14 August 2019/08.30 CET – Q2 2019/Selvaag Bolig ASA earnings presentation

Translation from the original Norwegian, which remains the definitive version

Corporate participants Rolf Thorsen, CEO, Selvaag Bolig ASA Sverre Molvik, CFO, Selvaag Bolig ASA

Presentation

Rolf Thorsen, CEO, Selvaag Bolig ASA A hearty welcome to everyone to this presentation of the figures for the second quarter and first half of 2019 for Selvaag Bolig. And a hearty welcome to those who are following us on the web transmission. This meeting is also being streamed directly to those who want to follow us on the web. My name is Rolf Thorsen, and I am the CEO of Selvaag Bolig. This is my first quarterly presentation. I was also present at the previous one, but I wasn’t allowed to do more than say my name on that occasion. This time I’m allowed to say a bit more. I hope I’ll be able to take you through at least some key figures and a little more than that as well. I will be giving this presentation together with Sverre Molvik, who is our CFO. In terms of the agenda, the plan is that I start by going through a few highlights and some sales figures. Sverre will then take over and talk more about operations and the key figures, and go into these in somewhat greater depth. I will then return to talk a little about the market and finally try to sum up. We propose that all questions are taken at the end in a form of Q&A session. It is also be possible to submit questions via the web portal. If there is anyone out there following us on the web, they will thereby also be able to put questions which we will read out and answer here. It is fun, I must say, to be able to show the kind of figures we’re going to present at my first quarterly presentation. The figures are generally good. All the key figures, after all, are strong and it is the strong sales which first and foremost characterise the quarter, as well as the first half for that matter. Based on this, and on the strong figures, the board decided yesterday afternoon to pay a dividend of NOK 2.00 per share, which will be paid later this autumn. We aren’t finding, of course, that we’re enjoying a bonanza market in any way. It’s probably more of a slog market, a “bread and milk” market. But it’s precisely in such a market that a player like us has its strength – where craftsmanship finds its just reward, where we must toil for each sale, where each sale must be worked through. That’s when a player like us really has a chance to stand out from the crowd. We’re also finding that it is Greater Oslo and our machines there which drive up our results and volumes. But it’s also important for us to be positioned in the other large cities. We are confident that Stavanger, for example, Bergen and for that matter Trondheim will also help to raise our results in the future. They are not contributing so much at the moment, but more will come. Looking at the key figures, IFRS operating revenues of NOK 1 035 million were primarily driven by deliveries in five projects – including three of our big “machines” in Oslo. The margin is fantastic, I’d say rather immodestly, at 30.5 per cent on the IFRS results for this quarter. The same also applies to the first half, with a turnover of NOK 1 144 million and a margin of 26.8 per cent. We are well satisfied with that – I’d actually say that we’re more than well satisfied. And we hope this won’t be where the expectations people have of us will rest for all time. We don’t believe we’re going to deliver margins in the 30-40 per cent range in perpetuity. We then have NGAAP operating revenues of NOK 868 million. The strong sales are actually what have pulled us up here. We talked about strong sales in the previous quarter and they continued during the second quarter. And it would be no exaggeration to say that we’re also selling well in the third quarter. An NGAAP margin of 24.4 per cent for the quarter and 23.6 per cent for the first half is very good. As I have mentioned, sales are what is driving us. We had a sales value of NOK 1.1 billion in the second quarter – almost on a par with our first-quarter performance, which was a record figure. So progress is really brisk where sales are concerned. It’s clear that the NGAAP result is a combination of sales and production in the projects, so both aspects are helping to drive results. But it’s sales which primarily stand out in this quarter and, for that matter, this half-year. If we look at numbers, we have sold 453 units net so far this year. Comparing that with earlier years, this is a very positive level and actually marks a return to the strong 2015-2016 figures. We are back to a

very good volume. The same applies if we look at the rolling figures. All the curves are actually pointing upwards here. The Selvaag Bolig ship is making faster and faster progress – NOK 3.6 billion in 12-month rolling sales volume and 905 units sold. So sales are high on our agenda and the results board for this quarter. But it’s not only sales. We’ve also had fantastic IFRS results, which are the outcome of rather more than sales. So Sverre will now take you through the figures in a little greater depth, and I’ll return with both facts and opinions about the market, and we’ll then take questions at the end. The floor is yours, Sverre.

Sverre Molvik, CFO, Selvaag Bolig ASA Thank you. I’ll take a rather closer look at operations and the financial figures. As Rolf said, the market has been very good so far this year. The first quarter witnessed good sales and the second was equally positive. This means that, for the second quarter in a row, we are starting construction of more units than we’re completing. That’s very positive, of course. It increases, you might say, the speed of the ship. We had four more construction starts than completions in this quarter, which means we increased the value of units in production even further from the previous quarter to NOK 1 538 million. Admittedly, the value of the completed units was a little higher in the quarter than for those starting construction, so that the total figure is down a little, by just over NOK 50 million to NOK 7 039 million. Seventy-one per cent of units under construction were sold at 30 June, which we’re well satisfied with. We have started construction of just over 800 units over the last six-nine months, and the fact that we’ve cycled out about half the number of units under construction during that period while still maintaining such a high sales ratio is good. In addition, as Rolf indicated, sales have been good during the first month and a half of this quarter, so that the sales ratio of 71 per cent is naturally higher now than it was at 30 June. The bulk of the construction volume – in other words, 82 per cent – is still in Selvaag Bolig’s core market, which is Greater Oslo. That has always been the tendency but, as Rolf mentioned, we will be expanding our activities in the other cities. We expect to get under way in Bergen soon, Trondheim is already making a good contribution and Stavanger is ticking over. Rolf will come back to this a little later on, but these are markets we expect to strengthen over time. If we look at forthcoming completions, our guidance is the same as for the previous quarter – 776 units for the full year. Of these, 83 per cent were sold at 30 June and far more by now. We have, of course, a fixed sales strategy which I can remind you of. This fundamental strategy is to sell 60 per cent of the units until the start of construction, generally at a fixed price. If the market is very good and we’re selling too quickly, we raise prices even in that period. We then raise prices and sell on a straight-line basis during the construction period until completion, and take out the market potential and optimise risk/reward in each project. That’s very important and is naturally a key factor in our ability to deliver the way we do, which we’re going to look at now – specifically a very good result with a very high margin. We delivered 246 units during the quarter, which was virtually the same as in the same period of last year – just three more. But you can note that the value of the units we’re delivered this year – the unit price – is far higher than last year, which naturally means that the volume is significantly higher. Total revenues of NOK 1 035 million compared with NOK 864 million, including some rental income and Pluss service revenues. Project costs came to NOK 705 million – I repeat, as expected. I can’t remember the last time we overran a budget. In other words, when we start sales in a project, we have a calculation which has a figure for the turnkey construction contract plus a small buffer. And more or less whenever we deliver that project, our costs are lower than the calculated level at sales start. That’s why we’ve managed to achieve these results – we’re able to keep costs under control throughout as a result of good follow-up, good descriptions and back-to-back agreements with the contractors in relation to what we sell to the buyers. Having no changes between those two aspects allow us to keep to the cost budget, which is naturally highly important. NOK 34 million of this was previously capitalised interest payments on land holdings and construction loans for those units we delivered. Where other costs are concerned, sales, marketing and payroll fell by NOK 10 million compared with the previous quarter. We had slightly higher sales and marketing outgoings but our payroll expenses were significantly lower since we had a number of restructuring costs in the same period of last year. As most of you know, we report an adjusted EBITDA. That’s not to embroider any figures, but only to highlight the fact that the IFRS has defined financial expenses as part of project costs – the NOK 34 million shown here for this quarter. We exclude them in order to get an EBITDA without the “I”, which is the point of talking about earnings before interest. This came to NOK 316 million, corresponding to a margin of 30.5 per

cent, which is our next best since we received our stock exchange listing. Only the fourth quarter of 2018 was better. These are very strong margins. Earnings per share came to NOK 2.24, compared with NOK 1.26 in the same period of last year. That’s almost 80 per cent higher even though we delivered almost the same number of units. As I’ve mentioned on a number of previous occasions, our strategy isn’t necessarily to deliver the highest number of units but to earn the largest amount of money on the bottom line. That’s more important than maximising deliveries. Better to earn NOK 1 million per unit than NOK 500 000. During the first half, we delivered 275 units compared with 302 in the same period of last year. Revenues were down by NOK 100 million, and earnings per share were NOK 2.08 compared with NOK 1.60. That was significantly higher, but the increase was not as great as in the second quarter. We showed a loss this year during the first quarter which draws the figure down a little. So we have again decided on a dividend of NOK 2.00 per share for the first half. I’ll return a little to the issue of dividend later. If we look at results in accordance with the percentage of completion method, which takes account of the sales ratio multiplied by the completion ratio to provide a result calculated on a straight-line basis for sales and production. This gives a far, far better illustration of value creation than the IFRS, which depends entirely on how many delivered units you have. That varies considerably, and you get a great deal of hopping about – as we have seen over the past three quarters, where we had a loss in the first quarter, hugely positive results in the fourth quarter last year and very positive results now. The more correct picture is naturally that you have the steady value creation you see in NGAAP accounts or percentage of completion, as it’s called. NOK 868 million in NGAAP revenues with a margin of 24 per cent is good, particularly given that we have started construction, as I mentioned earlier, on 800 units over the past three quarters which then represent a very large proportion of the projects currently under way. Typically, a project manager holds back some of their reserves and margins in the project until approaching completion, when things become more predictable in terms of sales and market. So we are well satisfied with this. The annual pace is then exactly one – the fourth quarter in a row, up to just under NOK 3.3 billion and a margin of 22 per cent. You can say that the percentage of completion results obviously emerge in the IFRS. This gives a good indication of what will be coming down the road in terms of results. Where cash flow is concerned, we had an opening balance of NOK 565 million. The contribution from operations was negative, which you might find somewhat surprising, but the reason is that we have significantly higher receivables from customers because of deliveries late in the quarter. I’ll talk a little more about that later. Cash flow from investment was positive at NOK 10 million owing to dividends from associated companies and from the financing side. Despite paying dividend, we have drawn down more debt so that we ended up with NOK 600 million in cash and cash equivalents at 30 June. Looking at the balance sheet, equity was slightly down from the previous quarter. We paid NOK 2.50 in dividend per share in the quarter, and had a profit of just under NOK 2.25, giving a decline of NOK 0.25 in equity. The equity ratio remains very high at 42.8 per cent. Inventory rose by NOK 186 million. I’ll come back later to how that breaks down. Trade receivables, as I mentioned earlier, rose by NOK 372 million. We also had a massive increase in the second quarter of last year, which reflected the fact that payment for deliveries made close to the holiday season at the end of June does not leave the settlement agents’ accounts until July. The same occurred this year. So there’s nothing dramatic about this. It’s a high figure, but the money comes in. Whether it reaches us on 30 June or 4 July has no significance for the company’s financial position. As I mentioned earlier, cash increased by NOK 35 million. Prepayments from customers currently total NOK 219 million of other current non-interest-bearing liabilities. Inventory has increased by NOK 66 million from the previous quarter. This means that the land we have purchased – a site in Lørenskog just outside of Oslo has been acquired since 31 March close to Lørenskog Stasjonsby, one of our big projects near the indoor skiing stadium – is worth more than the acreage where construction started during the quarter. Work in progress is more or less constant, and similar to the previous quarter with a high level of activity. NOK 67 million in this context is equivalent to more or less the same. Finished goods were up by NOK 187 million. That doesn’t happen very often, and you could well ask why this has happened. It’s quite simply because we have chosen to do that, and that’s because we have actually sold a great deal of it and accepted delivery of a lot of units in the third quarter – in other words, right after the holiday – for those who did not want to take over immediately before the summer break.

That’s fairly typically something you can do before a summer holiday or prior to Christmas. So there’s nothing dramatic about this. Forty-three per cent of completed projects are sold. The number of completed but unsold units is also slightly higher. That’s also a choice we’ve made – we’ve completed a lot of units at Valle Hovin and the market has been good, but when the completions are finalised we expect to have sold out. We’ve done a lot of that this summer, too, and similarly at Nybyen Økern with those projects where we chose not to press out the final units immediately before completion. So that’s a conscious decision, where we take account of the market and other important factors in deciding not to sell out completely by completion. Turning to our debt structure, this is unchanged. We have still not drawn down any of our top financing. We have increased our land loans to NOK 1 606 million from the previous quarter, and similarly increased land loans by roughly NOK 150 million. Our total interest-bearing debt is then NOK 2 965 million, with net interest-bearing debt at NOK 2 365 million. The margins are at the same levels as before. We had a high return on equity of 22 per cent for the quarter, which is good. This is calculated with the aid of the 12-month rolling net income. Since we have delivered somewhat higher results than in the same period of last year, that value naturally gets pulled up. Finally, we have a dividend policy of paying out at least 40 per cent of net profit. It is also our policy not to reduce our equity ratio below 30 per cent. We were far above that level in the quarter but are paying NOK 2.00 per share. We also have an unwritten policy – a tradition and an intention – to pay a higher dividend in the second half than in the first six months. We’ve always done this and we are a traditional company, so we hope we can continue with that, without there being any loan covenant on it. That’s what I had to say about the financial position. Rolf, you’re then the one who’s going to take over.

Rolf Thorsen, CEO, Selvaag Bolig ASA Thank you, Sverre. It’s the case that if we’re going to sell something, somebody must want to live in the houses we sell and it’s then important how the market develops and how many people want to reside in the areas where we have operations. And we then want to focus attention on population growth. Norway doesn’t have any huge growth in population at the moment. It’s probably a bit less than one per cent. But that represents 55-60 000 people or thereabouts. And what we see is that a steadily increasing proportion of such growth as there is comprise people who want to live in Oslo and Akershus county – Greater Oslo, if you like. In 2018, 24.5 per cent of Norwegian population growth occurred in this area. And we see that a steadily growing proportion of Norway’s population wants to live there. That puts a certain pressure in the market where we have our main activity. If we combine this with production or what is delivered in the way of housing to the market, we would maintain that an unhealthy shortfall exists on the supply side here. If we look at this a little from a historical perspective, from 2006 to 2018, we see that housing completions have averaged around 6 500 units in and around Oslo and Akershus. These are figures from Statistics Norway, while Prognosesenteret forecasts that the need is 9 400 units. And this is our estimate of what will be delivered in Oslo and Akershus in 2019-20. And we are now starting to have fairly reliable figures for this. Housing to be delivered in 2020 must necessarily be under construction now – or the excavator must at least be standing there ready to start digging. So we would maintain that the market will be good for a housing developer over the next few years. That can be compared with the fairly low volume of units securing planning permission in Oslo, which came to 800 in 2018. The pace has picked up a bit this year, with 915 completing the planning process in the first half. That creates fairly substantial pressure in the surrounding local authorities. And the latter have also been good at awarding planning permission, so that there is a chance that the demand can be met. But it is clear that Oslo is losing a little in this battle in relation to being actually able to offer housing for its new residents. Activity in Oslo’s second-hand market is high. Looking at inventory, this has varied over the years and is now probably at a relatively high level. If we go back to the figure for activity, however, we see that the second-hand market is more or less in balance. And the newbuilding share of total inventory was about 50 per cent at 7 August. That has resulted in a price development which, if you look at the figures we have here for January-July in 2014-19, resulted in a growth of 5.4 per cent for this period of the present year. We regard that as a good and healthy increase for us. But this relates very specifically to Oslo. And this is a moving target, going a little up and down. Going back to what I said right at the start, we are not experiencing any bonanza in this market but we are finding that it is a market where good players can do well.

Turning briefly to inventory for newbuilding, we see actually that there is little in the way of big movements here. That is to say, there is movement, but opening and closing figures remain much the same. If we go back to 1 January 2018, 1 947 units were for sale in the market, and there were 1 909 units at 30 June 2018. And looking at 2019, little movement can be seen. But inventory is showing a declining trend. Taking a little look at the other markets we operate in, Stavanger, Bergen and Trondheim, we see a completely different market. The supply of second-hand homes is substantial, particularly in the Stavanger area, but also to some extent in the others. Combined with a relatively low turnover, that clearly means this inventory does not look likely to nosedive, to put it that way. The Stavanger market, as Sverre said, is ticking over, but not very loudly. However, we actually had our best sales month so far this year during July in Stavanger, but that’s with seven units. So it’s not a massive volume. But Trondheim is progressing fairly well for us. We’ve not got going properly yet in Bergen and are struggling a little quite simply with planning permissions before we bring projects to market there. The share of newbuilds is also interesting, for that matter. Clearly, such a big supply and a newbuilding share of 56 per cent are a lot in all these markets. I’d say they all represent a buyer’s market. So let’s compare ourselves a little with our colleagues or competitors – they’re both, for that matter. We see that, in volume terms as represented by the number of units, we’re in the premier league. We’re just a little behind Obos in volume terms, and a good step ahead of the other competitors for this quarter. But we must be a bit cautious about putting too much emphasis on quarterly sales figures in this context. They could be a trifle arbitrary in relation to who has sales starts and so forth. Even in the first half, however, we see that we’re at a level with good figures and good growth where some of the others show a little contraction. So we’re definitely a player in the premier league on the housing side in Norway. If we try to summarise this a little, we can presumably see that, OK, we’ve had a very small interest rate increase now, but our interest rates are actually low and have stimulated the housing market. Our experience is that the small rate rise we have had has not actually affected anything at all. What has perhaps had an effect has been the government’s mortgage regulations which have undoubtedly hindered some from entering the market. Despite that, however, we actually have record high sales. But what might happen in the time to come is clearly an interesting question. A big interest rate increase would have a fairly powerful impact on our market. But there’s probably nobody who believes in a sharp rise in interest rates. We actually believe in a stable market, a good market for a player like us with high employment, with a fairly good balance between supply and demand, and with some continued pressure in the areas where we have our operations. As I said, we feel that the supply side will come under pressure in 2021 – driven in part by rather slow planning processes, particularly in Oslo, but also by few construction starts. That means we believe the supply side will be unable to meet demand in 2021 and 2022, perhaps. That also holds out the promise of a good market for us. To sum up overall, very good sales in the second quarter, very good sales in the first half viewed as a whole, combined with deliveries from some of our strong “machines”, mean that we are delivering good key figures across the board, which allows us to pay a dividend of NOK 2.00 per share at 30 June 2019. In addition comes a market we regard as good for a player like us and we feel that we’re well positioned here in Oslo – and for that matter in the other cities – to be able to continue delivering in the future. That was what we had intended to say, so we’ll then open the floor for questions and will answer as well as we can. That presumably means we need another microphone to get this included on the TV.

Simen Mortensen, DNB Markets You’re the new CEO of Selvaag Bolig, of course, and you are standing here for the first time. Perhaps you could also have told us a little about what plans you may see the need for, steps, things you will do with Selvaag Bolig strategically, possibly whether you will present any plans for the longer term which take the company in new directions which are not familiar – that type of action. Are you able to comment on how you’re thinking?

Thorsen I also said a little about this in the previous quarterly presentation. What I said then was that I see no need to turn anything upside down. The company’s historical performance shows that this isn’t required. But it’s clear that, like everyone else who’s good, we need to take care that we don’t become fat and happy. And

that applies to this company too. So I think that my main job will be to file and file and file and be a thorn in the side, to put it like that, for all the employees to ensure that we maintain our level of ambition. Strategically, of course, we have worked a little over time with this Pluss concept of ours, which I perceive to be an uncut diamond. And I don’t think it’s any secret that we’ll be working more with conceptualisation in general and sharpening of the Pluss concept specifically. And then Sverre touched on this issue of low costs. Our construction costs are low, and we’re in a market where we find that there is upward pressure on such costs. Really doing what we can to enable the construction companies to maintain their low costs is also a priority job. Finally, we have just established ourselves in Stockholm. This is a market which now lies in a stable recovery position – and perhaps even an unstable recovery position – and we believe that is the right time for us to position ourselves there and start working to prepare quite simply to secure volume and results from the Swedish market as well. So those are perhaps the main headlines in response to your question.

Mortensen How much can you imagine getting and how big would you be in Stockholm?

Thorsen We are entering this market cautiously. We do not envisage making any acquisitions or the like. We’re positioning ourselves slowly but surely. We have appointed a manager for Stockholm who has not started work yet and whose name we can’t make public yet, either, because it hasn’t been announced. But we’ll have a manager in place and we’ll be working organically there. We’ll be working with the local authorities and to secure building permits, and will grow calmly and cautiously. We will be making a careful and conservative entry there and won’t be committing big money. But we are going to be building activity over time.

Molvik I’d just add that we have had projects in Stockholm over many years, of course. So the person we have appointed will be taking care of the projects we already have and we’ll then have to seize the opportunities which emerge. It’s not the case that we’re going to be making a huge commitment in Stockholm. But that could happen. I understood where you wanted to go, Simen (laughter). We’re not suddenly going to invest a heap of money in Stockholm.

Mortensen You used the term “a buyer’s market” about many of the regional markets in Norway. How do you see that? Was that specifically about the second-hand market, or do you also see this in the newbuilding market?

Thorsen This emerges partly from the information contained in the slide, of course. We see that newbuilding accounts for more than 50 per cent of inventory in those cities, and with a big inventory my comment applies to both sectors. The number of new construction starts is quite simply too high.

Molvik I’d just add that this is also something that you’ve seen, Simen, over the past six-eight quarters in Trondheim and Stavanger. It’s still possible to do business in competition with others if you have ability – as we do – and we’re therefore also under way in both Stavanger and Trondheim and are managing to create good value there. It’s not the case that this is new, but there’s been a buyer’s market for two years. This isn’t something which has got any worse now. It’s simply been dead, stable. Margins for the projects in Stavanger naturally differ today from the 2017 heyday, when they were 20-25 per cent and they’re now at what we promised in the IPO, which is an ordinary project at 12-13 per cent. But it’s ticking over.

Mortensen You mentioned, Sverre, that what you bought of land was a little more expensive on value than what went out. Can you quantify how much the sites at Lørenskog cost and what leaves the balance sheet?

Molvik I didn’t mean by that to indicate anything about the price per square metre for completed land prices compared with newly acquired land. We naturally never reveal anything about land prices, but we can say that we’ve purchased it at a competitive price for that area. But it’s higher than the price we paid for Skårer in 2010. It is that (laughter). In that area, land is sold at NOK 12-20 000 depending on size and planning status.

Thorsen But we don’t buy anything we think is too expensive.

Molvik We have our fixed models for property purchases, which we have talked about here a number of times. We buy on the basis of a 12 per cent calculation and we then manage to create value through projects so that we deliver on average the value we promise, which is around 20 per cent in a flat market. We delivered 30 per cent this time, which I’ve also said before is not sustainable – but which we’ve actually done on a number of occasions. What is more natural is not to have overly high expectations for all time, but we will manage to lie higher than 12 per cent. That’s my belief. Twelve was what we promised at the IPO.

Mortensen Just a final comment on the 48 unsold units and the NOK 300 million in the balance sheet for tied capital. Where does that lie?

Molvik With regard to capital tied up in the unsold units in the completed inventory, 34 per cent of this is sold with delivery in the next quarter, so that the unsold account for less than NOK 100 million. In addition, a great many of those which have now been sold went in July, specifically at Nybyen Økern and Hovinengen, where we consciously chose not to push this before the holidays in competition with a number of others who had bought in order to sell immediately before completion, and that has proved sensible. There’s no point in giving away discounts of a couple of hundred thousand in order to sell against strong competition.

Thorsen Any other questions or comments?

Tom Aslaksen, via the web The dividend was disappointingly low when equity capital and earnings in the company are taken into account. Comments?

Molvik To start with, we have heard that one before. It’s not disappointing in relation to the earnings per share of NOK 2.08. We’re paying out virtually the whole profit for the half-year. And, as I’ve said, we have a tradition – not a policy – of paying a larger dividend in the second half. We’ll now have to see if we continue with that, when we have much greater control over how the year will turn out, and that could theoretically be more. That’s what it’s been earlier.

Thorsen We retain a high equity capital, of course, that’s true enough. We’re still a very financially sound company after that payout.

Any other questions? Then I think we’ll just wind things up, if there’s nothing more? Thank you for attending.