Welcome to Samhällsbyggnadsbolaget Q4 Report 2022. For the first part of the conference call, the participants will be in listen only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. I will hand the conference over to the speaker, CEO Ilija Batljan. Please go ahead.
Great. Thank you very much. My name is Ilija Batljan. Welcome to the call with Samhällsbyggnadsbolaget i Norden or SBB. SBB, we are the largest owner of social infrastructure in Europe. At the first slide, you see some of our buildings. Among others, we are the largest owner of social infrastructure for public education. You see on the slide one of our preschools, and you also see one of our buildings that is used for apartments for elderly people. We have a strong position in working together with Nordic municipalities to deliver social infrastructure.
This morning, we, before announcing our report, we also announced that the board is investigating if we should IPO one of our subsidiaries, Sveaf astigheter. Sveaf astigheter has a unique portfolio of assets in Stockholm's in Stockholm region. Total number of apartments within Sveaf astigheter will be 5,000 or more than 5,000. On top of that, they have building rights for 4,900 apartments. We will also move our ownership in Heba Fastigheter to Sveaf astigheter. In that way, we create largest Stockholm-focused rent-regulated platform.
Those of you that are visiting Stockholm or living in Stockholm, please visit some of the properties from Sveafastigheter, you will see that they have been doing a great job. That is why they're also been awarded different architecture prices, and their focus on sustainability has been acknowledged many times. Sveafastigheter, SEK 15 billion total asset value. SBB's share of that is SEK 8 billion. Some of the buildings from Sveafastigheter, you can see at this slide.
As I mentioned before, award-winning architecture with cutting-edge technology and being able to deliver the new buildings throughout cycle and having also strong demand for rent-regulated residentials. That was one of the points that we emphasized in priorities from the board related to situation and our focus to continue to deleverage and continue to strengthen our balance sheet. We also as a part of board's proposal for dividend. Board is proposing dividend of SEK 1.44 per Class A and B shares, and SEK 2 as usual per Class D shares.
Board is also proposing that we will launch DRIP, dividend or opportunity for our shareholders to reinvest the dividend. Shareholders will have opportunity to choose either to reinvest the dividend or to receive dividend in cash. Reinvestment is we've seen in among others, our partner Brookfield is having this program in Canada. We see this as additional opportunity for our shareholders to compound and continue to get value from the business. Great. Let me now focus on earnings capacity that we are presenting at the end of the last year.
Despite doing a large amount of divestments and being probably the most active company in the space, divesting assets, strengthening the balance sheet, we are delivering very strong earnings capacity. You can see that we're expecting operating profit of SEK 2.8 per share and earnings capacity SEK 2.11 per share. On top of that, you can add that we are getting income from our projects portfolio in terms of the building that will be finished during the year. Those are delivering SEK 275 million in extra income, in extra net income next year, which is corresponding to SEK 0.19 per share.
In total, earnings capacity for 2023, SEK 2.3 per share. We also illustrated at the lower side of the slide, earnings capacity showing effect of minority interest. As you can see, after minority interest, we should be able to deliver SEK 2.2 per share plus SEK 0.19 as I mentioned before. SEK 2.2 per share all in. Strong earnings capacity for 2023 and basically strong effect from increased income from inflation that we already get in the beginning of this year. That will be seen in our results in when we present Q1 numbers.
We have presented priorities the last quarter, we were very clear that our is to divest assets and also to divest share of joint ventures. In Q4, we divested the joint ventures for 2 billion SEK. We also divested 49% in SBB EduCo for 2.9 billion SEK in cash, plus earn out of 1.2 billion SEK. Another important point is to continue to work to diversify our financing, and last year, we were doing our first U.S. private placement. We were also issuing in the Schuldschein market
In November last year, we did a large repurchase of our bonds, but also EUR 150 million of our hybrids. Another point that we emphasized in Q3 last year was that we are, we will distribute the residential company to our shareholders. That has been done in record time. It was announced and delivered in 30th of December last year and listed at First North Growth Market 10th of February this year. That transaction decreased SBB's exposure to secured financing with SEK 7.4 billion.
The last point, as we also mentioned, and as a, as a priority in Q3 was that we are focusing to take in minority investors with long-term institutional capital that will work together with us to develop our assets. We announced thirtieth of November, we announced the transaction with Brookfield. Also there we did close the large part of that transaction eighteenth of January this year.
It is always good having a good base that weI've announced during the last year, and the priorities that the board is presenting for this year are including among others investigation about IPO of Sveafastigheter, as I mentioned before. We are also continuing to strengthen our balance sheet through disposals. Right now we are in dialogue of disposing SEK 6 billion of assets to further strengthen the balance sheet. We have a great cooperation with Brookfield and we are doing together strategic work to look for future growth in Europe. Our.
We used to emphasize that sustainability is the core of our business. We have the highest rating in accord among our peers from Sustainalytics, and we are very clear track to become climate positive by 2030. actually, just a few days ago, we also started our first solar park that has been built last year, and that will produce 10 TWh electricity, which is 5% of our total consumption. If you are driving at E18 in Sweden close to Hallstahammar, you can see beautiful panels delivering SBB green energy.
Last point given that we had announcements last year about JM, the board wants to be very clearly in message that they see JM as a strategic investment in line with SBB strategy of owning unique and attractive assets. Highlights from the fourth quarter. As we have said before, we do think that ability to adapt is what is differentiating the winners. We have shown through 2022 and also through fourth quarter our ability to adapt. We have strong focus on our core business.
If you look at our NOI yield, if you look at our operating surplus, the net operating surplus, you will clearly see that we have strong delivery from our core business. Our net operating income is highest ever 2022. We have continuing to have high interest coverage rate of 3.9x and also strong increase in cash flow. That is actually you more focus on core business, you stronger increase in cash flow. You can see that our cash flow has increased with 42% year-on-year 2022 to 2021, 78% of our gross debt has a fixed interest rate.
Our longest debt is the lowest priced. We are using cash coming in to repay short-term debt. That is also why we focused the latest repurchase of the bonds on short-term. The most important point here is actually number 5, and that is that we have shown both during pandemics, but also in 2022, in a challenging market, that we have a unique liquid assets. We use that fact to be committed to continue to strengthen our balance sheet. As you already know, our assets are in the most populated regions in the Nordic countries, 79% is located in major cities and university cities.
We are having a relatively high net initial yield for this kind of for this kind of low-risk assets of 4.2%, and a very long contract or lease average lease length with our tenants that is increasing 10 years. Looking at key ratios for the fourth quarter and in comparison to the fourth quarter 2021, we are increasing our rental income despite divestments with 9%. We are also, as I mentioned before, increasing cash flow before changes in working capital. We have lower profit from property management, that is basically related to unrealized losses in currency.
Adjusted profit from property management is increasing. As I mentioned before, strong net initial yield and strong ICR of 3.9x despite increasing interest rates. At the end of 2022, we are still having outstanding cash that has to be paid to us from committed divestments of SEK 10.5 billion. The largest part of that is coming from Brookfield. SEK 6.6 billion have been already paid in 18th of January this year. That means that reported LTV ratio is decreasing heavily after that cash comes in.
Here you can see on the pro forma illustration showing that LTV is going down from 49 to 45%. Net operating income. Our rental income is landing the year at SEK 7.4 billion for all year. Net operating income for all year, SEK 4.9 billion, 66% surplus ratio. This is a message of strength in a quarter where we still were consolidating Neobo and having a large share of residential apartments that were fully affected by increase in energy prices. We are delivering 60% net operating surplus in Q4 and 66 for all of 2022.
This is one of the strongest delivery comparing to our peers, and particularly controlling for that we had a large share of residential income during 2022. Rental income increased by on like-for-like basis by 4%. That is 1.2% or 120 basis points over 120 basis points over base inflation from 2021. Which is strong delivery given that our main part of our income is related to inflation. On top of that, we own rent-regulated residences. Profit from property management.
As I said, as I said before, we have on a yearly basis a strong profit of property management of, excluding translation losses in currency, SEK 4.4 billion. Taking into account translation losses of SEK 1.9 billion, we are landing at SEK 2.4. As I mentioned in the introduction, our core business is continuing to have a strong delivery. Given the divestments and restructuring that we have done during 2022, we should be able to show continuing strong delivery in Q1 this year.
On profit before tax, here is where you can see that we have been doing large cleaning in 2022. We are having a decrease in changes in value with SEK 4.5 billion, which is one of larger decrees, basically related to rent-regulated residentials. We also are taking through the P&L according to IFRS some kind of realization results on distribution of Neobo. We are dissolving goodwill after property sales. All of the goodwill that has been on the other part of portfolio, including building rights, have been dissolved or have been written down.
Also sales are leading to that some part of the goodwill that is within deferred tax has been dissolved. We are over the line also continuing to write down JM's stake, despite that JM is both increasing the dividend and having strong buybacks. We are also taking a hit on values of financial instruments. That is how to say, part of the story that our core business is delivering strong profit and strong cash flow, and we are doing large known cash write-downs. If you look at...
If you look at our debt, as I mentioned into introduction, we have a unique, long debt portfolio with relatively long maturity of almost four years. We also have large expected inflow of cash from divested assets. It's not only expected, it will be done, and the first part of that has already been done. Given the cash coming in from the Brookfield transaction, will be continuously used to repay bonds.
However, right now we are having final discussions with Swedish banks on refinancing and some new financing of SEK 12 billion. We are also seeing that the bond market is slightly trying to take the first steps also for the Swedish real estate. We think that is good. However, our focus is still to fulfill what we have said last year to continue to strengthen our balance sheet. I will try to summarize what I just presented to you with few main points.
The first one is, we announced this morning, in line with the board priority that we are investigating IPO of Sveafastigheter, a unique Stockholm-based residential portfolio with large focus on sustainability. We do have in that portfolio SEK 8 billion on equity value attributable to SBB shareholders, and IPO. If we choose the IPO then the plan is to deliver on this in the first half of this year. We are fulfilling our continued disposal plan, and are in dialogue regarding disposals of SEK 6 billion on the book valuation. That is also in order to further strengthen the balance sheet.
Number 3, we have started our partnership with Brookfield, and we are working together and will work together to have a strategy for future growth in Europe. We think that Brookfield as our partner is the, is the right step when taking SBB in Europe to grow together with Brookfield. Number four, we are, we think that JM is developing well. They are a unique and attractive asset. The board has concluded after strategic overview that this is a strategic investment in line with the SBB strategy of owning unique and attractive assets.
Number five, we are continuing to focus on core business, which is in our case, social infrastructure, and where we in some places in order to support municipalities are complementing with rent-regulated residentials. As I said before, we feel that there are strong needs for social infrastructure. We feel that we have very good cooperation with our municipalities. We feel that SBB with a stronger balance sheet is also important for municipalities in order to support their needs for social infrastructure. Finally, the board is announcing that they will propose to...
They will propose to annual general meeting dividend of 1.44 SEK per Class A and B shares. Two SEK per Class D shares. Both share classes will have opportunity to reinvest instead of taking dividend in cash, to reinvest into new Class B shares. That means that all share classes, both Class A and B, but also Class D shares will have opportunity to choose instead of getting paid dividend in cash, to get or to reinvest in new Class B shares. Great. I will stay there. Please speaker for the questions.
Thank you. If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from John Vuong from Kempen. Please go ahead.
Thank you for taking the questions. Over the past quarters, you've been conducting sales to strengthen the balance sheet like you said. Tying this into the decision to increase the dividend, does this imply that you're happy with where the balance sheet sits right now? Onto that, should we expect further sales beyond the Sveafastigheter spin-off and the SEK 6 billion of disposals in discussion?
Thanks, John. As you said, we have actually still waiting, or at the end of the last year, we were still waiting to get in SEK 10.5 billion in already committed cash that we have sold properties for. First SEK 6.6 billion we get in mid January. This SEK 10.5 billion also combined with both eventual as we said, IPO and Sveafastigheter, and those divestments that we are in process with, will together deliver one of the strongest strengthening of balance sheet ever seen in real estate in this short period of time.
With this, we feel that we will be ready for the next step, having strong balance sheet and ready also to use, how to say, financial strength of our partner, Brookfield, to proceed with growth.
Okay. That's clear. Maybe on the Sveafastigheter spin-off. If I understand correctly, it's an IPO of secondary shares. Will there be any primary issue tied to this transaction?
Sveafastigheter is having a very low LTV. It is, actually, I think, on consolidated basis, around 30% or less. We have not decided, yet we are in the process. This is a unique Stockholm-based asset, and we will do what is the best for SBB and for the company.
Okay. Then last one on one of the comments you made in your report. You mentioned that you expect to secure new financing in the bond market already this year, probably as the conditions improve. What would the use of these proceeds be and you say would that be for refinancing bond maturities in 2024? If so, is that already included in your forward-looking earnings capacity?
No, it is not included. That is more of the comment what we are seeing in the market. Because you had like last part of 2022 where the Nordic bond market was frozen. Now in the beginning of this year, we have seen some openings, and we think that is good that market is start to open.
Okay. That's it. Thank you.
Thanks, John.
The next question comes from Fredric Cyon from Carnegie. Please go ahead.
Good morning, Ilija. Two questions.
Mm-hmm.
Starting off with the projects. Those have not been added to the earnings capacity, if I misunderstood. You also guided towards a contribution from those projects during the coming year, three years of about SEK 417 million. Out of those SEK 417 million, how much do you expect to be completed in 2022?
Fredric, I didn't hear the last part of your question. How much of these SEK 475 million?
Yeah. The question was out of the SEK 417 million in NOI that the projects are expected to generate, how much of that is expected to be completed within the next 12 months?
Two hundred and seventy-five millions.
Okay, perfect. Moving over to the 6 billion SEK-
That is on NOI basis. That is our pure earning of SEK 275 million.
That's clear. Nothing of that has been added to the earnings capacity?
Nothing.
Perfect. Then moving over to the deal volume of SEK 6 billion that are being discussed. When do you expect to come back to the market and give us some indication of when that's completed? Second of all, what kind of assets is it and is it multiple deals or is it a larger portfolio bid?
It is multiple deals. We are expecting to close that in first half of this year.
Great. Moving over to the loan extensions. There is a volume of SEK 12 billion that you discussed. How much of that is prolonging existing facilities and how much is new facilities?
It is a combination, and the larger part is prolonging existing the facility, facilities, but it is also new facilities.
Great. Then my final question is related to the book value of JM. It took a hit in the fourth quarter, although minor. What is the book value today of the JM stake?
The book value today, that we have at the book of JM, is largely, slightly above SEK 6 billion.
Okay.
We have, write it down, both in Q3 and in Q4.
Great. That's all for me. Thank you.
Thanks, Fredric.
We have a question from our unregistered number.
Please state your name and company. Please go ahead.
Morning, everyone. This is Neeraj here from Barclays. My first question is around S&P rating. Despite all the disposals and deleveraging efforts, S&P still kept the outlook on negative. What do you think will be required more to make progress on that rating side?
I think that S&P has been clear in their messaging that they want us to see that we have received cash. I think when we report Q1 numbers, that will be very clear that we have received cash, and that our LTV is decreasing. In this report, I think there is another important message that I think S&P should appreciate, and that is that we are delivering very strong ICR. Because in the market where we have low-risk asset, ICR is when the interest rates are increasing, ICR is issue. We are showing that we are delivering strong ICR of 3.9x .
All right. Thank you. My second question is, regarding your pro forma LTV calculation on page 10 of the slide. I see that you're reducing the total assets, by SEK 10.5 billion as well. If I remember correctly, you plan to fully consolidate the EduCo, right? Technically, that shouldn't reduce your total assets.
Yeah, it should. That is a very good question. Thank you for that. That is reducing total assets because when the cash comes in, we will repay the debt. That is why it is reducing in in the calculation.
All right. Thank you. My final question, where do you see your final pro forma LTV to be like, after all the disposals you have made and the disposals you are planning, of SEK 6 billion and the listing of the subsidiary? Where do you see yourself, in terms of target LTV, to?
We see that on reported level we will be around 40% and on the S&P level around 50%. That is where we are targeting and that is what we think that we should be able to achieve.
All right. Thank you.
Thank you.
The next question comes from Markus Henriksson from ABG Sundal Collier. Please go ahead.
Thank you very much. Good morning, Ilija.
Mm-hmm.
Just one question from me. It's regarding the dividend reinvestment plan. I wonder how does it work technically? Is there a discount to the new Class B shares, or will they be swapped at the current spot market price? Anything that would be helpful here would be very, very helpful.
Markus, usually, we are having now work that will follow up the board's, sorry, that will follow up the board's proposal with lawyers and experts working to prepare this in exact way. Usually, that has been done in some other countries, has been that, you, for example, take the record date and four following days. You use like five days average share price. That is how usually it has been. Sometimes company have like 1% or 2% discount, like an extra for the shareholders.
Work on that is done, but usually it is based on the average price on 5 or more days, including record date.
That's very clear and helpful. Thank you for that.
Thank you.
Please state your name and company. Please go ahead.
Hi there. This is Paul Gorrie at Thames River. Just checking you can hear me okay.
Almost. Please just be slightly more clear.
I'll speak a bit, a bit louder.
Thank you.
There we go. I had a quick question on the valuation decline in the quarter. I think you said, you know, that most of it related to the residentials. Can you just give a split, or any more colors to how much of the, kind of, two and a half quarter on quarter decline-
I can, if I just give you for all of the year, we are reporting SEK 4.5 billion. Of those SEK 4.5 billion, it is like SEK 3.7 billion-SEK 3.8 billion that is coming from residentials. Then we have SEK 6 million-SEK 7 million that are basically related to the newly built or projects for social infrastructure. All in all, social infrastructure have been stable during the year. We see actually now large demand for social infrastructure, but there are no assets, so you can buy.
Yes. Yeah, no. Understood. Just in the fourth quarter specifically, can you give me the figure for the residential, the sort of quarter-on-quarter percentage decline?
In the fourth quarter, we had a total of SEK 3.5 billion in decreased valuations. Half of that have been residentials, and then we have, like, half of the rest is coming from projects and newly built community service properties.
Yes. Okay. Okay. The, the reason I ask was Neobo also reported obviously this morning and wrote down the resi by, I think, 8%, quarter-on-quarter. Obviously they used to be SBB properties, but it seems like they've taken a bigger hit on their residential than you have just based on those numbers.
Neobo's valuations are done within SBB valuation process. It is.
Yes. They should match.
It
They were down 8%.
It is within the same, it is with the same, the same process. Actually it is us that have delivered material to the valuers, and we use only external valuations. We are not doing any. How to say? We are not. Our valuations of all properties, also including Neobo properties, are coming from external valuations.
Sure. Okay. Theirs were down 8% and yours were down sort of 4 or 5. Are they much lower quality? Is that the differential?
You can never. It can also be that some of the properties have not closed their rental negotiations and so on and so forth. It's always very difficult to do it on one quarter when you have external valuations every quarter.
Okay. Okay. Understood. That's all for me. Thanks.
Thank you.
There are no more questions at this time, so I hand the conference back to the speakers for any questions from the web.
We have received a few questions from the web. The first one is the following. Can you please clarify, will the DRIP involve new B shares being issued or are these B shares purchased on the open market?
We have not as I said before how the DRIP will be fully structured, we will come back with that in connection to annual general meeting.
Okay. The next question is, when you're putting out Sveafastigheter on the market, will existing shareholders have preference to sign up for the introduction?
We have not decided yet about IPO. We see that it's important for us to show this unique asset that we have. The board has chosen to do investigation, and eventually details will come going forward.
Thank you very much. Ilija, please can you now sum up? Thanks.
Thank you very much. To sum up, we think that our core business is delivering strong profit from property management. We are delivered according to disposal plan, and we are continuing to focus to strengthen our balance sheet. Both ongoing divestments and IPO or investigation about IPO of Sveafastigheter are part of that process. We think that we have a strong, unique collection of assets that are, at the end of the day, government-backed. We look forward to continue to create value for our shareholders and our creditors. Thank you very much, and thank you for