Samhällsbyggnadsbolaget i Norden AB (publ)

Good morning, everyone, and welcome to today's earnings call for Q2 2024 for SBB. My name is Helena Lindahl, and I'm the Treasury Director at SBB, and we will present to you our quarterly earnings for the second quarter of 2024. With me, I have our CEO, Leif Simnes, who will be presenting, and also Daniel Telberg. Leif will begin by sharing the strategic and financial highlights during the quarter and give you an overview of our performance and our business segments. After that Daniel will talk about the financial statements and I will end with discussing our state of the finance. We will, of course, host a Q&A in the last part of the presentation. And with that said, I would like to kick off and hand over to Leif.

Thank you, Helena. One key highlight for the first half of this year is the strong development of the revenues in the Life for Life with the 7% growth. That is really strong. And also if we look on the net operating income growth, like for like, it's also very strong with 9%. When we have this situation where the rental growth is high and also the net operating income is growing fast, this will on long-term create valuations for S&P. The properties is likely to at some point start to increase in value. We have focused still on improving the financials in SBB. And one way of doing that is, of course, to reduce the debt. So for this period, we have reduced the debt with close to $8 billion and with $43 billion the last two years. And we see still some value decrease in our assets, so 1.4% in the quarter. We believe that the market shifted during this year and particularly during the last three months where the interest rates have been reduced and also the credit risk in the markets have been lower. So we expect that we think that the property prices have a good chance to bounce back in the quarter ahead. We continue to deliver on our strategy in order to provide you with transparency and also proof that we get, over time, better funding for the SVB Group and also that we can show higher efficiency in our main holdings. You can shift page to page four. One part of the company is the education piece, and there we part on the company Nordicus together with Brookfield. We entered a milestone this year when we received a strong investment grade rating in Nordicus, and on the back of that strong rating, we could borrow 9 billion SEK in the capital market with the maturities varying between 10 and 15 years. And we also could add 1 billion of new credit lines from banks. So in the Nordics, now we have the situation with long leases and long funding and a very predictable cash flow in the years ahead. and that gives us a belief that we will receive dividends from Nordicus in the years to come. In Sveafastheter we also have a strong development. We have dissolved all the joint ventures in Sveafastheter and created that very efficient organization with a new management and new board, totally independent. We have received or refinanced or reorganized all the debts. So it's seven banks, Nordic banks with 10 billion of debt. And we also issued up a bond after the quarter. So we have set up the SEFA state in a very good way in order to attract new part owners of that business. And we intend to divest up to 49% of the company and keep the majority of the shares. And in the community section, we entered a new joint venture together with Castle Lake, providing a liquidity for the company. And also after the quarter end, we settled the exchange offer where we in SBB bought back senior bonds and also hybrid bonds where we traded 1.6 billion in equity for the shareholders. If you look on the group structure, we have three business areas. We have community, residential and education. And as I mentioned earlier, we have received good funding in two of the three business areas now. We have investment grade rating in the education part and we have investment grade like structure in the residential part. So we expect to get good funding in both those parts of the company going forward. And then we still have some work to do with the community properties, but we expect to take the same journey as in the other two areas and create a situation where we can attract both equity and debt on attractive levels. And I think we This process of creating good companies will be easier in the years ahead due to the strong development we foresee in the markets. If you look deeper into the communities part of the operation, we have a leading and scalable platform in the Nordics. and elder care is the largest part of the operation with 25%. We have a low downside risk in revenues. Instead, we have a possibility to beat the market when it comes to growth in revenues. We have strong demographic trends that works in our favour and we have strong tenants. And so we really like the community operation and it continues to develop in line with our expectation. And as I mentioned regarding the residential part, it's mainly constituted of the company where we have A goal to take in part owners in 2024. And for those who know the Swedish market, you know that the rents are rent controlled. So there is a limited or no risk of lower income. Instead, there is strong possibilities of increasing rents. And this time it's an even higher possibility to increase rent than it used to be, due to that inflation on short-term has outpaced the rental growth. So we expect from the residential area in Österby that we will be able to increase rent to 10% more than inflation in the upcoming years. and that will lead to a 15 to 20% growth in NOI compared to the inflation. Also, we believe that the years with increased yields is behind us and there is a good chance that the property yields are stable or even decreasing on the back of stronger capital market sentiment. So we are, you can say that we are bullish on the residential at the moment. And on the education, it had been a good journey. We started some years back with thinking about taking in co-owners and we are happy that we choose Brookfield which have a lot of equity and also a lot of know-how in the infrastructure operation in the property market. So together with them, we have created a very good company called Nordicus, and we are now taking the benefit of that in the capital market. And it's very happy to see that a lot of investors share a view of the stability of the operations. We think that Nordicus and the education part of the operation have a very bright future. We see during the last year high yields in the property market. We believe that now the property yields will not increase anymore. And hopefully it could be so that, as I mentioned earlier, the good trend in the capital market influence the property prices in a positive way. We have a slight decrease in occupancy, but it's not dramatic. We believe that we will pick up to the normal 94 to 95 percent in occupancy going forward. And we have a little bit more vacancy in Finland. But overall, we believe that we will be able to recover that and more and increase the occupancy over time. One reason behind that is that we expect to have more time to focus on operations in the years ahead than we have had in the recent two years.

Thank you Leif. Let's go more into detail on the financial statements. On a like-for-like basis, rental income for Q2 increased by 7.2% compared to the same quarter last year, and net operating income also grew by 8.9%. In general, both revenues and costs are rising, but revenues are rising more than costs, resulting in a favorable development of net operating income. This is driven by the fact that maintenance costs have been kept low while operating costs have risen in line or faster than revenues. This achievement is the result of our continued dedicated work to deliver on a strategic plan despite the still challenging market conditions which are gradually improving. In terms of segment, community and residential are relatively similar the full period in terms of both income and net operating income why community shows a stronger development in the quarter together the income basis provides stability and reduce risk by balancing income streams across different segments During the quarter, net operating income continued to grow and improve on a like-for-like basis despite reduced income due to divestments. Admin and restructuring expenses are up compared to last year, mainly related to one of advisor costs and legal fees, which we did not have last year. These are expected to half by the end of 2025. There was a decrease in property values, but we are now seeing signs that the decline is leveling off. The decrease of nearly 3.6 billion is due to both realized and unrealized changes. Of the 3.6 billion, 2.8 billion is unrealized, of which only 846 million is in Q2. Q2 is consequently a better quarter in terms of changes in value. The value of our properties decreased with 1.4% for the quarter. The realized value changes are mainly attributable to transactions with SBB infrastructure and SBB social facilities. They have resulted in accounting-related losses as property are deconsolidated into associated companies and valued at an estimated discount to the net assets. Looking ahead, rent development and lower capital costs are expected to lead to a positive property value changes in the long term. Rising interest rates on the back of increased inflation, which are now seeing a tendency to decrease. Net interest improved due to increased interest income. The average interest rate has decreased six basis points in the last year other financial items includes profits from repurchase of bonds relating to the tender offer let us look briefly into the balance sheet and at the asset side the goodwill impairment is related to the first to defer tax with a flip side in the third tax giving no equity net effect The largest changes in property portfolio are attributable to transaction with joint ventures and associated company, while only 720 million is attributable to sales to other companies. These sales should be seen as a structure measures rather than sales of assets. The acquisitions are mainly attributable to the solution of Kåpan, as a preparation for an IPO and strategic partner in Svea Fastigheter. I would now like to hand over to Helena to look more into the financing.

Thank you Daniel. As we've been holding the five consecutive quarter now, you who usually listen into these calls know that we have been repeating relentlessly the same messages and that is that our main focus is to reduce the company's level of debt and to decrease the dependence of individual sources of financing. And also that and as you know that we have been working through very heavy headwinds and this is probably the first quarter when we have had a series of falling interest rates, which had fallen very sharply during the last three months. So we finally had some kind of shift in the wind direction, and maybe we will catch the tailwind. We will relentlessly continue to strengthen the company's financial position, and that is our main objective. And the long-term goal is, of course, to regain the investment grade that we once had. And I think there is a good sign if you look at the loan-to-value diagram in the lower part of the picture that you finally see that you get a little relief on the loan-to-value. And I think that if you look on the loan-to-value graph, for a longer horizon, you will see that it follows the market very clearly. Next page. We are very confident that we have still a very attractive long-term set of funding that we hold on our balance sheet. And the interest rate maturity is about three years. 3.5 years and the average rate interest rate is still very low at 2.1 percent and the reason that we manage this is that we have instead of refinancing at the higher interest levels we have chosen to amortize that and which has meant that it has taken a lot a whole lot longer for our company to to impose the higher interest level on the interest costs. And also, we are very confident that the debt maturity profile of the company that we have is working in our favor. And the overall maturity is 3.8 years. And I would like to point out that still we have 66% of the debt falling to maturity after 2027 with very low interest rates. Next page. I think this graph shows that it is a good sign for us that our hard work has paid off and that we managed during the last eight quarters reduced the company's debt by like-for-like figure of 42.5 billion SEK, which is a number we are very proud of. But we are not satisfied to gain the level we have. We will continue to strengthen the balance sheet of the company. And how will we do that? We will have no additional dividend for the foreseeable future. We will have very limited and cautious stance to investments and we will have a very limited and cautious stance to new acquisitions in the company. We will focus on the same thing as we focused on in the past and that is to repay maturing debt and divest of financial assets and also to conduct direct sales of real estates, where the market is finally picking up. And one important feature in this is to, as Leif already talked about, is to complete the IPO or to seek for a strategic equity partner in Suja Fastigheter. Over to you, Leif.

Thank you. To summarize, we see a very strong growth in the like-for-like income and the like-for-like net operating income. We continue with the strategy that will lead to financial stability and strong liquidity for the group. And we have taken an important step in the key holdings this first half year. We have success in the PPI associated company. We have seen strong development in the residential area and the structuring of the Sveafas theater. And we have improved the funding in Nordicus. And now we think that we and all the other real estate companies start to get some tailwind, which will help us going forward.

With that, I think we're ready for the Q&A session.

If you wish to ask a question, please dial pound key 5 on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial pound key 6 on your telephone keypad. The next question comes from Emanuele Arnoldi from Barclays. Please go ahead.

Good morning and thank you for the presentation and the report. It's Emanuele Arnaldi from Barclays. Quick question. You used to give a fairly useful uses and sources looking ahead for the next 12 months, let's say, and I think everybody is very interested in understanding how much you're missing in terms of liquidity to be raised in order to meet the Q1 maturities and then there is a little bit in Q2 but then you have a very nice period without large bond maturities at least. So, would it be possible for you to let us know how much you feel you need in addition to the current liquidity to be able to overcome the Q1 2025 bond maturities?

Yeah, thank you very much for giving us credit for the graph that we haven't included and We will, of course, consider including it again. I don't know if you have time to read the report, but in the finance section, we write about the liquidity and we point out that one really important piece of the puzzle is a successful IPO or a strategic partnership for Svea Fastigheter. But of course, if that should have any risk of not materializing in the way we expect, we of course have other plants.

And the other plants are probably related to I think there is a shareholder loan from, and sorry if I mispronounce, actually for sure I do, Svefastiga, and then there is probably, following the IG rating of Nordicus, maybe some repayment there as well in the medium term, or is it too optimistic to think in these terms? You know more than I do, so I think.

I don't think we would like to elaborate on exactly what our plan A, B and C are, but we write in the report that we have always the possibility to sell assets either one by one when the market improves, we can maybe sell larger portfolios.

Okay. And so just, I'll be more specific then. When you write in the report, a successful distribution of Svefastiger to shareholders is expected to cover SBB's capital needs for 2024 and 2025. Is that referring to the shareholder loan that you have against them or is it another type of distribution?

It's selling up to 49% of the shares in Sveafast.

Sorry, the line was broken up. Can you say it again?

We plan to sell up to 49% of the shares in Sveafast.

Okay, so it was that. It's the IPO slash partner. Thank you for clarifying. And last question, sorry, it's always the same, but it was just broken up in different segments. If I take the $6 billion of liquidity that you're showing on your balance sheet as of Q2, am I correct in, roughly speaking, taking away $2.5 billion for the dividend plus the coupon paid on the PERPs, both paid during the first week of July? and uh and then needing to adding up more or less uh say three billion in order to overcome the q1 2025 bond maturities is that a fair although imprecise and probably too short description of one needs to be done or is it different than that uh yes we

We published now the figures as of end of second quarter. And after that, we of course have done other transactions as well, both that is improving the cash flow and some are in the cash flow. And we don't want to give at the moment a new update on the current liquidity as of now. And that will come in the later reports.

Okay. Thank you very much.

The next question comes from Anders Dankvard from Pareto Securities. Please go ahead.

Good morning all. A few questions from my side. Starting off with the D-sharp I back from June. I think looking at the ownership changes, it looks quite clear that it was from Dibber. And if I remember correctly, there has been a historical put option associated with that holding. Were there any such effects included in the quarter expected going forward relating to that?

We as a company thought it would be useful to buy back some due to the pricing of the instrument and the upcoming dividend. So we made a public offering and we made the offer so we had enough liquidity left in the company. So it was a smaller offer. And then we gave the responsibility for buying the shares to a broker. And that firm had all the contact with the potential sellers. We don't want to comment on which we believe or thought it could have sold the shares. We know that we have bought, but we don't collect information who has sold the shares.

Understood and of course fully fully respect that part and maybe in relation to that historical put option are there any such sort of liabilities and associated sort of I guess terms that are still active or have you been or have you been sort of resolving those prior to this quarter?

At the moment we don't have any such arrangement in the company.

And were those resolved at the end of Q2 or has that been resolved during Q3?

We have taken care of all the maturing agreements at the time when they mature and at the moment we don't have any such arrangement that we

mentioned there okay understood not exactly clear on on sort of the timing here that we're referring to so if you want to clear up that would be helpful but of course full respect if you don't have any additional details to hide on that question and all right no so I can do one for my side I think next question on my end is regarding the 3.4 billion Swedish kronor receivable from SBB social facilities. How should we view that receivable? Is that something you expect to get a repayment of in the near term, or is this more of a long-term receivable in your view?

We have a long-term agreement with Castle Lake, and we have a good relationship, and we hope it will last for many years.

All right, I understand. And then the final question. So on Svia Fastiette, you mentioned, I believe, that you're looking to either divest or IPO and sell out about up to 49% of the shares there. Could that be interpreted as the banks now being sort of more comfortable with SPD remaining as a majority owner in regards to the bank financing, or is that really much to the situation?

I think the banks in general like the real estate companies more now than just a quarter ago because of the strong anticipated development of the Nordic property market. So I think the banks are willing to support SBB more now and also Svea Fastiater, which is a very strong residential company. And if we go the route to be a listed company, then it will be the largest listed company on the Swedish Stock Exchange in residential real estate space. And I think the banks are happy to provide funds to such companies.

Right. And should that also sort of be seen in the general portfolios? Of course, you have some banks that are maturing here later this year. Are you seeing that the banks are now sort of being more positive in these refinancing discussions as well?

Yes, it's always good to have a hat on the banks, but we have shown the last year that we also have strong possibility to raise the money from strong equity partners and also strong creditors outside of the banking industry. So it's just like a question of the margin done on the maturing debt. And at the moment, the cost of funds for us is being reduced partly due to the progress we do in our work, but also partly due to the strong development in the credit market.

All right. That's very helpful. I think that was the question for me. So thank you very much.

The next question comes from Angus McMahon from Soria. Please go ahead.

Hi. Most of my questions have been answered, but I do have one. On the Nordicus private market debt, how is the cost of that compared to the Castle Lake loans that you've taken out? Is it above or is it lower?

Can you repeat that question, please?

Yeah, I'm just trying to get a comparison of the cost of the new debt that Nordics, the private market that Nordics has taken out.

Since Nordics has refinanced with large global institutions in the private placement market, I think you can understand that there is no disclosure of the terms and condition in particular, not the price of any PP transaction really.

Okay, thank you. Thank you.

As a reminder, if you wish to ask a question, please dial pound key five on your telephone keypad. The next question comes from Emanuele Arnoldi from Barclays. Please go ahead.

Very quick question on the Castle Lake financing. What was the number for the net proceeds of the financing. I think it's a 5.7 billion SEC. Once you deduct the cost and the bank debt attached to those properties that is refinanced, how much is the actual net cash proceeds from that financing, if it's possible to know? Thank you very much.

We haven't disclosed that. Also, it's not so easy to answer because we have moved around the debt in the company. So we have just changed security on some properties. So we have moved in some securities to the structure and then changed securities for some banks. So it's hard to mention the exact figure on the net proceeds there if you calculate also the potential reduction in bank debt. But it is lower than the 5.4 billion, because in connection with borrowing from or from setting up the structure, we repaid some bank that was maturing.

So as an order of magnitude, like with a half a billion error, is it possible to give an indication?

We won't elaborate on the amount.

There are no more questions at this time, so I hand the conference back to the speakers for any closing comments.

Thanks for calling in and all the good questions. We in SBB have a strong development at the moment when it comes to rental growth and also net operating income growth. And also we have success in the way we structure the company. And we will continue to improve the company, which will hopefully have positive implications for your holdings.