CEO ILIJA BATLJAN
The cash flow machine Samhällsbyggnadsbolaget (SBB) continues to deliver. The third quarter of 2019 became SBB’s best quarter ever in terms of profit from property management. This contributed to the Profit after paid tax (EPRA Earnings) adjusted for non-recurring expenses for January-September increased by 70 percent to SEK 606m (357), corresponding to EPS of SEK 0.80 per share (0.48). Cash flow from operating activities before changes in working capital increased by 99 percent to SEK 507m (255). Adjusted for non-recurring costs for, among other things, repayment of expensive loans, cash flow for the nine-month period lands at SEK 657m (335). SBB owns, develops and manages social infrastructure long term in four Nordic countries: Sweden, Norway, Finland and Denmark. The common denominator for all four countries is that they are strong tax-financed welfare states. Social infrastructure is comprised of elderly care homes, healthcare centres, properties for the disabled, schools and other properties where tax-funded activities are conducted in the Nordic region, as well as regulated rental apartments in Sweden. During the third quarter, we continued to increase the already very high proportion of social infrastructure in the portfolio. At the end of the period, around 94 percent of the property portfolio consisted of social infrastructure, with 60 percent community service properties in the Nordic region and 34 percent Swedish regulated rental apartments. We continue to experience strong demand and are continuing to expand our base of long-term leases.
SBB’s unique and scalable business model with a focus on low-risk assets that in addition to a strong earnings capacity from management provide further earnings from three value-creating areas – renovations/investments in the existing portfolio, development of building rights and transactions – continues to contribute to a strong increase in the EPRA NAV, 19.5 percent in the past 12 months. In the past 12 months, the EPRA NAV less dividends of SEK 496m increased by SEK 1,692m or SEK 2.24 per ordinary A and B shares. The adjusted EPRA NAV (adjusted for D shares and hybrids) was SEK 22.83 per share at the end of the third quarter.
Profit before tax amounted to SEK 1,526m. Profit after tax was SEK 1,337m. Adjusted for non-recurring costs for repayment of expensive loans, the nine-month earnings per ordinary A and B shares (after profit paid to preference shares, class D-shares and hybrids) were SEK 1.61 per share. A central point in our business model is a scalable platform staffed with some of the Nordic region’s most experienced employees in the senior positions. SBB invests in low-risk properties that generate stable net operating income and manages properties with a long-term perspective. We have extensive experience of cooperating with the public sector in the Nordic region and we have built the company from the ground up. The largest owners of social infrastructure in the Nordic region are municipalities and we are thereby continuing to be a leading partner for them. Our strong position combined with demographic trends that lead to extensive need for elderly homes and schools creates potential for new cooperation and growth.
At the beginning of September, SBB was the first private property company to become an associated member of Public Housing Sweden. A membership in Public Housing Sweden is another guarantee for our long-term approach and our social involvement, as well as an important piece of the puzzle for our continued cooperation with the municipalities. And I fully agree with the words of Anders Nordstrand, CEO of Public Housing Sweden: “It is pleasing to be able to welcome even more long-term and serious housing companies to become members, even if they are not owned by a municipality. Public Housing Sweden is now becoming a broader organization that also represents private actors with social responsibility that safeguard the rental apartment as a form of housing.”
Around 60 percent of the value of our property portfolio is in the Nordic region’s largest cities with Stockholm as the largest market (26 percent of the value), with an average lease length of seven years. If we adjust for newly signed long-term leases, the average lease length is 10 years. This entails a low risk. We can add to this fact that more than 91 percent of our total rental income, which in a rolling 12-month period amounts to SEK 2,003m, comes from social infrastructure either through regulated rental apartments or directly or indirectly from the state and municipalities through our community service properties. Altogether, this is a low-risk exposure that is unique in its kind and is not affected by the economy.
STRONGLY INCREASED EARNINGS FROM PROPERTY MANAGEMENT
SBB’s 12-month rolling earning capacity from the property management amounted to SEK 991m (766) at the end of the third quarter of 2019. Considering a theoretical cost because the company had a liquid position (available liquidity and unutilized credit facilities) of 14,280m an adjusted earning capacity would end up at SEK 1,141m, corresponding to an increase of 48 percent since the end of 2018. The profit from property management adjusted for non-recurring costs increased compared with the third quarter of 2018 by 59 percent to 658. In addition to costs for the repayment of loans, the non-recurring costs include SEK 10m in the cost for transition to renewable energy and SEK 10m for central administration. The strong net operating income combined with ever lower financial expenses is the main factor behind the strong increase in profit from property management.
INVESTMENTS IN THE EXISTING PORTFOLIO, TRANSACTIONS AND PROPERTY DEVELOPMENT YIELD RESULTS
Our renovation rate is now at the levels that we have strived for and will continue to yield strong earnings and growth in EPRA NAV. In the first nine months, we began renovations of 476 apartments of which 311 are completed. For another 232 apartments, the leases of which are cancelled, agreements have been signed for renovations to begin in the fourth quarter. In the first nine months, transactions were made for around SEK 16bn. For example, the sale of DNB in the second quarter yielded nearly SEK 1.8bn in non-restricted cash flow that we were able to use for new investments in community service properties with a higher yield and thereby higher earnings and greater value creation. Property development also continues to provide a strong return. At 30 September, SBB had development projects in various detailed development planning phases regarding a total of around 1,020,000 sq.m. GFA. NEW TARGETS
SBB has updated its financial and operating targets and communicated a new dividend policy in the third quarter. Among other things, the target for the equity/assets ratio was adjusted to higher than 45 percent and the target for the interest coverage ratio was adjusted to no less than 3.0 times. The new growth target is expressed as: “A property portfolio of SEK 55bn by 2021, with retained BBB+ rating (compared with the earlier SEK 40bn by 2023 with the retained investment grade rating)”.
SBB’s new dividend policy entails a goal to generate a steadily increasing annual dividend. The company’s Board of Directors is expected to propose an initial dividend according to the new dividend policy of SEK 0.60 per ordinary A and B share for the 2019 financial year, to be paid out quarterly in 2020/2021.
BBB+ RATING FOCUS IN THE NEXT 12 MONTHS
The work of consolidating the balance sheet to improve our financial position is continuing. We focus on achieving a BBB+ rating in the next 12 months, which is a prerequisite for strong growth.
We are continuing to strengthen equity in the first nine months of 2019 by SEK 4,743m. Our interest coverage ratio increased sharply to 2.4 times and our average interest rate decreased in the past 12 months from 2.49 percent to 1.75 percent. We also extended the period of fixed interest. 100 percent of SBB’s loans are interest hedged with an average duration of 4.9 years. Our debt maturity is among the longest in the market at 4.9 years. At the end of the third quarter, our net debt through total capital according to S&P’s definition amounted to 55 percent.
SUSTAINABILITY – A CENTRAL PART OF OUR BUSINESS MODEL
We see extensive potential to continue to develop our management and increase focus on energy efficiency enhancement. Sustainability is a central part of our business model and we have therefore initiated collaboration with Skellefteå Kraft for them to supply 100-percent origin-certified renewable electricity to all of SBB’s Swedish properties. Once SBB’s total consumption in Sweden of around 60 GWh has switched over to 100-percent renewable electricity, it will mean that SBB’s carbon dioxide emissions will be around 15,000 ton lower per year than if the energy according to the so-called Nordic residual mix were used, corresponding to CO2 emissions of around 250.76 g/Kwh. The nuclear fuel waste savings amount to nearly 70 kilograms. These figures provide clear information: SBB is like a green municipal bond, 100 percent renewable electricity and more than 91 percent of our income comes directly or indirectly from the state or municipalities and Swedish regulated rental apartments.
It can be noted that the commercial real estate industry is generally heading for harder times and in light of this, it is pleasing that we have a business model that is not sensitive to economic fluctuations and where the need for investments in social infrastructure in the next 10-year period is the highest ever.
SBB’s secure cash flows are only marginally affected by the economy and external factors. We deliver a strong earning capacity from property management and see good conditions to continue delivering further earnings from our three value-creating areas – renovations/investments in the existing portfolio, development of building rights and transactions. For 2019-2021, my assessment is that we will be able to deliver the highest annual increase in EPRA NAV among all Swedish listed property companies.
SBB’s class B and class D shares have been traded on Nasdaq Stockholm’s Large Cap list since 20 September 2019. We have had a distinct ambition of carrying out a change of listing venue to Nasdaq Stockholm in 2019 and it feels good that we have now delivered on this important step. A listing on the main market entails a stamp of quality on SBB of another level and is fully in line with our profile as a long-term society builder. Since the original listing on First North, we have noticed a continuously growing interest in our activities in the Nordic region and internationally, and I expect that this will be even bigger on Nasdaq Stockholm’s main market. SBB is on a strong journey of growth and we believe that an inclusion in the FTSE EPRA Nareit Global Real Estate Index may be the next step.
SBB continues to deliver strongly thus far in 2019. Altogether, we have the best conditions to continue the work of creating the Nordic region’s leading actor with a focus on social infrastructure (community service properties in the Nordic region and regulated rental apartments in Sweden).
CEO and founder
"SINCE THE BEGINNING OF THE COMPANY WE HAVE PROVIDED SHAREHOLDER VALUE, GOOD PROFITABILITY AND A POSITIVE CASH FLOW."
About Ilija Batljan
Ilija Batljan is the founder and CEO of SBB. He came to Sweden with his wife and daughter in 1993 as a result of the war in the former Yugoslavia. He was previously a deputy commisioner for Stockholm County Council and Mayor/Chairman of Nynäshamn municipal executive board, representing the Social Democrats. Following his political career, he entered the property industry and was deputy CEO of Rikshem AB for over four years. Ilija Batljan has a BA in Economics and a PhD from Stockholm University in demography and planning care of the elderly. Ilija Batljan has long and extensive experience from different management positions, from Sweden and internationaly.