Interim Report Q1 2022

SBB’s income comprises secure cash flows from property management of social infrastructure, in which housing, including LSS, constitutes 53 percent of the property value and 50 percent of the rental income. Educational properties make up 28 percent of the property value and 29 percent of the rental income.

Focus on a stronger rating and a lower loan-to-value ratio

SBB owns properties for SEK 159bn and to this can be added SBB’s share of the value in joint ventures/associated companies, corresponding to about SEK 35bn. The investments made by SBB in the past three years provide, on the other hand, a good opportunity for SBB to now prioritize higher credit ratings clearly over acquisitions. In Sweden, 2022 is also an election year and activity in municipal sales is expected to be low over the next 12-18 months. All in all, this provides a very good opportunity for SBB to reduce the loan-to-value ratio through sales and loan repayments and to use its strong position in property development for organic growth, through new construction, through investments in existing holdings, as well as through sales of building rights. In the first quarter of 2022, SBB completed renovations that improve the net operating income from 304 apartments. In addition to apartment renovations, SBB continuously upgrades its portfolio of community service properties. The total volume of these projects amounts to about SEK 2,003m and, when these have been completed, they will contribute to an increase in net operating income of SEK 107m on an annual basis. This means that the yield on cost for these value-generating projects is 5.3 percent. Our focus is on generating the greatest-possible risk-adjusted return for our slightly more than 200,000 shareholders. We believe that a stronger rating and a lower loan-to-value ratio is the best choice for delivering the highest return. Let me therefore be clear: A BBB+ rating is SBB’s priority objective.

Inflation-secured rental income – strong increase in rental income in the first quarter

SBB’s rental income is tied to the Consumer Price Index (CPI) and is thus hedged for inflation. The relatively high level of inflation in the Nordics entails stronger growth in the company’s rental income for 2022. Given SBB’s active property management and property refinement work, our internal target is for our average annual increases in rental income in comparable portfolios to exceed the CPI by 100 basis points. We have exceeded the target every year since the company’s inception and the average outcome on a 12-month rolling basis for the past three years is about 120 basis points above the CPI. The year 2022 is expected to deliver according to plan. Rental income in comparable portfolios (like for like) increased by 3.8 percent in the first quarter. Despite a cold winter quarter, the increase in net operating income for comparable portfolios (like-for-like) was strong at 2.4 percent. SBB is a safe asset, even in times of high inflation. The almost automatic indexing delivers a strong increase in income every year.

Fixed interest is an insurance premium for times like these

SBB had an average interest rate of 1.24 percent at the end of the first quarter. Interest rates are on the rise and that is precisely why we have taken out long-term fixed-rate loans over the past two years. To put it quite simply, we have paid a premium to let inflation do the work. At the end of the first quarter, our interest maturity was 3.7 years. This means that it will take some time before higher interest rates have an impact on SBB’s earnings and will be compensated by inflation-adjusted rental income. To illustrate this, we have visualized below the effect on SBB’s average interest rate and profit from property management if the interest rate, measured as 3-month STIBOR, would increase from the current 0.1 percent to 1.5 percent, 2 percent or 2.5 percent.

BB’s interest-coverage ratio was a multiple of 5.5 at the end of the first quarter of 2022. The fact is that SBB could manage to keep the dividend and raise it with inflation even if the nominal interest rose to 10 percent (real interest two to three percent). If SBB would lower the net debt by SEK 5bn, it would be possible to raise the dividends with inflation even if the nominal interest rose to 10 percent and the real interest was four to five percent. Inflation adjusted rental income and long-term fixed interest rates offers stable cash flow and dividends.

Results are what count: profit from property management increased by 135 percent

SBB owns and manages high-demand rent-regulated residentials in Sweden and community service properties in the Nordic region with an average lease term of 11 years. Profit from property management for the first quarter of 2022 increased by SEK 831m to SEK 1,446m. Profit from property management, adjusted for changes in value and tax from joint ventures/associated companies increased by 115 percent to SEK 1,326m (618). Net operating income increased by 34 percent to SEK 1,153m (858).

… and continued strong profit growth from our value-adding strategies

We supplement our uniquely secure property management with three revenue-generating and value-add-strategies: building rights development & new production, investments in existing portfolios and value-generating transactions. The value-add strategies strengthen SBB’s earnings, helping generate value over the long term. Our value-add-strategies continue to deliver on all levels. For the first quarter of 2022, profit from building rights development and new production amounted to SEK 1,642m, compared with the target of SEK 2.0-2.5bn on an annual basis. At the end of the year, we had 4,905 apartments and 99,447 m2 of community service properties currently in production and 15,787 apartments currently in project development. At the same time, we sold properties with building rights for SEK 184m in the first quarter, demonstrating our capacity to derive considerable cash flow from our building rights portfolio year after year, and to reinvest in cash flow properties.

Profit after tax was SEK 2,939m. EPRA earnings, that is, profit from property management adjusted for earnings attributable to preference shares, Series D shares, hybrid bonds and minority interests, was SEK 0.64 (0.25) per ordinary Series A and B share.

Sustainability is the core of our business model

SBB’s Vision 2030 climate target is to be climate positive throughout the value chain by 2030. We also have a solid road map of climate targets that have been approved by Science Based Targets following a due diligence process and that have been published on their website. The most sustainable properties are those that have already been built. This is why SBB conducts unique initiatives and makes major investments in streamlining its existing portfolios.

Miljöbyggnad iDrift is an important tool in Sweden’s efforts to establish a framework for the sustainable management of existing properties. In collaboration with the Sweden Green Building Council, SBB has begun the certification of 500 of its existing buildings, following which, an additional 500 will be certified.

SBB has commissioned a further analysis of the climate impact of wooden construction. The study shows that the climate impact of the building system is very low compared with other building systems, and if the storage of biogenic carbon is included, the building system is climate positive. SBB currently has buildings of the type analyzed in production in four projects, and more are underway. In Region South, SBB has implemented a new agreement for approximately 250 environmental waste sorting rooms. The new agreement allows SBB to monitor the waste volumes and CO2 savings per month. The agreement will now be implemented at more properties. Several projects involving solar cells, heat pumps, additional insulation, connection of properties, electric car charging, etc. are underway in all of SBB’s markets.

SBB’s LHL Hospital in Gardermoen, Norway has been certified in accordance with Breeam In Use Outstanding, which is the highest classification that can be achieved. This is the highest classification achieved in the health sector for Breeam In Use. An additional certification of the GC Health Center in Gardermoen is currently in progress and start-ups are planned for two more properties. Amasten has new production projects in progress to build additional rent-regulated residentials in Örnsköldsvik, Luleå, Eskilstuna, Falun and Gävle. All of these projects are being built within the framework for Miljöbyggnad Silver certification and have solar cells, IMD, charging posts and FTX ventilation.During the month of February, solar cells were installed in Örnsköldsvik. In the Kronandalen area in Luleå, 49 rental apartments are being built with sustainability in focus, with, for example, a carpool, recycling centre, proximity to green areas and natural methods for delaying and regulating storm water. Ground was also broken for 206 rent-regulated residentials in Eskilstuna.

We are in the process of advertising new summer-vacation jobs. This year too, hundreds of young people will experience their first contact with working life through SBB. Social sustainability is not a charity – it is a win-win! An important part of the company’s social sustainability initiative is to contribute new elderly care units and LSS housing. The number of apartments for elderly care units managed in-house is set to increase sharply, with the target of doubling the total rental income from elderly care units and LSS housing between 2020 and 2025, from the level of slightly more than SEK 800m to SEK 1.6bn annually. At the end of the first quarter of 2022, our income from elderly care units and LSS housing had increased to SEK 1,243m. The acquisition of Odalen, which is Sweden’s leading developer of elderly care units, will further strengthen our position.

Prospects

SBB is stronger than ever. SBB’s rolling 12-month earnings capacity rose by 64 percent compared with the first quarter of 2021 and amounted to SEK 8,379m (5,065) at the end of the period. Earnings capacity per Series A and B shares increased by 62 percent to SEK 5.76. For the 2022 full year, we forecast earnings of SEK 8.10 per Series A and B ordinary share, and that stands firm. Today we are a large family with about 200,000 shareholders and slightly more than 400 employees at many locations in several countries. Our team is our platform. Whether you develop cities, cars or computer games, it’s all about human creativity, knowledge and meritocratic market thinking. If you also make sustainability the foundation, you foster optimum conditions for delivering long-term shareholder value and societal value throughout the value chain, from property development to property management. And that’s what we intend to continue doing.

Ilija Batljan
CEO and founder