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

Good morning, and welcome to the Samhällsbyggnadsbolaget's conference call. [Operator Instructions] Please note, this event is being recorded. I'd now like to turn the conference over to Ilija Batljan, CEO. Please go ahead.

Thank you very much and welcome to SBB's Q2 call. And I can start with our cover slide showing some of our properties that are basically explaining what our core business is. SBB is largest owner of social infrastructure in Europe, covering Swedish rent-regulated residentials and community service properties in the Nordics. And at the first slide, you can see some of our properties, among others, cultural center in Skellefteå, one of Europe's most sustainable building. You can also see one of our elderly care homes. Important is to understand that in Sweden, elderly care homes are normal residential apartments that are in best residential locations. And then one of our preschools. We're the largest owner of preschools in the Nordics. Next slide, please. Why I'm repeating the message regarding our assets is because we do think that our assets are having very low risk. And that is why we are stating that we're operating in the world's safest real estate asset classes, community service properties in the Nordics, where 100% of tenants are, at the end of the day, tax financed or income is coming directly or indirectly from tax financing. And the Swedish rent-regulated residentials, where the rents are so low, they can never be lower. The properties are in attractive locations. 79% of our portfolio is located in major cities and university towns in the Nordics. And if you look at our property portfolio, we have assets for SEK 157 billion. Of those, SEK 120 billion is in Sweden, SEK 25 billion in Norway, SEK 10 billion in Finland, and SEK 2 billion in Denmark. Our passing rent is 7.3% (sic) [ SEK 7.3 billion ]. And despite that we have been selling assets during second quarter, we are continuing to have a strong passing rent. We have 11 years' WAULT. Still, our net initial yield is 3.8% and average interest rate 1.46%. Next slide, please. Our income is our best asset. So if you look at our SEK 7.3 billion of income, 34% is coming from rent-regulated residentials and 64% is coming from community service properties, basically from apartments for elderly care and educational facilities in terms of preschools, compulsory/ upper secondary schools, and universities. As I said before, 11 years' WAULT and strong indexation. Our contracts within the community service sector are indexed with inflation. And also within the rent-regulated space, we are, historically no matter how high inflation has been, enabled that over a period of 3, 4 years to get even better than inflation. We are trusted partner for municipalities. And also in Q2, we closed our latest municipal deal with City of Stockholm, and we are very proud that our property management team is appreciated by municipalities and that we can deliver the best services in terms of social infrastructure. Next slide, please. If you look at our property portfolio, as I said before, we have been able to increase property portfolio, and at the same time continuing to increase our WAULT from 2017 to now we have increased our WAULT from 7 years to 11 years. We are continuing to increase economic letting ratio. And as you know, part of the portfolio is always under refurbishment. So that is basically explaining why we have any vacancies. But despite that strong change since last year with increasing economic letting ratio being at 95.1% at the end of Q2. And also summer has started very good because our properties are often in very good locations. So we have signed additional leases after Q2 and we'll probably report even higher economic letting ratio in Q3. If you just look how our portfolio is on the main characteristics. As I said before, we have credit worthy tenants, because majority of income is coming directly or indirectly from the Nordic States or local government backed municipalities. Those services like elderly care homes and the location are in the Nordics tax finance. Our residentials are in a regulated sector, where rents are so low, so they probably can never be lower. And they are, in terms of regulated rents, at levels of like 60% of that. And even if you compare with our neighboring country, Finland, that has market rates, you will see that our rents are on average probably at 40% of the market rates. Long WAULT, average WAULT of 11 years for community service properties. And as I emphasized before, strong economic letting ratio. We have inflation hedged income with our contracts, our leases within the community service portfolio linked to CPI. And CPI is relatively high in the Nordics this year. And we have very limited rental receivables. Even through COVID crisis, we had 99.8% rent collection. So this together is delivering low risk, stable, inflation-linked cash flow, and that is also why this morning we presented very strong operating net. Next slide, please. Our business is affected by population development. And in the Nordics, we have strong population development, among the strongest in Europe. And on top of that, we are also affected by changes in population composition, meaning that higher share of elderly people is requiring more investments in new elderly care centers. And according to the data from Sweden, there is a need to have 560 new elderly care units until 2026, 74 new health care centers until 2026. We need 1,000 new schools and preschools until 2030. And we do see that as a trusted partner to municipalities, we have a very strong position to continue to grow our business and grow our cooperation with municipalities. And that is also here important to emphasize that we now are strongly focusing on our core business, on our cooperation with municipalities. And that means that we intend to systematically reduce the proportion of joint venture operations through divestments of joint ventures and divestments of financial investments in order to strengthen the balance sheet, increase transparency, and focus on core operations, because that will give us opportunity to continue to expand our business with municipalities and to continue to serve our core clients at the best possible rates. Next slide, please. Key ratios for the second quarter 2022. We are delivering strong rental income for the period, SEK 1.878 billion in rental income, which is increased 29% compared to last year. We are most proud that we are delivering strong net operating income because that is the best measure of our operations. We have, in Q2, SEK 1.290 billion in net operating income that is slightly over our expectation, because April was cold and energy prices have been higher in the first half of the year. And despite that, we delivered net operating income of SEK 1.290 billion, which is 27% higher than the year before. This is, of course, having direct effect on our cash flow from operating activities and the cash flow from operating activities before changes in the working capital increased 39% to SEK 1.045 billion. Our profit from property management is slightly negative, mainly depending on one-off costs and unrealized changes in currency. And if you correct for that and adjust for that, our adjusted profit from property management adjusted for noncash flow exchange rate changes, nonrecurring costs and changes in value and the tax in the joint venture business landed at SEK 1.024 billion, which is 47% higher than last year. And also in this quarter we are having effect in our financial assets. So our income from financial assets has decreased with -- or those are changes in the value of financial instruments that have decreased with SEK 1.4 billion. And this is also related to that those financial assets are reporting at the market value. Also related to that, I can comment our total return swap, because you will see that in our balance sheet, we have one post that is cash collateral. But cash collateral is only derivative. And that cash collateral derivative has declined from SEK 5.6 billion at the end of the last year to SEK 2.5 billion at the end of Q2. So that is not cash, that is derivative. And when our financial instruments in TRS, then they decrease in value, then we are paying the difference because we have full risk for our financial assets. So on the one side, you have derivative that is cash collateral, and on the other side, you have your financial assets. So financial assets are hurting us, and that is not, how to say, that is not strange. It is how markets have been developing the first half of the year. And in the same way, it's also not strange that we are taking risk for the assets that we have chosen to have. If you look at our key ratios on financials, loan-to-value ratios reported 46%. Given strong operating net, we have increased our interest coverage ratio. We have a multiple of 5.6x. The average period of fixed interest for all interest bearing liabilities was 3.2 years at the end of Q2, and the average debt maturity was at 4 years. Here it is also important to mention our strong cash position that is even stronger when taking into account that we have committed sales where we have receivables on the balance sheet of SEK 1.3 billion. This cash will come in during Q3. On top of that, after the reporting date, we have signed additional sales of SEK 3.3 billion. So in total, if you sum up our cash at hand with the cash that will come in from already done sales that will be around SEK 10 billion in total cash position in terms of having cash at hand. And on top of that, we have confirmed credit commitments. That also means that we do think that we have a very strong position as regards to deal with our debt maturities. And just to give you a flavor, I will come back to that, in the next 12 months, we have SEK 3.7 billion of bonds maturing. Of those, SEK 500 million have been already paid by 4th of July. So that means that we have SEK 3.2 billion maturing bonds. And if you add to that, that we've been -- 2023 have additional SEK 1.9 billion. That means that our total exposure in the next 18 months to maturing bonds is SEK 5.1 billion. If we continue at our share-related key ratios, long-term net asset value SEK 62 billion and, of course, hit by changes in financial instruments, which means that long-term net asset value EPRA NRV per share at the end of the quarter was SEK 42.72. Market value of properties, SEK 157.4 billion, and all our properties are valued by 5 external valuers every quarter. So that means every single property has been valued by external valuer. Our surplus ratio is improving despite, as I said, a relatively cold first half of 2022 with high energy prices. Despite that, we are delivering surplus ratio of 69% and a yield of 3.8%. Our valuation is, according to values, almost unchanged. And as I said before, economic letting ratio 95.1%, which has increased 1 percentage point since the end of last year. But the most important message from this quarter is actually that we are continuing to deliver more than 100 bps over CPI in like-for-like increase. So our rental income in comparable portfolios on a like-for-like basis increased by 4.1% in the first half of 2022. And you probably know that CPI was, in Sweden, 2.8% in October last year, which is a base for our leases during this year. So that means that we are continuing to overperform and deliver a stronger increase than inflation, and we have been doing that almost since start of the company. And despite the cold winter quarter, the increase in net operating income for comparable portfolios like-for-like was strong at 3.5% for the first half of 2022. I also said before that our average interest rate is 1.46% at the end of the second quarter. And as I said, we delivered strong profit from property management, if you adjust for noncash flow exchange rate changes, nonrecurring costs, and changes in value and tax in the joint venture business. That was for the first half of 2022, SEK 2.1 billion, and SEK 1.024 billion for the second quarter. Next slide, please. I said before that our passing rent is SEK 7.3 billion. And here you can see our earnings capacity going from SEK 7.3 billion in passing rent, and this is the income that we had at the end of Q2 on 12 months forward-looking basis with the leases that we had at the book. So SEK 7.3 billion in rental income. And after property cost of SEK 1.9 billion, we are expecting to have an NOI of SEK 5.4 billion. Observe that we are taking maintenance costs through P&L and not capitalizing. So SEK 5.4 billion is expected NOI. And then after expected profit from joint ventures and also financial expenses, we are accounting to have an operating profit of around SEK 5.1 billion. We also, in this slide, put how we assess our cash earnings for the group and by adjusting income from joint ventures and associated companies, just taking in expecting dividends also after latest divestments. And if you adjust for that and you also adjust for dividends to equity instruments, excluding A and B shares, like B shares and hybrids, after all payments, we are expecting to deliver SEK 3.4 billion in cash earnings for next 10 months, which correspond to SEK 2.34 per ordinary class A and B shares. Next slide, please. As I said before, our commitment to deliver stronger balance sheet and also to deliver lower LTV, and in that way, a stronger rating is very clear. And we will do what it takes to stronger our position, and that is also why we have been very clear in our messaging that we have sold assets for a large amount and that we will also continue to sell assets until our rating has improved. So during the period, April to July 2022, we have sold assets for SEK 9.5 billion. Important point here is that we are not, in this value, SEK 9.5 billion, you can relate that to book value of SEK 9.3 billion. Even if you take into account that we do have deductions for deferred tax of about SEK 0.3 billion, you will see that net after deduction of deferred tax, we have delivered SEK 9.2 billion in net sales. But total property value, sold assets, and that means that includes sold properties, equity-linked instruments and financial assets totaling SEK 9.5 billion. Our values for rent regulated residentials are marginally affected in the quarter despite the crisis and our community service properties are not affected due to the fact that inflation adjusted rental income clearly dampens any changes in yield. And selling assets for SEK 9.5 billion, and also having additional sales in pipeline that we will announce in next few months, is showing that our properties are needed and also liquid even in this kind of market. Next slide, please. You can see that we continue to have a strong balance sheet. And with continuing deleveraging focus at the end of Q2, we are reporting LTV of 46%. And LTV will decrease during Q3 given already announced asset divestments. We are also delivering very strong interest coverage ratio that have been increasing, very strong last 2 years, and at the end of Q2 was 5.6x. Our secured loan-to-value is at level of 19% and that means that we have additional space to use secured loans if we choose to do that. And on the rating side, we have BBB- with negative outlook from S&P and BBB- with a positive outlook from Fitch and BBB flat from Scope. Next slide, please. Given that we have 3.2 years average fixed interest rate maturity, we do see that we still have low cost of debt and relatively long-dated maturity profile. You can also see, as I mentioned before, that within 1 year we have SEK 5.3 billion in outstanding bonds and loans. On top of that, we had, at the end of Q2, SEK 4.3 billion in outstanding commercial papers. Of SEK 3.7 billion in bonds outstanding for the next 12 months, we have already repaid SEK 500 million by 4th of July. And our ratio of liquidity sources is well above 1.5x, thanks to large divestments. And as I also emphasized before, we are going to continue with divestments. We have also been working to broaden our access to financial markets. We did our first transaction in Schuldschein market here that was closed end of June. And after that, we have announced after the report -- or after the end of Q2, we have announced, on 13th of July, that we have successfully priced our inaugural U.S. Private Placement transaction with U.S.-based investors. Our social USPP was issued at 5 and the half of the amount of $100 million is at 5 years and the other half is at 10 years. And this was priced with a spread to maturity of Treasuries plus 325 bps for 5 years and plus 350 bps for 10 years. And then at the time of pricing, those levels were equivalent to a 5-year euro yield of 4% or 4.36% or mid-swap plus 279 bps and a 10-year euro yield of 4.87% or mid-swap plus 290 bps. So this is also showing that our low-risk assets have access to capital markets across the world. Next slide, please. One important issue that many of our investors are concerned about is our joint ventures. And first let me just emphasize one important point. And that is that yesterday we sold 25% of shares in Solon to OBOS. We announced a week ago. And yesterday, Norwegian Competition Authority has approved that sale of 25% of the shares to OBOS and the sale price was NOK 880 million. So we are happy that OBOS is taking a stronger position in Solon. And before that, we also sold our equity-linked instrument in SMB or Svenska Myndighetsbyggnader to Kåpan, which is Swedish Pensioner Fund or Swedish institutional investor. And we also think that, that is very good that Kåpan is taking a larger responsibility for that joint venture. Those 2 sales are not, how to say, are not one-offs. This is, to be very clear, start on our process to systematically reduce the proportion of joint ventures through divestments. And in that way, strengthen the balance sheet, increase transparency and focus on core operations, because we are very humbled that market has had a view that given the large number of joint ventures that it's difficult to see all moving pieces. And we are committed to strengthen the balance sheet, to increase transparency, and to focus on core operations. And that means that we will continue to divest joint ventures and financial assets. But in terms just for information, it is also important to note that we have a relatively low LTV in our joint ventures. On average, our LTV joint ventures is around 40%. But despite that, we do think that reception of large number of joint ventures has not been good for our business and we will make sure to reduce that and to continue to divest joint ventures. Next slide, please. Our main asset is actually our income where we are serving needs for social infrastructure in the Nordics. And in the way, being a long-term player, sustainability is core of our business. And as you can see, we are committed to continue to invest and to become climate positive in the entire value chain. And at the next slide, Slide 13, you can see also that this has been seen by rating agencies, and you can see that, for example, we were voted or named by Sustainalytics as regional top rated 2022. You see also here our rating that was from Sustainalytics that was at 11.5, which is very low ESG risk rating. After that, Sustainalytics has decreased our rating to 10.7. So currently, our ESG risk rating with Sustainalytics is 10.7, which is much lower than our peers, and which is very strong given that we have a large amount of residentials that historically have been difficult to do certification on. However, we are investing heavily in order to decrease our CO2 emissions from our residentials. So strong sustainability ratings when the rating from Sustainalytics is now at 10.7, which is very close to threshold for negligible ESG risk. Next slide, please. Let me sum it up in few key highlights. First, our income is CPI-linked rental income, and we have been able to deliver a strong increase of rental income during the first half of the year. And on like-for-like basis, this exceeds base inflation by 1.3%. Second, we continue with disposals, continuing to strengthen the balance sheet. We have sold assets for SEK 9.5 billion. And the book value of those assets was SEK 9.3 billion. The net value of the disposals after deduction of deferred tax was SEK 9.2 billion. Number three, we do have a strong balance sheet with deleveraging in focus. LTV at the end of Q2, 46%, and ICR of 5.6x. Number four, sustainability is core to our business model with ambitious 2030 climate targets. We continue to present stronger rating. And as I emphasized before, our latest rating from Sustainalytics is almost at threshold of negligible ESG risk with score of 10.7. We continue to invest in our communities and we have offered 300 young people summer jobs in SBB. And finally, our fixed interest rates duration of 3.2 years are supporting our strong position where our average interest rate is, at the end of Q2, 1.46%. And you can see from the report that also, bonds that are maturing, some of those have much higher interest rates, for example, bonds that we have after taking over Offentliga Hus. So we do think that we will be able to continue to deliver strong ICR, basically thanks to that our income is continuing to increase even better than inflation and that we have fixed interest rates coverage for the next 3.2 years. So to sum it up, SBB has strong position, and we continue to deliver on our targets, and in the first quarter, we delivered strong cash flow that -- for the first half year, we delivered strong cash flow, where cash flow from operating activities increased with 57%. We have full focus on our core business of delivering needed social infrastructure. At the same time, we must also be humble in the face of the fact that the war change on 24th February of this year. We cannot do much about it. However, we can always influence our work and to be prepared to learn from our mistakes and work to be a little better every day. We do have strong delivery regarding operating net and cash flows, and this shows that we are on the right path to become even stronger tomorrow than today. We are also very clear to our shareholders and our credit investors that we will do everything necessary to get a better rating. And given those measures that have already been taken and planned, we also find no reason to reconsider our current dividend decision. So I'll stay there. Thank you very much.

[Operator Instructions] We have a first question from the line of Helen Rodriguez with Mizuho.

I have a couple of questions, please. The first one, can you please explain the nature of the total return swaps that you alluded to? What is the underlying asset and what's the purpose? And where do we see it in the accounts? And then I've got a sort of boring accounting question. On the income statement, I can see the changes in the value of financial instruments, which may be the TRS, minus, well, 1.444, and the changes in value property, minus 836. But then when I look on the balance sheet, I'm probably being a bit thick, but I can't -- I can see financial fixed assets at fair value, and that seems to be going up and derivatives is going up. And the other category is going up. So I don't see where that write-down that you have in your income statement is feeding through to the balance sheet. And then a third question, if I may, is you mentioned doing secured debt. Obviously, your bonds don't have any securities. So would you contemplate priming those? And how much security would you be willing to take in order to achieve closer to your 1.5% current funding level? And what consideration would you give to your unsecured bonds in such transactions?

Thank you for the questions. Let me start first with TRS. We use TRS against the listed shares. And we have, I think, the main ownership there is Heba, as we have said last year, and that has been for the time being. Given the -- if I continue on the -- and the old changes in financial assets are marked to the market values, and those are, of course, affecting the balance sheet. So, please, do also send your detailed numbers to our CFO, and you will get the detailed composition. But everything is affecting the balance sheet and that is also why our net or EPRA NRVs decreasing, because it is affecting through the changes in financial instruments. Then concerning the issue of secured debt. We have a very good relationship with Nordic banks. And we have, right now, 19% of our debt that is secured, and our financial target is to be below 30% secured debt. And at the same time, we show to issuance in Schuldschein market and issuance in USPP that we also can issue unsecured debt in the global markets, because both Schuldschein and USPP are unsecured debt. So we will continue, when needed, to issue both secured and unsecured debt, but also have, how to say, been under thresholds for how much secured debt we will take in.

We have next question from the line of Fredric Cyon with Carnegie.

Yes. A couple of questions from my side. Starting off with a very simple one. Earnings capacity is -- that does include all of the latest deals or only deals that were communicated prior to the end of the quarter?

Could you please repeat your question?

Yes. So regarding the earnings capacity at the end of the report, does that include all of the latest deals?

That includes all of the deals that have been closed before the end of the quarter. And in terms of split, it is divestments of like SEK 6.2 billion. So it is additional SEK 3 billion of divestments that are not included, those that have been announced after the end of the quarter.

That's clear. And moving on to the yearly contribution in the second quarter. If you look at the property management profit, it was rather low. I think it was somewhere around SEK 80 million compared to SEK 300 million in the first quarter. What are the reasons for that large decrease Q-on-Q?

The largest reason for that is that income in Solon in Norway has been negative. So that is main explanation.

And why is that?

And that is -- Solon is having some larger costs in the first half of the year. And this is still assessment because the company is selling residentials and they usually have better profit in the second half of the year.

And then moving over to the debt side. So if you look at the total interest bearing debt, it increased slightly in the second quarter. And of course...

That is mainly because of the value of changes in currency.

Okay. But during the first half, you invested close to a little bit more than SEK 2.5 billion in projects in general CapEx. And if we assume a similar level in the second -- should we expect a similar level moving forward? And in terms of the absolute debt level, do you...

No, we will not...

We will not see investments being at the same level?

We will not see investments being at the same level. As we also emphasized, we are not starting any new projects. And we are also selling some projects with the same perspective. So the properties that we sold to Hemfosa are also having project character. So we will see much less investments in the second half of the year, probably closer to slightly above SEK 1 billion, and continue to decrease in 2023.

That's clear. And in terms of the quantum of debt, without our knowledge, of course, of the FX movement, it should decrease from this level?

It should decrease...

Deferred in fourth quarter?

It should decrease considerably because, as I said, we do have, of the announced sales for SEK 4.6 billion that are not come in and that will be used to decrease debt.

And then my final question on the cash position, because there have been a lot of rumors surrounding that cash position in media. So cash equivalent in the second quarter ended up at SEK 4.8 billion. How much of that is unrestricted?

We can use our... As I said before, we are reporting TRS as derivative. That is not cash, that is cash collateral. However, we are paying the difference to the banks when our instruments are decreasing. So including cash at hand and including divestments that are already announced, we will have a cash position of around SEK 10 billion.

We have the next question from the line of Jonathan Kownator with Goldman Sachs.

A couple of more questions left. So I noticed your admin costs have gone up. Can you comment on that level and whether that's sustainable or whether you intend to decrease that? That's quarter-on-quarter. And would it be possible for you to give a bit more clarity on your disposal ambitions? You've mentioned that a few times during the call. Obviously, there's a number of transactions that have already been signed. But how much more do you want to do and how fast do you want to do that? And do you think you can achieve that book value as you have commented?

Thank you. As I said before, we have sold assets for SEK 9.5 billion, and I also said that we see that we will be able to do additional SEK 5 billion within the next few months. So that is our full focus. At the same time, we have said that we will do what is needed to strengthen our rating position. So that is where we are.

So what is -- excuse me, what is needed? Do you think the SEK 5 billion will be enough or do you think that you will need to do more than this?

We do think that -- given the sales that we have done and given that we will not continue to invest, that we have stopped investments in new production, and given our underlying cash flows, we think that additional SEK 5 billion is a good number. But we will do what it takes.

Okay. And can you comment on the increase in G&A? It's almost the same level as 2021, just for one-half. So is that a recurring level or is there a temporary increase in there?

It is a temporary increase. It is like SEK 145 million that are one-off costs. And that is also the number I use when adjusting the operating profit.

We have next question from the line of Pranava Boyidapu with Barclays.

This is Pranava from Barclays. In the past week, there was a Bloomberg headline that you might be considering buying back bonds from the proceeds of the sales. Obviously, I don't see anything in the disclosures today. Is that something you're considering?

We do think that it is very important for us to continue to strengthen our access to capital markets. And part of that is actually doing divestments and then using divested cash to repay debt. And one part of repaying debt is buying back bonds. So our ambitions are not changed and that is also why we have an increased pace of divestment.

And I understand you will have around SEK 10 billion by the next quarter. But just looking at the cash flow statement this quarter, obviously, there have been a lot of changes. I assume that's because of the recent statement you made that on a going basis you will be making those changes. But roughly, the cash and cash equivalent number has come down by SEK 3.4 billion, and the change in cash collateral is SEK 2.1 billion. But as you said, the cash collateral is not cash. So should we think of this SEK 4.8 billion cash and cash equivalent as including the SEK 2 billion balance of the cash collateral? So does that mean that what you actually have as positive is that SEK 2.8 billion.

Cash collateral is derivative. However, if the value of the financial instrument decreases, then we have to pay for the difference or to sell the assets. So assets are already marked down. So that is how it is. So there is no additional exposure.

We have next question from the line of Patrick with Aviva Investors.

This is Patrick Noel, Aviva Investors, France. I have a question about your loan-to-value, which increased from 42% at the end of the first quarter to 46% at the end of the second quarter. Sorry, but I don't understand why. Because you realized a lot of sales during the second quarter, so is it possible? Can you explain that?

Yes. And the explanation for that is that we have not got all cash from the sales yet. As we write in the report, there is additional SEK 4.6 million of cash that will come in, in the next quarter. So that is one side of that. The second side is that we have marked down our financial assets.

So you write down?

Yes, we have -- as you can see in the report, we have write down our investments in financial instruments. So we are reporting changes in the value of commercial instruments for the first half of the year of SEK 1.8 billion.

1.8?

SEK 1.8 billion. But the main explanation is that cash from the divestment is coming in, in Q3 and that is SEK 4.6 billion.

Sorry, I don't understand. What is the amount you write down, 1.8?

No. I said that we are reporting in our report that changes in the values of financial instruments are included with minus SEK 1.8 billion.

We have next question from the line of Yi Qian with Atlanticomnium.

I have some simple questions regarding the accounting, because you reported negative movement in property valuation, but then you also have some positive unrealized property valuation gains. So does it mean that actually in the asset disposal, you actually reported losses instead of some gains, and which asset class is it mainly?

We are selling the assets. As I said before, we have sold assets for SEK 9.2 billion in total, comparing to a book value of SEK 9.3 billion. However, when you sell the assets in Sweden, we sell assets through the companies by selling the companies. And then you have some discount for deferred tax. On the other side, you will get also effect by dissolving some old deferred tax.

Okay. Understood. And then the second...

We are selling at a higher value than book value. And then we have some discount for deferred tax because that is the only tax that you are affected by when selling the companies.

Okay. Understood. And then my next question is regarding the rental growth going forward, because basically, this year, you're still using the 2.3% inflation number of last October. And with the Swedish CPI so high at 7%, how can your like-for-like rental growth showing not to compose the inflation this year? Or we should still expect some lagging effects over the next year maybe?

You should expect that we will deliver increase in income in accordance with inflation, whatever inflation needs. So if inflation is 7%, 8%, then our income will increase 7%, 8%.

Okay. And then in terms of the leverage ratio, I mean, you've mentioned all the measures that can improve your leverage ratio? And at what level will you consider maybe changing your dividend distribution plan?

As I said into introduction, we have a strong focus on continuing to do divestments. And we do think that given the measures that we have already taken and given measures that are planned through divestments, that we should be able to continue with our current dividend decision. So there is no change there. But our focus on continuing to sell assets is very clear. We see that we have buyers that appreciate our assets. And we have shown that by selling since late April, within late April and July, we have sold assets for SEK 9.5 billion.

We have next question from the line of Fredrik Stensved with ABG.

First question on the property value changes in Q2, negative by about SEK 800 million. Is it possible to share any sort of details on specific segments or countries or where these negative revisions entered through.

The negative revisions are coming for Swedish rent-regulated residentials and basically those that are within projects. So it is affected by valuer's expectation on how the increased construction costs will affect the final valuation. So that is a plain explanation. On community service properties, they have actually slightly positive value changes, thanks to increased income. And we will probably have even better in the next quarter when valuers take into account expectation for CPI next year.

Understood. And then second question on sort of that same question and maybe circling back to the last question there as well. You have divested properties for SEK 9.5 billion, book value is SEK 9.3 billion. Is that book value the Q1 book value or the Q2 book value when sort of markdowns already have been done?

It is book value when the deal is done, Fredrik. Because when we said that something is at the book value, that means that is at the latest valuation for the asset. Because we don't have any other book values than those that are coming from external valuation.

We have next question from the line of [ Pierre Borsky ] with HBK.

A couple of questions from my side, if you don't mind. First, about rent above the CPI that you report. Can you comment a bit on the dispersion of this, i.e., are almost all assets increasing rent above CPI or at least at CPI? Or is the large part of the portfolio, for example, 3%, 4%, 5% above CPI, and then you have another part that is below CPI, and sort of like the average is about the 1-point-something percent above? And then secondly, are you going to change your cash flow reporting going forward to report on a net basis?

That is already changed -- Sorry, but that is concerning the cash basis. That is already changed in this quarter.

Yes, yes. But are you going to continue reporting like this going forward?

Absolutely.

Okay. Understood.

And then on the CPI, the reason why we are delivering better than CPI is coming from refurbishments of both rent-regulated residentials and community services and also on new leases on community service properties side, because we have low rents from the beginning. That is why what I have tried to emphasize is that our rents are relatively low, and they are like 60% of the replacement cost. And that gives us an opportunity to increase the rents in connections with prolongation of the leases. So I should say that, on the positive side, you have refurbishments, both rent-regulated residentials and community service properties, and you have renegotiation of community service properties. On the negative side, you have that rent increase in rent-regulated space has been around 2%, which is lower than CPI. But if you include all those 3 components, then you get the delivery that is better than CPI. And that is why we have been delivering since -- I mean, we have published a number for the last 3 years, but we have been delivering that since start of SMB.

Okay. That makes sense. And then just on your JVs. Firstly, does your earning capacity that you disclosed include anything from JVs? Or is that purely on your fully owned assets? And then do the JVs, are they completely separated sort of from the parent company with own funding structures and no sort of funding commitments or guarantees, i.e., if something were to happen in those JVs and they no longer are attractive assets, could you sort of like cut them off without any further losses? Or are there any parent guarantees or anything else that would require you to either fund or otherwise support these JVs?

I mean, our largest JVs are with strong partners. For example, with Kåpan. And there we have 2 large JVs. The one that we are decreasing our exposure, and there is ambition that we will sell also shares in Svenska Myndighetsbyggnader, SMB, to Kåpan. We have also another JV with Kåpan that is owning residentials in Stockholm, where we own 50%. We have Solon that we own with OBOS, which is a large Norwegian business, where we have sold 25%. We do think that we should be able to exit all JVs with any additional LTVs and those JVs are, on average, at level of 40%, and we do think that we can exit JVs with any, I'd say, additional requirements on us. However, the important point here is that it is obviously that market has been concerned about our JVs. And that is why we have been very clear that we will make sure to sell out from the JVs and, in that way, clean the structure and increase the transparency. We also report JM as JV and there we don't have any, how to say, we don't have to support JM and we just own more than 30% of that company.

No, no, I understand sort of like the strategic ambition for the JVs and the strong partners, but I'm more thinking from a corporate and a funding structure perspective, if we hit like a massive crisis and all these values sort of like decrease, do you have any funding commitments to those JVs? Or could you, if they no longer become economically sustainable, just sort of like cut them off, write down your equity investment in those to 0 and sort of just not worry about it going forward? It's more sort of like a worst case scenario consideration. Would you then need to inject additional cash?

No, in worst case scenario, we can just cut our shareholding to 0. That is the worst case scenario.

Okay. Perfect. And then just 1 last thing. You mentioned SEK 145 million of one-off costs in your central admin, I believe. What exactly is that related to? And is it sort of a true one-off or is it going to phase out over time?

No, it's true one-off and we are also taking the cost that not are fully paid yet. So that is true one-off.

Thank you. Ladies and gentlemen, that concludes today's question-and-answer session. I now hand the conference back to the speakers for closing comments. Over to you, gentlemen.

Thank you all for listening, and we are emphasizing that we are delivering a strong operating net that landed at SEK 1.3 billion for the second quarter. Our cash flows increased with 57% for the first half of 2022. So our core business is delivering strong and we are fully committed to continue to divest in order to strengthen balance sheet, and in that way strengthen our position. Thank you very much.

Thank you very much. Ladies and gentlemen, the conference has now concluded. Thank you for attending today's presentation. You may now disconnect.