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

Welcome to the SBB press conference. [Operator Instructions]. With that, I hand over to the CEO, Ilija Batljan. Please begin your meeting.

Good morning, everyone. Today, we have presented the latest deal that SBB announced this morning, and that is that we are selling a 49% stake in our social infrastructure portfolio for public education, and buyer is Brookfield Super-Core Infrastructure Fund. Price for shares is SEK 9.2 billion in cash, with an additional earn-out of up to SEK 1.2 billion in cash. And just to give you a relation, depending on value of the earn-outs achieved, the transaction price represents between a 2.7% discount and a 2.7% premium to the book value as of Q3 2022. Next slide, please. Just to describe transaction related to our sales of 49% stake in our social infrastructure portfolio for public education to Brookfield, Brookfield is doing a transaction through its open-ended Super-Core Infrastructure Fund. And as I said, the transaction is -- that Brookfield is paying SEK 9.2 billion in cash upfront, plus up to SEK 1.2 billion in cash through earn-outs for 49% minority stake in EduCo. SBB is creating EduCo by contributing our SEK 44.9 billion social infrastructure portfolio for public educations. And public education in the portfolio includes preschools, elementary schools, upper secondary schools and university. The portfolio is today only owned by SBB, and we are creating new subsidiary, EduCo. SBB will consolidate 100% of EduCo post transaction, and the investment strategy of EduCo will be to invest in and manage social infrastructure assets within the public-backed educational sector in the Nordics, and will be the main vehicle for SBB's opportunities within the sector. As I mentioned before, the price, depending on value of the earn-outs achieved, the transaction price is SEK 43.7 billion. That is related to NAV, 2.7% discount or 2.7% premium to the book value of SEK 44.9 billion that was book value at the end of Q3. The initial yield is 4.1% at 2022 numbers and the 4.4% at '23 numbers, given inflation effect, and that's related to NOI. And in Sweden, we always really present yield, our talking in terms of net initial yield. We have two separate earn-outs. Those are expiring after 6 years from the transaction closed, and earn-outs are based on achieving refinancing terms or achieve the NOI yield on new development and acquisitions, respectively. Total maximum cash amount payable to SBB from Brookfield for our earn-outs will not exceed SEK 1.2 billion. Financing, existing external bank financing of SEK 6.9 billion and existing SEK 14.5 billion of inter-company financing provided by SBB to EduCo is in place, and it's a tenure of up to 6 years. And in SBB, we have a large amount of our debt that is fixed interest rate. And in EduCo, it will be fixed interest rates of 3%. EduCo have an intention to refinance the inter-company loan at market terms in medium term. EduCo's target loan-to-value, LTV ratio, is 50% to 55%. Given the strong cash flows and the high quality of assets, this will be -- this will lead to strong rating for -- strong rating position for EduCo. EduCo will be managed by SBB, and will enter into an asset management agreement with SBB. And on top of paying for operational costs, EduCo will also pay 1.8% of NOI to SBB for central administration covering the management of the company. EduCo will be chaired by me, Ilija Batljan, and Jenny Asmundsson that is here with me. Please, Jenny, come forward. Jenny is part of SBB's Group Executive Management Team, and Jenny be responsible for EduCo's operation. And Jenny, please tell to our listeners a few words about you.

Good morning. I'm Jenny Asmundsson, and I will be responsible for the EduCo operations. I've been with SBB since 2020, and I have a broad experience on the different segments within social infrastructure. I have been working with both management, development and business transaction in public and private companies as well as in municipalities over my 25 years in the industry. I'm looking forward to starting up this long-term cooperation with Brookfield, and I'm confident that this gives us a very strong platform for continuing growth and development of new educational infrastructure in the business -- in the Nordic region.

Thanks, Jenny. And if you then focus on rationale for the transaction, transaction is a real win-win deal, positioning SBB to continue delivering critical social infrastructure for municipalities and governments within the public education sector. On top of that, the transaction provides diversification of funding sources for SBB's business and accelerate the deleveraging of SBB's balance sheet with pro-forma loan-to-value of 42%, which is creating a position for SBB to achieve its target of BBB+ rating within a short time. The timing for transaction is very straightforward. The transaction is unconditional and expected to be completed in two steps at the first closing. That is intended to be completed on 30th December 2022 or latest in the beginning of 2023. It will be transferred, 77% of the assets, and a second closing for the remaining 23% of the asset value is expected to be completed in first quarter or second quarter 2023. Next slide, please. I will give you a few words about SBB and update on the numbers. Next slide, please. SBB is largest portfolio of social infrastructure in Europe. We used to say that we operate in most safest asset classes, social infrastructure in the Nordics, where 100% of leases are sovereign or public finance leaseholders and highly regulated Swedish residential assets. Our assets are, as you can see on the slide, in attractive location in major Nordic cities. Occupancies close to 100% of available assets in terms that we have some assets that are used for refurbishment or development, and -- or rolling numbers for 12 months forward. We have an income of SEK 7.9 billion, assets for SEK 154.5 million at portfolio book value. We have one of the longest duration, longest contract durations in the market, 11-year contract duration. Strong net initial yield of 4.1%. Average interest rate at SBB level, 1.89%. And as I said before, net LTV on total assets of 42%. We have today our business in Sweden, Norway, Finland and Denmark. Next slide, please. As you can see from this slide, SBB have a strong position in the field of social infrastructure and different segments. The first segment is social infrastructure for public education. Those are low-risk assets as preschools, primary schools, upper secondary schools and university in the Nordics, and are publicly funded as well as supported by strong demographics. On top of that, we have a social infrastructure for elderly care, social infrastructure for health care, social infrastructure for special residential care, which is publicly funded residential assets for people with special needs in a housing market characterized by structural shortages. We also have government infrastructure and municipal buildings, and we own a large portfolio of Swedish rent regulated residentials. On top of that, we have associated companies and investments, including that we are largest shareholder in JM AB, but also larger shareholders in terms of capital in Heba Fastighets and a few other companies. Next slide, please. We have been acting very focused this way -- this year after aggression on Ukraine and changed macro environment. We already, in the first half of this year, start the strong deleveraging program. This deleveraging program has continued and -- with focus on maintaining target LTV below 50% and ICR of more than 3x. On top of selling assets and creating us strong cash position, we have also used our position to buy back bonds. We did one of the largest buybacks here in the Nordics by buying EUR 631 million of bonds, including EUR 150 million of hybrid bonds and paying for that approximately EUR 500 million. EUR 150 million, as I said, were tendered across our three hybrids, and that is a maximum buyback that we are allowed within rating framework, and EUR 481 million was tendered across our euro, SEK and NOKs senior bonds. I think we bought a share of [ 15th ] of our bonds an average purchase price of 91.1%. This resulted in a positive effect on equity attributable to SBB's A and B shareholders of SEK 1.4 billion or SEK 1 per share. On this slide, you can see how we are building our pro forma cash and balance sheet. And if you combine that with maturities that you can see in the lower part of the slide, then you will see that we have a very strong liquidity position, SEK 17.3 billion in pro forma cash on balance sheet plus confirmed unutilized credit commitments, which is fully covering our bonds that are due in next 3 years, more than 3 years, covering both 2023, 2024 and 2025, including also repaying bridge credit facility. Next slide, please. A few more deep dives on transactions. This slide, next slide, Slide 8, you can see some more detailed information about EduCo, which is SBB's vehicle for social infrastructure within public education. This is leading social infrastructure portfolio for public education in the Nordic region. Unique asset class, publicly financed leaseholders under long-term leases with minimum turnover revenues, almost 100% inflation linked. We are continuing to manage those assets. Also, given our strong partnership and our track record working with municipalities, we are also innovation leader in designing and managing educational space. The portfolio has SEK 2.3 billion revenue on the 12 months rolling. Portfolio book value of SEK 44.9 billion, NOI of SEK 1.9 billion, net initial yield of SEK 4.3 billion according to book value, 13 years contract duration. And as you can see, strong exposure. 100% of portfolio in AAA-rated countries, Sweden, Norway and Denmark, and AA+ Finland. You can also see how the split related to contract duration is between different parts of the portfolio. Split by total asset value is that preschools are 47% of the portfolio, elementary schools are 38% of portfolio, and 15% of the value is coming from universities. Next slide, please. Continuing on transaction rationale, this is leading difficult to replicate Nordics social infrastructure portfolio for public education, favored by preferred relationship with municipalities and publicly-funded operators in the Nordics between the educational sector. As I said before, strong and predicable inflation secured cash flow backed by AAA government funding. Number three, essential nature of underlying assets in the Nordics in a market with favorable tailwinds. Nordics have strong demographic fundamentals. We are partnering with Brookfield, positioning SBB to continue to deliver critical social infrastructure for municipalities within the public education. We and Brookfield are, in this case, perfect match, and we'll be able to continue to grow and to deliver needed social infrastructure properties for education. And of course, taking in SEK 9.2 billion in cash plus additional potential for SEK 1.2 billion of cash is diversifying funding sources for SBB and accelerating our deleveraging with pro forma loan-to-value of 42% post transaction, and also strong ICR landing at 5.1x from 4.8x at Q3 2022. Next slide, please. I can tell you more and take long of your time bragging about our strong position, but I will just emphasize the fact that we are undisputed leader in the Nordic region and have a very strong relationship with municipalities and private providers that are delivering educational services to municipalities in the Nordics. Next slide, please. And at the last slide, you can see that we are undisputable leader in the sector with strong relationships that are difficult to replicate and with high barrier on entries -- high barrier of entry. And at Slide 11, you can see a few important points. One is that we have very long leases with existing leaseholders. Turnover for the space is negligible, both since properties were acquired by SBB but also prior. And we have very long leases across the portfolio. You can see that 46% of portfolio is longer than 10 years. And here, for example, two amazing portfolios in Norway, Trygge Barnehager comprising of 15% of 2022 revenues on 25 years lease, but also Laeringsverkstedet, where that is 15% of 2022 revenues on 35-year triple net lease. Those leases are in educational sector, typically without break closes. 10 to 15 years contracts for newly-signed leases. 100% indexed inflation and improvements -- and increasing standard is paid by the leaseholders or through a contract's price increase or longer contracts. As I said before, I think it's eight countries in the world having AAA rating. Three of those are Sweden, Norway and Denmark, and Finland is having AA+. Next slide, please. Demographics in Nordics, I don't need to take much time on that. But as you can see on the slide, it's very strong and also strong in comparison to the rest of Europe. So this is a sector with highly supportive macro conditions underpinned by attractive demographic, which create continuing strong demand. And just in Sweden, we need 1,000 new schools until 2030 with similar demand expected throughout the Nordic region. Next slide, please. We already have a very strong position in the Nordics, but partnering with Brookfield is giving us a strong opportunity to continuing organic and inorganic growth. Within the educational sector, we are best positioned to lead pan-Europen consolidation. Given strong financial position for SBB and backed by Brookfield, we will be able to be in a growth mode already in the next year and be best positioning to lead pan-European consolidation. We do see strong potential for continuing increasing revenue in EduCo. And we have long and unparalleled delivery in -- from our development team. And just -- I don't know, we have not sent, I think, press leases yet, but we will make sure to send press releases -- more information about that in the next few days. That we, for except got approved one of the largest zoning plan in one of the regional cities close to Stockholm, just an hour from Stockholm where we own almost 1/4 of central city [ industry ]. Next slide, please. Key ratios. As I said before, the transaction is accelerating SBB deleveraging. And you can see that post transaction, we are having a loan to value or pro-forma post transaction loan-to-value of 42% interest coverage ratio, increasing strongly to 5.1x and secured LTV being at a relatively low level of 18%. Next slide, please. I think we have in presentation, if you -- up in this slide, you can study those when you have the time and want to learn more about this amazing business. I will stay there for now, and I will take questions, please.

[Operator Instructions] Our first question comes from Fredric Cyon at Carnegie.

Ilija, congratulations for the deal. I have a number of questions. Starting off with you said that you will fully consolidate EduCo, and so how does the transaction alone affect your pro forma loan-to-value versus the reported in Q3 2022?

Transaction is leading to a decreasing LTV to 42%, and the major part of that decrease is from the transaction. On top of that, we have done a few other divestments in accordance what we stated in our Q3 report that we will deliver sales resulting in [ SEK 13 billion ] in cash.

So the numbers you referred to takes into account other things than this deal in isolation, what the press releases you have stated that, over the last 2 months, has stated? Or is it -- is it just the EduCo deal you're referring to here?

The transaction is pro forma to what we have been done by today, and that includes, among others, sales of joint venture shares for approximately SEK 2 billion.

That's clear. And then moving over to the EduCo portfolio. Will it be booked at SEK 43.7 billion on the books, i.e., excluding the earn-outs when the deal is completed?

On the books, will be booked according to late evaluation. And that is -- that we will be seeing where the valuations are in by Q4 this year.

But the earn-outs will not be included in the book value, right?

Yes, that is right. But that this -- you have like to size on that. The one is cash for selling the shares, and the other is that consolidated portfolio will be booked at the value that the value is assessed by Q4.

And then the intercompany financing to EduCo, will that change the fixed interest rate structure of SBB? And if so, with -- to what magnitude? .

No, because this is the financing that is already at place, and as I said, the SEK 6.9 billion of this financing is existing financing, and the rest is existing intercompany loans. The SBB's fixed interest ratio will be over 90% after the repayments of debt and also after the residential has been...

That's clear. And then the bridge facility that facilitated the hybrid and the bond buyback. Will you pay that back immediately after the closure of this deal, or will you retain it for a longer period of time?

No, we will pay that back, and it's not only that we are paying back. We will continue to -- with additional buyback of the bonds. We already completed SEK 630 million bond buyback, which is one of the largest bond buybacks ever done in the Nordics.

So when will the bridge facility be out of the books at the latest?

It will be fully out of the books in the first half of the next year.

Two more questions, and then I'm done. The previous LOI, is that part of this deal? Are those properties that were up for grabs previously, is part of this deal or does that refer to other assets?

Those properties are not up for grabs. It is rather that we are taking in minority investors by selling 49% of shares in EduCo, and we are not commenting our counterparties.

Okay. And then finally, on the EPRA NRV impact for this deal. Obviously, you mentioned the book value in various -- how you treat deferred tax, et cetera. But what is the net effect on EPRA NRV per share?

My view on this is that this transaction should not affect EPRA NRV per share given consolidation. However, we will make sure to have all numbers in Q4 also taking into account minority interest.

Our next question comes from Mr. [ Kumar ] at Barclays.

My first question is around the intercompany loan at 3%. Is it secured or unsecured? And in the context of this, what is the current cost of financing for SBB in the market? For example, that bridge facility, how much it costed for the company to take on that one?

Current SBB debt is house average interest rate of 1.89%. And the bridge, we have not communicated the margins for the bridge, but those are very favorable in relation to where our debt is priced, if you look at our listed bonds. And the SEK 6.9 billion of this -- of the debt is current bank financing, and slightly above SEK 14 billion is current intercompany loans. So the average pricing in EduCo will be higher than average pricing of SBB's debt.

Got it. And sorry, I think I missed that. Is it secured or unsecured intercompany loan?

The existing bank financing is secured, and the intercompany loan is -- given that it is consolidated within SBB is our security.

Okay. Got it. My second question is on this letter of intent of SEK 9 billion, which you canceled. Today morning, you announced. Can you please provide more color around it, like any reason for cancellation? Any additional color on that?

We are never commenting our counterparties. We have just tried to be clear in messaging to market that we have terminated that transaction.

Got it. And probably my last question is a bit linked. So does this complete your disposal program, or can we expect more to come in the future?

Yes. This is completed our disposal program in terms of where we have -- where we want to be to have a strong financial position, and we think that with this disposal, we are achieving a very strong balance sheet that is probably among the strongest in Europe and -- both on numbers. But I like your question, because it's very important that we don't only have low LTV after the transaction and strong balance sheet, but we also show that we have most liquid assets in Europe. And that is, I think, amazing message to our bondholders and to our shareholders that's in the market with strong macro challenges where no other players are able to execute what they have been promising, we have been able to execute on every point during this year.

[Operator Instructions] Our next question comes from Jonathan Kownator at Goldman Sachs.

Just wanted to go back on the NRV question earlier. And maybe this relates to the earn-out, but obviously, you're potentially selling at a small discount to face value before DTL. And just the value also includes the present value of the SEK 1 million -- sorry, SEK 1 billion asset management fee. So I was just wondering, I mean, obviously, if you adjust for the SEK 1 billion asset management fee, you're selling at a discount to book value for assets that you are keeping, obviously, for 51%. So shouldn't this have an impact on your NAV, which should be negative?

It should not, because the central cost that will be paid to SBB are perpetual, so that is a normal part of business. And as you pointed out, SBB will receive 1.8% of NOI as a perpetual payment for that. So in terms of NAV, this transaction is natural. Of course, because we are selling the shares, then you have to take into account the -- some discount for deferred tax, which is market practice for these kind of transactions.

Sure, that's fair. So let's just -- sorry, let's just assume we take into account the SEK 1 billion of asset management fee and you add that to the transaction value and you get these synergies, and that's absolutely fair. But you're still selling at 2.7% discount to book value, even including that before the earn-outs, right? So...

That is fully right, that the price that we are selling is 2.7% discount to NAV before earn-outs, and it can be 2.7% over NAV if the earn-outs are delivered. That is exactly so.

Okay. But that means that effectively, you're just waiting to understand what's happening with the earn-outs to put or not this 2.7% discount to book value in your numbers. Is that correct?

No, that is -- we will work to , of course, to earn extra cash from SBB by delivering on the earn-outs. But the day 1, the correct answer is that the day 1, the effect is 2.7% discount to NAV and the earn-outs, if delivered, will land transactions to 2.7% over NAV, which is a very, very strong message.

Okay. Just coming back on the repayment of the loan, so you said it was unsecured. What is going to be the strategy? I mean, what is an acceptable refinancing rate for that loan? I mean obviously, you're providing the loan at 3%, which is about the level of swap rates, I guess, on a blended basis. So are there any special conditions that need to be achieved in order to refinance the loan, or how are you planning to work on that strategy?

SBB's consolidated this business, so this is not a separate business. And in this business, we think that it's fair if our average interest rate is 1.89%. And given the buybacks and repayment of the debt, we will have more than 90% of our interest rates as fixed, then we think it's fair that having 3% average inter sales in this portfolio is actually 1.1% more than average debt for the SBB in all, including those properties.

Okay. But -- sorry, I'm a bit confused on that because again, I mean, I appreciate your reasoning on a consolidated basis on a see through basis, you still are to collect the cash until the company can refinance, meaning that effectively, the impact on your LTV is not 4 percentage points, but only 1 percentage point on a see through basis, 1.2 actually. So again, maybe -- so you don't intend to get that -- the refinancing done, and it doesn't seem for you to be -- what's the timing on that?

The timing first, let me just -- I'm collecting SEK 9.2 billion in cash and plus additional SEK 1.2 billion from earn-outs, and using that cash to repay debt will decrease SBB average interest rates even more. However, as we also said in the presentation, the ambition is to refinance the existing intercompany loans in EduCo within next 6 years.

And our last question comes from Mr. [ Galen ] at Green Street.

Congratulations on the deal. First question for me is in terms of the earn-out terms, you mentioned outperformance on CapEx deployments on new developments and acquisitions. Do you have a sense of how much deployment are you going to make?

We think that the targets for earn-outs are reasonable, and it is our expectation that we will be able to deliver extra cash to SBB from earn-outs.

And do you have a sense of the committed development pipeline for the EduCo portfolio?

Yes, we put a few of those examples in presentation. But as I mentioned before, SBB's development team is the best in Europe. And just as an example, we are -- and we will probably announce more details in the next 2 days. We are exactly now getting large zoning plan approved in one of the regional cities an hour from Stockholm and we're shaping where we're on like a quarter of the central city district. And of course, if you develop 1/4 of the central city district, that will include more train stations, but also schools and preschools and assets that will be very, very good to be owned by EduCo.

Understood. And last question for me is on -- so how do you get to the value of SEK 1 billion for the present value of the management fee in terms of from the 1.8% of NOI, just to get a sense of your assumptions there?

It has been in relation to pure cash -- pure cash value of 1.8% of the [ value ].

We have no further questions on the phone line, so I'll hand back to the speakers.

We have received a few questions by e-mail. Most of these have been answered already, so we will take just one or two questions. One of which is what will happen to the schools now? Can Brookfield guarantee the conditions for the rents, for example.

Brookfield is not managing the schools. It is SBB that is managing the schools, and the rents will be unchanged after this transaction in relation what they were before this transaction.

And then finally, we have a final question. It looks like a cheap deal for Brookfield to buy 49% worth of almost SEK 44 billion for SEK 10.4 billion. Is it a bad deal for SBB?

This is a fantastic deal for SBB, and I hope that it will be great deal for Brookfield. Brookfield is buying shares at a level that are corresponding to 2.7% discount to NAV before earn-outs or 2.7% premium to NAV after earn-outs. So I think this is a very good deal for all of us. But for SBB in particular, in two sense. The first is that SBB will be able to continue to grow and to be a strong partner to municipality to deliver properties for education. And the second is that SBB will, in this way, get more diversified financing and also will use cash of more than SEK 9 billion coming from the beginning and potential earn-outs to repay debt and decrease LTV and deliver stronger balance sheet.

Okay, thank you. I will ask you just to wrap up.

Great. And I just want to wrap up with message that we start this presentation with that SBB's sale of 49% of shares in SBB's social infrastructure portfolio for education is delivering to SBB SEK 9.2 billion in cash and potential for additional SEK 1.2 billion after earn-outs, and this is a strong message to the market on two very important points. The one is that SBB has the most liquid assets in Europe. And number two, that with this transaction, SBB is strengthening its rating position. Thank you very much, and thank you for listening.