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

Welcome to the SBB Audiocast Teleconference Q4, 2021. For the first part of this call, all participants will be in listen-only mode. [Operator Instructions] Today, I'm pleased to present Ilija Batljan, CEO. Speaker, please begin.

Thank you very much. SBB is a social infrastructure champion in Europe. And this first slide, you can see some of our assets. The building in orange is actually apartments for elderly in the city center of Linköping, which is one of the largest cities in Sweden. A long municipal lease for this property, and the value of this property is probably 1/2 of the value of the condos surrounding the property. So it's a very large potential in this property going forward. Down on the slide, you can see one of our preschools. We are the largest owner of preschools in the Nordic and we own preschools in all 4 Nordic countries. And then this small picture is a picture of the most sustainable building in Europe, cultural center, that we have built 26,000 square meters completely in the wood and even recharge power is done on combination of the batteries and solar power. So probably the most sustainable building in Europe. Next slide, please. Focusing on sustainability and having long leases, where we have 11 years average lease, almost 11 years average lease, and on top of that, Swedish rent-regulated residentials with waiting list is a great basis for an amazing value creation to profit from property management. And you can see that we in this quarter are presenting an earnings capacity that is during 2021 increased with 85%. And our -- you see that our rental income in 2022 is expected to be SEK 7 billion. You see that we have property cost, including maintenance, and we take all of property cost through P&L. Then we have an NOI of SEK 5.1 billion. And then after -- some costs for central admin and financing costs, but also profit from joint venture and the associated companies. And here is the cash profit from joint venture and associated companies. Then we will have SEK 5.2 billion in profit from property management for next 12 months rolling. And that is SEK 2.96 per share. As many of you know, we have -- we are a team of 400 professionals and there are 3,000 people working in our companies, and we are delivering very strong profit also from that organization through profits of our value-add strategies. So if you add our value-add strategies and you also take into account that we are paying the dividends to these shares and taking into account that we are paying the dividends to -- or of interest rate to hybrid, then you will get to SEK 5.65 per share, or SEK 8.2 billion. That is our adjusted operating profit to ordinary A and B shareholders expected in 2021 (sic) [ 2022 ] as a basic earnings capacity. On top of that, we are running the projects that we believe are SEK 800 million in profit from property management. And summing up, we are saying the profits from property management will land between SEK 5.65 and SEK 6.2 per share in 2022. In 2021, we had great profit. Profit after tax for the period was SEK 35.8 billion, which is a strong increase compared to the corresponding period of the previous year. And that corresponds to SEK 17.2 per ordinary Class A and B shares after dilution. Rental income. SBB is inflation hedged, and our rental income increased like-for-like by 1.8% compared to corresponding period last year. And for those of you that are following Nordic economies, inflation in 2020 was weighted for our country 0 point -- something like 0.35%. So that means that we are delivering 145 basis points over inflation in 2021. That is a record. We usually deliver more than 100 bps. But that is record high. And even stronger was net operating income like-for-like that increased by 4.7%. And that is a very strong increase in net operating income for like-for-like portfolios and the strongest in relation to our closest competitors. For the full year 2022, earnings per ordinary share A and B are estimated to be SEK 8.10 per share, and that is our forecast for 2022, is that we will deliver SEK 8.10 per share, or which you have seen that we have illustrated SEK 5.65 in our earnings capacity 12 months rolling. The main -- next slide, please. The main force behind our strong numbers are coming from profit from property management, where that has been underpinned, as I said before, by strong like-for-like rental growth corresponding to an increase of 1.8%, like-for-like net operating income corresponding to increase of 4.7%. And you can see that we delivered operating profit of SEK 5.4 billion. Adjusted for value changes in joint ventures and one-off costs, the operating profit was SEK 3.4 billion, which is an increase of 31%. So adjusted for the value changes in joint ventures and one-off costs, we are delivering increased operating profits with 31%. EPRA NRV or our NAV have increased to SEK 45.11 per ordinary A and B shares, a very strong increase during the year. And we are expecting to continue to increase our EPRA NRV through 2022. We have a relatively high net initial yield. And when I said, net initial yield, that means NOI yield. And our NOI yield is 3.8%, which is almost double where the general residentials are traded. And our valuation yield is over 4%. One important thing that our property management is delivering is our cooperation with municipalities and with government-backed operation providers, where we have been able to increase our WAULT from 9 years to 11 years in last part of 2021. That is a very strong increase. And we are actually -- because we are taking in the portfolio some elderly care homes, some municipal buildings that we're building that are coming in Q1, so we are expecting that our WAULT will increase during this year, which is also unusual given such large portfolio that we have and given our long leases. An important point. From 2021 -- and the part of the business that have delivered the best profit is our profit from property development. During 2021, we have created 490,000 square meters new building rights. And as you know, we have building rights at different phases. But important message for this is that building rights with granted zoning plan, meaning building rights with legal force increased with 464,000 square meters during 2021. This is amazing. There are not many companies in Europe that have 464,000 building rights for residential. And if you imagine, that is exactly what has been driving our strong profit from property development. And of you that have been following us for years know that we are selling those building rights without putting in cash in construction. We are creating a large amount of the value. And in 2021, profit from property development was SEK 6.6 billion. And in Q4, this profit was almost SEK 4 billion. An amazing delivery from our property development team. Another important point. Of course, those building rights are also delivering cash to us. And just in Q4, we sold building rights, getting cash of SEK 2.6 billion. But I will come back to that. Another important point that has supported our credit metrics in last part of 2021 has been our disposals. During 2021, we sold properties for SEK 19.4 billion, with profit of SEK 3.1 billion, of which SEK 850 million has been reported as realized value changes. The rest has been reported as unrealized value changes in the periods before closing. And this is just showing you that we, despite that increased valuation based on sold properties, even on top of that, we are delivering almost SEK 1 billion in realized value changes in 2021. Total disposal in Q4 has been SEK 12.6 billion. So we get SEK 12.6 billion in cash in Q4. And that has been backed by selling investment properties for -- or cash coming from selling investment properties for a total of around SEK 10 billion and building rights and development properties SEK 2.6 billion. So this has been one important point that has supported our opportunity to acquire Amasten. So that deal has been almost fully financed by cash from selling the properties and also doing great profits from that. Next slide, please. Of course, our sales and sales of -- divestment of properties and divestment of building rights has been very supportive to deliver on our key ratios. And we have been successful in integrating Hemfosa, in integrating Offentliga Hus, in integrating Amasten already. So we have a very strong track record of fast and successful integration of the recent acquisitions and where we are successful in achieving anticipated synergies. And those divestments in Q4 have strengthened our credit metrics. And as you can see, we are reported according to S&P's -- S&P's way to do the math, where the hybrids are counted as 50% equity and 50% debt. We are delivering reported numbers below 55%, that is the threshold by S&P. And we have in Q4 2021, adjusted debt to debt plus equity ratio of 53.8% reported. If you take into account that we have additional SEK 4 billion that are loans to our joint ventures and additional SEK 2 billion that are coming in cash from the sold properties, then you will arrive at 52%. Taking into account also our income 10 months forward-looking, we are landing at 47%. But reported 53.8%. And here, the management has shown commitment to deliver on adjusted debt to debt plus equity remaining well below 55%. And despite increased focus on acquiring the large low-risk rent-regulated residentials in greater cities, the main focus on Stockholm. But that has been main change in portfolio in Q4, that we have strongly increased our residential portfolio. You can also look at our ICR. That is also increasing very strongly. And also here, we have strong focus from management to deliver. And according to our financial policy, we should have interest cover ratio above 3x. Our interest coverage ratio adjusted in accordance with S&P is 4.1x and will increase significantly in 2022. Our strong EBITDA margin, which is very strong given large portion of portfolio being Swedish rent-regulated residentials, landed at 69.4%. And we are expecting in 2022 rental income to increase with 3.5%, 4% like-for-like. So a strong base for continuing growth. If we continue to the next slide, please. Just to illustrate how big shift. And you can see some of the properties that we have developed, at this slide, in a very good location. And we actually get the price as the best landlord in a competition from this property Hydran in Vasteras. So we have been voted by our tenants. I don't know, maybe for you financial guys that is not important. But for us, delivering services to our tenants is the most important that we can do. And we have been voted as the best landlord by -- in Sweden by our tenants. Swedish rents included in residentials have more stable rents than the European peers and those are most adequate in real estate space. SSB rents are well below market rents. SSB average rent is SEK 1,132, which is compared to new construction of SEK 1,850 per square meter. And this is an amazing asset with long-term value creation potential. We are also continuing to renovate apartments. That are going to have a high utility value. And that is, of course, giving us opportunity to negotiate significantly higher normative rent. We focus on sustainability. We are delivering strong yield on cost 5% to 7%, sometimes 8% of our investment in sustainability related measures. Next slide, please. On this slide -- we said a few years ago that we are going to have the strongest EPRA NAV growth per share, and we have been continuing to deliver on that. In 2019, we have 74%. In 2020, we had 41%. In 2021, EPRA NAV growth per share 60%. EPRA NAV SEK 45.11 per share. Also backed by strong increase in our earnings capacity that you can see started in 2017 with SEK 0.67 per share, and now at the end of Q4 is SEK 5.65 per share. So strong delivery both on profit from property management, but also delivery from property development and other value-adding strategies that are growing EPRA -- or growing our NAV very strongly quarter per quarter. Next slide, please. SBB operates in the world's safest real estate classes, community service properties in the Nordics, where 100% of the tenants are sovereign or state-financed organizations and highly regulated Swedish residentials. Our properties are very attractive. We have SEK 150 billion own properties in 4 countries. We have passing rent of SEK 7 billion, as I mentioned before, relatively high net initial yield or NOI yield of 3.8%, almost double what our competitor in German residential space have. And we have among the longest WAULT in the market, 11 years. At the end of fourth quarter, our average interest rate was 1.1%, and it should be even lower if it was not for some higher interest rate loans in Amasten, in the company that we have acquired. We used to get rid with that kind of high interest financing as soon as we take over the company. So we will do the same job also this time. I'm looking at our Finance Chief, Lotta, and she's just showing thumbs up. We will make sure so we can continue to have low interest rate. If you look at our portfolio book values, you will see that our portfolio is located in major cities and university towns across the Nordics and particularly also our building rights portfolio is located mainly in Stockholm and other major cities. And that is why we have been able to make such amount of cash in 2021 Q4, by selling building rights. Next slide, please. Another important message from this quarter is that, of course, as many of you know, we are creating values from AAA assets because we have exposure to the Sweden, Norway and Denmark that are 3 of 8 AAA-rated countries. And we have Finland that is AA+. And as you can see here, our income. 50% of our income is coming from residentials, either rent-regulated residentials or publicly funded residentials for elderly people or people with disabilities. And even higher share of value is related to residentials. 54% of our property value is related to residentials. So -- then we have education, 28% of income and 28% of value. Then we have -- and that is 78%. And then we have 6% hospitals. We have some government infrastructure in city halls, 7%. So -- and we have a very small part of our portfolio that is public offices. It's just 5% now. And as some of you know, we have been selling offices since acquired Hemfosa in late 2019. We are creating value from underutilized land, and we have properties -- our total -- we have 5.4 million square meters in properties. On top of that, we have 3.5 million square meters on the building rights. That is in total 9 million square meters. So as Mark Twain said, "Buy land, they don't make it anymore." And if you have long cash flow on those, as we are showing this slide with 11 years WAULT, then it is even more cash in that properties, in that land. Next slide, please. One important move that we have done in 2021 was developing our relationships and getting even more competence and getting more power, the operational excellence, through our joint ventures and the associated company. We have at the end of Q4 joint ventures with total value of SEK 90 billion. That is one of the largest -- our joint ventures together are one of the largest real estate companies in the Nordics, SEK 90 billion. And our share of that is SEK 35 billion. And those joint ventures have also a relatively low LTV. They don't have such exposure to different instruments. So they have LTV of 37%. Our larger joint ventures are actually joint ventures that we have cooperation with different investors. We have Svenska Myndighetsbyggnader or SMB. There we have property value of SEK 10.4 billion at the end of Q4. This is pure property management company. Public Property Investment (sic) [ Invest ] in Norway, SEK 8.7 billion, pure property management company. SBB Kåpan are the pure residential company in Stockholm, with SEK 5.7 billion. We have JM, that you know -- which is developed with largest development bank in Stockholm with 36,000 apartments in development bank. We see that there is very good potential for us going forward. We have Heba, which is also large Stockholm player, owning rent-regulated residentials and apartments for elderly people. And so on and so forth. But it is very important to see that we have strong value creation and strong recurring profit from our joint ventures. Next slide, please. As I mentioned before, one of the main reasons for us being able to deliver on both profit but also on deleveraging in Q4 has been our property development. Our property development team has continued to expand and continued to deliver and sell building rights. And in Q4, they sold building rights for SEK 2.6 billion in cash. So there are not many companies in Europe that can take out SEK 2.6 billion in cash through a quarter. And that's a very good performance. However, our building rights are still very low value. So we are estimating potential profit from the building rights to SEK 21.4 billion, and that is without any penny of new investments. So we have SEK 21.4 billion outside of the balance sheet that is -- that will just go through these administrative processes and to getting legal force and to get value of additional SEK 21.4 billion. That is a large amount of cash and a large amount of equity outside of the balance sheet. Next slide, please. However, as a long-term partner -- because we have been saying that we have ambition to increase our dividend the next 100 years. And we also think with our company, in generations -- for example, my daughter is working in the company, and I hope that my grandson will work in the company and I hope that, looking at our finance sheets, her grandchildren will work in our company. Because we are a family business together with our 200 -- more than 200 shareholders. We are most on the company -- next most on the company among small investors after investor, and we are feeling that we are working for them every day. And they want us to have this 100-year focus. They want us to be climate positive in the entire value chain, because this is an issue for their kids. And that is why we are investing large amounts of money in reducing energy usage and the climate impact. We have as a target to do -- to reach 5% per year. We are on track to deliver. We will deliver more numbers in our annual report. We are also building 50% of our new construction in wood. As I said before, we built last year and that was finished at the end of the last year in Skellefteå, one of the richest municipalities in Sweden, the more sustainable building ever built, 26,000 building, wood, and with very strong environmental performance, also getting the highest specification. We are also continuing to deliver on our social sustainability. As you know, we have been rated by ISS ESG as the strongest company in the social space in terms of social sustainability. And we are continuing to deleverage in order to deliver on our target to achieve BBB class rating and A- rating. We are also heading for 100% sustainable financing. And right now, our bonds -- some of our bonds are cheap. So we will look at those that are not sustainable. So we will investigate that in next few days, how we can use the market situation to continue to move to get less of unsustainable financing, because we have to focus to have 100% sustainable financing. Next slide, please. We have among the highest ratings from different sustainability agencies, MCI, Sustainalytics. We have highest rating among the peers by Sustainalytics in our category with -- even -- a few years ago, we actually get this Regional Top Rated 2022, which is in comparison with 4,000 comparable companies that Sustainalytics is rating. And this is, of course, very important for us, and it's important our people have incentive programs that are connected to sustainability delivery. And this is going to be one of our main focus also going forward. Trying to summarize, and first, summarizing with -- first, summarizing with a few points on general sense about SBB or -- it was someone that said that it's difficult to pronounce, but I can -- I think we can have a training on this -- Samhällsbyggnadsbolaget i Norden. It's very good for you to remember the name. Samhällsbyggnadsbolaget i Norden or SBB to make it easy to you. SBB is a social infrastructure champion in Europe. On this slide, Slide 13, you see some of our main strengths. The number one, we have a stable cash flow with large cash conversion backed by AAA countries. Number 2, we have strong growth fueled by unique investment platform combining property management with our 3 value-add strategies, building rights development, new production, investments in existing portfolio and value-added transactions. And we have this long-term 100 years horizon. And that is why we are proposing to increase dividend from SEK 1 per share to SEK 1.32 per share. Since 2017, we have increased dividend with 1,220%. This dividend will be, if our Annual General Meeting so decide, paid monthly, and we are looking forward to that. Small investors in Sweden and Nordics are looking forward to that, and we will make sure to deliver on that. Rating. We have a strong rating ratios, strong key ratios. We think that we have delivered all key ratios for BBB+. And we will continue to deleverage in 2022. We are now in a very strong position in order to achieve BBB+ and that is our key priority, because we don't think that we do not -- we think that we do not need new acquisitions because we have strong organic growth. And now we will prioritize to use the cash that is coming from selling or building rights to deleverage during 2022 in order to deliver our highest priority for 2022, which is BBB+ rating. And finally, our 100 years perspective again. We focus on strategic sustainability because that is the only way going forward, and that is the core of our business model. Then -- that is the most important stuff that you heard in this, how to say, big summary. However, it is always best to let numbers talk. So I will finish my presentation by giving you a few numbers focusing on continuing delivery on operations and cash conversion. Number one, SBB's rolling 12 months earnings capacity rose by 102% compared with the fourth quarter of 2020 and amounted to SEK 8.2 billion at the end of 2021. As of 31st December 2021, earnings capacity per Series A and B ordinary share was SEK 5.65, an increase of 85% over the past year. For the 2022 full year, we forecast earnings of SEK 8.10 per share per Series A and B ordinary share. Number 2, SBB's income comprises secure cash flows from property management of social infrastructure, in which residentials and LSS housing constitute 54% of the property value and 50% of the rental income. Educational properties make up 28% of both property value and rental income. Our average lease term is 11 years, the longest of any major European property companies. We supplement our uniquely secure property management with 3 revenue-generating and value-adding strategies, building right development, new production and investments in existing portfolios and value-adding transactions. The value-adding strategies strengthen SBB's earnings, helping generate value over time, but also delivering, for example, strong cash of SEK 12.6 billion in Q4 2021, helping to fund the Amasten bid. This also contributed to earnings per Series A and B ordinary share of SEK 17.35 and produced strong cash flow over the year. Number 3, total disposal during full year 2021 was SEK 19.4 billion, with profit of SEK 3.1 billion, of which SEK 0.9 billion has been reported as realized value changes. The rest has been reported as unrealized value changes in the periods before closing. Number 4, the interest coverage ratio continued to increase, according to S&P definition of ICR, including 50% hybrid as debt, that was 4.1x. We also delivered strong EBITDA margin of 69.4%, demonstrating successful integration of recent acquisitions, achieving the anticipated synergies and establishing an operational track record with a mature portfolio that is overperforming. Rental income increased '21, like-for-like by 1.8% compared to the corresponding period last year, 1.5 -- which is 1.5% over CPI. Net operating income increased even more, like-for-like 4.7%. And we are looking forward to achieve 3.5% to 4% also in 2022. SBB is an amazing inflation hedge. Thank you very much. Please Q&A.

Okay. So we will now go to Q&A. And we have almost 1,000 people following the webcast and 100 people on the phone line. So -- and we understand that there will be a lot of questions both on the report and the short seller reports published earlier this week. So we ask you to keep your questions brief. We ask you to not repeat questions that have already been asked. And the Q&A session will go on for 45 minutes. And with that said, operator, we can start with the Q&A from the phone line.

[Operator Instructions] The first question is coming from Fredrik Stensved at ABG.

So I want to start off with the earnings capacity. You have announced a couple of transactions lately from Vallentuna, Tensta, Båstad and Kalmar municipality. Are any of these transactions included in the earnings forecast?

Nothing is included.

Okay. Great. And some of the sort of municipality deals require a formal approval. What is the best guess on when that can happen and -- for this deal to be completed or closed?

It is always the same, Fredrik. It is like 50-50. But we are the only player that has been successful to complete deals with municipalities. And we are never including those deals in our earnings capacity before they are closed. But we look forward to close the majority of those deals.

All right. Then one more question on the earnings capacity. I guess all your public properties have the standard CPI from 1st of January and then the residential properties will have the indexation a few months later. What is included and what is not included in them in terms of CPI?

Nothing is included on rent-regulated residential. Only the income that is taken into account -- only the income that was there at the place was included. So no negotiations -- no increase from negotiations from tenant associations. And now you can see 1/2 of our portfolio is committed to residential. Nothing of that is included.

All right. But the CPI for the public properties, that's included?

That was -- this is taken directly from economic statement, so that is probably included.

Then I have a few detailed questions on the EPRA earnings. There was a discussion during the Q3 conference call. So first of all, the adjustments you do for JVs, should that be interpreted as value changes and tax in JVs? And then secondly, I believe you started with this adjustment in 2021. So there's no adjustment for 2020, which makes the year-over-year figure appear relatively low. Is this correctly understood?

That is correct. We have adjusted in 2021 for value changes in joint venture. In fact, it's exactly so.

Perfect. Final question...

However, here, Fredrik, it's important to see that we are building large cash flow generations from the joint ventures and we will probably have SEK 1.2 billion in 2022 coming from joint ventures.

Perfect. Last final question for me. I noted that there was 100 people on the telephone line. So we have all seen increased credit spreads and significantly higher in implied yields for long-term bonds across the whole real estate space in the last month or so. How should we think about this going forward for SBB? Should we expect sort of a shorter interest maturity in order to keep the low interest rates? Or should we expect that to stay at 3, 4, 5 years?

The interesting point here, Fredrik, is that our longest bonds are the cheapest one. So we have a fixed interest rate longer than 4 years. So we will continue to have long maturities. That is important for us. And I said before, we would also look to buy back some bonds that are not sustainable. We want to have 100% sustainable financing. So we will be going for -- we will try on our side, because we have a strong position and we will prioritize to buy back the unsustainable bonds.

The next question coming from Markus Schmitt at PRISMA Westman.

I have a couple. For the start, and I cannot avoid this, will you launch a special audit by an audit -- independent auditors that will address the allegations by Viceroy, particularly the allegation that you boost property valuations by selling assets and funding the sale as a minority buyer at the same time? There were no remarks in the slides. So how do you see this topic? And are there any to dos on your side to increase further transparency or make changes to the structure, for instance, changing Board composition or other measures? That's the first question.

We will never let criminals affect our company. So that will be the -- but we have published answers on the short press report this morning, and that has been done together with external lawyer with Vinge. And we have also filed to police and to financial authorities. So they will investigate the criminal. Concerning SBB's fair value, our properties are valued every quarter, Markus, every quarter by international independent valuers, and those are 5. And also, if you -- Markus, if you are in real estate business, please also look at the report that we published that average implicit reevaluation of large Swedish real estate companies has been -- sector average 10.3%. So if you take into account our strong performance from property development and from selling properties and building rights, that means that our increase in the value is below the average. Next question.

Okay. Yes. And then there's another question I have and that is what I'd like to understand, based on your maintenance expense in the P&L. But what I'm interested in...

Let me be very clear on that -- on there. We are passing all of maintenance through P&L.

Okay. There is basically no maintenance CapEx investment need? So is that correct?

Yes. All of maintenance is taken through P&L. That is according to this year finance.

Yes. But is there a maintenance investment need based on the agreements with your tenants?

No. That is -- Markus, the only -- and this is important. I hope to see you in Sweden, to visit us, so we can show. Actually when we -- for example, when we -- all maintenance, for example, for our residential included in P&L. And if the tenant moves, then we have opportunity to negotiate with tenant's association to get increased rent. And if we do that, then we invest and upgrade the standard in apartment. And for that, we used to double the yield. So we'll be happy to show you -- if you visit Sweden, please visit us and we will show you how this is working in place.

Okay. Then one final question for me, and that is in terms of the strategy. So I would like to know if you think it's maybe time to shift away from growing aggressively and focus more on cash retention? I think the final sentence you gave during your presentation implies this a little. Because I see 2 issues here. When I look on to other Viceroy cases -- it's very difficult to rebuild investor trust. It takes basically one second to destroy reputation. It takes many years, if not forever, to rebuild this when I think about some German cases. So this old real estate business model of leveraging the balance sheet to finance portfolio growth is probably more difficult going forward. And the second issue I have is in that context. In an environment of potentially, at least, slightly rising interest rates, the real estate business model becomes a bit harder. So is it maybe not time to focus more on generating cash flows, in the best case use excess cash flows to delever instead of focusing on growth or aggressive growth? Maybe you could comment.

Markus, I agree with you. However, as I said before, criminals -- the Swedish authorities will deal with those guys that have been conspiring to try to affect the...

Yes, it's -- apart from the Viceroy stuff, it's also more related to the changing interest rate environment.

I will address your real question because those are important. And the first one is, that is exactly, as I said, we see opportunity now because we have grown, we have very strong cash flow conversion to consolidate and to deleverage in order to achieve BBB+. That is the Board's main priority for 2022. At the same time, Markus, it is important to understand that we are actually inflation hedged. We did in -- and I don't know if you are following other companies, but we did in 2021 1.8% like-for-like, which is 145 basis points of the inflation in 2020 in our weighted. So that is 145 basis points over inflation. On NOI, we did 4.7%, which is very strong. This year, we are expecting 3.5% to 4% increase in our both rental income like-for-like and NOI like-for-like. But we see, at the same time, that it is a good opportunity for us to focus on deleveraging and to focus on achieving BBB+ rating. At the same time, we will have -- continue to have strong cash coming from our building rights that doesn't require large investment, because as I said before, we delivered 467,000 legal force zoning plans in 2020. That is -- I don't know if you are specialized in real estate, Markus, but that is an amazing amount. And to deliver those building rights is just our staff that is required. So in this environment -- I also commented before the issue of interest rates. We are expecting interest rate to rise and we are ready to meet the challenge. But given that our income is inflation hedged and given that our longest bonds are the ones with the lowest interest rate, we will use our firepower now under the next few months to buy back unsustainable bonds. That is one of the issues that the Board is looking at, and we will probably come back to that in days to come, because also in those times when interest rates are increasing, it is important to focus on sustainability.

The next question is coming from Fredric Cyon at Carnegie.

Yes. 2 questions from me, starting off with the earnings capacity. Adjusting for the year, it's about SEK 300 million underlying for the full year 2021. When I look at the earnings capacity, you said that yearly it will contribute by SEK 1.1 billion. Will SEK 1.1 billion will be the contribution also under EPRA earnings? Or there is need of any adjustment to get to the SEK 1.1 billion in the EPRA earnings impact?

Yes, that is -- in earnings capacity, it's only cash. There are no valuation changes in earnings capacity, and that is for JVs. So it's only full cash backing. So that means that we will probably have SEK 1.1 billion to SEK 1.2 billion that will affect EPRA earnings.

Okay. So SEK 1.1 billion addition from -- to EPRA earnings from JVs. That's clear. And then the second question relates to project investments. So last year, you invested SEK 3.9 billion. That's almost 100% up versus 2020. It seems like you're ramping up project investments also moving into 2022. Should we expect more than SEK 5 billion in investment into existing properties and new projects?

No. We -- as I said before, Fredric, we have very good, how to say, a very good opportunity there to navigate by ourself to refurbish or to increase the standard when we think that is most economically for us and for our tenants. So you should not expect more than that.

Okay. So it's going to be approximately SEK 4 billion in 2022 in investment?

Yes. But it can be even lower. It is -- we don't have any CapEx in that way that we are obliged to do anything. We can do that, that is delivering strong cash flows and so profit to our investors, and to look at -- to compare to other opportunities.

The next question is coming from Bertil Nilsson at Carlsquare.

Very impressive everything. But I have a question on your remark on the entry on the German market, you said. And I have heard it before that NOI yield is much lower than in Sweden. And your yield requirements -- and do you find it challenging to make your acquisitions there now given those key rates?

Bertil, Germany is very expensive right now. You can see in our numbers that we are delivering NOI yield of 3.8%. And in Germany, you have to be prepared to get like 2%, 2.1%. And that is in an environment where interest rates are increasing. That is not efficient investment for us. So we have parked our -- we have been building infrastructure, so we are ready when it's time. But we do think that we have a great opportunity this year to focus to achieve BBB+ rating by deleveraging and to focus on organic growth. So we will not go in Germany right now. It's too expensive. That is the only reason. We like Germany. It's a beautiful country, great people. I mean we like residentials in Germany. It's a beautiful asset class. I still argue that Swedish rent-regulated residentials and our community service properties are the lowest risk asset class in Europe. But second to us are German residentials. So we like the space, but it's very expensive.

The next question is coming from Clark McPherson at Clearance Capital.

A couple of questions from me. First of all, I see the -- on the balance sheet, I see the increase use of commercial paper from Q3 to year-end. I wonder what your strategy is for this, whether you intend to try and turn this out and reduce the reliance on that...

Yes. We do...

And related -- sorry. Go ahead.

Sorry for the interruption. But usually -- we use that usually when we acquire the new companies in order to be very able to, how to say, to restructure if it's needed. So our focus is to continue to prolong our debt maturity. And that is just part of our, how to say, dealing with creating a position to get in new acquisitions.

Okay. Understood. And related to that, I see that you had the bank line coverage and I see that you report unutilized bank lines of SEK 11.87 billion. I wonder if you could give us some granularity on what proportion of those bank lines, if any, are maturing within the next 12 months?

Nothing is maturing within 12 months. And I don't know how good you know the Swedish bank market. In Sweden, banks are usually working with 3 years horizon. And this stuff is rolling in that way, in order to make sure that always those are longer than 12 months and have a period of freeze. So this is the standard that how we deal with this in Sweden.

Sure. Okay. On Page 27 report, I see there was a mention of the use of total return swaps. Just wondering what that relates to specifically. Is it part of the acquisition of shares and potential targets? Just wondering if we could get some more clarity on that.

Frankly, Clark, I didn't understood the question. Probably my English is like that. Could you just be specific, because I have difficulty to see how this is connected to the Swedish? Can you please just repeat the question?

Yes. So on Page 27 of the report, you note a booking for total return swaps. And I'm just wondering what they relate to and how significant your use of PRS is? Sorry, it's -- yes, Page 27.

It is not significant. It has been used, among others, in those with acquiring Amasten. So that is for that purpose.

Right. Okay. And then last question. You mentioned that you could take the current market opportunities to refinance debt that's not sustainable. Would that include -- or could that include your hybrids? I know some of them were only recently issued in 2020, 2021, but I'm wondering if that could be a potential target.

Hybrids, we like the hybrids, and we are delivering good returns to our investors. And we are -- hybrids are a permanent part of our equity structure. And so, we -- so unsustainable bonds -- then I think when I said that, then -- it's a meaning of senior bonds. Hybrids are long-term permanent part of our equity structure.

The next question is coming from Patrick Noel at Aviva Investor France.

I have 2 questions. Firstly, about your deleveraging. I see you deleveraged a lot in 2020. But I see also that in 2021, it looks that there is, on the contrary, releveraging because your loan-to-value increased from 35% to 40%. So can you give me more color about that, because it puzzles me because you said you were trying to deleverage?

Yes. And that is -- of course, the part of that is probably affected. We had even larger cash position at end of 2020. At the end of 2021, we have the cash position of almost SEK 10 billion. And in -- at the end of '21, we had cash position of almost SEK 10 billion and have larger balance sheet. So those SEK 10 billion are having less effect than -- we had much stronger cash position at the end of 2020. So I should argue that we in 2021 have retained our strong position and we are continuing to deleverage in 2022.

Okay. What is the amount of your real estate portfolio? Do you give this up here?

It is -- all our properties that are not rent-regulated residentials are having CPI indexation. But also rent-regulated residents -- it is utility cost system. So you have to negotiate with tenant association. So you...

I mean -- no, no, my question is simple. So could you give me the valuation of your portfolio, gross asset value, if you prefer?

Our property value was SEK 149 billion and with the valuation yield over 4% and with deliverable yield or NOI yield of 3.8%. On top of that, we control joint ventures with SEK 90 billion in value and our share of that value. And that is not fully in -- of course, not fully in our accounts because the -- in our accounts it's booked at -- I have roughly a page for those. It is SEK 35 billion. So you can say that we're on the properties for SEK 150 billion, control additional SEK 90 billion. And of those, SEK 35 billion are those that are SBB's share. So that should be in total SEK 185 million.

Okay. And last question is about the Viceroy report. But let's say the Viceroy report is totally wrong. But even though...

We do not say anything about that. We have published all answers. So...

Yes. But I'm afraid that you could have financing problems, like we can so far [indiscernible] with banks to be afraid, financial market to be afraid and you could be obliged to sell some assets very quickly.

You should not be afraid that -- those shortages have tried to make you -- I'd say that they have tried to take your money by shorting the bonds. But bonds are recovering this morning. And the criminals will -- Swedish authorities did it. And our answer is you can find everything in our report that has been written by -- and we have an external lawyer firm that has been - Vinge, that has been doing that. And we also filed the criminal -- we also filed the notes for criminal investigation that has been sent by our Board this morning. So criminals will be dealt with Swedish authorities. We will focus on our business to deliver to you the best return if you invest in our instruments.

The next question is coming from Axel Ohlsson.

I noticed that your -- if you look at your property value by segment, that residential has become much, much larger in the last year. How do you see the residential side playing for SBB going forward?

We have strong position in the residential market, particularly in Stockholm. I don't know if you follow, but our daughter company, Sveafastigheter, has won the largest share of these municipal competitions last 4 years to get space to build new residentials -- rent-regulated residentials in Stockholm. So we have a very strong position. We'll continue organically to grow our residential portfolio. Because as I said before, in 2022, we are focusing on deleveraging and organic growth. And that means that the residentials probably will be large part of our value at the end of 2022.

At the end of 2020 (sic) [ 2022 ], where do you see -- how many percent do you see residential make up your total property value?

Right now, we have 54% of property value that is rent-regulated and publicly funded residentials. And I do think that we will probably pass 60% at the end of 2022, to be at 70% in 2023.

Next question is coming from [ Jim Morgenson at BNB Markets ].

This is [ Simon from BNB ]. Just a few questions on hedging of currency. In the report, you state that -- the use of natural hedging. But in the period, you also -- I noticed you have taken a charge of SEK 160 million, SEK 175 million attributed to translation difference of loans in euros. Just to help us, how are the company actually hedging against currency volatility?

It is very easy, Simon. You can take 2020 and 2021. So in 2020, we had a profit of SEK 158 million. And in 2021, we have a loss of -- on this translation gains of SEK 175 million. So that is insignificant because we are a long-term investor and we are not speculating. We have assets in both Denmark, Finland and Norway and we use natural hedging. And then we use cross-currency swaps and other derivatives to hedge our currency exposure.

Okay. Just also on interest rate hedging. In the Q3 report, you had 8% of variable interest rate exposure. This since has grown to 26% in the Q4 report. At the same time, we also noticed that the duration period is now 3.6 years. This is 4.2 in the Q3 report. Lower hedging and shorter duration. Could you please help us a bit understand the profile of the durations of the interest rate hedges, especially given that market interest rates seems to be on the rise?

It's very easy, Simon. We published all of our -- our largest loans are European bonds and those are at fixed interest rates. So you have -- you can find all of those in the report. The reason why this -- this is because the other companies are not hedging, and that is typical Nordic situation because we have been the ones that have been most focusing on hedging. So we bought potentially a huge -- they have bonds that have been expensive for us to buy back. Probably, we will look at those and those dates. And they were not hedged. We have bonds on muster with a very low hedge. And then we also used to clean up some positions at the end of the year. So that is just a vision. We are very focused to prolong with our debt maturity and our fixed interest rate.

Perfect. Great. So we will stop the questions from the phone line then. We have a few e-mail questions. We'll try to select things that have not been raised so far. So we'll take them quickly, and then we'll wrap this up.

So where have you funded acquisitions with D shares? Is the rent payable contractually linked to your capacity to pay dividends?

That is -- our D shares are publicly traded, so everyone can buy our D shares.

Can you confirm that you have absolutely no contractual obligations to maintain, refurbished properties in your lease agreements? Obviously, you will maintain according to your own standard, but I'm asking for obligations vis-a-vis tenants?

We don't have any obligations to anyone. And our long lease -- it's actually that tenants have obligation to maintain properties in the standard that is good, so if they leave that we can rent out to other people -- to other businesses.

Do you have a time line in mind for an upgrade to BBB flat from S&P and Fitch considering the ratings have a positive outlook? And you feel that the current market volatility undermines your access to finance and hence a potential upgrade?

We have good access to finance, and we are looking forward to be upgraded. This is additional year where we are delivering on all thresholds.

Secondly, could you give us a bit more information on your acquisition strategy for 2022 and ahead in order to achieve your targeted portfolio of SEK 300 billion?

We don't need to do new acquisitions in 2022 in order to achieve our target for 2026. 2022 is going to be a year where we are continuing to deleverage and focusing on BBB+ rating.

In terms of the significant increase in investments in JVs and associated companies, should we expect this number to further increase or have you a cap on such investments?

We will not have any caps. But just in terms of -- in terms of numbers, we have a balance sheet of SEK 195 billion. So our exposure to joint ventures is relatively low and the main exposure to joint ventures is to the properties that are operational. It is a cash flow generating properties.

You always refer to safe, sound and stable cash flow. But from what I can tell, both your operating and free cash flow are consistently inconsistent on both the quarterly and yearly basis. Could you please educate me what I'm missing, not understanding properly regarding your cash flow?

It is very easy. You can just call our CFO. We are delivering all of the numbers, how they are. And it is according to IFRS. So you can see that we have a large cash conversion. Otherwise, we could not use that cash to invest in the new properties and continue to build our strong and profitable growth.

Great. That was that. So -- and just as a reminder before wrapping this up. So we have received a lot of questions on the short seller report published earlier this week. We at around 10 this morning published a full response to that report, going through it in detail. And you will find that statement with all information relating to it on the website. It has been published as a press release and you will find it in the Media section under Press Releases. And with that being said, Ilija, you can maybe provide a few concluding remarks.

Thank you, Adrian. And our message is very clear, and that is summarized in Slide 13 in the presentation. We have stable cash flows with large cash conversion. We have strong organic growth. We will increase the dividend, if shareholders will, to SEK 1.32 per share to be paid monthly. And in 2022, we have a strong focus on deleveraging and achieving BBB+ rating. We will also look to buy some -- to buy back some unsustainable bonds in days and weeks to come. Thank you very much and thank you for listening.