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

Welcome to Catena Q2 Report 2023. [Operator Instructions] This call will be conducted by CEO, Jörgen Eriksson; CFO, Sofie Bennsten; and Chief Treasury Officer, David Silvesjö. Now I will hand the conference over to CEO, Jörgen Eriksson. Please go ahead.

Hi, everyone, and welcome to this report call. In today's presentation, we will start off by giving a short summary of the second quarter, followed by a short overview of our business. We will then proceed to the business update, where we will touch upon our current growth initiatives. Sofie and David will then guide you through the numbers in the financial update and sustainability, and we will then end up with a Q&A. Next slide, please. Starting off with a summary of the half year period, we continue to report rental income growth, driven by acquisitions, projects and a stronger like-for-like numbers, driven by our CPI-linked contracts. We received a confirmed credit rating of BBB- from Fitch Ratings, the first from 1 of the major rating firms, and the rental income for the period is up 17%, the NOI is up 19%. Income from property management per share is up 6%, and we have an LTV of 36.7%. And we have also a WALE of 5.3 years. Further, we announced during the second quarter, our biggest project yet, Logistics position Ramlösa with the tenant, Nowaste Logistics, signing an LOI for the entire space. All of this is in line with what we stated during last year with the equity raise. And lastly, after the quarter, we announced this week an acquisition of Bockasjö, a logistic property development company, and I will go deeper into this later in the presentation. So please proceed to Slide 6. On a similar theme, as we saw in Q1 2023, we are going through a trying macro environment with decreasing consumer confidence impacting the majority of the segments, particularly challenging in the e-commerce sector where the decrease in sales, both nominal and real, is impacting many players. While we are tracking bankruptcies and they are increasing, no material impact has been registered, which we can see in the segment as large. Having a strong customer base has been central to Catena's business and showcases its benefits through resilience and growth potential. While the e-commerce, as a whole, is facing a tough market. There are segments that are players who are growing. Fashion and Pharmacy is registering growth and many of our customers are pre-leased or new space in order to match existing volumes and future growth. We are seeing continued demand for new developments, and these are strong players who want the optimal long-term logistics setup in order to capture future growth. Here, energy, location and automation is key for the customers. Therefore, we think that these players will end up in a stronger position when the market swings back. Once again, illustrating the importance of having the right type of customer. As mentioned before, all of this showcases the strategic importance of the logistic facilities, long-term trends such as omni-commerce, circularity and reshoring are pushing the demand for more space and particularly modern space in right location. As we progress, we will also see the entire logistic segment move past just leasing the facility itself. Future revenue streams will include, for example, electric charging stations of trucks, leasing of standardized equipment such as shelves and automation. And lastly, we are seeing more logistics space being completed this year and the next. While this volume is unprecedented, it doesn't keep up with the customer demand for the long term. Due to the more challenging regulatory environment with regards to zoning, there will be less land lots, particularly in the prime locations, and this will add the pricing power for existing facilities and lead to higher rents. Next slide, please. During the quarter, we acquired a land lot of 47,000 square meters in Gothenburg, which brings the portfolio to a total of 129 properties, with a contracted annual rent of about SEK 1.8 billion. Next slide, please. Having a look at our customer base. The ICA acquisition, which took effect in Q1, makes ICA our second biggest customer with regards to the contract value. And furthermore, the top 10 customers now stands for 45% of the contractual value. Next slide, please. And let's take a look at our initiatives for future growth on next slide. About our current projects, this quarter, we announced a new development of Logistics position Ramlösa with the customer on Nowaste, which I dwell deeper into later. As mentioned in the previous quarter, we are hovering around 6.5% in yield on cost in the current projects. With newer projects, we will be aiming for 7%. And the total investment of all of our ongoing project is SEK 3.8 billion, and that will add about 325,000 square meters to our portfolio when all it's finalized. Next slide, please And now to the fantastic project at Logistic position Ramlösa, we mentioned during our equity raise in Q4 that we saw potential for new attractive projects going forward and that there is a demand for modern facilities in great locations. And in line with that statement, I'm very happy to announce our latest, biggest project to date made official during the quarter. In Helsingborg, we will build 3 new facilities, totaling 75,000 square meters. Nowaste Logistics has signed an LOI for all of the space. This process we have done previously with the customer and feel comfortable going forward, starting the construction during the summer. Our partnership with fast-growing 3PL players stretches back many years, and it's a clear illustration how we grow together with our customers and assist them in their growth journey. Construction will start now, as I said, in the summer this year, and will be completed the latest in Q1 2026. I can also say that I assume that some of the buildings will be finalized a lot earlier than 2026. Next slide, please. And with regards to our land bank, we have had some progresses in a couple of our processes, although we have to wait for some decisions to gain legal force. And as mentioned before, we acquired a land lot in Gothenburg, which is owned and ready for a project whenever we have a case. Next slide, please. Then, this week, we announced the exciting acquisition of Bocksjö AB, a leading logistics property developer. They have 1 of the most extensive track record in Sweden, having developed over 1 million square meters of logistics space in a variety of locations. This experience also extends to the network, having worked with some of the biggest customers in our segments. We purchased Bocksjö through a rights issue amounting of SEK 125 million with deal finalizing in October. This is also the net effect of the transaction and the sum that will end up as a goodwill in our balance sheet. And the rationale for the acquisition is to accelerate our initiatives on our land bank with new development, and optimize our setup for growth within the area, both through pace and profitability. And we do see a potential for higher yield on cost in future projects as a result of Bocksjö strategy of running and procure projects. Next slide. Looking at our leasing operations. Our letting ratio continues to be high, standing at 96.7%, reflecting a strong demand for our segment. It is a small decline compared to Q1 isolated, and it's due of some [ cable ] players that have been struggling that has resulted in some small vacancy changes, but nothing to worry about. It's on the margin. It has nothing to do with our pure logistics business. And we also do have a confidence to fill up those vacancies quite rapidly. And now I would like to hand over to Sofie for sustainability and financial update. Next slide.

Next slide, please. Good morning, and thank you, Jörgen, and good morning, everyone. We continue to work with certification of our property portfolio. At the end of the half year, we have 33% of our lettable area certified and in pipeline for certification later this year is another 18 properties. Since Q2, we have almost doubled our self-produced solar energy. And now during the warmer season, and as the rain started to come, we continue to work with our biodiversity goal, with several ongoing biodiversity projects in all our regions. And we're going over to Slide 17 for some financial updates, on Slide 18. Thank you. Rental income for the period amounted to SEK 892 million compared to SEK 760 million Q2 last year. And this was driven primarily by indexation, acquisitions and some projects being finalized. The higher rental income increased our net operating surplus with 19% to SEK 723 million. The higher surplus ratio is explained primarily by us divesting 2 older facilities during 2022, while acquiring and completing more efficient facilities with lower property costs. Profit from property management rose 23% to SEK 583 million compared to SEK 474 million Q2 last year. Impacting the profit from property management with the effect from associated companies [indiscernible] above it with NOK 35 million due to change in value for the completed project for HelloFresh [indiscernible] And next slide, please. The rental development for the half year has been positively impacted by our CPI-linked contracts that came to effect by start of the year. Acquisitions contributed with SEK 49 million. Divestments made a negative contribution of SEK 20 million. And within projects, the main contributors were the completion of the Postnord facility at Skogskojan and the Nowaste facility [indiscernible] here in Helsingborg. And now handing over to David for comments on financing. And next slide.

Thank you, Sofie, and good morning to everyone. On balance day, we reported an equity ratio of 52.2%, which is well above our minimum target of 40%, and offers a flexible way of progress from here. The underlying macroeconomic prospects still screens some uncertainty, which is no surprise to anyone, specifically with regards to difficulties assessing interest rate peaks to combat inflation versus potential downturn impact on economic activities. In the quarter, Fitch Ratings published a long-term issuer rating of BBB- with stable outlook and Nordic Credit Rating confirmed their BBB- with a positive outlook. Both signals our strong financial profile, along with benign operating fundamentals and our market-leading position. Next slide, please. In line with our strategy, we keep a safe distance to our financial policy targets. With market interest rates higher, average cost of debt increased to 3.5% on balance day compared to 3.4% from last quarter. Net debt-to-EBITDA was reported at 7.9x, whereas run rate was reported at 7.6x. Combined with the low leverage of 36.7% and a secured loan-to-value of 32%, we have ample headroom to our targets and covenants and expect to be able to capitalize on further opportunities from here. Next slide, please. In the quarter, we have refinanced about SEK 1.6 billion of bank debt, with debt maturities ranging from 3 to 4 years. Credit margins are still attractive and moves out only marginally. Additionally, we have signed and borrowed SEK 130 million through the Danish mortgage system with a 15-year commitment at very attractive levels. Average debt maturity is 4.2 years. After the quarter, we have also signed a new loan agreement with the Nordic Investment Bank of SEK 430 million with an 8-year duration, which also adds to our sources of funds and further extends maturity. Over the next 12 months, about SEK 1.3 billion of debt is about to mature, and including committed investments, we have good control over liquidity. On balance day, liquid funds amounted to SEK 3.1 billion. We continue to assess different strategies, including the bond market, but for now, it still screens unattractive spreads. Next slide, please. Our interest maturity structure implies we have currently 68% of total debt hedged, with an average term of almost 3 years. Our derivatives portfolio and fixed interest loans combined have an average term of about 5 years. Market rates could move out another 1 percentage point from here, and we would still be able to keep interest coverage ratio comfortably over 3.5x. Thanks, and back to you, Sofie.

Thank you very much, David. Next slide, please. During Q2, we acquired a small piece of land in the North of Gothenburg of SEK 42 million that added to acquisitions in Q1 of 2 lease assets, 1 Danish property and the land at Stigamo in Jönköping. A total investment in acquisitions so far, SEK 1.1 billion. Divestments during Q1 of 1 small property came to SEK 9 million, and our development CapEx ended almost at SEK 1 billion. These investments are mainly related to our large ongoing projects with Elgiganten, Jönköping; Menigo in Landvetter and with Lekia in Malmö. Going to next slide. With regard to our property valuation, we registered write-downs of SEK 558 million in the first half year, driven by higher yield requirements during Q1 and the stabilization of the yields during the second quarter, where we also added some successful projects. The average weighted valuation yield for the portfolio of 5.6% by the end of the period, same as Q1, and the EPRA net initial yield came to 5.3%. And moving to Slide 26 for some closing remarks from Jörgen.

Thank you, Sofie. So the takeaway from Catena's Q2 can be summed up into 2 points. The first is that Catena has strong fundamentals. Our unique land bank present us with attractive opportunities, which together with our financial profile, make sure we have the means to realize them. And lastly, with the Logistics position Ramlösa, our biggest project to date, we have a best-in-class pipeline of quality assets being constructed. This will add great value in the coming years. And with that said, I would like to open up for questions.

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

On the Bockasjö acquisition, you mentioned that the net effect is SEK 125 million paid, which is related to the equity that you're raising. But from the press release, I was under the impression that you paid roughly SEK 460 million. Could you highlight how -- what exactly the difference here is? And does this relate to the cash inflows from the assets that's going to be sold?

Good question. I mean, in the press release, we mentioned the digits that we have to pay because there is a major part of equity in the company. And so the net effect from it is the SEK 125 million, so to speak.

So this doesn't necessarily relate to the cash and that you're still getting on the 3 projects that's still to be sold?

The 3 projects that are in the company, they will be sold, but that will not impact our results. And we do not pay for them, so to speak.

Okay. That's clear. And on the synergies, you mentioned that you expect to be developing a bit more profitable. Does that mean that you're also looking towards higher yield on cost? And what target would you be with this acquisition?

It's too early to say, but we do see a clear synergies. And we also can see from their track record and how they procure and how they handle the projects without going to the big entrepreneurial and construction companies makes very good possibilities for us to also save some money and by that reporting higher yield on cost, but too early for us to mention any digits.

Okay. That's clear. And on the capacity growth, what run rate would be feasible after the acquisition?

It's also too early to mention. Of course, there is some ongoing projects that the team from Bockasjö will and have to handle during the first period. And then it depends a lot on what dialogues we have on the table right now with existing and potential customers, and how the process is in terms of some of the zoning plan processes, when they will be finalized and they will gain legal force. So I can just, generally speaking, say that we will not decrease the tempo.

Okay. That's clear. And does it change anything in terms of your philosophy with regards to the pre-let ratio you want to achieve on developments?

Not as we speak.

The next question comes from [ Frederick C. Wilen ] from Carnegie.

Starting off with value changes in the quarter. It was positive SEK 152 million. Can you give us some breakdown on it? You mentioned that it's partly driven by rents. Is there also a component of projects gains to the net number?

Yes, there are some finalized projects that's been impacted for that uplift. Also, we have seen in some valuations that there are some different thinking about the market rent going forwards and have made some changes in some of our property values. So it's a mix up of those 2.

That's clear. Moving over to acquisitions. So first half, you did about SEK 1.1 billion. You're mentioning the new target in terms of new projects, it is about 7%. So would that entail that new acquisitions will have to be done at even higher levels than 7% for you to be interested?

Yes, in a theory, that's correct. But then there could be other things that we're taking into account what strategy, what kind of customer it is? Is that an existing customer at a very, very good location, we can consider lower yields than 7%, but you're thinking right. The most likable scenario is that we will focus on own developments, on our own land bank where we can have a fantastic deal on cost.

And in the transaction market, are you seeing more distressed sellers, whereby 6.5% is a tangible and realistic assumption on net initial yield on acquisitions?

No. Not in our segment. We do not see any distressed players. On the contrary, we have seen a lot of transactions made actually in the last month. You saw the Bocksjö disposed to NREP. And we also saw [indiscernible] acquired from Bocksjö in Gothenburg. So that confirms that the yields are actually below 5% as we speak for prime.