Welcome to SBB Q4 2023 Report Presentation. For the first part of the presentation, participants will be in listen-only mode. During the questions and answers session, participants are able to ask questions by dialing pound key five on their telephone keypad. 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. 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 have 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 the negative development of the SBB properties and also the general trend of the property market. However, we are seeing signs 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 remains at acceptable levels.
Let's move on and look at the execution of our new structure and strategy. During the quarter, we have made significant progress implementing our decentralized group structure consisting of three 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. This was formerly called EduCo. In November, SBB reduced its ownership to 49.84% to optimize its capital structure, and this is representing a significant milestone for SBB. Nordiqus were able to raise SEK 16 billion from banks, and this has increased the stability 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 rejection 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 reflects our strategic goals and creates more transparency and opens 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 associate companies. This segment remains stable and profitable, with a yield of close to 4%.
Properties 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, the occupancy of the group is 94%, with very low fluctuation. So independent of the cycle, SBB's properties remain strong. If we take a look on education, you will see that the property value that goes into SBB's books now stands for SEK 0.6 billion. This, of course, is after the deconsolidation of almost all properties that now are in Nordiqus, which is now majority owned by Brookfield. The joint venture, including Nordiqus, stands at SEK 11 billion. The decentralized group structure is essential to achieving a more beneficial financial position for SBB.
The structure will give each segment better flexibility in financing and growth opportunities, and the management of each business area will be more focused. Yielding results 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 rent 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 was 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 high 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 on 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 shifts. 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 offering 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 through government-backed income with minimal tenant turnover. Nordiqus showcases 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 predictability 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 Nordiqus's deconsolidation. As of November 22nd, SBB holds a 49.84% stake in Nordiqus. Following the shift in majority ownership, in line with a 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 22nd 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. Similarly, net operating income grew by 6.1% on a 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 market. Quickly looking at our 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 a 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 -15.2% over the past 21 months. Under the same period, the 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 have increased as a result of increased inflation, although current trends suggest a tendency of decreasing, hinting at an improvement in the financial market. 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. A 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. As mentioned before, we have implemented several initiatives to accelerate this. A long-term objective has been set to regain an investment grade rating, and this work is already underway with the 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.
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 rate 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 debt 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 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 a cash sources/cash uses ratio above 1.0, and there are several processes ongoing to continue to manage both sides of this chart. It currently stands at 0.88. 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 to continue working on strengthening our liquidity. It's an ongoing work. With these comments, I would like to hand 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 did not hold back to take strong action, to plan, execute, to improve the situation for SBB. At SBB, we are working to improve both liquidity and the financial situation as a whole. We have implemented significant measures both during 2022 and 2023, and we will work hard to make improvements also in 2024. 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 also the net operating income had a high growth pace with close to 11% like-for-like growth.
That's very good and shows that the fundamentals of SBB's business are 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 years. 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. 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.
If you wish to ask a question, please dial pound key five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key six on your telephone keypad.
The next question comes from Fredrik Stensved from ABG Sundal Collier. Please go ahead.
Thanks. Good morning. May I start with two questions on the deal that you announced two 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? Thanks.
Thank you for the questions. 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.
All right. Fair enough. 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? Thanks.
Okay. I think SBB is a large company with access to various funding tools. And 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.
All right. That's it for me. Thank you.
The next question comes from Edoardo Gili from Green Street. Please go ahead.
Hello. Hi. Good morning, everyone. First question from me is, do you have an update from the investigation conducted by the Swedish Financial Supervisory Authority?
No, not at the moment. We submitted our response to their questions a while ago and haven't heard anything since.
Okay. Understood. 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?
Yeah. As we have expressed earlier, we were aiming for paying dividend in June, but that decision needs to be taken by the board at the latest stage and depends on various factors.
Understood. Can you explain a little bit more these factors that you're talking about?
Yeah. 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.
Understood. 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 to asset quality?
Okay. Fair enough. And then lastly, in terms of the NOI margin, which has decreased a little bit versus 3Q23, do you have an explanation for that? It seems like your operating costs have increased quite a bit quarter-over-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.
Understood. Thank you. I have no more questions. Thank you.
The next question comes from Emanuele Arnoldi from Barclays. Please go ahead.
Thank you. Thank you for the opportunity to ask a question. 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 pay it out or other uses for that? That's number one. And number two is also very simple, hopefully. A little bit, again, on the dividend and the hybrids.
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 two 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 on the hybrids before, or are the two topics disjointed and the pause on the hybrids was just instrumental for gaining time until June or for other reasons? Thank you so much. I hope I didn't talk too much.
Thank you for your comment regarding the transfer 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. 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. The rules for the hybrid bonds are such that if you pay the dividend, then you also need to pay the coupon of the hybrids. Those should be put together, I think. It also needs to be noted that we have 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. Both we and Castlelake have an ambition to continue the collaborations.
Thank you. The question was, is the SEK 5.2 billion part of it necessarily going to repay some banks that were previously financing some of these assets, for example?
No. These properties were unpledged.
Unencumbered. Okay. Very good. Okay. Thank you. Is part of this SEK 5.2 likely to be used to or has already been used, sorry, to cover some bank financing that has not been extended? 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. If you look on the bank debt, we had three parts of bank debt, you can say. One part was in Nordiqus, EduCo. And one part is in Sveafastigheter, the residential portfolio. And then we had a third part in our community properties. And then in the fourth quarter, we repaid all the Nordic banks in Nordiqus and obtained SEK 16 billion from other banks with the 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 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 showed that there are opportunities to find even better bank cost of funds than the Nordic banks.
Also this transaction with both Brookfield in the past and Morgan Stanley and Nordiqus shows that should the banks not want to prolong, there are alternatives for SBB.
Thank you.
The next question comes from Othman El Iraki from Fidelity International. Please go ahead.
Yes. Hi. Thanks for taking my question. Just a clarification on the hybrids 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 cut the hybrid payment or the hybrid interest earlier this year? So if you can clarify that, and what does that mean for dividends? I don't really understand. If you can clarify, please.
Yes. The clause is 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, you need to pay the hybrid coupons.
Okay. So dividends could be paid, say, in June. Is that what you said?
Yes.
Potentially?
Yes.
Okay. Because I was just looking at the in the report, you were saying that there was no new dividend being proposed. So that's why I'm a bit. There's no new dividend for Series A and B and D proposed by the board.
Yes. We have postponed the dividend for 2020, 2 years, and in report. The dividend we pay out is actually for the last year. For this year, we proposed that no new dividend is added.
Okay. So the dividend to be paid in June is from last year?
Yes.
Okay. And going forward, do you think that you would 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. You know the rating, CCC. The ambition is, of course, to have a company in a strong liquidity position. We would make the decisions to be a stable company from that perspective.
Okay. Thank you.
The next question comes from Yi Qian from Atlantic Omnium. Please go ahead.
Hi. Thank you for the presentation. I have a few questions. The first one, it's looking at the long term. What's your perspective of the parent company? Shall we see it as a pure HoldCo without any properties, or do you plan to still hold some properties at HoldCo level? And then the second one, it's still on the dividend, which I'm slightly unclear because the SEK 2.1 billion, it's supposed to have been approved for the 2022. Can you still delay the dividend payment, or it should be paid by June this year? And the last one, it's just a clarification regarding the borrowings at SBB Residential Property AB. I noticed the interest rate. It's around 13%. I'm just wondering whether this borrowing, it refers to the preference shares issued to Morgan Stanley, or there are other lenders on this funding, please. Thank you.
Regarding the dividend, then there are to be totally transparent. There are different opinions on whether the company needs to pay it or not. But since we have the previous annual meeting, we 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, there is not certain that we must, but we will try to do it. And regarding the 13%, that's Morgan Stanley structure.
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 Sveafastigheter. 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 the near-term focus.
Okay. Understood. Thank you.
The next question comes from Anders Dankvardt from Pareto Securities. Please go ahead.
Hello, everyone. A few questions from me. First off, on liquidity sources. Looking ahead, do you see any additional capacity in the banking system aside from rolling existing maturing bank debt, also adding on additional secured financing? And then also, secondly, do you see these new transactions like the ones with Castlelake as sort of the main source of incremental secured financing going ahead?
Yes. SBB has a rather limited amount of debt in the Nordic bank system. We can easily borrow a lot more. I think before we can do that, we need to improve the rating a bit. We should first improve the general 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 to do so, we have entered a partnership with Castlelake and previously Morgan Stanley. I think the preferred route for us is more like normal secure debt from banks. 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 accessing the unsecured capital market. But that will be the long-term ambition, at least.
First off, just a quick follow-up on that comment you made on secured bank financing. If I interpret you correctly, you say 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?
Yeah, I'd say correct, but maybe I can give some more color on it. It's not the whole company. Let's say we have Nordiqus. They will get an investment-grade rating, and they can easily borrow from the local bank market. Then we try to do the same maneuver with Sveafastigheter. Then we have two-thirds 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. If we have the same funding as them, then there are terms we'd like to be better than the peer group.
Understood. Maybe final question there on Sveafastigheter. How much secure debt do you have in the Sveafastigheter structure at the moment?
That will be disclosed during the process that we are currently in. That is nothing that we will comment at the moment.
All right. Understood. And just a final question on liquidity. So if I remember correctly, you still have some amount of that remaining intercompany loan down to EduCo or now Nordiqus still remaining. Is that correct? And if so, how much do you have outstanding?
Yeah. 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.
All right. Understood. And that is receivables from associated companies, right?
Correct.
All right. Understood.
To give some color on that, that means that there will be some interest on that position going forward.
Understood. And I guess that one would be reported under financial income, or will you include that in? All right. Perfect. Final question on that. So, of course, you're aiming to go for an 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 debt in that entity?
That is not the plan for 2024. For 2024, we want to secure an investment grade. And after we have done that, then we will see if there can be some changes. But on short-term, there will be no change.
All right. Understood. Thank you very much for these answers. That was all from me.
As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. 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.