Earnings Call: Q1 2019

Mar 31, 2019

Thank you very much. My name is Ilya Batyan, and I'm Founder and CEO of SVB. Slide 2, please. We are, as you can see on Slide 2, presenting strong profit from for the first quarter, our net profit increased to SEK 216,000,000 from SEK 113,000,000 for the Q1 of 2018. And that's despite that we took EUR 25,000,000 in nonrecurring costs related to bond buybacks, but also some additional non specified costs related to transactions and some energy projects. The most significant result from the report is the strong increase in our net asset value that increased with EUR 4.32 million or EUR 0.57 per ordinary Class A and Class B shares. And this is almost doubling compared to the Q1 2018. We continue to strengthen our equity during the Q1 with EUR 585,000,000. After the end of the quarter, we have issued additional number of ordinary D Shares for SEK 750,000,000 and also hybrid bond in the euro market of EUR 300,000,000. This means that in 2019, so far, we have strengthened equity by approximately EUR 4.4 15.5 billion. Also at the end of the first quarter, if you look at our net LTV, that was 52%. However, taking into account the issues of ordinary D shares, hybrid Eurobond, sale of DNB, planned repayment of SEK 3,400,000,000 of secured debt. And if you add all of this, also including announced acquisition in Finland, then our pro form a net LTV will be about 40%, which is really strong and put us in position to be to have a BBB flat rating that is also part of our short term goals. Number 4 point is that we continue to deliver profit from additional profit from 3 value creating areas, refurbishment and investments in our rent regulated residential and social infrastructure, development of building rights and transactions. Also in this quarter, investments in transaction contributed with SEK 135,000,000 and billing rights with SEK 32,000,000 to profit before tax. In the Q1, we had started to renovate 176 apartments and prepared at the end of the quarter additional 75 apartments that will be started to be refurbished in the second quarter. During the Q1, also our property development is continued to deliver zoning plans of 50,500 square net building rights were approved in Niklan, Oskarsham, Uliseham, but also that we managed to build and deliver 2 new LSS, special housing building units at our own building rights in Malmabule. And the final point in the highlights is, as you can see, that we continue to grow our earnings capacity and our estimated earnings capacity on a rolling 12 months basis at the end of the Q1 was SEK 798,000,000, an increase with 35% from SEK 590,000,000 at the end of Q1 2018. Next slide, please. Financial performance, a few key numbers. Rental income, SEK 4.29 million net operating income for Q1, EUR 240,000,000 surplus ratio, 56%, slightly lower than in 2018, mainly affected by us having slightly larger share of rent regulated residential apartments in Q1 2019, but also that we are taking some by having this nice pace of refurbishment, we are also doing some extra maintenance. And at the same time, we have had some additional costs for our energy projects, both as a part of our sustainability investments, but also the part that we want to use our strength as a big company also to prepare for renegotiations of prices for different utilities. And interim profit, EUR 2 16,000,000 yield still relatively high for this kind of low risk assets. We have a yield of 4.6% and there is still valuation upside And strong increase in cash flow, we report EUR 97,000,000 at the end of Q1. Property value, EUR 27,200,000,000 EPRA NAV, EUR 9,200,000,000 earnings capacity, 12 months rolling, as I mentioned, EUR 798,000,000, an increase with 35% from the last year loan to value EUR 52,000,000 percent, but heading pro form a to 40%, equity ratio 39%, but increasing strongly, adjusted equity ratio 43% and Oniper ordinary share SEK 0.2. Next slide, please. Few words about the company. We are managing or managing low risk social infrastructure properties in terms of elderly care homes, schools, municipal buildings, ministries in the Nordics now having properties in Sweden, Norway and Finland, also looking to enter in Denmark to be a broad player in the field of social infrastructure in the Nordics and combining this with rent regulated residential properties in Sweden. We own approximately more than 10,000 or manage more than 10,000 rental apartments, of which 1700 are owned by joint ventures. One of our biggest rental apartment portfolio is actually in Stockholm where we have 17,500 units. And you can also see that 71% of our value is in Sweden, 28% in Norway and 1% in Finland. The biggest cities in the the biggest cities in the region are our main hubs. And Oslo and Stockholm together are almost half of our total portfolio. Stockholm strongly increasing and will continue to increase in quarters to come. And as I mentioned, SEK 27,200,000,000 in property value, 634 properties, rental income of SEK 1,700,000,000 at 12 months rolling, almost no vacancies with occupancy rate of 96.6%, mainly related the vacancy that we have are mainly related to refurbishments and to property development, still a relatively high yield of 4.67 years, probably the longest vote in the market with 7 years reported and with adjustment to the contracts that we will go in, in next 2 years, among others, new 50 years lease with municipality of Szelento, total of total vault of like 10 years, adjusted equity ratio of 33%. Next slide, please. As I mentioned, we have low risk social infrastructure properties and Swedish rent regulated residentials. And as you can see here, we have EUR 16,700,000,000 in social infrastructure properties, which is 62% of value. We have 31% of the value, which is rent regulated residentials and that is about EUR 8,500,000,000 and then SEK 2,000,000,000 in our property development property development field, which is 7% of the value. And as you can see at the slide, we are developing those building rights by converting cash flow properties to building rights for rent regulated residentials and social infrastructure properties. And at the slide, you can see the outlooks in the knee shaping when we have own entrance to Central Station and where we own almost a quarter of Central City District. Next slide, please. However, the main business or the unique point for our business is our long term relationships with municipalities. And in our team, we have long experience of working together with municipalities, delivering both from transaction and from the building rights and from being partner in building communities. And you can also see that 91% of our income is coming either from rent regulated rental residential or from government direct or indirect. You can also see at the slide some of our partners that are, among others, Norwegian state, Norwegian government and the largest cities and regions in Sweden. And as I mentioned before, at the end of the last year, we also did the first ever 50 years lease in the first ever 50 years lease in Europe with the municipality. Next slide, please. Our relationship with the municipalities are, of course, very important for long term development of the company. However, those are underpinned by strong demographic change with higher proportion of elderly people requiring elderly care homes. And also, we are in the as I mentioned before, having 50% of the portfolio in Oslo and Stockholm. And those are the most growing cities in Europe. We also do a lot of work on energy efficiencies projects, and we see sustainability as a core part of our business. And if you add to that broad organization all over the Nordic countries, then you have very good combination for delivering good profit by combining relationships with Nordic municipalities with this kind of mega trends that will continue to support our growth. Next slide, please. We delivered strong net operating income in Q1. Profit after tax was EUR 2 16,000,000, which adjusted for nonrecurring cost relating to refinancing and repurchase of bonds amounting to EUR 241,000,000 and that is a strong increase compared to the corresponding quarter of the previous year. And because of force having more than 10,000 residential units, Q1 used to be our weakest quarter. So having this kind of profit is also giving good signals for the rest of the year. Our strong net operating income, combined with long term reduced financing cost and also cash flow from building rights enables that we will continue to deliver growing cash flow. And also for this quarter, I did a summary of cash flow changes just to give you a flavor what kind of cash we are delivering from different parts of the business. And if you look that we are reporting EUR 97,000,000 in cash flow before changing in working capital. And then you add that we've paid the EUR 25,000,000 snorke during for redemption of the repurchase of the bonds, then that is SEK 25,000,000 additional. And we have in this quarter strong cash flow from building rights because we got 50,000 square meters re signed and there is still cash to come from those building rights in Q2. But in Q1, we got EUR 157,000,000. And then if you subtract paid interest on the hybrid bonds and paid dividend on preferred shares of EUR 41,000,000, then adjusted free cash flow of EUR 2 38,000,000 for Q1. Our estimated earnings capacity on rolling 12 months basis at the end of Q1 was EUR 798,000,000, which correspond to an increase of 35% from 35% from Q1 2018. Next slide, please. Oil and its capacity continue develop and SEK 1,700,000,000 in income, SEK 1 point EUR 2,000,000,000 in NOI and still relatively high financial expenses. You have heard me talking about this last years. And in 2018, we have been successful to decrease our financial cost with like EUR 100,000,000. And I'm pretty sure that we will continue on that ride also in 2019. Despite that, we have an earnings capacity of SEK 800,000,000 and this is from property management only. And in addition to this, we will deliver profit from building rights, from refurbishments of the residential and from our transaction business. Next slide, please. And this is just to give you more flavor on the statement at the previous slide concerning continuous decrease in our financial costs. And here, you can just see some of the points from last few weeks. And you will see that there is still large potential for us to get in better profit as a result of lower financing costs in the months and quarters to come. Next slide, please. Our property development continued to deliver also this quarter. As I mentioned before, more than 50,000 square meters with approved zoning plants, delivering cash in 2,000 in the Q1 of 2019. And as you can see on the slide, there is still more to come. Total portfolio of 970,000 almost 960,000 square meter that will continue to deliver cash and to boost our NAV in next quarters and next year. Next slide, please. I will try to summarize the quarter with a few points. And the first, of course, is that SPB is low risk management of social infrastructure in the Nordics, as main player in the Nordics and combining those with rent regulated residentials with big emphasis of rent regulations and this delivers sustainable and predictable cash flow. And that is the foundation of our activities. On top of that, we can add that we have one of the most experienced development and transaction teams in the market. I could mention large targets on as the person that has done probably the most real estate transactions in the Nordics market ever and add to that our leadership in property development with Christian Carlson and the team. So those are the teams with very strong track records that continue to deliver from quarter to quarter that have delivered building other companies and have been very important for development of SVB last 3 years. We also delivered strong NIB growth, and this has continued to our 3 value creating areas in addition to property management. And those value creating areas are renovations or refurbishment of rent regulated apartments, but also investments in our social infrastructure properties, our development of building rights and our transactions. Profit before tax landed at EUR 349,000,000 and where the profit from Property Management contributed EUR 106,000,000 investments and transactions with EUR 135,000,000 and building rights with EUR 32 million. And just to give you some comparison between 2016 to 2018, Transaction contributed with EUR 700,000,000 in profit, building rights with EUR 5 11,000,000 on average yearly average and the investments with EUR 290,000,000 on yearly average. And we will probably see even higher numbers in profits from refurbishment and investments because there is a significant potential from renovations within both residential and social infrastructure properties. And in the Q1, we started renovation of 176 apartments. And at to start and well planned for renovation to start during the Q2. So our target of 600 apartments to be renovated in 2019 is within the reach. And that will, of course, boost both our income and our NAV growth. Renovation within social infrastructure, an area where very few other actors are active because in the field of refurbishment of apartments, you have both Hembla and Victoria Park that often are in our neighborhoods that within social infrastructure, we have very strong and unique positions by renovating and also signing new leases for renovating properties. And one example is our new 25 years lease with the Nikla Municipality in connection with the rebuilding of the municipal house. Point number 5, of course, it's very important for us to emphasize sustainability as a central part of our business model, And we are using a lot of We have energy projects on the way in Cizahorn, Skara and our largest in Utala, where we are expecting to reduce CO2 emissions with 75%. And in early February this year, we also launched our first green bond of EUR 500,000,000 with the maturity of 5 years that has been listing on NASDAQ's sustainable bond list. And the last point is that on the outlook, we see continued strong demand for rent regulated rental apartments and great competition for both rental apartments and community service properties. And to finalize, we always used to deliver on the things that we say that we will do. And last quarter, I wrote that I look forward to the credit rating agencies report. Now those reports have come and we have delivered BBB- to our investment grade rating with stable outlook from both Fitch and Standard and Poor's. And that is not good enough for our quality of assets. And we are looking to also fulfill our short term goal, which is BBB Flat. And I will stay there saying thank you and inviting you for Q and A. Thank you. Our first question comes from the line of Niklas Holen. Yes, good morning. Niklas Holen, Nordea. Okay. Let me start out with a couple of questions. Firstly, could you share some highlights related to the DNB divestments that you've announced for the Q2 here? What will be the sort of effect on NAV and earnings capacity following that aspect? Thank you. Yes. We will the effect of NIB is almost neutral, but there will be large effect on NIB going forward because of 2 things. The one is that DNB, and I have to say first that, that is one of the most beautiful buildings and probably the most beautiful one in the Nordics. And I it has been a difficult decision for me to sell it. And but in relation to earnings capacity growth, that will have significant FX because DNB has also been connected to high financing costs. And we have the like average interest rates for senior and union bonds for DNB at almost 4%. And of course, taking that away and using money to buy like the properties that we announced last week at and going from both decreasing costs and going from a yield of 3.8% to 5.2% or 6 percent that we did the last week will have significant effect on earnings capacity. Okay. And then moving over to the report. If we look at the trend, you have very strong rents but soft NOI, as you alluded to, you had some extra costs in the quarter and NOI margin is only 56%, while in your earnings capacity, it's 69%. Could you help us a little bit of the magnitude of these costs and if they are sort of recurring, if you will have continued energy costs going into the rest of the year? Yes. But you have seen first, concerning surplus fish. You have seen before that our surplus fish in Q1 is not significant for the development that will come. And that has been case both in 2017 2018. So there are, as I mentioned before, 2 main effects affecting the superstitions. One is that we had higher proportion of rent regulated residential in Q1 of this year than before because in Q1 this year, we did a few transactions buying rent regulated residential and social infrastructure transaction will be visible first in Q2. That is one part of it of that. And the other is actually even more positive. I should say that our utility costs are like EUR 10,000,000, EUR 15,000,000 too high in Q1 and because of 2 different things. The one is that we are concentrated all of our electricity bills in one big pool. And that means that in a short period of time, we have to be exposed to that market completely and meaning that we have the higher cost that we should have. But on the long term that is giving us nice profit. So we are not trying for those costs. And the second one there is that we are doing some energy projects that has been taking some costs that will deliver both return in terms of lower CO2 emissions and lower costs going forward. And the third one is that we now are increasing our pace in refurbishment area, and that gave us also opportunity to efficiently do some extra investment in maintenance. And we did that in Q4. We are continuing to do that in Q1. And we encourage our management to do that going forward when it's most efficient. Is it fair to say that these investments are supportive to your sort of cash earnings outlook and actually what's going to be supporting to the values in the properties? Absolutely. And also we have also did some because we are moving part of portfolio, you know, to a joint venture. And also in this process, of course, we are taking some additional costs. We have also some additional we are in the process to the paying company to change this. We have some additional costs for that. But I mean, we feel that we deliver strong profit and we are not how to say, we are not having time to try to estimate those costs because we see that trend is very clear. We are going to continue to see the strong increase in NOI and also related strong increase in NIB. Okay. My second question was actually related to the central and admin costs. They are also on a slightly higher level than what's your indication in the earnings capacity, rather around SEK 9,000,000 higher. Is that related to the listing costs? Or is it It is related to mainly to transactions and some listing costs. So that and it is beneficial for us to take those costs through the event. Okay. And then my first question is actually just a follow-up on the DNB. When you sort of divest this property and you redeem these loans, will we see any extra costs related to the on the financing side in the Q2 to sort of be aware of? Or will this be sort of netted out in the transaction? We will sort out the main part between transaction and that is also, how to say, that is also giving extra value to this transaction given our strong development of credit metrics. However, we may have this is, as I say, it looks like cliche, but it's paying for success. We have been too successful in the capital markets, meaning that our bond prices our margins decrease very fast, meaning that we pay a lot to get rid of those. So those we are continuing to clean up. And as you know, Niklas, I still think that our assets requires much, much lower financial costs. And that means and I always very clear in the market that we are always on the nice side concerning our bonds because they are still very cheap. That will be, of course, costly for us, and that means that we will probably have additional cost for repayment of the bonds also in Q2. Right. My last question, if I may. When we look at the development portfolio, part of the value changes were related to building rights or zoning coming in that place. What's your outlook for the sort of timing of the already announced divestments to sort of generate cash over the rest of the year. Have you seen any planning in place also in the second quarter and your outlook for the SEK 1,500,000,000 to be coming into the balance sheet or into the cash flow statement? Yes. And as I emphasized in the CEO letter, we delivered SEK 157,000,000 in cash flow from building rights in Q1. We are expecting additional EUR 85,000,000 in Q2 as I can see right now. And my expectation for the whole of the year are, as I mentioned before, between EUR 500,000,000 EUR 650,000,000. And I don't see any stress to that. Of course, sometimes some things can move 1 quarter forward, but it will be in the reach of net cash flow from Building Rights in the quarters to come. And just to follow-up, though, if I may. On this SEK 500,000,000 to SEK 600,000,000 in cash from this already taken on divestments and more the timing. What would be the revaluation effect? Because I know that you are sort of having Because it's very important. I'm not I'm never giving predictions or how to say I mean, we are guiding that we will deliver EUR 2 50,000,000 to EUR 400,000,000 in profits from building rights on a yearly basis. Last 3 years, we have delivered EUR 511,000,000,000 on profit from building rights. I'm just commenting cash flow coming in. That means if you run the hard cash flow of EUR 100 and 57,000,000. And we are, given the sole building, right, expected to land at EUR 500,000,000 to EUR 650,000,000 in cash flow for 2019. And they may be that part of it may slip Q1 of 2020, but that is how this business works. But concerning the profit, that was delivery in Q1 was EUR 32,000,000. And we will see what we'll do in the quarters to come. Okay. Super. Thank you very much. Thank you. And the next question comes from the line of Philipp Hulberg from ABG. Please go ahead. Yes. Hi, Philipp Hahlberg here from ABG. So just a detailed question regarding the DNB divestment. Will the preference share related to the barcode be removed after the divestment? I think it's roughly SEK 330,000,000 or so that you mentioned in the report. Yes. We have already repaid almost all of those after the end the quarter, all of those preferred shares, I think we have 27,000,000 left. And we will we are always ready to repay those also, but we that is not that is insignificant amount for us. So it's as I said before, concerning the bonds, we are always on the buy side for all mispriced assets. So that is the case here also. Super. And then in Q4, we talked a bit about debt you had on your balance sheet related to the JVs where you were to transfer that to the JV. So how are you going with that? Is the progression going well? You said it would be a gradual phasing out of the JV debt. Yes. It is in this quarter, we had we phased out like EUR 150,000,000 from from one of the older JVs. And then we have some additional debt to relaunch and new JV in or prepare for new JV in Norway. But those are insignificant changes, significant changes that we've seen in Q2 because we already, after the end of the quarter, have refinanced EUR 600,000,000 like EUR 650,000,000. As I have said before, we are expecting to be refinancing after EUR 1,000,000,000 of JV debt before the end of Q2, and EUR 650,000,000 has been refinanced last week. Okay. And that was that you initially had on your balance sheet, right? Yes, yes. That is and this is also because as you know today, the banks take some longer times for financing and in those joint venture, same sales, mainly bank debt and that has been SEK 650,000,000 approximately has been closed last week. Yes. Okay. Perfect. And then just a broader question. But now when you sold the DNB property and you have issued your D shares and the large hybrid bond, How large would you say that your current investment capacity is both regarding acquisitions and projects? Obviously, you bought a finished portfolio here last week, but if you could just give some clarification regarding Yes, it is absolutely, Philippe. And I mean, as you know, the transaction business is an important part of our business model, where we are delivering large profits from our transaction business over time. And we have we did the Finnish transaction announced last week, and we will close it in a few hours from now, I think I need to send some money in May that actually after the call or like SEK 1,500,000,000 and we will get capacity to do at least 3 more billions in, I should not say leads to carbon at least in during next during this next quarter. Okay. Super. And then just another broad question. But you mentioned here the call that you're looking into perhaps entering Denmark. Are there any specific type of assets you're looking into or just any type of community service property really? Yes. We are focusing on elderly care homes, schools and how to say municipal government buildings. So we see that we will need these in this space of social infrastructure because if you look at the market, we have only one competitor in the market and that is HEMSA. And we see that we can continue to be a leading player in social infrastructure space in the Nordics in years to come. Super. Thank you for taking my questions. Thank you. And the next question comes from the line of Bert Lindsen from Your Capital Securities. Please go ahead. Yes. One remaining question, rather, has been taken. And my question relates to the profitability you mentioned in the residential refurbishments. And one thing, obviously, when you're looking at the value changes comparing residentials, public properties and other properties that residential has increased rather significantly while the others are not so much. When your factor is profitability, is that due to this change? Or is it other components like rent increases and lower construction costs and so on? It is mainly is very important because refurbishment the first thing is that we still have very high yield for this kind of low risk assets with lot of valuations. So we have very low effect of and you are making very important points here that I actually forget to mention that we almost don't have any bigger support for decreasing in yields. As you can see, we have almost the same yields over the quarters. The main NAV growth is coming from these different areas, as I mentioned before, from building rights development of building rights, from transactions, but also from refurbishments and renovations. And that is the main force behind the increasing valuation in the Hanger's residential portfolio. And as I said before, we still we are close to have to double the yield for every refurbished apartment and that is very good efficiency. And the last question comes from the line of Jan Efel from Kepler Cheuvreux. Please go ahead. Okay. Thanks for that. I have a couple of questions. First one is on your financial net. If we look at the earnings capacity at the end of 2018, you indicated a run rate of SEK 90,000,000. Now it came in at SEK 107,000,000, excluding the EUR 25,000,000. So I'm just wondering if so called tomret of yield is included in this 107 That is the effect the part of effect down here of the 70s that we did, as I mentioned before, we launched some bonds relatively yearly in the quarter, both by tapping out of on one of our bonds in January and then doing the green bond, euros 500,000,000 and then after that an additional bond of EUR 200,000,000. And by then, there is we took longer maturity because that is one of very important thing for us is to have as low refinancing risk as possible. And we took those bonds at levels of 3.3. Today, we should pay like 1.4 or 1.5 for the same maturity. So that is one part of the explanation. The other part is that the part of the bonds of these high priced bonds that we have from before still have some additional fees that also will expire through time. So those are the main parts. And concerning, I think we didn't have a high amount of land leases, but I can check more exactly and send an e mail to you. Okay. And I'm also a little bit puzzled about your earnings capacity. If we go back 1 year and when we started 2018, your earnings capacity indicating a surplus ratio of 70%. When we finally got 2018, the reported surplus ratio was 63.6. It seems to be high quite high leakage here. And now you're saying 69%. Is that excluding all the extra costs that you mentioned that you had in the Q1? And will this higher cost base continue? Yes. But this is I should say that there is no higher cost base because the main part of those costs are main part of those costs are of nonrecurring characteristic. The main reason behind this is also our high transaction pace. And that means that the earnings capacity is just mathematic exercise, but I think very good one because it's showing the trends. And it's not it's exactly for that point in time. And if you look at 2,000 and this is an important point for me because if you look at 2018, we did almost EUR 7,000,000,000 in transactions without increasing total volume. So you can imagine how big change in the mix is. And this transaction pace is very beneficial for us delivering profit. If you remember in the beginning of and of course, that is always problem from outside to see that those incomes should be seen as recurring. But no matter how you can you see them, we have delivered like EUR 700,000,000 from transaction last 3 years on average. And then for that, we do have some extra costs that are hurting our NOI and particularly in comparison with earnings capacity. So I would say that our surplus ratio of 69% is exactly how this portfolio could be run-in a steady state environment. However, we are not going to run it in steady state environment. But I should say on the total, we will deliver the profit that is better than steady state environment. So that is I can just guide you for some of the pieces from Q1. We are delivering in Q1 Q1 net operating income of EUR 240,000,000. And I should say that this should be in the levels €20,000,000 €25,000,000 higher without transactions and without these projects that we are running on energy efficiency and also extra maintenance that you already have people place doing the refurbishments. Okay. And your investment volumes in existing buildings for 2019 2020, any rough number there? In 2019, we are expecting to do like EUR 400,000,000 in the refurbishments. And that will according to our plans that we used to, how to say, to almost double the yield, that will deliver additional €400,000,000 in profit. So that the biggest part of this will come from refurbishing rent regulated renovations, but we also do, as I mentioned before, some refurbishments also with pre signed contracts of in social infrastructure. And this is very important because I used to say that this is the main difference between this kind of low risk business and commercial business because we never have a CapEx. We have just investments in already signed contracts where we have this kind of doubling the yield. Yes. Okay. Euros 400,000,000 of focus, Matt. And if you add maintenance CapEx to that, it's like €600,000,000 or something for the 2019 or No. As I said before, we don't see this as a CapEx, but as investments, all other CapEx is already fully integrated in our maintenance costs, and those will be around EUR 100,000,000 for 2019. Okay. Thanks. That's very clear. And my final question is regarding the DNB head office. Do you have any amount of the financing costs of this building in the 1,000,000? How much would it cost to finance? We announced that with sale of BNB, our financial costs are decreasing with EUR 139,000,000. Okay. Thanks very much. Thank you.