Catella AB (publ) (CATB) Earnings Call Transcript & Summary

Good morning, and welcome to the Catella Q2 2022 Earnings Call. [Operator Instructions] Please note that this event is being recorded. I would now like to turn the conference over to Christoffer Abramson. Please go ahead.

Thank you, and good morning, everyone, and thank you for attending our second quarter 2022 earnings call. I'm Christoffer Abramson, the CEO of Catella. And with me today are Mattias Brodin, our Chief Financial Officer; and Michel Fischier, Head of Investor Relations and Communications. As usual, all materials, including reports and presentations are available on our website and the recording of the call today should be available also on our website within a couple of days. I'd like to start, like we normally do on Page #3, by giving you a brief overview of Catella even though I believe most of you are familiar with our strategy and operations by now. Catella operates in 3 property-focused business areas: Investment Management, Principal Investments and Corporate Finance. As of the end of the second quarter, we managed SEK 135 billion in our Pan-European Investment Management platform. About 75% of assets under management are in property funds and the other part in a significant number of asset management mandates across Europe. Principal Investments is where we invest our own equity, into a broad and diversified portfolio of European investment projects together with partners. And then finally, Corporate Finance, which is our real estate advisory and brokerage arm with leading positions in large European markets. Corporate Finance is also an important internal adviser to our other business areas, Investment Management and Principal Investments. So with that brief introduction, let's move on to Page #4 for the key operational highlights of the second quarter. Start at the Group level. We completed the acquisition of the Warsaw Property Partners during the quarter. We're very happy and glad to welcome WPP to the Catella family. They come with a strong and well-established team in the Polish market, which adds another local platform for us to deliver growth and synergies and also investment opportunities with Principal Investments. We now have an approved Group ESG strategy, which provides alignment and targets across Catella to monitor our progress when it comes to our environmental, social and governance initiatives. We continue to have a strong liquidity position and no near-term refinancing needs. This provides us the capacity for both opportunistic investments and also capital to invest in profitable growth. Look at Investment Management a little bit more. We continue to deliver strong growth in assets under management, adding nearly SEK 10 billion in the second quarter alone, which the acquisition of WPP added around SEK 1.5 billion in Asset Management mandates. The growth in property funds at around SEK 3 billion during the quarter, evenly distributed between residential and commercial products and primarily focused on green funds and sustainability products. Looking ahead, we have over SEK 10 billion of committed capital for investments in '22 and beyond, which gives us good confidence in continuing to grow the business and continue to invest where we see it fit. In Principal Investments, we completed the second and third sales of Swedish logistics properties. There was strong interest in the assets. And this confirms the solid business model of developing modern and sustainable logistics properties with long leases in great locations. And this happens even in more uncertain market conditions. The 2 sales generated a profit of about SEK 100 million, with IRRs well above our long-term targets. 4 additional development projects that we have ongoing, out of a total of 11 active projects, are expected to be completed and potentially divested during 2022. The biggest project, Kaktus, our 2 residential towers in Copenhagen, is progressing according to plan with virtually full occupancy in the apartments as of this week and substantial investor interest in the asset. With a strong balance sheet and a growing number of partnerships, we feel we're in a very good position to capture -- select investment opportunities across Europe. And finally, Corporate Finance. We have a strong market position in our 5 remaining markets following the exit of the German and Baltic operations during Q1. The Q2 transaction market, however, was a bit slower than usual as market uncertainties and somewhat of a price gap between buyers and sellers expectations delaying transactions. However, we continue to see a good pipeline of transactions in Q3, and so far, Q3 has begun quite well. We are observing increased interest for Debt Advisory services as traditional credit markets of Titan, and we anticipate material upcoming refinancing needs in the real estate sector. So we continue to work in that segment a bit more than in the past. As a final point, it's worth mentioning that Catella Corporate Finance was a sell-side adviser on the successful sales of the logistics assets in Orebro and Ljungby in Sweden, highlighting the expertise and synergies we can utilize across the group. Now let's move on to Page 5, which is a summary of the group's consolidated results. Well, to start with, I am very, very pleased to present an exceptional financial performance for the quarter. Revenues grew by almost 80% year-over-year to SEK 861 million. We delivered an operating profit of SEK 328 million compared to SEK 9 million in Q2 last year and with an operating profit margin of nearly 40%. Earnings per share in the quarter was SEK 2.80, which we consider a great indication of long-term value for our shareholders. Investment Management has delivered a substantial AUM growth of SEK 23 billion over the last 12 months. And in Q2, AUM grew by SEK 10 billion, strong outcome in a relatively challenging market. Profit margin was 45% in the quarter, and we track at 31% over the last 12 months, driven both by underlying AUM growth, which increased our fixed fee generation and also by substantial variable revenues. In Principal Investments, the logistic divestments added SEK 100 million in group profits. These sales were finalized on July 1, and invested capital post Q2 now amounts to about or around about SEK 1 billion compared to SEK 1.3 billion at the end of the previous quarter. As I mentioned, we had a slightly slower quarter in Corporate Finance. The bid-ask spread between buyers and sellers price expectations, it's really -- buyers being a bit cautious and sellers still seeing the value that have put certain transactions into the future. But despite the lower revenues, Corporate Finance delivered a solid quarterly EBIT of SEK 26 million. Okay. On Page 7, I'll discuss Investment Management a little bit more in detail. Since the inception of Investment Management in 2015, we've delivered a strong average annual growth rate of 25%. And year-on-year, assets under management grew by SEK 23 billion as of Q2. Of course, the growth continues to drive increased fixed fee income, which is our key underlying Investment Management metric and frankly, the main underlying profit driver in Catella. Last 12 months, fixed fees grew by 18% to over SEK 740 million. Last 12 months variable fees were SEK 516 million compared to SEK 426 million for the same period in 2021, the increase of 20% is mainly driven by significant performance fees in several residential funds. Investment Management continues to be the main growth engine for Catella as we successfully raised new capital and launch new sustainability focused funds and asset management mandate. So on Page 8, a quick sort of deeper look into the AUM growth, assets under management growth in Investment Management. We provide a broad and diversified fund offering for our clients, which continues to generate capital inflows, especially into funds with a clear sustainability agenda. Of the SEK 23 billion in AUM growth over the last 12 months, a large portion stems from inflows to our modern residential funds, again, with particular interest in sustainable assets. Notably, we have very, very strong inflows into Catella Wohnen Europa and our Article 9 dark green residential fund, Catella European Residential III. If you look at Q2, the AUM growth was both strong and quite broad from fund inflows, which in this quarter were evenly split between residential and commercial products. the acquisition of WPP, of course, new asset management mandates in the U.K. and some positive currency effects due to a weaker Swedish krona. Now outflows during the quarter albeit not so great related to normal active portfolio management and some exit sales from completed asset management mandates. As mentioned, we have over SEK 10 billion of unlevered committed capital ready to be deployed into our funds through property acquisitions and further developments. On Page 9, we have the P&L for Investment Management. And here, we are pleased to report a 60% revenue increase year-over-year, which is mainly driven by performance fees and the underlying AUM growth continuing to increase fixed fee revenues. We delivered over SEK 200 million of performance fees from 3 funds that continue to deliver outstanding returns for our investors, and the net impact of these and operating profit for Catella was nearly SEK 150 million. Our growth in managed assets doesn't notably increase costs with the exception of primarily variable compensation. And this really supports our expanding margins, improves the scalability of the business model as our fixed fees grew close to 20% annually and costs certainly nowhere near that. On behalf of our fund investors, we are currently reviewing sales of certain fund assets during 2022. The ambition of any disposals at the moment is really to enable a reallocation of capital to even more sustainability profile investments and rebalance the portfolio a little bit. We go to Page 11. We have an overview for Principal Investments. We continue to invest into diversified portfolio projects in different asset classes. The portfolio now consists of 11 active projects in 6 European countries, which I'd say are all progressing according to expectations. At quarter end, we had about SEK 1.4 billion of equity invested, as mentioned, following the logistics sales in Sweden on July 1, invested equity amounts around SEK 1 billion. Our projects sold to date have generated an average IRR above 50%, well ahead of the long-term target of 20%. Of course, I should point out, the 50% is not an indication of where we think the market is going to continue. But so far, so good, and we continue to see great projects in our pipeline. Total revenue for Principal Investments was SEK 242 million in the quarter, of which SEK 160 million related to the logistics sales in Sweden and other revenues related to the development companies, Catella Logistic Europe and Catella Project Management, which were both as of the first quarter this year included in Principal Investments. Operating profit for the business area was SEK 102 million, of which the 2 Swedish logistics sales generated virtually all of that. On Page 12, we continue with a little bit on Principal Investments portfolio. As we've mentioned on prior earnings calls, 2022 is a bit of a harvesting year for Principal Investments. And already 3 of 7 projects have been finalized and divested. The investor interest remains strong, and it shows really the value of the assets we develop and the importance of having platforms creating a pipeline of projects across asset classes and markets. The next 2 Swedish logistics assets will be coming to the market shortly. And the large Kaktus development in Denmark is, as I mentioned, generating significant investor interest at the moment. Looking ahead, we see a solid pipeline of opportunities, meeting our IRR requirements. But we are, of course, very closely monitoring the construction cost inflation and interest rates at the moment. We have a lot of intelligence through our Corporate Finance arms across Europe, and we will not change our underwriting requirements just to keep investing, of course, but rather keep finding the right opportunities with our partners at the moment. And this market movement creates interesting opportunities. Examples, 2 recent U.K. investments, the bottom of your page, are good examples of this, where we see long-term potential and we can use our Catella APAM team to execute on these pretty complex plans, but that is exactly what they do and what they're experts in. Okay. On Page 14, let's focus on Corporate Finance. Catella Corporate Finance maintains a strong market position in all remaining 5 platforms and markets, and we are no longer negatively impacted by loss-making platforms. As mentioned, the current market uncertainties and a bit of a bid-ask spread between buyers and sellers' price expectations have been and continues to push some transactions forward in time. Despite this, Corporate Finance delivered a solid EBIT of SEK 26 million. And excluding the Q1 restructuring costs in Germany and Baltics, which we talked about last time, the year-to-date EBIT is really on par with a very strong 2021. And we continue to see a good pipeline of transactions and an increased interest for Debt Advisory services as traditional credit markets have tightened and we look forward to working on upcoming refinancing needs in the real estate sector. So I now hand over to our CFO, Mattias Brodin, to cover the financial summary, beginning on Page 16.

Thank you, Christoffer. Let me briefly cover the financial summary, focused on below the EBIT line items. As Christoffer already mentioned, the strong quarterly operating profit was driven by Investment Management and Principal Investments leading to a very strong operating profit of SEK 328 million, corresponding to a margin of 38% compared to 2% year-over-year on a Group level. I would once again remind you of the line deduction of profit attributable to noncontrolling interest. According to IFRS accounting standards, we fully consolidate all income from companies with controlling influence. In order to highlight profit attributable to Catella AB's shareholders, we adjust for profit attributable to noncontrolling interests. For example, all of the revenues from the sale of Orebro was recognized as revenue but SEK 58 million was then deducted in order to disclose our share of the profit. Turning to financial net. We noticed an improvement from last year. This is mainly driven through the implementation of an improved intercompany lending structure as well as positive currency effects primarily from a weakened Swedish krona against euro. As a result of the strong quarter, earnings per share increased to SEK 2.8 year-on-year compared to negative SEK 0.52 last year. Continuing to Page 17, where we look at our financial and liquidity position. Catella continues to have a strong balance sheet and equity ratio supporting our future growth plans, both in new investments and for potential M&A activities. Compared to last year, total assets have increased by over SEK 1 billion to SEK 5.6 billion. The increase is related to additional and new investments in Principal Investments. The liquidity at the end of the quarter amounted to SEK 1.4 billion compared to SEK 1.1 billion in previous quarter. Reported liquidity does not include sales available in Ljungby and taking this into account, the liquidity is at SEK 1.8 billion. As seen, the past years increased utilization of excess cash has taken us through a more efficient balance sheet position, reducing excess cash to generate returns for Catella and shareholders. To conclude, it is worth noting that we have no short-term refinancing needs and that we have a good capital position to further explore both long-term investments and opportunistic possibilities supporting profitable growth. That was all regarding Catella's financials. And back to you, Christoffer.

Thank you, Mattias. So before opening up for Q&A, I would like to briefly summarize the quarter from our perspective on Slide 19. We are pleased to deliver an exceptionally strong second quarter for Catella, and we're heading towards one of the best years in the history of the company. It's an exciting time, challenging times, but exciting times. And I think and with our partners across Europe, we are well positioned in this market. The strategic steps taken last year, creating a property-focused company, built on 3 business areas and internal synergies is paying off, and we're pleased to keep adding excellent platforms and more investment partners across Europe. It's really the growth engine that we use. Investment Management continues to grow steadily and has over SEK 10 billion in unlevered capital -- committed capital to support further growth opportunities. The acquisition of WPP was finalized. And we're excited to welcome a strong team and a well-established company to the Catella family in an exciting market in Poland, where we see big investment opportunities and positive demographic trends. Our ESG strategy was approved and harmonizes our long-term ambition and goals across subsidiaries and business areas. And we also continue to be both encouraged and immensely proud by the strong investor demand for our sustainability focused funds. The transaction market has slowed down somewhat given the current market climate. But Corporate Finance is a good pipeline of opportunities looking ahead, and we are developing our offering in Debt Advisory services. Further sales from our Swedish logistics portfolio supported strong results in the quarter, and we see substantial investor interest in our ongoing investor projects across Europe. When investing from our own balance sheet going forward, we will do so with both focus on new platforms to generate revenue streams for all of Catella, but also on being ready to make the right material opportunistic investments in this evolving market. And with that, I would like to thank you all for listening and opening up -- and open it up for questions. Thank you.

[Operator Instructions] Our first question is from the line of Jesper Von Koch from Redeye.

First of all, congratulations to the very strong quarter.

Thank you.

So my first question is regarding Principal Investments where you say that you will take a more cautious stance for new investments. So if you could just elaborate on your plan there in the current environment?

Yes. I think cautious is one word to describe it. It's more -- we have to be more focused. We -- I'm not saying we are taking our foot off the accelerator, but we have to be more cognizant of the market. If you look at price expectations, which we see in Corporate Finance, the spread makes it somewhat more challenging to take a step forward. But look, we have great partners. And we trust and rely on their expertise to find the right opportunities. As you know and as you can see on Page 12, the continued focus has been -- we've made some relatively large plays compared to the overall portfolio in the U.K., where we have a very strong team, and they're specialists in certain types of assets conversion mandates and development mandates, which are long-term. Where I would say we would be more cautious in the short-term is quick development projects or arbitrage opportunities. That market has softened. It's harder today to just buy a piece of land, develop something and sell it in a forward market. That market is a lot tougher. So what we are doing instead is focusing maybe a little bit more on longer-term, higher-value and with even more potential, but it takes a little bit more time and patience to do the right investments. And that's not to say that we changed our philosophy, it's where we see the most value today for Catella shareholders.

Okay. Good. And then regarding the underlying portfolio in Investment Management and its valuation, especially in the property funds. What I'm wondering is regarding the potential cushion in devaluation. So basically, since you don't devalue the properties from a certain yields, but rather the revaluation first becomes substantial when you divest the assets. So if you could just talk about this and how big that valuation cushion might be?

Yes. I think, as you know, we don't provide a forecast. And I think it would be -- it wouldn't be prudent for us to suggest that the valuation rules that are in force for portfolio valued are wrong. But what we see is that, as you know, in an upturn, cash flow valuations are a bit slow moving. And having looked at the last 2 quarters of executed sales, clearly, they've delivered a significant upside compared to the portfolio value -- the book value. That has, however, changed the valuation in some of the funds because the valuators have to take into consideration recent sales. So we see an uptick. But clearly, we consider this as the first movements of recognizing what we think is a substantial buffer in our portfolio, which would be great as the market turns, and it's going to be even better if the market continues where it's going. But I don't want to put a number around it, Jesper, as you know, but I think recent performance and recent sales have changed the valuation somewhat. It shows that we do have underlying values in a lot of our portfolios that would be realized if we sold today.