Samhallsbyggnadsbolaget I Norden AB

STO:SBB B

Earnings Call Analysis

Q1 2024 sees SBB reducing debt, increasing rental income

In Q1 2024, SBB focused on reducing debt by SEK 39 billion over the past 21 months while also aiming to improve liquidity. Rental income increased by 3.9%, and net operating income rose by 3.0% compared to last year. The company maintains a high occupancy rate of 94%. SBB successfully repurchased bonds, profiting nearly SEK 800 million and improving equity by SEK 2 billion. The company aims for further debt reduction and anticipates higher property valuations as market conditions improve. SBB is preparing for an IPO or strategic partnership in its Residential and Education sectors, aiming for an investment-grade rating in 2024.

Company Overview and Strategic Direction

The recent earnings call of SBB reveals an unwavering commitment to improving its financial health while navigating a challenging market environment. The company has focused on three key sectors: Community, Residential, and Education. Each of these segments is being developed to ensure better financial stability and operational efficiency. Particularly, SBB emphasized the integration of subsidiaries into simpler structures, providing individual management focus to enhance performance.

Strong Financial Performance Amidst Challenges

For Q1, SBB reported a 3.9% increase in rental income and a 3.0% rise in net operating income compared to the same period last year. This resilience is commendable given the market complexities. The yield stood at 4.9%, and occupancy remained high at 94%, presenting a robust position against economic fluctuations. Furthermore, the company successfully repurchased bonds, yielding nearly SEK 800 million profit, thus boosting equity by almost SEK 2 billion.

Debt Management and Future Guidance

SBB is ardently focusing on reducing its debt, which it has successfully cut by approximately SEK 39 billion over the last 21 months. The company aims to achieve an investment-grade rating by 2024, particularly highlighting the potential for its subsidiary Nordiqus to reach this status. The current loan-to-value ratio stands at 55%, showing a robust capital structure. Additionally, the average interest rate on debt is a favorable 2.2%, with maturity spread averaged at 3.5 years. Future strategies include a planned IPO or strategic partnerships for its residential and community properties, projecting to enhance capital inflow.

Sector-Specific Insights: Education and Community Sectors

In the Education sector, SBB is especially optimistic about Nordiqus, where it holds just under 50% ownership with Brookfield as a strategic partner. This partnership is seen as pivotal in driving growth and achieving further capital infusion due to solid underlying operations. The Community segment benefits from strong, government-funded tenants and minimal risk of rent loss, with rental income closely tied to inflation—significant in preserving income stability.

Outlook and Positivity for Investors

Management expressed solid confidence regarding market recovery and expects property valuations to stabilize and improve as economic conditions shift. Initial indications show lower rates that may contribute to improved funding costs. Thus, by addressing both income growth and cost management, SBB presents a promising outlook that anticipates increased operating performance aligned with macroeconomic improvements. Investors should weigh SBB's proactive adjustments in operations and capital structure against its debt reduction goals.

Earnings Call Transcript 2024-Q1

[Operator]

Welcome to SBB Q1 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to Treasury Director, Helena Lindahl. Please go ahead.

[Helena Lindahl, executive]

Good morning to you all, and I wish you all a very welcome to our quarterly earnings for the first quarter of 2024. My name is Helena Lindahl and I'm the Treasury Director at SBB. The presenter this morning will be myself and our CEO, Leiv Synnes and Finance Director, Daniel Tellberg. Leiv will share the strategic and financial highlights during the quarter and also give you an overview of the performance of our business units. Daniel will guide you through our financial statements, and I will discuss the state of our financing. We will end the call with a summary and also a Q&A session.

Over to Leiv. Please go ahead.

[Leiv Synnes, executive]

Thank you, Helena. I will walk you through our key financial metrics, our execution on the strategy as well as on some point of the new group structure. It's our ambition to give a transparent view of our financial position and to take it that direction, even though it might be a bit complex. As always, we value your questions and happy to receive them during the Q&A session.

Looking on the highlights from the quarter. I think we continue to execute on this strategy, and we have implemented a lot of measures that will improve their financial position over time. We have continued our work with improving financial stability of the group and also the liquidity.

In the past 21 months, we have reduced debt with close to SEK 39 billion. In order to reach the financial stability that we want to have, we understand that we need to continue to reduce debt. I think the operations is steady as usual. It continues to increase the rents, and we continue to lift the operating. And I think we will continue to do so in the following quarters. And we also benefit from low cost on the majority of the debt. We have 2.2% in funding costs on the interest-bearing debt, which I think is low and good.

I think the proper valuations will start to flat out and over time, we'll continue to be at a higher level. On short term, we saw a further reduction of property values with 2.1% -- 2.8% for the quarter. But as I said, we believe that we are now close -- the end of this business cycle and new business cycle will occur and with that, comes higher property valuations in the quarters to come. That is my expectation.

If you look on the strategy, it's -- we have created three business areas: It's Community, Residential and Education. And if we start with the Community, we are structuring all the assets into one vehicle that owns all the assets in the Community. And one part of that is in turn owned by a company called PPI, which we successfully listed on the stock exchange in Norway. And it's good to see that we now have access to growth capital in that part of the operation.

In the Residential area, we continue to take steps -- good steps in Sveafastigheter. We continue to dissolve small joint ventures and to make the structure less complex. And we have decided to dissolve one large joint venture, which we have with Riksbyggen and we will continue to dissolve other structures in order to make the company structure as easy to understand as possible. The goal is to have only fully owned companies in this Sveafastigheter structure, and the goal is to raise capital in that entity during 2024.

In Education, we see a lot of improvement. Most of our assets are in the entity Nordiqus, which we partner together with Brookfield. The next step for that company is to get an investment-grade rating. And on that rating -- with that rating, being able to raise attractive funding.

One other thing we did during the first quarter was the buyback bonds. This resulted in a gain of close to SEK 3 billion. We have, in total, an exposure to the real estate business of SEK 104 billion. It's, as I said, divided into 3 areas, Residential Community and Education. And in the Residential, we have a total exposure of SEK 37 billion, whereof SEK 28 billion is direct ownership and SEK 9 billion to different collaborations. And in Community, we have an exposure of SEK 47 billion, and then in Education, we have SEK 21 billion.

And the goal here is to create a structure, which is transparent and also a structure that enables attractive funding over time. And also, I think the last thing is important that we'll have a management in each of the area with dedicated focus to improve their part of the operation.

If we move on to Residential, the most part of the assets are placed in Sveafastigheter. In Sveafastigheter, we aim for an IPO or a strategic partnership in 2024. We have elected a new CEO, Erik Hävermark. We have also elected an Independent Board. And we're taking a lot of steps to improve the operations. I think when we have a dedicated management with the sole focus of improving the financials for Sveafastigheter, I think we will be able to increase the rents faster and reduce the costs in a better way than what we have done in the previous years. One example is that we believe that the occupancy rate of 90% -- 95% will be increased going forward.

And also the good thing with Residential is the strong fundamentals and also the secure place, at least to have regulated rents in Sweden. We believe that we, over time, we will be able to have a faster rental growth and inflation.

And if we go on to the Community. As you know, community properties are government-funded tenants. We have a minimal risk of rent loss. It's a leading platform. It's a scalable platform. And it's a good opportunity for us to develop the business going forward. The rental income is close to 100% inflation linked. The majority -- the largest part of the assets is elderly care with 31% of the properties. And in this area and also in the other areas of the business, we focus on sustainability. And as I said earlier, it's the biggest sector for us with SEK 47 billion of assets. They're indirectly owned.

Since last year, we own slightly less than 50% of a large company called Nordiqus. This is the main part of the Education holdings. I think it's very good for us to have a partner in Brookfield. They are very skilled and they have a lot of capital. And I think we will continue with them and develop the business in a good direction. We see the underlying operation in Nordiqus is developing very well. And we believe that we can continue to be -- to build on Nordiqus, which is the leading platform in Europe for public education property. And as I mentioned earlier, we strongly believe that we will end up with an investment grade rating in this part of the operation in 2024.

[Daniel Tellberg, executive]

Thank you, Leiv. Let's go more into detail on the financial states. On a like-for-like basis, rental income for Q1 compared to the corresponding quarter last year increased by 3.9%. Likewise, net operating income increased by 3.0%. As you can see, because of our strategy, the net operating income is increasingly coming from our partly owned business like Nordiqus, and as we prepare Sveafastigheter for an IPO or a new partnership, we can expect this trend to continue. This is a significant achievement given the challenging market conditions.

Quickly looking at the yield and occupancy rates. We can see that our yield stands at 4.9% during the first quarter. Our occupancy rate remains high at 94% for the first quarter, a number that together with who our tenants are, give us confidence regardless of where we are in the economic cycle. This puts us in a competitive position for when market conditions improve further.

Let's look at some key takeaways from the income statement. During the quarter, net operating income was protected like-for-like despite reduced income from divestments. There was a decrease in property value following higher yields and we are now seeing greater signs of decreasing valuation leveling off. An increasing number of experts and institutions believe in decreasing rates this year. We successfully conducted the repurchase of bonds in March, which resulted in a profit of nearly SEK 800 million and improving in equity with additional nearly SEK 2 billion.

With that said, let's switch over to financing.

[Helena Lindahl, executive]

Thank you, Daniel. Financing. Our main focus and top priority is to reduce the level of debt, but also on the dependence on individual sources of funding, we believe that our decentralized group structure will aid in that effort by creating financially strong partly owned companies, which can fund themselves on their own merits.

Our work to strengthen the financial position of the company continues. And as mentioned, we have implemented several initiatives to accelerate this. We work very hard to improve the liquidity and reduce the level of debt in order to, in the longer term, of course, regain an investment-grade rating. As Leiv mentioned before, Nordiqus is looking at an investment grade rating in the near future.

Looking at the bottom on the page, you can see our loan-to-value ratio, and it stood at 55% at the end of quarter. Work is continuously ongoing to address this and improve this number over the medium term. We still have a very attractive long-term funding. We have interest rate average maturity of 3.2 years and still the average interest rate in the company is 2.2%. And also, if you look at the debt maturity profile, we have an average debt maturity of 3.5 years. And I would like to point out that we have 62% of our debt, which matures later than 2026, which is a very strong number. And that debt has an average cost of 2.3%. Leiv?

[Leiv Synnes, executive]

Thank you. Yes, we have been good at reducing debt in the previous years. We understand that we need to continue to improve the financials. We need to lower the debt and also grow the liquidity. We expect after the dividend that was decided last year is paid out, we expect no further dividends. We have been reluctant with the new investments. So with the current ongoing investments, large investments being finished, we expect there will be low amount of investments going forward. And also, we do not sign any acquisitions. And these three things is helpful in order to bring the cash flow up in the company.

We work to refinance maturing debt. That is mainly a bank debt. The bonds will be repaid at maturity. We have the opportunity to sell financial assets and we'll do so when we think it's fruitful for the company. We can also -- or intend also to sell properties, and we will also do so when we think it's in the best interest of the company.

We are working towards an IPO of the Residential or Community partnership, and that will bring in equity to the group, but also we will achieve a better funding situation for the Residential properties. And we'll also continue to investigate capital solutions for our Community properties. All in all, we have a lot of tools in order to improve the financials for the company, and we intend to do a lot of measures in order to strengthen the company.

Yes. To summarize, the first thing, and that is very important, is that the underlying business is going very well in SBB. We increased the rents. We keep the occupancy high. We have no -- or very low risk of reducing income. Instead, we expect strongly that the positive trend on revenues on a like-for-like basis will continue. And if you do the right thing with your assets that will, over time, lead to higher property valuations.

In the previous years, capitalization rate or the discount rates on cash flow in real estate have increased. We believe that, that, at some point, will level out and growth in revenues will lead the way towards higher property valuations in the quarters to come, that is our expectation. And probably also helped by better funding opportunities for us and also for the peers in the market.

We are continuing to execute on the strategy. We have taken good steps in all of our business areas, Residential, Community and Education. We believe that we have the ability to raise equity in the subsidiaries, which will help the company to stabilize. We have reduced debt, and we will continue to reduce debt. In the meantime, we continue to benefit from the low interest rates we have on the current debt. The interest cost for us is, at the moment, 2.2%, and that is a very helpful level.

I think that concludes the presentation. Let's move on into Q&A.

[Operator]

[Operator Instructions] The next question comes from [ Rashid Anwar from Inphi ].

[Unknown Analyst]

It's [ Ash ] from [ Polis ] here. I'm not sure why I've got that different name on. I had two questions on your Castlelake JV. The first one was why has the SBB infrastructure AB entity being deconsolidated? What's it about the government arrangements there, which means that even though you own 100% of the common equity, it's been deconsolidated?

And the second question was, how do I find the SEK 5.2 billion of gross proceeds from the Castlelake financing in the cash flow statement for the quarter?

[Leiv Synnes, executive]

And the first question is, we have an own control over there, together with Castlelake and therefore this joint venture. And the second point, all the money haven't been paid out yet at the end of the quarter, and that is due to FDI regulations in Sweden. So we expect the money to be paid out in the second quarter.

[Daniel Tellberg, executive]

In relation to your question regarding the cash flow from the Castlelake joint venture, you can see in the cash flow analysis that disposal of subsidiaries' cash and cash equivalents amounts to SEK 4.0 billion, SEK 3.7 billion of those are coming from Castlelake. SEK 0.3 billion is coming from other disposals.

[Operator]

The next question comes from [ Anders ] from Pareto Securities.

[Unknown Analyst]

So a few questions from liquidity from my side. Starting off with the underlying reasons for the tender that you did here early this year. And maybe if you could elaborate a bit on the trade-off here going for longer-dated maturities and hybrids instead of your more near-term maturities.

[Daniel Tellberg, executive]

Yes, it's in fourth quarter last year, we did a tender and then issued the '24 bonds. It was a prudent way to do it. And we took care of the short-term maturities. This time, when we did a tender, we believe that we are in a stronger financial position from a liquidity standpoint and therefore, introduced a little bit longer instruments. And that was the rationale.

[Unknown Analyst]

Understood. And then maybe going into that liquidity position and looking ahead, so if I remember correctly, last time around, you mentioned that you had very different opinions on the ability for the requirement to pay these deferred dividends. Now if I interpret you correctly, you are planning to do these deferred dividends here in June or July. Are there any sort of conflicting views on your side, whether you should do it still given the relatively limited liquidity at present? Or do you see that this will be something that is conducted here in conjunction with this Annual General Meeting?

[Leiv Synnes, executive]

It was not like internal discussion about paying the dividend or not. What I meant was that it was different avenues to interpret the law in Sweden. So -- but we believe that we need to pay the dividend, and we have planned to pay the dividend. And my opinion is that we have the ability to pay the dividend when it's come due and then need to pay -- be paid before the end of year. So that is -- that was -- is what I have been working towards and that is what I intend to deliver.

[Unknown Analyst]

All right. Understood. And then final question. So starting off at the current liquidity position now, what are the sort of key items among those delisted that you see as the most near term in terms of adding this additional liquidity? Is it primarily divestments? Or do you see additional debt deals being sort of the main sources here in the near term? Of course, a lot of listed sources for these up only 12 months, but it would be interesting to hear your thoughts on sort of what sources are the most near term.

[Leiv Synnes, executive]

One -- a couple of points there. One is that what we've been -- we see that we get more imbalance with, you can say, the outflow and also if we include investments and so on in that. And if you [Technical Difficulty] short-term financing that we used in the previous, like commercial and so on, a much better balance between signed acquisition investments, short-term financing and operating cash flow. So that is very helpful for us.

And we see that the measurements we have taken in the previous year is fruitful this year. And we have also found the tools to manage the maturing debt. If there are debts from banks, for example, that mature, we have solutions to deal with that. We don't necessarily need to sell assets when debt is maturing. We find ways to raise capital. And at the moment, we have [ under tracks ], which we're working on towards raising additional capital. And it's too early to mention which one will come first.

I think we look forward 1 year. It's likely that we have continued to sell some assets, and also that we have been able to raise capital from the market.

[Unknown Analyst]

Understood. And then maybe just final follow-up on those points that you mentioned. So primarily when looking at these different solutions for maturing debt, are you primarily looking then to just refinance the existing bank financing? Or do you see the ability to also raise additional proceeds?

[Leiv Synnes, executive]

Yes. You see from the numbers that the secured debt isn't extremely high. So that is also, of course, a capital source. So if, let's say, a local bank will not prolong the debt, it's not end of the world because the properties are not highly leveraged. Likely, we can get a similar amount of cash elsewhere, if you need.

[Operator]

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

[Mary Pollock, analyst]

If you are paying the dividend, should we assume that you'll also be paying the hybrid coupon after that?

[Leiv Synnes, executive]

Yes, you should I expect that.

[Mary Pollock, analyst]

And regarding the transactions after period end, Unobo deal and the PPI IPO deal transaction, from all of those, is there any cash inflow to SBB?

[Leiv Synnes, executive]

On the PPI?

[Mary Pollock, analyst]

On both PPI and Unobo.

[Leiv Synnes, executive]

No, there isn't.

[Mary Pollock, analyst]

Okay. And then can you provide any guidance on what you expect on your dividends from JVs and associates in 2024, just to have an idea of what the cash is coming up to the parent?

[Leiv Synnes, executive]

I don't have the figure now, but we expect to receive dividends from Nordiqus, which is the main like investments. And the other partnership, which we have, we are likely to -- meaning that this in the Residential area, we would probably dissolve it instead of getting dividends. So I don't have a figure on the total amount of dividend that we expect to get from the joint ventures and so on.

But I don't think it's that material from a liquidity standpoint, at least. I think we need to do other things in order to improve the liquidity position, and that will be investments or raise of equity.

[Operator]

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

[Leiv Synnes, executive]

Closing comments, I think it's helpful for us and not surprising that underlying business continues to develop in a fine matter with the rents increasing and net operating income increasing. We also see that we get help from the markets and we expect to get more help from the market. We see that peers can fund themselves at the lower and lower cost of capital at the moment compared to last year. And we see that the property transactions start to increase. And this is very helpful developments in order to get some tailwind in the recovery of our financials, which is we think is needed. Thank you.