Welcome to SBB Q4 earnings call 2024. For the first part of the conference call, the participants will be in listen-only mode. During the Q&A session, participants are able to ask questions by dialing #5 on their telephone keypad. Now, I will hand the conference over to Treasury Director Helena Lindahl. Please go ahead.
Good morning, everyone, and a very welcome to our year-end 2024 conference call for SBB. And thank you very much for taking the time and listening in. With me in the room, I have today's presenters, Leiv Synnes, CEO, who will guide you through the last quarter and last year's events, and will comment a lot about the strategy going forward. Daniel Olaissen, Finance Director, will guide you through the numbers. And lastly, myself, Helena Lindahl, Treasury Director, will go through the funding with you. The presentation will, as always, be followed by a short Q&A session at the end. So with that said, Leiv, please go ahead.
Thank you, Helena. I'm glad to see that the rental growth is there. We increased the rent by 5.5% in the like-for-like portfolio. And when we look on the net operating income, it increased by 7% in like-for-like, which is very good. And it's like it illustrates the strong portfolio that SBB has. We still have financial stability and liquidity as our core focus. And we try to reduce the debt as much as possible in order to strengthen the company. And in the last 24 months, we have reduced the debt by 32 billion SEK. We feel that the valuations on the properties are stabilizing. And we are hopeful that we will get some tailwind in 2025, with some hopefully write-off on the property side, which will be very helpful. We continue to deliver on the long-term strategy when we see improvements in how we structure the company.
In 2024, we listed Svea fastigheter, which is now the largest listed pure residential company in Sweden, and we're very happy about that, and we see good progress in Sveaf astigheter and also in all of the residential assets we have in the SBB group. We have delivered some development gains. We have developed properties in Västerås and Flen, and we have sold them or plan to agree to sell them for 1.4 billion SEK, which is very good and illustrates also the good staff we have here in SBB that deliver projects with good gains. We continue with the focus to make SBB more transparent, and one part of that is to dissolve joint ventures and reduce the number of associated companies, so we have dissolved joint ventures for the amount of 20 billion SEK during the year.
And if you look on the community properties, first, let me tell you about the completed steps that we have done here in SBB. In the educational properties, we feel that Nordiqus is now fully structured and is a very good company with access to cheap and long-term funding. You see that the residential, we have taken care of that with the IPO of Sveaf astigheter and also the restructuring of the debt in Svea fastigheter. And also, we have the PPI, the Public Property Invest in Norway, which is an associated company in SBB, which has received a BBB rating and has funded itself with Eurobonds. And the remaining segments are the community properties, which still are on the to-do list for us.
And we will put focus on that part of the SBB group from now on, with the aim to lower the vacancies, increase the rent level, and add letting areas. I think the properties perform well, but I think that they can perform even better if we put a little bit more effort into the operation, so we will add resources, particularly with the value-added properties that we have in SBB, so from an operational standpoint, we will divide the portfolio into two main areas. One is the cash flow or the pure cash flow properties. And then we have a smaller part with properties that need some development, and then we will put in more resources to work with the value-added projects that we have, and roughly, you can say that the cash flow properties are 90% and the value-added properties are 10% of the holdings.
And if we look on the big picture on the group structure, we believe that we are transforming ourselves to a very transparent group with three main areas: the community properties, the residential properties, and the educational properties. And the aim is, of course, to make it easier for you guys to understand SBB. In the end, it will lead to more funding options for us. If you look deep into the community section, it's a leading and scalable platform. And the largest asset in the community property portfolio is elderly care. Long-term rental agreements with publicly financed tenants, making the operations very stable. And the amount of assets is 44 billion SEK. And the residential mainly consists of the holdings we have in Sveaf astigheter. But we also have a joint venture together with Morgan Stanley. And then we have a couple of billion that we own 100%.
I think we know when we have put most of the assets into Sveafastigheter, we can benefit from economies of scale and also a pure focus for the management in the residential part of the business to increase the rents and reduce the costs. So I think we will see improving net operating income from the residential properties in 2025 and onwards, which will be very helpful. I will touch upon the educational part of the company, which is co-owned with Brookfield, which brings a lot of expertise on how to manage and grow infrastructure properties. And also helps us with getting long-term infrastructure financing. So Nordiqus has now one of the safest asset pools combined with very safe long-term funding, making the risk in the Nordiqus holdings very low. If you look on the occupancy, it has decreased a little bit during 2024.
One part of that is that we have deconsolidated some part of the operations, which is stable in the joint ventures together with Castlelake. So if we would include the joint ventures with Castlelake into the figures, there is no material drop in occupancy rate. So the operations in SBB are stable.
Thank you, Leiv. So let's go more into detail on the financial statements. On a like-for-like basis, rental income for the full year increased by 5.5% compared to 2023. Having costs under control with low maintenance costs provides a strong net operating income growth of 7.1%. This achievement is the result of our continued dedicated work to deliver on a strategic plan. For the full year, 63% of the consolidated net operating income was generated from community, but also with strong contributions from residential through Sveafastigheter. During the quarter, net operating income continued to grow strong and improved like-for-like with almost 10%. Administration and restructuring expense remains high during the quarter, driven by legal process, but also additional organizational costs in Sveafastigheter, being the Q1 as a listed company.
The ambition for reducing admin costs by 50% by the end of 2025 remains, and the work is on track. Changes in property value were almost flat compared to SEK 3 billion down in Q4 prior year, where the slightly negative movement for the quarter is primarily driven by realized changes in value from final settlements of previous transactions. Improvements of results from associated companies and joint ventures are mainly driven by changes of property values leveling off in JVs as well. Net interest improves compared to the previous year due to contributions from on-lending to joint ventures, while the shift in other financial items was affected by FX differences. During the year, the consolidated property portfolio has decreased by SEK 20 billion, primarily driven by properties being deconsolidated into established joint ventures.
During the quarter, SEK 1.8 billion of acquisitions have been reported due to acquiring stakes from JV partners, while having a very small cash flow effect. Goodwill was impaired in the Q3 by SEK 1.4 billion, but kept intact in Q4 due to stronger market conditions. Reducing debt and improved balance sheet remains our key priority. I will hand over to Helena to elaborate on that further.
Yep, thank you very much, Daniel. As you're very well aware, our main focus has been during the past 18 months to reduce the debt level significantly and also to make the circle of sources of financing wider as the bond market was shut down to us in May 2023. However, our long-term ambition is still to return to investment-grade rating. We realize that that road has already commenced, and I think that we expect it to take some time. During 2024, we saw an increase in the loan- to- value, and that was mainly due to the dividend payout we executed in 2024 as a backlog and also on the property value change. But during the last quarter, you can see that the LTV level has come down a little, 1%, but at least it has come down to 61%.
I think that that is a good sign that the market has turned around on property valuation. We have a secure loan- to- value of 20% and an interest coverage ratio at 2.0. The company has benefited tremendously during the past two years for the attractive long-term funding that was put in place already during 2021. This has meant that we have the bulk of our maturities after 2026, namely around 70%. And it has meant that we still have an average debt maturity of 2.9 years, and we are at an interest rate maturity of 3.1 years. As I said, as we have been amortizing debt rather than letting the new higher interest rate feed into our profit and loss statement, we still have a very, very low average interest rate of 2.43%.
We realize that the debt level is still too high, and we would like to bring it down significantly. We will do that by making no additional dividend for the foreseeable future. We will be very cautious around new property investments, and we will make very, very limited new acquisitions. We will use the cash flow to repay maturing debt in order to decrease the debt level. We will also make direct sales of fully owned real estate. We have also identified SEK 10 billion of non-core assets, which we will sell in the years to come. If that is not enough, we will raise equity in subsidiaries to address coming maturity, for instance, the 2026 maturity in August of 2026, which is the next one upcoming. Overall, we have had and still have a very, very constructive dialogue with all the banks.
As you can understand, this dialogue has been made a lot easier when we have been able to put litigation behind us. It's a very constructive climate. Also, I would like to mention that we feel a very strong support from our bondholders, and some of them have articulated very clearly that they would like to see us back in the bond market sooner rather than later. As we write in the report, we appreciate that some of the bondholders are still in Samhällsbyggnadsbolaget i Norden AB. For those of you who would like to exchange those bonds for newly issued bonds in the holding company, we invite everyone to reach out to us, and we will address that separately. Leiv, time to summarize.
Thank you, Helena. We have created a decentralized group structure with three focused business areas, and we have a strong brand name in those business areas. We have Nordiqus, Sveafastigheter, and PPI, and all of these properties, companies have investment-grade-like funding, and they are growing at the moment through construction of buildings or through acquisitions, so each of our core holdings will grow during the year, which is very helpful. We still need to reduce the debt, and that will be mainly done by selling other assets that sit in the parent. It can be residential properties outside Sveafastigheter or some direct lending to subsidiaries or associated companies. SBB operates in countries with strong credit rating and favorable population growth, and you can see some of the effects in the growth in revenues and the growth in net operating income.
We expect further growth in the like-for-like income and net operating income for 2025 and onwards. We feel strongly about, and we are very positive about the development in the underlying property portfolio. We believe also that the tide, the wind has changed in the property market. From a couple of years with declining property values, we are more hopeful this year that we will see some value growth in the assets. That will help us to improve the financial stability in the group. Net selling assets on the parental level, combined with the value growth of the assets, will bring down the loan- to- value, and will help us to recover the financial stability in SBB. For 2025, we are very hopeful that we will see improving figures throughout the years.
Thank you for that. And now we are ready to move on to the Q&A session. Operator, will you assist?
If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Mary Pollock from CreditSights. Please go ahead.
Good morning. Thank you for taking the questions. A few from me. The first is again on that SEK 2.5 billion facility that you have. Could you provide any more detail on tenor and cost of that facility? And also, where does that sit? Is it at the previous issuer, if you will, or the new issuer level? And is it secured on anything?
I think we'd rather not give any more details other than what we have written in the finance pages of the report, so I will redirect you to read them.
Okay. And you mentioned in the report that it was possible to refinance bank loans reaching maturity over the full year. Could you clarify, are those only bank loans at the residential subsidiary, or have you also been able to refinance bank loans secured on the community services properties or other properties that sit at the parent?
We have been able to refinance bank loans in the parent. Just before Christmas, we informed that we have dissolved two joint ventures, which we had with Magnolia and Sveaviken, and by dissolving them, we refinanced the bank loans that came with them in the parent with a large reputable Scandinavian bank.
But those were JV bank loans. Are they 100% owned by SBB?
They are now 100% owned.
Okay. Thank you. And my last question is, it looks like occupancy ticked up, and for growth was a little bit slower than I expected. So could you talk about the drivers there in the quarter?
The drivers behind the growth in income is, to a large extent, the indexation of rents due to the inflation the previous years. We expect the community sector to show a little bit slower pace in rental growth in 2025 due to lower indexation, but we expect that the residential properties will continue with high rental growth and high growth in net operating income and on the cost side, we believe that with more focused business lines, we will be able to cut costs, so hopefully, the net operating income there by will grow faster than the revenues.
Thanks. And on the occupancy, I know it was only up a tiny amount, but excuse me, occupancy was down a tiny amount in the quarter and over the full year. Can you talk a little bit about that?
Yeah. We were hit by some vacancies, particularly in Finland during the Q3 . But if we include, as I said, if we include the joint ventures that we have into the figures, there is no big movement in the occupancy rate. And that is due to the fact that we have a large pool of residential areas, residential properties with stable occupancy rate, more or less from year to year. And also, we have long leases with publicly funded tenants to a large extent. So you should expect very low volatility in the occupancy rate for SBB going forward.
Thank you very much. Next one, to ask a question?
The next question comes from Fredrik Stensved from ABG Sundal Collier. Please go ahead.
Thank you. Good morning. So can you sort of shed some light or elaborate a bit more on the SEK 10 billion of non-strategic assets, which you talk about? How much of that is residential? How much is public properties? How much are the loans to JVs, etc.?
We have dissolved some residential joint ventures with Sveaviken and Magnolia during 2024 or end of 2024. And those assets are roughly SEK 2 billion we are contemplating to sell. It's not like a must to sell it now because the next big bond maturity is in the second half of 2026. So we have the time on our side. But we want to concentrate our residential holdings to Sveafastigheter, and thereby we don't need to hold residential assets in the parent. So those properties are on the sale list. And we also have the residential properties together with Morgan Stanley in a joint venture. And we believe that the residential properties will have a strong development. So there is no need for a quick fix. We will take our time. And when we see an opportunity to divest that joint venture, we probably will do it.
So that is the larger part of the SEK 10 billion. And then we also have claims on subsidiaries or associated companies that we would like to reduce. So we don't intend to prolong the lending to joint ventures, meaning that the parent will get some cash from the associated companies. And together with the disposal of residential assets, we expect that will add up to SEK 10 billion in the next years.
All right. Thanks for that. Secondly, can you explain why financial income has been so high now in Q3 and Q4? It's between 240 and 250 million SEK per quarter or almost a billion SEK on an annualized run rate or annualized basis. So where is that coming from?
Yeah. So as we said in the presentations, we have contributions from underlying to our joint venture, and that is primarily with Castlelake, which was established during the year. So that's why you have the increase during the year.
Yeah, but the loan to the social facilities is what, SEK 3.5 billion? And this is SEK one billion of annualized level, so that would sort of imply a 30% interest rate. I guess we're not at that level, so is there any additional sort of interest income coming from somewhere?
Yep. When we sold 2% more of Nordiqus to Brookfield, we deconsolidated Nordiqus, and then the lending to Nordiqus became a loan to an associated company instead, so you will see the rental income there in the financial income. Previous year, it was like a payment for ourselves because it was consolidated, so that is a bigger part of the increase.
Okay. So it's basically the SEK 4 billion loan to Nordiqus and the SEK 3.5 billion loan to social facility. That's what makes up a billion SEK in run rate.
Yeah. The loan to Nordiqus is SEK 5 billion. But it is SEK 5 billion. And the value of it is, in our books, SEK 4 billion.
Okay. So that sort of implies that the interest rate is, what, 11%-12% on average to these JVs. Is that a fair assumption?
Yeah. We used the market rent at that point of time when we deconsolidated the properties. Yes. Any more questions?
Okay. And yes, a final one on that theme because I'm just trying to get a sense of what this line item will be in the future as well. When I look at your earnings capacity, there isn't any financial income. So why is there a difference here?
Yeah. That's a good question. I think we definitely checked in the earning capacity, but I think it might be like a normalized situation then for us. And we don't add up the financial income in that. Maybe we can come back to you on that one because.
Perfect. Thank you.
We expect the loan to Nordiqus, for example, to mature, and we will not prolong it. So thereby, it will be no eternal flow of cash flow from Nordiqus.
Okay. Yeah.
Yeah. Next question.
The next question comes from Othman El-Iraqi from Fidelity International. Please go ahead.
Yes. Hi, guys, and thanks for taking my questions. Just two from me, please. The first one is, you mentioned the possibility to come back to the bond market at some point. What would be the trigger for you to come back? Is it enough kind of rate compression or any other thing in your mind? That's my question.
Yeah. The trigger, I think we will try to muster as much liquidity as we can in order to repay all the maturing debt from the upcoming bonds. We believe that the bond market now is open to us, even though the spreads are wide. But it's good if we should, for whatever reason, fail to create liquidity. Then we believe that we now will have the opportunity to raise the liquidity from the bond market instead. So I would say the trigger would then be that we feel that we would like to have the disposal of assets at the later stage rather than this year for whatever reason. One reason could be that we believe strongly in the development of the value of those assets. And we believe that it's better to sell them next year instead of this year.
Is it fair to say that for the 2026 bond, you will more rely on asset disposal rather than a new bond to refinance, or do you think differently?
The plan at the moment is to repay the 2026 bond with liquidity that we get from the investments of assets. But of course, if we would fail to do that or we feel that we would like to delay the investments, then we might do a small bond instead.
I think it should.
My second question.
Yeah. I think it should be seen in the light that we are slowly but very surely returning to a normalized situation. And in that situation, we still see the clear need to bring down the debt level. But that doesn't rule out ourselves from tapping into the bond market should it be very favorable conditions for that.
Okay. Makes sense. Thanks. And my second question is on the SEK 5 billion loan to Nordiqus. I mean, do you have a timeline in mind? I know it's not necessarily a very easy liquidity source for you, but what kind of timeline do you have in mind for the retirement?
Yeah. We could do it quickly, but we usually have a counterpart that have a saying as well. So we will, of course, negotiate with Nordiqus and see what we can do. And if the terms are not favorable, we will wait. And it could be so that we will wait until maturity in 2029 to receive the funds. But it can also be that we agree at an earlier stage.
Okay. Perfect. Thank you very much. Thank you.
Thank you.
There are no more questions at this time. So I hand the conference back to the speakers. For any closing comments, please go ahead.
Thank you very much. Leiv.
Thank you for listening, and thanks for all the good questions. At the moment, we feel that we have tailwind. We feel that the rental income is growing. The net operating income is growing. And we believe that we, in 2025, hopefully will see some revaluations on the properties so that the loan-to-value will start to decrease. Thank you for listening.