Welcome to the SBB press conference. Afterwards, there will be a question and answer session. To ask a question, please press zero one on your telephone keypad. With that, I hand over to the CEO, Ilija Batljan. Please begin your meeting.
Good morning, everyone. Today, we are presented the latest deal that SBB announced this morning. That is that we are selling a 49% stake in our social infrastructure portfolio for public education. Buyer is Brookfield Super-Core Infrastructure Fund. Price for shares is SEK 9.2 billion in cash with an additional earn-out of up to SEK 1.2 billion in cash. Just to give you re-relation, depending on value of the earnouts achieved, the transaction price represent between a 2.7% discount and a 2.7% premium to the book value as of Q3 2022. Next slide, please. Just to describe transaction related to our sales of 49% stake in our social infrastructure portfolio for public education to Brookfield.
Brookfield is doing a transaction through its open-ended Super-Core Infrastructure Fund. As I said, the transaction is that Brookfield is paying SEK 9.2 billion in cash up front plus up to SEK 1.2 billion in cash through earnouts for a 49% minority stake in EduCo. SBB is creating EduCo by contributing our SEK 44.9 billion social infrastructure portfolio for public educations. Public education in the portfolio includes preschools, elementary schools, upper secondary schools, and university. The portfolio is today only owned by SBB, and we are creating a new subsidiary, EduCo.
SBB will consolidate 100% of EduCo post-transaction and investment strategy of EduCo will be to invest in and manage social infrastructure assets within the public backed educational sector in the Nordics and will be the main vehicle for SBB's opportunities within the sector. As I mentioned before, the price, depending on value of the earnouts achieved, the transaction price is SEK 43.7 billion. That is related to NAV 2.7% discount or 2.7% premium to the book value of SEK 44.9 billion. That was book value at the end of Q3. The initial yield is 4.1% at 2022 numbers and the 4.4% at 2023 numbers, given inflation effect. That's related to NOI.
In Sweden, we always when we present yield are talking in terms of net initial yield. We have two separate earnouts. Those are expiring after six years from the transaction close. Earnouts are based on achieving refinancing terms or achieve the NOI yield on new development and acquisitions respectively. Total maximum cash amount payable to SBB from Brookfield for earnouts will not exceed SEK 1.2 billion. Financing existing extended by bank financing of SEK 6.9 billion and existing SEK 14.5 billion of intercompany financing provided by SBB to Educo is in place. It is a tenor of up to six years. In SBB, we have large amount of our debt that is fixed interest rate and in Educo it will be fixed interest rates of 3%.
EduCo have a intention to refinance the intercompany loan at market terms in medium term. EduCo's target Loan-to-Value LTV ratio is 50%-55%. Given the strong cash flows and the high quality of assets, this will lead to strong rating position for EduCo. EduCo will be managed by SBB and will enter into an asset management agreement with SBB and on top of paying for operational cost, EduCo will also pay 1.8% of NOI to SBB for central administration covering the management of the company. EduCo will be chaired by me, Ilija Batljan, and Jenny Asmundsson, that is here with me. Please, Jenny, come forward. Jenny is part of SBB's group executive management team, and Jenny will be responsible for EduCo's operation.
Jenny, please, tell to our listeners a few words about you all.
Good morning. I'm Jenny Asmundsson, and I will be responsible for the EduCo operations. I've been with SBB since 2020, and I have a broad experience of the different segments within social infrastructure. I've been working with the both management, development, and business transaction in public and private companies, as well as in municipalities over my 25 years in the industry. I'm looking forward to starting up this long-term cooperation with Brookfield, and I'm confident that this gives us a very strong platform for continuing growth and development of new educational infrastructure in the business in the Nordic region.
Thanks, Jenny. If you then focus on rationale for the transaction is real win-win deal, positioning SBB to continue delivering critical social infrastructure for municipalities and governments within the public education sector. On top of that, the transaction provides diversification of funding sources for SBB's business and accelerate the leveraging of SBB's balance sheet with pro forma loan to value of 42%, which is creating position for SBB to achieve its target of BBB+ rating within short time. The timing for transaction is very straightforward. The transaction is unconditional, expected to be completed in two steps.
At the first closing, that is intended to be completed on 30 December 2022 or latest in the beginning of 2023, it will be transferred the 77% of the assets. A second closing for the remaining 23% of the assets value is expected to be completed in first quarter or second quarter 2023. Next slide, please. I will give you a few words about SBB and update on the numbers. Next slide, please. SBB is largest portfolio of social infrastructure in Europe. We used to say that we operate in the most safest asset classes, social infrastructure in the Nordics, where 100% of leases are sovereign or public finance leaseholders and highly regulated Swedish residential assets. Our assets are, as you can see on the slide, in attractive location in major Nordic cities.
Occupancy is close to 100% of available assets in terms that we have some assets that are used for refurbishment or development or rolling numbers for 2010 months forward. We have a income of SEK 7.9 billion, assets for SEK 154.5 billion at portfolio book value. We have one of the longest duration, longest contract durations in the market, 11-year contract duration, strong net initial yield of 4.1%, average interest rate at SBB level, 1.89% and, as I said before, net LTV on total assets of 42%. We have today our business in Sweden, Norway, Finland, and Denmark. Next slide, please. As you can see from this slide, SBB have a strong position in the field of social infrastructure and different segments.
The first segment is social infrastructure for public education. Those are low-risk assets as preschools, primary schools, upper secondary schools, and university in the Nordics and are publicly funded, as well as supported by strong demographics. On top of that, we have a social infrastructure for elderly care, social infrastructure for healthcare, social infrastructure for special residential care. Which is publicly funded residential assets for people with special needs in a housing market characterized by structural shortages. We also have government infrastructure and municipal buildings, and we own a large portfolio of Swedish rent-regulated residentials. On top of that, we have associated companies and investments, including that we are largest holder in. That we are largest shareholder in JM AB, but also largest shareholders in terms of capital in Heba Fastighets, and a few other companies. Next slide, please.
We have been acting very focused this way this year after aggression on Ukraine and change the macro environment. We already in the first half of this year start strong deleveraging program. This deleveraging program has continued and with focus on maintaining target LTV below 50% and ICR of more than 3 x. On top of selling assets and creating us a strong cash position, we have also used our position to buy back bonds. We did one of the largest buybacks ever in the Nordics by buying SEK 631 million of bonds, including SEK 150 million of hybrid bonds, and paying for that approximately SEK 500 million.
SEK 150 million, as I said, were tendered across our three hybrids, and that is maximum buyback that we are allowed within the rating framework. SEK 481 million was tendered across our euro SEKIS and NOKIS senior bonds. I think we bought a share of 15 of our bonds at average purchase price of 91.1%. This resulted in a positive effect on equity attributable to SBB's A and B shareholders of SEK 1.4 billion or SEK 1 per share. On this slide, you can see how we have building our pro forma cash and balance sheet.
If you combine that with maturities that you can see in the lower part of the slide, then you'll see that we have a very strong liquidity position, SEK 17.3 billion in pro forma cash and balance sheet, plus confirmed unutilized credits commitments, which is fully covering our bonds that are due in the next three years. More than three years, covering both 2023, 2024 and 2025, including also repaying bridge credit facility. Next slide, please. Few more deep dives on transaction. At this slide, next slide eight, you can see some more detailed information about EduCo, which is SBB's vehicle for social infrastructure within public education.
This is a leading social infrastructure portfolio for public education in the Nordic region, unique asset class, publicly financed leaseholders on the long-term leases, with minimum to nowhere. Revenues, almost 100% inflation-linked. We are continue to manage those assets, also given our strong partnership and our track record working with municipalities. We are also innovation leader in designing and managing educational space. The portfolio has SEK 2.3 billion revenue on the 10- months rolling. Portfolio book value, SEK 44.9 billion. NOI of SEK 1.9 billion. Net initial yield of SEK 4.3 billion according to book value. 13 years contract duration.
As you can see, strong exposure, 100% of portfolio in AAA-rated countries, Sweden, Norway and Denmark, and AA+ Finland. You can also see how the split related to contract duration is between different part of the portfolio. Split by total asset value is that preschools are 47% of the portfolio, elementary schools are 38% of portfolio, and 15% of the value is coming from universities. Next slide, please. Continuing on, transaction rationale. This is leading difficult to replicate Nordic social infrastructure portfolio for public education, favored by preferred relationship with municipalities and publicly funded operators in the Nordics within the educational sector. As I said before, strong and predictable inflation-secured cash flow backed by AAA government funding.
Number three, essential nature of underlying assets in the Nordics in a market with favorable tailwinds. Nordics have strong demographic fundamentals. We are partnering with Brookfield, positioning SBB to continue to deliver critical social infrastructure for municipalities within the public education. We and Brookfield are, in this case, a perfect match, and we'll be able to continue to grow and to deliver needed social infrastructure properties for education. Of course, taking in SEK 9.2 billion in cash, plus additional potential for SEK 1.2 billion of cash is diversifying funding sources for SBB and accelerating our deleveraging with pro forma loan to value of 42% post-transaction.
And also strong ICR landing at 5.1 x from 4.8 x at Q3 2022. Next slide, please. I can tell you more and take long of your time bragging about our strong position, but I will just emphasize the fact that we are undisputed leader in the Nordic region and have very strong relationship with municipalities and private providers that are delivering educational services to municipalities in the Nordic. Next slide, please. And at the last slide, you could see that we are undisputable leader in the sector with strong relationships that are difficult to replicate and with high barrier of entry. And at slide 11, you can see few important point.
One is that we have a very long leases with existing leaseholders. Turnover for the space is negligible, both since properties were acquired by SBB but also prior. We have very long leases across the portfolio. You can see that 46% of portfolio is longer than 10 years. We have, for example, two amazing portfolios in Norway, Trygge Barnehager, comprising of 15% of 2022 revenues on 25 years lease, but also Læringsverkstedet, where that is 50% of 2022 revenues on 35-year triple net lease.
Those leases are in educational sector, typically without break clauses, 10-15 years contracts for newly signed leases, 100% index, 100% indexed inflation and improvements, and increasing standard is paid by the leaseholders or through a contract price increase, or longer contracts. As I said before, I think it's eight countries in the world having AAA rating. Three of those are Sweden, Norway, and Denmark, and Finland is having AA+. Next slide, please. Demographics in Nordics, I don't need to take much time of on that, but as you can see on the slide is very strong and also strong in comparative in comparison to the rest to the rest of Europe.
This is a sector with highly supportive macro conditions underpinned by attractive demographic, which create continuing strong demand. Just in Sweden, we need 1,000 new schools until 2030, with similar demand expected throughout the Nordic region. Next slide, please. We already have a very strong position in the Nordics, partnering with Brookfield is giving us a strong opportunity to continuing organic and inorganic growth within the educational sector. We are best positioned to lead pan-European consolidation. Given strong financial position for SBB and backed by Brookfield, we will be able to be in a growth mode already in the next year and be best positioning to lead pan-European consolidation. We do see strong potential for continuing increasing revenue in EduCo.
We have long and unparalleled delivery from our development team. Just, I don't know, we have not sent, I think press releases yet, but we will make sure to send press release and more information about that in next few days that we, for example, got approved one of the largest zoning plan in one of the regional cities close to Stockholm, just an hour from Stockholm, where we own almost a quarter of central city district. Next slide, please. Key ratios. As I said before, the transaction is accelerating SBB deleveraging.
You can see that post-transaction, we are having loan to value or pro forma post-transaction loan to value of 42%, interest coverage ratio increasing strongly to 5.1 x, and secured LTV being at a relatively low level of 18%. Next slide, please. I think we have in presentation a few appendix slide. You can study those when you, when you have the time and want to learn more about this amazing business. I will stay there for now, and I will take questions. Please.
Thank you. To ask a question, please press zero one on your telephone keypad. Our first question comes from Fredrik Cyon at Carnegie. Your line is open.
Good morning, Ilija and team. Congratulations for the deal. I have a number of questions, starting off with, you state that you will fully consolidate EduCo. How does the transaction alone affect your pro forma loan to value versus the reported in Q3 2022?
Transaction is leading to decreasing LTV to 42%. The major part of that decrease is from the transaction. On top of that, we have done a few other divestments in accordance what we stated in our Q3 report, that we will deliver sales resulting in SEK 13 billion in cash.
The numbers you refer to, takes into account other things than this deal in isolation. What the press releases you have stated at, over the last two months have stated or is it?
Uh-
Is it just the EduCo deal you're referring to here?
The transaction is pro forma to what we have been done by today, and that includes among others.
Yeah
joint venture
Mm
shares, for approximately SEK 2 billion.
That's clear. Then moving over to the EduCo portfolio, will it be booked at SEK 43.7 billion on the books i.e. excluding the earn-outs, when the deal is completed?
On the books will be booked according to latest valuation. That is that we will be seeing where the valuations are in by Q4 this year.
The earn-outs will not be included in the book value, right?
Yeah. That is right. That is, you have, like, two sides on that. The one is cash for selling the shares, and the other is that consolidated portfolio will be book at the value that the value is assessed by Q4.
The intercompany financing to EduCo, will that change the fixed interest rate structure of SBB, and if so, to what magnitude?
No, because this is the financing that is already at place. As I said, SEK 6.9 billion of this financing is existing financing, and the rest is existing intercompany loans. The SBB's fixed in-interest ratio will be over 90% after the repayments of debt and also after a residential spin-off.
That's clear. The bridge facility, that facilitated the hybrid and the bond buyback, will you pay that back immediately after the closure of this deal? Will you retain it for a longer period of time?
No, we will pay that back. It's not only that we are paying back. We will continue with additional buyback of the bonds. We already completed SEK 630 million bond buyback, which is one of the largest bond buybacks ever done in the Nordics.
When will the bridge facility be out of the books at the latest?
It will be fully out of the books in the first half of the next year.
Thank you. Two more questions, and then I'm done.
Yes.
The previous LOI, is that part of this deal? Are those properties that were up for grabs previously is part of this deal, or you said refers to other assets?
Those properties are not up to grabs. It is rather that we are taking in minority investors by selling 49% of shares in EduCo. We are not commenting our counterparties.
Okay. Finally on the EPRA NAV impact of this deal. Obviously you mentioned the book value, in various, how you treat the pre- tax and et cetera. What is the net effect on EPRA NAV per share?
My view on this is that this transaction should not affect EPRA NAV per share given consolidation. However, we will make sure to have all numbers in Q4 also taking into account minority interest.
Thank you. Those were all my questions.
Thank you.
Our next question comes from Krishan Kumar at Barclays. Your line is open.
Thank you for taking my question. My first question is around the intercompany loan at 3%. Is it secured or unsecured? In context of this, what is the current cost of financing for SBB in the market? For example, that bridge facility, how much it costed for the company to take on that one?
Current SBB that is has average interest rate of 1.89%. The bridge, we have not communicated the margins for the bridge. Those are very favorable in relation to where our debt is priced if you look at our listed bonds. The SEK 6.9 billion of the debt is current bank financing, and slightly above SEK 14 billion is current intercompany loans. The average pricing in Educo will be higher than average pricing of SBB's debt.
Got it. Thank you. Sorry, I think I missed that. Is it secured or unsecured, the intercompany loan?
The existing bank financing is secured, and the intercompany loan is. Given that it is consolidate within SBB, is unsecured.
Okay, got it. My second question is on this letter of intent of SEK 9 billion, which you canceled today morning you announced. Can you please provide more color around it? Like any reason for cancellation, additional color on that?
We are never commenting our counterparties. We have just like to be clear in messaging to the market that we have terminated that transaction.
Got it. Probably my last question is, bit linked. Does this complete your disposal program, or can we expect more to come in future?
Yes. This is completed our disposal program in terms of where we want to be to have a strong financial position. We think that with this disposal, we are achieving a very strong balance sheet that is probably among the strongest in Europe, and both on numbers. I like your question because it's very important that we don't only have low LTV after the transaction and strong balance sheet, but we also show that we have the most liquid assets in Europe.
That is, I think, amazing message to our bondholders and to our shareholders, that in the market, with strong macro challenges, where no other players are able to execute what they have been promising, we have been able to execute on every point during this year.
That's very helpful. Thank you very much for all your answers.
Thank you.
As a reminder, to ask a question, please press zero-one on your telephone keypad. Our next question comes from Jonathan Kownator at Goldman Sachs. Your line is open.
Oh, hi. Good morning. Thank you for taking my question. Just wanted to go back on the NAV question earlier, maybe this relates to the earn-out. Obviously you're potentially selling at a small discount to face book value before DTL. Just the value also includes the present value of the 1 million, sorry, 1 billion asset management fee. I was just wondering, I mean, obviously, if you adjust for the 1 billion asset management fee, you're selling at a discount to book value for assets that you are keeping, obviously, for 51%. Shouldn't this have an impact on your NAV, which should be negative?
It should not because the central cost that will be paid to SBB are perpetual. That is a normal part of business. And as you pointed out, SBB will receive 1.8% of NOI as a perpetual payment for that. In terms of NAV, this transaction is neutral. Of course as because we are selling the shares, then you have to take into account some discount for deferred tax, which is market practice for this kind of transactions.
Sure. That's fair. Let's just assume, we take into account the SEK 1 billion of asset management fee, and you add that to the transaction value, and you get these synergies, and that's absolutely fair. You're still selling at 2.7% discount to book value even including that, before the earn-outs, right? It is just because.
Yeah. That is fully right, that the price that we are selling is 2.7% discount to NAV before earn-outs. It can be 2.7% over NAV if the earn-outs were delivered. That is exactly so.
Okay. That means that effectively you're just waiting to understand what's happening with the earn-outs, to put or not, this 2.7% discount to book value in your numbers. Is that correct?
No, that is. We will work to, of course, to earn extra cash from SBB by delivering on earn-outs. The day one, the correct answer is that the day one, the effect is 2.7% discount to NAV. Earn-outs, if delivered, will allow transactions to 2.7% over NAV, which is a very, very strong message.
Okay. Thank you. Just coming back on the repayment of the loan. You said it was unsecured. What is going to be the strategy? I mean, what is an acceptable refinancing rate for that loan? I mean, obviously you're providing the loan at 3%, which is about the level of swap rates, I guess, on a blended basis. Are there any special conditions that need to be achieved in order to refinance the loan? How are you planning to work on that strategy?
SPV is consolidated this business, so this is not a separate business. In this business, we think that it's fair if our average interest rate is 1.1889%. Given the buybacks and repayment of the debt, we will have more than 90% of our interest rates as fixed. We think it's fair that having 3% average interest rates in this portfolio is actually 1.1% more than average debt for the SPV in all, including those properties.
Okay. it
Yeah.
Sorry, I'm a bit confused on that. I mean, I appreciate your reasoning on the consolidated basis. On the see-through basis, you still are to collect the cash until the company can refinance, meaning that effectively the impact on your LTV is not 4 percentage points but only 1 percentage point. On the see-through basis, 1.2, actually.
So-
You don't intend to get the refinancing done, you know, and what's the timing on that?
The timing, first, let me just. I'm collecting SEK 9.2 billion in cash and plus additional SEK 1.2 billion from earn-outs. Using that cash to repay debt will decrease SPV average interest rates even more. However, as we also said in presentation, the ambition is to refinance the existing intercompany loans in EduCo within the next six years.
All right. Thank you.
Thank you.
Our last question comes from Jay Rhim at Green Street. Your line is open.
Hello. Hi. Hi, Ilija. Congratulations on the deal.
Thank you.
First question from me is in terms of the earn-out terms, so you mentioned outperformance on CapEx deployments on new developments and acquisitions. Do you have a sense of how much deployment are you going to make?
We think that, the targets, for earn-outs are reasonable, and it is our expectation that we will be able to deliver extra cash to SPV from earn-outs.
Do you have a sense of the committed development pipeline, for the EduCo portfolio?
Yeah. We put a few of those examples in the presentation. As I mentioned before, SPV's development team is the best in Europe. And just as an example, we are, and we will probably announce more details in the next two days. We are exactly now getting a large zoning plan approved in ome of the regional cities, one hour from Stockholm, Nyköping, where we own, like, a quarter of the central city district. Of course, if you develop quarter of the central city districts, that will include both residentials, but also schools and preschools and assets that will be very, very good to be owned by EduCo.
Understood. last question from me is on, how do you get to the value of SEK 1 billion for the present value of the management fee in terms of, from the 1.8% of NOI? Just to get the sense of your assumptions there.
It has been done in relation to pure cash, pure cash value of 1.8% of NOI.
Okay. understood. Thank you, Ilija.
We have no further questions on the phone line, so I'll hand back to the speakers.
We have received a few questions by email. Most of these have been answered already. We will take just one or two questions, one of which is: What will happen to the schools now? Can Brookfield guarantee the conditions for the rents, for example?
Brookfield is not managing the schools. It is SPV that is managing the schools. Rents will be unchanged after this transaction in relation what they were before this transaction.
Finally, we have a final question. It looks like a cheap deal for Brookfield to buy 49% worth of almost SEK 44 billion for SEK 10.4 billion. Is it a bad deal for SBB?
This is fantastic deal for SBB. I hope that it will be great deal for Brookfield. Brookfield is buying shares at a level that are corresponding to 2.7% discount to NAV before earn-out or 2.7% premium to NAV after earn-out. I think this is very good deal for all of us, but for SBB particular in two sense. The first is that SBB will be able to continue to grow and to be strong partner to municipality to deliver properties for e-education.
The second is that SBB will in this way, get more diversified financing and also will use cash of more than SEK 9 billion coming from the beginning and potential earn-out to repay debt and decrease LTV and deliver stronger balance sheet.
Okay, thank you. I will ask you just to wrap up.
Great. I just want to wrap up with a message that we start this presentation with that SBB's sale of 49% of shares in SBB's social infrastructure portfolio for education is delivering to SBB SEK 9.2 billion in cash and potential for additional SEK 1.2 billion after earn-outs. This is a strong message to the market on two very important point. The one is that SBB has the most liquid assets in Europe. Number two, that with this transaction, SBB is strengthening its rating position. Thank you very much, and thank you for listening.