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

Good morning, everyone. Thank you for taking time this morning and listening into SBB Q2 2025 Earnings Call. My name is Helena Lindahl, and I'm the Treasury Director of SBB. Here with me this morning, I have our CEO, Leiv Synnes, who will present the Q2 results and the strategy update for you. And also Daniel Tellberg, our Finance Director, who will answer questions on the report. After the presentation, we will have a Q&A session. If you have any questions during the call, please submit them to our e-mail address [email protected]. You can also find the e-mail address in the press release with the details of the call. With that said, I hand over to Leiv to present the results.

Thank you, Helena. I will shortly introduce the numbers to you. But first, I would like to give you a quick reminder of what SBB is all about. SBB owns social infrastructure in the Nordics and residential properties in Sweden. We have close to SEK 100 billion in property exposure spread across the four business segments. These are mainly, Community, Residential and Education. The tenants are typically government backed for Community and Education segment, and we provide housing within the Swedish highly regulated residential market. We see ourselves as a partner helping to enable the very successful Nordic welfare system. With these segments, we have an overall platform, which give low downside risk in revenues and also provide a substantial growth potential. We have efficient and very focused platforms, and we have overall a very good market position. And now to the highlights for the period. First of all, it's very pleasing to see that SBB increased its property exposure by SEK 900 million for the first half of this year. The growth comes from the strong companies we have created during the last couple of years, Sveafastigheter, Nordiqus and PPI. They are financially strong and all of them are able to capture growth underpinned by low cost of funding, which they are able to attract through the investment-grade rating. It's also pleasing to see the underlying business deliver in such a way it does. Rental income growth is 1.3%, up and the net operating income growth with 3.7%, both like-for-like. During the period, SBB issued shares, which resulted in lower leverage and with Aker entering as a new major shareholder and now hold 29% of the votes. This is a strong signal and a vote of confidence in SBB's assets, business model and organization. And now I would like to dive into each of the business segments. We will start with Community. It shows strong fundamentals and have a positive rental outlook. In short, it is government-funded tenants, minimal risk of rent loss and also close to 100% CPI linkage. Around 30% of the assets are elderly care, which is a segment where Swedish local authorities and regions project that the demand will increase with more than 30% in the next 8 to 10 years. The interest from external parties confirms the strong underlying value of the portfolio, both with regards to asset quality, but also in the operation. A part of the segment is Public Property Invest, PPI, that is listed in Oslo and is part of the segment. PPI has acquired properties during the second quarter with an area of almost 200,000 square meters, and it contributes to SBB growth in total property exposure. The company has also issued new shares as a part of acquiring some of these properties. SBB has a strong belief in PPI business plan, and we, therefore, choose to invest SEK 700 million to safeguard the position as the largest shareholder. SBB now own 33% of the shares and continuously, the investor base for PPI is growing. Aker is now the second largest shareholder with 25% of the shares. Dividend has started to be received by SBB, and I predict that the future dividends will grow from PPI over time. Next business segment is Residential, where most of our exposure is in Sveafastigheter. Sveafastigheter has started on an impressive journey. They have listed -- they were first listed last October. And in June, they will uplift to NASDAQ Stockholm Main list. Sveafastigheter have also successfully received an investment-grade rating from Fitch and has issued bonds in the capital market, capturing lower cost of funds, which will enable future growth. The operation in Sveafastigheter is going well. They report 4.3% rental growth like-for-like during the first half of this year. We estimate that the rent will continue to increase faster than inflation in the next years. The residential properties that SBB owns which are not included in Sveafastigheter, we will plan to divest them over time and focus solely on Sveafastigheter in the residential space. I believe that SBB is industry-leading and has a strong competence in sourcing and developing large-scale residential projects. During the second quarter, a series of newly developed properties were divested to a North American pension fund. The total value of the transaction was roughly SEK 1.2 billion, and the rental value was SEK 65 million. This is just one example of SBB's ability to create and realize value from project development. And also the demand for the products that SBB creates. Moving on to the Education segment, which is -- which to the utmost extent is made up by Nordiqus, the company that SBB owns together with Brookfield. Nordiqus has been developed to become a leading platform for the infrastructure in education with growth potential and scalability opportunities. Long leases, together with long-term funding results in a high predictability of future cash flow, a very stable business with government-backed income, high lease renewal and close to 100% CPI-linked of rents. I'm happy to see that Nordiqus is growing and has during the second quarter, acquired a new state-of-the-art campus with Dalarna University as a tenant and the price was around SEK 700 million. The dedicated Development business segment was established during the Spring. The purpose is to single out properties with significant potential or and a need for special consideration to maximize stakeholder value, both for shareholders and for tenants. In Development, we gather specific and specialized competence to be designed to ensure and to drive further value creation in our projects. Higher return on equity is expected on these projects, 15% and above. To manage risk, we have limited the Business segment to 5% of the total property exposure. One of the success stories we have in SBB and which we intend to replicate within the newly formed development segment is the creation of Kriminalvårdens hus in Västerås. Back in 2017, SBB acquired together with K2A, a small commercial property with potential. In 2025, the project resulted in an upcoming state-of-the-art retention center with the Swedish Prison and Probation Service as a tenant with a 20-year lease. SBB successfully divested the project in April 2025 with a liquidity effect of SEK 300 million. SBB has the ability to provide rental growth and net operating income growth in the like-for-like portfolio. 21% increase in rents, 26% growth in net operating income since January 2022 is a clear evidence. Regulated residential in Sweden and social infrastructure assets in the Nordic with long leases provide limited downside risk and long-term growth potential. SBB has large property portfolios that lower the risk, improve efficiency and market recognition. The platforms are scalable. To sum it up, strategy execution is well on track. Subsidiaries drive growth. We have delivered on the strategy to create financially strong companies, which have potential to be leading within their segments. Nordiqus, PPI and Sveafastigheter are examples. We are improving the effectiveness of the cost control. Central admin cost is decreasing year-by-year by 23%. Company-wide drive to increase efficiency is showing results. There is a stronger confidence in the core business. Positive net rental across the portfolio. And there is a vote of confidence with new strong ownership by Aker. We see an increased access to capital, more options for sourcing funding and equity, coupled with more favorable capital markets. Significant holdings in large listed company, PPI and Sveafastigheter create a liquidity reserve. And now I would like to pass the word over to Helena, and it's your turn to go through the finance.

Thank you, Leiv. I will start with the liquidity. The total liquidity for SBB on a consolidated basis was SEK 3.9 billion quarter end and SEK 2.2 billion for SBB on a stand-alone basis. The unutilized credit facilities was SEK 1.1 billion for total SBB and SEK 500 million for SBB stand-alone. We continue our strive to improve the liquidity for the consolidated SBB Group. We are also continuing to strengthening the SBB financial stability. For this quarter, we report a lower loan-to-value of 59%, where the share issue in Q2 contributed positively. We have also improved access to capital overall, both equity and debt, at a time when the capital market has improved significantly during the past 1.5 years. This is particularly true for Nordiqus, Sveafastigheter and PPI, which all individually have set their own footprint in the debt capital markets. We also report a higher interest coverage ratio, 2.3x. And also during next 6 to 9 months, the refinancing for the joint venture is a top priority for us. We expect a significant lower cost of funding for the assets in the joint ventures. SBB is continuously benefiting from having a very attractive long-term funding. The average interest rate is reported low at 2.5% with an average interest maturity of 2.7 years. Still, 75% of the company's debt matures later than 2026, which gives the company a runway to secure the refinancing of the longer-dated debt. I will leave the word back to you, Leiv. It's time to summarize the presentation.

Thank you again, Helena. To sum it up, strong companies in the SBB Group drives the growth. which is positive. We also see a positive net letting and that central costs are trending down, which is positive. We have a stronger confidence in the core business. And all of this results in increased access to capital. Thank you very much for listening in. And we now move on to the Q&A session.

First question. How will you fund the upcoming maturities in 2026 and 2027?

I think that question belongs to me. We are executing on the plan to divest the non-core assets, which has been previously communicated. And we have already divested SEK 1.2 billion of non-core residential assets during the second quarter. We are also working on the structuring of the Community segment and thereby opening up for additional funding sources. Also, we are in a position where we feel that our options for sourcing liquidity and also capital have increased significantly compared to previous years. As we say in Sweden, we have a much larger smörgåsbord to choose from when it comes to sourcing funding. In addition, I feel and we feel strongly that the time is on our side, and it is a good possibility that we will be able to refinance the maturing bonds with extensions.

Thank you. On to the next question. Will you continue to make divestments?

I think, similar as what Helena said, we have time on our side now, and we can take our time to make divestments if we need to. Overall, I think that we have a good chance of long-term increasing the property exposure by the growth in the subsidiaries and associated companies that we have in the group. By that, I mean that, I believe that both Sveafastigheter, Nordiqus, as well as PPI have a good chance in growing their portfolios.

Thank you. Next question. Can you elaborate on the NOI?

Yes. I think, we -- as I said earlier in the call, we are happy with the development of the net operating income. It was increasing by 3.7% during the period and 26% since 2022, everything on a like-for-like basis. I think, it shows -- and sorry for repeating myself that we have low downside risk. Instead, we have a potential to year-by-year growing the business with higher and higher net operating income.

Thank you. Moving on to the next question. How much of the SEK 253 million in interest income and similar items are actual cash flow? You have previously had a positive accounting effect here due to recognizing intercompany loans at fair value.

The reported interest income for the period amounts to SEK 253 million. If you exclude non-cash effects, the cash flow statement outlines that received interest amounts to SEK 120 million for the period.

Thank you. We'll move on to the next question. You have said previously that central administrative costs should decrease, yet expenses continue to rise compared to the previous quarter. Sveafastigheter's central administration costs are also increasing. What concrete measures are planned to reach a more competitive level?

Yes. As we have several ongoing initiatives to strengthen the organization and further increase the internal competence, this will drastically reduce the purchase of external expensive services. One such initiative is the in-sourcing of financial management. Looking at 2025, the administration costs include legal expense related to the resolution of the dispute with bondholders as well as costs associated with Sveafastigheter's listing on the NASDAQ Main market. Despite this, administration costs for the first 6 months are a total of SEK 130 million lower than prior year. We will stay on this road and continue to reduce the administration costs further.

Thank you. Final question. The loan-to-value ratio is at 59%, which is above the internal target of 50%. How does this affect the possibility of achieving investment grade and what is required to reach the target?

It's a good question. We -- I think we and SBB has time on our side, and we will continue to divest non-core assets in order to optimize the capital structure and thus lowering the leverage. We also have a period with declining property values and a period where we have been able to increase the rental income and the net operating income. I think we will see continuous trend of increasing income in the like-for-like portfolio for SBB and also with a stronger trend in the capital market, there is a high and high chance that we will see an improvement in the property values. And together with divestment, of course, this will lead to a higher and improved financial situation and also a lower loan-to-value.

Thank you. As this was the final question, I'll leave it back to Helena Lindahl.

Yes. Thank you very much for listening in to this Q2 earnings call. And also, please note that if you have any further questions that you might have, please write and send an e-mail to [email protected]. Thank you very much.