't been officially upgraded. Can you say anything about the reason for that is the outstanding bids for Offentliga Hus and Entra. 1 reason, for example, that we don't really know what the balance sheet will look in a couple of quarters from now?

We -- our job is to deliver the numbers. And then it's up to rating agencies to implement that in their models. And we all saw acquisition of Offentliga Hus and Entra is -- they are structured in the way. So we keep the BBB+ rating. So that should not be -- at least if you do the math, that should not be an issue. But we will wait and see how the rating agency will follow-up on this.

And 1 final question for me, please. Just when I look at the report, I get the impression that a big part of the future growth will be from development of residential units. Can you give an indication of what kind of yield we should expect that you can deliver on the production?

I mean if you look at our portfolio, which I think is unique, and which this report is showing is exactly what you are emphasizing that the large growth is going to come from our add-value strategies leading by our property development. And I mean already this year, we delivered over the target by delivering profit of SEK 2.2 billion. And we are able to deliver new buildings at levels that are slightly below 5% to 5.5%, which is very strong when in the market you have to go down for the newly built apartments to 3.5%. And for all apartments, even below 3%. So there is a very strong valuation in years to come from our property development portfolio.

And the next question comes from the line of Victor Friba from [indiscernible]

The x amount of share is SEK 28.21 compared to I think it was SEK 24.36 in Q3. Can you comment on this quite spectacular increase from Q3 to Q4?

The main reason for that is a combination of the strong profit and also at the same time that we are continuing to issue new shares in Q4. We both issue new shares for SEK 1.4 billion and are delivering a very strong profit. So it's a combination of those 2.

And you have building rights regarding about 34,000 apartments and a lot of square meters of community properties in production. How important is your property and project development for the company as a whole, would you say?

It is part of our add-value business, and it is also that is differentiated SBB from traditional real estate business that we have moved with #1 property development team that is creating value in a sense that is stronger than many traditional property developers. I mean, if you look at SBB and our -- both the companies, Sveafastigheter. We are set, we are among the builders in Stockholm winning the most competitions for new sustainable rent regulated apartment. So that is, of course, important part of our growth, an important part of our value creation.

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

Just a few technical questions from my -- sorry, in terms of the financial fixed assets, which is new on the balance sheet of almost SEK 2.9 billion. What are those, which is financial investments at market fair value. Is that Offentliga Hus? Or what is it?

Yes, that is listed shares and listed bonds, mainly listed shares.

Okay. And also included is then classified financial investments per year-end, if I'm correct?

Yes. Well, that is related to listed shares mainly and listed bonds.

okay. The convertible bond, just wondering how is the dividend there reflected in the EPRA the dividends for the convertible bonds, especially in the EPRA EPS on Page 42 and the EPRA NAV, would I see there's a reversal effect stated, but what -- how is the main elements of that convertible bond reflected in those issues?

It is done according to IFRS, and you can reach to Eva-Lotta Stridh that is our CFO to get exact details, but EPS is diluted for amount of the shares that will may or will be issued in the convertible.

Okay. My last question is just if you have any comments on the economic letting ratio, which was down 120 basis points year-on-year.

Yes. That is related to our property development. We see that we are making a large amount of money from property development. So we are focusing on to create new building rights and, in the way, switching the properties to get rent-regulated residentials and increasing part of it. But we actually almost don't have any vacancies, the main part of our vacancies is related to rent-regulated residentials where we have in 2020, increased the number of apartments with 16% and also the number of apartments that is vacated in order to be prepared for refurbishment has increased and then property development on top of that.

And the next question comes from the line of Jan Ihrfelt from Kepler Cheuvreux.

Okay. I actually have 3 questions. And the first regards your rating, you said that you have every reason to believe of an increased rating to BBB+. Could you tell us just the effect that would get on your average interest rate cost in terms of basis points, how much lower will it be that saturating?

For the new issuances, increase in rating from BBB- to BBB+ will be probably between 25 and 30 basis points and going to BBB+ will lead to additional 25 to 30 basis points. But that is one part of the coin. The other part of the coin is that, that will already be BBB flat. It will be a very strong de-risking in the company and access to much broader investor base, which is, of course, given our profit very, very good for our development.

Okay. And you're also targeting A rating some point in time, could you just tell us approximately, is it in 2 years, 4 years? Or what time do you have for this A rating?

Yes, we see that we -- given the assets that we had that we should be able to beat increasing size of the portfolio and increasing size of rent regulatories, residential elderly care homes, special partners for people with disability, schools, this kind of core social infrastructure properties together with BBB+ leverage numbers should lead to A- rating. So in 3, 4 years, we should be there.

Okay. And I'm also interested if you could give us the split in terms of net initial yield of your community service properties versus your residential properties? What -- can you give us a ballpark figure for these segments?

Yes. We -- I think that our rent-regulated residentials are at the levels like 3.7%, 3.8%. And that means that community sales properties are at 4, 5 or 6, which is still relatively high. So in both segments, we see a large potential, particularly after we have moved having more and more apartments in university cities and particularly Stockholm.

Okay. And my final question regards to your building right portfolio, these 34,000 building rights that you have. And I just want -- 33 -- 34,000 apartments, is it -- how much are you going to develop yourself? Or how much are you going to sell? Or how much are you going to do with the JVs? And just give us a flavor on that, please.

We are focusing to have like more and more in own management because we have very strong margins on those, and it is very difficult to buy new apartments, and we have traditionally said that we will have 50% of the portfolio in joint ventures and 25% in building for on the book and 25% selling. We do think now that we will continue with having a 50% in joint ventures. However, we will be more for on the book and sell fewer because we see that we have both strong value creation and at the same time, securing long-term cash flow from lower rate assets.

And the next question comes from the line Bertil Nilsson from Carlsquare.

Yes. Previous questions has been about property development, which I'm also interested in. If you look at the market as such and also that around 50% of the value increase in Q4 was residential for your portfolio, I mean the 20% of the total market cap roughly. Would you say that -- if you look at the market as a whole, the production of new residentials are in line with demand or could increase, so to speak?

Yes. I mean, we delivered strong profits from all 3 of our value-add strategies and there is strong demand from -- for rent-regulated residentials, and we are guiding that we should be able to deliver SEK 1 billion to SEK 1.4 billion from our property development, which includes delivery from building new apartments. So that is our view.

Yes. Second question. If you look at important events after Q4, your refer to value increase of SEK 1.2 billion, which has not been in the result so far. When I read it, is it -- does it include Offentliga Hus? That figure?

No. I mean, Offentliga Hus, how to say, Offentliga Hus delivered a negative profit for 2020. So they are punishing us with minus SEK 4 million in our profit numbers. Without Offentliga Hus, we should have SEK 4 million or more in profit.

And the next question comes from the line of Fredrik Cyon from Carnegie.