Earnings Call: Q1 2021

May 5, 2021

Thank you. Hello, everyone, and let's start with the first slide, Slide number 2, showing why we are arguing that we are social infrastructure champion in Europe. There are 5 highlights that we used to emphasize. The first one, we have very strong and stable cash flows that are at the end of the day backed by AAA countries in the Nordics. Number 2. We are a strong growing company with growth fueled by 3 value add strategies that are delivering strong organic growth. Number 3, we are being very successful to create strong cash flows and continue to increase dividend to our shareholders. So dividend for last year that we've been paying out this year is SEK1 per A and B shares, which is increased with 900% since 2017. Number 4, we have a very strong financial position and have now all the key ratios delivered for 3 to 3 plus as we are arguing in the report. Number 5, sustainability is the core of our business. And also in this report, we are giving flavor on this by different examples from all how to say, different part of sustainability, both from energy efficiency, so that we are running the projects where we successfully decreased energy consumption with 50% to energy productions where we are producing energy from our solar cells. And also important part that often is discussing the public debate our big focus on building in wood and an important way to continue to decrease CO2 emissions and continue to support renewable growth. And as you also saw showing in the report, we have wood the as very good material from life cycle perspective. Next slide, please. Slide 3, you will see our assets. The important message from this slide is that we today are in terms of GOVS or Property Portfolio book value, the 2nd largest the listed company in Nordics passing Castellum this quarter and having added CHF5 1,000,000,000 in portfolio book value. Strong passing rent of CHF5.7 billion, the steel continue to have long growth of 9 years with a relatively high net initial yield. And as you can see, 75% of our assets is located in larger cities in the Nordics and 91% of the newly built residential is located in the largest cities in the Nordics. Slide 4, please. Slide 4, we are showing our income of €5,700,000,000 and you will see that on top of the very strong tenant structure with 98% of the income, social infrastructure, 9 years' worth. You will also see that we have increased our income from Eldaric Care Homes the LSS. As you know, we are targeting to have €1,600,000,000 in income from this a very safe assisted Fit Living or Assisted Residential. We are targeting increase from €800,000,000 in the EUR 20,000,000 to €1,600,000,000 in 2025. Already this already now we are passing 1,000,000,000 being at €1,086,000,000 So continuing increased income from low risk low risk assets with 5.5% or 98% of total income coming from social infrastructure. Slide number 5, on top of very strong profit, if you look at our report, and we are delivering strong profits from property management after adjustments for one off cost and we are even delivering stronger profit before financial cost of more than €1,000,000,000 And on top of this strong profits from property management, we are continuing to deliver profit from our value add strategies. And as you know, we are guiding €1,000,000,000 to €1,400,000,000 from property development, €600,000,000 from refurbishments or investments in the current portfolio and EUR 400,000,000 from value adding transactions. Slide 6, please. On this slide, you see how this thinking, holistic thinking that we have where we are applying all of 4 different business areas, property management, property development and establishments transactions in a holistic model. And at Slide 7, a few words about building rights development of new production. We are guiding to deliver €1,000,000,000 to €1,400,000,000 on a yearly basis. We are delivering in the Q1 €507,000,000 and we are also in this quarter becoming the largest property developer in the Nordic with 41,700 apartments at the balance sheet. And you can see at Slide 8, Slide 8, please. You can see at Slide 8 that we're on top of 41,700 building apartments or building rights for apartments. At the own balance sheet, we have additional 6 1100 Apartments in Joint Ventures. And in total 2,900,000 square meters of building rights. We have also more than 6,000 apartments that are either in project development for production or in production for management. And on top of that, we have additional almost 1,000 apartments in production in joint ventures. So this is today strong recurring revenue that will continue to be delivered in accordance with our guiding guidance of €1,000,000,000 to €1,400,000,000 and as I mentioned, the profit for the Q1 was €507,000,000 Next slide, please. Investments in existing portfolio with strong focus on sustainability. We are continuing to invest here, and you will see at Slide 10, that we are on the apartment side, targeting to refurbish 600 apartments. We are already in the first refurbished 200 apartments, and we have delivered profit of €100 €55,000,000 from this business to be compared with guiding of €600,000,000 on yearly basis. That means slightly over the target also from investments in existing portfolio. Slide 11, emphasis on, as I said in the introduction, sustainability as a core part of our business. We are doing also job on reporting here. We have updated our key ratios in accordance with TCFD. And in the first quarter in the Q1, we also launched our joint venture with Koppen Parsonne to accelerate housing construction in Stockholm and focus for the joint venture is to deliver apartments with high level of sustainability. We are continuing to invest in our folio die. As I mentioned before, we have the 22,000 square meters that are other establishments where we are halving energy consumption, and we are running large investments in studying solar cell. As before, we are targeting to be climate neutral by 2,030. And already today, we use 100% renewable electricity all our properties. We are also continuing to do investment in social sustainability also during Q1. Next slide, Slide 12, please just mentioning our value add transactions. We are in the market almost every day. At slide 13. You can see that in 2019, we did transactions for €64,500,000,000 2020 with the transaction for €28,100,000,000 this year already after a quarter, we have done transactions for €16,700,000,000 and it's not only that we have done transaction for SEK 16,700,000,000, we are also at the same time continuing to strengthen our balance sheet. At Slide 14, just an example of our holistic model where we are applying all our value add strategies in on the curing basis and delivering strong profit to our shareholders. Slide 15, our earnings capacity. We are running rental income of €5,700,000,000 property cost, €1,500,000,000 Important here is that we are taking large amount of money invested in maintenance to our balance sheet. So please compare our maintenance, for example, with Castello or other players, and you will see that we are investing much more in maintenance than other large real estate businesses. NOI, dollars 4,100,000,000 the operating profit of SEK 3,600,000,000 or SEK 2.55 per share after the value add strategies and after all payments for dividend for equity instruments, excluding A and B shares of 852,000,000. Here are some additional dishes that were registered at the end of the quarter and some after the end of the quarter in total additional 26,000,000 in cost that the total profit is 5 slightly more than €5,000,000,000 and €3.56 kron the Class A and B share. And that is also why we in this quarter are launching a forecast and we are forecasting that we will deliver earnings per share for 2021 of INR5.15 per share, an ordinary A and B class share. Next slide, Slide 16, trying to sum it up for as I said, our forecast for 2021 is earnings per ordinary share A and B estimated to be SEK5.15. We have strong and stable cash flow backed by AAA countries. And our profit of €2,700,000,000 is increased with 99% compared to the last year. And if you look in the adjusted profit per Series A and B ordinary shares as adjusted for nonrecurring cost. Then we delivered profit of DKK1.91 per A and B share. Next paragraph or next highlight. We continue our growth mainly from with strong support from organic growth where all 3 value add strategies are delivering strong profit. We had €507,000,000 from building rights development and new production compared to target of €1,000,000,000 to €1,400,000,000 We have today a portfolio of almost 3,000,000 square meters building rights corresponding to 42,000 apartments at Onibook plus additional partners in joint ventures what makes us Nordic Region's leading property developer. We continue to deliver strong profit from investments in existing portfolio refurbishments in the Q1. The profit amounted to €255,000,000 to be compared to €600,000,000 guiding on yearly basis. We also have strong pace on refurbishments of the apartments. The republished 200 apartments in Q1 comparing to the target of 600 apartments on yearly basis and also the same time being able to prepare new apartments or refurbishments. And finally, we have today one of the strongest balance sheets in Nordics with all key ratios for BBB plus rating delivered. In the Q1, we strengthened our equity with €5,800,000,000 Last 12, 15 months. We are strengthening our equity with very large amount, almost doubled. And despite competition of €10,000,000,000 transaction to acquire of Entrance. We have been able to significant reduction of our loan to value ratio and continuing to deliver. It is also important here that of Antti Ahu's profit is just affecting our profit with €10,000,000 We count profit just only on 1 month. Taking into account all of the income from our pensioner who's both our income and our NOI and our profit will be higher. And this is even more clear looking at our earnings capacity numbers. At the end of Q1, our pro form a net debt adjusted for cash inflows from properties that have been sold, but not yet transferred from liquid financial assets and 12 months earnings dividend by total capital in accordance with S and P's definition of the loan to value ratio amounted to 48%, which is very strong in line with the BBB plus rating. At the end of the quarter, we had net debt related to net debt to equity at 51 percent despite, as I said, consolidating Opentia, whose transaction. So to summarize on the reported key ratios, we have a strong BBB flat trading today. And given that the rating should be forward looking according to our calculations, we have fulfill the key ratios most significant for BBB plus rating. Here should be added that our ICR was 4.8x at the end of Q1. Samipat, strong profit from all business areas, strong financial position and guiding to forecast that we for 2021 will deliver earnings our estimated to deliver earnings per ordinary share A and B to be SEK 5.15 per share. Thank you. Please with 2 to cancel. And our first question comes from the line of Frederic Cian of Carnegie. Please go ahead. Your line is now open. Good morning, Ilya. A couple of questions. Starting off with the surplus value that you mentioned post you did an external relation post the end of the Q1. And you're stating that it's additional SEK 1,000,000,000 to be added to the book value within the next 12 months. That number was €1,200,000,000 if I'm not mistaken following the Q4 report. How much of that €1,200,000,000 has already been taken account in Q1 and how much is new additional surplus value? I think it is it has been taken into account like €300,000,000 and it is like €100,000,000 this new one. Okay. Okay. So the majority are from what you already said in Q4 that is? Yes, from the last quarter, we had the €1,200,000,000 and €900,000,000 is left and €300,000,000 taking into account in this quarter. Very clear. And moving over to results from JV, it was 2.4 €4,000,000 in the Q1. How much of that is actually cash flow? I would assume that it's perhaps €40,000,000 approximately. Is that accurate? The cash flow from our joint venture is around slightly above 40,000,000 for the Q1. Then we also have some dividends that will come in, in Q2. And then regarding paid tax going forward, what are you guiding towards on actual paid tax with the current portfolio? I mean, we have if you look for the Q1, we paid €92,000,000 in taxes. And we should be paying around if we have on rolling, I can just in order to be very we have our profits from property management of SEK 3.5 billion and our tax, and that should be on the early basis around €270,000,000 €300,000,000 Perfect. And then 2 additional questions, if I may. Moving over to the rating outlook. You said that based on your calculations, you're up for an upgrade. Have you gotten any indications of when that might occur from the rating agencies? Or is it just based on your own calculation, so to speak? I mean, our job is to deliver our work and then it's activating rating agencies to act on that. And we have seen last 2 quarters both Fitch and S and P upgraded us to positive outlook and now we are waiting for reaction to report. Okay. But you don't have a clear timeline on when we should expect something happening from that side? It is always difficult. The only time line we used to have is for ourselves. We can never have time line for other people. Okay. I understand that. And then finally, on goodwill, I couldn't see much change related to the Ofeentlichiosis acquisition. Why is that? Didn't seem to be in the goodwill position? Fanciere is asset acquisition. So that is the difference. As you know, Cielo, Frederic, this is we always one to do the asset acquisition because that is what we actually do. But in types of kampoosah. We needed to have it as how to say, company or ongoing business acquisition, which is then resulting in goodwill. So on the fact that because we are acquiring assets, we will not have any Our next question comes from the line of Oliver Crothers of Goldman Sachs. Please go ahead. Your line is now open. Hi, Ilija and Tim, and thank you very much for the presentation. Just to follow-up on that first question there, on the taxes. So you're saying this should be DKK 270,000,000 to DKK 300,000,000 per annum. So is that cash taxes paid? And will that include taxes on asset disposals as well in there? We don't pay taxes on our asset disposal. Okay. Okay. So that is total that is total pay tax. So there's no realization of the deferred component coming through in that EUR 270,000,000 to EUR 300,000,000? No, that is just how to say accounting, the deferred tax and the realization of deferred taxes just just account. Okay. So you will be so to confirm on a cash basis, you think you will be paying EUR 270,000,000 to EUR 300,000,000? That is my we used to publish in our reports this sensitivity analysis that at Page 46, Appendix 4. And then we have just as illustration that will be €347,000,000 but my assessment is that it should be around €270,000,000 to €300,000,000 So it is out. Okay. And on the central administration costs, when in the context of your, I guess, SEK 63,000,000 recognized for this quarter And the earnings capacity guidance of $153,000,000 When should we expect to get down to this, I guess, quarterly level of €37,500,000 per quarter. This is mainly that is €150,000,000 or €153,000,000 on a yearly basis. €150,000,000 or €153,000,000 on a yearly basis. And that is what our costs are. However, given the transactions, it is good for us and you have some transaction cost the true centralization. So that we are not, how to say, we are not worrying about that or so our view on that is that our that differential always be matched with much higher profit from either sales or from value changes. Okay. So let me just to be clear, the difference is only related to transaction business. And this quarter, we did transactions for almost SEK 70,000,000,000. Okay. And so to be clear on that, the €150,000,000 essentially assumes no transactions. And if you are to do transactions in a given quarter, we should assume that it comes in at an elevated rate? Assumed transactions level of the normal Swedish or normal European countries. Okay. So, it's $150,000,000 we should be able to do average. If we do better than average, then it is beneficial for us to have some cost that are higher than that. Okay. And then one the final question on the 244 JV income line. So you mentioned earlier that just above SEK40 1,000,000 of that was cash flow. Can you give context on what the remaining SEK200 1,000,000 was? It is the remaining is actually realized sales and unrealized value gains. And our actual profit is higher than this. I think it's €40,000,000 €50,000,000 that is how to say cash related, but we have also dividends from some of these joint ventures that are coming in the next quarter. Okay. All right. Thank you very much. Our next question comes from the line of Frederic Stenzel of Pareto Securities. Please go ahead. Your line is now open. Thank you. Good morning, Ilya. So I would like to start off with a question related to your CEO statement. So you mentioned that Obviously, growth opportunities in the Nordics remain. But it also seems like you indicate sort of an opportunity to be a European player. Do you look To expand outside of the Nordics and if so, which countries are thanks, Frederic. Yes, we are currently building infrastructure outside of the Nordics and looking at largest European countries. And at our core businesses, which are assisting living for elderly people and people with disability and the infrastructure. So that is absolutely so. And for us, I mean, in this quarter, we passed Castellum as to becoming the next largest player in Nordics. And that means that we should be able to continue our growth and to strengthen our position as European Champion in Social Infrastructure. All right. So should we interpret that as Do you expect any acquisitions out of Nordics in 2021? Or is this further ahead into the future? I mean, we will always do acquisitions. So we will come back to that, but you should anticipate that that we our saying that we are building infrastructure in Europe. And when we do that, the parties for fiscal what we should continue to grow. Okay. That's clear. Thank you. And then on the like for like rental growth amounted to 0.2% in the quarter. And is it That is possible. We we don't have increasing rents in our residential portfolio and some switches to property development. So we should be back on track in I think already in the next quarter or in Q3 3 by passing inflation plus 1. That is what our how to say that is what our like for like growth is. It's at least inflation plus 1%. Okay. Thank you. And so final question then, we have an election coming up in 2022 in Sweden. When is the sort of window of opportunity to acquire properties from municipalities and similar actors closed? Yes, that is very important point and that is why our organic growth is very important in 2022 because municipality will close already in November this year and then it's because then they start the internal processes and then it's closed in 2022. So for us, I mean, position with strong building rights portfolio and with strong organic growth and also infrastructure in other countries will make sure, so our growth will not be affected, but the growth in Sweden will be probably less from acquisitions in 2022. It will be mainly from organic growth and acquisitions in other countries. Our next question comes from the line of Bertil Nielsen of Carlsberg. Please go ahead. Your line is now open. Yes. My first question relates to what's already been mentioned around those around SEK1 1,000,000,000 which is identified value changes after 31st March this year. Is that the main effect of, let's say, underestimation of the loan rental contracts Or a yield shift or both? No, that is not related that. It is related to that we have that those are the properties that we will be that will be finished in terms of that the building of the property will be finished or that the contract that the new contract will start. So it's mainly related to the assets fully coming in on balance sheet. Okay. And second question, if you look at slightly down in the report, It's a comparison of yields 4.3 for SPB with some transactions and For instance, the police sales 3.4 percent. I mean, I said that before and it is really crazy thing that S2B is having a 4.3% the net initial yield when the transactions are done at 2.5% or even elderly care homes at 2.2% or if you look at our German counterparties that are averaging 2.7 parties that are averaging 2.75. And I will argue that we have better in many positions, both better assets, stronger cash flows, longer leases. However, given our strong growth, the valuers are not catching up. So if I have to value my portfolio today, I should value it at least 100, 125 basic points more or less. That means that we have very strong value side going forward. And but we are in this in long term. So we are not rushing. We have seen before the company is changing value years and doing everything in once. We have seen before people buying out companies because of being how to say, being disturbed with this. And we have the largest real estate businesses in Sweden are valuing doing valuations by themselves. But the as a young company, we have decided to do external evaluation every quarter and that is, of course, punishing us. But we think this is long run issue. Okay. Last question. How about, let's say, investment prospects for like the police, you mentioned police houses and so on. Also outlook there. There is strong pipeline in organic growth there. I think we are currently building 4 police stations at our own book and one in joint ventures, church and we are also rebuilding 1 in Finland. But particular growth that you see is in elderly care homes, where we are continue to strengthen our position. So I think we should be able to do more transaction in elderly care homes, schools, continuing to derisk portfolio and continue to build this kind of very secure income from most demanding assets. Our next question comes from the line of Axel Olesen of Nordic Property Use. Please go ahead. Your line is now open. Hi, Ilya. Looking over the report and the property value by geography. You're still quite significantly smaller in Denmark than the rest of the Nordic countries. How do you see yourself developing the company in Denmark going forward? We our building our position in Denmark for every day. Actually, I think I signed yesterday evening. I mean, we are doing transactions just every day. So sometimes it's I mean, we are a team of 300 professionals. And despite many people thinking that we are sending out a lot of press releases and we could send 2 press releases per day. I think I signed yesterday evening a small deal in Denmark. And I think this morning, I sent a NOI in another small deal in Denmark, and I think we should have some news in Danish real estate media in today or tomorrow. Certainly, so we see that we are building for every day larger and stronger position in Denmark, both on the school side, but also on the side of assisting living in terms of L'Oreal and LSS. Okay. But for 20.1, do you have a figure of where you think your property value in Denmark will be at the turn of the year? I think we should be able to double our portfolio in Denmark. You saw that at the end of Q1, we had €1,000,000,000 in assets in landbank. We should be able to pass €2,000,000,000 in this year. Great. And looking at the Danish geography, is it Copenhagen or some other regional cities that are the most interesting to you? Of course, Copenhagen is the main city for us as for everyone, that you have in Darmark, and that is like almost in all countries, you have 3, 4 large cities and that is where we are. So that is where we have infrastructure and that is where we do all transactions. That was all my questions. Thank you so much. Thank you. Our next question comes from the line of Simeon Mortensen of DNB Markets. Please go ahead. Your line is now open. Hi, Ele. I have two questions from my side. Most have already been But I saw in the report that in terms of cash and cash equivalents, it now included listed shares, most likely the SEK 6,000,000,000 included in Entre. Is there a strategic reason why these are now Consider it as cash and not as financial investments? That is not Simeon, that those cash equivalents are not including including, of course, Entra. As you know, we have a flag that we have passed 5%, they are also including other liquid investments. And this is related to that all of that shares are on possibly to be sold every day. We don't have any board representations. We don't have any long term view on those assets. It's pure financial placement that can be turned to cash every day. Okay. My second question was a bit what you said about the CapEx and maintenance levels in the portfolio, if you just can repeat, I fell a bit off when you sold it. Because when I look, you said you had a very high level. And did you take it over the P and L, your maintenance costs? Because when I look at your earnings capacity, you have SEK287,000,000 worth it, which is roughly 27 basis points of your asset values or just below DKK 60 3 per square meter. Can you just tell us how you what how do you actually account for maintenance and CapEx and how it flows through the balance sheet, say, cash flow and P and L? Always easiest to compare with the peers. So please compare with Castello. That is the easiest because it is the same amount of assets. Okay. Those are my questions. Thank you. Well, at this stage, we currently have no further registered questions. I'll hand back to speakers for any further remarks. We have received one written e mail. Again, it's been touched upon earlier. When do you expect BBB plus to be achieved? Our assessment is that we have key ratios for BBB plus already today. So we are expecting things to be upgraded as soon as it's possible. But at the end of the day, it is rating agencies and it is also for our investors to see what kind of key issues we are delivering and then we have to rate how rating agencies view this important message from our side is that we are going to run our business with key ratios for BBB plus that is our take. So we have business we are running business having strong balance sheet with the highest it is actually one of the highest unencumbered ratios in Europe. We have 3 times cover, which is like 100 it is compared to a carriers that is below 2x or compared to some other U. K. Players that are slightly above 2x and have get strong recognition for that. We have more than 3x. We have ICR of 4.8x. We have the safest cash flows in Europe being only company in Europe in 2020, delivering almost 100% of income. So we think this should be acknowledged by rating agencies. And on top of that, we also derisk the portfolio by increasing the level of income coming from residential, elderly care homes the LSS. And therefore, elderly care homes and LSS, we increased from 20.20 €800,000,000 2, 2021, Q1, €1,100,000,000 So we have to wait. Thank you, Ilya. Then I would ask Ilya to sum up this Q1 2021 results. Thanks, Marika. And summing up is that we are estimated and having forecast for the full year 2021 to deliver earnings per ordinary share A and B of SEK 5.15 per share. We are also emphasizing that we are achieved all key ratios for BBB plus rating, and we will continue to grow, delivering income from property management and our value add strategies and continue to build the larger portfolio, but still having strong key ratios for BBB plus rating. Thank you very much.