Earnings Call: Q2 2019

Jun 30, 2019

Thank you, and welcome to SVB's presentation of Q2. Please go to the Slide number 2, quarterly highlights. If you look at quarterly highlights or the first half of twenty nineteen, we delivered strong profit after tax. Net profit increased with 80% to SEK 933,000,000. And that's despite that we paid SEK 100 and 23,000,000 in nonrecurring costs related to bond buybacks. And those costs, sorry, bond buybacks are consequence of our success in credit market, where we are improving our credit metrics and where our financial costs are decreasing. The net asset value after deductions for the dividend increased strongly during the first half of the year with SEK 857,000,000 or SEK 1.14 per ordinary Class A and B shares. And that means that the last 12 months we increased NIB with 20% or more exactly 19.6 percent. Bullet number 3, we continue to strengthen equity during the first half of the year by €4,400,000,000 Swedish klouds. And then in the second quarter, our net loan to value ratio was 43%. We also could see very strong increase in interest coverage ratio from 1.7 to 2.2 times. And you can also take into account that, that is eroding 12 months. And that means that for every quarter coming, we will continue to increase our ICR. We have decreased our average interest rate from 2.93 percent from Q2 2018 to 1.96 percent at the end of Q2 2019, despite prolonging both capital maturity and fixed interest rates. Our fixed interest rate is 4 years and 91% of our loans are with fixed interest rates. So bullet number 4, we continue to deliver profits from all of our 3 value creating areas from renovation investments in our properties and from transactions, in total SEK 854,000,000 for renovations and transactions, but also building rights €40,000,000 So our renovations are going well, and we are also expanding the team with 4 new members. And at the end of the first half years of twenty nineteen, we have commenced in the refurbishment of 248 apartments, of which 98 are completed. For another 147 apartments leases at 2018, those are now in planning and preparation for renovation. Bullet number 5, during the first half of the year, the zoning plans of more than 50 1,000 square meters were approved. And there is amazing project that we have in Iqan, which is part of Stockholm region. We are also finished 2 new LSS special housing units, our building rights in Malmo and signed additional for long leases for LSS Special Housing Buildings. And last bullet for quarterly highlights. Our estimated earnings capacity on a rolling 12 months basis at the end of the second quarter was €1,600,000,000 which is a very strong increase with 57% from SEK 640,000,000 at the end of Q2 2018. Next slide, please. So just to give you some flavor with the numbers for the half of the year. Rental income increased with 10% to SEK 893,000,000. The net operating income increased 11% to SEK 560,000,000. We see strong increase in cash flow and profit before tax increased with 54% to SEK 1,060,000,000 and profit for the period after tax increase with 80% to SEK 930,000,000 Now we have a portfolio value of SEK 30,300,000,000 and long term net asset value of €9,600,000,000 corresponding to SEK 12.69 per share, which is increased with 20%. And as I mentioned before, very strong decrease in average interest rate on a 12 months rolling basis from 2.93% to 1 0.96%. If you look at next slide, please. If you look at the second quarter, rental income increased to SEK 464,000,000 and net operating income increased to SEK 3.20 million. And the main message from this is that our surplus ratio increased from 66% to 69%. We also see strong increase in profit and cash flow from operation. And finally, net income after tax for the 2nd quarter amounted to SEK 717,000,000 corresponding to Onyx per share of SEK0.73 before dilution. Next slide, please. And on the financial performance, I've already gone through some numbers. To give you some additional numbers is that our equity ratio landed at 43% and adjusted equity ratio 46% our net loan to value ratio, 40%, 43%. So overall, strong financial performance. And I also mentioned before strong increase in ICR and very nice decreasing average interest rates cost. Next slide, please. Looking at portfolio, we today have properties in Sweden 84% of the value, 10% in Norway, 5% in Finland and 1% in Denmark. We did the 1st deal with the Danish state during the 2nd quarter. We are continuing to work together with municipalities in Sweden, Finland, Norway. We'll start in Denmark to continue to strengthen our base as leading listed social infrastructure company. The Nordics, we have 91% of our earnings capacity coming from social infrastructure with elderly care homes, schools, free schools in the Nordic countries and also Swedish rent regulated residential. And if we look at the property value that it's almost 93% coming from social infrastructure, where community service properties account for 59% and Swedish Rent regulated residential 34%. And we also have a stronger position in the Nordic larger cities. Almost 60% of our property value is today in the larger cities in the Nordic. And Stockholm is our largest city with 26% of total property value. Please, next slide. At Slide 7, you can see how our LFS housing and municipal and government agencies amounted to SEK 17,900,000,000 or 59% of total value. And then we combine that in a strong social infrastructure block with residential properties, rent regulated residential in Sweden, 10 €200,000,000 in total value or 34% of total value. And then we have our property development, which is mainly land bank and cash flow properties that will be resold to the building rights of 8% or EUR 2,300,000,000. But half of this is already building rights that will be used for social infrastructure. So if you add this, then you should have numbers like 90% social infrastructure, which is very strong in exposure to the very strong exposure to the Nordic Welfare State. Next slide, please. We have one very special or very specific characteristics for Sammis Vigenslager or SVB, and that is that we are long term reliable partner for municipalities. And we have been doing that and have a very long track record. So you can see that of our EUR 2,000,000,000 or EUR 1,909,000,000 in rental income on 12 months rolling, 91% is coming either from Nordic Welfare States, direct or indirect or from Swedish and regulated Redemptions. And you can also see that the Norwegian government is actually our largest tenant. And after Norwegian government, we have some of the Nordic largest cities as large tenants. Our long history is very important for our continuing development because as a partner to the municipalities, we also use our partnership very actively, and this is supporting both transactions and renovations and property development. We have a very strong track record helping municipalities to develop the cities. And you can also see at this slide some of the deals that we have done with municipalities last year. And for example, we actually signed the 1st 50 years deal with the municipality ever done in Europe, maybe signed the deal with the municipality of Schallerste or at the end of the last year. Next slide, please. Onyx capacity, we see that we have strong growth in Onyx Capabilities, and we have a rental income of SEK 2,000,000,000 NOI, slightly less than EUR 1,400,000,000. And then you can see strong operation profit in earnings capacity, EUR 1,600,000,000, which is increased with 57% to the last year, last half year of 2018. And we still see potential to continue to decrease our financial expenses. So we have done a great job there by decreasing average cost of interest rates from 2.93 to 1.96, despite at the same time also prolonging both capital maturity and average interest rates maturity or fixed interest rates maturity, which fixed interest rates maturity was 4 years at the end of first half of the year, and we will continue to decrease our financial costs. To summarize, strong increase in earnings capacity. Next slide, please. Project Development at the end of the first half of the year, we had our land bank, more than 1,000,000 square more than 1,000,000 square meters. And as you can see also from the city table, it is almost half of it that is in Stockholm's region with Hanning, Nijsherping, City of Stockholm, Miklan and Terby. So we see continuing potential for cash inflows in the quarters to come and also continuing potential for value creation. Next slide, please. It is always good to summarize, and I'm pointing out in the CO letter that we feel pretty confident to continue to deliver value and to continue to increase NIB. And we have some of very strong key pillars in our story. And the first one is that we have a unique and non applicable long term relationships with municipalities. We have, by today, SEK 30 billion low risk social infrastructure property portfolio. We delivered the last 10 months, compelling NIV growth per share of 19.6 percent and at the same time building a strong financial position and an investment grade capital structure. So you can see that we have succeeded to grow the portfolio and increasing EBITDA NAV with very strong pace. Next slide, please. To summarize, sustainable and predictable cash flow remains the foundation of our activities. As I mentioned before, we delivered strong increase with 57% in the earnings capacity to 0 to EUR 1,000,000,000 at the end of the first half year of twenty nineteen. We have also very experienced development and transactions team with strong track records. Just to give you some flavor, we closed transactions for SEK 14,500,000,000 first half year twenty nineteen. We delivered strong NAV growth, thanks to the 3 value creation areas: innovation, investments in our properties, building rights and transactions, and where the profits from property management in total profit before tax of SEK 1,060,000,000, profits from property management was SEK 254,000,000, affected by non recurring costs for repurchasing the bonds. But on top of that, we had profit from investments and transactions. With EUR 854,000,000 in building rights with EUR 40,000,000. And dollar number 4, we see continuing significant potential for renovation within both residential and social infrastructure properties. And during the first half of twenty nineteen, we have commenced the refurbishment of 248 apartments, of which 98 were completed and another 147 apartments prepared for renovations. And we also continue to do this midyear renovation of social infrastructure. An important point here is that we have now very nice stock of apartments where rents are negotiated and where apartments can be renovated after tenants moves out. Policy number 4, as previously communicated, we are continuing work to prepare SPB for a listing on the Nasdaq Stockport Main list. We are on a strong growth path, having announced 10 acquisitions with a total value of SEK 8,900,000,000 in 2019. And as we continue to see opportunities to grow, we may also evaluate the possibility of rising capital with the listing on the main list in order to further strengthen our capacity to fund growth in compliance with our recently achieved investment grade credit rating. And finally, we see continued strong demand for rent regulated rental apartments. We also see great competition for both rental apartments and community sized properties. And we have a unique position as a long term partners to municipalities. And we will combine growth with a strong financial metrics. We now have BBB- with stable outlook from both feature, standard and post. And our short term goal is to have it will be flat. That means combine our low risk social infrastructure assets with strong low risk financial position. Next slide. Thank you very much. Questions, please. Thank you. And the first question comes from the line of Niklas Hoglund from Nordea. Please go ahead. Yes, good morning. Niklas Hoglund here from Nordea. A couple of questions, if I may. If you first start without with the surplus margin, it is it was extremely strong in the second quarter, especially given a little bit weaker first quarter, up to 69% in the quarter. Is there any onetime positive incomes or lack of costs which we should be aware about? Or should we see the sort of first and second quarter in a more in a total in the first half to give a fair picture of the sort of underlying cost? We are communicating in the report our earnings capacity with surplus ratio for the all of the year at level of 68%, and those are our real numbers. And that means that increase strong increase in surface ratio between Q1 and Q2 is mainly because Q1 was lower than it should be you have this kind of fluctuation, particularly when you have a large number of rent regulated rent regulated residential. Another, how to say, extra burden of Q2 was that we had some that we had lower socialization for some of the apartments that have been sold. Is, I would say, transaction related. So I think the surplus ratio could be signaling where we are going, and that is underpinned by surplus ratio of 6% to 8% for all of the year. And surplus ratio is a measure that we will spend more time to explain, particularly for international investors, because there is a lot of trends that we are also passing to the municipalities through the supplements. So actually, in international comparison, our margins are much higher than those 68% that our surplus ratio shows. Right. And then moving over to value changes. Could you help us sort of to get to understand the sort of drivers here? You report a negative 2.7 2,000,000 value changes from DNB and pretty small value changes related to the building rights portfolio. So the underlying value changes are very strong in the quarter. Could you break that down to sort of deferred tax in acquisitions, and value changes related to renovations? Please help out here. DNBs, as we are writing in the report, we sell DNB at the latest valuation, even slightly better if I need to be more exacting slightly better. But we said in accordance with our latest valuation, the realized value changes that are actually related to accounting regulations. And we also explained that the main part of that is offset by the fair tax and also on top of that by cost for repurchasing very, very long bond that we have there, the financing. So BNB is an amazing deal that delivered EUR 500,000,000 in profit in 2 year and 3 year times ownership and also delivered by selling, delivered strong cash flow that we could use to buy new properties and to increase earnings capacity. And we have if you look at the numbers, we have slightly EUR 200,000,000 because we are writing in or I'm writing in my CEO letter that transactions and investments were together SEK 854,000,000 and slightly below SEK 200,000,000 yields coming from investments and renovation. And the rest is coming from strong transactions. And that is the strength of XBV to have a very experienced transaction team that is creating Just to follow-up on that note, well, Just to follow-up on that, well, I mean, when you look at the transactions, you've done off market deals, it's clearly supported to the cash earnings in the quarter. And but what's the sort of the drivers here for revaluation already now? Is it related to acquire deferred tax? Or is it related to these off market transactions, I. E. That the value is sort of applying the better values? It is mainly related to of as I said, a quarter rupee or slightly below SEK 200,000,000 is related to renovation and investments. And the rest, about €600,000,000 is related to mainly to off market deals. And strength in the business of those deals. And the history that we have prepared some of those deals during last 12 months and before actual time of execution. And my final question then on you're mentioning that you're aiming for an investment grade flat rating and that you also are looking into the possibility to strengthen your balance sheet in connection with the listing in the sort of on the larger marketplace here second half. Could you elaborate a little bit how much you'd move to strengthen your capital in order to reach an investment grade flat? And if that would be sort of a constraint on growth now in the second half? Let me be very clear on this. We do not with current knowledge capacity and with our deliverables from all of our income streams, we feel pretty confident to achieve a typically flat rating, which in our case is having adjusted LTV of and as communicated by rating agencies, having adjusted LTV of below 50%. So we feel pretty confident to achieve that in the beginning of next year. However, we think that we have a unique position where we have opportunities to grow. And in that position, it is important to us to grow with strong financial metrics. And it is also why at the same path where we are communicated before that we will that we are preparing SPB for a listing on the main list. And this is why when we see opportunities to grow, we also want to point out that we may evaluate the possibility of rising caps having connection with the listing of the main list in order to strengthen our capacity to fund growth in compliance with, as I mentioned, our strong financial position and investment grade rating. So it's more just to clarify, it's more growth related, if any, and your capital rather than to sort of get the BBB flat that should be more in place already today? I should say it's only growth related. We have strong metrics that is improving, strong credit metrics increase in earnings capacity and we see deliverables on both subtraction renovation and have busy ramps. Thanks for my questions. Thank you. Thank you. Thank you. Our next question comes from the line of Bertil Nilsson from Carlsberg. Please go ahead. Yes, hello. The previous it's already touched upon this transaction part was placed. But if you look at the individual Nordic markets, do you see any difference in the heat, so to speak, in the transaction market? And also, if you look at if you if you make very much off market deals, are there sellers public sellers, are they not reflecting value increases that fast since you are able to gain value gains in these transactions rather clearly? Please? I mean, we are long term partners to the municipalities. And for the municipalities, it's also important to have long term partners. So that means that when investing in municipalities and when buying new health care homes or schools, municipalities are not only getting money, they are also getting a professional team that we will be there in long term and also support city development and municipality development. That is why I said in the introduction that it's important to see our unique and non replicable long term relationships with municipalities, but also many, how to say, private sellers, because those are very special assets. And also many private sellers are preferring to not chasing the last club, but preferring to sell to long term owners because they don't know that, that will be appreciated municipalities and that will both give them to maybe to not do the best exit ever, but however to preserve the position to continue to be active in this very special market. So that is actually the main strength that I emphasized before today in another presentation. The main strength of SBB is our team and our relationships and our deliverables. If you look at the transactions and it may seem as a good profit. At the same time, we have done we are executing transactions for EUR 14,500,000,000 in 6 months. That is a lot of money. Very impressing. But also follow-up on any particular differences in the Nordic markets that you see in that respect or in the raw? Yes. I mean, we did our first Danish transaction with the Danish state in this quarter. The Swedish Municipality Swedish social infrastructure market is very professional. Municipalities have been in the market for a long time. We see now that we do prepare transactions both with Finnish and Norwegian municipalities. So there are some differences, but the main thing here is that you are the countries with large tax financed services that need professional property management and that also have to deal with both demographics challenges from the age of populations and the organization. And this, I should say, is even strengthening our position. Okay. Got you. Thank you. And as there are no further questions registered at this stage, I will hand the word back to you, Ilya, for any closing comments, please. My only comment is that we are on the path to create the leading Nordic social infrastructure property company in the listing space in the Nordics. And we look forward to having on board. Thank you very much.