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

Good morning, and welcome to the Catena Q3 2022 Earnings Conference Call. [Operator Instructions]. Please note this event is being recorded. I would now like to turn the conference over to Jörgen Eriksson. Please go ahead.

Hi, everyone, and welcome to this earnings call. And operator, please proceed to the next slide. In today's presentation, we will start off by giving a short summary of the latest quarter, followed by a short overview of our customers and our property portfolio. We will then proceed to the business update, where we will touch on our current growth initiatives. Sofie and David will then walk through the numbers in the financial update, and we will then open up for a Q&A. Next slide, please. So first of all, it's a changing world, but we are standing very, very strong. So I'm happy to report continued growth and a very strong financial position with record low LTV as we are passing the 9-month mark for 2022. We registered continued rental income growth driven by our acquisition projects and a stronger like-for-like number. In the month of September, the CPI index reached 10.6% and which, if this continues into October, would mean a significant increase in the rental income for next year, driven by our majority CPI-linked contracts. The rental increases will help us to mitigate the effects of higher inflation and cost of debt. Furthermore, we continued our strategy of increasing the exposure towards modern logistic properties by making a divestment of a nonstrategic asset in Kista. After the quarter, we announced a new project in Ängelholm for Carepa and a new lease for the newly built facility at logistic position tossed up in Helsingborg. All in all, a good quarter. And next slide, please. So please proceed to the next slide. During the quarter, we conducted a number of divestments that resulted in a lower number of properties and lettable area compared to last year. These divestments are in line with our strategy, and we will on a per square meter basis, increase the quality of the entire portfolio. Next slide, please. Taking a look at our customer base. No significant changes were made in the top 10% customers with regards to rental value. We continue to work closely with our customers and support them in their growth journey. One example of that is the new lease agreement with Nowaste that's tossed up. Next slide, please. Here in the market update, I would like to comment on some of the trends we are seeing in the moment on the customer side. We are seeing a decrease in the share of take-up from new logistics space for e-commerce companies compared to the record year 2021, driven by need for these companies to lower CapEx and OpEx and thereby improve their cost structure. 3PL companies are increasingly taking up, the majority of the take-up for logistics. Furthermore, the recent events during the last 2 years have led to strategic decisions within companies to make supply chains more resilient and decrease carbon emissions. This has led to an increased demand for new logistics space closer to the home market. This trend, we expect it to continue for the long term. Furthermore, since costs are raising for many e-commerce players, improving logistical efficiency and continued investment in automation will be paramount in order to stay competitive in the future, both when it comes to the customer experience and on a cost level. Thereby, the logistics facility is growing in importance for these companies. Next slide, please. And the business update, we will take a look at our initiatives for future growth. So next slide, please. Taking a look at our current projects, we are progressing very well with a good cost control as we announced after the quarter ended a new facility at Tostarp in Helsingborg was completed and the fast-growing 3PL player, Nowaste, has signed a 7-year lease agreement for the facility. Furthermore, we announced a new project in Ängelholm after the quarter with Carepa company. The facility will be at 7,000 square meters and the investment will total SEK 83 million, and Carepa will sign a 6-year lease agreement and the facility will be completed next year in Q3. With our current projects, we are seeing a smaller delay with our project at logistics position Landvetter due to a now-solved issue with the Swedish Transport Administration. Completion is now set to Q4 2024, and we are now moving on with full speed. Next slide, please. With regards to our land bank, about 300,000 square meters is now allocated to a new project. Otherwise, we are working with our ongoing zoning plan processes. Just to mention also in this slide is that we have seen some very interesting transactions regarding land transactions and the price levels, for example, in [indiscernible] it was, on average, SEK 2,600 compared to the very low values that we have in our books, it's really an upside for Catena. Next slide, please. Taking a look at our acquisitions and divestments. We are continuing with our strategy to optimize our portfolio, increasing the share of modern properties in great logistic locations and divest nonstrategic assets. During the quarter, we sold a larger property in Kista, close to Stockholm. The property was run by originally a newspaper printer and has over the year had been redeveloped to a data center, which today houses the leading data center player interaction. We sold during the quarter, the property to Interaction since it's not a strategic asset and the price was sensational. We registered significant profit, which highlights the value we generate by working closely with the tenants and act upon interesting development opportunities over time. As a strategy, we're prioritizing our own project development where we're currently finding an attractive yield on cost, and therefore, being selective with regards to acquisitions. However, we do stand ready if great properties will be available at attractive prices in the turbulent times. As for the 9-month period, we have now acquired 72 square meters of lettable area which the majority is related to the Halmslätten acquisition. we have, at the same time, sold a number of our properties, which led to SEK 100 million in profit. Next slide, please. Looking at our leasing operations, we continue to register a strong net leasing of SEK 27 million in Q3. The WELL continues to increase slightly due to a stronger customer interest for longer leases. Our letting ratio continues to be high, standing at approximately 97% and also reflecting the strong demand for our segment. And now I would like to hand over to Sofie for the sustainability and financial update. Next slide, please.

Thank you, Jörgen, and hello, everyone. Taking a look at sustainability. We are increasing the pace of certification of our property portfolio. This is showcased in Q3 where we certified 5% of our entire portfolio. It was a great achievement by the team. We also upgraded our EPRA sustainability rating from Silver to Gold. With regards to our coworkers, we are very proud to report that we maintain our high rating of 88% in the employer rating, Great Place to Work. We are above the industry standard and our goal for 2025 is to maintain and stay over 85%. We will continue to work to improve all parameters and through the process, maintain and recruit the best talent at Catena. Over to Slide 15. There is also some financial updates. We go on to Slide 16. Our income for the period was driven by our made acquisitions, completed projects and indexation driven by our CPI-linked rent agreement. Rental income for 3 quarters amounted to SEK 1.2 billion compared to SEK 1 billion during 2021. This also increased our net operating surplus with 11% to SEK 900 million compared to SEK 821 million last year. Property costs per square meter amount to SEK 148 compared with SEK 132 last year. The increase is driven by higher electricity prices, which in turn is re-invoiced to our tenants. Our profit from property management rose 18% to SEK 723 million since Q3 2021. Lower financial costs driven by our financing mix, lower LTV and together with higher rental income are the main reasons of the increase. Next slide, please. Rental development for the quarter continued to develop as the previous quarter with strong like-for-like, driven mainly by indexation and a higher occupancy rate. Divestments had a bigger impact of 2% this quarter due to sizable sale of Fröträdet in the end of Q2 and Trelleborg in Q3. And as earlier mentioned, this is 2 nonstrategic assets where we saw low potential for future development. As mentioned in previous presentations, we have a favorable position with regards to conversation of higher CPI to rent increase. We estimate that 90% of the CPI increase will translate to rental income going into next year. Now I would like to hand over to David, who will talk you through our financial standing.

Thank you, Sofie, and good morning to everyone. So far, during 2022, we have witnessed a dramatic shift in capital markets. Capital has become more and more scarce. And credit yield spreads have widened, specifically related to real estate and the bond market. Inflation is elevated and interest rates has followed suit. While we continue to keep a close eye on the economic and financial developments, it's our general perception that our strong balance sheet, combined with our long-term commitment of owning high-quality, cash-generating properties offers us a sound safety margin, but also flexibility and opportunities ahead. On balance day, our loan-to-value was reported as 35% and our secured loan-to-value was 29% with an average cost of debt of 2.7%, which constitutes an increase of about 40 basis points from last quarter. Interest cover of 5.2x signals strong cash flow and the equity ratio of 51% is record high. Next slide, please. Our debt maturity structure implies we have about SEK 4 billion of refinancing to do the upcoming 12 months. Whereof we have already signed and negotiated for about SEK 1 billion, rest of SEK 3 billion is related to bank loans for most part. Credit margins have been stable, and we expect only a small price concession over the coming 12 months compared to one year ago. Almost 60% of our outstanding loan portfolio consists of bilateral bank loans and about 30% is related to capital market funding and the rest is Danish mortgage bonds. Over the coming 12 months, only SEK 400 million are maturing bonds. Through a strong cash holding position of SEK 1.4 billion along with unutilized and confirmed credit facilities in the amount of SEK 2.3 billion in combination with the resilient cash flow from operations, we feel comfortable to handle upcoming refinancing activities in combination with deploying capital to our development pipeline. Next slide, please. Our interest maturity structure implies we have currently 68% of total debt hedged with an average term of 3.3 years. Our derivatives portfolio and fixed interest loans combined have an average term of about 5 years. Within the next 12 months, around 40% of our interest exposure is potentially changing. This strategy offers in part the protective shield to increasing market rates and the impact in sales on our cost of debt. In the current context, it makes perfect sense since it offers us time to benefit from a high degree of CPI projection. For a strategic reason, we could also make use of the value of our existing derivatives portfolio to either lower our cost of debt and/or expand our hedge ratio that would, however, come with the cost of shorter overall interest maturity. Next slide, please. While logistic yield have moved out somewhat over the last quarter, sustainable rental growth and occupier demand in the sector will play an important role in cushioning the impact on values. We have run a number of stress test scenarios to assess the impact of higher property yields and rental growth on valuations. In this slide, Specifically, we present 2 different scenarios. They are based on Q3 numbers and serve only as an illustrative assumption, not as a forecast of any kind. The first scenario assumes all else being equal, that yield requirements expand by 2 percentage points. That suggests a corresponding drop in market value of about 40% which would lead Catena's loan-to-value to around 60%, which is the lowest covenant threshold the group has to maintain. The second scenario assumes all else being equal, that yield requirements expand by 2 percentage points and that rental income increase momentously by 5%. That suggests a drop in market value as well, but only to the extent loan-to-value is capped below 55%. Given the market situation, we feel there is satisfying headroom to our covenants supported by a strong balance sheet. Next slide, and over to Sofie.

Thank you. On Slide 22. More words on capital deployment, acquisitions during the first 3 quarters came to SEK 1.9 billion, mostly due to the Halmslättens acquisition. Divestments for the period amounted to around SEK 900 million, which increased this quarter due to the Trelleborg divestment and current development CapEx amounts to almost SEK 1 billion. As mentioned earlier, we are comfortable with our financial position, which allow us to continue to invest in our projects and acquisitions. And next slide, please. For the period, we added SEK 2.8 billion as a result of net acquisitions and development CapEx. For the quarter, we made a minor write-down to our property value as a result of increasing yield. As David mentioned in earlier slides, we are well positioned to carry the impact from increasing yields with our CPI-linked contracts and also high yield on cost on our projects. And going to Slide 24, and it's time for the takeaway from today and handing over to Jörgen on Slide 25.

Thank you, Sofie. Well, Takeaway from Catena Q3 can be summed up into 3 points. The first is that Catena is in a very strong position with strong underlying long-term trends, the market for logistics property is driven by sound fundamentals, and we are in a leading position in that market. Second, Catena has a resilient financial position driven by our strong cash flows and low loan-to-value, which give us significant headroom going forward. And lastly, we have unique growth opportunities through our land bank and acquisition strategy. And with that said, I would like to open up for questions.

[Operator Instructions] Your first question comes from John Vuong from Kempen.

I think you mentioned you are expecting to be able to capture 90% of CPI. What's the factor or reason for not, say, 100%. This is due to the nature of some contracts? Or do you expect pushback from some tenants?

No, that's from the contracts. For example, in Denmark, the normal cases, there is a floor and there is a cap. So that's -- and also we have some contracts in Sweden, where there is not 100%, it could be 85% of the indexation. So all in all, we are at the level of 90% of impact.

Okay. That's clear. And on the floor and caps, could you perhaps give some color on what these levels are?

It's up and down. I don't have the exact digits here. It's easy to get me wrong if I say a digit difference. But for sure, most of the contracts in Denmark, there is a cap, and that's also the reason because it's another situation in Denmark. You have the right to, in an existing contract, renegotiate if it's not in line with the market trends. That's why also this part want to have capped in Sweden. We have a contract, and then we have to follow it all the time as long as the contract lasts. That's why we, in the normal case, have uncapped CPI in Sweden.

Okay. That's clear. And just on to market rental growth, do you think it's able to keep up with this indexation, or do you expect that WELL rental growth is a bit lower?

No, I think it's -- with all the things on the table today with higher construction costs, higher cost of debt, I think that this CPI adjustment of about if it's not 10%, it's no problem to justify that new level.