Skanska AB (publ) (SKAB) Earnings Call Transcript & Summary

Ladies and gentlemen, welcome to the Skanska webcast and conference call. I'm Andrei, the Chorus Call operator. [Operator Instructions] The conference is being recorded. [Operator Instructions] The conference must not be recorded for publication or broadcast. At this time, it's my pleasure to hand over to Anders Danielsson, CEO. You will now be joined into the conference room.

Good morning, and welcome to the Skanska press conference. I'm Antonia Junelind, Senior Vice President, Investor Relations. And here with me on this call is President and CEO, Anders Danielsson; Group CFO, Magnus Persson; and Group EVP, Claes Larsson. This call is arranged following our announcement last night. We continue to experience weak property markets. And as a consequence, property asset impairment charges will be recognized in Commercial Property Development, Residential Development and Investment Properties, impacting the fourth quarter results 2023. Please let me also inform you that after the publication last night, we have spotted an error in the English press release. For clarification, the assessed average valuation yield for Investment Properties in Malmö is 4.8%. This has now been updated on all of our external platforms. So we will start this call by shortly summarizing the situation. Afterwards, you will be able to ask questions by using the audio link or the conference phone numbers. Just follow the instruction provided by the operator. Please let me also remind everyone that we will only make comments in relation to the announcement, and we will, therefore, not comment anything else in relation to the fourth quarter performance or results. So with that short introduction, I will hand over to you, Anders, for a brief summary.

Okay. So I will have a brief summary on the fourth quarter impairments of SEK 2 billion, which is divided in Commercial Property Development, SEK 1.4 billion. And most of that is in the U.S. portfolio, which is our weakest market currently. Residential Development has a charge of SEK 500 million and the majority in our low-cost segment, BoKlok, which has been impacted the most by reduced market activity following increased interest rate and inflation. In Investment Property, we have a charge of SEK 200 million, and that is a change in property values. These charges have no impact on the fourth quarter cash flow. We also have a change in surplus values in the Commercial Property Development, and that is based on the review of estimated market values. And the change is SEK 1.6 billion in the Commercial Development portfolio, and mostly of these are referred to the U.S. properties. With that, I hand over to Magnus.

Thank you, Anders. So the impairments and the changes in value that we communicated last night, of course, they relate to changes in sort of market circumstances that lies beyond our control, and all of them are taken also in the property operations. So nothing in the announcement last night relates in any way to the Construction business. I think that's good to point out. And of course, we need at every point in time to ensure that we have a balance sheet that represents the best possible assessment of the values that we recognize. And as we have pointed out on several occasions during the fall, there are today very few comparable transactions out on the market to look at, which is the most used sort of method in order to gain reference points when you assess value for property assets. There are transactions made, but in many cases, those are sort of difficult -- the pricing of those transactions are difficult to extrapolate into a larger transaction volume on the market there. So through the fall, we have worked with this a lot, obviously. And due to the lack of comparable transactions, we have, piece by piece, essentially increased the scope of the supporting information that we've looked at in order to use this input in our valuation, looking at interest rates, buyer pool appetite, funding availability, funding costs for potential buyers and so on and so forth. And this goes very much in line also with the message that we've had both in the third quarter and in the Capital Markets Day that we held not too long ago that there is a large uncertainty around the value of properties today because it is sort of difficult to find relevant comparable transactions and thereby derive the value. So the charges that we announced yesterday and the changes in the surplus value, this represents our current best assessment of the values for these properties. And if you look at the table that we released, we can see that we have done charges in Commercial Property Development on the accrued values of SEK 1.4 billion. That will impact then our P&L in the fourth quarter. If we take into account the changes in the surplus value, we have to relate that to the total market value at completion of that portfolio. And the size of the charges on the accrued numbers are around 3.5%. And the size of the total changes in value at completion is around 5%. If we look at Residential Development and do the similar analogy or comparison, the charge -- the size of the charges in relation to the unsold accrued values is around 3%, and Investment Properties is around 5%. And I want to emphasize again, we have very good assets, very good land in these operations. So the impact that we see here is truly driven by the market situation essentially. I'll stop there and hand over to Antonia for questions and answers.

Yes. Thank you for that introduction. So with no further ado, we will open up the Q&A. So operator, can you please introduce the first caller?

[Operator Instructions] The first question comes from the line of Simen Mortensen with DNB.

Just one question. I don't know if you want to answer it. But you have, in Commercial Development, also been doing asset sales in the quarter, both through directly to the Investment Property division, which has done also a write-down, but you also do write-downs in CD. Can you give us some flavoring about how these valuations you are now reporting is correlating with what is done in the transactions in Q4?

Simen, this is Magnus. Let me try and give you an answer to that. It's -- I understand your question. It's a bit tricky to answer, not because we're holding out an information here but because it's difficult to compare one specific transaction to a broader portfolio. Obviously, we can say that the transaction that we have done is -- the values of that are sort of reasonably in line with what we now communicate. But were you referring also to the divestment we did externally in LA?

In the U.S.

Okay. I got it. I thought it was only on Investment Property transactions. On that one, we don't give specific numbers and financials on single deals, as you know, but we can say that given the very tough market circumstances in the U.S., we were very happy with the result of that one and shows that quality matters. We were able to sell it to an owner-occupier that sort of preferred the top quality of the asset.

The next question is from the line of Graham Hunt with Jefferies.

Maybe 2 questions for me. First, I noticed -- I don't think you adjusted any valuations for completed properties in the Nordics. And I think I heard you say, Anders, that the reduction in surplus value was primarily focused on the U.S. So could you just talk about the -- I think you have 10 projects there that completed, 80% leasing ratio. It seems to me that you still remain pretty confident on the valuation levels of those properties. And do you see -- is that related to where you're seeing buyer interest at the moment? Because I think that's above your leasing threshold to go to buyers. And are you optimistic we could see some movement on that specific portfolio anytime soon? And then second question, maybe just on how we should think about the flow-through to dividends on this impairment. Does that just drop directly through to any kind of dividend that you would propose this year, the SEK 2 billion impairment, just thinking about the impact there?

Thanks, Graham. This is Magnus. I will take your first question, and Anders will briefly comment on your ask around the dividend. In terms of completed properties in the Nordics, the Nordic market is we have a better sort of see-through and visibility in the Nordic market than we have in the U.S. market, which is most challenged as we also stated in the release and communicated before. So in terms of these valuations and why we don't make any changes, it's simply because we have reviewed, obviously, all the values and feel comfortable with where we stood at the end of the third quarter.

Regarding the dividend, we don't give any forecast on the dividend. We will come back on that on February 9 when we release the year-end report.

The next question comes from the line of Gregor Kuglitsch with UBS.

Can I just sort of calculate back the residual sort of surplus value, I think, you had, excluding the stuff that was already sold, I think, SEK 6.1 billion as of Q3, taking that down by SEK 1.6 billion, I think, so that leaves SEK 4.5 billion? And I guess that's to be compared to roughly [ SEK 55 billion ] of market value, right? So basically an 8% margin. Is that what you're basically saying you think you have in the portfolio? And I appreciate there will be a mix. I guess the U.S. will be lower than that or next to 0 and perhaps other bits a bit higher. I just want to understand if that's essentially what you're taking in. First question, #1. I guess the second question is, as you kind of alluded to it, it's quite hard to actually know where transactions are settling. So I guess, what's the risk that you have to kind of come back and take another hit later on if things move, and I appreciate it's a bit of a difficult question, but any thoughts as to kind of how conservative you've been in this round?

Greg, this is Magnus. I'll try to answer your questions here. In terms of the surplus, I'm sure your math is correct. But when we come into the fourth quarter, we need to realize that we also have other gross impact on the surplus values. So your absolute numbers become -- will sort of not look like that in the fourth quarter. And in terms of your margin assessment, I really can't comment on that. But otherwise, your math seems sort of to add up. In terms of risk for future value revisions, I mean we have gone very deep into the portfolio assessed values with all the reference points we can find, and this is our best assessment of the current value. This is no means a guarantee for that nothing will happen in the future, but it is reflecting where we are standing today. This is as far as I can go with commenting on the future because no one really knows, right?