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

Hi, and welcome to Catena's audiocast. We will now start today's presentation. And Jörgen, you're welcome to start with some highlights.

Thank you. Moving to Slide 3. Catena reports a strong third quarter with a 10% increase in rental income. Our profit from property management has increased by 13% year-over-year. EPRA NRV has increased by 31% to SEK 293 per share. At the same time, earnings per share came out of SEK 40.25. New leases summarized to SEK 27 million in the quarter. Worth to mention is that we came out this quarter with a cost of debt at 2.1%. We acquired a property in Linköping, fully let out to Msek NOI and further, we won a 160,000 square meter land allocation in Helsingborg. And in the third quarter, we presented new and more ambitious ESG targets. Moving to Slide 4. I hope that this will be maybe the last time we talk about COVID-19, but we'll see. But anyway, the impact from the coronavirus had a limited effect on Catena in the first 9 months of '21, summarizing a rental value of SEK 12.5 million was agreed to change from quarterly to monthly payments, of which they all have been paid according to the plan. Discounts linked to the government rent subsidy amounted to just under SEK 2.8 million. Moving to Slide 5 and further on to Slide 6, please. And we are very proud to present the history of profitable growth and profit from property management has paced at 14% compounded annual growth for the last 5 years and the earnings per share has paced at 41%. And at the same time, the dividend has a compounded annual growth of 20%. Slide 7. Rental income amounted to SEK 38 million in the period. The total growth in rental income was 9.6% year-over-year. Project developments contributed 5.4% and net transactions to 4%. Like-for-like rent growth contributed 1%, which comprises a combination of lease reviews, renewals as well as indexation and changes in vacancy. There was also a one-off effects related to prepayment of an early lease expiry amounting to 0.8%. Moving to Slide 8, and Sofie?

Yes. Furthermore, on the income statement. As we heard, the increase of rental growth was due to most project development and acquisitions and was 10% higher than the same period last year. And the increase of income from property management was 13%. The surplus ratio stayed at 79.9%, the same as last quarter, compared to 80.3% same quarter last year. The surplus ratio is now back to a normal level since the pandemic struck. We had some effect from the cold winter and also the cost for energy has somewhat increased due to the energy shortage in Sweden and especially in South of Sweden. The effects are, to some extent, offset by a change in build expenses to [ Catena ]. Unrealized changes in property value amounted to a total of almost SEK 1.3 billion, which corresponds to 6.1% of the value before adjustments. The value changes of derivatives amounted to SEK 152 million of profit for the year to SEK 1.4 billion, resulting to an earnings per share of SEK 40.25. Go to Slide #9, Jörgen.

Yes. Thank you, Sofie. As indicated by the diagram, our cash flow has been growing consistently since 2016. For Q3, we have performed another strong cash flow period where we retained 60% from revenues in property management income. Cash flow is, of course, 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 50% of profit from property management less standard tax. Coming to Slide 10 and further on to 11, please, and handing over to Sofie again.

Yes. During the quarter, we bought 1 piece of land outside of Helsingborg and 1 property in Jönköping. After this, we have a total of 125 properties, whereof 9 is located in Denmark. The economic letting ratio is back up to 96% from last quarter of 95%. Moving over to Slide #12. Catena has a diversified asset portfolio, both in terms of geography, tenant concentration and asset size. Moving over to Slide 13 and Jörgen?

Thank you, Sofie. And as always, we are very proud of our customer portfolio shown on this slide, and you recognize the customer as well. I hope many of them, for example, DHL, Boozt, Apotea and PostNord has performed extremely well in the last 12 months. Moving to Slide 14. Here is a picture of where we show the rent levels in our regions. And as you can see, we have the highest levels in Stockholm, Malmö and Gothenburg, the big cities in Sweden. Moving to Slide 15. We have a net rental of SEK 55.5 million for the first 9 months of 2021. The WALE is a bit more than 5 years. And as Sofie mentioned, the letting ratio is back on 96%, which we are very happy about. Moving to Slide 16 and further onto 17, talking a bit about the valuation. And the EPRA NRV has grown by 16% annual since 2016, and we came out Q3 with SEK 293 per share. At the same time, the 5-year average return on equity has been 17%. Moving to Slide 18 and Sofie again.

In same period last year, the equity has grown with 48%, much due to 2 share issues earlier this year and equity per share came to SEK 247. EPRA NRV, that is the long-term net asset value, came to SEK 293 per share. The total assets came to SEK 24 billion, which is an increase of 22% since the same period last year. Moving to Slide 19. Our investment properties amounted to SEK 22 billion, an increase since year-end of SEK 3.4 billion, of which SEK 1.3 billion was due to unrealized value changes. EPRA net initial yield came to 5.2%, which is down 0.5% since September last year. Increase in value changes this quarter are due to the ongoing market yield compression. Going to Slide #20, debt and capital. All in all, the interest-bearing liabilities have increased with SEK 450 million. And by the end of the quarter, they amounted to SEK 10.4 billion. The net LTV came to 44.7% and are well below the goal of 50%. Average interest rates came down to 2.1% as a result, both of the new unsecured green bond and also replacement of derivatives to a lower rate. Equity ratio was reported at 42.3%. Going to Slide 21. The proportion of green financing has gone up to 21% and the portfolio hedge ratio came to 67%, down from 71% last quarter. Debt maturity came to 3.2 years. Moving on to Slide 22, capital deployment, and Jörgen go to Slide 23.

Thank you, Sofie. Yes, our goal is, as we have mentioned before, the focus is the majority of our investments into development, although during the first 3 quarters, we have acquired properties for SEK 1.4 billion, whereof around 50% is in Denmark. We have also invested SEK 650 million in projects. And looking into the coming years, we see that the amount invested in development will increase. Moving to Slide 24. Here, you can see a slide over all the transactions I talked about, and they are summarizing to SEK 1.4 billion, as I said. Moving on to Slide 25. Here's the map of Sweden and Denmark, and our largest project in progress are presented here and 2 of them commenced in Q3 and are located in Helsingborg. I will talk more about them later on. Moving to Slide 26, and here we show you the potential in future development. And we hold about 5 million square meters of land where almost 1 million square meters are consolidated and with development plans in place. Rest of land bank is conditional on various contractual agreements such as detailed development plans having to gain legal first. And the search of new land continues along with ongoing zoning planning in progress. Moving to Slide 27 and 28, Sofie?

Unlike previously in the formulation of the new sustainability targets, greenhouse gas emissions now include indirect emissions from construction of new buildings and extensions as well as major renovation. The new biodiversity target entails an increased focus on safeguarding biological diversity in connection with changes in how land is used. In efforts to achieve a more sustainable property industry, Catena considers this an aspect of increasing importance in the decision-making processes as new projects entail. As of now, we do not have all the answers and solutions, but we are confident that with the help of our dedicated staff that we will succeed or at least make a difference in Catena's impact on the environment. During this quarter, Catena was certified by Great Place to Work, demonstrating that the company's employees perceive Catena as an excellence workplace. Moving to Slide 29, and some more sustainable figures. 13% of Catena's lettable area are now certified according to [ net zero ]. And we have 19 rooms with installation of solar cells. The work with the new taxonomy is ongoing and also the work with TCFD and the mapping and analyzing our client risk. You can also read more about our work with TCFD on our website. Moving to Slide 30 in the side.

Yes. And further on to Slide 31. And we were talking before about our customers' performance the last 12 months, we here show you some statements from PostNord, Instabox and Mathem, and they all confirmed the rapid growth in their business the latest year. Moving to Slide 32. A picture of 1 of our new projects in Helsingborg, a 15,000-square meter building, where we have signed an LOI with Nowaste. The construction will be completed in Q3 '22. The investment is about SEK 124 million. Moving to Slide 33, where we show the other project in Helsingborg also started this summer. It's almost 17,000 square meters signed lease contract with PostNord and the project will be finalized in Q3 2022. Here, we have an investment of about around SEK 132 million. Moving to Slide 34. And the latest acquisition is located in Linköping, and we welcome Scan as a new tenant by Catena and the investment was around SEK 200 million. Moving to Slide 35. In the other week, we press released that we won a land allocation competition in Helsingborg together with our tenant Nowaste Logistics. The land concern is located close by the E6 Highway, covers approximately 160,000 square meters and has been designated for industrial purposes by the municipality. In competition with 11 other tenders, the proposal submitted jointly by Catena and Nowaste won the contest announced by the city of Helsingborg. And now we are finished by the presentation, and we move on to the Q&A session, please.

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

I've got a couple of questions. First off, regarding energy prices. It seems there'd be quite limited impact in Q3. But what's your outlook on the Q4 results if the high prices remain?

We think that it will be small, small impact since we -- I mean, the letting ratio is 96%, and the tenants cover almost all the energy costs. So it's just a small impact for us.

Okay. So you can transfer the costs?

Yes. Exactly.

Great. And then some questions about the latest land allocation in Helsingborg, I was wondering if you could say anything about the present price, time line or potential yield on cost in that project?

I think it's too early to talk about that. We got the news 2 weeks ago, and the next step is a meeting with the municipality, starting to, so to speak, negotiate about the land, the price of the land and the time table and so on. So we have to come back later on with that issue.

Okay. You mentioned that you won the allocation together with the tenant, Nowaste. What does that mean? Does that mean that is -- will be some kind of a JV or will the yield on cost be lower in this project because you have to share the profit with Nowaste here? Or is this just a normal project in that sense?

I don't want to go into any details there, but at the end of the day, we will fully own the real estate to 100% and Nowaste will be the tenant. But we had a package deal to -- that we show the municipality that we have best case together. So yes, we will -- we have to come back in that matter also later on.

Okay. Great. And I believe in your project pipeline, you mentioned that one property was vacant, but I believe you had that deal with Nowaste on that one, right?

We have signed an LOI with Nowaste. So the intention is that they will sign a contract with us. But as we speak, there is no lease agreement. But as we have an LOI, we, of course, hope that, that will be the effect in the coming periods that we sign a contract with them. Otherwise, we have to go out to the market and find another tenant. But both parties are aiming for signing a lease contract.

Okay. Great. And my last question is about the interest rate down from 2.3% to 2.1%. Is this all explained by mature swaps? Or have you also redeemed swaps?

We have also -- yes, but also it's an effect of the...

Lower margins, of course.

Yes, lower margins, of course. And our MTN program that we started in this spring with lower interest rates.

Okay. But you have not redeemed any swaps?

No, that hasn't matured.

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

Okay. Actually, I have 3 questions. And the first 1 is regarding your like-for-like growth in rental income. It's 1%, and that's including the indexation effect. Is it hard to raise rents for you about the indexation level?

Yes, we have had that discussion many times, and I think we will have it in the future as well. First of all, we don't have so many contracts that we are renegotiating every year. So it's tough to see any trend. Of course, if we are in Stockholm and in Malmö and Gothenburg on the best locations, we can see that there will be a potential of higher rent. But it's tough for us to see how much that will impact the total portfolio. We can also see if there -- on our other locations in smaller cities along the highway, there is still some land available. And with the market yield right now, it's tough to push the rents upwards on those locations. So with that said, we are guiding around 1% like-for-like in the coming 12 to 24 months.

Okay. And the second question really regards the supply situation. Do you see that your competitors have started new properties with -- or speculation? Or how does that trend evolve?

We have seen some deals done in the -- actually the last week. I think it was Skanska sold to bearings where they, I think, have 4 different objects. One was with the lease agreement that was vacant. So some bigger players, they are investing a lot and they can also invest in pure speculation. So there is a lot of capital going into the market in Scandinavia right now. That's our feeling. That's also our feeling and when we are looking into new acquisitions, but the yields are going downwards.

Okay. But do you see that the portion of built on speculation has increased compared to probably last year?

Yes. I don't have any exact figures on that one, but that's our feeling that there are some more speculation ongoing that there was 12 months ago.

Okay. And my final question regards projects. And on Slide 26, you have a map of future development projects that may start in the future. Could you just help us -- are any of these projects that you plan to start in 2022?

I would say that we will start in terms of preparation on the ground for Landvetter on Stockholm South and also in Sunnanå Logistic Position. Sunnanå we have ongoing discussions. Some in Landvetter, we still wait for the zoning plan. We hope that it will be approved in Q4, and we will be ready to construct as soon as we can. So with that said, we will start with the ground preparation as soon as we can. And we will be ready to start construction and, of course, negotiate with the potential tenants in 2022.

And the next question comes from the line of Paul May from Barclays.

I've got a couple of questions sort of fairly linked and thinking back to a couple of the earlier questions as well. It comes back to the rental progression point. My understanding is your portfolio is generally one of the more prime portfolios in the market. I appreciate it's not going to be 100% prime located, but general broker consensus is that rental growth is coming through strongly. I appreciate our investor locations. Just wondered -- I appreciate your like-for-like generally lower. But if you were to think about your rental position relative to where market rents are, what sort of reversion potential do you feel is available in the portfolio today? And how much has that grown relative to, say, a year ago or even over the last 3 months where things seem to have accelerated quite materially?

It's very tough to answer that. But I'll try to elaborate a bit about it again. I mean, we can see as soon as a new project is starting somewhere in Sweden, the rents are relatively low because of the yields on the market compared to the yield on cost. There is a project profit for the developers. And if we have an existing property in that area, we've probably a higher rent since it was negotiated some years ago where the yields were around maybe 7%. It's rather tough to push the rent levels up in those areas. But as I mentioned before, if we are in Stockholm, we have some objectives around Stockholm. And also when we will start new projects in Stockholm South, where there is -- it's shortage of land around Stockholm, we are very confident with quite high rent levels with the new projects as well as when we are going to renegotiate the existing contracts around Stockholm and also in Malmö and Gothenburg. But it's tough to guide with some figures in this matter.

Okay. So just, I suppose, think about it another way. You're saying that by developing in certain locations, you're actually putting your portfolio into an over-rented position in those markets, and therefore, you're facing rent deflation? Is that how I should be understanding in certain markets?

Maybe not deflation, but stable, just stable. And we -- also when we renegotiate, if we can do some adjustments in the existing properties and maybe there is a chance to push it a bit or to have it stable that we are very seldom going down in the rent levels. But of course, maybe in some special location, it could be the reality as well. But, in total, our portfolio -- we can see a small potential in the like-for-like in coming years. But of course, they are different case by case.

Sure. And just to be clear, the 1% you're mentioning like-for-like, that's in addition to any indexation, is it?

Yes. And of course, we'll see -- I mean, last year, there was almost no indexation in Sweden. Maybe this year will be a bit higher. We don't know yet. So of course, it's included.

So indexation is included? Because indexation is currently running around nearly 3%. So you're saying your 12-month like-for-like on a non-index basis is going to be negative? Sorry, to understand the...

Yes, but we haven't made any forecast in the coming 12 months. If the -- I mean, it's looking better if you say that the indexation will be 3%. Of course, it's looking better if you just isolate 12 months. But, I mean, also the last year was -- I think it was 0.4%.

No, I appreciate that. What I was just trying to understand is your 1% excluding any indexation assumption, actively, and that's -- I mean, you're saying it is. So that's good. And just to get a sort of sense on when you have your negotiations because sorry to labor on the point around rent, but we are hearing from others that there is strong rental tension. And I think you mentioned in your statement as well that you expect demand to exceed supply, if you pick up any of the new supply that is coming through. Demand is very, very strong. How much are you trying to push the rents forward? And how much are you sort of working with your tenants for occupation? Just to get a sense of your approach to the negotiations and whether it's not a bad thing, whether you're just slightly less aggressive on pushing the rents than maybe some of your competitors or peers, or really, competitors but peers?

Yes. Let me put some color on it. I mean, we have, for example, DHL and PostNord and some other strong partners or tenants that we have on many different locations in Sweden. And we can maybe see a potential to raise the rent a bit in one location, but there is other ones that we are quite happy if they will prolong the contract and that will, of course, be in negotiation. But we will always prefer the long, stable relationship with the tenants. Hence, we are looking very, very, very far in the future with a very good cooperation with the customers. So we are not pushing the rents no matter how much it costs. It's a balanced work.

Yes. Okay. And just sorry, final one on valuation. Is that a similar approach to valuation as well that you take that longer-term approach and almost reluctantly compress yields given your yields do look extremely attractive? I appreciate your share price is trading at significantly ahead of that, but your yield on the portfolio looks considerably attractive relative to where even average market yields are for your type of properties. Obviously, prime yield is significantly tighter, but even average seems to be tighter than where you are. So is that, again, a sort of cautious approach to that long-term view on the valuations?

No. I'd agree totally there. I mean we have an external value of the whole portfolio, and the properties will be evaluated once a year. We do see that there has been a compression the last months actually. And maybe all of the valuations are not updated. We feel confident with values today, but maybe we see in the coming months that there will be some signals from the external valuators that the yields are going down. They normally lag about 6 months. They should have a lot of evidence in the market before they change their yields. So yes, the trend is downwards, that's my opinion.

[Operator Instructions] Our next question comes from the line of Victor Krüeger from ABG.

I thought I heard in the beginning that you briefly mentioned no one-off, and I can't track that in the report. Would you like to reiterate what that was, please?

The one-off, it was when we had a tenant moved out from Linköping in the first quarter in 2020. So when we make the comparison with 2021, there was a one-off in that one, if that's...

And I think if we had a customer in Malmö that moves out, yes, they have to pay a one-off to get out of the lease contracts in hand, but they moved to our own property in another place. So we came out well on that. So that's why we had a one-off even this quarter -- during the [ new quarter ].

But we have a negative impact that we have reported this year compared to last year.

Yes, the one-off we had last year was even bigger. Yes, we had one-off even bigger...

And just to clarify, the [ dug out ] one in Malmö -- what that -- what quarter was that?

I think it was during this quarter. I'm not...

Last year.

Exactly, yes. I think we...

We can come back...

Yes, I just wondered if it was something recent. But we can find that, no worries.

The figures.

Cool. And then just briefly regarding Stockholm Syd, the building start, you had a question, the first 1 here in the Q&A session that asked around that. And as I understood it, you said you just got land allocation 2 weeks ago. So it was too early for you to comment anything closer to about the time line. Is that...

That was regarding Helsingborg and the competition we want. So we will have to come back with more details around that when we have started negotiating with the municipality regarding Stockholm South.

And there's no...

Yes, that's no way and Catena in a corporation. But regarding Stockholm South, I said that we start preparing for ground work in 2022. Some of the areas where we do not need the water permission because that's also an ongoing progress and that's the same case for all of the competitors in the area in Stockholm South. Many of us are struggling with the water permission that's on our area, the 450,000 square meters. Some of the area is good to go. So we'll start with some work, groundwork, not the buildings in 2022, the first 2 quarters.

Okay. And with construction, would you say would that start in H1 '23 then?

It's -- I'm not sure about that. I mean also depending on when we have a lease agreement. So we will come back to that one.

Okay. Fair. And you said -- you mentioned in the report it was the first -- it was half of the land that you start to build on. Is that the same as the amount of land that you don't need water permission for?

Well, I don't have the exact figures here, but...

Just ballpark.

We will start with 1 portion of the land to prepare so we can -- in the theory, we can also start with some buildings in the area.

I wanted to get some flavor -- 1/6 or if it's the half of the land, like sort of some sort of quantity to understand the size.

Yes, we have to come back with that one. So I don't give you the wrong figures.

Okay. And on something more there -- and then just regarding the -- regarding to what we just talked about, did you mean that both land investors, Stockholm South and [ Sunnanå ] projected to have some sort of preparation started in 2022?

Right.

Cool. And last 1 for me was just the indexation -- or more so the like-for-like questions. The first guy who asked questions said it was -- you answered it was including indexation [ the last guy ], excluding, as I understood, I just wanted to clarify what the 1% to 2% like-for-like growth includes?

Yes. We need to sort of doing the homework now when we can face the indexation what will be for 2022 and come back with the figures. It has been a mix of both as before. So we have to analyze that again -- once again.

And we have 1 final question from [ Christian Royal Davis ] from [ Uwing ].

Apologies to rather on about the indexation point, but I think there's a very important bit of clarification here, regardless of whether the number has been reported in the past is including or excluding indexation for the component, the like-for-like. But just conceptually, in your mind, as CEO, do you expect the business to grow the like-for-like 1% above indexation in the next 12 to 24 months as you guided 5 minutes ago? Or is that including indexation, which most commentators think is going to be kind of at least 2% to 3% for next year?

If the indexation will be 2% or 3% next year, then we have to change the guiding around 1%, of course, because we have almost 100% indexation of all our contracts. So I apologize if we are saying wrong or mix it up. But of course, when we do know the indexation for next year, if it's around 2% or 3%, we -- then we can see that there will be more than 1% like-for-like.

And as there are no further audio questions, I'll hand it back to the speakers.

Okay. If there's no more questions, and we have no questions from the e-mail. So we would like to thank you all for today.

Thank you very much.

And wish you all a nice week.

Take care.

Thank you all and take care.

Stay in touch. Bye-bye.

Bye-bye.

This concludes our conference call. Thank you all for attending. You may now disconnect your lines.