Year-end Report 2023
When I look back on 2023 and how external factors have affected SBB, several clear trends stand out.
During the year, the consumer price index continued to rise, which contributed to SBB’s properties increasing their rental income by 8.8 percent for comparable portfolios and operating income for comparable portfolios by 10.9 percent. High inflation has led to higher interest rates, which, together with weak credit markets, are the main reasons for the negative value development of SBB’s properties of 12.0 percent.
The value development of SBB’s properties has been minus 15.2 percent over the past 21 months and the average yield requirement has been raised from 4.35 percent to 5.19 percent. As rent levels are based on the consumer price index of October 2021, the index has increased by 19.3 percent. This means that for SBB’s fully indexed properties, the real decline in value can be estimated at 34.5 percent over the past 21 months.
The market has transformed recently, with many now believing in declining interest rates, which is reflected in higher market valuations of real estate companies and greater access to market financing. My assessment is that we are now at the beginning of a period where conditions in the financial markets are improving, and that more real estate transactions occur at reasonable long-term levels.
For SBB, a more normalized situation in the property market means that the company has A word from the CEO the largest negative asset value developments behind it, and that value increases in the coming years cannot be ruled out. I am confident that SBB’s income in comparable portfolios will continue to grow strongly in 2024 and onwards.
Streamlining of our three business areas continues
SBB continues to take important steps to realize the strategy and divide the company into three business areas for better governance, increased transparency, and improved conditions for raising capital.
Business area Education has been streamlined and almost all educational properties have been sold to Nordiqus. Brookfield has purchased shares in Nordiqus in stages, and now owns 50.16 percent following SBB’s reduction in ownership stake in November to 49.84 percent to optimize the capital structure in line with the new strategy. The change means that Nordiqus becomes an associate company instead of a subsidiary and will therefore not be consolidated in our financial statements. Earnings per share will not be materially affected initially by the change from just above 50 percent ownership to just below, even if it means assets and income decreases because of the deconsolidation. Nordiqus aims to obtain an investment grade rating during the first half of 2024, which is likely, based on cautious leverage and strong fundamentals in the property portfolio. A stable and competitive Nordiqus will generate more profit for SBB over time.
In December, SBB announced that it would consolidate its residential portfolio and residential development in the subsidiary Sveafastigheter. All jointly owned structure, within Residential, will be dissolved in the long-term, and organised with Sveafastigheter where there are operational advantages.
Sveafastigheter has a new strong board and management team that is working toward the plan to broaden the shareholder base in 2024, so that the company will be able to obtain beneficial financing on its own merits. In connection with this, SBB’s financial position is also strengthened, enabling a reduction of SBB’s debt levels and exposure to current funding sources.
We are also creating a company that will own SBB’s assets within business area Community, which similarly to Nordiqus and Sveafastigheter will be market leading within their segment.
Complex accounting in the short-term
SBB’s need to create new partnerships due to financial reasons in combination with the implementation of a large number of other measures contributes to increased complexity in our financial reporting in the short-term. However, the goal is to reduce the number of complex structures and create more simplified accounting and less costly administration. Nordiqus, Sveafastigheter, and PPI are examples of streamlined structures.
After SBB has restructured and improved its financial position, administrative costs will be normalized.
Measures to strengthen liquidity and balance sheet
A number of important liquidity-strengthening measures were carried out during the quarter. While SBB has implemented many measures to strengthen key figures, market development has contributed to dampening the effect of these measures. This means that SBB’s key figures are well-positioned to be strengthened once the market improves. SBB’s loan-to-value stood at 54 percent (49) at the end of the quarter. This is a level that needs to be reduced to achieve a long-term sustainable financial position.
The proceeds from the Nordiqus transaction was used to partially finance a tender offer regarding outstanding bonds for an aggregate principal amount of EUR 417m with the aim of proactively managing upcoming debt maturities.
During the quarter, sales of properties in line with the latest external valuation were also carried out, valued at SEK 330 million.
1.78 percent average interest rate
SBB’s average interest rate was 1.78 percent as of 2023-12-31. On average the capital matures in 3.6 years. The debt that matures after 2026 has a cost of 2.18 percent. SBB benefits from its long funding at a low interest rate.
Further liquidity improvements necessary
SBB is in a challenging financial situation, where both debt levels and liquidity need to improve. SBB has implemented significant measures during both 2022 and 2023, and the work with making improvements needs to continue during 2024. The potential broadening of the shareholder base in Sveafastigheter will improve the financial situation for SBB. SBB is also working on several other projects aimed at strengthening the company’s financial position, reduce dependence on individual sources of capital, and create optimal financing opportunities.
Ineffective acceleration notice from an opportunistic hedge fund
In November, SBB contested a purported and ineffective acceleration notice from an individual opportunistic fund, brought forth by the fund’s company in the Cayman Islands. It is worth noting that only one single bondholder has made the claim and no other bondholders or banks have made any corresponding claims.
In February, after the end of the reporting period, SBB was informed that the same fund has now initiated formal legal proceedings at an English court. As previously announced in a press release on May 31, 2023, SBB rejects that it is in breach of the EMTN consolidated covenant ratio and as such considers the acceleration notice received from the opportunistic fund to be ineffective. The process will now take its course and is currently estimated to continue until the second half of 2025.
Positive outlook for property portfolio
While SBB faces many challenges regarding financing, the outlook for SBB’s property portfolio has improved. Rent-regulated residentials and properties with long lease terms with the public sector are holding up well, even in a weaker economy. Regardless of the economic cycle, population growth is accelerating, creating more demand. Low levels of new property construction and higher construction costs mean that SBB’s properties are in a favourable competitive position. Rising rent levels and a high level of occupancy are expected to remain in the coming years.
We need to continue reducing debt levels and dependence on individual funding sources, and we are working from a solid plan to achieve this. Executing the plan is expected to be easier in 2024 than in 2023.
I also want to thank all SBB’s employees for their engagement and fantastic efforts in implementing our new strategy and driving the company in the right direction during a challenging time, and a warm thank you to our tenants and partners for their continued trust.
Leiv Synnes, CEO