Ladies and gentlemen, welcome to the SBB Audiocast with Teleconference Q1 2022. For the first part of this call, all participants will be in listen-only mode, and afterwards, there will be a question and answer session. Today, I am pleased to present Ilija Batljan, CEO. Speaker, please begin.
Thank you. As said, my name is Ilija Batljan, and I will present SBB's Q1 report. At the first slide, you see some of our properties, including European Most Sustainable Building, Sara Cultural Center, in city of Skellefteå, which is 26,000 sq m, built in wood, with the highest possible environmental standards. Actually, the building was finished at the end of last year. Finally, it is in our accounts from this quarter. If you look at the quarter slide two, please.
If you look at the quarter and the key ratios, you will see that we had strong performance. Rental income for the period has increased with 38%, landing at SEK 1.8 billion and a like-for-like 3.8% for the first quarter, which we think it's strong and in line with our focus to deliver CPI plus 100 bps on yearly increase of rental income. Net operating income strong SEK 1,153,000 , despite cold quarter, despite that we have increased the share of rent-regulated residentials in portfolio. The profit for the period SEK 2.99 billion.
If you look at our profits from property management excluding joint ventures value changes and the tax we landed SEK 1,326,000 which is also strong increase in relation to corresponding years. EPRA earnings SEK 0.64 to be compared with SEK 0.25 last years. We have a strong focus on deleveraging loan-to-value ratio slightly up this quarter mainly because of taking in minority interest from Amasten which had a double effect SEK 1.8 billion in cash and also decreasing minority interest.
However, we see the deleveraging continue this year with strong focus on a higher rating and lower LTV. Interest coverage ratio 5.5x . Very strong position there, and particularly given that we have average period of fixed interest of 3.7 years, which is giving us a good opportunity to deliver strong income from property management also going forward and been able to deal with the general trend of increasing interest rates.
Given the fact that we have almost four years fixed interest rates, we will be able to to let inflation do the job and in that way making sure so we can continue strong profits from property management and being able to deal with higher interest rates going forward. Important point here is also that all of the profit from outside of the profits from property management is almost coming from our property development. We have unchanged valuation yield during the first quarter. We slightly continue to increase our average contract length of social infrastructure properties.
Rounded, it's 11 years, but it's slightly over 11 years. Next slide, please. Another important message from the quarter is continuing increase in earnings capacity. We are now seeing earnings capacity at the property management level of SEK 3.71 per share. If you look at the adjusted profit for property management including profit from our value add strategies, and also payments for dividends to these shares and the hybrids, and also income or profit attributable to minority interests, we see that we should be able to deliver SEK 5.76 per share in adjusted operating profit to ordinary A and B shareholders. On top of that, we have additional SEK 1 billion in income coming from our current investments in project development.
That is adding to SEK 6.47, SEK 6.47 per share. Strong continuing increase in earnings capacity. Next slide, please. Trying to sum up with a few lines the first quarter. As I said, the business is focusing on a stronger rating and lower loan-to-value ratio which is key for taking next step to achieving BBB+ rating. Important point there is that we are continuing to deliver a strong ICR. This quarter ICR was 5.5x and that has been supported by a strong increase in like-for-like rental growth increased 3.8% and net operating income increased with 2.4%. The difference there is mainly given the cold quarter and this will be even up during the year.
Operating profit increased by SEK 831,000 - SEK 1,446,000 . Adjusted for value changes and tax retentions, the operating profit was SEK 1,326,000 which is an increase of 115% to the last year. EPRA NAV increased to SEK 47.31 per A and B shares. As I said, we continue to increase our WAULT. At the end of this quarter, we have WAULT that is slightly longer than 11 years. I mentioned also the importance of that we have last year invested in having long bonds with fixed interest rates.
At the end of the first quarter, the interest maturity was 3.7 years, and we had the average interest rate of 1.24%, 1.24%. Profit after tax landed at SEK 2,939,000 billion with unchanged valuation yields. As I mentioned before, EPRA earnings strong increase from 0.25 crowns per share last year to SEK 0.64 per ordinary shares A and B, A and B shares. The strong delivery from our value add strategies is continuing and they are delivering over expectation. This will be our main line for future organic growth, in focus where we are focusing on deleveraging and strong organic growth. Profits from building rights development and new production landed at SEK 1,642,000 .
We also continue to invest in our existing portfolio. In the first quarter we refurbish 304 apartments. Our investments in existing portfolio of SEK 200 billion are done at yield on cost of 5.3% which is strongly over valuations and will deliver continuing increase in cash flows in the quarters to come. Next slide, please. In our report, I also presented the more detailed scenarios to address issue of expectations and increasing interest rates. Also trying to connect that to the situation where we have our income CPI adjusted and where we also are able through investments in existing portfolio and through refurbishments to deliver 100 bps over inflation.
At this slide you can see that in scenarios where STIBOR that is today around 10 basis points increase to 250 basis points, which actually no one is still assuming it will happen. The most assumptions are around 150 to 200 basis points. But even in a scenario with 250 basis points STIBOR, we will be able to continue to deliver a strong profit and a strong dividend base. We also performed scenarios where we used actually nominal interest rates of 10%.
If you assume real interest 2% or 3%, even in that case, we will be able to manage to keep the dividend and rise it with inflation. If we lower our net debt with SEK 5 billion, which is part of the plan, in that case, we should be able to rise the dividend with inflation, even if the nominal interest rates rose to 10% and the real interest rates is like a double, 4%-5%. That is an important message, given strength in our income that inflation-adjusted rental income and long-term fixed interest rates offers very stable cash flow and continuing increase in dividend. Next slide, please.
We are continuing to perform both on NAV. As you can see, we have had a CAGR of 54% last years in NAV per share, which is the strongest in the sector. This is fueled by strong increase in earnings and profits from property management. You can see that for the last years CAGR on earnings has been stronger than CAGR of NAV. There is a lot of talk about valuations and NAV, but the important message that you can see from our report is that our CAGR on income has been stronger than our very strong CAGR of net asset value.
Next slide, please. Portfolio continuing to grow at the end of the quarter, we had properties for SEK 159 billion, continuing to grow in all our markets. We are having strong teams in all four countries, Sweden, Norway, Finland, and Denmark. I think that we also in this quarter were successful to buy additional properties in Denmark with government tenants and at the same time having strong underlying organic growth in Sweden. Passing rent, SEK 7.3 billion, continuing strong increase since last quarter.
WAULT, as I said, longer than 11 years. Net initial yield still relatively high, given the low risk of the properties of 3.8%. 79% of the portfolio located in major cities and university towns in the Nordics. Continuing strong focus on delivering new residentials and community service properties within Stockholm region. Next slide, please. Our income, as you already know, government-backed by AAA rated governments. This quarter, rent-regulated residentials are now at the level of 33%, publicly funded residentials for elderly people and disabled people, 17% of income. In total, residentials are now 50% of the income and 53% of the value.
We have properties for education, 29% of the income, and 28% of the values. 80% of our income is core social infrastructure, which is very low-risk assets. On top, the rest of 20% is hospitals, and government infrastructure. Public offices are continuing to decrease despite very strong income, and the government-backed income. As you have said before, we do think that in SBB, we are focusing on core and then we are selling public offices.
We also have a strong joint venture with Kåpan that is investing in government infrastructure in Sweden. In Norway, we are investing together with Arctic Securities in government infrastructure. That is giving us a very strong position in those markets. You can see that we do not have any larger leases that are expiring this year. That actually doesn't matter because we have, like, for elderly care homes, like 98%-99% property. In the same line also for education for the educational properties.
The actual WAULT is much longer than 11 years reported from within the community service properties part of social infrastructure. Next slide, please. Few lines about our joint ventures. Our joint venture with Kåpan, which is Swedish government employee pension scheme, is continuing to grow. There we have property value of SEK 12.4 billion. We have relatively low LTV in our joint ventures. We see that all of those are developing well. Next slide, please. Property development continuing having the strongest position in property development in Europe. At the end of this quarter, we had 4,900 apartments in production.
We have decreased the number of apartments in project development because if we see strong increase in interest rate and if we see that the prices on the construction are increasing, that means, of course, that we will have lower investments. I mean, we are focusing to deliver the best possible return to our shareholders and at the same time, to be responsible community builder. In that is also included that we have to follow how the prices are developing and to see how much we will invest in years that are coming.
The lower number apartments on the project development means that we think that we will be very cautious and following price development on construction. Next slide, please. The one part of our business where we are not cautious, because you have heard me today, being very cautious, focusing on deleveraging and decreasing LTV. However, the part where we are going to be very aggressive is sustainability. We have the ambition to be climate positive in the entire value chain. We are continuing to argue that the best properties from the sustainability perspective are the properties that are already built.
We are continuing to invest in our portfolio, and we are doing that with good profit to the society and to our business. We are right now running one of the largest ever done certification efforts in real estate in Europe. That we are planning to certify right now on the certification of 500 buildings, and after that, we will start with additional 500 buildings. Next slide, please. We do have strong ratings on sustainability, and we are industry leader in social sustainability. The important message there is that also in the times where the economy is having challenges, we are continuing to run our projects on social sustainability.
We have an announcement for summer jobs to young people to work in our company during the summer. We are planning to have more than 200 people having summer jobs in our communities this summer. Also today at the general meeting, the general assembly will vote about sending SEK 50 million to support Ukraine because we think that that is part of our core business and that is also part of our role as the industry leader in social sustainability in Europe. To sum it up, next slide 13, please. To sum it up, SBB stands stronger than ever.
We have inflation-adjusted rental income and long-term fixed interest rates that offer stable cash flows backed by AAA countries. We will, despite deleveraging, continue to have organic growth that is fueled by our unique investment platform, combining property management with our three value-add strategies. We are also selling building rights in that way, delivering extra cash to the business. We continue to be a strong dividend company and proposed dividend to today's annual general meeting is SEK 1.32 per A and B shares. That is proposed to be paid monthly and starting already this week.
We are emphasizing even stronger focus on rating, and we will be delivering some sales where we are using cash to repay loans as very focused approach to use our opportunities where we can sell the building rights and can sell public offices to continue to lower loan-to-value ratios. We do think that we have key ratios for BBB+ on the 12 months forward-looking and are fully focused to have all those fully reported by end of this year.
As I said before, despite focus on deleveraging, there is one part of the business where we will continue to invest heavily, and that is strategic sustainability. Sustainability is core of our business model, and we feel pretty comfortable to be able to deliver value for our shareholders, and value for the society. To sum it up, strong quarter where all business lines are delivering according to plan, even better, both from property management and from property development. SBB is stronger than ever, and we have a good position to take advantage of the market that is changing towards a higher interest rates environment. Thank you.
We can stay there and I can take questions.
Okay. We will now begin the question and answer session. If you have a question for our speakers, please dial zero and one on your telephone keypad. The first question we've received is from Niklas Wetterling, DNB Bank. The line is now open. Please go ahead.
Thank you. I have two questions. We can start with financial instruments, the result from those. Because in Q1, sector peers have had positive value changes from financial instruments due to rising market values on interest rate swaps, while SBB reports a loss. I wonder if you can tell us something about what's behind the result for financial instruments.
Our financial instruments are mainly shares in different companies. That is, if peers are making money in this environment, then they are the best investors or better investors than us.
Yeah, I believe it comes from increasing market values on interest rate swaps. That's okay, but.
We are not making money from investing in financial instruments. In our case, swaps are not financial instruments. Swaps are derivatives. Financial instruments are listed shares. I said again, if the peers are very successfully investing in listed shares, then they are better investors than us, and that is okay.
Okay, thanks. The other question is on rent increases for regulated or residential apartments. At the Wallenstam earnings call yesterday, they said that the rents is not raised automatically and that residential rents historically during times with high inflation has lagged behind CPI by a few years. What's your view and expectation for rental growth for regulated residential rents?
We don't have any other view concerning SBB rental income than the one that we are always been delivering, and that is inflation plus 100 bps. So that is our focus. How Wallenstam runs their business, that is their focus.
Okay. Yeah. You believe it can kick in like the year after?
No, but we are not negotiated through the calls or newspapers. We are just delivering the numbers, and we have always been able to deliver 100 basis points over inflation. That is because 70% of our income is more automatically adjusted coming from social infrastructure, from elderly care homes, from schools, and 30% is coming from residentials. That is, I don't think that Wallenstam has discovered anything new. It's in residential sector, you have to negotiate with tenant association.
We have a large portfolio, so we will have different negotiations depending on the local condition. All in all, our deliverables that we are guiding on is 100 bps over CPI, and there is nothing changed for this year, and that is what our like-for-like numbers shows this morning.
Okay, great. Thank you.
Thank you.
The next question is from Fredrik Stensved, ABG. The line is now open. Please go ahead.
Thank you. Morning, Ilija. During the transaction, I understand you closed the transaction in Kalmar. Did you also manage to or did the transactions in Stockholm with SISAB and the acquisition in Halmstad close in Q1?
Kalmar and Halmstad closed in Q1, and Stockholm will be in Q2 because the municipal council decided about the transaction in Stockholm after Q1 was closed.
Okay, perfect. The residential CPI indexation, if you will, is that included in the Q1 earnings capacity rental income figure?
Not all of that. There are still some negotiations ongoing. We will probably have higher than 3.8% when that is closed.
Perfect. Thanks. Final question on the financing side. During the quarter, the share of commercial papers decreased a lot, and you went from 12% - 18% in terms of secured financing. I know you have a target to stay below 30%, but should we expect sort of this trend to continue? Will you increase the share of bilateral bank loans in the coming quarters?
No, Fredrik. That is, we have the target to have secured the loans below 30%. This quarter, we are slightly higher. That is also partly connected to our acquisition of the Amasten and the job that we are doing there on refinancing, and also partly by working to prolong our both debt maturity and fixed interest rates. That is probably peaking at this quarter.
Okay, perfect. Thank you.
The next question is from Stefan Andersson, SEB. The line is open. Please go ahead.
Thank you. Just a couple of questions from me. Could you, if you look at the SEK 768 million in liquidity, that is stocks. Could you maybe mention. I think that's where we had this impact on the financial net negative that we talked about earlier. Could you possibly help us with the biggest positions that you have in there to understand how to look at that going forward?
Biggest position in what?
Oh, sorry. In your liquidity. Liquidity [at placement, andra], in your Swedish line, SEK 768 million. That which is.
Yeah.
-shares.
We are not commenting that because if those are there, that means that they can be sold within a year. We will not comment that.
Okay. Could I put it this way then? Are there some bigger ones in there, or could we more look into the stock market index and to understand the what impact it could have on your P&L going forward?
They don't have any impact on our P&L.
Sorry, I misunderstood then because I thought this was the SEK 341 million on your financial net, as we talked about before. You had the value changes on financial instruments, SEK 341 million. I thought that was related to the stocks you had in your liquidity. Maybe I misunderstood that.
No, not at all. That is related to financial assets.
Okay. Let me talk about another item then. On your joint ventures, you have your 27%-28% holding in JM. At what valuation do you have that in the balance sheet? Is that your what you paid for it, or have you done any adjustments to that value?
The value is Amasten, our joint venture, and the value there is according to IFRS. It is not connected to the share price.
Okay, good. I guess I mean, it could be a situation where you might actually under IFRS also change it if the change in valuation is substantial and for long term and all that. I fully understand it's the acquisition price. When you think-
I mean, that it could not be Stefan because that has to be done according to IFRS. I mean, concerning JM, we are long investors there, so that is not an issue for us.
Yeah. Okay, good. I mean, connected to all that, I guess, the stocks as well that we talked about before. Are you talking about taking down LTV and maybe divesting some properties? Could you also see yourself actually divesting some of these shares? Okay, JM, of course not because you just said it's long term, but if you look at the other ones, I guess those are also part of what you could divest to get your LTV down a little.
We can divest whatever we want, but we are trying to be very, how to say, very clear on our long-term focus. If our long-term focus is social infrastructure and residential, that means that the assets connected to that that are long-term investments for us. That is concerning divestment, we do not need to divest anything if we don't want. Because we had said before, we made a large amount of money last year of selling building rights and selling some public offices, and we think that strategy has worked well, and we will continue on that line.
Yeah. Good. Thank you. My last question is regarding EPRA, which you follow and include some of their recommendations. I'm thinking about LTV there. Is that something that you might follow as well and disclose the LTV according to their new recommendation?
Yeah. We will look during this year because we will have actually lower LTV using EPRA because we have a relatively low LTV in our joint ventures. Stefan, as you know, joint ventures, those guys are not working so fast and not so it's always getting the numbers. We will look towards the end of the year to also add LTV measure because I understand that you and many others are very interested in that, so we'll be happy to do that.
Okay, great. Thank you.
Thank you.
The next question is from Fredric Cyon from Carnegie. The line is now open. Please go ahead.
Hi, four questions from me. Starting off with the acquisitions and divestments. Yesterday announced SEK 4.8 billion in acquisitions. Net acquisitions are gonna be a net seller for the remainder of the year.
Yeah, we will probably be net seller for this year.
That's clear. What kind of assets, if any, are you looking at selling? Is it more related to building rights, is it community services or residential properties?
It is building rights and public offices mainly. It can be that someone give us very good bid on some assets in smaller cities, and then we may look to sell. It is mainly building rights and public offices.
That's clear. Third question. It has been a long journey for SBB to reach the BB B+ rating compared to when you initially talked about it. When should we expect it to be reached?
I mean, we actually get rating from BB B flat from Scope, and we have now BB B- with positive outlook, both from S&P and Fitch. We have a focus to report the numbers for BB B+ . Rating should normally be done on forward looking. However, given that we have been growing very fast, rating agencies are probably expecting us to see the reported numbers. Our ambition is to have reported numbers in place at the end this year.
Okay. You're expecting it to be reached during 2022?
That is, uh, that is-
Clear.
That is our focus, absolutely.
Okay. My final question. Anything materially that might impact your cost of debt during the second quarter? I, for instance, prolonging loan duration or changing your hedging, or should we expect the 1.24% to be approximately the same when you report second quarter numbers?
We will probably be unchanged if nothing revolutionary happens. I don't know if STIBOR moves to 10% tomorrow, then it can change. In a normal environment, we should be almost unchanged.
Okay. Thank you very much.
Thank you.
The next question comes from Clark McPherson, Clearance Capital. The line is now open. Please go ahead.
Good morning, everyone. Thanks for hosting the call. Actually, just to follow up on the last question, talking about all-in cost of debt. I see on the interest rate scenario, you seem to be using a spread of one point or 130 basis points. If I look at one of your peers who funded in the Swedish market in the last two weeks with a similar rating, the spread on their five-year paper was 190 basis points. I'm wondering if I could just get an idea from you of, if you had to access the Swedish krona market now, say for five-year paper, where do you think your spreads would be?
I did the 10 years at 230 bps just last March. If you look at my scenarios, then you can see that I also used 250 bps on STIBOR, which in total is 3.8%.
The ten-year that was the bank funding that you did?
Yeah, it was 130 basis points on 10-year.
Was it secured or unsecured?
That one was secured.
Okay. For unsecured funding, where do you think like here and now the spread would be on over STIBOR?
I do think that when we do it the next time, it will be around 130 bps-140 bps, which on average will be below 130 bps if you look at all our portfolios.
Okay, great. Understood. Just going back to this previous question, highlighting the shift in secured versus unsecured funding and which seems to be, you know, this seems to be a shift from CP and increased utilization of bank funding. Given the current market environment, would you feel that bank funding and secured funding is probably, I wouldn't say the only option, but the best option in terms of managing your interest rate costs at the moment?
No, not at all. We have a broad financing base. It is mainly choice of moving and taking into account that we acquired Amasten with the large part of rent-regulated residentials that historically have been financed in the banks. As I said before, the housing-secured funding has peaked at the end of Q1 and will continue to decrease towards where it was mid last year.
We should assume that the CP usage remains at sort of the current levels that we're seeing now then?
Yeah, I think so. That is the level that we have had historically. Because historically we have been paying a large amount of money when repaying the loans and bonds. We used CPs as a part of bridging when completing the Amasten acquisition because before placing some of the loans. Those loans have been placed in secured market because that is where traditionally residentials have been funded.
Okay. Just one last question from me. You've done a small bond buyback, and you've alluded to doing more. First question is like why would the amount
Well, that was small because no one wanted to sell to me.
Okay. Fair enough.
I will have to do more.
All right. I guess that's certainly a positive. Just going forward then.
I don't know. That is the fact.
Well, going forward, I mean, where would you target the future buybacks? Would it be on the euro debt structure or on the SEK or NOK? What about floating versus fixed? I mean, any guidance where you would target the buybacks in future?
We will probably target the floating given how the interest rates are moving. We will do what we perceive is the best for our investors. We don't have any ideological or political intentions with this. It's just focusing on to make sure our investors can make the best possible profit.
Okay. Great. Thank you very much.
Thank you.
The next question comes from Jan Ihrfelt, Kepler Cheuvreux. Your line is now open. Please go ahead.
Okay. Thanks for that. Good morning. I have three questions. First one is, as you earlier stated that you're going to be a net seller this year, could we expect your cash position, which is currently at SEK 9 billion, to come down during the year?
That is not Jan, you know, I'm a very cautious guy. I like cash. Cash is good to have, particularly in those times. I'm not sure of that. It depends on how the market and opportunities. We will, as I said before, target some floating bonds. We will repay some other loans. We will decrease part of our secured funding. We think it is good to.
I mean, you never know how long the war will last in Ukraine or what may happen. It's good to have some cash because there may be opportunities too.
Going to your residential production, do you have 100% flexibility to stop that, or are there any projects that you had promised, so you're more or less forced to start them, or could you just decide yourself on-
No, no.
What?
We have great flexibility and that is, we will of course build because we feel that the society needs more rent-regulated residentials. If the interest rates are high, we will stop building. I mean, if the central bank and the government don't want anything to be built, we will not build. That is how the economy works. I mean, usually interest rates are increased in order to decrease activity in the economy. We will be very following on that.
If interest rates increase, then we will just put the foot on the brake.
Okay. Could you just help us on what kind of parameters are you looking at when you decide this? Is it return on investment? If you could just guide us what it has been in the past.
I think that we.
-what you see right now and-
Yeah, that is the only parameter we are looking at. The only focus we have is to deliver the best possible profit to our shareholders. That is, we think that is the best way to run the business. We don't have any like pre-decided numbers or, we have to in every moment to weigh the risk and the cost of the capital and the deliverability, and decide if that is delivering the best profit for our shareholders.
Okay. My final question regards your building rights. You said that, if you were to sell something, which is less likely, you probably go for, among other things, your building rights. Due to raised construction costs, and so on, do you still think you will be able to sell this building right with above booked values?
Yeah, yeah. Our booked values are very low, so we are always making money from the building rights. We will see. I mean, if we don't get good price, we will not sell. We have been able to sell at good prices in Q1. I think we sold for like SEK 150 million, something like that. We look forward to see how the market develops. Because Jan, you should know that, well, they used to say, "Buy land, they don't make it anymore." Particularly in the large cities like Stockholm, there is still demand also for building rights.
Okay, thanks for taking my questions.
Thank you.
The next question is from Bertil Nilsson, Carlsquare. Y our line is open. Please go ahead.
Yes, thank you. My question related to what was asked before, if you felt about the rent, the construction of residential and decrease. As I understood it, you refer to construction costs, increased construction costs. Has it not something to do with investeringsstöd, which is gone now and so on? Or what kind of
No, not at all. I mean, construction costs have been increasing. However, we are running the projects. As I said before, we have 4,500 apartments that are currently built, and we don't see any problems with those projects. But I said that we are decreasing the amount of the apartments that we are preparing for to be built going forward. Because in a situation where interest rates increase heavily, then it's not wise to build new apartments.
That is the only view on that. We don't have any problems with how the situation is right now.
Okay. Thank you.
We have a follow-up question from Fredric Cyon, Carnegie. Your line is now open. Please go ahead.
Yes. Thank you. Just one follow-up question. You're trading now at a 35% discount to your reported EPRA NRV. If you believe in your book values and argue your balance is strong, why are you not doing buybacks?
We will not comment where and if we should do buybacks. We have chosen historically to pay dividend to our shareholders instead of buybacks. We are actually asking general assembly today to give us a mandate for the buybacks.
Okay. Thank you.
There are no further questions at this time. I hand back to you, speakers.
Right. We have had a few questions by email, but they have all been answered by other speakers today. With that, I hand over to Ilija to sum up the call. Thank you.
Thanks, Marika, and thank you all for listening. As I said, we delivered a strong quarter on property management, on property development. We stand stronger than ever and we'll have focus on stronger rating and lower loan to value ratio, and part of that will be fueled by our organic growth. Thank you very much, and thank you for