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

Hello, and welcome to Catena Fastigheter Q3 Report 2020. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Benny Thögersen; and CFO, Sofie Bennsten. Please begin your meeting.

Thank you, and welcome to today's Q3 presentation. The content is, as usual, start with highlights and result overview, operational review, capitalization, capital deployment and market and outlook, and we finalize this with a question-and-answer session. Please move forward to Slide 4, highlights. Catena has performed well in the third quarter. And despite the uncertainties caused by COVID-19, the structural trends fueling high demand in the sector is yet outweighing negative economic impact from the pandemic. NAV per share is 8% higher in the third quarter alone, indicating further demand for our asset cost, both from customers and investors. We acquired a newly build property in Borås in Eastern Gothernburg and signed an agreement with the e-commerce fashion company, NELLY.COM, for 15 years with expected NOI of SEK 16.5 million a year. We have experienced another period of strong letting activity, helping us to grow stable cash flow, and we keep working hard to obtain future and present developments. Slide 5, please. COVID-19, we have been fortunate enough to experience only a limited negative impact on revenue caused by COVID-19 so far. In total, SEK 6 million year-to-date has been expensed as total rentals corresponding to well below 1% of total headline rents. Though the market sentiment in the quarter has recovered, alternative about the long-term impact of pandemic remains clouded. In many countries around the world, the virus spread has yet again, unfortunately, started to increase. Our net debt to value position of 54.3%, in combination with our global cash flow operations, makes me feel comfortable going forward. We keep monitoring the situation and continue to explore ways to address the challenges faced by our communities, our customers and employees. Slide 6. Results and balance overview, and I hand over to Sofie for taking action on Slide 7.

Thank you very much. From the income statement, you can tell that the net operating income was 10% higher year-to-date compared with the same period last year, and income from property management was 13% higher. That's SEK 14.39 per share compared to SEK 12.68 a year ago. NOI ratio was reported at over 80% in comparison to last year's 77%, in part due to lower maintenance costs caused by limited access to some of our properties during the pandemic. During the period, rental income was affected by a positive one-off related to an early redemption of rental contracts in the amount of SEK 40 million, and a negative SEK 6 million was related for reserves for expected credit losses. Unrealized changes in property value amounted to SEK 480 million, corresponding to almost 3% of fair value. And we go over to Slide 8. About our financial position, the balance has grown by almost SEK 2 billion since last year, where unrealized value changes from properties contributed SEK 679 million and investments in standing assets by SEK 969 million. Net asset value per share was reported at SEK 223 million, which is an upturn by 13% year-over-year. And then we go to Slide #9, an operational review, and handing over to Benny on our rental growth.

Slide 10. Rental income amounted to SEK 937 million in the period. The total growth in rental income was 5.9% year-over-year. Project development contributed 2.4% and net transactions 1.1%. Like-for-like, the growth contributed 1.5%, and there was also one-off effects related to prepayment of an early lease expiry as well as reserved losses, net amounting to 0.9% in the period. Slide 11. As indicated by the diagram, our cash flow has been growing consistently since 2015. From the last 9 months, we performed another strong cash flow where we retained 58% from revenues in property management income. Cash flow is key to stability and to enable continued focus on stable and profitable development pipeline. Our target is to maintain a level above 50%. Next slide, please, 12.

Slide #12, going to talk a bit our portfolio characteristics. We hold a diversified portfolio, both in terms of geography, asset size and tenant concentration, whereas approximately 44% of our contractual income is derived from our 10 biggest tenants, many of them, such as [indiscernible], will hold several contracts attached to a variety of properties. And above all, third-party logistics clients like these provide critical services to society. Handing over to Benny, Slide 13.

A little bit more about our diversified customer base. Simply put, our success is mirrored by the success of our customers, and we are proud to acknowledge the long-term relationships we tend to keep with all of our customers. This slide is displaying an essential part of our customer portfolio with the majority is experienced growth and/or a part of an industry experienced growth, with over 40% of rental value being represented by well-recognized firms within third-party logistics, transport and recycling provider stability. Another 23% is related to food and beverage, where for some customer growth due to online grocery expansions currently is very high. Almost 15% is related to home construction, packaging and health care, all at home at various degrees are witnessing a state of growth. Slide 14, Sofie?

Yes. Our -- on balance day, our property value was appraised at approximately SEK 17.8 billion, with a reported EPRA NIY of 5.7%. During the third quarter, unrealized value adjustments amounted to approximately SEK 400 million, reflecting a market yield compression, but we also -- but is also due to projects being finalized and a favorable leasing activity. Turning to Slide 15 and Benny.

Rental market. We continue to perform well on leasing, reflected in the high utilization of our facilities, leading to continued high occupancy of 96.1%. Rental market can be characterized as strong, particularly in prime locations with good means of transportation, mainly driven by high demand coming from a structural shift in supply of goods and scarcity of land and standing assets. In other parts where land is not an issue, the market is more stable. It means too early to draw any long-term conclusion with regards to the pandemic incident. In Sweden, restrictions have been discussed and partially implemented. The critical function of supply chains, in combination with steps away from traditional brick-and-mortar, however, makes logistics real estate very resilient. Leasing activity and contract maturity. With continued strong leasing performance, we welcome the SEK 3 million worth of new leases in the quarter and net of SEK 28 million. In the third quarter, we have completed over 36,000 square meters of new development, capable of generating SEK 25 million of NOI. The maturity of our remains well disputed over time, averaging approximately 5 years. And we move forward to capitalization and Slide 18, Sofie?

Yes. We maintain our cost of debt at 2.4% on average, and LTV was reported at 56%, down 50 basis points a year back from now. Equity ratio was reported at 34.9% with sufficient headroom from our minimum target of 30%. Turning to Slide 19 and our funding structure. Here are some details about our loan portfolio. Access to financing has gradually improved from late second quarter, reflected in credit spreads being tightened. During the third quarter, we have successfully printed SEK 414 million in 2 separate bond issues, one 4-year floating rate and one 2.5-year fixed rate, both with just a slight increase in pricing compared with the beginning of the year. The commercial paper market has also picked up pace in the quarter. And therefore, we also have been using that window of opportunity to shift some source of funds. Ongoing discussions with our bank registers are going well. On balance day, we reported a debt maturity of 2.2 years and an average interest maturity of 3.1 years. And we go on to Slide 20, which is about our capital deployment, and handing over to Benny on Slide 21.

Capital deployment year-to-date. We continue to focus the majority of our investment into development. During the first 9 months, we invested a total of just over SEK 1 billion, with 3 additional acquisitions of standing properties earlier this year totaling SEK 307 million. The rest of SEK 722 million has been directed towards our development pipeline, including investments in our standing properties. Slide 22, development projects in progress. At September 30, 77,000 square meters of space was under construction, of which all is pre-let, equating to remaining SEK 430 million to invest. The value of projects in progress was SEK 1.125 billion. During the quarter, we have finalized 2 major development projects in Helsingborg, adding almost SEK 25 million of net operating income to our earnings. Market and outlook, and please move forward to Slide 24. A little bit about the market and a short notice about some interesting news. PostNord, who is the leading parcel service provider in Sweden, announced in August that e-commerce was growing at a pace of 25% compared to last year. That indicates a declining growth in contract to the number reported this spring/summer, which is quite expected given the extraordinary circumstances that prevailed at that time, notably caused by all restrictions. The big difference from last year is that this is slicing whom is utilizing our online shopping. Now [ Jan ] as well as [ Ole ] has found its way to digital platforms, and that progress is here to stay. No one has probably missed out the news flash about Amazon's earlier this quarter. And actually, today, they launched their new Swedish home page. From a logistics point of view and a Catena viewpoint in particular, I think this will only add and accelerate what has already been in place for quite some time. Goods derived typically from certain mid-price segments have been struggling for a while. And with a giant like Amazon, established goods put pressure on the speed of the digital transformation. Slide 25. In late September, we announced the agreement to acquire a 38,000 square meter lettable area located in Borås, strategically set next to Gothenburg. The newly constructed facility offer a state-of-the-art efficiency. Catena has signed a 15-year lease agreement with NELLY, a well-known e-commerce fashion company, including an option for expansion of another 13,000 square meters. The contract generates an NOI of approximately SEK 16.5 million. Of course, the lease will be prepared for solo sales. Slide 26. When we first started to develop Sunnanå logistics position in the French of Malmö in 2015, and our goal was to create a modern, experienced and sustainable cluster of logistics operations serving the greater Copenhagen area. Now 5 years later, we have successfully done just that. It's been a fantastic collaboration. And I'm proud to announce that in the third quarter, we signed leases for the remaining space in our multi-tenant warehouse. From February 2021, the entire position will become fully let. Slide 27. Next to this position I just described, we hold a piece of land where they expect to have a final decision on Sunnanå plant within the next 6 to 12 months. It comprises 110,000 square meters of land and enables another 50,000 to 55,000 square meters of lettable area, which could potentially generate another SEK 15 million in head rent. From the experience with first part of Sunnanå, we know this is an attractive location for logistics purpose. Slide 28, potential, future development projects. The search of new promising land continues along with ongoing detailed development plans in progress. On balance days, we have a potential of about 5 million square meters of land, where almost 1 million square meter are consolidated and with development plans in place. Rest of the landbank is conditional on various contractual agreements, such as detailed development plans having to gain legal force. Slide 39 -- 29, sorry, moving forward, and welcome some questions, and we will try to answer those.

[Operator Instructions] Our first question is from Pieter Runneboom from Kempen.

So it's clear the current market is driven by high demand from e-commerce. Could you also shed some light on which part these tenants for which you see a lower demand and for which you expect a low demand going forward?

Looking at the demand, all in all, we must understand that we are very heavily within the Swedish retail ecosystem. And within that segment, we see actually that it's a brick-and-mortar part of sales that are suffering those days. So from an e-com perspective, we don't see that. But as said, looking into the fashion segment and sports segments, they have had -- yes, they have been suffering a little bit, but that is especially related to brick-and-mortar sales. And if you're looking at Catena, where we have some losses or risks related to COVID-19, I would say we have some square meters of, what you call, climbing center where you have -- what do you call it, where you go to event handling and so forth, but that is really on the margin.

And do you also expect maybe a rise in bankruptcies from next year onwards with the economic recession maybe hitting some tenants?

That's very hard to foresee. I think that is very much related to a much more global situation and linked to second, third wave of COVID-19, but -- and I don't want to sit here guessing about that.

[Operator Instructions] Our next question is from Jan Ihrfelt from Kepler Cheuvreux.

Okay. I have a couple of questions. So I'll just start with my first one, and that is regarding your property uplifts. And you mentioned in the report that they are built in some kind of uncertainty in the valuation. Could you quantify a little bit about the actual amount or estimated amount that is put into some kind of uncertainty in your valuation at the end of September?

Well, we're not going to quantify. It's hard to put a number on it, but we see the compression of the yields, both in our own external values and our internal and also from the big acquisitions that have been -- or the big transactions that have been made in the market around us during this last half year. To put a number on, it would be to forego coming valuations, and I don't want to do that. And with things...

But is it a small...

Valuation is well within -- we follow the market on our fair value.

So it's a small impact or rather large one, or how would you...

No, I would say it's a small impact. It's not that big, but we also look -- we can't foresee where the market is going. Here in [indiscernible], it's now closing down. We got restrictions for 3 weeks going forward, and we can't foresee where the pandemic takes us. So right now, we don't have any big issues.

Okay. And just a question on yields then. Yields, you probably are involved in some kind of bidding process for logistics properties and so on. Are you expecting yields to come down further from this level?

Well, in some areas, we might still see a yield compression, where you don't have -- where there is a scarcity of land, the yields are going to -- might going to go down to follow as they are in Europe. But we also have -- in Sweden, we have a lot of land, and there are areas that you got land easily accessible, and then we see the yields going the other way. So I think the major areas of the big cities, I would expect some yield compression going forward.

Okay. And you are -- just now the topic, your paid tax has been rather low during the last years then -- are you expecting it to be in such a low amount going forward also? Or how do you look upon your pay tax in 2021 and 2022?

I would expect us to -- you know what, lease rentals rose again, I should say that. You honestly know what I mean. These -- the new regulations have made a lot more difficult for us to -- we want to pay taxes, but we don't want to pay it all at once. But yes, we are going to pay taxes. And I think we're going to hold the same amount as we have been the last year. I don't expect to see a big increase on paid taxes during the coming years.

Okay. And just digging into your projects. There were 2 projects that were finalized in the third quarter, the PostNord and Nowaste. And was it early in the quarter, late in the quarter, just to get a feeling for how much it was impacted the rental income for the quarter?

Of course, we will see some coming rental growth due to those projects and also others that will be finished, but I won't give you the exact figure.

Okay. But when was the...

If you're looking at the ongoing project, then you could elaborate and make a backboard calculation on that one.

Okay. So maybe a fair assumption that they moved in, in the middle of the quarter and then there will be some extra also in the third quarter.

Yes. Yes.

Okay. And the more or less the same question for DHL and both in the fourth quarter. Is it the same there that we could maybe calculate with the same math that may be moving in, in the middle of the quarter and you're getting an impact on the first quarter on these 2 approach.

I think you're absolutely right.

Okay. Is that a fair assumption to make? Or...

Yes. Yes, absolutely. Absolutely.

Okay. Okay.

[indiscernible]

Yes. Okay. And you also have an impressive utilization ratio. Is it -- is this the absolute ceiling? Or could you just -- could you raise it even further? Or how do you look upon agencies?

What I can say is that the market is still strong, and just not going into the details, but we expect the market to be strong going forward.

And my final question really regards your financials, financial costs. And I could see from the slide here that 45% of the loan portfolio have expiring interest rates agreement in 1 year time. And with your discussion with the banks and so on, do you think that you could come down a little bit on your average interest rates in 2021?

I don't know if we're going to come down. I think it's going to be continued where we are at now. We don't see any big increase or decrease in the margin.

[indiscernible]

[indiscernible] if it's flat.

And our next question is from Markus Henriksson from Pareto Securities.

I have 3 questions. First one is the NOI margin. In the third quarter, you mentioned last quarter that you had trouble to do some maintenance. So I'm just looking for near-term for Q4. Do you still have trouble to do maintenance? Because I guess for next year that we should expect more of a normalized NOI margin, more in line with 2019, plus some efficiency.

In the short run, we know we are about in the same situation due to the COVID-19 pandemic. And at the other hand, late on the last quarter is normally one with a slightly higher level. So I think you could -- about the same levels, maybe a little bit up on that side. But I do not see that normalized going forward, I think you could calculate with the levels that we have been at -- looking the quarters.

Q4 is still on the low side and a normal -- more normal year. We hope -- we all hope for that during 2021.

And what we need to take into consideration, of course, is that we have had a lot of new projects, new development, which means for the added square meters that will be, for sure, lower costs.

Do you still feel that there is some maintenance that you were not able to do this year and that will come next year? You say more of a normalized...

I don't expect you to add it on top, so to say. It's just to see if it's more normalized.

All right. That's clear. Then looking at the investment levels, you are at an all-time high here at trailing 12 months, almost SEK 1 billion, but many projects are finalized. Now short term, what do you think we should view? You have -- earlier you stated a level of around SEK 700 million, and now we're way above that. So what's your view on future project pipeline and the investment level?

Total investment level, absolutely, we will aim for the same levels that we have been at. And you know our priority firsthand, developing projects on our own land and then we will top it with acquisitions. That is the plan going forward. And when it comes to project related, we still aim for this plus SEK 700 million a year.

All right. That's clear as well. Last question is regarding the follow-up on the revelations here during the quarter. You mentioned Tostarp and Sunnanå, is that related to Blackstone [ billable ] sale. It's not so close, but do you see more evaluations in the Arizona region than you see in your other parts of the portfolio during the quarter?

Yes, we do see a higher up on those locations, and it's also regarding that we have -- that the projects now are finished and the tenants have moved in. So it's a mix of those two. But absolutely, the South of Sweden [indiscernible].

So there are no material positive revaluations in other parts of your portfolio if you exclude projects and the Arizona region?

Yes, there are, but those are the 2 biggest ones. We have, especially in Stockholm City area, we can see higher values as well.

The same logic applies. For dense areas, productivity of land and projects.

[Operator Instructions] And it seems that we have no further audio questions, so I will hand over back to the speakers.

Do we have any e-mail questions? No? Then we have no further questions, and thank you all for this presentation. Stay safe in COVID time. Bye.

Bye-bye, everyone.