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

Hi, and welcome, everyone. In today's presentation, we will start off by giving a short summary of Q3 report, followed by a short overview of our business. We will then proceed to the business update, where we will touch upon our current projects. Sofie and David will then walk through the numbers in the financials and sustainability, and we will then open up for the Q&A in the end. Next slide, please. So starting off with the summary. We continue to report rental income growth driven by acquisitions, projects and the stronger like-for-like numbers, driven by our CPI-linked contracts. Profit from property management increased by 17% in total and per share, the increase is 4%. The balance sheet is very solid, with an LTV at the comfortable levels. Lastly, we recently announced that the zoning plan for Logistics Position Söderåsen has gained legal force. This means that we have the possibility to develop [ Stormberg's ] 240,000 square meters of new GLA. Please proceed to Slide 6 for the market update. On a similar theme, as we've seen in the whole 2023, we are going through a trying macro environment with decreasing consumer confidence, impacting the majority of the segments. We are seeing continued demand for new development, but it takes longer time to sign contracts, and one can summarize it as a wait-and-see situation. And for the decision makers, it's easier to wait, just then to say yes. But with that said, the strong players are also keen to have an optimal long-term logistics setup in order to capture future growth and to end up in a stronger position when the market swings back, once again illustrating the importance of having the right type of customer as we do have. As we have said before, we can see that 3PL players have their chances to gain their business when other players want to and have to decrease their investment in logistics systems. Another thing that we have talked about throughout the year is our possibility within the energy area. We can contribute with solar panels on our roofs and potentially with batteries, for example, [ shave peaking ] and for charge stations for electric trucks in the future. We also see that more and more of our customers are looking into some kind of automation solutions to increase their efficiency in their business. Lastly, we are seeing more logistics space being completed this year and the next year, especially around the Stockholm, [ Mälardalen ] region. It will lead to somewhat higher vacancies in the short run, but in the long run, we still see the trend speaks for logistics and a higher demand for more spaces. Next slide, please. During the quarter, we acquired a smaller land lot in Sundsvall and a new building in Gothenburg, which brings the portfolio to a total of 131 properties with a rental value of almost SEK 1.9 billion. Next slide, please. Taking a look into our customer base, it's pretty much the same situation as last quarter. 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 stands for 45% of the contract value. And as before, logistic and transports, together with food and beverage, are the 2 big segments in our portfolio. Next slide, please. Let's talk a bit about the business updates. So next slide, please. We have a very extensive project portfolio, and it totals to around SEK 3.7 billion as we speak, where SEK 2.2 billion is remaining investments. When all this is completed, we can add about 315,000 square meters to the portfolio. The yield on cost is hovering around 6.5%. And for the new projects, we are aiming for around 7%. Next slide, please. In an excellent logistics location at the foot of the Söderåsen ridge near the E4 and with rapid access to the E6, Catena owns the property of Vrams Gunnarstorp. And we are very pleased that the zoning plan recently gained legal force, allowing the development of 565,000 square meters of land. And our ambition is to build sustainable, efficient facilities with an estimated lettable area of 240,000 square meters. The land is located in Bjuv's municipality, close to the border with the Åstorp's municipality and near Åstorp's southern industrial area. And we have been aware of the potential in the area for a long time. We are now seriously establishing Logistics Position Söderåsen as a significant new logistic hub there. You should also bear in mind that this is the only available land in the Helsingborg region at the moment. Next slide, please. Another project that is ongoing, and one of our latest projects, it's located in Jönköping, and the new facility will cover an area of approximately 33,000 square meters, part of which will consist of a high-bay storage of 30 meters in height. Catena has signed a 9-year lease agreement with a third-party logistics company, Nowaste Logistics for this facility with an option to lease the remaining space. In the facility, Nowaste Logistics will handle flows of goods from Granngården, a leading retail company in gardening and agriculture. Next slide, please. And the last project we will present is in Malmo. It's on Lodgatan, very close to the city of Malmo, where we are building a new facility, with a total of almost 19,000 square meter, and we have signed a lease agreement with Lekia, who plans to move into the new premises in January 2024, and the building will be certified by Miljöbyggnad Silver. Next slide, please. For the future development, with regards to the land bank, we have had great success, as I said before, in Söderåsen. We are still waiting for the [indiscernible] in Stockholm South, but it's expected to be on its way, and we assume that it will be decided in Q4 2023. The land bank speaks in our favor to be capable to deliver many new projects going forward, and the total potential of new GLA is somewhat 1.7 million square meters. Next slide, please. Taking a look at our leasing operations. Our letting ratio continues to be high, standing at 96.4%, reflecting a strong demand for our segment, and our net letting was SEK 17 million in Q3. With that said, I would like to hand over to Sofie for the sustainability and financial update.

Thank you, Jorgen, and good morning, everyone. Going to next slide, yes. Thank you. Our sustainability work, continue. We have now reached 37% of our lettable area as environmentally certified. Produced energy from solar cells increased by 7% since last Q3 and reached over 6,000 megawatts. And we also achieved EPRA's sBPR for our sustainability reporting. And now for some financial update, and going to the next slide, and over to the income. Rental income in the period amounted to SEK 1.3 billion, a growth of 17% since Q3 report last year. The increase was driven primarily by inflation, acquisitions and some projects being finalized. The higher rental income increased our net operating surplus with 19% to SEK 1.1 billion. The higher surplus ratio is explained primarily by us divesting older facilities and replacing member efficient facilities with lower property costs, either through acquisitions or finalized projects. Net profit from property management rose 70% to SEK 849 million. And now over to next slide, please. Rental development. The largest positive impact on our rent is our CPI-linked contracts that came to effect by start of the year, and they were giving a like-for-like growth of 10.7%. Acquisitions contributed with SEK 68 million with, for example, 2 assets in Denmark and 2 properties that we bought from ICA. Divestments made a negative contribution of SEK 32 million. And within project, the main contributors were, same as last quarter, the completion of the PostNord facility and the Nowaste facility, both in the Helsingborg. And now over to David for some comments on financing. Next slide, please.

Thank you, Sofie, and good morning to everyone. Our equity ratio of 51% is well above our minimum target of 40%. During the quarter, we have witnessed a short-term -- in short term, a dramatic shift in long-dated treasury yields on the back of stickier inflation expectations. And the view that we are heading into a world of government debt funding could potentially exacerbate that trend as well. Central banks seems to have set sale now to wait for the market to respond going forward. If rates stay elevated on or around these levels, Catena can still stand firm. The fundamentals of our strategy is to absorb even higher rates for longer. We have been working with long-term commitment thinking in all parts of our business, whether it's about customer care, property management or financial strategy. Currently, we hold through Fitch Ratings, a long-term issuer rating of BBB- with stable outlook and Nordic credit rating also confirmed earlier this year, a BBB- with a positive outlook. Both of them confirming our strong operations and the flexible financial position. Next slide, please. Our financial KPIs holds up very well, and there is a comfortable safety margin to our financial policy, targets and to our existing financial covenants. The current market interest rates through Stibor and Cibor sets our average interest rate on balance stay at 3.7%. Net debt to EBITDA was reported at 7.5x, and we then -- interest coverage ratio of 4.2x, we believe we have been able to mitigate the interest environment in a good manner so far. Given our strong operations and a loan-to-value of 36.5% offers us a valuable situation to take advantage of potential opportunities ahead. Next slide, please. During the quarter, we finalized the borrowing from the Nordic Investment Bank with a SEK 430 million loan with debt maturity of 8 years. We also had issued commercial papers for SEK 150 million. We have arranged for a satisfying liquid buffer, meaning that we can comfortably cover for 12 months of debt maturities should that deem necessary. However, we expect to refinance the upcoming SEK 2.3 billion of debt that matures over the next 12 months, where around 50% is secured bank debt and the other half are secured bonds with typically prime assets as collateral. We have several sources of funding partners to work with, and we feel great comfort in these operations. Credit margins, in general, are good without any major concessions. Additionally, we have witnessed during the quarter an opening in the bond market for some players, and we specifically have received some attention from investors, which I believe is a valuable signal on our sound business model. Next slide, please. And on the interest sensitivity during the quarter, we tend to acquire an interest rate swap for SEK 500 million with a fixed rate of around 3% with a maturity of 8 years. Our consolidated interest maturity structure implies we have currently 65% of total debt hedged, with an average term of 3 years. Our derivatives portfolio and fixed interest loans combined had a mix of maturities up to 10 years from now. The interest sensitivity implies that if short-term market rates would move out another 1 percentage point momentarily from here, we would still be able to keep interest coverage ratio comfortably well over 3x. Thank you, and back to you, Sofie.

Thank you very much, David. And a few words. Next slide, please. And a few words on our capital deployment. During Q3, we acquired the first of 2 property in Kungsbacka, South of Gothenburg at a value of SEK 113 million. Total investments in acquisitions so far are SEK 1.2 billion. We had one small divestment during Q1, a property [indiscernible] of SEK 9 million. And our development CapEx ended at SEK 441 million during the quarter. These investments are mainly related to our large ongoing projects with Elgiganten in Jönköping, Menigo in Landvetter and with Lekia in Malmo. Total development CapEx for the year came to SEK 1.4 billion. And next slide, please. With regard to property valuation, we registered write-downs of SEK 603 million by the third quarter. The write-down was driven by higher yield requirements, which were partially offset by renegotiated leases and some successful projects. The average weighted valuation yield for the portfolio is 5.6% by the end of the period and so far, 77% of our portfolio has been externally valued. Therefore, net initial yield came to 5.3%. And now, over for some closing remarks from Jorgen. And next slide, please.

Thank you, Sofie and David. Well, a few takeaways from Catena's Q3 can be summed up. The first is that Catena has very strong fundamentals and continue to deliver profitable growth. Second, our extensive pipeline of projects in combination with a very strong balance sheet gives us a lot of possibilities in the coming years. And with that said, we would open up for Q&A.

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

There has been some pressure on your occupancy over the past 3 quarters. Of course, this comes off a super high level. But how do you see this going forward, also given the small oversupply that you're seeing in some submarkets?

Yes. John, good question. We do see that till next quarter, we are rather positive that we could maybe go up a bit again in the letting ratio, all else equal, what we can see now and what we have on the table, so to speak. What will happen in the coming years, well, it's very interesting to see. As I mentioned, as you know and all know that there will be some oversupply in some parts of Sweden, but not all of the parts. So we are pretty confident with our situation. We also know that competitors view with the vacancies are expecting rather higher rent levels. So we are actually competitive in those discussions with our existing customers, existing premises. So I'm not concerned about our letting ratio will be trending down more in the short term or not even in the long term, for sure. But one could think that in the short term, it should go down a bit more regarding the trend, but I don't think so.

And when you're saying rather high levels for the vacancies, what exactly is the difference then compared to your sitting rents? And how does it, for example, compared to market rents? Do you still see market rental growth in those submarkets?

Yes. I mean, there is a huge player, Panattoni, everyone knows them. They acquire land on the peak, the price peak. They also kicked off a lot of projects during the peak of construction costs. With that said, they need to have high rents to do a profitable project. And we do not have the same requirements in our projects or in our existing premises. So with that said, I don't think that our customers will move out, to move into something cheaper, if you follow me.

That's clear. And that basically also implies that it doesn't necessarily impact your decisions on your own land bank, given that you have quite a large land bank in the south of Stockholm, of course. And you previously mentioned that the -- well, oversupplies in the Mälardalen region.

Yes. It's more specific in Enköping [indiscernible]. We do see that Stockholm South will be a very interesting area once the water [indiscernible] is in place. But we also, as you know, we do not kick off any aggressive speculative projects right now. We have the network with the customers. And with that said, I'm not concerned that we could not present new projects in Stockholm South going forward. I'm very, very hopeful that we can have something there sooner or later.