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

Welcome to SBB Q4 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to Treasury Director, Helena Lindahl. Please go ahead.

Good morning, everyone, and welcome to today's call. My name is Helena Lindahl and I am the Treasury Director at SBB. Today, we will be presenting our quarterly earnings for the fourth quarter of 2023. The people who will be presenting for you today are CEO, Leiv Synnes; Finance Director, Daniel Tellberg, and myself. Leiv will begin by sharing some of the strategic and financial highlights for SBB during the quarter and full-year and give you an overview of the performance of our business units. After that, Daniel will walk you through our financial statement and I will discuss the state of our financing. We will end with a summary and a Q&A. With that said, I would like to hand over to Leiv. Please go ahead.

Thank you, Helena. I will walk you through our key financial metrics, our execution on the new strategy as well as the new group structure. It is our ambition to provide transparent understanding of our financial position and strategic direction. As usual, we value your insights and questions and I look forward to a productive discussion during the Q&A. Looking at some highlights from the quarter. We continue to execute on our strategy and have implemented several measures to improve our financial position. We've continued our work with improving financial stability and liquidity. In the past 18 months, we have reduced our debt by SEK 33.5 billion. As you can see, our full-year net operating income has grown by close to 11% like for like. This shows that our strategic direction is effective and yielding results. Looking at our debt. All gross debt has fixed interest rate with an average maturity of 3.4 years. This gives us a good degree of control. We have seen a pressure on property valuations in 2023. In the fourth quarter, they dropped by 2.9%, and for the full-year, by 12%. High inflation has led to higher interest rates which together with weak credit metrics are the main reason for a negative development of the SBB properties and also the general trend of the property market. However, we are seeing sign of improvements with higher market valuations of real estate companies and greater access to market financing. We take this to mean that the downward pressure on properties is starting to ease and one can be a little bit more optimistic of the future in 2024. Our interest cover ratio at 2.3 remain at acceptable levels. Let's move on and look at execution of our new structure and strategy. During the quarter, we have made significant progress implementing our decentralized group structure consisting of 3 business units. The new structure will create better governance and transparency and will improve access to bank funding and enable other capital raising. First of all, almost all of our educational properties have been transferred to Nordiqus which was formally called EduCo. In November, SBB reduced its ownership to 49.84% to optimize its capital structure and thus representing a significant milestone for SBB. Nordiqus were able to raise SEK 16 billion from banks and this has increased the ability of the SBB group. In the quarter, we also decided to defer interest payments on our hybrid bonds in accordance with the terms. This frees up even more liquidity in the short term. We remain firm in our reaction of all allegations by the opportunistic hedge fund that SBB is in breach of the EMTN consolidated coverage ratio covenant. In February, we were informed that the same fund has initiated legal proceedings which we also consider to be ineffective. With support from our top-rate legal counsel, we are confident that SBB will be able to protect itself and its stakeholders. I would now like to discuss the performance of our business. Our updated group structure reflect our strategic goals and create more transparency and open up for more funding options. As of today, our Residential properties are valued close to SEK 30 billion with SEK 6 billion in joint venture and associated companies. This segment remains stable and profitable with a yield of close to 4%. Progress within the community portfolio are valued at SEK 44 billion and joint ventures and associated companies contribute to close to SEK 2 billion. With a yield of 5.3%, it shows that financial health of the properties in this segment is solid and there is strong demand. Overall, and the occupancy of the group is 94% with very low fluctuation. So independent on the cycle, SBB's properties remain strong. If you take a look on education, you will see that the property value that goes into SBB's books now stand for SEK 0.6 billion. This is of course after the -- this is after the deconsolidation of almost all properties that now are in Nordiqus and which is now majority owned by Brookfield. The joint venture, including Nordiqus stands at SEK 11 billion. The centralized group structure is essential to achieving a more beneficial financial position for SBB. This structure will give each segment better flexibility and financing and growth opportunities. And the management of each business area will be more focused, yielding result in the future. Let's look more closely into each segment, starting with Residential. Our rental income stands at SEK 1.4 billion. We continue to prioritize regulated leases which has led to ramp development consistently outpacing inflation over time. Given the promising demographic dynamics and opportunities for development, we are well-positioned to capitalize and we have little downside risk in the exposure. Since the current rent control system were introduced in the 70s, the rents have never gone down in Sweden. So the downside risk in the Residential space for Sveafastigheter and for SBB is very low. Regardless of the economic cycle, population growth is increasing, and that over time leads to higher demand. Our organization as well as the management and the new Board will be able to facilitate on growth going forward. We are now exploring the possibility of raising equity in the Residential segment under the label Sveafastigheter. Let's take a look on the community segment. With a focus of government-funded tenants, we ensure minimal risk of rent loss. Nearly 100% of our rental income is inflation-linked, providing stability against inflation and market shift. The leases are long and the properties are in good locations. Sustainability and ESG considerations are important for SBB. For example, elderly care properties make up 30% of our portfolio, reflecting the social importance and benefit of our business. I'm also pleased that investor interest in partnership in the community segment remains, indicating confidence in the business model and offer us greater flexibility if we decide to execute on this opportunity. Finally, let's look on education. As mentioned before, we have a partnership with Brookfield regarding the company Nordiqus which is Europe's leading public education property platform. It's a unique platform for education. The collaboration with Brookfield ensures a stable income flow to governance-backed income with minimal tenant turnover. Nordiqus showcase a high lease renewal rate with rental income almost entirely inflation linked which protects our earnings against inflation and keeps the business segment very stable. Through careful financial planning, our properties maintain predictable and provide safe earnings, a key factor in eventually ending up with the investment grade rating. With that said, I would like to hand over to Daniel.

Thank you, Leiv. Now let's go more into detail on the financial statements. We understand that our statement has increased in complexity as a consequence of the Nordiqus deconsolidation. As of November 22, SBB holds a 49.84% stake in Nordiqus. Following the shift in majority ownership in line with our new strategy and decentralized group structure, SBB has deconsolidated the business now reporting Nordiqus under joint ventures and associated companies. All activities related to Nordiqus prior to November 22 are reported as a discontinued operation. This has also resulted in a more complex but still transparent reporting in the quarter. It is worth noting that the deconsolidation process has a minimal impact on our earnings per share. On a like for like basis, rental income for Q4 compared to the corresponding quarter saw an increase by 6.2% compared to the previous year. Similar, net operating income grew by 6.1% on the like for like basis. Like for like full-year, our rental income increased by 8.8% and our net operating income increased by 10.9%. This is a significant achievement that also provides attractive long-term opportunities and provides an attractive opportunity in an otherwise challenging markets. Quickly looking at the yield and occupancy rates. We can see that our yield stands at 4.8% during the fourth quarter and that the full-year average is at 4.6%. Our occupancy rates remain high at 94.2% for the fourth quarter and the full-year average of 95.6%. This is a slight decrease much related to the deconsolidation of Nordiqus. This puts us in a competitive position for when market conditions improve further. Now let's look at some key takeaways from the income statement. During the quarter, net operating income remained resilient and showed improvement despite reduced income from divestments. There was a decrease in property value following higher yields. The value development for SBB's properties has been minus 15.2% over the past 21 months. Under the same period, consumer price index has increased by 19.3%. This means that for SBB's fully indexed properties, the real decline in value can be estimated at 34.5% over the past 21 months. Interest rates has increased as a result of increased inflation although current trends suggest a tendency of decreasing, hinting an improvement in financial markets. Operations related to Nordiqus prior to the 22nd of November are listed as a discontinued operation following the transaction with Brookfield. I would now like to hand over to Helena to go through our financing.

Thank you, Daniel. The primary focus for SBB is of course to reduce the debt levels, but also on the reliance on individual sources of finance. We believe that our decentralized group structure will aid us in this effort. And our work to strengthen the financial position of the company continues. And as mentioned before, we had implemented several initiatives to accelerate this. Our long-term objective has been set to regain an investment grade rating. And this work is already underway with implementation of our new structure and the active steps we are taking. If you look at our loan-to-value ratio, it stood at 54% at the end of the quarter. This is a level that we want to reduce to achieve a better long-term financial position but it is not a level that absolutely stands out in historic terms for a company with SBB's profile. And of course, the historical variation is attributed to changing market conditions and mostly, a consequence of revaluation of properties a few years back. Next. Our long-term funding is attractive as seen by our 3.4% average interest maturity and low average interest rates at 1.8%. Our average debt maturity stands at 3.6 years with as much as 60% of our debt maturing outside 2026. This debt has an average interest rate of 2.18%. Let's look at our top priorities, increase liquidity and reduce debt. Through active management of our debt portfolio, we have achieved a substantial decrease in our debts on a like for like basis both through, deconsolidation debt and actively managing the debt portfolio. Our aim is to continue to reduce debt further through operating cash flow, strategic divestments, and partnerships with equity partners to strengthen our financial position further. Next. Liquidity. Liquidity is in the short term remains a top priority for everyone in the company and it is essential in order to bring SBB into a more stable financial position. We have achieved significant progress and aim for at least SEK 3 billion at any given point in time in liquidity. Our goal is to maintain our cash sources, cash uses ratio above 1% -- 1.0. And there are several processes are ongoing to continue to manage both sides of this shard. It currently stands at 0.8. As you can see, the proceeds from the Residential IPO and partnerships are not yet included in our liquidity prognosis since we want to be prudent but this will of course improve our position when they materialize. If needed, we will continue to selectively sell properties to support our liquidity targets to ensure financial stability of the company. Since the graph has a 12-month outlook, it does not, for instance, include the 2025 bond maturities. Therefore, the graph doesn't adequately highlight the need -- it does not adequately highlight the need to continue working on strengthening our liquidity. It's an ongoing work. With these comments, I would like to turn back to Leiv, who will summarize.

Thank you, Helena. In conclusion, we have been able to make significant progress in our execution of our new strategy. Last year was a challenging year for the sector, but we didn't hold back to take strong action to plan and execute to improve the situation for SBB. At SBB, we are working to improve both liquidity and the financial situation as a whole, but we have implemented significant measures both during '22 and '23, and we will work hard to make improvements also in '24. We are confident that we are working from a solid plan and that we will achieve this and that we will see a better SBB in 2024. I'm pleased that we now have been able to achieve such a high growth in revenues, where the -- also the net operating income had a high growth pace with close to 11% like for like growth. That's very good and it shows that the fundamentals of SBB's business is strong. While our debt levels need to decrease, it's worth to notice that the average cost of funds in SBB is 1.78% and that we have a fixed interest term of 3.4 year. So we have a solid financing. The market has begun to transform and higher market valuations of real estate companies and greater access to market financing can be seen across the sector -- seen across the spectrum. My assessment is that the conditions in the financial market are improving. For SBB, this means that we have the largest negative asset value developments behind us. And that value increases in the coming years cannot be ruled out. I am confident in the continued growth of our portfolio and the continued growth of the revenues. That concludes our presentation today. Let's move on to Q&A.

[Operator Instructions] The next question comes from Fredrik Stensved from ABG Sundal Collier.

May I start with 2 questions on the deal that you announced 2 days ago? So one question is, what's your ownership share in the JV of the shares? And secondly, what's the maturity of the SEK 5.2 billion loan?

We -- it was a competitive process to raise funding in the structure. SBB has several investors looking at the transaction. And in the end, we chose Castlelake, which proved very strong throughout the process. We will inform the market a little bit more in the Q1 interim report where we also see the ownership and the duration. For us, this is a long-term collaboration with Castlelake, and it makes SBB much stronger.

Then I have one question on sort of the bank discussions regarding secured debt. You mentioned in the report that you did prolong SEK 100 million of secured debt during the quarter and you took up SEK 400 million new secured debt. Are there any sort of examples where you have not been able to prolong existing debt? And you also have a little bit more than SEK 2 billion maturing now in Q1. How are those discussions progressing? And what are the banks saying?

I think SBB is a large company with access of various funding tools. And we have -- through the last year, we have shown that we have access to both equity investors and debt investors outside the Nordic region. So I would say that we are confident that the Nordic banks would like to prolong the funding to SBB. And should that not be the case, we have a lot of other options to fund the properties as we have shown in the past transactions. So we are not that worried about refinancing excellent assets with low loan-to-value.

The next question comes from Edoardo Gili from Green Street.

First question for me is, do you have an update from the investigation conducted by the Swedish Financial Supervisory Board?

No, not at the moment. We submitted our response to their questions a while ago and haven't heard anything since.

Secondly, do you have an update regarding the dividend to be paid? I mean after pausing the coupons and the hybrids, what does that mean for the dividend to be paid later this year?

Yes. As we have expressed earlier, we're aiming for paying dividend in June, but that decision needs to be taken by the Board at a later stage and it depends on the various factors.

Can you explain a little bit more of these factors that you're talking about?

Yes. The financial situation for SBB at the moment. And if the financial situation is strong, then it's likely that the Board will make the decision and pay the dividend. And if the opposite is the case, then we need to -- then that decision is not so easy to make.

And thirdly, regarding the potential IPO, how do you see that being feasible when you see other Residential companies like Neobo trading at discounts to NAV? How is that feasible for you going forward for your listing with Sveafastigheter?

What is your assessment of the quality of Sveafastigheter regarding the asset quality?

And lastly, in terms of the NOI margin, which has decreased a little bit versus 3Q '23, do you have an explanation for that? It seems like your operating costs have increased quite a bit quarter-on-quarter on the continuous operations.

The operation for SBB has been strong throughout the last years. We see that the income from the properties in a like for like basis outpaces the costs. So we have a higher growth in revenues than we have in costs. And if the margin is dropping, then it's due to -- that we have changed the portfolio. And one change that we have done is that we have deconsolidated EduCo or Nordiqus.

The next question comes from Emanuele Arnoldi from Barclays.

Two very quick questions. The first one is the transaction announced on Sunday. It refers to SEK 5.2 billion of proceeds, of course. Shall we assume that these are the net proceeds and they will be for example available for coverage of the bonds as we go forward or is there any deduction that we should factor in like existing bank debt on these assets that need to be paid out or other uses for that. That's #1. And #2 is also very simple. Hopefully, a little bit again on the dividend and the hybrid. In the table that you have on the annual report, which is actually very helpful for uses and sources in 2024, you're saying paying the dividend, which I assume is the old dividend, which was declared but never paid for SEK 2 billion more or less. And then paying the coupon on the hybrids for more or less SEK 500 million. Are these 2 things necessarily going together? So did you represent it like that because if the dividend, as you explained, as you would like to, is paid in June. Then obviously, you need to pay also the coupon, the hybrids before or the 2 topics is jointed and the pause on the hybrids was just instrumental for gaining time until June or for other reasons?

Thank you for your comments regarding the transparency of the cash uses and -- cash sources and cash uses. Regarding the table, it's what we expect to do based on the current situation. And then we have put up an outflow of cash for the dividend and also outflow of cash for the hybrid. This is what we expect. And the rules for the hybrid bonds is such that if you pay the dividend, then you also need to pay the coupon of the hybrids. So those should be like put together, I think. And it also needs to be noted that we had proposed to the Board not to pay any further dividend than this one. On the first question, I didn't really catch the question, but the net proceeds from the current agreement with Castlelake is SEK 5.2 billion. And both we and Castlelake have an ambition to continue the collaborations.

The question was, is the SEK 5.2 billion, is part of it necessarily going to repay some banks that were previously financing some of these assets, for example?

No. The -- these properties were unpledged.

Unencumbered.

Yes.

And is part of this SEK 5.2 billion likely to be used to or has already been used to cover some bank financing that has not been extended or I think if I understand correctly, I think you said you don't know going ahead. You're probably confident. In the past, everything has been extended so far.

Yes. We -- if you look on the bank debt, we have 3 parts of banks that you can say. One part was in Nordiqus EduCo and one part is in Sveafastigheter Residential portfolio and then the third part in our community property stuff. And then in the fourth quarter, we repaid all the Nordic banks in Nordiqus and obtained SEK 16 billion from other banks with aim to place those funds in the capital market in the USPP in 2024 based on the investment grade rating. And then the ambition is to do the similar things with the Residential bank funding. And also to achieve a good rating on that company. And then we are currently working on the community assets. And this shows that we -- there are opportunities to find even better bank cost of funds than the Nordic banks. And also this transaction with both Brookfield in the past and Morgan Stanley and now Castlelake shows that should the banks not want to prolong, there are alternatives for SBB.

The next question comes from Othman El Iraki from Fidelity International.

Just a clarification on the hybrids. So -- and the hybrids and the dividend because it's not really clear to me. So are you expecting to pay the hybrids this year because you've actually got the hybrid payment or the hybrid interest earlier this year. So if you can clarify that? And what does that mean for dividend? It's roughly -- I don't really understand. If you can clarify, please.

Yes, the clauses in the hybrid bonds terms is such that if you pay the dividend, you also need to pay all the deferred hybrid coupons. So if the Board decides to pay out the dividend, then within, I think it is 10 days, we need to pay the hybrid coupons.

So dividends, could be paid, say, in June. Is that what you said?

Yes, potentially.

Okay. Because I was just looking at the -- in the report, you were saying that there was no new dividend being proposed. That's why I'm a bit -- there's no new dividend for series A and B and D proposed by the Board.

Yes. The dividend, we have postponed the dividend for 2022 year's annual report. So the dividend we pay out is actually for the last year. And for this year, we proposed that no new dividend is added.

So the dividend to be paid in June is from last year?

Yes.

And going forward, do you think that you will continue to pay the coupon on the hybrid after June or you would think about your liquidity?

I don't know if I can say it now, but we need to send a press release about that, I guess, but the rating CCC and the ambition is, of course, to have our company in a strong liquidity position. And then we will make the decisions to be like a stable company from that perspective.

The next question comes from Yi Qian from Atlanticomnium.

I have a few questions. Looking at the long term, what's your perspective of the parent company? Should we see it as a pure holdco without any properties or do you plan to still hold some properties at the holdco level? And then the second one is still on the dividend, which I'm slightly unclear because the SEK 2.1 billion is supposed to be -- have been approved for the 2022. Can you still delay the dividend payments or it should be paid by during this year? And the last one is just a clarification regarding the borrowings at SBB Residential property AB. I noticed the interest rate is around 13%. I'm just wondering whether this borrowing, it refers to the present shares issued to Morgan Stanley or there's other lenders on this funding, please?

Regarding the dividend, then there are, to be totally transparent, there are like different opinions on whether the company needs to pay it or not. But since we have -- the previous annual general meeting decided to pay out the dividend, our ambition is actually to pay out the dividend if we have the capacity to do so. But legally, that is not certain that we must, but we will try to do it. And regarding the 13%, that's Morgan Stanley structure.

And regarding the long-term view of the holdco?

Sorry for forgetting that question. At the moment, we are only working on raising capital into the Residential area where we both look on discussion with large investors and also assessing the opportunities that we might have in the -- as a listed company. Regarding the rest of the properties, we are not conducting any discussions with investors at the moment. So that is, at the moment planned to be wholly owned by the parent. Having said that, we, of course, do structure the operations also for the community properties. So should there be a need to take in equity or to do something in that area, we will have the ability to do so. But currently, that is not like in the near-term focus.

The next question comes from Anders Dankvardt from Pareto Securities.

First off, on liquidity sources. So looking ahead, do you see any additional capacity in the banking system to aside from rolling existing maturing bank debt also adding on additional secured financing? And then also, secondly, do you see sort of these new transactions like the ones with Castlelake as sort of the main source of incremental secured financing going ahead?

Yes. SBB have a rather limited amount of debt in the Nordic bank system. And we can easily borrow a lot more. I think before we can do that, we need to improve the rating a bit. So should we first improve the general like financial stability of the company, then we can raise a lot of money from the local banks. Regarding Castlelake, I think the main focus for us now is to access new funding sources and to diversify the funding and also to improve the liquidity. I think on the -- to do so, we have entered in a partnership with Castlelake and previously Morgan Stanley. I think the preferred route for us is more like normal secured debt from banks. And also if we, at some point, succeed to come back to the capital market and regain the investment grade to use unsecured bonds. However, at the moment, we are a bit far away from access the unsecured capital market. But that will be like the long-term ambition, at least.

So first off, just a quick follow-up on that comment you made on secured bank financing. So if I interpret you correctly, you said that the secured bank financing right now, it seems that it is somewhat contingent upon you improving your financial metrics. Is that a correct interpretation or did I misinterpret?

Yes, it's correct. But maybe I can give some more color on it. It's not the whole company. Let's say, we have the Nordiqus, they will get an investment grade rating and they can easily borrow from the local bank market. And then we try to do the same maneuver with Sveafastigheter. And then we have 2/3 of the company that hopefully already this year can access the local bank market on similar or better terms than the peer group. We have better assets than the peer group as an average. And if we have the same funding as them, then there are terms, we would like to be better than the peer group.

And maybe final question there on Sveafastigheter. So how much secured debt do you have in the Sveafastigheter structure at the moment?

That will be disclosed during the process that we are currently in. So that is nothing that we will comment at the moment.

And just a final question on liquidity. So if I remember correctly, you still have some amount of that original intercompany loan down to EduCo or now Nordiqus still remaining. Is that correct? And if so, how much do you have outstanding?

Yes. So that is roughly SEK 5.3 billion, and that has been reported on a fair value basis for this quarter. So in the books, we have a carrying value of SEK 3.9 billion.

And that is receivables from associated companies, right?

Correct. And to give some color on that, that means that there will be some interest on that position going forward.

And I guess that one would be reported on their financial income or will you include that in…

Yes.

Final question on that. So of course, you're aiming to go for a investment grade rating in Nordiqus. Are you looking to refinance that remaining intercompany loan in conjunction with such a process if you go out to the capital market and raise new debts in that entity?

That is not the plan for 2024. For '24, we want to secure investment grade. And after we have done that, then we will see if there can be some changes. But in the short term, there will be no change.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Thank you. I guess that concludes the call. Thank you all for attending.