Quarterly report Q2 2020
”Our most important asset – our employees – has successfully integrated Hemfosa and our margin in terms of surplus ratio was at the end of the first six months of 2020 approximately seven percentage points higher than the corresponding last year”
Samhällsbyggnadsbolaget i Norden AB (SBB) is today the Nordic region’s largest and one of Europe’s largest owners of social infrastructure. Thanks to our low risk assets and our strong financial position, we have been able to meet the Covid-19 crisis by working even harder and continuing to invest. We have also ensured that the social infrastructure works well despite the circumstances. By providing deferrals and rental discounts, we have supported tenants with a long-term ability to survive. During the second quarter, we received 99.8 percent of our rental income, which is probably the highest of all listed real estate companies in Europe. We continue to support our tenants and intend to enable deferrals, changed payment periods or provide other types of support corresponding to approximately 0.6–0.8 percent of our quarterly income during the third quarter. We stand up for society through various types of social initiatives and continue to invest in sustainability. Amongst other, we have donated food to vulnerable persons and health care workers and safety masks to the elderly care. SBB has also given summer jobs to 123 youths. Our most important asset, our employees, have successfully integrated Hemfosa and our margin in terms of surplus ratio was for the first half of 2020 approximately seven percentage points higher than the corresponding last year. Net operating income in a comparable portfolio (like for like) increased by seven percent.
Profit before tax amounted to SEK 2,447m and profit after tax was SEK 2,595m. Adjusted for non-recurring costs and deductions for earnings attributable to preference shares, D shares and hybrid bonds, the result for the period was SEK 2.08 per ordinary share A and B.
Cash flow from operating activities before changes in working capital increased by 389 percent to SEK 1,194m (244) for the first half of the year. Adjusted for non-recurring effects for repurchases of expensive loans and restructuring costs, cash flow landed at SEK 1,348m (367).
Profit from property management adjusted for non-recurring costs increased by 247 percent to SEK 1,285m (386) compared with the second quarter of 2019. In addition to costs for the redemption of loans, the nonrecurring costs also include restructuring costs and unrealised currency effects. The strong increase in net operating income is the main reason behind the strong increase in profit from property management.
BBB+ rating in focus
At the end of the half-year, our net debt pro forma, adjusted for cash from sold but not divested properties and 12 months’ earnings and the acquisition of Laeringsverkstedet in Norway in early July 2020, through total capital according to S&P’s loan to value definition, amounted to approximately 50 percent. Thus, according to our calculations, we are close to fulfilling one of the most important key figures for a BBB+ rating. In the long term, the goal is to achieve an A- rating. This is supported by the quality of our assets and the fact that we have the same secure publicly funded cash flows as our competitors in the public rating category. We continue to raise the interest coverage ratio, which at the end of the halfyear was 3.1 times, which we expect to land around 4 times for the full year. We have just over SEK 50 billion in non-pledged assets, cash including cash from sold but not closed property transactions and financial assets of SEK 11.3bn and available credit commitments of SEK 11.4bn.
New financial goals
At the SBB Capital Markets Day in June, we presented updated financial targets with a focus on a strong financial position with the goal of a BBB+ rating no later than the first half of 2021, and A- rating in the long term combined with a new performance target. Our new goal is to generate 6 growth in our property management result per ordinary share A and B, which over a five-year period averages at least 15 percent per year. This goal is possible thanks to our unique value-creating model which, in addition to secure cash flows from property management, also provides recurring revenue streams via property development, renovations and transactions. In property development, we now focus on using our large building rights portfolio to build new housing and community service properties based on the needs of the municipalities, both in our own book through the new organisation after the integration of Hemfosa, but also through joint ventures with parties that take the construction risk.
The scenario analyses in the project and property development section show a potential for annual earnings in excess of SEK 1bn from property development. In renovations, we continue to deliver on the target of 600 apartments per year. During the first half of the year, we renovated 323 apartments. Among our apartments, there is room for renovations over 75 percent of the portfolio, which together with the need to renovate community service properties creates potential for strong recurring earnings. We continue to use our building rights and renovate our properties to ensure an appropriate and attractive social infrastructure, some examples below:
• Three new police stations (15-year leases)
• New elderly care home in Västerås for Västerås municipality (25-year lease)
• New elderly care home in Ängelholm and new LSS (15-year lease)
• Renovation and extension of Nykvarn’s town hall (new 25-year lease)
• Construction of a culture house for Skellefteå municipality (50-year lease)
• Construction of the Social Services building in Västerås (15-year lease)
• Conversion of premises in Haninge to a school and elderly care home for Haninge municipality (a 23-year and a 20-year lease)
• Construction of six LSS properties together with Emrahus and four LSS properties under own management (15-year lease agreement).
In addition to property development and renovations / investments, we continue to deliver within transactions. Under difficult market conditions, we have proven that our assets are among the most liquid in the entire Nordic region. Since the acquisition of Hemfosa, we have sold properties for SEK 10.9bn in line with or higher than book value.
SBB’s secure cash flows and work towards a BBB + rating have made it possible for us to meet one of the biggest challenges our economy has been subjected to in modern times. We continue to see that in accordance with the result for the first half of the year and the earning’s capacity, we are delivering a strong earning’s capacity of SEK 2.91 per A and B share this year. We will continue to invest in society, amongst others by offering summer jobs to 123 youths living in SBB:s rent regulated residentials.
Covid-19 has gone from being a pandemic to also becoming a greatly increased risk to the world economy that leaves no one indifferent. The great uncertainty that currently prevails around economic development requires focus and hard work. Community service properties and residentials are least affected by the crisis, but crisis leaves no one unaffected. On the other hand, this is neither the first nor the last crisis that long-term focused companies have to deal with. Crises come and go and you have to be humble in the face of this, but our task is to be a reliable and long-term societal player that delivers shareholder value, good profitability and strong results in a sustainable way
CEO and Founder