Earnings Call: Q2 2020

Jul 14, 2020

Thank you very much, and welcome all to call presenting SBBS Q2 report. Slide number 2, please. Let me dig to the numbers directly. We present on the rental income for the first half of twenty twenty of EUR 2,664,000,000 and the net operating income of EUR 1,817,000,000. Here, I want to add that we had SEK 40,000,000 in on off costs related to some accounting things related to Hemfus acquisition. So adjusted NOI for the first half of the year was €1,857,000,000 and it was that means that also adjusted NOI for the quarter for the 2nd quarter is EUR 40,000,000 higher. Surplus ratio, 68% reported, 70% adjusted, strong profit of EUR 2,600,000,000 and still relatively high yield for this kind of safe and secure assets yield of 4.6 percent 4.6 percent. We are continuing our trend of strongly improving cash flows and cash flow from current operations landed at EUR 1.90 4,000,000 for the first half of the year despite large on offs. Property value at the end of the quarter, EUR 73,000,000,000 and EPRA NAV, euros 19.92 per share earnings capacity, euros 2,500,000,000 and continuing strengthening balance sheet earnings per ordinary shares for the first half of the year, SEK 1.8 per SEK 1.8 per share. Next slide, please. The main business for SPB is providing Nordic welfare states with social infrastructure. And in this report, also for the first time, we are presenting detailed number on different categories with in community service properties. As you can see, 90 our income is coming from social infrastructure, 17% coming from rent regulated residential. You can also see that the main part of our community service business is education and care. And that is, among others, consequence that we have sold a large part of offices during the Q2. We have a long history of cooperation with municipalities. And that is, of course, underlying the fact that we are having rent collection of 99.8% in Q2 2020. That is probably the highest in European listed real estate universe. We have also been able to continue to prepare for organic growth through new long leases, among others. We announced this with the Westeros municipality, 25 years lease for elderly care home and also announced 3 new police station and few more are to come. Next slide, please. As I said, if you look at our safe and secure law risk assets, you will see that 94% of the property value is coming from social infrastructure, 94% of the income is coming from social infrastructure. And we are largest player in social infrastructure in Nordics, having 75% of the property portfolio in Metropolitan and University Cities. Next slide, please. The main message from the report, and I think that is that should be underlined many times, is strong track record of operational performance. Despite that we bought a company that was larger than us Already a few months after the transaction, we have fully accomplished integration. We have integrated talented best in class managers from SPB and Henfusa. And those guys and ladies, I should say they are chaired by the lady, they have been performing well. Our margins have increased with 7 percentage units. Adjusted margin for first half of the year was 70% to be compared with 63% by last year. And as you can see, also given the acquisitions that we did after the quarter, we are already now in line with earnings capacity that is around margin of around 72%. And you can also see very strong growth in EPS earnings per share growing from Q4 2019 of SEK 0.2 per share to SEK0.47 per share for Q2 2020. Next slide, please. One important message I want to send is also liquidity in our assets. We have we announced in connection to acquisition of Hemphusa that we will dispose the EUR 11,000,000,000 on assets. Almost 100% of that has already been delivered. And that has been delivered in probably one of the most challenging real estate markets ever because in those markets, you have many constraints to visit properties, to move around, to I mean, complying to government measures. And despite all of that and despite less functioning capital markets, we succeed to deliver €10,900,000,000 in disposals last 6, 7 months. So that is something that I'm very proud of our M and A team. And it is also showing once more two things. The one is that we have the most liquid assets in the Nordics and probably in the Europe and on top of that, very experienced M and A team. Next slide, please. We are active in Nordic and focusing on Nordic markets. Those are countries with strong population growth. And our market is also affected by aging population and clear supply shortage of community service properties. And this is going to create opportunities for us to continue to grow earnings per share and NIV and a large focus in next quarter will be on organic growth, where we have great potential to deliver new community service properties, new social infrastructure to the Nordic level states. Next slide, please. And one important part of that is moving our property development focus from selling building rights to also delivering and continuing to be long term owner of social infrastructure. Let me first start with an amazing development that we have had in our property development portfolio. By 32 June, we had approximately 2,100,000 square meters, which corresponded to approximately 28,000 apartments, making SBB 1 of the Nordic region's leading property development. That means that on the top of property management with strong margins, we have like company within the company that is probably the largest one of the largest leading Nordic property developers. And in the report, you can see that large majority of our building rights portfolio is in larger cities and university cities in the Nordics. Next slide, please. We are delivering from property development and from transactions with very long leases. After the quarter, we announced buying preschools in Norway. And also after related to acquisition, also signing the new 35 years triple net leases. No break losses, 100% indexed to CPI. We also, during the next 12 months, we will also have in our portfolio the first ever 50 years lease in Europe with municipality of Celestevo. And on top of that, a few weeks ago, we announced a new 25 years lease with municipality of Vasteras, which is part of Stockholm region and Sweden's 7th largest municipalities. Also here, no break closes, 100% index to CPI. On top of that, as I mentioned before, we are continuing to cooperate different government agencies, making sure so they have the best properties and also following their strategies and supporting them to get the best properties for their business. And among others, we have announced 3 15 years leases for police for the new buildings for police authorities. And as I said, it is more to come here also. Also this strong base for continuing NAV growth and continuing growth in the earnings capacity. The no No one of those leases is included in earnings capacity presented at the end of Q2. Next slide, please. And then when talking about earnings capacity at the end of the quarter after successfully successful divestments, We had €4,500,000,000 in running income, €3,200,000,000 in NOI and €2,500,000,000 in operating profit, which is SEK1.98 per share. And you also see that including the results from our additive income streams and after being accounting for payments of all dividends, among others, or for D shares and hybrids. We have adjusted operating profit to ordinary shareholders of SEK 3,700,000,000 on a yearly basis or SEK 2.91 per share. And this quarter is underlying that we are delivering according to earnings capacity. Profit after tax was SEK 2,600,000,000, which is strong increase compared to last year. We have also, as I said in the introduction, showing very strong increase in cash flow from operations and cash flow from operations before changes in working capital adjusted for nonrecurring costs amounted to EUR 1 point 1,348,000,000. And on top of that, in that, we have not included the cash flow from the building rights. And we have had strong profits from the property development for the first half of the year. I will come back to comment that. Next slide, please. Just to summarize, a few important points showing key updates on successfully delivering on the business plan. As I said before, ahead of schedule, we have delivered already almost everything that we said in connection to Hemphos acquisition and our deleveraging ambitions. Organization is fully integrated, and it was placed already in the beginning of May. We have now a company that is social infrastructure champion in the Nordics. Synergies have been delivered in the first half of the year with €170,000,000 and the rest will be delivered in the second half of the year. Disposals, euros 10,900,000,000 according and even better than planned and also significant deleveraging. Important thing here, when you read the balance sheet is, you will see that we have EUR 7,000,000,000 in cash to come from already sold properties. And at the same time, we have also been able to continue to create additional earnings capacity, among others, by buying large property of PISCOs in Norway. Also after the quarter, we did actually extend evaluations of the leases that we will start during next 12 months. And those valuations are showing extra value, exceeding divestments, crystallizing unrealized fair value gain of additional EUR 2.200 or EUR 2,242,000,000. And those numbers are, of course, not included in Q2, but it will come during next 12 months, which is building a very stable base for strong continuing growth in NIV. And EUR 2,242,000,000 that is almost EUR 2.2 per share. Important message from those leases is that average worth for those is 36 years. And we have 36 years fully indexed 300 and €74,500,000 of NOI to come. So you can do your math by yourself. So you will see that is amazing guaranteed cash flows going forward. We have also been able to continue to lower our cost of debt since the HELFUSA acquisition. And despite large interest rate in Helfus, we have lowered the cost of debt from 1.75 to 1.61. And despite that, Stibor was higher in the beginning of Q2. And also despite that, we have prolonged our debt maturity by repaying short debt. So given today's rating, we will probably finish the year by having average interest rate of below 1.5. And if we improve our rating, that will be even much below. So that is one of the strengths in our financial positions that we will be able to continue to decrease our funding costs. Next slide, please. To summarize, profit after tax per ordinary share of Class A and B increased to SEK 1.8 per share. And if you take into account nonrecurring cost, as I'm writing in the CEO letter, that is that will be SEK2.08 per share, which is the strongest in the market. Our earnings capacity, as I said before, euros 2,500,000,000 in earnings from operations and very strong increase of 149 percent per ordinary A and B shares during last 12 months. And the 2 profit before tax showing that we are delivering not only profits from property management, but also delivering profit from all of our income streams. And profit after tax was €2,600,000,000 As I mentioned before, adjusted for nonrecurring costs for repayment of expensive loans and also taking into account all payments for desales and hybrid bonds earnings for the first half of year were 2.adjusted, 2.08 per ordinary A and B shares. Number 3, as I mentioned in the introduction, strong continuing increase in cash flow, cash flow from operation operating activities before changes in working capital increased by 389 percent to €1,200,000,000 and adjusted for nonrecurring FX for the buybacks of expensive loans, cash flow landed at EUR 1,348,000,000 for the first half of the year. Then you have the next number 4. And here, we have few important points showing our great performance in Additive Income streams. 1st, if you start with Property Development, we had before a goal to deliver EUR 250,000,000 to EUR 400,000,000 on a yearly basis. On 17th of June at our Capital Markets Day, we presented the new goal that we will be delivering €500,000,000 to €700,000,000 over business cycle on yearly basis, recurring income. And already for the first half of the year, we have delivered 258,000,000 in 2nd quarter. Of those 258,000,000 for the first half year, 108,000,000 come during the second quarter. And this is, I should say, just a slice of our large building rights portfolio of 2,100,000 square developer on top of our safe cash flow. We also continue to invest and running our investments and innovation programs. And I showed the examples before with renovating with building new we renovated 323 apartments during the Q1, which is slightly higher than our target to renovate 600 apartments on a yearly basis. And we used to say that sustainability is integrated part of our business, so we don't need to brag a lot about that because that is what we do. But just to give you a flavor in accordance with our green framework, we are continuing to initiate energy efficiency investments and continue to decrease CO2 emissions. We are also starting large investment in solar energy, also in that way supporting our target of being 100% climate neutral by 2,030. Then paragraph number 5, as I mentioned before, we are focusing on achieving BBB plus rating during 2020. And as I'm writing in the CEO letter, we do see that we already now, if we take into account also the profit for the next 12 months that we are already now at the levels that will be in space for BBB plus An important point here is that when you read our balance sheet and you look at other receivables, you will see that like EUR 7,000,000,000 and that is cash. The majority of that cash, like €5,000,000,000 came in by 9th July. So it's very important when you do math to look at there is a large amount of cash that company is having on balance sheet. And this is, of course, very important for our growth to continue focusing on BBB plus rating in short, medium term and long term goal. Long term, the goal is to achieve an A- rating because we have the most save, the lowest risk assets in Europe. And we could also show through corona crisis that we have the strongest trend collection, which is underpinning should say, one of the main messages from the report now when we have fully integrated Hemphousa, we are continuing to delivery with strong potential from organic growth, from the property development, but also high NOI margins and high increase in our NOI margins from property management. We increased adjusted And on showing adjusted NOI margin for first half of twenty twenty at 70% and in accordance with 72% according to earnings capacity for all of the year. And finally, this is something that maybe is not interesting for you, but very interesting for me as responsible for the business is that we are continuing to deliver very strong like for like and like for like increase with 7% at the end of Q2. Thank you for listening. I will stay there. And please, question. Thank Our first question comes from the line of Steen Mortensen from DNB Markets. Please go ahead. Hi, Alia. This is Simon. Congratulations with a stable and solid report. Just a few questions from my side this time. In terms of the vacancy rates, it seems to be going up a bit. It's up 80 basis points year to date and 30 basis points in the quarter. Do you have any comment on that? Yes. It's just composition effect. We, after selling for SEK 11,000,000,000, we have the refurbishments and investments and the properties for building rights have higher weight. So actually, our vacancy rates are decreasing in our portfolio. So that is just composition effect. So it's just related to transaction, if I must have said you correctly? Yes. It's related to transaction in two ways. The one is when you sell the offices, and the second one, which is main effect, is that the properties for property development and rent regulated residentials that are ready for refurbishments get higher weight in counting average occupancy. And as you could see, we performed 3 93 apartments refurbished in the first half of the year and have prepared additional stocks to continue to refurbish during the second half of the year. And my second question is, we'll go into about the earnings capacity guidance. I know this is a bit down from all the sales, but I assume assuming I see like the top line for earnings capacity guidance is down 12% year to date. But is that now reflecting all the sales you have been doing? And is the only thing that's left in this, from what you have announced, is Gladding Sverke, the transaction which will come in September, if I'm correct? Yes. That's right. The earnings capacity now is clean for all sales, and it is it will come additional earnings capacity from learning back. Let's say that in beginning of September. Okay. And in terms of landings, I guess, congratulations. It's an impressive yield of 5.9% in that yield. But I noticed one thing. Based on the figures you stated in terms of it's a triple net lease. And if you look at the square meter in the rent, the rent in the portfolio seems to be NOK2200 per square meter on triple net, which would, in a normal rent, be like NOK2,500 per square meter, which is well above what we see in CBD Oslo. Can you tell us a bit on how that will be treated? Because the rent seems so high in that portfolio versus what will be normal market rent for kindergartens in Norway. As you know, Simon, in Norway, it's regulated the size of the plot. So the rent is not already it's not only covering the rents for the buildings, it's covering that we have 600,000 square meter of the plot for the properties. So in a comparative perspective, the rents are still 10%, 15% lower than in another large portfolio that was sold by Adabson's brothers to private equity last year. So those rents are very competitive. And I should say they are even or they are the 10%, 15% lower than the closest competitor. Yes. I know that deal quite well. We were advised during that deal. So just in terms of you continue to say you have successfully integrated Hemfulsa, and it's fully integrated. But yet you have in your earnings capacity, you say so on synergies. When are these come? And what do you mean by fully integrated? And yet still guide on you're going to have more synergy? Yes. Because Timo, we already had in we didn't this is affected with those €40,000,000 that we had to take this quarter related to Mphusa accounting from the last years. And that is now taken into account. So already in Q3, you will see that there are no on offs, and you will see the even more than €40,000,000 on comparable basis coming from integration with Herpusa. Thank you. Those are my questions for now. Thank you. And the next question comes from the line of Berndijn Nielsen from Carlsquare. Please go ahead. Yes. Hello. I want to check the math on your impressive coming increased value of your development portfolio, which to some 70%, 75% is signable to the loan Lending Circuit rental agreement, as I can see. And my interpretation is the value the new valuation is something like 3% to 3.5 percent yield. Could that be correct when finished? No. That is not correct. The valuations for those additional contracts are averaging yield of like 4%, which is still relatively high for average of 36 years. Okay. Yes. Correct. Okay. Thank you. Thank you. And the next question comes from the line of Stefan Beeler from ABG. Please go ahead. Hi, good morning and thank you for the presentation. I have questions regarding the adjustment of accounting principles to SEB's accounting principles, which resulted in the effect of SEK 40,000,000. So first, what does this relate to? And 2, for which period? Is it January to June or April to June? And 3, should we expect more accounting translation for the coming quarters? I can start with the last one. There are no more accounting because now also accounting is fully integrated. So there will not be any more accounting effects from Hephusa. Number 2, those are related to utility charges. And number 3, the effect was taken on in Q2. So that is, of course, very thank you for that question. I forget to mention that because that is very important because that means that NOI for Q2 was adjusted was €962,000,000 which is very strong very strong NOI margin. If you look €962 percent and as a late to 13.23 percent, you would get an NRI margin of 73% for the Q2, which is really strong. Okay. Thank you very much for taking my questions. Thank you. As there are no further questions, I'll hand it back to the speaker. We have received one question by e mail as well. Considering the strong demand for your D shares and that they help your rating, have you considered issuing more G shares in a public or directed new issue? We are never commenting the questions related to different issues. We do see that all our share classes are very strong. Great. And actually, we'll receive one more just this minute. Can you please specify which divestments that are included in the cash flow for first half 'twenty and what adjustments that need to be carried out to reflect for all announced divestments, also including incoming cash for Q3 'twenty? As I said before, all divestments are already done in Q2. So there are no divestments left in Q3. So the earnings capacity of SEK 2.5 billion at the end of Q2 should be adjusted with EUR 250,000,000 coming from announced transaction with Leriska Fere. So that's it. Great. No more questions by email. You want to conclude? No. We saw this as a strong quarter in a very, very challenging environment. And I mean, we are humble in those environments. And a part of that is that we also will continue to invest in our society, and we have been supporting different initiatives to deal with COVID-nineteen crisis. But one important message from us is that we will continue to support our communities. So that is why we also offered 123 summer jobs to young people living in our neighborhoods. Thank you very much.