Catena AB (publ) (CATE) Earnings Call Transcript & Summary

Hello. And welcome to the Catena Fastigheter Q4 2019 Report. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Benny Thögersen. Please go ahead with your meeting.

Okay. Thank you. I'm Benny Thögersen speaking. I would like to go to Slide 2 where we see the contents of today's presentation. We will walk our way through this agenda and the topics. And please go to Slide 3, Highlights. The year was overall very satisfying, specifically on the backdrop of several major development projects announced throughout the year. We retain our focus on development projects and acknowledge high demand from existing as well from potential new customers. Profit from property management has increased by 10% year-over-year and that kind of translates that hard work pays off. The Board has decided on a proposed dividend of SEK 6.50 per share and up from SEK 5.75 last year. Despite the forthcoming slower pace in the global economy, we feel comfortable about our business going forward. Several 3PL providers testified about the strong fundamentals and structural changes happening in the logistics segment. Throughout the year, it's evident several major foreign investors and real estate companies have picked up on the Scandinavian market for logistics properties, pushing yields down, and we expect a high activity to continue in 2020. Please move on to Slide 4. Peter?

Yes. And we jump directly to Slide 5. My name is Peter Andersson, I'm the CFO for the company for a couple of months more. So I have some comments on the income statement. If you look at individual for the fourth quarter, we have 3 separate events that are a little bit of kind of one-off effects. We have 2 smaller bankruptcies among tenants in Karlstad and Sundsvall, and they have affected rental income isolated fourth quarter. We have also a change in property tax values under property expense, which has resulted in the one-off effect. And the third one is our EV share for [indiscernible] for 2019. It's slightly lower than we had planned, but here we have made some investments that we have put in the expense. Those investment is to enable leasing [ forward ]. For the full year 2019, we landed on an income from property management of approximate SEK 627 million and it was, as Benny told you before, it's up 10% from last year. Realized change in value amounted to SEK 75 million for 2019, which is the most related to the option solution in Staffanstorp of SEK 59 million, and we had a reversal of the rental guarantee on previous year sold property of about SEK 60 million. The total change in value of the properties during 2019 amounts to SEK 866 million, which gives us a fantastic net income of around SEK 1.224 billion, which is up 49% from last year. Slide 6. The balance, we landed on SEK 17.8 billion, it's up approximately SEK 1.5 billion since last year and it's most regarding to the property value. Over to Benny on Slide 7.

Operational review, and then we move forward to Slide 8, rental growth like-for-like. The rental income amounted to almost SEK 1.2 billion in 2019. The total growth in rental income was 8.5% compared with corresponding year. Project development contributed with 4.1% and net transaction contributed with 2.1%. The remaining increase of 2.3% related to like-for-like and it's [indiscernible] net letting and renegotiations. Slide 9, please. Cash flow, we have a very sound cash flow, and it's of utmost important to us, and I'm happy to note that for the full year, we retain 53% of our income in the company before value changes. It thereby continued to improve. The same number was 52% in 2018. Slide 10, please.

Yes. I'll take Slide 10, and this slide tells you about the organization, that we are organized in 5 regions, and you find the detailed figures for the regions on this slide. I'm moving forward to Slide 11. And here, we have some key figures on the property portfolio. And if you're looking at the middle graph, it shows that approximately 45% of the income comes from the 10 largest tenants and that the 3 largest tenants are still DHL, ICA and PostNord. And over 25% of those 45% is related to the biggest tenants and are related to third-party logistics service providers, which meaning they, in turn, have an immense amount of customer, which bring risk down for us. Slide 12. You will find that we have an average EPRA net initial yield of 5.8% in the property portfolio. And this has led us to somewhere around SEK 199 million in unrealized change in the value of the property in the fourth quarter. The property value has risen by 11% in 1 year, but by which unrealized value change accounts for 5.3%. Back to Benny on Slide 13.

The rental market. The rental market indicates a sustainable development with the local variations. We can expect support for a higher rental growth in parts where there typically an imbalance in supply and demand of land and that's in the most urban regions. The continued structural demand for more logistics space in certain key areas supports a sustainable and stable growth rate in those specific areas. With overall lending ratio of 95%, though somewhat lower than in 2018, makes the [ constant ] above the occupancy going forward. We continue our focus on raising the quality in our portfolio. In 2020, we look forward to finalize many of our ongoing projects, adding incremental value into our existing portfolio. Slide 14, leasing activity and contract maturity. The quarter provides for a stable net letting. SEK 39 million worth of new leases were contracted in Q4 and net SEK 4 million. Year-to-date, the same number adds to SEK 86 million worth of new leases and net SEK 23 million. Maturity of our contracts remains well disputed over time, averaging approximately 5 years. Slide 15, a history of growth. A brief glance of our historical performance. And let's start with profit from property management. That came in at SEK 16.63 per share, up 9% year-on-year. Annually, the compounded growth rate has paced at 16% for the last 5 years. EPRA NAV per share came in at SEK 203, up 20% year-on-year. The return on equity came in at 21%, up 450 basis points a year ago. This 5-year annual average is 18%. Slide 16, Peter, on capitalization.

Yes, and then we are moving forward directly to Slide 17 where we find a graph. We have an average LTV level at 54% and it's down from the last quarter of 56.5%. And all of our finance is still secure through mortgage. We're moving forward to Slide 18. And here, you can find that we have a debt maturity of 1.3 years on the balance sheet date, but we are aiming to extend the debt maturities at least 2 years. After the balance date in the beginning of 2020, we have signed new loan agreements of approximately SEK 800 million. And we have increased our backup facility from SEK 1 billion to SEK 2 billion. And the work of expansion will continue. Back to Benny on slide, I think we're going forward to Slide 20.

Thank you, Peter. Capital deployment year-to-date. During the year, we have acquired new assets totaling SEK 82 million. And in the final quarter, we sold Mörby 5:28 for SEK 83 million. The acquisition of Muttern 6 in Kungälv, Gothenburg, is a great example of our integrated business management. Upon acquisition date, the property had no tenant and just some months later, we have found partnership with new customer signing up for the entire space. But the main part, however, have been allocated towards our development portfolio, totaling to SEK 753 million. Please move forward to Slide 21, development projects in progress. On balance date, we have invested SEK 680 million in our ongoing project portfolio with almost SEK 760 million still remaining. The most recent added projects comprises a third logistics facility directed towards our tenant, Nowaste, in Helsingborg as well as an extension directed towards DHL in Sunnanå Logistics Park close to Malmö City Center. In 2020, we expect most of our projects in progress to be finalized, adding almost 115,000 square meters to our existing stock, and more importantly, a deeper relationship established with many of our customers. And this will, of course, have a positive effect on our earnings capacity going forward. We have finalized 2 projects during the fourth quarter and that's part of the multi-tenant facility in Malmö with a toy retailer, Lekia, as a new tenant, and the hybrid warehouse in Helsingborg with the tenant, Nowaste. Please move onto Slide 23, sustainability trends in Catena. Our business is dependent upon our responsibility towards sustainable progress and the disclosure necessary to prove our efforts. I'm happy to announce that in 2019, we have decided on certifying 11 buildings to Miljöbyggnad Silver representing 165,000 square meters of lettable area. We have also made commitment to increase investments towards installing photovoltaic cells, 6 new buildings are underway to have solar cells installed. For 2020, we target to have an increased focus on the disclosure and transparency related to ESG reporting. The TCFD recommendation will be implemented together with improved EPRA sustainability disclosure. Please move on to Slide 24. A few voices from the market. Third-party logistics is experiencing high growth, and PostNord, one of our customers are expecting they would need to grow and buy another 25,000 square meter in Sweden every second year. DHL, the world-leading logistics company where they're researching or reasoning about the evolution of globalization. Though the global economy is likely to pace slower in the coming year, the globalization has just begun. Please move on to Slide 25, Case Sunnanå. In the last quarter of 2019, we announced an extension to one of our existing facilities with DHL as customer. The demand for more logistics space has led to a mutual understanding of adding some 1,850 square meters with contract extension of 10 years. We have several proposals on the remaining parts of the multi-tenant warehouse. Please move on to Slide 26, Case Tostarp. In October, we announced a third commitment directed towards Nowaste to commence the construction of a new e-com warehouse in Tostarp, Helsingborg. It comprises there 18,000 square meters of lettable area and offers a rental value of SEK 10 million over 5 years. Helsingborg has really proved to be one of the most popular and interesting spots for logistics purposes. According to the journal, Intelligent Logistik, it's considered the second best rated area in Sweden for logistics. Please move on to Slide 27, Case Järna. In the final quarter, we announced an acquisition of land south of Stockholm and the plus -- the plot comprises of 1 million square meter land and expected exploiting rate of 40%. The deal is a joint venture arrangement without -- with our part being 50% initially but with ambition of taking ownership of the entire land piece as soon as the detailed planning process is becoming final. I am particularly glad about this deal since we strongly believe the [ south path ] into Stockholm will serve as an excellent logistics community. Please move on to Slide 28, Case Denmark. With 3 new facilities at 3 different locations in Denmark, facilitating the distribution of goods to populated areas, I am particularly glad to acknowledge that -- the acquisition we announced in January. Through this very important transaction, we confirm our vision to link the [indiscernible] of Scandinavia. The 3 terminals comprises a total to 12,700 square meters of lettable area, and they are fully let to PostNord, and I am proud we can continue to contribute to their business even outside of Sweden. One of the properties is under construction and in the total transaction also includes building rights of almost 20,000 square meters for future development. Please go to Slide 29, potential future development. We are always keen on getting hold of strategic land that could serve as future logistics hubs. Adding our most recent piece of land to our land bank, we held 3.8 million square meters. However, in total, including all options, joint venture agreements and land allocation option from municipalities, we have access to potential of almost 4.8 million square meters of land. Contract agreements of land not yet done and dependent on various actions comprises around 2 million square meters. In upcoming year-end report, we will present our land bank in more detail. And thereby, we have finished this part, and we are moving forward to the question-and-answer session, please.

[Operator Instructions] And our first question comes from the line of Staffan Bulow from ABG.

Staffan Bulow of ABG. A couple of questions. First of all, you mentioned some one-off events in the presentation, 3 bankruptcies and change of property tax. So I wonder if you could provide some numbers of -- on how much rental income and NOI was affected from these one-offs?

Yes, if you're talking of -- it was 2 bankruptcies and in isolated [ call ], it was almost SEK 2 million. And if you're talking about the property tax, we have change in our tax valuations for the whole 2019, but it's coming in the late of 2019. So the one-off in Q3 and Q4 is SEK 5 million, so it's around SEK 5 million. We had some minor change in the rental income as well, but it's very low and it's 7, 8 difference, totally it's combined somewhere around SEK 1 million, SEK 1.5 million. And we have also some of -- if you're looking at the rental income, we are -- if you're talking about the mild winter, we had a lower cost on the mild winter to the media, but then we also had a lower invoice to our customers. So the rental income is decreasing because of the mild winter, if you have -- if you follow me there.

Yes, I'm following you. Okay. And as you mentioned in your presentation, you have acquired 3 properties in Denmark last month, and we previously had 1 property in Denmark. So should we see the latest acquisitions as a sign of that you want to expand into Denmark? And why are you doing it? Are you doing it because you think the prices are too high in Sweden? Or because you think it's more of a strategic fit to include Denmark in the portfolio?

First question, I'm just saying, yes. Secondly, I'm saying it's strategic. We see the Greater Copenhagen area, including Denmark, to be very natural, so it complements our business and our business model and also knowing that the Fehmarn Belt connection plan to be up and running by 2020. So we think it's strategically wise to make that move now.

Okay. And concerning the potential Coop warehouse development in Eskilstuna, could you give us some flavor on what yield on cost or rent levels you find reasonable for that warehouse?

Not for the time being. We are still negotiating. So we could not comment on that.

All right. And could you comment on what financing options you are considering to finance the development?

No.

All right. And you are establishing a logistics position in the southern part of Stockholm and you most recently acquired a property in Södertälje. Could you elaborate the strategic rationale behind establishing a position in the south rather in the north, for example?

I think the logic from a logistic point of view is that, I think somewhere around 80% of the road traffic passes by those 2 locations, and then it makes sense to have the last piece of distribution that could be coming from those position. And they are also good for national-wide connection. so I foresee a similar development as for the northern areas of Stockholm.

Our next question comes from the line of Philip Hallberg from Danske Bank.

So my first question is regarding your like-for-like rental income growth. You stated that it was 2.3% in 2019. So it's driven by CPI, of course, and net leases and renegotiations. So I'm questioning what kind of rent uplift are you getting in your renegotiated contracts on average, so to speak?

I don't have the figures right now for that one, sorry. But what we could see is that depending on where we are geographically in the areas where more people live than scarce of land, there is potential that is quite high and when we're coming out to the more rural areas, it's more like flat.

Okay. So but in those areas which you're mentioning that are more populated, so to speak, are you getting, like, is it 10%, 20%, 30% on rent uplifts or what could we expect there?

I'm not really -- it's a combination of what we're doing for the rent uplifts also. It could typically go with some project development within the facility and so on, but not that high levels, I would say.

Okay. So you had -- I think you mentioned here in the presentation, you had SEK 680 million in project development CapEx in 2019, and you have roughly SEK 760 million left to invest in your remaining projects. Are you targeting a lot of starts during 2020 to secure the project CapEx for 2021 and 2022? And what are most recent projects that you can start right now?

I don't think I could comment on what we could start now, but we expect to go forward with the same level, SEK 600 million to SEK 800 million. We could buy our own cash flow earnings startup for SEK 1 billion. And don't forget, we need to consider the Coop project as well.

Yes. Of course. And maybe regarding the Coop project. I know that you can't comment a lot, but right now when I look at your balance sheet, you have roughly 53% in net loan-to-value. What sort of net loan-to-value would you be comfortable going up to? Would it be like 60% considering that you have quite high-yielding properties and you'll have a strong cash flow generation? Or what sort of level are you comfortable at right now?

Well, when we deal with the bank agreement, we are on levels of 60% to 65%. So it's possible to go towards the 60%, I should say. Yes, yes. But it depends on the volume of the investments, of course, and how we use the share as well.

Yes, of course. Has that been like ongoing discussion, whether to use your share? Obviously, you're trading at a quite healthy premium right now. So it would be NAV accretive. But is that a financing option, which you think is viable to use your share, I mean?

Yes. When we are talking of acquisitions, it's a possibility. But I can't speculate especially on price. No, I cannot do that. So but we have done it earlier, plenty of time in the history when we bought -- last time, we did in 2018, we did acquisition of the Morgongåva facility, so we are doing.

Yes. And also just a final question regarding your acquisitions in Denmark. How do you view the different markets if you compare Sweden and the competition here? Obviously, extremely fierce on logistics right now in terms of acquisitions. Do you see the same level of competition in Denmark? Or is it more convenient to find properties to acquire there?

I think the market looks a little bit different, a different type of ownership and so forth, which make it different. And I don't see it as scarce as it is in Sweden for the time being.

Our next question comes from the line of Niklas Wetterling from DNB.

I have a couple of questions as well. You showed strong value uplift and have lowered your initial yield. Would you like to elaborate a little about where the contribution comes from? Is it from the older assets, newly built ones or the ongoing development?

Well, it came from everywhere, as you say. But the most part is, obviously, from the investment that we are doing in -- especially in Southern Sweden. We're talking about the Copenhagen area, we've Sundsvall and Tostarp and so on. So there we have some uplift. But I think it's -- for the full year, I think it's 80 properties that's involved in 6 different valuation for the year, so it's come from a very different type of uplift in the portfolio.

Okay. So no stronger contribution from any different part of the assets?