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

Welcome to Catena Q4 Report. [Operator Instructions] Now I will hand the conference over to CEO, Jorgen Eriksson.

Hi, everyone, and welcome to this Q4 presentation. Please proceed to 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 property portfolio, we will then proceed to the business update, where we will touch upon our current growth initiatives. Sofie and David will then walk through the numbers in the financial update, and we will then open up for Q&A. Next slide please. As we close the books on 2022 everyone can agree, it's been a turbulent year, fastly shifting macro trends driven by the war in Ukraine and energy crisis in Europe has put large pressure on the economy as a whole. Despite this Catena has ended the year and stronger position than ever with an optimized prime asset portfolio, new existing projects within new development, and a resilient financial profile with a record-low LTV below 32% and a very strong cash flow. As we move into 2023, we are optimistic regarding growth within acquisitions, new developments and energy investments. We are in a fortunate position where many players need to scale down, but we can at the same time, put the foot on the pedal. Regarding our Q4 results, we continue to report rental income growth driven by acquisition, projects and the stronger like-for-like numbers. Going into 2023, we will be able to buy our CPI-linked contracts to get 10.9% rental increase from approximately 90% of our total of contracts. Thanks to our close relationship with our customers. We have had an early discussion and preparations for this race with our customers understanding more or less the reasons behind it. During the quarter, we conducted an equity raise of SEK 1.6 billion earmarked for growth at an attractive ROI for Catena and I'm looking forward to shed more light on these initiatives as we move ahead. And just before year ended in line with our stated intention with the right issue, we acquired 2 prime cold-storage assets from ICA Fastigheter through a sale and leaseback transaction more details about the deal later in the presentation. Next slide please. Now for a business overview on the next slide, please. Starting with the market update, we are facing a trying macro environment with decreasing consumer confidence impacting all companies. What we are seeing that Catena, is that the market-leading players are cementing their position in segments such as food and beverage and healthcare, and are more unfaced by the current trend. Catena fortunate to have most of the leases with players such as DHL, PostNord and Apotea, when they are growing, we can assist them in getting around ourselves. Thereby, we are optimistic regarding our customers and our ability to navigate in this challenging environment. And in this transaction market, we are seeing it going up, and transactions being made and our acquisition of ICA assets are just one example. We expect to see more assets to come on the market and Catena is in a great position to capitalize through our financial profile and ability to execute fast when needed. Regarding new development, we are seeing a growing interest for prime land lots in order to stay competitive and lowering cost. Many e-commerce companies has shifted their operations to 3PL players, who came with the larger customer stock, invest heavily in automation and utilize their space more effectively. This business has led to increased demand for modern facilities, suited for automation and has energy-efficient setup with plans for clean energy, generation and research stations for electric trucks. All these factors has accelerated these past years. And all of this comes back to the long-term factors that favors logistics, the shift from transporting pallets to physical stores to now needed to include individual packages to customers has driven an immense demand for new space. Ongoing trends such as omnichannel and circular commerce are also growing trends that adds the demand for more logistics. This together with longer and more complicated selling processes drives more pricing power for existing assets particularly for prime assets. Time is there for Catena's brand in this regard and we will believe the fundamentals for logistics to remain strong for the coming years. Next slide please. For a business overview and during the quarter we added the property Egeskovvej in Horsens, Denmark which brings the portfolio to a total of 125 properties with the contracted annual rent of SEK 1.6 billion. In Q1 2023, we had closing on the second Danish DKI property and also the ICA assets that we signed before Christmas. 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. And with that said, in the next quarter due to our ICA transaction conducted in Q4, ICA will be our second largest customer, all else equal. Sorry, and food and beverage will be the largest segment within our portfolio and further diversify the customer segment. Next slide please. During the quarter, we conducted an equity raise of SEK 1.6 billion. We have identified 3 areas of growth investments, which we are now in a position to act upon while also maintaining strong financial profile. The 3 areas are, projects within new development, the pipeline of potential new projects are approximately SEK 1 billion, and we are enabled by our unique land bank and by our position as a leader within the Nordic logistics. Within energy, we have identified investments in solar panels and battery solutions upward SEK 500 million which can give us an IRR in the low double-digits. Through these investments, we also future proof our facilities and take leap forward toward the net-zero targets for 2030. Lastly, we have earmarked SEK 1 billion for investments on the transaction market and we are seeing great assets coming out on the market that's attractive yield levels and will act upon those which fits our portfolio strategy. We have acted fast in this regard and acquired the 2 ICA assets, which I will delve deeper into now. Next slide please, which is in the business update. So next slide please. The ICA acquisition, and just before the year ending, we acquired the 2 prime cold-storages from ICA Fastigheter, the leading food retailer in Sweden. This transaction showcases our ability to execute fast when needed, and also the great opportunity that exist on the market. These assets are in line with our strategy to own the best logistic properties with best customers, in this case, we have bought 2 great assets on excellent location for SEK 500 million with [ 5.75% ] yield. Arendal which is showcased in the picture overlooking the port of Gothenburg, the largest port of railroad traffic in the Nordics, and both facilities are recently built and has excellent sustainability credentials with Arendal particularly stands out with a BREEAM building of the Year Award. The transaction was made by sale and leasebacks structure, where ICA has signed a 7 year lease, and we are very happy with the transaction and to deepen our partnerships with ICA. Next slide please. Taking a look at our current projects, we are progressing very well with good cost control. We are seeing a peak in construction prices and it's trending downwards from now on. Regarding the current yield on cost, we see that upcoming projects will, due to higher market yields and construction costs hover around 6.5% going forward. Next slide please. With regards to our land bank, we have progress with Orebro South and Logistics position Soderasen with the zoning plan advancing forward. Both of these large -- represent large areas for prime logistics and expect to gain legal force during this year. Some of the other processes are taking a little longer time, and that is something we have to get used to. Next slide please. Looking at our leasing operations, we reported a net leasing of SEK 85 million for 2022. Our letting ratio continues to be high standing above 97%, reflecting the strong demand for our segment. And now, I would like to hand over to Sofie for the sustainability and the financial update.

Thank you, Jorgen, and Hi, everyone. Taking a look at our sustainability, we continue to work with certification of our property portfolio. Ending 2022, we had 25% of our lettable areas certified, which is 10 percentage point increase since last year, and we will continue this work during 2023. We also increased our produce solar cell with 86% during 2022. In the coming annual report for 2022, we are glad to be able to introduce the new KPI with regards to our ambitious biodiversity goal to be net positive by 2030. We have chosen to track our progress using Green Area Ratio that is [Foreign Language] in Swedish. This is a way to measure eco-efficiency on the land area, the 2 that many municipalities use and our cap regulations are in many ways based on the calculation which is used by the City of Stockholm. While an international standard hasn't been settled upon, we believe this KPI is a great way to benchmark our initiatives beneath biodiversity. And going on to Slide 16, some financial updates and further to 17, thank you. Our income for the period was driven primarily by our made acquisitions, completed projects and some indexation. Rental income for the year amounted to SEK 1.5 billion compared to SEK 1.4 billion during 2021. Going forward in 2023, we will see a major impact on [ RFC ] by linked-contracts. The higher rental income increased our net operating surplus with 11% to SEK 1.2 billion. Property costs per square meter amounted to SEK 150 compared with SEK 140 last year. The increase is driven mainly by higher electricity prices, which in turn is invoiced to our customers. Profit from property management rose 16% to SEK 954 million compared to SEK 824 million last year. Higher financial income acquisitions and new developments have had a positive effect in the increase. Going to Slide 18. The rental development since last year consisted of project developments of SEK 40 million, and one example is the finalizing of the big project in Morgongava, north of Stockholm. The 2 properties from Halmslatten we booked in April was a part of an impact of 81% acquisition. This was counteracted by divestments of SEK 38 million. For example, we divested the sale and we had a sale of Frotradet, [indiscernible] or Vanda in Kista. All this ends up in a like-for-like for '22, of 4.9%. I'm now handing over to David for some comments on financing on Slide 19, please.

Thank you, Sofie, and good morning to everyone. On balance day we have reported an equity ratio of 53.5%, which is well above our minimum target of 40%. During 2022, we raised equity on 2 separate occasions, and the first one which we conducted in the spring of 2022, enabled the logistics real estate company warehouses that call to become a new principal owner in Catena, which we're very pleased of. And we are very positive that, that's a good thing for shareholders long-term. Anyway, they were both considered offensive from our perspective, but they also serve as a protective shield against the stressed financial market that we all are aware of right now. Gradually, over the last 5 years, we have strengthened our balance sheet which has now put us in a good and presumably favorable situation. Next slide please. From this quarter, we have announced a new KPI to our finance policy. Net debt to EBITDA which should be maintained at below 9x, and on balance date was reported at 7.9x. And among all it highlights our strong cash flow commitment in relation to our net debt going forward. Our loan-to-value was at the same time reported at the low-32%, and our secured loan-to-value was 26% with ample headroom to our policies. Our average cost of debt was 3% which constitutes an increase of about 30 basis points from last quarter. Interest cover was 4.9x and also signals robustness. We could easily lever the company if we judge the risk reward to comply with our overall strategy going forward. But in the face of broadening price pressure and hawkish central banks, we are not hasted into any deals. Next slide, please. Our debt maturity structure in place we have about SEK 2.9 billion of refinancing to do, the upcoming 12 months. Where we have ongoing discussions regarding the entire volume. Most of that is related to bank loans, where we have good relations with all of the big Nordic banks. Above SEK 400 million is a secured bonds through SFF, which has already been negotiated for, and is expected to refinanced this quarter. We have more than enough liquidity to cover for 12 months of loan maturities, should that deem necessary, which is not very likely. In the fourth quarter, we renewed a revolving credit of SEK 2 billion, and with our outstanding cash holdings, we have a total of SEK 4.5 billion of liquidity. We manage to cash as effectively as possible before making use of them in our core business, which is expected in the course of 2023. We expect the bond market to stay rather dysfunctional over the course of 2023, as I viewed a total outstanding pool of bonds related to real estate to be too large and needs to come down to find a balance between issuers and investors. Next slide, please. Our interest maturity structure implies we have currently 71% of total debt hedged with an average term of 3.2 years. Our derivatives portfolio and fixed interest loans combined have an average term of about 5 years. Our strategy to keep a certain degree of interest rate protection in place has been consistent over time in the current context with price pressures still surprising on the upside, we are relatively well positioned. If the market rent were to increase from here with another percentage point profits would be impacted by about SEK 31 million, all else being equal. Next slide please, Eric. So how values are impacted by this new landscape of higher interest rates and higher yields is, of course, also a matter of occupied demand and sustainable rental growth. And we have clearly a very strong occupier demand. We have made a copy from the last quarter and run a number of simple stress test scenarios to assess the impact of higher property yields and rental growth on valuations. As last time, we present 2 different scenarios, they are based on Q4 numbers and serve only as an illustrative assumption. As the test reveals, there is plenty of headroom before we near our lowest loan to value covenant. Given our strong balance sheet and low loan-to-value, this is quite expected. As long as occupancy stays firm, there should be a case for a sustainable rents growth, which should help mitigate the yield expansion to some degree. Next slide. Over to you, Sofie.

Thank you, David. Looking at our capital deployment, we're the largest acquisitions during '22, [indiscernible], and the first of 2 properties in Horsens, Denmark. The total amount of acquisition came to SEK 2.4 billion. Divestments for the year came to SEK 900 million, and development CapEx ended at SEK 1.4 billion. We're still comfortable with our financial position which going forward will allow us to continue to invest in our projects and acquisitions. Going to Slide 25, some comments with regards to property valuations. We registered write-downs of SEK 365 million in the fourth quarter driven by higher yield requirements. This yield expansion has mitigated our CPI-linked contracts, which increases our rent levels. The average weighted valuation yields for the portfolio is 5.4% by the end of the year. For the full year, we made a positive valuation gain of SEK 865 million were SEK 765 million were unrealized changes. The EPRA net initial yield came to 4.8%. These are quite comfortable levels with respect to the current environment. And now it's time for Jorgen and some closing remarks. Please?

Thank you, Sofie. Next slide, the take away from Catena's Q4 can be summed up into 3 points. The first is that Catena is entering 2023 with strong fundamentals. Our organic growth opportunities are attractive and we can be offensive during the year. Secondly, we have a resilient financial position, driven by our strong cash flows and lower loan-to-value which give us significant headroom to act upon our growth ahead. And lastly, the third one, we are opportunistic with regards to the transaction market and new development and looking forward to present more great news throughout the year. And with that said, I would like to open up for questions.

[Operator Instructions] The next question comes from John Vuong from Kempen.

Just one on your CEO comments, you mentioned that you will probably announce several new projects this year. Could you provide a bit more color on what to expect? Does this fully related SEK 1 billion in projects that you're expecting, or is there anything else besides this?

I mean, I cannot give more flavor on the -- more color on it in terms of what customer is it and so on. But we are discussing deep with customers and certain land in our land bank. So it's looking very promising, I mean, at least SEK 1 billion is reasonable, but I would guess that it will be above SEK 1 billion in new projects presented during 2023. And also I feel quite confident with its decent levels in terms of yield on costs.

And in terms of decent levels, I suppose that's in line with what you're currently doing or would that be better than what you're currently doing?

Yes. As I've said before in the presentation, I think we will hover around 6.5% compared to the 6% that we have presented before.

Okay, that's clear. And maybe on rental growth. Historically, you also mentioned that on average rental growth is at best just indexation given availability of land. So I suppose you are bit more upbeat now with the comments you made during the presentation. Are we now actually in a situation where market trends growth can keep up on average with the indexation that we -- that we're seeing as of 1 of Jan, or is it even going to surpass this indexation?

I think we can keep the level that we -- the new level that we have after this indexation of 2023. I think also we can see some examples of even higher rents going forward in 2023, if we have renegotiations in certain places as for example, Stockholm, Helsingborg and Malmo. A little early to say, but we are confident with the new rent level that is approximately 11% higher than it was last year.

So does that mean that on your portfolio average, it could be better than just indexation?

It could be in some cases, yes.

Okay. And just one more on your financial policy, not pursuing a new KPI, but one of the KPIs that you already had is to maintain an investment-grade rating. Would you consider also obtaining one from an international credit rating agency given that you're also adding the net debt to EBITDA KPI now?

Yes. That's a good question and that's definitely something that we might consider, but we'll have to come back with that once that will be materialized.

The next question comes from Markus Henriksson from ABG Sundal Collier.

Thank you very much. First off, I want to thank you for the investment split here on projects and tenant adaptations, et cetera, very helpful going forward. I want to follow-up there a bit on the project volume, you invested around SEK 800 million here in '22 in new construction, and you highlight SEK 1 billion that you will use your new money from the equity raise. But the way I look at it, you have a lot of remaining investments around SEK 1.8 billion already and a lot of completions are in '23 and '24. So I'm a bit curious in to see what you see on potential new project negotiations? Or should we just expect that you finalize the ongoing ones?

Markus, good question, let me be as clear as I can. We have a remaining investments in our project portfolio for about SEK 1.8 billion. Then we are talking about a potential of a new SEK 1 billion in new projects that we can present to the market this year. So that in total, it could be that we are running SEK 2.8 billion in new projects during 2023.

Very clear. And then if we can just look a bit on the value changes in the quarter, minus 1.3%. Could you speed it up projects cash flow yield adjustments?

Yes. I'm looking at my colleagues here if we should do any splits. But I don't have the exact digits on that. We have to come back. We have it, of course, but not on top of my head. But of course, the yields have trended up as Sofie told you, and then we have the extremely counterweight in the indexation of 10.9%. There has been during 2022 also uplifts from the new completed projects, of course, but no certain digits top of my head, sorry.

That's fine. Then also a bit of an update on the HelloFresh project finalized in October, if I'm not remembering wrong, and it's a quite large facility, but I see the updated earnings capacity that you have 0 contribution from JVs in '23. Could you just give us a bit of an update on the JVs that you have and why or why not we should see any contribution from that role?

We have -- in the JV, we have -- there was a smaller delay on the HelloFresh. But now it's, of course, completed and the tenants have moved in. There seems to be an upside in that project. But in the JVs total, there are some other smaller challenges that is the counterweighted upside in the HelloFresh project, maybe we can give some more color on that in the coming quarters.

So a bit more negative development in the Foodhills part, while HelloFresh is giving a positive contribution for '23, is that correct?

Exactly. It's the older part of the Hello -- Foodhills Fastighet is a bit challenging, so to speak.

All right. Then also you highlight that the direct market might open up a bit in '23. Could you share a bit what you currently see on the transaction market? Do you get something from brokers? Or is it very limited deals out on the market currently?

We get a lot of questions from brokers. And I mean seller and buyer much, much closer to each other than the case was in the summer. Now we have to see what happens because of the Riksbank's interest rates uplift again. And so maybe some are more careful about buying. But of course, we are looking into some cases when we are talking prime logistics. I think that there will be more efforts -- deals, transactions presented in the market, not necessarily. We are one of the buyers, but we have seen a lot of proposals.

Last question, do we have any non-recurring items to highlight here in the quarter? I see, for example, a financial income of SEK 11 million. Should we expect you to continue to have this center return on your cash flow? Could you help us out a bit?

Well, there is a non-recurring item in the form of an exchange-related gain. Other than that, I think it's fair to assume that we will have interest income from funds being invested. We are living in a world right now where interest rates actually do occur also on investments. So -- and given the fact that we have a lot of cash, you can expect to have some income there. Yes.

Perfect. A follow-up there, to -- I see that there was SEK 14 million in currency and FX gain, but that was in Q3. So do you have another FX gain in Q4 as well? Or was it for the full year '22 that you meant?

Yes. The only a small figure in Q4, so from that's almost the main part, that was related to net interest income. And that will continue in 2023, but it's related to our cash holdings.

The next question comes from Paul May from Barclays.

Just a couple of questions from me. Starting on the finance expenses, obviously moved up to 3% as of the year end. Just noting you've got about SEK 4 billion of interest maturity at 0.3% in the current year. Is that right to assume that, that moves to a higher -- much higher rate over the years, so interest rate further increases by year end '23?

I have a bit of trouble hearing you. But if I interpret your question right, I think it's fair to assume that if market rates and when I say market rates, I mean, STIBOR 3 months and CIBOR 6 months, which are typically the interest rates that have an impact on our interest cost. If they were to increase by another 1 percentage point from here, you could expect about 30 basis points impact of our overall interest rate.

Just -- sorry, just to say that on the existing interest maturities, just noting you've got SEK 4 billion of interest maturities due this year at 0.3%. Would there be an additional increase on top of any changes in market rates as you refinance those interest derivatives and maturities?

Yes, that's a good question. I think it's fair to assume that whenever we do a refinancing right now, and most of that is related to bank loans, I think, in comparison to a year, 2 years ago, you have a minor concession, which could be somewhere between 10 and 20 basis points on top of the margin that we typically paid 18 months ago.

Okay. So all-in cost of refinancing about between 4.5% and 5%, is that a right -- fair assumption?

I think given -- let's give you a very concrete example. It all depends on what maturities you choose. But let's say the market rate is at about 3%. And you have a margin, which could be anywhere between 80 basis points up to 1.75 basis points depending on if you are lending in Denmark, Sweden, not [indiscernible]. So it's really difficult to give you a perfect answer to that one.

Okay. That's great. And just a separate one on -- obviously, WDP now owning 10%, I understand I think they've got a board representation, but I may be wrong there. What influence have they had on the business since the spring? Have they brought any sort of changes to strategy? Or is it an acceleration of the development pipeline, for example? Or is that something that was going to happen anyway?

And you're right there. Joost Uwents in the board since last spring and first of all, he has a fantastic experience from the logistics in Europe and a great track record. Joost has come with a lot of expertise in the boarding room, but also, we have met our management with WDP management. We have exchange experience. They are impressed by our sustainability work. We are impressed by their development history. Now we are looking into, as I said before in the presentation, quite heavy energy investments and for WDP, the energy is the biggest customer. So we have started to use each other for better business, so to speak. That's what I can say, at this stage.

The next question comes from Jan Ihrfelt from Kepler Cheuvreux.

A couple of questions from my side. Firstly, if you look at the NOI margins, the last 5 years, the NOI margin has been down in Q4 compared to Q3. Now it's more or less unchanged. Is there -- and you were mentioning there weren't any, I mean, one-offs. So that's indicating a better NOI margin going forward or --

I would say that we have a better NOI margin going forward. That's also a result of the optimizing the portfolio that we have started in the last years, and we will work further on with that in the coming years. So yes, we can assume higher NOI margin.

Okay. And going back to the projects, the project Sunnana and Stockholm Syd, how soon can you start this? Is it first half of this year or second half or any time frame that will be variable?

Yes. Sunnana, of course, there is a zoning plan its gain legal force, and we have started with ground work, but not for -- that's just a general word. So we could be very fast with the project there once we have signed a lease agreement with the customer, and we have discussions ongoing. So potentially with the construction work this summer after a building permit. Stockholm South, we have still a challenge with the water permit, but it's in the part of law right now and everything gets right. We are good to go for 1/3 of the area. And we have also made a lot of groundwork there using dynamites and so on. So we could also be good to go and start construction this summer or even a bit earlier if there is a rush from the customer side.

Okay. And the Ramlosa project looks on the table here that has been a little bit delayed for half year. So is there something that happened that has caused this delayed?

We are in negotiation with the municipalities. We will do in time agreement for the land. And so I think it's up and running right now with some smaller delays, but that's -- you have to get used with that when you're talking with municipalities, traffic government and land deals and I don't know the English word, but it's taking so much time.

Okay. And then a little bit of a clarification, you mentioned that the ongoing projects, the remaining part of it is SEK 1.8 billion and you probably will add another SEK 1 billion in new projects this year. But what about CapEx? What -- because I think these are divided into '23 and '24, so what's -- do you have any CapEx guidance for this year?

For this year, no, we have to come back with that. It also depends on when we are starting up the different projects that we are talking about. That is not decided yet, of course, since they are under agreements. But we are more guiding the market that we have the potential and probably present projects. But when we start the construction, that's -- we'll have to come back there.

And my last question regards acquisitions. Actually, you have a lot of projects that is going to be started. But are you still looking for acquisitions? Or is it -- are you going for the projects alone?

Well, that depends on how much projects we will decide upon. But of course, it's an interesting alternative with some more acquisitions. We have the firepower, and we are ready to use our balance sheet during 2023. And whether -- how much is divided into acquisitions, new projects and energy investments, it's -- we have to come back with that exactly digits.

Okay. And what kind of market is most interesting to do acquisitions at this time? Is it still Denmark? Or where do you look if you go for the acquisitions?

It could be both in Denmark and Sweden. But of course, the currency right now is in favor to acquire in Sweden actually.

There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

Well, thank you, everyone who have listened to our presentation. Have a nice day, and we'll keep in touch.

Thank you. Bye-bye.