Interim Report Q4 2024
Net operating income in comparable portfolios increased by 7.1 percent.
Revenue and net operating income are lower than in the previous year, reflecting SBB’s decision to sell assets and amortize debt in order to improve its financial position. On a comparable portfolio basis, revenue increased 5.5 percent and net operating income increased 7.1 percent for the period.
Active Measures for Continued Growth in Community Service Properties
With inflation totaling slightly less than 20 percent over the past three years, SBB has experienced favorable rental growth thanks to inflation-indexed leases on community service properties. As the economy slows down, additional resources are being devoted to retaining existing tenants and attracting new tenants. One goal is to have recurring project profits and increased rental income through higher rents, increased lettable area, and lower vacancies.
One of the measures we are implementing is to transfer the responsibility of cash-flow properties with significant development potential from the property management organization to SBB’s project and property development department, which can drive value-generating measures.
At year-end, the occupancy rate was 92 percent, with only minor changes being noted in the fourth quarter. With the completion of a number of structural measures, SBB now has greater opportunities to reallocate resources to property development, thereby increasing the portfolio’s occupancy rate.
In 2024, SBB divested several projects with good results. For example, alongside K2A, SBB created a project whereby a centrally located property in Västerås will be developed to approximately 34,600 m² of state-of-the-art, sustainable premises with the Swedish Prison and Probation Service as the tenant.
We have agreed to sell the project where the buyer takes possession in 2025, generating an expected cash injection of SEK 300m over the next year. Another example is the signed sales of the SBB-developed nursing homes Sågklingan 6 in Västerås and Vävskeden 21 in Flen. The agreed property value of SEK 679m should be compared to the total project costs of SEK 573m. The profit on the projects was therefore SEK 106m, or 19 percent.
Residential Rents with Potential
SBB has consolidated most of its residential properties into Sveafastigheter. Its focus on core operations and economies of scale will have further positive effects on income and savings of SEK 25m in the long term. Furthermore, SBB still owns residential properties directly and in a joint venture with Morgan Stanley, with a total property value of SEK 6bn.
Over extended periods, residential rents in Sweden have risen faster than inflation – one explanation being that a normal year includes real wage increases and welfare improvements. In the short term, a particularly favorable rent trend is possible as residential rents respond to general price increases in society, which have been substantial in recent years.
All in all, things look bright for residential properties in 2025.
Strengthened Organization, High Central Costs
Subsidiaries and associated companies have gained qualified employees and improved structure. Central functions, such as finance, legal, and accounting, have been given increased resources with the aim of raising quality and implementing structural improvements. The insourcing of financial management and accounting systems was completed at the end of the year, initially driving costs but generating annual savings.
Costs related to central administration have been impacted by complex structures, a high rate of change, and legal processes. A significant portion of this is due, directly or indirectly, to the now-discontinued dispute with an opportunistic fund regarding the terms of SBB’s bond program.
For external observers, the dispute created an uncertain legal situation that made it virtually impossible to raise capital through the parent company, requiring more complex measures. By the end of 2025, the objective is to increase quality and normalize the central cost level, entailing a significant reduction in costs.
The discontinuance of the legal dispute increases the ability to utilize cost-efficient structures and makes it easier to operate in both the banking and capital markets.
Average Interest Rate: 2.4 Percent
SBB retains favorable financing at low average interest rates. At the end of the period, the average interest rate was 2.4 percent and the average capital duration was 3.1 years. Excluding Sveafastigheter, the average interest rate was 2.2 percent. Debt maturing after 2026 has an average interest rate of 2.4 percent.
In the coming years, the volume of debt is expected to decrease, reducing financial expenses. In 2024, SBB repurchased and restructured bonds on several occasions, creating a total value of SEK 6.5bn for shareholders. Equity was injected through new issues in Sveafastigheter and Public Property Invest, which, combined with a better structure, has created a better financial situation for the SBB Group and its stakeholders.
Greater Capacity to Improve the Financial Situation
For both equity and debt, there is much to suggest that the real estate industry in general will be able to raise capital at attractive levels in 2025. During the coming year, companies will have good opportunities to improve their financial risk profile or to plan for aggressive investments.
As risk premiums fall and more companies plan to invest aggressively, real estate prices will be positively affected. For SBB, this means that 2024 was probably the last year with a negative property value trend in the current economic cycle.
SBB’s property value decreased by a total of 4.4 percent or SEK 3.2bn in 2024, and by a total of 20.8 percent since the peak in 2022. In the fourth quarter of 2024, values remained essentially unchanged. The change in value can also be compared with inflation of about 20 percent since the end of 2021.
For property companies, the cost of new debt developed positively during 2024. Short-term market interest rates in SEK fell by 1.5 percentage points in 2024, from 4 to 2.5 percent, and have continued to decrease since the start of this year.
A strengthened capital market, diminishing refinancing risks, and, in the long term, positive property value changes enhance SBB’s capacity to reduce debt and increase liquidity. Improving the financial situation remains a priority for SBB.
SBB has identified approximately SEK 10bn in non-strategic assets for gradual sale, mainly residential assets (excluding Sveafastigheter). Lending to partly-owned structures will not be extended. This enables further streamlining and provides liquidity for upcoming debt maturities.
SBB has the operational strength and increased capacity to improve the financial situation.
Transparency, Financing Opportunities, Focus on Core Operations
For financial reasons, SBB established two joint ventures with Castlelake in 2024, in addition to what had already been entered into with Morgan Stanley in 2023. Since then, market conditions have improved significantly, and a potential dissolution of these structures is expected to have a significant impact on SBB’s earnings.
Overall, SBB significantly reduced the number of partly-owned structures and dissolved partnerships valued at a total of SEK 20bn in 2024. The purpose of this streamlining is to establish large, transparent companies focusing on their core operations with good access to both equity and borrowed capital.
In 2024, most of SBB’s residential properties were brought together in the subsidiary Sveafastigheter, which was then listed on Nasdaq First North. Sveafastigheter is now Sweden’s largest market-listed pure-play residential company with good access to capital.
Nordiqus, SBB’s associated company within educational properties, Nordiqus plans to settle all bank debt with the help of capital market financing with an investment-grade rating.
Continued Tailwind for Improvement Efforts
SBB has skilled employees who do a very good job. To implement all of the changes that SBB is making requires dedicated employees with superior work capacity and expertise.
SBB has a high-quality property portfolio with the capacity to generate an increasing operating surplus. We have come a long way towards becoming a transparent and efficient corporate structure with properties financed long-term at a reasonable price.
Falling property prices and a tough financing market characterized 2023 and the first six months of 2024. My view is that the market turned in mid-2024, and it will take several quarters before this starts to show in all of the numbers.
We continue to work hard for our shareholders and other stakeholders and are confident in the company’s strategic actions and operational focus.
Leiv Synnes, CEO
