Interim Report Q1 2021
“The quality of our assets, both in terms of the security of the rental flows and of their liquidity in the transaction market, has proven to be among Europe’s most secure in challenging times.“
Samhällsbyggnadsbolaget i Norden AB (SBB)’s continues to deliver strong profits, secure cash flows and high growth. Profit after tax was SEK 2.7bn, an increase of 99 percent compared with the first quarter last year.
Adjusted for non-recurring costs for repayment of expensive loans and deductions for earnings attributable to preference shares, series D shares, hybrid bonds and minority interests, profit for the period amounted to SEK 1.91 per series A and B ordinary share. I estimate that SBB will deliver earnings per series A and B ordinary share of SEK 5.15 for full-year 2021. This is based on SBB’s current earnings capacity and profit for the first quarter of 2021.
Samhällsbyggnadsbolaget i Norden AB (SBB)’s income comprises secure cash flows from property management of social infrastructure, which are supplemented with three income-generating value-adding strategies: building rights development and new production, investments in existing portfolio and value-adding transactions. Let us start by analyzing the outcome of our secure cash flows.
Profit from property management increased by SEK 296m, corresponding to 93 percent
Adjusted for non-recurring costs, profit from property management increased by 41 percent in comparison with the first quarter of 2020 to SEK 843m (596). In addition to loan-repayment costs, non-recurring costs also included costs for loan redemption (SEK 40m), restructuring costs (SEK 3m) and unrealized FX effects SEK 185m).
SBB has a very strong financial position with slightly more than SEK 80bn in unencumbered assets, strong banking relations and access to the European credit market. At the end of the quarter, SBB had cash and cash equivalents of approximately SEK 18.4bn. Access to capital is important, but it is even more important to deliver secure and strong cash flows from operations.
There are predominantly two factors contributing to the increasingly strong cash flows. One is stable net operating income. Despite a cold and snowy winter, which resulted in costs that were approximately SEK 30m higher than for a normally corrected year, not including Offentliga Hus, SBB maintained a strong margin in the first quarter of this year. The other is our financial costs, which continue to decrease. Not including Offentliga Hus, SBB had an average consolidated interest rate of 1.17 percent at the end of the first quarter.
Our value-adding strategies continue to out-deliver.
Profit from building rights development and new production for the first quarter of 2021 amounted to SEK 507m, compared with the target of SEK 1.0-1.4bn on an annual basis. At the end of the first quarter, SBB’s portfolio of building rights amounted to approximately 2,919,000 m2 GFA, corresponding to approximately 42,000 apartments, which, together with a new production portfolio of 6,185 apartments, makes SBB the Nordic region’s leading property developers. The new production portfolio comprised 328,492 m2 of housing (corresponding to 6,185 apartments, of which 872 are currently in production and 5,313 are currently in project development) and 111,514 m2 of community service properties currently in production.
Profit from investments in the existing portfolio in the first quarter of 2021 amounted to SEK 155m, compared with the target of SEK 600m on an annual basis. In the first quarter of 2021, SBB completed renovations that improve the net operating income from 200 apartments. A further 120 apartments are currently being renovated and the leases on 167 apartments have been terminated, with renovation planned to commence within a three-month period. In addition to apartment renovations, SBB is continuously upgrading the company’s portfolio of community service properties. The total volume of these projects is approximately SEK 2,780m. The yield on cost is 6.1 percent, paving the way for strong value generation over the next few years.
An important part of the company’s social sustainability initiative is to contribute new elderly care units and LSS housing. The number of elderly care units to be managed in-house is set to increase sharply, with the target of doubling the total rental income from elderly care and LSS housing between 2020 and 2025, from the level of slightly more than SEK 800m to SEK 1.6bn annually. By the end of the first quarter of 2021, our income from elderly care units and LSS homes had increased to SEK 1,084m.
Key ratios for a BBB+ rating have been delivered
In the first quarter of 2021, SBB strengthened its equity by SEK 5.8bn. Despite the completion of the SEK 10bn transaction to acquire Offentliga Hus from the stock exchange, there has been a significant reduction in the loan-to-value ratio compared with last year. At the end of the period, our pro forma net debt, adjusted for cash inflows from properties that have been sold but not yet transferred, liquid financial assets and 12 months’ earnings divided by total capital, in accordance with S&P’s definition of the loan-to-value ratio, amounted to 48 percent. According to S&P’s loan-to-value definition, our reported adjusted net debt was 51 percent at the end of the quarter, despite Offentliga Hus having been consolidated in its entirety.
On the reported key ratios, we therefore have a strong BBB rating. According to our calculations, we have, at the same time, fulfilled the key ratios most significant for a BBB+ rating. The finance policy and the Board’s clearly expressed ambition regarding the rating strengthen the ambition to achieve an A- rating in the long term. The quality of our assets, both in terms of the security of the rental flows and of their liquidity in the transaction market, has proven to be among Europe’s most secure in challenging times. We continue to raise our interest coverage ratio, which was 4.8 times at the end of the quarter. We have slightly more than SEK 80bn in unencumbered assets; cash balances, including liquidity from properties that have been sold but not yet transferred and financial assets of SEK 21bn, as well as available credit commitments of SEK 9.0bn.
Sustainability is the core of our business model
SBB’s focus on being completely climate neutral by 2030 is based on holistic thinking with a focus on energy investments, life cycle investments with a focus on building in wood and reduced carbon dioxide emissions from new production in concrete, and on generating renewable energy. Energy investments are being made with the aim of halving energy consumption. Energy projects will include window replacements, heat recovery from waste-water and exhaust air, as well as additional attic insulation. In the first quarter, investments were made in energy efficiency improvements for a lettable area of 22,368 m2.
More than half of SBB’s new production currently in progress is built of wood. Wood is renewable, has a lower climate impact from refinement processes compared with other building materials and also has the capacity to store carbon dioxide. If forests are managed sustainably, both forests and communities can continue to grow and flourish.
SBB produces geothermal heat, builds solar cell plants to generate power and is planing for wind power. SBB has decided to set aside SEK 100m annually for installing solar cells. In the first quarter, ten solar cell plants were brought on-line in four residential areas.
In the first quarter, SBB ceased printing rent advice slips for residential tenants to reduce paper consumption and unnecessary transports. SBB now offers a modern alternative for receiving and paying rent advice slips digitally via SBB’s residents’ app. An updated national inventory according to TCFD (Task Force on Climate Related Financial Disclosures) was also conducted in the first quarter.
In the first quarter, SBB and Kåpan Pensioner formed a joint venture to accelerate housing construction in Stockholm and to continue fostering sustainable housing development.
We have turned five years old. And around the same time, we became the Nordic region’s second-largest listed property company with properties valued at approximately SEK 105bn on the balance sheet. The pandemic that impacted all of society hard has also affected life’s smaller-scale pleasures, such as being able to celebrate together. But we will defeat this together and we will celebrate together. While we must still postpone the celebration, it is just as well that we work even harder for the time being and it occurred to me that we should celebrate when we become the Nordic region’s largest listed property company. Today we are a large family with about 80,000 shareholders and some 300 employees who are located in many places in several countries. Our employees and our infrastructure form a unique investment platform that will continue to deliver strong earnings, secure cash flows and high growth.
The demand for secure and sustainable assets will intensify in the years to come. This will benefit SBB’s secure cash flows and sustainable business model. Higher inflation would probably also be beneficial for long-term cash flows secured with longer-term interest maturities.
I pointed out in the introduction that our profit for the first quarter and earnings capacity indicate that we will be able to deliver earnings per series A and B ordinary share of SEK 5.15. In accordance with our earnings capacity, profit from property management is SEK 2.55 per series A and B ordinary share, and profit per series A and B ordinary share from our value-adding strategies is SEK 1.54 of the projected earnings for 2021. SBB enjoys favourable conditions for continued strong growth in the Nordic region, at the same time as all indicators suggest that we will become a strong social infrastructure player in the European context too. All we have to do is keep working hard.
CEO and founder