Interim Report Q3 2024
Strong companies emerging
By listing Sveafastigheter on Nasdaq First North, SBB has achieved another major step in its strategy to focus more clearly on its core business and to optimize its financing. Sveafastigheter is now Sweden’s largest listed pure-play residential company and has a management team focused on improving net operating income long term. Over the upcoming years, I believe there will be particularly favourable conditions for net operating income to develop strongly thanks to good general rental growth in the market and planned improvement measures. Financially, Sveafastigheter is strong with a 40 percent loan-to-value ratio and an average interest rate of 3 percent, which means that we have the ambition that they will obtain an investment grade rating in 2025.
Nordiqus, SBB’s associated company in educational infrastructure, has already financed its operations with investment grade financing. Both Nordiqus and Sveafastigheter can now improve their day-to-day operations without financial stress. They can also capitalise on their leading platforms and financial strength to identify additional business opportunities and grow organically.
SBB’s third major business area alongside residential and educational properties is community service properties. In the second quarter, SBB participated in the IPO of Public Property Invest ASA, which is now in a strong position to expand its property portfolio and improve operations. A target for the upcoming years is to create the right conditions for all assets in the segment. A sign that we are on the right track is that PPI received an investment grade rating of BBB- with a positive outlook from Fitch in November. We have started, but are far from finished, structuring SBB’s community service properties.
Benefitting from strong project operations
A large proportion of SBB’s residential projects and residential building rights are now part of the subsidiary Sveafastigheter, which is recognized as skilful in residential development. Among other things, they have received awards in sustainability and for most satisfied tenants in new production. Sveafastigheter has been granted building rights for 2,351 apartments between 2021 and 2023.
Together with K2A, SBB has developed a project in which a centrally located property in Västerås will be developed into approcimately 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 with access in 2025, where SBB’s share of the profit amounts to SEK 210m and the liquidity contribution is expected to be SEK 300m in the coming year.
In November, SBB signed agreements to sell the elderly care properties Sågklingan 6 in Västerås and Vävskeden 21 in Flen which were developed by SBB. he purchase price was SEK 679m, compared with total project costs of SEK 573m. The project profit was thus SEK 106m or 19 percent.
SBB retains a solid project and property development portfolio, as well as a number of identified cash flow properties with development potential. With a number of restructuring projects behind us, I believe we have greater potential to shift more resources to property development. The aim is to generate recurring project profits and to increase rental income through higher rent levels, larger premises and lower vacancy.
Focus on the core business
The property management organization will focus solely on the core business of leasing premises, carrying out investments in consultation with new and existing tenants, and otherwise providing good service to our tenants. SBB has considerably reduced the number of partnerships and concentrated its holdings in larger units in order to make administration more efficient. From time to time, there may be reasons for new partnerships, but the long-term trend is towards rationalisation and increased transparency.
Strengthened organization
SBB has significantly strengthened its organization. Subsidiaries and associated companies have been given qualified staff and improved structures. Resources have been added to central treasury, finance, legal and accounting functions. At the end of the year, insourcing of financial management and implementation of financial systems will be completed, which in the long term will generate annual savings of SEK 25m per year.
The central administration costs have been affected by several complex structures, a high rate of change and legal processes. The aim is to normalize the central costs by the end of 2025. While all changes present challenges, the changes we are currently making will lower costs and raise quality in the long term.
A shifting market
The wind has clearly shifted in the capital market for Swedish real estate companies. For example, their credit margins have halved to 1.4 percent this year for bonds in SEK and with a credit rating of BBB. At the same time, we see that property companies are now increasingly able to raise equity to strengthen their financial positions or to invest aggressively. This represents a significant improvement compared to before.
My belief is that the credit market will improve further after the turn of the year, with the leading property companies achieving even lower credit margins. With a some lag, better access to capital will lead to increased demand for properties. This will, in turn, have a positive impact on property valuations.
Lower market interest rates result in higher valuations and cheaper financing, but also indicate a slowdown in the economy leading to lower inflation and lower rent increases in indexed leases, as well as weaker demand for commercial premises in particular. For SBB, this means that more resources need to be devoted to retaining existing tenants and securing new ones.
The residential segment is expected to perform well moving forward, as rent growth in recent years has not kept pace with general price increases, and is expected to catch up over the next few years. This could have significant effects. Over long time series, residential rents in Sweden are rising faster than inflation, where one explanatory factor is that in a normal year we get real wage increases and welfare improvements.
Net operating income in comparable portfolios increased by 7.4 percent
Income and net operating income decreased compared with the previous year, which is due to SBB choosing to sell assets to improve its financial position. For comparable portfolios, income increased by 5.9 percent during the period and net operating income increased by 7.4 percent.
The rental occupancy rate fell slightly during the quarter to 92 percent, which is mainly due to completed residential projects where leasing is ongoing and to upcoming projects where we are vacating the property. Excluding projects, the occupancy rate has been slightly negatively affected by increased vacancies in public offices.
Changes in value
SBB continues to have long-term financing with low average interest rates. At the end of the quarter, the average interest rate was 2.33 percent and the average maturity was 3.3 years. Debt maturing after 2026 has an average interest rate of 2.37 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 ensure that it takes longer for the higher interest rates to be reflected in SBB’s interest expenses. Excluding Sveafastigheter, the average interest rate is 1.98 percent.
Average interest rate of 2.33 percent
SBB continues to have long-term financing with low average interest rates. At the end of the quarter, the average interest rate was 2.33 percent and the average maturity was 3.3 years. Debt maturing after 2026 has an average interest rate of 2.37 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 ensure that it takes longer for the higher interest rates to be reflected in SBB’s interest expenses. Excluding Sveafastigheter, the average interest rate is 1.98 percent.
Improved financing structure
Nordiqus’ portfolio of educational properties with long-term contracts is well-suited for long-term financing. Over the year, American capital market financing with investment grade was carried out for terms of ten to fifteen years. Nordiqus has redeemed all loans with Nordic banks, partly because they do not offer equally long-term financing.
Residential properties in Sweden have access to a secure source of capital in the form of the banks’ mortgage institutes. During the financial crisis, the banks mortgage institutes were one of the sources of funding that functioned properly. Most of SBB’s residentials are now part of Sveafastigheter which is predominantly financed by mortgage institutes. Sveafastigheter’s capital structure allows the capital market to compete with mortgage institutes.
SBB’s financing structure proved vulnerable when demand for bonds decreased and the intended financing could not be raised from the banks. The broadening of the shareholder base in Nordiqus and Sveafastigheter has led to both improved loan conditions and an injection of capital, which has been used, among other things, to reduce bond debt. The work of creating optimal financing is not complete, but the result will be that SBB has access to several sources of capital and that dependence on these is less than has been the case. The actions we take now will equip SBB much better for the future.
Baseless claim from opportunistic hedge fund
SBB’s dispute with a single opportunistic hedge fund is close to a ruling in a UK court. The case will be heard by the court in January, with a ruling likely being announced in March 2025. The opportunistic fund considers that changes in value not affecting cash flow in joint ventures are to be included in the cash flow measure of interest coverage ratio. No other SBB bondholders or banks, expect changes in value 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 programmes and therefore considers the claims received from the opportunistic fund to be unfounded and that position remains.
Financial stability is prioritized
SBB’s main priority is to achieve a stable financial position. Measures are continuously being taken within the framework of the new strategy, which will lead to improved liquidity and more reasonable financing. Falling property prices and a harsh financing market have posed challenges in recent years as SBB has been working towards a stronger financial situation. My belief is that efforts to improve the financial situation will be easier moving forward.
Leiv Synnes, CEO