Interim Report Q1 2024
SBB owns residentials in Sweden and premises for publicly funded social infrastructure in the Nordic region.
The capital market continued to develop in a positive direction in the first quarter – the mar- ket assessment being that the European central banks will lower their interest rates. Nordea, for example, believes that the Swedish policy rate will have been lowered from the current 4 percent to 2.5 percent by the end of 2024.
In retrospect, credit margins on BBB-rated three-year bonds from Swedish property companies, rose from about 1 percent in 2021, to between 3 and 4 percent in 2022 and 2023. From the second half of 2023, margins have instead fallen gradually to 2 percent at the end of the first quarter of 2024. My assessment is that credit margins will likely continue decrea- sing and that SBB’s part-owned companies can benefit from this more advantageous financing.
The stronger financing market has also contributed to property transaction volumes rising – by 60 percent in the first quarter, compared with the corresponding quarter last year. Demand for properties is trending upwards, suggesting a favourable value trend for SBB in the long term, particularly as income from our properties is also increasing.
Net operating income in comparable portfolios increased by 3.0 percent
SBB’s net operating income for comparable portfolios continues to rise – by 3.0 percent for the quarter. At the same time, income from comparable portfolios rose by 3.9 percent and the occupancy rate of 94 percent remained favourable. Development over the quarter con- firms SBB’s capacity to increase net operating income over time, while also maintaining a high occupancy rate in comparable portfolios. Rising net operating income will drive growth in SBB’s asset values and improve the situation for all of the company’s stakeholders.
Continued growth anticipated in net operating income
Demand remains strong in all of SBB’s segments: Residential, Community and Education.
We expect income from the existing residentials to clearly outpace inflation over the next few years. In addition, several project properties will be completed and let to tenants, leading to a better relationship between income and expenses.
Our income from community service proper- ties and educational properties is rising stably thanks to our long-term index-adjusted leases. Over time, we perceive favourable opportunities to deliver growth exceeding inflation. Partly by making supplementary investments, and partly by adjusting rent levels in connection with lease extensions and annual rent negotiations.
Average interest rate of 2.22 percent
SBB continues to benefit from the company’s long-term financing and low average interest rates. At the end of the quarter, the average interest rate was 2.22 percent and the average maturity was 3.6 years. Debt maturing after 2026 carries an average interest rate of 2.26 percent. We are working actively to reduce our interest-bearing liabilities and to improve the company’s financial position. By choosing to amortize rather than refinance loans as they mature, we postpone the impacts of the higher interest rate situation on SBB’s interest expenses.
SBB’s property exposure is SEK 104bn
Consolidated property portfolios are decreasing as properties are transferred to joint ventures that are not consolidated. The collaboration with Nordiqus has had the greatest impact,
with a property portfolio of SEK 40bn that is no longer consolidated as SBB’s holding is slightly less than 50 percent. The benefit for SBB has been an injection of equity, a knowledgeable and well-capitalized partner and the opportu- nity to achieve significantly improved financing within the joint venture.
If we combine consolidated property hol- dings with the proportion of significant holdings which are not consolidated, SBB’s property exposure totals SEK 104bn, with net operating income of SEK 4.7bn.
Sveafastigheter plans distribution to shareholders
The process of distributing Sveafastigheter to shareholders is continuing and an independent Board of Directors for the company was appoin- ted during the quarter. The distribution to shareholders will generate proceeds for SBB and establish optimum conditions for the financing and efficient operation of residentials. This includes winding up our part-owned companies in the Residential segment and bringing our wholly-owned residential portfolio together within Sveafastigheter.
Following the end of the quarter, SBB agreed with Riksbyggen to split the jointly owned Unobo AB and for SBB’s part of the portfolio to be transferred to Sveafastigheter.
As a listed company, Sveafastigheter would be the largest housing-focused company on the Stockholm Stock Exchange. The company has the capacity to deliver both stably increasing rental income in existing portfolios and to generate profit through project development. First, building rights are established or land allocations obtained, after which profitable in-house project development occurs, with the completed properties ultimately being transfer- red to the property management operations.
Sveafastigheter takes a long-term approach, adapting project volumes to the prevailing conditions.
The prerequisites for profitable projects will likely increase as the need for new housing continues growing indefatigably in Sveafastighe- ter’s core markets.
Nordiqus developing well
The distribution to shareholders that we previously conducted in the Education segment, with Brookfield acquiring slightly more than 50 percent of the shares in Nordiqus, has been successful. The operations are developing well, with net operating income rising in compa- rable portfolios over the quarter. Nordiqus is financially strong and the objective is to achieve an investment grade-rating over the year.
Nordiqus is a European leader in educational properties. It feels gratifying, as with Sveafast- igheter, to be involved in building beneficial and independent companies.
IPO of Public Property Invest
In April, SBB’s associated company Public Property Invest was successfully listed on the Oslo stock exchange. The company is part of SBB’s Community segment and specializes
in properties with public-sector tenants in Norway. In connection with the IPO, SBB’s Norwegian property management organization transferred properties for SEK 1.7bn to Public Property Invest. Following the issue in kind of properties and the distribution to shareholders, SBB’s holding amounts to 33.7 percent.
With assets of SEK 10bn and a loan-to-value ratio of 40 percent, a large and stable company is established that is able to play an active role in the consolidation of the property market. I believe that the company will eventually receive an investment grade rating – SBB’s ambition for all holdings.
Joint ventures strengthen financial position
In the Residential segment, SBB established a joint venture with Morgan Stanley in 2023. In the first quarter, another joint venture was established together with Castlelake for community service properties. The fully implemented transaction will raise proceeds of SEK 5.2bn for SBB.
The proceeds from these joint ventures are being used to reduce bank loans and bond financing. For example, in March senior and hybrid bonds for EUR 163m were repurchased, with the nominal value being EUR 408m.
Complex accounting to continue a while
The combination of SBB establishing new partnerships for financial reasons and the company implementing, at the same time, of a large number of measures, will entail the complexity of the financial reporting increasing for a while. However, we remain determined to reduce the number of complex structures and to establish comprehensible accounting and a less expensive administration. Once SBB has completed the restructuring process and improved the company’s financial position, the administrative costs will normalize.
Measures needed to strengthen liquidity and the balance sheet
SBB has implemented measures to mitigate the financial risk. SBB’s current CCC+ credit rating from Fitch and CCC rating from Standard and Poor’s demonstrates clearly that this process must continue. In particular, SBB needs to continue improving its liquidity and lowering its loan-to-value ratio, which, at the end of the quarter was 55 percent. We believe that the increasingly strong credit and property markets will favour SBB in this regard, while our bond maturities are managed using the proceeds raised by establishing favourable and indepen- dent companies, such as Sveafastigheter.
Baseless claim from opportunistic hedge fund
As was previously announced, a lone opportu- nistic fund claims via its company in the Cayman Islands that value changes not affecting cash flow in joint ventures shall be included when calculating the cash flow measure, interest coverage ratio. No other SBB bondholders or banks, expect value changes to be included in such a cash flow measure.
In a press release on 31 May 2023, SBB refuted claims that it had violated the terms on interest coverage ratio in the EMTN program- mes and, accordingly, consider the demands received from the opportunistic fund to be unfounded. A legal process is progress and is currently estimated to continue until 2026.
Confidence in our strategic plan
As we continue working step by step with the challenges associated with SBB’s financing, the fundamental prospects for SBB’s property port- folio continue to improve. Over time, rent-re- gulated residentials benefit from population growth and public sector leasing is insensitive to economic conditions. Construction remains very limited and we can expect rising rent levels and high occupancy rates over the next few years. At the same time, the cost of capital is falling for the market as a whole, affecting the valuation of properties positively. We have great confidence in our strategic plan and I would like to thank all of our employees for their significant efforts, as well as our tenants and partners for their continued confidence.
Leiv Synnes, CEO