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

Welcome to the conference call. [Operator Instructions] Now I will hand the conference over to the speakers. Please go ahead.

Good morning, everyone, and welcome to today's call. My name is Helena Lindahl, and I'm the Treasury Director at SBB. Today, we will walk you through the financial results for the third quarter of 2024. And joining me this morning presenting our results is our CEO, Mr. Leiv Synnes; and our Finance Director, Daniel Tellberg. Leiv will start with the key financials and the strategic highlights for the third quarter and an overview of our business units. Daniel will then provide a detailed review of our financial statements, and I'll provide an update on our financing in the end. We will, as always, finish with a summary and Q&A. With that said, I would like to hand over to you, Leiv, the floor is yours.

Thank you, Helena. If we start with the most important thing, is the development of the core business in SBB, we see that the rental income in the like-for-like portfolio develops quite well, close to 6% up. We see also that the net operating income develops well with 7.4%. So we are very happy that the properties continue to perform well. We also work towards better and better financial stability and high liquidity. And one goal for us is to reduce debt, and we have reduced the debt with SEK 43 billion during the last 2 years. And we're happy with that and we will continue to reduce the debt going forward. We have had some headwinds when it comes to property valuations. I think the wind is leveling off, and in this quarter, we had the value decrease of 0.8%. We believe that we will get some tailwind starting from next year and we'll get some help with property valuations and help us in our goal to stabilize the SBB Group. We have our court case coming up, and we're happy to see an end of the discussions about the financial covenants. So we will start in January, and hopefully, we will get a positive result in March. And we highly expect that. We strongly believe that the best argument is in our favor. We continue to deliver on the strategy in creating strong subsidiaries and associated companies, and we're very happy with the development in the core portfolio. If you look on more details about the achievements on the strategy front, we did some bond exchange, which we had the closing in July, and that resulted in SEK 1.6 billion in equity for the shareholders in SBB. And then later, we listed Sveafastigheter and we collected SEK 3 billion from the stock market. And that fund will help us to repay the maturing bonds during 2025. And Sveafastigheter will also get long-term financing from Nordic banks and additional credit lines, which will help them to continue performing well from the property side. Nordiqus, an associated company of SBB, has been able to borrow 10- to 15-year money in the U.S. bond market with an investment-grade rating. They have also received additional credit facilities and also are being able to give dividend to the shareholders in Q4, and they will continue to give dividend in the upcoming years. So we're very positive on the development in Nordiqus and also Sveafastigheter. And we also have a large ownership in PPI, a Norwegian company, and that company received a BBB- rating from Fitch with positive outlook. And that they have started to acquire properties and we're very pleased with the performance of that company, too. We have a strong project development team in SBB, and we are happy to -- we have been able to announce a couple of transactions lately, where we have divested properties or will divest properties for around SEK 1 billion, and that is elderly care and a property with Kriminalvårdens as a tenant. We're happy with the strategy execution. We believe that we should and we want to create a situation with strong companies in the SBB Group. We want to create a transparent group structure, and we are gradually achieving that. As I mentioned, we have Nordiqus and PPI, 2 strong companies, and we also have Sveafastigheter. So we will achieve transparency and also funding options for the group, which is very helpful going forward for SBB. If we look on the Community segment, we, in total, have SEK 45 billion as on property exposure. And some of it is controlled to 100% via SBB and some of it is controlled via strong associated companies. I think the property performance is very good with mostly index-linked revenues, and we see a strong development in the like-for-like key figures like rental income and net operating income. So a very stable business. Residential is the part of the company that I think will perform the best in the upcoming year. Due to that -- the rent development has been a little bit lower than the inflation in the recent years. And over a long period of time, the rents in Sweden for residential grow faster than inflation. So we expect that for the upcoming year the residential business will beat the revenue growth compared to other segments in the Nordic property market. So we expect a strong development on rental income and strong development of net operating income, and that is very helpful when it comes to property valuations. Education part of the SBB is dominated by the associated company, Nordiqus. And as I said earlier, they have a very strong portfolio from a property point of view. And now they have also a strong position when it comes to funding. With the investment-grade funding possibility and the infrastructure rating, and they can borrow for 10 to 15 years, it's quite a strong signal that we combine very strong assets with very long-term funding. It can't be more stable than that, I think. As I mentioned earlier, we had some headwind when it comes to property valuations, and things go up and down when it comes to valuations of real estate. If we continue to work hard with improving the rental income and also the net operating income and the EBITDA from the properties, I think at some point of time we will get some tailwind. And I believe that the development in the capital market will help us towards higher property values going forward. We see more or less stable property valuations during the last quarter when it comes to yield. The occupancy rate is decreasing slightly, and that is due to projects. We have emptied some properties for us to start new development projects, and we have also just recently finished development of some residential properties, which we are currently leasing out. So most of the drop in occupancy is due to projects, and we think that the occupancy rate will recover in the upcoming quarters.

Thank you, Leiv. Let's go more into detail on the financial statements. On a like-for-like basis, rental income for the period increased by 5.9%, while net operating income increased by 7.4% compared to same period last year. In general, both revenues and costs are rising, but revenues are rising more than costs, giving a positive development of net operating income. This is driven by the fact that we have managed to maintain maintenance costs at a low. This achievement is the result of a continued dedicated work to deliver on our strategic plan despite the challenging market conditions, which we believe are gradually improving. Together, the income basis provides stability and reduce risk by balancing income streams across the different segments. During the quarter, net operating income continued to grow and improve like-for-like. At the same time, admin and restructuring expenses are down compared to the same quarter last year. During the period, they remained high due to reorganization and legal processes, which we did not have in the last year. We have an ambition to reduce those costs by 50% by the end of 2025, and we believe that we're in the right way. There was a decrease in property values, but we are now seeing signs that the decline is leveling off. The decreases of nearly SEK 5.4 billion is due to both realized and unrealized changes. Of this SEK 5.4 billion, SEK 3.2 billion is unrealized, of which only SEK 0.5 billion is in Q3. The value of our property has decreased with 0.8% during the quarter. Rent development and lower capital costs are expected to lead to positive property value changes in the long run. Now briefly looking at the balance sheet and the asset side. The large change in property portfolio for the period is attributed to transaction with joint ventures and associated companies. The acquisitions are entirely attributed to dissolution of Kapan and Unobo in the preparation of the IPO of Sveafastigheter. The changes in other sales is due to structural measures rather than sale of assets. By that, I would now like to hand over to Helena for the financing.

Thank you, Daniel. SBB's primary focus is, of course, to continue to reduce the debt levels and also to reduce the reliance on individual sources of financing. And the long-term ambition is, of course, to regain the investment-grade rating we had last year. And we believe that our decentralized group structures will aid us in this effort. And our work to strengthen the company's financial position continues unrelentlessly. And we have also implemented several initiatives, which Leiv already talked about, to accelerate this. Our loan-to-value stood at 62% this quarter, a number which we're not happy with. And we will work very hard going forward to bring this figure down. And this work is ongoing. The main reasons for the higher number is the dividend payment and also, of course, the property value changes. On our side, we think that we still have a long-term funding, which is very, very attractive by any measurement. We have a 3-year average interest rate maturity and our average interest rate cost stands at 2.33% during this past quarter, which is very low if you compared to the market. On the debt maturities, our average debt maturity is 3.3 years. And we would like to point out that still 67% of the debt matures later and beyond 2026, and that runs with a rate of 2.37%. So I would like to reiterate again that our top priorities is to increase the liquidity and also to continue to reduce the debt level. Through active management of our debt portfolio, we have achieved a substantial decrease in our debt on a like-for-like basis. And even if we have had the hefty headwind, we've made good progress. And our aim is to reduce the debt level further through operating cash flow, strategic divestments and partnership with equity partners. Let's now move on to summarize the presentation.

Thank you, Helena. The key focus for us is to deliver on the core business. And we have a strong development in rental income and the net operating income, which we are very happy about. We also have strong performance when it comes to property development. And we are well able to divest the Finnish projects in a very good fashion. So we're happy with that. And then we have, of course, a continued need for improving the financial figures for the group, meaning we need to lower the loan-to-value and improve the liquidity. So we will continue hard to continue to improve those areas. I think we will be helped going forward with the tailwind. The situation now in the capital market is quite -- much better than it was 1 or 2 years ago. And within some quarters ahead, I think we will see some recovery of the property prices, and that will give us some help with improving some key figures and also much easier for us to divest assets at a good price in order to decrease the leverage and improve the equity level of the group. Thank you.

And with that, we move to the Q&A.

[Operator Instructions] The next question comes from Mary Pollock from CreditSights.

In the liquidity section of your filing, you mentioned a new credit facility that you signed after quarter end. Can you provide more detail on that? Should we think about -- that's just like a straightforward RCF? Is there anything that you need to provide to the Scandinavian bank that is different? Do you have access -- full access to that for your liquidity needs? And the maturity and terms, it will also be great if you can provide it?

I can confirm that the facility is in place and is ready to be utilized whenever we will need it.

And can you provide any more detail in terms of maturity or terms?

Not at this point in time.

And then you also mentioned in that -- that section, more disposals, are likely sort of pointing to the past deals you've done or structured, some are more JV focused, some are unique, some are straightforward. I guess what do you think is the most likely path right now as you already think about your pipeline for the 2026 bond maturity? Another big deal like we saw with the IPO or a series of smaller transactions that started the year?

In SBB, we have one big maturity in early 2025. And we have taken the time during 2024 to muster the liquidity needed to manage that maturity. And the next maturity on scale is, I think, late in 2026. So we have plenty of time to consider how we will meet that maturity. At the moment, we see that the property prices in the transaction market is improving, and we continue to believe that, that pace will continue. So at the moment, we think it's better to do small investment of assets rather than selling shares or establishing new joint ventures.

And you've noted the occupancy decline had some -- is some somewhat driven by public tenant departures. Can you provide more detail there, like which types of your tenants are departing? Do we need to worry about that? Is that indicative of a work-from-home trend for some of your public tenants? I was surprised to see that.

Yes. We are a company that focus on residential and long-term leases to publicly-financed tenants. So if you compare us with peers, we have a very strong income stream, which is less sensitive to movements in the market when it comes to lease activities. Of course, we do have some agreements that can be vacant, but it shouldn't be seen as a large concern. But even we face -- we expect that we will face some more difficulties to lease out mainly public offices. But it is a small part of our business. And I think when it comes to rental growth like-for-like, it will still be quite positive next year due to the dominance of good development on the residential side and also indexation on the leases that we have on long term. So even if we get some slight improvement -- decrease in occupancy rate, we will still be able to show good numbers when it comes to like-for-like rental growth and like-for-like net income growth.

That's really helpful. And on that indexation piece, what extent do you think indexation will slow in 2025 because inflation has come down?

We have a goal to beat the inflation when it comes to rental growth, and that is mainly due to small projects that we do together with the tenants. We can construct new areas or like improvement in the properties, which enable us to increase the rents above the indexation. And that is ongoing work. And we believe that also in the upcoming year, we will be able to show higher growth in the like-for-like rental growth. And that's what the indexation give us.

So you'll beat your -- you'll be higher than your indexation, but you can't provide any color on what that indexation might be? Like is it going to be 2% or 5% or flat?

I don't have the number in my head what the indexation was for this year.

I think the number is around 2%.

For this year?

Yes.

As in 2024? Okay. Wonderful.

It is measured as the October CPI number, which came in a tad over 2%.

The next question comes from Edoardo Gili from Green Street.

Just a quick one for me. Assuming the court case is settled early '25, how will that impact your access to financing, both from banks rolling their exposure, but also equity partners joining you in joint ventures and different partnerships. How will that work in '25 if the court case is settled?

I think the court case is giving us some headache when it comes to raising new debt in the market. So when we win that court case, it will be much easier for us to raise new money. And we can go to traditional lenders to a higher degree and lower the cost of capital for the group. And that will be helpful for the current bondholders, but also from the equity partners. And it will also improve the ability for us to cooperate with other investors in order to raise the equity of the SBB Group.

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

Just 2 questions for me. The first one on the bond exchange that you did in the summer. Do you think you could do something similar going forward? That's my first question. And my second question is on the ICR. It stands at 1.7 today, which is slightly below your kind of own policy at 1.8. How do you think about the development of this metric going forward as your interest -- your weighted average interest rate is still quite low at 2.3%, I think. How do you think about this metric going forward?

Yes. The first one, the bond exchange, that was done in order to create a good financial structure for Sveafastigheter ahead of the IPO. So that transaction was, I would say, a one-off. We understand, of course, that we need to reduce the level of debt in the SBB Group and we need to divest some assets or take in equity partners. And that will create liquidity. And we will use the liquidity to buy back bonds or to repay maturing bonds. So if we have some excess money at some point of time in the future, we -- it can be so that we have a bond exchange, so we'll be asked to repay some bonds ahead of the maturity. And that will be decided when we actually have some money to spend on that.

Okay. But it's unlikely that you use other kind of part of the business to do the same kind of transactions, pushing debt at the subsidiary level?

Yes, we need to -- in SBB Group, we need to use the possibilities we have in order to create stability for us and also for the subsidiaries. We had a need to increase the debt level in the Sveafastigheter to not a high level, but to an appropriate level ahead of the IPO. So we did a bond exchange, where we moved down bonds into Sveafastigheter and then [Technical Difficulty] to the Sveafastigheter. And that was done in order to create a financial setup in Sveafastigheter. So we were able to do a listing of the shares later. So that transaction was, I think, a one-off. But of course -- we have, of course, the ability to create new entities in the future. We see just that transaction creating a large residential unit as a one-off transaction.

Yes. And on the ICR question, you had -- I think we have reiterated many, many times that our aim is to reduce the level of debt, and hence, the -- and also the interest rate cost. And we are very much focused on that number, of course.

And also when it comes to ICR, the debt with the highest interest are the short-term funding. And the long-term bonds that we have in SBBs have a low coupon. So when we gradually will repay the maturing bonds, the average cost of funds will decrease. And also when we divest the properties or take in equity partners or we get in equity through the sale of Sveafastigheter, we will use those proceeds to reduce also the amount of debt. And those 2 trends will help the ICR going forward.

The next question comes from [ Michael Stigjohan Leven ] from Ericsson.

It's related to unrealized changes in property values, which amounted to negative SEK 0.5 billion during Q3 and negative SEK 1.5 billion during Q2, although the yield requirement has been unchanged. Can you please explain how you end up with the negative value changes although the yield requirement is unchanged and considering that you're also right that other factors such as rent development, renegotiations and newly signed leases have contributed positively to property values?

With regards to realized value changes, this is mostly related to technical accounting reasons in relation to the creation of the joint venture with Castlelake. In relation to the unrealized value changes, as we said, during the quarter, we have negative changes in value of 0.8%.

Yes. And during Q2, it was a bit bigger. Can you please explain how that has risen since value -- or since yield requirement is unchanged? And you're right that other factors have contributed positively.

I think to some degree, we see a little bit more vacancy in some properties, which have affected the valuation of the portfolio. It's related to cases and properties which have affected us during the quarter where the tenants have said to us that they will not renew the contract. So that has affected the property valuations negatively. I think as I pointed out earlier, those kind of properties are not in majority for the group. The majority of the properties we have, have long leases or are residential properties. So I don't expect this trend to continue.

There are no more phone questions at this time. So I hand the conference back to the speakers for any written questions and closing comments.

Thank you all for listening in and raising good questions in this call. Thank you very much.