Welcome to Samhällsbyggnadsbolaget Q1 report 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star five on their telephone keypad. Now I will hand the conference over to the speaker, CEO Ilija Batljan. Please go ahead.
Hello. My name is Ilija Batljan, I will present the latest report from SBB. Let me start with our operational performance. We think that our underlying business is doing great. We have a strong operational performance. Net operating income like-for-like is increasing with 13.4%. On top of that, we have the fact that we have not received the income from increased rent within our rent regulated residential portfolio. Taking that into account, we have a like-for-like of 14.9% on net operating income.
On rental income, like-for-like, 11%, and we have very strong culture of efficiency in our property management and our costs, property costs on like-for-like basis have increased with just 1%. We are on the long-term basis, strengthening our net operating income with SEK 600-700 million. The importance there is, given that our leases are indexed, that is compounding. It is a very strong long-term effect, from strong operational profit. If you look at earnings capacity, 12 months rolling, we do count to deliver rental income of SEK 6.9 billion. After cost, NOI of SEK 5.4 billion.
Operating profit of SEK 4.2 billion or SEK 286 per share. After adjustments for dividends and payments for these shares and hybrids, but also adjustments for results attributable to minority investors, we are expecting SEK 2.6 billion or SEK 1.8 per share in operating profit to ordinary A and B shareholders. I mentioned in my CEO letter in the report, we are expecting to get additional SEK 200 million in income from finished projects this year. In total, we have SEK 365 million in extra income coming from the project.
So that will increase operating profit to ordinary A and B shareholders between SEK 0.15 and SEK 0.30 per share. Another important point from operations are that we have been able to deliver strong growth in NOI much higher than CPI. Part of that is that we have a relatively low rents. If you look at the slide, you will see that, for example, for the leases that are expiring in 2024, our rents are SEK 1,467 per square meter. Compared to our rents that are expiring 2033 or later, that means 26% difference.
Comparing to another alternative for our tenants, which is newly built premises, the difference is even higher. It is 40%. We have a strong upside potential to continue to deliver growth in NOI over CPI and compounding over time. We have before guided that we should be able to deliver 1% over CPI, which we have delivered since starting the business. This quarter that is even much. That overperformance is even higher. At the same time, given that the company is doing strong operationally, the board is continuing to take action to strengthen the balance sheet and to lower financial risk in the business.
The board has decided, as we announced this morning, to carry out the rights issues of these shares of SEK 2.6 billion. We feel comfortable that 12.5% is good dividend and good return to our shareholders. This is offered to all existing shareholders through a rights issue of Class D shares. The proceeds will be used to strengthen balance sheet and to reduce the company's debt. Number two, we are having a strong position in the Stockholm rent-regulated residential market with Sveafastigheter and the strategic review, including divestments or taking minority investors, but also evaluation of the condition for listing are ongoing. We are proceeding good there. Proceeds from that transaction will be used to decrease our debt. We also continue with disposal plan.
We have announced that we are planning to sell assets for SEK 6 billion. We have been doing some smaller sales, and we look forward to deliver on that. We have been very successful in selling assets during 2022, and we feel comfortable that we will be able to deliver the SEK 6 billion of disposals. Finally, despite that it seems sometimes that there are not many people that care about sustainability, but for us, that is a core part of our business. We are on track to become climate positive by 2030. In this quarter, we actually finished the construction of our first solar park that is producing having producing capacity of 10 GWh.
In total, we have now covering in different production initiatives and energy efficiency measures, 5% of our total energy consumption. On this slide, a few words about our rating. We have three ratings. Triple B minus with a positive outlook from Fitch, triple B flat with stable outlook from Scope, and triple B minus with negative outlook from S&P. I will comment that given that we last 12 months have reduced our total debt with SEK 16.4 billion, we are expecting to do large divestments in the next 6 months. On top of that, we are announcing the rights issue of Class D shares.
We are decreasing our LTV and also we clearly show that in this quarter, our net debt to debt plus equity is below 60% and will continue to decrease significantly in the quarters to come. Our interest coverage ratio remains at good level, exceeding three times, and will be further strengthened by the measures presented. We also are continuing to strengthen our access to capital, and we finished large refinancing that were announced at the end of Q1. We are also done additional financing after the quarter, the quarter was ended. We also in the quarter did the majority of the closing of our Brookfield transaction of SEK 9.2 billion.
We have done two closing, taking in SEK 8.7 billion that has been completing during the first quarter. The rest is just waiting for internal restructuring measures. At the same time, it is important to see that SBB has SEK 78 billion of net debt. Of those SEK 78 billion, SEK 21.5 billion is standing at the EduCo level. In that way, we have also a partner supporting our future refinancing. We are preparing to do rating for EduCo and we are expecting to have triple B flat rating.
That is very strong business with long leases and strong underlying fundamentals. We have a very good cooperation with Brookfield and looking forward to develop that further. To do some highlights for the first quarter, let me start with pointing out that we are delivering 13.4% like-for-like growth in NOI. Important, if you look at our reported profits from property management, is to take into account that profit from property management has been affected by changes in currency.
Adjusted for changes in currency and on-offs, our profit for property management is landing at SEK 860 million, which is strong underlying delivery. Looking at the profits from property management, it is also important to recognize that we still have one of the lowest average interest rate in the Swedish real estate market, thanks to the fact that we have 85% of our gross debt with fixed interest year, interest rate. The average period of fixed interest rate for all interest bearing liabilities is 3.3 years.
We are continue to focus on our core business, also by divesting assets with lower margins and strongly focus on triple net leases. We show ability to adapt. We start to act last year, and we are continuing to act to strengthen balance sheet. We continue to argue that we have a unique liquid assets, and we remain committed to continue to strengthen our balance sheet. You see that our reported net initial yield is 4.4%, and our valuation yield is 4.83%, which is relatively high for this kind of safe assets.
Looking at key ratios, as I said before, important point for comparisons is taking into account that changes in non-cash exchange rate fluctuations are affecting our adjusted profits from property management. That is adjusted for currency is landing at SEK 670 million plus SEK 146 million in on-offs cost, in total SEK 860 million. As I said before, lower loan to value according both reported numbers and also according using S&P's net debt to debt to security measure.
Continuing, strong interest coverage ratio and even prolonged average fixed maturity now at 3.3 years, and average debt maturity at 4 years. Important here also that we are continuing to increase our economic letting ratio. Now we are at 95.5%, and we are, given that we have a part of portfolio that is projects, we are approaching full letting. We also see the strong demand for residentials, for rent-regulated residentials, particularly in the Stockholm region. Our margins are continuing to increase, and we will see improvements in the margins also in the quarter ahead of us.
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Let's break down the original transcript: "Uh, important point, uh, is, uh, here that, uh, increase in, uh, rents, uh, within rent-regulated portfolio have not been, uh-Booked, uh, in Q1 and, uh, it will, uh, come in Q2. And, uh, those are, uh, we will also receive payments for, uh, for, uh, for, uh, for Q1. And, uh, that will also lead, as I mentioned before, that, uh, our like-for-like growth in, uh, rental income will, uh, go from a reported nine point nine percent to, to eleven, uh, to eleven percent on like-for-like basis. I mentioned before, uh, that, uh, our profit from property management, uh, has been, uh, affected by, uh, translation gains and losses and, uh, one-off costs." Applying the rules: 1. **Remove filler sounds ("uh")**: * "Important point is here that increase in rents within rent-regulated portfolio have not been Booked in Q1 an
Here at this slide you see a detailed comparison to the last year and also that profit from property management, excluding FX and items affecting comparability is landing at SEK 816 million for the first quarter. We are presenting a negative profit before tax. This is, as you can see here, mainly related to changes in value still basically coming from or largely coming from changes in value for rent regulated residential portfolios and changes in value of financial instruments. Those value changes together are standing for SEK 3.5 billion.
On top of that, changes in values in joint venture including write down of JM are fully behind our negative profit before tax. Concerning changes in values, we do see that we are approaching a relatively high yield. All our properties are externally valued by external values every quarter. As I mentioned before, at end of this quarter, our valuation, net valuation yield was 4.83%. Looking at our debt maturities, as emphasized before, we have still a relatively long debt maturity. The majority of our euro debt is longer than three years.
We have still strong resilience on average interest rates. As you can see, given where the markets currently is pricing interest rates, we will continue to have comparable compared to peers, lower average interest rates. We have full liquidity cover to buy back our bonds. We in this calculation, we are not added expected proceeds from the investments that will increase available liquidity from SEK 15 billion to over SEK 20 billion. As I mentioned before, we are expecting to divest for at least SEK 6 billion in next 6 months.
Concerning our bond maturities, you can see that we have SEK 8.7 billion within one year. It is SEK 2.2 billion for 2023. Then within two years, including beginning of 2025, we have additional SEK 5.9 billion in maturing bonds. To sum it up, as I mentioned before, our board has been acting actively since last year to strengthen the company's balance sheet. In light of that, is the announced rights issue of these shares of SEK 2.6 billion.
The work with strategic review and different alternatives including divestment, minority investors and evaluation of the condition for listing of the Sveafastigheter that are ongoing. Our disposal plan of SEK 6 billion is continuing. First deals were closed during April. As I mentioned before, we deliver strong like-for-like on NOI, 370 basis points better than weighted inflation. That is before effects from rent regulated residentials, which will increase like-for-like growth in NOI from 13.4%-14.9%. 85% of the gross debt has a fixed interest rate. Important also to see that we have SEK 365 million of extra NOI coming in from remaining investment in project portfolio.
Of those, SEK 200 millions will come already this year and the rest will come next year. I will stay there and take questions.
Thank you. If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from John Vuong from Kempen. Please go ahead.
Hi. Good morning, Ilija. Thank you for taking the questions.
Good morning.
Maybe on the first one, on the operating side on your like-for-like number, if I understand it correctly, it's plus 10% on the total portfolio, excluding the 4% rent increase you expect on residential.
That's right.
Doing my calculations, that implies that it's plus 15% on public properties. Is that the right way to look at it? If so, what is driving this like-for-like to be much stronger than indexation?
It is, As I mentioned before, we have relatively low rents in our portfolio, so prolonging the leases and indexation together are delivering very strong like-for-like.
Okay, that's clear. Maybe on the prolonging of the leases, what reversion are you capturing here?
We are, we are not doing that analysis, separately. In total, we are delivering, 9.9% in total rent increase.
Okay. Thank you. Okay, maybe then moving on to the Class D shares that you're looking to carry out in terms of rights issue. Could you perhaps highlight why you think Class D shares is the right funding tool here and not, for example, Class B shares or just straight debt?
We think that we want to prepare company for for continuing to grow our business. We have a strong profit incoming from from our projects. We think that in this in this situation in the way that issuing Class D shares to our shareholders is delivering the strong dividend to our shareholders. At the same time, we can strengthen our balance sheet and also take in extra NOI from from remaining investment in project portfolio. In that in that way we are not diluting future value creation for our shareholders.
Okay. That's clear. If I look, for example, at the implied dividend yield on the Class D shares, I think it's close to 12.5%, considering a 2 SEK per share dividend. Is this considered also a fixed charge for the S&P credit metrics, given the ICR, the fixed charge coverage ratio?
These shares are not fixed charge. These shares are common shares. This is not debt. This is pure equity component.
Okay. That's clear. Thank you. That's all my questions.
Thank you.
The next question comes from Jan Ihrfelt from Kepler Cheuvreux. Please go ahead.
Okay. Thanks. Good morning. I start with maybe a nitty-gritty question. You reported administration cost of SEK 157 million. If I take on the earnings capacity, the line and divide it with four, I get a quarterly number at SEK 126. Are there any one-off in the reported admin costs this time?
We are continuing to take down our cost for administration. There are still one-offs related to EduCo transaction. Also related to some work after the Neobo transaction. We are heading to the earnings capacity on our administrative cost.
Okay, thanks. A question on financing. You mentioned here that the total bond maturities in 2023 is like SEK 2 billion.
Yeah. It's SEK 2.2 billion.
What's the number? 2.2, sorry. What's the figure for 2024? I mean, the total bond maturities for that year.
In 2024, we have a total bond maturity of like SEK 8 billion.
Okay. Could you comment anything upon your bank margins? What kind of bank margin do you have on your bank financing?
We have not commenting that, but we have said before that bank margins and that is what we see have increased with 30-35 bps in relation to before the interest rate increase cycle. That is what we see in the market. The margins have been different depending on different assets also slightly. We think that our bank margins are still okay.
Okay. A question on your dividend. You suggested a new plan for that with either cash or in shares. How does this proceed? When could we be expecting-?
We are having a general meeting today that is expecting to take decision on that. The lawyers are working with preparations. We will come back.
Okay. A question on your rental apartment rent negotiations. How much of your total rental apartments has new rent for this year? You expected to come quite much in the second quarter, are there any effect in the first quarter?
Yeah. It will be effect in the second quarter. We are in earnings capacity. We have been doing illustrations with 4%. Our assessment right now is that we will be averaging 4.5% extra income for this year coming from rent regulated residentials.
Okay.
That will be mainly booked in Q2.
Yeah. Thanks. And a final question on Sveaf astigheter. When could we expect company to be listed?
We are, as we emphasize, the board has decided that this process is continuing because we see interest in the market. There are, like, three options, both divestments of Sveafastigheter but also taking in minority interest, and evaluating IPOs. That is, that job is ongoing. We will come back, when we have chosen the path.
Okay. Thanks for taking my questions.
Thank you.
The next question comes from Niklas Wetterling from DNB Markets. Please go ahead.
Thank you. Yes, I got a few questions. I'm starting off with the earning capacity guidance. I got a question around the profit to minorities, which were down at 20% if we compare with the Q4 results. I wonder, yeah, why? What's the driver? Has there been any changes with the deal or any other assumptions made?
No, it is nothing change. There are no changes in the deal. It is the difference is probably just expecting to close the last part of the transaction after internal restructuring.
Okay. There is parts of the deal left to be made, and after that it will increase somewhat.
Yeah. That's, that is right.
Okay, thanks. I wanted to ask about cash flow between EduCo and SBB. If there is any, like, dividend policy or so, or what is to expect about cash flow payments between EduCo and SBB?
I mean, SBB is consolidating, and the proceeds are now staying within the company.
Yeah. Yeah. In IFRS, I know they are consolidated, but it is two different companies. Do you expect to pay dividend from EduCo to SBB?
Yeah, yeah. Absolutely. We will SBB will have dividends from from EduCo. Absolutely.
Okay. No, no figure or any guidance on what to expect in cash flows?
No. We have not done, we have not have any communication on that. Important point is also that EduCo is servicing SEK 21.5 billion of debt that is reported at SBB level.
Okay, thanks. I believe I remember regarding the management fees, that you stated that you would do a net present value calculation and include that in the P&L, in the balance sheet. Has that been the case?
That is, that is the case that, SBB is getting paid for that. Absolutely.
Okay. Yeah, is the net present value of it in the balance sheet?
Net present value of that is not in the balance sheet, but the cash paid to SBB is coming into SBB.
Okay, perfect. Yeah, a follow-up on the strong like-for-like figure on NOI. I just wonder if the comparable year has been adjusted following the change of treatment of the property administration costs that is now in central administration.
Following the change of what? Sorry.
The property administration costs, I believe, is now in central administration, if I understood it correctly.
We are taking in full administration costs in one line among others compared to be comparable to Balder as largest business in the space. Because we think we are continuing to work to strengthen transparency for SBB, and we will try to do more and more as other large businesses in the space. The administration changes in administration costs have not affected the like-for-like.
Okay, thanks. My last question is just regarding this Class D rights issue. What's your thoughts around having the right price above the current share price for the purchase D shares?
When we announced the right issue, the price announced was below the share price. We think that giving opportunity to our shareholders to get dividend of 12.5%, is very good return.
Okay, thanks. That was all of my questions.
Thank you.
The next question comes from Neeraj Kumar from Barclays. Please go ahead.
Hello. Morning. Thanks for taking my question. My first question is, you say that you meet all the criteria for leaving negative outlook from S&P behind us. Can we expect a revision of outlook from S&P next couple of months or so?
That is not, that is not My work is to continue to deliver on deleveraging. As you can see from the report, we are now at 59% at net debt-to-equity level. After few of the announced measures, we will be down to 55% on net debt to debt to equity. Which is compared to many other place in the space that are going in the opposite direction, relatively strong.
We also continue to show that we have a strong ICR. We also present in that we are continuing to expand our fixed interest rates coverage. In total, we have deliver better key ratios and we'll continue to deliver better key ratios. That is what we can do.
Oh, that's helpful. Thank you. My second question is, do you think S&P may decrease the downgrade thresholds given the increase in minority interest from full consolidation of EduCo?
S&P has published the rating after the EduCo transaction was announced. You can find that rating at our web page.
Yeah, I've read that. I was just wondering because I think sometimes rating agencies take longer time. Are you worried on that side or not?
Absolutely. My answer to that is that the latest notes from S&P have been published after EduCo transaction has been announced. Nothing has changed in that transaction.
Got it. That's helpful. Thank you.
Thank you.
The next question comes from Silvia Duranti from GSAM. Please go ahead.
Hi. Good morning. Thank you so much for taking my question. My first question is about the liquidity. In the report we see that there are unutilized credit facility around SEK 2.4 billion, down from SEK 4.7 billion. In the presentation we see that there are new credit facilities that are also SEK 2.4 billion. Is the total liquidity now around SEK 4.8 billion? Are these the SEK 2.4 billion new facilities that are signed after the reporting period?
Thanks, thanks Silvia for the question. Given that we have been doing the large refinancing, there have been, as you have rightly seen in the report, that there have been some movement between before the end of the quarter and after end of the quarter. At the same time, we have been doing the large refinancing as we announced, when also at the same time restructuring the EduCo. Your math is fully right.
Okay, thank you. Still on the liquidity, how much of these outstanding unutilized credit commitments are subject to covenants related to downgrading to high yields? Meaning, how much can actually be revoked, if the company is downgraded to high yields? To the extent you can comment.
We do not have, we do not, we have, as we wrote in our annual report, there is only the one commitment. That was SEK 1.3 billion, and it's partly been exchanged to the SEK 670 million, and the part of that has been done as term loans. It is a relatively marginal effect.
Okay. The rest are basically unrestricted, from that perspective.
Exactly.
Okay. Thank you. Another question on the disposal. Can you give us the breakdown of the remaining SEK 2.1 billion disposal that you're guiding Q2? I understand SEK 1.7 billion is left from the Brookfield transaction. Is SEK 2.1 billion?
We have not been given more details on, on that. Those are committed disposals where we are just waiting to get payment in.
Okay. Perfect. You cannot comment to how much has been disposed of this, SEK 6 billion so far?
We have not announced that, I mean, some small transactions have been published in the Swedish newspaper. We think that it's always better to deliver everything and then say, "Now we have delivered this, and this is how it is.
Okay. Okay. Point taken. Last question. Just to confirm, what is the amount of the secure debt that you have maturing in 2023? How much has been refinanced as of Q1? Just to confirm.
We have a relatively small amount of debt maturing or secure debt maturing. We have not published the split. You can see from maturities in our bonds that is a relatively small amount of bank debt. Bank debt in Sweden is usually prolonged.
Okay, great. Thank you so much for taking my questions.
Thank you.
Please state your name and company. Please go ahead. Your line is now unmuted. Please go ahead. The next question comes from Daniela Costa from Goldman Sachs. Please go ahead.
Hi, it's Jonathan Kownator actually from Goldman Sachs. Thanks for taking my question. A couple of questions, if I may. You highlight in the report that you want to, you're reducing investments, obviously, given the context. How much should we pencil in going forward? There's SEK 1.9 billion, I think, of investment for Q1 2023. Is there a run rate that we can look at that is going to be recurring that'd be helpful? Thank you. The second question would be in the change in cash collateral, there's still a change for Q1. Is that related to a position that is now being closed or is that still a position that you have that is ongoing and it was planned as further disposals? Thank you.
First, Jonathan, let me take the last question. Cash collateral was related to TRS that has been closed in Q1 as we have reported before. Concerning investments, you can see from our reports that we actually stopped the new investments last year. That means that remaining investments are decreasing quarter after quarter. In this report, we are presenting that in next two years, the total rest remaining investment is... That means that our run rate on investment basis is falling down very fast.
I apologize. The line cut. I'm not sure if that was only for me or for everyone. Can you please just restate the numbers that you've given? I understood it's coming down quite fast. That's what you said, but I just didn't get the numbers. Apologies for that.
In report, Jonathan, you can see that for the next 3 years. For the next, how to say, rest of 2023, 2024, and 2025, the total investment volume remaining is SEK 2.3 billion. Of those, SEK 1.4 billion is externally financed.
Okay. Okay. Very clear. Thank you very much.
Great. Thanks, Jonathan. Thank you. Thank you all. I will start just to finish this. If there are any other questions, please send those to our investor relations, and we will be happy to answer. We'll be happy to answer everything. As I said, we think that we are delivering strong operational profit, like-for-like among the highest in the sector on a NOI basis. We are continuing with the strategic measures to strengthen.