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

Welcome to the Catena Q4 2021 Annual Report. [Operator Instructions] And just to remind you, this session is being recorded. Today, I'm pleased to present Jorgen Eriksson, the CEO; and Sofie Bennsten, the CFO. Please begin your meeting.

Hi and very welcome to Catena's audiocast for our year-end report 2021. Presenting today is CEO...

Jorgen Eriksson.

And then myself, CFO, Sofie Bennsten. Jorgen, you're welcome to start with some highlights for the year.

Thank you, Sofie. Moving to Slide 3. Catena came out very strong for '21 with a 10% increase in the rental income. Our profit from property management has increased by 15% year-over-year. EPRA NRV has increased by 32% to almost SEK 324 per share. Earnings per share came out at SEK 66.63. WALE is now 5.5 year with an occupancy of almost 95%. It's worth mentioning that we came out 2021 with the cost of debt only 1.9%. We have started groundwork at some of our new Logistics position as Landvetter, Sunnana, Stockholm South, and furthermore, we have acquired 200,000 square meters land in Jonkoping, probably the best position in Jonkoping at the moment. Yesterday, Catena announced the bid on the property portfolio of Halmslattens with agreed property value of SEK 1.52 billion. We experienced a very strong demand from new logistics facilities the next 12 to 24. Moving to Slide 4. We are -- we'll do a quick review of 2021 in terms of development, operations and ESG. We have replenished our landbank with approximately 700,000 square meters of attractive plots in the Helsingborg region, adding future potential investment of about SEK 2 billion and 300,000 square meters of new prime logistics space. Groundworks, as I said before, have started or are about in Landvetter Gothenburg, Stockholm South, Sunnana Malmo, and Hyltena Jonkoping, all being prime locations for logistic purposes. We have also completed 30,000 square meters of new developments at the range of 6%, 7% yield on cost. In terms of operations, we were awarded with BBB- credit rating following beneficial impact on cost of debt. A SEK 5 billion MTN program were established and we successfully placed our green bond of SEK 1.4 billion. We raised proceeds of approximately SEK 1 billion in an oversubscribed placement of shares to capitalize and accelerate growth. In the first quarter, we expanded geographical footprint in Denmark by additional acquisitions. Despite the pandemic, we collected close to 100% of rents throughout 2021 and capital value movement due to active management, development completions and yield compression amounted SEK 2.3 billion corresponding 11% increase. And regarding ESG, we announced commitment of new sustainability targets, targeting to become net zero before 2030. We became certified as a Great Place to Work member and we performed and published risk analysis in accordance with the principles of TCFD. Moving to Slide 5, financial performance and further on Slide 6. Sofie?

Yes. And in addition to the 10% increase of wins during the year, we had an increase in property expenses, 12%. The increase is partly due to a normal SEK in the maintenance since the COVID struck. The surplus ratio came to 79%, a little bit below the ratio for 2020. The increase of the income property management was 15% since last year. Our realized changes in property value amounted SEK 2.3 billion during the year and corresponds to 11% of the value before adjustments. Value changes of derivatives amounted to SEK 200 million. And we also sold a small piece of land in Jonkoping, which amounted to the realized change in property value of SEK 22 million. All in all, the profit for the year amounted to SEK 2.7 billion, resulting to an earnings share of almost SEK67. Moving on to Slide 7. Jorgen?

Thank you. As indicated by the diagram, our cash flow has been growing consistently since 2016. For 2021, we have performed another strong cash flow year where we retained almost 60% from revenues in property management income. Cash flow enable us to generate investment capacity and our target is to maintain a level above 50% of rental income. Our dividend objective is to distribute 50% of profits from property management, less standard tax. Moving to Slide 8 and further on to Slide 9. Sofie?

Yes. During the year, we bought 5 properties in Denmark, 4 in Sweden and also 5 properties from [indiscernible] to develop, where we hope to build [indiscernible] The latest acquisitions of land is in Bjuv, outside of Helsingborg of 565,000 square meters and another 200 square meters in prime locations in Jonkoping. We have by the end of the year, a total of 126 properties, where 9 located in Denmark, which are included in the Malmo region. The economic letting ratio went down to 95%, a small decrease in large strips due to small vacancies. The process of finding new tenants are in progress. We already managed to fill some of these vacancies. Going to Slide 10. The portfolio resembles last year, but we can see a shift of the 10 biggest tenants now stand for 42% of the contract to income compared to 47% last year. This is much due to the acquisition made in Denmark in March. We're one of the larger tenants from international freight forward, NTG, Nordic Transport Group, a new and stable add-on to Catena's customers. Going to Slide 11, and Jorgen?

Talking a bit more about the customer base, on the left-hand side, we can see the top 10 customers in terms of rental value, and beneath you can see from the well-known [ global ] types that our customer portfolio consist. The right-hand side we have the sector exposure. Our logistic and transport represents 43% of the revenues. Going to Slide 12. The rental income amounted to almost SEK 1.4 billion for 2021. The total growth in rental income was almost 10% year-over-year. Project developments contributed with 4.5% and net transactions with 4.4%. Like-for-like growth contributed 1.4%, which comprises extension of lease reviews and renewals, as well as indexation and changes in vacancy. There was also a smaller one-off effect related to prepayment of another lease expiry amounting to minus 0.6%. Moving to Slide 13. The rent levels in our regions are presented here. And as you can see, we have the highest levels in Stockholm, Malmo and Gothenburg and the majority of our contracts are linked to inflation measured by CPI, Consumer Price Index. Moving to Slide 14. We have a net leasing for SEK 32 million for 2021. In Q4, we had a negative SEK 22 million due to 1 customer who moved out, but we have already signed a new contract for a part of the [indiscernible] in during 2022. So it's good for this year. The WALE is now 5.5 years and the letting ratio, as we mentioned before, 95%. Moving to Slide 15, and further on to Slide 16. EPRA NRV has grown by 19% annually since 2016, and we came out 2021 with almost SEK324 per share. At the same time, 5-year average return on equity has been at 20%. Moving to Slide 17, Sofie?

Yes. Our investment properties have grown with the acquisitions of SEK 1.5 billion investments and projects of SEK 900 million and SEK 2.3 billion were value changes. The equity has grown 48% since last year and the EPRA NRV, the long-term net asset value came to SEK 323 per share. Total assets came to SEK 25.9 billion, an increase of 27% since the beginning of this year. Moving to Slide 18. Investment properties amounted to [ SEK 23.4 ] billion that is an increase since last year with 26%. The unrealized changes of SEK 2.3 billion are monthly due to still growing market yield compression in Sweden, but also in Denmark. And we also had some projects being finalized during 2021. The EPRA net initial yield came to 4.9%, which is down 0.6% since last year ending. Moving on to Slide 19. Cost of debt decreased due to our unsecured green bond and also we have repatriated such a lower rate in the beginning of the year -- during last year. And the average interest rate ended this year at -- last year at 1.9%. During the year, our interest-bearing liability has increased to SEK 1.3 billion that is an increase of 40%, almost to SEK 11.1 billion. The net LTV came to 43.1%, well below our new goal of 50% that we launched in the beginning of April. The equity ratio, as reported, at 43.5%. Going to Slide 20. During 2021, we extended our average debt maturity to [ 3.3 ] years. The average interest maturity stayed at 3 years. We keep continue to work with the sustainability within the company and to certify our buildings. These efforts have led to that we now have 25% green financing in our debt portfolio. Hedge ratio went down to 63% from last year of [ 67% ]. Moving on to Slide 21 and further on to 22, and Jorgen.

Thank you, Sofie. Our goal is to focus the majority of our investments into development. Although during 2021, we have acquired properties for about SEK 1.5 billion, somewhere around SEK 700 million in Denmark. We have also invested around SEK 900 million in projects. Moving to Slide 23. We have by the end of 2021 projects in progress where there is SEK 1 billion remaining in investments, the GLA construction is 113,000 square meters and the largest project in this slide we show on the map, 38,000 square meters in Morgongava were finalized in February 2022. Moving to Slide 24. On balance day, we hold a potential of about 5.3 million square meters of land where almost 1 million square meters are consolidated and we -- with development plans in place. Rest of the landbank is conditional on various contractual agreements such as zoning plans having to gain legal force. Moving to 25. Sustainability and further on to 26, Sofie.

In addition to our continued work with environmental certifications around buildings and installation of solar energy, we'll continue to develop our understanding of climate changes and what Catena's impact can be. Not only have we made climate with inventory of our total portfolio, we also developed our own sustainability program, which aims to identify and steer all our larger projects to be incorporated and the impacts of the environment. Our net zero target now [indiscernible] and with that all emissions from project, which is the new aspects in our sustainability goal for 2022. Another big step for our company is to work with the goal to be net positive and biodiversity of 2030. This is an inspiring and challenging ambition that will go forward to work with. Going on to Slide 27. Outlook and further on to 28, and Jorgen?

Some outlooks for the next 2 to 3 years where we feel very confident with the significant growth. The market condition speaks in favor the levels of our historic highs and predicted to last given the strong drivers and see a supply shortage of new modern spaces and land is becoming scarcer in some areas. We will have the focus on development complemented by disciplined approach to new acquisitions. We have a clear development opportunities of approximately SEK 3 billion. At the same time, we are also searching for a complement on high quality logistic assets to diversify, especially in the southern part of Sweden and Denmark. A strong reputation is a key to securing the land and the discussions with municipalities and other land owners. We have the financial strength and the long-term management, which are keys to success. Moving to Slide 29. I will be a bit more specific about the near-term development opportunities to present this slide, which summarizes to a potential value of SEK 3 billion and includes occasions we have mentioned before and where we have started or is to start ground work very soon. All its ground works are about to be done just to be in a good position, so we are very committed to start with projects. Today, we have lease agreements on place. Moving to Slide 30. Now in the beginning of 2022, the best logistic area in Sweden is Helsingborg. That's now ranked #1 by the Journal of Intelligent Logistics and we have 2 very interesting land plots of about 700,000 square meters and look forward to start projects here in the coming 2 years. As we speak, the supply of land in Helsingborg is very limited. Moving to Slide 31. This is the vision picture of how it can look like at the Logistics position Ramlosa when the project is finalized in maybe 2023 or 2024 and this is one of the spots, which we mentioned in the previous slide. Moving to Slide 32 talking about the dividend. For 2021, the Board suggests the dividend of SEK8 per share. The compounded annual growth of dividend is from 2016 to 2021, 20%. Now we move on to the Q&A session.

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

Okay. Let's start off with the vacancy rate. It increased in the quarter to 5.3%. Can you add any flavor on that one?

Right now, we are -- as we've said, there is some tenants in a no shopping and move that out in the last balance of 2021 and we have already press released some parts of the vacancy. It's rent out and a project is ongoing and during 2021, we will probably fill up -- all of the area, but not all areas is signed today.

Is there any...

We can see, it's like a temporary, but not so huge.

Okay. And my second question is about HelloFresh development project in the JV. I can't find in the project list you have there and have you -- what do you believe the JV will contribute to your profit from property management of the completion of that project?

It should be in the earnings capacity. I assume the project will be finalized in Q3 2022 and there will be some smaller digits in their earning capacity, but we'll maybe -- I'll check it further on.

Yes. You raised it slightly from 0 -- from minus SEK 5 million to SEK 0 million, but...

Yes. That's correct. During 2022, they may have been I think October or something like that, but we only see small impact in 2022 and the same impact the first by 2023. Exactly what demand -- what the earnings will be from JV I can't answer today, but we can get back to you on that one.

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

First question is really your -- your property uplift in the fourth quarter, could you give us a split of the impact from cash flow and the impact from yield compressions?

We have seen clear -- clear signals from the market completed transactions where we have -- we have the yield compressions and we have very good locations for example in certain Helsingborg. So it's obvious that the yields have been trending downwards, the latest month in 2021, without mention any digits.

Okay. So it's probably 80% to 90% its yield compression, right?

Well, that's your assumption, but yes.

Okay. And how much -- how much do the projects contribute to the property uplift in the fourth quarter?

In the fourth quarter there was not so many projects completed. I cannot mention any exact digits in that case either. As of February, we will have now in Q1 '22, there will be a larger project finalized, but we'll see what happens with that value going forward.

Okay. My second question relates to your like-for-like growth of 1.4%, how much of that was indexation?

Indexation for 2021 was very low digit. It was -- CPI was -- I think it was 0.4, 0.5, so very low digit.

Yes. And then also probably impacted by a little bit higher vacancies, how much did that affect the like-for-like growth?

Well, we have to come back with that. I don't have the exact digits on that one either, sorry.

Our next question comes from the line of Markus Henriksson of ABG.

Very appreciated here with the development table and outlook for the coming years. Just want to see what -- how -- what's your view on the competition here for tenants and are you ensure the tenant discussions for the developments with possible start here in 2022 that you list?

Yes. I mean, the -- the competition is nice and sharp so to speak, but we feel confident that we have the right positions in terms of we hold the lands and that's the strongest trump card in this game. So we have a good feeling that we can compete in the market, and there is -- as the underlying demand of new space is -- mentioned is very strong. So that's also -- that additionally is that the first time in Catena's historically that we have started so many ground works without having any kind of lease agreements on place because we feel that we need to be good when we have lease agreements signed, we don't know when or how much, but we are -- we are positive.

That's very clear. Second question, you are currently bidding on the Halmslattens portfolio and I just want to see the ramming NOI is around SEK 60 million in those 2 properties. Are there any property costs that you can trim or is it around the net [ initially ] of 3.9%? Is that correct or do you see any potential for better cash flow than on Halmslattens has performed historically?

Not on the short term. We think this is a very good property. It's a solid property. It's certified by BREEAM. We like the customers a lot there. It's good position. This is spot on for the Catena portfolio in the long run. So, or -- we have to come back to see what the potential is trimming mainly cash flow.

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

Yes. And I also had a question about Page 13 in the presentation where you indicate that the prime rent for distribution centers in regional cities has started to decline, is that for assets in place or in the new developments and can you comment a bit about that?

If we can say, it's also a discussion we have a lot. If there are competition and if there is -- or land available for many hectares, it's pretty tough to keep the rent levels up because there are a lot of developers chasing for this sugar bowl. That's quite easy to follow that arguments. I mean the developers, they can produce, they can sell off for a very, very low yield at the moment, and we, as a long-term player, we are not willing to go that low in yields when we are discussing with new tenants so, yes, that's our take on this.

But do you see the same -- the same pattern for -- for assets in place or this new construction?

Now the question is on the table today. What we have to renegotiate and if we are in a region -- city outside the biggest areas of Stockholm, on the Gothenburg, for example, South of Jonkoping, there are land available and the developers are pushing down the rent levels very low. It's at the same time quite challenging for us to -- but then uplift in the rent levels.

Okay. And my second question there is about investment volumes. You've invested SEK 900 million 2 consecutive years. You have a target of SEK 600 million, and you have quite a lot of land. What do you expect about investment volumes for next 2 years? And [indiscernible] your targets?

Yes, we have to come back with that. It's that will be on the table, but as we've said in the presentation, we have a good feeling there is the potential of higher digits. We don't know and we are not finished by -- by the internal strategy of what's kind of digits will enter the market regarding projects, but clearly it's that potential the coming 12 months to 24 months.

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

2 more questions from my side. First one is your other operating income of SEK 5 million in the quarter, what was that related to?

This was an insurance income.

Yes. This is one-time insurance. It's been a long discussion -- a long process we had and came out with our favor and some of the insurance that comes so it's just a one-off.

Okay. And on the financing side, your average interest rate came down to 1.5% here in the fourth quarter. When you looked at the financial market and so, do you think you could keep at 1% -- 1.9% throughout 2022?

It's hard to say, had some insurance maturity to refinance during late this year. We've been a bit in Q3. So of course, we see like everyone else, that we're seeing the interest environment. We have -- we have the world worked from that like everybody else, but hopefully cyclical long-term or short-term we're going to try to keep them as much as down. I don't know but we have [indiscernible] with you as well as at the press release, I don't know if you want to add to that something?

No, thanks. You've mentioned some of the -- I think what's [indiscernible]

Sorry. Hard to hear to what you're saying.

Sorry. What I was saying was for 2022, I think we feel quite comfortable with these levels, but at the same time, I think you see as a good point in the 0 interest rate environment we feel is gone. So it's logic to think that interest rates in the future will be higher, but for 2022, we feel comfortable to stay at these levels. Discussions with banks indicate that we stay at the same credit level as before, whereas the bond market is definitely much more volatile as you're -- I guess you're aware of them. And let's see where the credit -- credit spreads will stay at once the new credit conflict is over and the idea of where inflation will also be at.

Our next question comes from the line of John Vuong of Kempen.

Just follow-up on the re-letting you've done. I appreciate that reversion is highly location-dependent like you mentioned, but is it possible for you to quantify what the exact reversion was or perhaps ballpark figure that you've seen in the re-letting you've done this year? And did it require any specific CapEx to re-let these assets?

Yes. Of course, there have been some smaller CapEx in one more -- in some cases. We will not go into -- to any distance about that. We do feel in some renegotiations now going forward that there has been in locations there could be some potential to the rent levels if we are around the Stockholm area, Helsingborg, and Malmo. But we also can see that we don't -- do not have so many contracts for the next few years to renegotiate. We do feel that there is a strong demand. So we feel confident by 95% -- 96% as we have within the last years. That's what I can say. So it feels good concerning the vacancy rate that we have.

And then perhaps on the re-lettings to be done this year or in 2022, is it more -- are there more contracts to be re-let in the major cities or in the regional cities, let's say?

It's mix. We have some now in the Stockholm area and everyone knows that it's easier to try to push up the rent levels in that area compared to if you are outside citizen, you are in South of Jonkoping or [indiscernible]. So we have a mix up. It differs. If we can maintain levels around Jonkoping, Bjuv area. It's good and in some cases, as I said, I think we can rate in short-term and definitely from the mid-term if we are in the Stockholm area.

[Operator Instructions] And there are no further questions at this time. Please go ahead, speakers.

Okay.

No further questions. And we say thank you to all of you listeners and have a nice day.

Have a nice day. Have a good day.

Good bye.

Bye-bye.