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

Welcome to the Catella Q4 2024 report presentation. [Operator Instructions] Now I will hand the conference over to the CEO, Daniel Gorosch; and CFO, Michel Fischier. Please go ahead.

Good morning, everybody, and welcome to Catella's interim report for the fourth quarter of 2024. My name is Daniel Gorosch, and I am the Interim CEO of Catella Group. And together with Michel Fischier, CFO and Head of Investor Relations, we will walk you through the highlights of the quarter and the full year of 2024. After the presentation, we will open up for a Q&A session, and the material and reports are, as always, available on our website. I'd like to start the presentation with a brief overview of Catella, starting on Page 3. Today's Catella manages SEK 155 billion in assets under management with a revenue base of SEK 2.3 billion and with operations in 12 countries and assets in 16, backed by nearly 500 employees. So we can flip to the next page. We operate in 3 property-focused business areas; Investment Management, Principal Investments and Corporate Finance. Although real estate has had a couple of challenging years recently, we are supported by a long-term growth trajectory as portfolio allocation to real assets is increasing. Nearly 70% of our income stems from fixed recurring revenue, providing stability to the business as a whole. We see sustainability as part of conducting our business, both through long-term relationships with clients as well as through fund investments and investment projects. We manage our larger institutional investors' capital through funds and asset management mandates. And this is done through local teams with profound knowledge of their markets, leading us being a true vertically integrated pan-European player. And we have a history of over 35 years. And during that time, we've been established a pan-European platform and a strong brand. So with that brief introduction, I'd like to start this quarter's presentation with a short market summary on Page 6. So we have had 12 quarters of declining or hesitant market. We have noticed support for a recovering and growing market as Q4 transaction volumes showed an increase of more than 20% year-on-year. Strongest growth was noticed in the residential segment with a 45% growth year-on-year. And the trend in valuation of European real assets is that it continues to stabilize. After over 2 years of negative value adjustments, lower interest rates as well as opportunities for financing opening up, the market is now at a point where yields are becoming attractive. A significantly stronger and well-funded interest in real estate investments is also something I and my colleagues are experiencing in our day-to-day operations. The increased activity level is seen foremost in the larger markets, such as in U.K. and also in Sweden, whereas smaller markets in, for example, Finland still are experiencing limited market activity in terms of transaction volume. So with that brief market backdrop, I'd like to move on to Page 7 for some key financial and operational highlights of the quarter. The improved market conditions are also reflected in our financials, as you can see. Net revenue has increased by 39% year-on-year. The EBIT increased almost by a factor of 7, taking restructuring costs of SEK 19 million into account, and this increase was even higher. Worth repeating is that the result is both an effect of improved market conditions as well as efficiency initiatives we have carried out over the 2 last years. If we then take a look into our business areas, there are a couple of things I'd like to highlight, and we can start with Investment Management. Summarizing the year and the quarter, we have had a larger inflow of capital than outflow, resulting in a positive AUM development. And even though it is not on the historical growth rates that we have been used to, we see this as a sign of strength. The ability to grow through asset management mandates with strong local teams, managing underperforming assets and assets which require repositioning proves the resilience of our business model. This in a market where capital inflows to our core property funds have been muted. In U.K., our seed investment capital from some 2 years back of GBP 2 million into strategic equities fund attracted capital from a large pension fund deciding to invest SEK 1.4 billion. And this is an excellent example of how we can leverage both Catella capital and competence into larger structures and managed assets. In Germany, we reached our milestone of EUR 500 million capital commitments into our logistics fund and logistics is an asset class which has performed well in this market environment that we have experienced. Also, in Germany, we finalized the merger of our 2 fund platforms into one, creating Catella Investment Management GmbH with EUR 10 billion in AUM and 420 assets across 15 European countries. In France, Catella Aquila, which we acquired a majority of in 2023, onboarded the fund assets in France, which we now will be managing in-house. So if we turn to Principal Investments, the sale of the French logistics development, Polaxis was finalized in November, releasing liquidity at a marginal profit. In Denmark, we invested in a new residential development project. And the investment is made together with a large international capital partner, capping our total capital commitment to SEK 83 million over the development phase and securing long-term mandate with recurring revenues and also at attractive returns, 15% to 20% IRR on the invested capital. And since I know that there will be questions on Kaktus, I can say that all is progressing according to plan, even though a transaction of this size takes some time, especially in the market as this. We are engaged in dialogues with investors and as market conditions are continuously improving, we stay positive that we will be able to close the transaction to our satisfaction. However, at this stage, I cannot share any additional information on specific timing or price, but I promise that we will get back with an update as soon as we have more specific information to share. For Corporate Finance, total number of transactions as well as volumes increased year-over-year, especially the team in Spain was kept busy in the quarter and had a record quarter and year. Besides having efficiency improvements and cost adjustments, which are also reflected in our P&L and EBIT improvement, despite lower revenue, we have also made some forward-focused recruitments to capture growth in returning markets. So before moving on to the business areas in detail, I'd like to discuss our route forward and our priorities for 2025 and onwards on the next page. Me, together with management, started to review our strategy during the autumn and had a discussion with the Board in December. What we concluded when reviewing our current strategy was that we had many, perhaps too many ongoing future focused initiatives. We have been successful with some, but really to advance our position going forward, we will need a more dedicated focus and fewer strategic priorities to secure the capacity and really focus on the how, i.e., how to implement the strategies and priorities we see as the most important. So following this review, we have landed in 3 overall strategic initiatives for the group. And the first one being to deconcentrate and to refocus principal investments. Looking ahead, we are firmly committed to decrease the concentration, i.e., to increase the diversification of our investment portfolio. And furthermore, we have refined the criteria for new investments. So the investments need to be smaller in size. They need to be more diversified as it comes to asset class, geography and duration and primary focus for principal investments going forward will be to support the growth of investment management AUM through new funds or mandates. And also investment hurdles shall be meet with a 15% to 20% IRR, but could also be lower if it secures long and recurring fixed fee revenue. So by narrowing down and focus the use of our own balance sheet going forward, our investments will fuel the growth of AUM and even further increase the stability of growing cash flows. Secondly, even though we made already significant efficiency improvements and strengthen our corporate finance organization, we believe that we can do more to improve the underlying profitability and make sure to put the structure in place supporting growth. And here, I see a clear scope to create a better joined up business where we take advantage of our strong local organizations, but at the same time, make sure to offer a seamless offering to our pan-European clients. And thirdly, besides refocusing principal investments to support AUM growth, we need to continue to grow our existing funds as well as launching fewer but larger international scalable products. That should be supported by our own investment thesis, the Catella house view. So investment management is the main value driver of our business, and it is, of course, extremely important that we continuously create products that are relevant and that are in demand from our investors. So with this as our priorities, we will continue to build Catella based on our core competencies, capital and competence and by increasing AUM and fixed revenue over time, create sustainable and profitable growth, creating shareholder value. So that was a little bit about the future strategy. If we then move on to Page 10 to discuss Investment Management in detail. Since inception, this business area has delivered a strong average annual growth rate of nearly 20%. Despite the more cautious market and lower interest for core fund investment, we show growth for the quarter and full year in assets under management. In funds, there was a net inflow primarily driven by larger residential funds, Catella European Residential III followed by Catella Wohnen Europa and Catella Modernes Wohnen with continuous interest from investors and finalized assets which have entered the funds. In asset management, some mandates reached maturity and assets were sold during the year, but a larger part of these were replaced by new long-term mandates, primarily in Finland, where AUM has nearly doubled over the year. And these are new mandates with a new focus where we aid investors to manage underperforming or even defaulted assets to reposition them and increase returns. And as I mentioned before, asset management provides a good balance to our business model and provides opportunities to grow in an environment where investor interest in core and core plus investments is limited. In this setting, our pan-European reach, coupled with strong on-the-ground local market competence is something investors and partners value highly, and that is a true differentiating factor for us. Moving on to Page 11. So the increased transaction activity led to an increase of nearly 40% in variable revenues compared to last year, and it is the driver behind the increase of nearly SEK 40 million in net revenues. OpEx ended at nearly SEK 190 million in the quarter, this was mainly driven by an increase of transaction-based variable expenses and one-off restructuring costs amounting to SEK 9 million. Taking this into consideration, we demonstrate a significantly lower fixed cost base compared to 1 year ago. And through the merger of our German fund platforms, we will further harmonize operations and increase efficiencies going forward. Besides the continued strong focus of our efficiency improvements, we continue our efforts of retaining and growing our assets under management looking ahead. We can now turn to the next page for an overview of Principal Investments. So our Principal Investment portfolio consists of 9 active projects at year-end, plus a few smaller seed investments and equity co-investments in client aggregation mandates. During the quarter, the logistics project Polaxis was sold, releasing liquidity at the marginal profit. Furthermore, an additional milestone payments were received for the forward funded Metz project, both strengthened our liquidity, which has been a key priority for us to manage during this part of the cycle. We also entered into new projects in accordance with our revised focus on principal investments. And in Denmark, as I mentioned, the investment in Vega will be made together with a large international capital partner and the structure caps our total capital commitment of SEK 83 million over the development phase. At the same time, it builds AUM and secures long-term mandates. This investment is also made at attractive returns, some 15% to 20% IRR on the invested capital. In Berlin, we have entered a similar project structure, but that is currently at an early stage, and we'll come back on that further on. So all-in-all, in Principal Investments, we remain committed to our projects. And based on our financial position, we have the opportunity to be patient and to protect value and generate shareholder returns. In parallel, we continue to review smaller investment opportunities as they emerge, like the ones we entered in Q4 with the ambition to grow AUM, gain new revenues through asset management mandates and generate returns on equity. So let's focus on Corporate Finance now on Page 15. Net revenue was on par with last year, but with differences between our different markets. Spain had a very strong quarter with our other 4 markets being at similar or lower levels. So even though net revenue was unchanged, EBIT came in stronger, highlighting the efficiency improvements being reflected in the P&L. To reiterate what we have previously said is that our Corporate Finance business area holds strong market positions in the 5 markets where we have operations. And with a couple of new recruitments and increased cost efficiencies, the business area is now in a better position to be a highly profitable business as the market now returns. So I'll now hand over to Michel, who will share a brief summary beginning on -- financial summary, beginning on Page 17.

Thank you, Daniel, and good morning, everyone. And to start by repeating what has already been mentioned, we summarized a strong end of the year in the fourth quarter with revenue top line mainly driven by increased transaction-based revenues in investment management, setting aside net revenue from the Principal Investment sales of Polaxis. When I browse through the analyst comment this morning, I noticed that our restructuring costs had not been considered in their first takes of the results. And as we've mentioned previously, we continuously -- we have continuously throughout the year, adapted the organization to a market with lower activity. At a first glance, OpEx increased for the quarter and full year, but that was mainly driven by variable expenses and also one-off restructuring costs. Our main focus, as you know, has been to reduce the fixed expenses. And for the quarter, as you can see on the slide, this decreased by SEK 33 million and for the full year, SEK 76 million. And this is before taking restructuring costs into account. Those amounted to SEK 19 million in the quarter and SEK 44 million for the full year. SEK 13 million of that is what is highlighted in the report, and that relates to severance costs and the additional cost of SEK 5 million is related to the merger of our 2 German fund platforms, taking us to a total of SEK 19 million. The corresponding figures for the full year, the severance cost amounted to SEK 28 million and the cost related to the merger amounted to SEK 16 million, summing this up to SEK 44 million of one-off restructuring costs for the full year of 2024. So in summary, we conclude a solid year under the current market conditions and taking the one-off restructuring costs, which I just mentioned into account, I would say that we end the year with more than solid results. Also worth highlighting is that since 2022, we have managed to reduce fixed costs by over SEK 200 million, as you also see, as also shown on the slide. Turning to net EBIT. It showed an improvement of SEK 59 million, and this then once again includes the one-off restructuring costs of SEK 19 million. If we then have a look below the EBIT line, net financial ended SEK 71 million better than last year, but this was mainly driven by FX tailwinds as the SEK depreciated during the quarter. Altogether, the last quarter of '24 ended significantly better than the last year at SEK 59 million, and the same goes for the full year results of SEK 30 million. If we then flip to page -- the next page. And here, after listening to feedback from some of our investors, we have refined our presentation of our net cash positions additionally. Amongst other things, we have also included our fund investments in this presentation. So end of quarter, the equity ratio -- our equity ratio stood at 37%, and our cash position was SEK 901 million, an increase from SEK 870 million last quarter and SEK 800 million end of last year. And as I've mentioned on numerous occasions, to prudently maintain a strong balance sheet and cash position has been key for Catella throughout this market downturn. And the slide you see in front of you summarizes also how we look at our net debt or in our case, net cash position. As you all know, by now, the overall majority of our liabilities are related to investments in development projects through principal investments. These projects are in turn always valued at cost. So if we then start on the left and move to the right, summarizing all our investments, these amount to approximately SEK 3.2 billion. If we then on top of that, add our current cash position of SEK 900 million, we reached a total of SEK 4.1 billion. If we then deduct our market debt and financing of projects and also adjust the cash position with working capital needs and bonus accruals, this takes us to a cash position of SEK 1.3 billion. So the background for this exercise is, of course, the hypothetical scenario if we would divest all our current projects valued at cost and our fund investments, this would lead to a negative net debt, i.e., excess liquidity after the debt being repaid. And of course, in this hypothetical scenario, we would still have Investment Management and Corporate Finance as revenue-generating businesses going forward. And to state the obvious, this is -- it's not our ambition to divest our projects, and we will continue to invest in our existing pipeline and also invest in new projects that meet the business area's long-term return requirements of 15% to 20% IRRs. And as Daniel mentioned, with a primary focus to fuel the growth of AUM in Investment Management. I think I'll stop there and hand back over to you, Daniel.

Okay. Thank you, Michel. And before we conclude and open up for Q&A, I'd like to briefly summarize the quarter from our perspective. As we now have mentioned, our house view is that we have the worst behind us and that the market will slowly start to recover from this point, fueled by significantly improved financing conditions, lower credit margins and an active bond market, transaction volumes have already started to increase, and we see an increased number of transactions as well as an increase in the average transaction size as well. As we previously discussed, during this hesitant period, we have taken decisive steps to decrease efficiencies and restructure and strengthen operations. At the same time, as we have preserved liquidity and a strong capital position, both at group and at fund level. So with these efforts, Catella is in a better position today as the market slowly now recovers. So our key takeaways from this quarter is that we continue to do the right things and we make progress. First, we are very proud of, and we see this as a sign of strength, as I mentioned earlier, being able to grow the assets under management with larger inflows of capital than outflows in this tough market context. Further, we have managed to deliver a strong Q4 with increased profitability as a result of implemented cost efficiencies. Further on, we have -- during the quarter, we have divested several projects within our Principal Investments portfolio in line with our strategy. And these divestments support continued investments in attractive development projects fed into other product strategies. And as we mentioned, as effective from front offices in the German fund business into Catella Investment Management in short. This move creates a EUR 10 billion investment platform where we will be able to enhance in synergies and share resources under one phase to the market. And lastly, we are now operating under a new and refined strategy that is centered around the 3 strategic focus areas to deconcentrate our investment portfolio within Principal Investments, to increase our profitability within Corporate Finance and also finally, to grow our AUM within Investment Management by growing existing funds as well as launching fewer but larger international scalable products. So all-in-all, we are satisfied with where we are, and we see that we are well positioned to reap the benefits of the continuously improved markets, and we remain committed to even more focus on delivering improved results, thus increasing shareholder value. So with that, we end this presentation, and I'd like to thank you all for listening and now open up for questions.

[Operator Instructions] The next question comes from Patrik Brattelius from ABG.

Yes. A few questions from my side then. If we start off by looking at Corporate Finance, it delivered a much stronger result than we have seen earlier in 2024. However, we know that Q4 and Q2 can be a little bit lumpy given it's where most transactions occur. So how should we think about the coming quarters here? Can you, for example, elaborate a little bit how do you view the current environment compared to how it looked a year ago without guiding on any specifics on numbers because I know you don't like to talk about that, but more of the market environment and how that has changed?

Yes, of course. I mean we have seen a continuously improved market activity. For example, as we have mentioned, transaction volume has increased month by month and also year-over-year. And for example, in -- take the Swedish example, we have now in December and January seen transaction volumes increasing with 100% compared with the same period 1 year ago. So we see a continuously improved environment, even though we're still, I mean, a bit from the high levels we have seen previously, but the trend is very, very positive. And that is fueled by, as I mentioned, by a significantly better financing conditions. So -- and also, you can see, I think Nordics are a little bit ahead of the curve, and you saw that transaction volumes increased by 30% in the Nordics last year, whereas the average in Europe was a little bit 20%, 22%. So we see a continuous brighter market with much more activity.

Sounds promising. Thank you. Moving over to Investment Management. We have seen negative revaluations effect on the asset under management for a couple of quarters in a row. When can we expect that to level out and disappear?

Well, I mean, once again, I mean, it's hard to make predictions, especially about the future. But where we stand now and our house view, we see these revaluations, negative revaluations bottoming out. And we see -- I think it was last quarter, we mentioned that we saw the lowest levels of negative revaluations that have been seen since this started over 2 years ago. So I would believe this sort of next quarter is where we bottom out of property values across Europe.

And to comment on that as well, I mean, we can see that the price -- sorry, just to add on that, that in the direct market, we have seen prices being corrected already in certain asset classes, for example, in both logistics and also in residential, whereas valuations are lagging behind approximately 6 months, which is the case also this time. So you can see already in the direct market that this correction has already been taking place.

And continuing on the drivers on asset under management inflow seems to have been SEK 17 billion in 2024, while the outflows was SEK 15 billion. How do you expect this to develop? Because in our -- in my thinking, at least, given the improving market environment, the pickup in activity, all else equal, it should lead to, all else equal, more attractive dynamic where is expected to increase while outflow to decrease on the back of this. Do you share this view? Or are you -- should we expect similar levels and this take a longer time before this translated into the AUM development in the coming quarters?

No, we share that view as well. I mean, with a more positive market and also with more capital coming into our business, we think that will be the case that we see more inflows and outflows will decrease even though with -- on European level, the fund business, I mean, the danger is not over. I mean there are still some outflows and we see competitors that have outflows. So we need to look at that very closely. But on a general level, I think the trend is positive on that as well.

Okay. Then taking those 2 answers into consideration, we should expect AUM to significantly increase then the coming years compared to what we have seen for the last few quarters. Am I reading you correctly?

We are not making any predictions, but we hope for that as well. So we are planning for that. So that you're correct in your analysis.

And then given this positive outlook on transaction activity, we usually see variable fees picking up, but you have been a little bit more conservative when you have talked about performance fees in the past for 2025. Can you -- do you have an updated view on your expectations on this? Is this reasonable to assume in 2025? Or is that more something that could be expected later in 2026, perhaps?

Patrick, as you know, that is totally related to the market development. So as you know and as we've discussed previously, the majority of our funds have high watermarks, which we need to reach before performance fees are to be considered. So it's really connected to the value or valuation of real estate across Europe. And I mean I wouldn't be comfortable in predicting that for 2025. So I have no clear answer to your clear and specific question.

That is fair. That is fair. And as a last question then more on a broader strategic thinking. Following the Kaktus divestments, which we expect to occur in 2025, how would you rank the priorities of using this strength and liquidity that this transaction would lead to? Is it M&A, capital repatriation? Or is it this acceleration with refocusing on principal investments? Can you please help to elaborate how you rank these priorities?

Well, it's not really for me or us to rank. I mean, at the end of the day, it's a Board decision. But for you and the rest of you listening to know, I mean, all the points that you mentioned are, of course, things that need to be evaluated. And we, of course, need to come up with what we think at least is the best position of liquidity usage. So sorry, once again, I can't give you a clear answer to that question, and we'll go back to you when we are in that position.

Perfect. And just if I squeeze in a tiny question more is, should we expect Kaktus divestment in H1 or in H2 of 2025?

Believe me, we are putting all our efforts behind this project. And as we have mentioned, we are not a long-term owner on the Kaktus project. We will come back when we have something more to tell you. We cannot really say anything more than that.

The next question comes from Emil Jonsson from DNB Markets.

I'd like to start by just asking considering that interest rates have been falling for quite a while now, have you noticed any recent change in how easy it is to attract new inflows in Investment Management?

Well, I think looking at the inflows versus outflows during the year, I mean, you should clearly see a trend as you follow us quarterly that inflows have been stronger during the later part of this year, which then gives an indication to your question.

Yes, but at least part of that, from my perspective, could be from development projects being finished, which is otherwise not counted in AUM and shows up as an inflow. But has anything changed when it comes to attracting new capital from new investors?

Overall, it's -- I mean, it's an improved environment, but I don't have any specifics on that. But overall, we see both on core and core+ that is interest, but also on, for example, in the value-add segment that it's attracting a lot of attention, and there is a lot of new capital coming in on the European arena. So as you say, as a consequence of the lower interest rates, the interest for this kind of investment vehicles are increasing.

All right. And looking at variable fees in investment management, they were up quite a bit year-on-year. Looking specifically though at the transactions that occurred in your AUM, should we consider this more of a coincidence, people wanting to get deals closed before year-end and so on or a greater underlying proclivity to make transactions in your AUM?

Yes. So what Daniel started with today was showing the overall transaction markets that have increased 22% year-over-year in the fourth quarter. And a lot of the transactions which occurred during the fourth quarter are transactions that we have considered during a larger part of 2024. And now as the market turns, we can realize those. I mean, for example, our Article 9 fund buying a green property in Madrid, their first investment in that market and also divesting some properties, which also have been on the market and for discussion of divesting in the Benelux market region. So I mean, altogether, as you see increased transaction volumes and increased interest into holding real estate as an asset in your overall portfolio, that, of course, benefits us as a whole.

All right. And the SEK 13 million in severance costs during the quarter, could you give some color on how much you expect that to ultimately shave off the OpEx line annually going forward? Is it SEK 20 million a year or more or less?

I mean, without inflation adjustments, then you should consider the majority of -- I mean, all else being equal, Emil, with the severance payments going out, the majority of those have not been new recruitments replacing people that have left. So all else being equal, yes. But then, of course, if the market grows and as Catella grows, then, of course, we need to grow with the number of employees as well.

Yes. But all else equal, what's the magnitude of the savings on the OpEx line?

I mean here and now without making any adjustments and assuming the same market as we have seen, it would be nearly [1:1] or as I mentioned, the majority of severance costs will also going forward be reflected in reduced costs. And you see that also if you look at the total number of employees. But once again, that is all else being equal and having a flat market from where we are now.

All right. And another question, the fact that the tax expense was so low in the quarter, is that just because of deferred taxes from previous quarters when earnings were negative or is there something else? What should we expect in terms of a normalized tax rate going forward?

So the first part of the question, the answer is yes. For the second part is, of course, I mean, assuming normalized taxes as corporate taxes based on our European composition.

All right. And just a final question. I know we've already talked about Kaktus for a long time, but just one question. For transaction of this size, there would be a substantial due diligence process and so on. Now if -- let's say that tomorrow, you were to receive a bid that you're more than happy with, how long would it then take to go through the whole process and close the transaction?

Approximately 3 months, I would say. If you have -- in a normal transaction, if it's like a rather clean structure, a transaction of this magnitude will take approximately 3 months from the receiving of a strong offer.

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Sure. Before I hand over to Daniel, we've received one question online from [ Max Odinson ] regarding the committed capital. And I guess that is capital commitments into investment management. And it's on the same levels as we have gotten used to over many quarters, SEK 10 billion approximately. And it's been on those levels during quite some time now because it's been a market where it's been tougher to deploy that capital into assets going into the funds. So we have seen throughout these 2 years, a bit of a lower inflow. At the same time, the investments into new assets into the funds has been slower. So it's been fairly stable. And hopefully, we can deploy that capital quicker going forward and also getting more commitments into our funds going forward.

Okay. All right. So thank you all for listening in. As we mentioned, we are satisfied where we are, and we are also really positive towards the coming year here, and we are now operating, as we mentioned, under our refined strategy. So we are looking forward to see you all again in the next quarter. And hopefully, we'll be able to report some good quarter, first quarter for 2025. So thank you all for listening, and see you soon again. Bye-bye.