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

Hello, and welcome to the Catena Audiocast with Teleconference Q2 2021. [Operator Instructions] Just to remind you, this conference call is being recorded. Today, I am pleased to present CEO, Jörgen Eriksson; and CFO, Sofie Bennsten. Please begin your meeting.

Hi, and welcome to Catena's Audiocast for the second quarter 2021. This is...

Jörgen Eriksson.

And Sofie Bennsten. And we will do today's presentation, and we move over to Slide #3. A quick view of today's content, where we will start with some highlights. And as usual, we will end today's session with a Q&A. And Jörgen, you're welcome to start, and we're going to Slide 4.

Thank you, Sofie, and here are some highlights. Catena came out strong in the second quarter with an 8% increase in the rental income. And year-to-date, our profit from property management has increased by 11% year-over-year. EPRA NRV has increased by 34% to SEK 278 per share, and the earnings per share came out with SEK 27.87. New leases of SEK 27 million were initiated, and our net leasing operations summarized to SEK 19 million in the quarter. Worth to mention is that we came out this quarter with net LTV around 45%. The zoning was in Q2 approved for additional land in Sunnanå next to Malmö and we also acquired a property in Gothenburg. And we feel that our business are backed by strong occupier demand, especially from segments as groceries and 3PL. Moving to Slide 5, please. COVID-19 and -- the impact from the coronavirus has had a limited effect on Catena in the first half of 2021 summarizing a rental value of SEK 11 million was agreed to change from quarterly to monthly payments, of which they all have been paid for according to the plan. Discounts linked to the government rent subsidy amounted to just under SEK 2.8 million. Moving to Slide 6 and further on to #7. We are proud to present the history of profitable growth and profits from property management has paced at 14% compounded annual growth for the last 5 years and the earnings per share has been 41%. At the same time, the dividend has compounded annual growth of 20%. Moving to Slide 8. Rental income amounted to SEK 673 million in the period, and the total growth in rental income was 8% year-over-year. Project developments contributed 5.6% and net transactions 3.3%. Like-for-like rent growth contributed 0.5%, which comprises a combination of lease reviews and renewals as well as indexation and changes in vacancy. There was also a one-off effect related to prepayment of an early lease expiry amounting to 1.3%. Moving to Slide 9, and over to Sofie.

Yes, we had some comments on the income statement. Our rental growth, due mostly to project developments and acquisitions, are 8% higher than same period last year. And the increase of income from property management are 11% higher. The surplus ratio is 79.9% compared to last year's 80.4%. But one should still keep in mind the effect of the positive one-off in the rental income of SEK 40 million that we had in the first quarter last year. Also, the harsher winter in the beginning of the year and the temporary increase of the cost for electricity has affected the surplus ratio. And furthermore, we also see a normalization of the maintenance. We now see a more normal surplus ratio for the period and realized changes in property value amounted to SEK 880 million and corresponded to 4.3% of fair value. And the value changes of derivatives amounted to SEK 110 million. All in all, the profit for the period ended at SEK 1.1 billion, resulting to earnings per share of SEK 27.87. Moving over to Slide 10, and Jörgen.

Yes. As indicated by the diagram, our cash flow has been growing consistently since 2016. For Q2, we have performed another strong cash flow period where we retain 59% from revenues in property management income. And cash flow is a key for stability and enable us to generate investment capacity for continued focus on our profitable development pipeline. Our target is to maintain a level of about 50% of rental income. And our dividend objective is to distribute the 50% of profit from property management less standard tax. Moving to Slide 11 and further to Slide 12, Sofie?

Catena has now a total of 123 properties, well located along highways and around the 3 major metropolitan areas. Since a year back, the portfolio has grown with SEK 4 billion corresponding to a growth of 22% to a total of SEK 21.2 billion. The 9 properties in Denmark amount to 7% of the contractual annual rent. The economic letting ratio has gone up since last quarter from 94% to 95% as the vacancy in Borås of 15,000 square meters that has been filled. And also, it has been a quarter characterized by good rental work. Going to Slide 13. Catena has a diversified asset portfolio, both in terms of geographies, tenant concentration and asset price. 41% of our rental value is derived from critical logistics and transport providers and 39% is the retail and wholesale with a booming e-commerce sector where half of it is in form of food distribution. Going to Slide 14, and Jörgen?

On this slide, we present a part of our customer, whom Sofie talked about in the previous slide, many of them are experiencing a strong growth, and we will do our best to supply them with more spaces when needed. And we can see and we hope that it will be an exciting second half of 2021, where we hope to present some more investments. Moving to Slide 15. Here we show our rent levels in our regions. As you can see, we had the highest levels in Stockholm, Malmö and Gothenburg. Moving to Slide 16 and talking about the letting operations, and we have a net rental of SEK 28.5 million for the first half of 2021, the WALE is a bit more than 5 years and the letting ratio as Sofie said is around 95%. Moving to Slide 17, further on to 18. And the EPRA NRV has grown by 16% annual since 2016, and we came out Q2 with SEK 278 per share. At the same time, the 5-year average return on equity has been 17%. Moving to Slide 19, Sofie?

During the year, we've done 2 share issues of a total of SEK 1.3 billion and equity has grown with 51% since last -- same period last year and amounts to SEK 9.6 billion. Since same period last year, the balance has grown with 24% amounting to SEK 23 billion. Moving to Slide #20. Property value was appraised at SEK 21.2 billion and the net EPRA, net initial yield, came to 5.3%. Unrealized value changes amounted to SEK 680 million during the first quarter and another SEK 200 million during the second. The increase in value changes is due to the ongoing market yield compression and projects being finalized. Moving on to Slide 21. In May, Catena was awarded an investment-grade credit rating of BBB- with stable prospect from credit rating agency, Nordic Credit Rating. This rating reflects both our fine financial position and our leading market division and also establishes additional conditions for long-term financing at favorable terms. Moving on to Slide 22. In addition to launching our new MTM program, we also launched a green financing framework, making it possible to issue green bonds to ensure that the framework meets strict environmental requirements, it has been reviewed by the independent climate and environmental research institute, Cicero, which has given the framework the rating Cicero Medium Green. The first issued bond of SEK 1.4 billion was green and Catena's green financing now amounts to 14% of interest-bearing liability. Our current target is to reach at least 50% share of green characterized loans until 2025 the latest. Moving over to Slide 23. The green finance framework sits on 3 subcategories for new construction and major renovations, for existing buildings and for energy efficiency. The framework will be [ controlled owned ]. Most of our assets qualified, green financing and achieved at least a certificate of Miljöbyggnad Silver and/or an energy performance certificate of A or B. Moving over to Slide 24. Catena's new MTM program was established in May amounting to appraise of SEK 5 billion. And shortly thereafter, the first senior unsecured green bond was issued with a total volume of SEK 1.4 billion. Rate terms was set just about 3 months plus 1.35% for a floating rate loan of SEK 950 million and mid swap plus 135% for a fixed loan of SEK 450 million, both with a tenure of 4 years. On balance day, the LTV amounted to 45.1% and the average interest rate stayed at the same as in Q1 of 2.3%. Equity ratio was reported at 40.15%. Moving on to Slide #25. As part of our efforts to favor our credit rating, we have been committed to extend our average debt maturity. With the establishment of our MTM program and issuing our Catena's first green bond with a 4-year tenure, the average debt maturity has changed to 3.3 years, which is an extension with 1.1 year since last year's of 2.2 years. Interest maturity went from 2.7 years last quarter to 3 years this quarter. The portfolio has currency a hedge ratio of 71%. Moving over to Slide #26 and moving over to Slide 27, capital deployment, and Jörgen?

Thank you, Sofie. Our goal is to focus the majority of our investments into development, although during the first 2 quarters, we have acquired properties for around SEK 1.2 billion were of around SEK 700 million in Denmark. We have also invested SEK 450 million in projects. Looking into the coming years, we see that the amount invested in projects will increase from the figures today. Moving to Slide 28. And here, we have a slide of our transactions. I talked about, as you can see, the major part has been concentrated in Denmark. Further -- next slide, please, 29. And here are our large development projects in progress and the project in Åstorp is about to be finalized this month and our tenant Seafrigo Nordic has moved in the other week. Next slide, please. Potential future development. On the Balance Day, we hold a potential of about 5 million square meters of land. Where almost 1 million square meter are consolidated and with development plans in place. Rental landbank is conditional on various contractual agreements such as detailed development plans having to gain legal force and the search of new land continues along with ongoing zoning plan in progress. Next, Slide 31, please, and further to 32, Sofie?

Catena's sustainability work progresses. We are happy that our implementation of green financing through our own green bonds went well, and it would give us additional flexibility in our loan portfolio. And also that we can match Catena's sustainability ambitions fully by offering green bonds as an investment alternative. We are committed to take our responsibility concerning environmental aspects of our operation and to make sure we follow the Paris Agreement. Right now, we are assessing the implications of the EU economy and how the regulations will impact our future reporting standards. Moving over to Slide 33. The work with specification has been intensified and 12 buildings are now certified according to Miljöbyggnad Silver and another 10 is ongoing. We have added solar cells on several routes and have now 15 installations ready. The positive news that the government increases the levels of tech systems to 500 kilowatts for solar cells installation will give us an opportunity to more cost efficient and larger installations. Moving over to Slide 34 for some market insights and ongoing.

Yes. In 35, and some interesting signals from our customers that confirm our reports around the strong markets. And on ICA it's 149% growth in Q1 regarding online sales of groceries. PostNord it amplified online shopping order by 53% in Q1 '21 compared to 2020. NTG who is a large customer in Denmark, came out in Q1 '21 with the best quarterly result ever. So once again, we feel very confident with the market, the very strong market. And we can see that our customers, they are in need of more logistics spaces in the coming years. Moving to Slide 36, and we can show here a large growth in different segments of e-commerce and on the left side and on the right picture, we can see that the share of online shopping for groceries has doubled from 2% in 2019 to 4% in 2020, and the trend has continued in 2021. Moving to Slide 37. As I started with a highlight in Q2, we had a new zoning plan approved in Sunnanå close to our large area where we have finalized all the projects. And now we have a plot of 110,000 square meters, and we can build up to 55,000 square meters. And after the summer, we will intensely work to prepare the farming land. So we can be good to go when we have finalized discussions with potential customers. Moving to Slide 38 is a picture of an amusement park here in Liseberg very famous in Sweden, and we acquired a property in the region of Gothenburg and the property is just over 7,500 square meter, and it's fully leased out to Liseberg AB for a 10-year contract. Then we move on to the Q&A session, please.

[Operator Instructions] The first question comes from the line of Niklas Wetterling from DNB.

I have 2 growth-related questions. And the first one is that it was no project starts in Q2 and the remaining investment volume is in a declining trend. And what's your near-term outlook for project starts?

I think and I hope that we can present some new projects after the summer or at least the coming 6 months, that's my very best guess, and we are fully aware of that it has been a declining figure seen in that investment trend and that we have been instead made some acquisitions. But once again, as I said, we will focus on our own developments in the coming years. And I don't know exactly what you mean by near time, but if we are talking the second half of this year, I'm sure that we will present some new projects.

Okay. Great. And do you think the SEK 600 million in investment volume is a fair target or are you likely to overshoot it?

It's very tough to mention any figures, but we will step up for sure.

Yes. And secondly, a question about transaction activity was also rather low in Q2. But I noticed your competitor, [ SOP ], has made 3 acquisitions in last weeks in regions where Catena has a strong market position. Why is not Catena the taker of those assets?

I think this goes hand-in-hand with the strategy that we will, for sure, focus on developments. And so in these cases, we have not been focused on acquiring those facilities. So we will focus on developments in the coming months.

Okay. So you have not been bidding for those?

No comment on that.

No problem. But do you prefer to buy cash flow assets in Denmark before Sweden?

Yes. As the market is right now, I think that we prefer to go further on in, in Denmark.

The next question comes from the line of Victor Krüeger from ABG.

Perfect. I assume that you guys can hear me?

Yes.

Yes.

Just I have 2 questions and the first 1 relates to what Niklas just asked that is to Stockholm Syd and the detailed plan that was described in your Q1 tel-co. So I was just wondering if -- or what the status is there? And if you have any updates to give us in regards to the detailed plan?

It's the same answer that in the last quarter, we are working with the water permission and handling all documents and -- for having the right papers in place and then give it to the court, to the environment court to take a decision. So we have no updates concerning any dates, but we are working on it.

Okay. And the other one was regarding the paid tax that came up or that went down again this quarter. Should we still expect the paid tax rate to be in line with Q1 for the full year? Or has something changed in that regard?

Well, we never calculate what we call paid tax in the quarters. We only do that when we come to it in the full year. So all the tax that we calculate during the year is the deferred tax because you can't really do it beforehand. But if you see the figure for the full year or 2022 in the annual report, you have a division, it's divided between paid tax and deferred tax. And it's more in line of that, that you can see since it's growing and of course, it's going to grow a little bit with that but the paid tax ability around that going forward. But the deferred tax is the calculation goes up and down if the derivatives and the property value is changing. So the...

So when you were guiding in Q1 for a higher tax rate, was that only referring to deferred tax?

Yes. Yes, it is. It is the calculation of -- yes, it is.

The next question comes from the line of Jan Ihrfelt from Kepler Cheuvreux.

Okay. First one is really on your financial net and there were SEK 5 million in financial income this quarter. I just wanted to know what that refers to?

Yes. That's the -- it's a one-off of...

Currency.

Currency. When we bought the property from Denmark, we hedged the currency at a certain point. And then when we took up loan, we got another currency. And from all this, we came out on the plus side. So we actually had SEK 4.5 million currency wins. But this is a one-off, so it won't come another one, but it's there. So that's the reason.

Okay. And looking at the financial costs, I mean, if I look to the earnings capacity for the first quarter, they indicated cost of almost SEK 56 million, and it actually came in at SEK 60 million. So I just wonder if there were any extraordinary items also in the costs?

No. I think it's more a thing that we are growing. We have a bigger -- you compared to last year?

No, the earnings capacity in the first quarter indicated a run rate of SEK 56 million per quarter, and it came in at SEK 60 million this quarter. So I just wonder if there were any...

Yes. But I think that in the earnings capacity for 4 quarters, and it's divided by 4, and then I think we can see some lower costs in the coming quarters regarding to, for example, the MTM program and so on. So yes...

Okay. So you think your average interest rate will come down in 2021 compared to 2020?

Yes.

Yes. Yes. Yes.

Absolutely, what we hope for.

Okay. Okay. To what extent? Is it 10, 15 basis points or...

That's difficult to project.

I'll leave it at that. Okay. Okay. Okay. Moving in -- moving on to your property uplifts. It's a little bit lower this quarter. I just wonder how much of the property uplift this quarter referred to the finalization of the Sunnanå project?

The Sunnanå project in terms of the buildings or...

I mean just looking at the property uplifts, I suppose there was some of it that referred to finalization of projects. I just wonder if it's -- how much of the SEK 200 million were actually referring to projects?

We don't have the exact figures...

We don't. We don't look at it like that, but I would -- I don't know, but maybe half of it, give and take, I don't know. But it can come in different -- sometimes -- it's not only the big projects that's going to give this effect, there will also be smaller projects that we do investments in that we give an uplift when the tenant moves in. We made an investment in the property, very mix of things.

So we cannot describe exactly how much it was for Sunnanå. But for sure, Sunnanå on tossed up some of the best cases where we have made a lot of uplifts during the past quarters.

Okay. And just also on the property uplift and your property value. Do you see that your current property values reflect what is happening in the market right now? Or is there time lag that the current transactions are not into your books, so to say?

I mean we have now made a lot of external valuations, and we feel very confident with the values. And -- but for sure, there is a lagging in time between the broker's view of the market and the valuators. So we -- I think we can see that maybe the yields are going down also in the valuators' perspective in the coming 6, 12 months, but who knows. But today, we feel confident with the values.

I just saw that the Tritax Eurobox bought a property in Gothenburg port of 3.6% yield. Is that an indication of lower yields going forward?

Yes, it could be. But it's also very, very difficult to just relate to 1 very low yield transaction. There could be some other reasons why they really wanted that one so bad, so to speak. But of course, when the market presents a lot of transactions where the yield is below 4, then I think we can see also some changes in the valuators, the external valuators' reports, so to speak.

Okay. And my final question really regards your CapEx level for this year. Do you have any, I mean, some kind of soft guidance for what we expect it to be?

No. As we said before, it's very tough to mention any figures, but we feel very confident with that we can present some more projects after the summer. And the coming 6 months, we have exciting discussions on the table. And yes, we know that the pace hasn't been that high in the last 12 months, but we feel that we are very eager to increase the figures again.

[Operator Instructions] We have a question from John Vuong from Kempen.

I was wondering whether you had a bit more color on the reletting spreads given that your like-for-like is still at 0.5%?

Yes. I mean I would have indicated before, it is something between that 1% and 1% like-for-like over the years, and it could also vary a bit between quarters. And you know we have a very long contract, and it's not that often that we renegotiate the contracts. And if we, for example, had, had a renegotiation in a smaller city than compared to Stockholm and Gothenburg that really shows in those figure of 0.5%. Next quarter or next year, maybe we renegotiate somewhere else and then maybe the figure is a bit higher. So that is a bit more flavor on that figure.

Okay. And I suppose it's fair to say that the renegotiations you had in the first half mostly in the smaller cities essentially?

Yes. It could be a way to interpret, yes.

Okay. And perhaps as a follow-up on that, what are you expecting for the coming 6 to 12 months in terms of like-for-like?

That is very tough to indicate. But as we have said before, it's a around this to 0.5% up to 1% maybe in some good cases, it could be up to 1.5%, but it's hovering around 1%. That's the best guess/forecast.

We have no further questions, so I will pass back for any closing comments.

No, then we would like thank you all for listening in and wish you all a wonderful summer, and see you soon again after the summer. Take care, everybody.

Yes. Take care and have a wonderful summer.

Bye.

Bye-bye.

Thank you for attending. You may now disconnect your lines.