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

Welcome to Catena Q4 Report 2023. [Operator Instructions] Now I will hand the conference over to CEO, Jörgen Eriksson; CFO, Sofie Bennsten; and Chief Treasury Officer, David Silvesjo. Please go ahead.

Hi, and warm welcome, everyone. In today's presentation, we start with a short summary of the report followed by a short overview of our business, and we will then proceed to the business update, where we will touch upon our current projects. Sofie and David will, as always, walk through the numbers in the financial update and sustainability. And then at the end, we will open up for Q&A. Next slide, please. So let us summarize 2023. We report 17% increase in the rental income driven by acquisitions, projects and stronger like-for-like numbers driven by our CPI-linked contracts. And the profit from property management increased by 16% in total, and per share, the increase is 4%. The balance sheet is very solid with an LTV at 37.1%. In the last quarter, we have an increase in our property values, much due to 2 land areas where we now have zoning plan and water judge in place, and the value change in combination with our earnings in Q4 adds to increase in the NRV per share with SEK 24 and ends up at SEK 392 per share. With all this in mind, we are comfortable to grow further and to make some acquisitions and more projects and, in that way, increase our LTV a bit and, at the same time, increase our earnings capacity. The next slide, please, and the business overview now. And next slide, please. So talking about 2023, it's obvious that it was a trying world from a geopolitical and economic perspective. This has resulted in low transaction volume and a sort of wait-and-see mode for our customers in general. And we now have started 2024. We can see a bit more positive attitude in the transaction market where buyers and sellers start to be agreed on values. And at the same time, we have quite many discussions about new projects both from existing customers as well as with potential new customers. The process is for signing new lease agreements. It will take longer time, but we just have to accept that. All in all, I'm optimistic that we are capable to present some new projects during the coming quarters. And regarding the e-commerce, no one couldn't miss that it has been trending down in terms of value, namely 8% for 2023. The more interesting point to talk about is, at the same time, the number of parcels has increased by 8%. That means that people still use Internet for shopping, but they consume cheaper items. And even more interesting news that came the other day actually is that for January 2024, the e-commerce turnover increased by 19% compared to January 2023. Another thing that we have talked about during the year is our possibility within the energy area. We have started to install solar panels and some batteries, but it takes time to solve challenges with energy companies and their connections and infrastructure. A new thing that we see is coming more and more is charge stations for electric trucks. It's still early in the process, but we clearly see that we have a role in those solutions in the future. Lastly, we can now ascertain that there are new build vacancies around the Stockholm, Mälardalen, but we cannot see any impact in our business yet. And the trend speaks for logistics and higher demand for more spaces going forward. The clear trend in January 2024 for e-commerce, as I mentioned before, speaks in favor for that. Next slide, please. Regarding our customer base, there has not been any major changes. The top 10 customers now stands about 44% of their contractual value, and as before, logistics and transport, together with food and beverage, are now the 2 big segments in our portfolio. Next slide, please. During the last quarter, we acquired a piece of land in Helsingborg, which brings the portfolio to a total of 132 properties with a rental value of almost SEK 1.9 billion. We also see uplift in the fair value compared to last year, more than SEK 3.5 billion. A major part of this is, of course, the deployment in our ongoing projects and acquisition but also the value changes that I talked about before. Next slide, please. Let's have a look at our business update, so next slide again. Thank you. Current developments in our ongoing project is impressive and totals around SEK 3.8 billion, where SEK 1.9 billion is remaining investments. When all is completed, we can add approximately 320,000 square meters to the portfolio. And the yield on cost is around 6.5%, and for new projects, we are aiming for 7% as we presented the last one to Rugvista in Malmö. Next slide, please. And this is namely the Rugvista in Malmö, where we now have started a project of approximately 14,000 square meters to Rugvista. After completion, we have turned this brownfield project to something very modern and attractive located really close to the center of Malmö. Next slide, please. And this project in Jönköping is also one of our latest projects and ongoing. The new facility will cover an area of approximately 33,000 square meters, part of which will be -- consist of high-bay storage of 30 meters high. And this will be the first high-bay in wood frame construction. And Catena has signed a 9-year lease agreement with third-party logistics company in Nowaste Logistics for the facility with an option to lease the remaining space. And in the facility, Nowaste Logistics will handle flows of goods for Granngården, a leading retail company in gardening and agriculture. Next slide, please. And this is Jönköping in Elgiganten, and we are nearing a completion. And our tenant Elgiganten is ready to move in, in May this year, and they will rent approximately 86,000 square meters. Next slide. And at Logistics Position Landvetter in Gothenburg at the airport, as we speak, we have completed the first building to MM-Sport. They move into a brand-new facility of approximately 8,700 square meters. And the construction for Menigo as a neighbor to MM-Sport is ongoing and is expected to be completed at the end of this year. Next slide, please. Future development possibilities. With regards to our land bank, we have had [ group ] success in Söderåsen and in Stockholm South, and now we are ready for more projects on our land bank. And the land bank speaks in our favor to be capable to deliver many new projects going forward, and the potential of new GLA is somewhat 1.7 million square meters. Next slide, please. Looking at our leasing operations. Our letting ratio continues to be high, standing at 96.6% compared to 96.4% the last quarter, reflecting the strong demand in the segment. And our net letting was, in Q4, actually flat. With that said, I would like to hand over to Sofie for the sustainability and financial updates. So the next slide, please.

Thank you, Jörgen, and hi, everyone. Next slide. Our sustainability work continue. We now have reached 39% of our lettable area as environmentally certified. And we continue to maintain a high level of EU taxonomy alignment for our CapEx at 74%, and produced energy from our solar cells increased 18% since last year and reached almost 8,000 megawatts. And now to some financial update, the next slide, and over to income. Total income for the year amounted to SEK 1.8 billion, a growth of 17% since last year. The increase was primarily driven by indexation, acquisitions and some projects being finalized. The higher rental income increased our net operating surplus with 19% to SEK 1.4 billion. The higher surplus ratio is explained primarily by us divesting older facilities and replacing them with efficient facilities with lower property costs, either through acquisitions or finalized projects. And profit from property management rose 17% to SEK 1.1 billion compared to last year, SEK 954 million. And over to next slide, please, for some rental development. The largest positive impact on our rent is our CPI-linked contracts that came to effect the start of the year, giving a like-for-like growth of 11.6%. Acquisitions contributed with SEK 73 million with, for example, 2 properties in Denmark and 2 properties that we bought from ICA during the year. Divestments made a negative contribution of SEK 32 million, and within projects, the main contributors were same as last quarter, the completion of the PostNord and the Nowaste facility, both in Helsingborg. And now over to David for some comments from finance. And next slide, please.

Thank you, Sofie, and good morning. On balance day, the equity ratio of almost 52% signals a resilient financial standpoint. EPRA NRV of SEK 392 per share signals another strong profit contribution in 2023 as Jörgen and Sofie has pointed out. The fourth quarter of 2023 was characterized by a significant drop in long-term interest rates on back of a combination of lower inflation and from fear of economic recession. With interest rate peak likely behind us, we expect investment sentiment to gradually pick up in 2024. Over the last months, we have witnessed a huge demand from credit investors, and credit spreads has compressed quite significantly in comparison to 12 months ago. For investment-grade companies, we expect this trend to continue over the year to come, creating a viable and flexible alternative to grow. Given our financial position, we should be able to use both debt and equity alternatives to continue facilitate value-accretive investments. Next slide, please. On balance day, our financial KPI [ screams ] there is comfortable headroom to our financial policy and to our existing financial covenants. And net debt-to-EBITDA of 7.2x signals operations are doing fine and is well balanced against our net debt position. With an interest coverage ratio of 4x, there is plenty of resilience built into the structure. With our loan-to-value policy limit of 50%, which was implemented already in 2021, the [ full ] rates took off. Combined with our view that markets has turned somewhat more positive over the last months makes us less concerned about using a bit more leverage going forward, with the mind of keeping a safety margin and taking into consideration the uncertainty that still prevails in the market. Next slide, please. During the last quarter, we refinanced SEK 1 billion of bank debt at satisfying terms. Over the next 12 months, approximately SEK 2.5 billion of debt is set to mature, which equals just over 20% of outstanding debt. There is sufficient liquidity to cover for refinancing operations should that deem -- seem like the proper choice. With the current trend in mind, with credit margins getting lower, we expect to make use of a blend of capital market funding and bank debt going forward. Next slide, please. During the quarter, we utilized the window of lower rates in December and acquired interest rate swaps for SEK 500 million with a fixed rate of 2.4% and a maturity of 5 years. Following this, our consolidated interest maturity structure implies we have currently 68% of total debt fixed with an average term of 3 years. Our derivatives portfolio and fixed interest loans combined have 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. And walking you through capital deployment and valuations, I hand over to Sofie. Next slide, please.

Thank you very much, David. And during 2023, we made acquisitions of SEK 1.2 billion, whereof the biggest were the Danish property in Horsens and the 2 assets we bought from ICA as a sale and leaseback, and they are placed in Stockholm and Gothenburg. We've made one small divestment during Q1, which came to SEK 9 million. Our development CapEx ended at SEK 521 million during the quarter. These investments are mainly related to our large ongoing project with Elgiganten in Jönköping, with Menigo and MM-Sports in Landvetter and the now-finished project with Lekia in Malmö. Total development CapEx for the year came to SEK 1.9 billion, and we go to the next slide, please. With regards to the property valuation, we registered a write-up of SEK 1.1 billion in the fourth quarter. The write-up was mainly due to the zoning plan gaining legal force in Logistics Position Söderåsen and a water judge that was decided at Stockholm South, giving a value increase of SEK 1 billion. Otherwise, the value changes were driven by higher yield requirements, which were partially offset by CPI and renegotiated leases and also some successful projects. The average weighted valuation yield for the portfolio came to 5.8% by the end of the period, and EPRA NIY initially came to 5.4%. 94% of our portfolio has been externally valuated. And moving to next slide and some closing remarks on Jörgen.

Thank you, Sofie and David. So the take away from Catena's Q4 and we summed up into 2 points. First one is that Catena delivered a record-breaking 2023. And secondly, we have very good opportunities to continue growing through acquisitions and new projects. And with that said, we would like to open up for Q&A.

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

On that last bullet point that you just mentioned on new projects, you expect that you are going to present new projects in the coming quarters. How should I think about the size of the pipeline by year-end given that you have quite some development completions over this year?

Sorry, I didn't get you. Can you take the question one more time, John? Was it the size of new projects or...

Yes, yes. So exactly, how should we think about the overall size of the total pipeline by the year -- by the end of the year, given that you have got quite some development completions?

Yes. That's very [ good ] to answer. Based on what I said, the discounts we have with customers and potential customers, we feel that we can present projects. But the size of those, it's very tough to guide you on. And of course, some of our ongoing projects will be completed during the year. So tough question to give you any precise numbers.

And I suppose that's also driven by the fact that you're also saying that negotiations are taking a bit longer. So how should I read into that? Does that mean that you're seeing slowing demand for new stock? Or is that more on the renegotiations on your current stock?

No. I would say everything takes longer time, and the customers need more Board meetings before they feel confident to sign new agreements. We see a demand, but I would also say that a lot of players they prefer the profitability before growth today. So if they can stay in their existing facilities a bit longer, many of them are happy with that. But at the same time, they say we see that we need more space. So that's a [ balance walk ] actually. If we go back a couple of years, the processes were much shorter, so to speak.

All right. That's clear. And when you're saying that they prefer to stay in existing facilities, I suppose that also offers opportunities for extension of facilities? Or is that not the case at all?

Office expansions?

No. Sorry, extension of space, so just adding more space to the current property.

Yes, it could be a case where if we have the building right next to the existing building, that's also discussions we have, of course. So yes, with that said, we are quite positive that there will be some projects, but how and how big and when, it's tougher to say.

Okay. That's clear. And just on to the revaluation gain. How much of that SEK 1 billion is driven by zoning approval? And how much is driven by development gains?

No, that's only from the land. We, as you know, buy farming land, and we do the process in-house. And once there is a zoning plan, so you can start construction, there is a totally different value of the land. And this is, of course, confirmed by the external valuators, and we have also totally safe compared to transactions in the market of buying land. So it's -- the SEK 1 billion has nothing to do with projects.

Okay. Then just to understand, the spending portfolio didn't see any write-downs or value gains. It's really just a land.

The uplift of SEK 1 billion in this quarter is for the land. But all in all, we came to a positive of SEK 500 million. So therefore, you will have a SEK 500 million write-down on the rest of the properties.

The next question comes from Erik Granström from Carnegie.

I would just like to start off with a question on your CapEx investment expectations for 2024. It came to SEK 1.9 billion for '23. What do you think you will end up for '24?

As I said before to John at Kempen, it's very tough to guide. So I can't, at this moment, disclose any numbers because the only thing is -- we know is that it won't be that number. It's very tough. It depends on how our ongoing discussions with new projects turns out and when they are finalized.

Okay. But assuming the ongoing portfolio that you have, you have an additional SEK 1.9 billion that needs to be invested in that up until early 2026, I believe. Is there a major reason for us to believe that investment CapEx will come down substantially even if you don't find that many new projects to do?

Well, you should take those SEK 1.9 billion, and you should have done for '24, '25 and a bit in '26. At one of the projects, you can sort of divide it in 2 pieces, '24, '25, and then on top of that, if we are negotiating good and we present new contracts in Q1, Q2, it's fair to believe that they will kick up -- kick in after the summer. But the substantial values will then be in first of '25 and going forward without giving any numbers.

Okay. And then moving on to the market and yield requirements. What have you seen in terms of transactions? And what do you think will happen to yield requirements this year? You mentioned a bit that you saw some new vacant space in the Stockholm-Mälardalen region. Do you think that there will be a substantial move in terms of yield requirements in the market for this year?

Depending 100% where the interest rates will -- if they will drop or not, what we can see in the market for prime, prime. And with prime, prime said, it's now the buyers are more keen that it should really be prime sort of location customers and so on. And then they are willing to pay a low 5 or 5 maybe. But 2 years ago, the players were not that picky about what is prime or not. Talking about the vacancies that are out in the market, what we can see is that the expectations of the rent levels are the same as up here and a year ago. So there hasn't been any drops in the rental value for the expectations of the rents.

Okay. And then with regards to that, you also mentioned that yield on cost for new projects you're starting is targeted at 7%, and we can see that, that is the case for the new projects in the report. Do you think that that's still doable for this year that the projects that you are in discussions with are those targeted to be at 7% as well?

Around 7%. Of course, we need to be comfort what is the market rent in those areas we are discussing. But around 7%. And of course, we also have to see where are the interest rates and so on and what can the customer stand and what are our requirements. But yes, it's fair to assume around 7%.

Okay. And my final question is regarding the net letting that you mentioned. For the year, it came in, I believe, flat or basically 0. Assuming that you are filling up projects, what does the terminations come from? Because I would assume that you normally have positive net letting not the least because of your project portfolio, which then adds to new leases. So what has anything specifically happened in the management portfolio during the year?

What we have told the market before is that we have had some [ padel ] players, not the player that plays [ padel ], but the ones who have the lease agreements that they have been struggling. So some of those have been shut down, and that take some time to find new tenants, and the net letting for Q4 was flat.

Okay. But do you expect to have that same sort of headwind in this year when it comes to those kind of tenants needing to lead the space?

I think we should be humble for 2024 that maybe some tenants can have a struggling time. But I think also we are pretty comfort that our letting ratio is around plus 96.5% to 97%. That's somewhere where, I think, it's fair to believe that we are.

The next question comes from Jan Ihrfelt from Kepler Cheuvreux.

Okay. I actually have 2 questions, and first one in regards loan-to-value, LTV. You're currently at 37%, and you were talking about the expansion of the company using both debt and equity. So my question is really what kind of LTV level are you happy with that with -- is it like 40%? Or could you just give us some kind of flavor on that matter?

Yes. Thank you, Jan, for the question. Well, it's also in -- that will be a decision from our part in combination with the opportunity that we will assess at the time. But I think it's fair to assume that if we end up somewhere over 40%, we feel still great comfort. Our take on interest rates, even though we -- 2 months ago, we expected a lot of cuts from the Central Bank. Now obviously, there is a pushback on those expectations, but we still expect interest rates to be lower in 2024, and that's one of the reasons also that we feel comfort in raising loans. Sorry, my voice is a bit bad today. So that's the reason basically we feel loan-to-value can be raised. And if it ends up just over 40%, that's fine, still great comfort, great resilience.

Okay. And second question regards your projects on Page 10 in the report, the Swedish version. You have larger possible projects, and some of them could be started quite soon, I suppose. But could you just elaborate a little bit which project is closest to start here?

Well, we cannot disclose any specific projects. It's fair to assume that we discuss with existing customers and new potential customers. And as we now have the zoning plan in place at Söderåsen close to Helsingborg and we have the water judge in Stockholm South, those 2 areas looks very promising from our perspective.

The next question comes from Paul May from Barclays.

A few of them are couple of clarifying points, which should be quite quick. Just on the earnings capacity, I just wanted to check that excludes developments that are completing this year? And does it include or exclude the 6.5% inflation rate that should come through?

Paul, good question. It includes the CPI for 2024. It also includes those projects that we see will be completed during the year. So the signed lease agreements that we have, they are in the earnings capacity.

And then also just another clarify point. What is the operating surplus ratio that you use in your developments?

You mean compared to those 80% we have in the report?

Yes. Is it broadly what you have? Or is it a higher operating surplus [indiscernible]?

In the new projects, it's fair to assume that we have much higher without mention any specific numbers. But I mean the first 10 years in the new building, there are practically no maintenance and things like that. Then there could be like if the customers don't -- can have the subscription with the energy companies, it has to go through us. Then there will, of course, be a lower margin. So some -- could be some of those cases.

Okay. Okay. That makes sense. Just on rates. Obviously, you mentioned about potential rate cuts and that being pushed out -- push back. Obviously, that's just on the Central Bank policy rate, Riksbank rate. Obviously, 5-year swaps are already significantly lower, so the inversion of the yield curve. Why are you not looking to fix more of your debt today and immediately take advantage of lower rates rather than waiting for the Central Bank to maybe or maybe not cut rates?

Thank you, Paul. That's obviously a very good question and one of the questions that any real estate company with debt are thinking about. And will the STIBOR basically -- will it get more expensive to stay with STIBOR over the next 5 years? Or should you do a swap for 5 years? Well, that's a good question. We have been very consistent in how we deal historically with interest rate management, which has been quite successful from our perspective. We were at 68% of fixed interest, and we are quite happy with that. So that's the -- that's how we think about it. But obviously, the question is good, and it's something we always think about. But right now, we're feel happy with the situation we have.

And then just a final question on acquisitions. I think you've sort of highlighted those as being a potential moving forward. Is there a such shift in your thought process because obviously, there's very much expansion through development with a bit of acquisitions? It seems you're sort of pushing the acquisitions a little bit more as an opportunity now. Is that because you do see or expect to see some, should we say, motivated sellers in the market and some quite attractive opportunities emerging? Or is it still more of the same? I suppose, getting, is there a subtle change in your expansion aspirations?

Well, the main expansion strategy is new projects. That's the same as it has been. But from time to time, we can consider to do some acquisitions if we find the opportunities. There could be some motivated sellers, or there could be some really good assets out for sale. And in combination with our financial capacity and the low LTV that we have, we see that there, we can look into some acquisitions going forward.

And just on the leverage that you consider. Obviously, everyone talks LTV still. There has been an increasing focus on net debt-to-EBITDA, which I see as sort of moved positively for your business. Do you also consider that as a metric on financing? Or is it still very much our LTV as the sort of main focus?

It's both. It's both. And when we do these assessments, obviously, we have a forecast in mind of the next 5 to 10 years, basically. And the net debt-to-EBITDA is extremely important to keep track on. So it's a combination when we do these assessments. So we want to make sure that we stay below 9x as you know. So yes.

Okay. And is 9x an appropriate level moving forward? Just considering the change that we've seen in the rate environment and rates are going to be higher moving forward, is that still continue to be the right policy? Or would you look to bring that lower, more akin to where U.S. companies are?

I think you have to look at the market you're at. The 9x is the assessment we have made. It's a good number for us. We have no intention to changing that right now. But obviously, as you point out yourself, you should always value these things, and that's something we do continuously. But right now, 9x, it's a good number. It facilitates a lot of good things. The rating agencies would like to see us stay below 9x. And so we are happy with that.

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

Yes. Thank you. And we have one written question. And it's, what are your observations on the 2023 acquisition of Bockasjö and its impact on Catena's expected 2024 operational performance? Well, we closed the deal with Bockasjö in October, and the development and business development team is now in place and working with some of our existing projects. They also [ work ] with some of the joint venture [ properties ] that we now have with Platzer, and Platzer will be the final 100% owner of them. We think that this is very promising for 2024 and, with the old Bockasjö network and the business developer and the project team in place, think that the process for having new customers and having even more efficient projects is very promising. Now another written question. Is the higher market supply of new developments a potential headwind to new development starts for you in 2024? Good question. Let's put it this way. We will not kick off a new project in speculation terms in the area where there are existing vacancies. Then it should be a prelet version. So of course, we sense the market and assess carefully where to start new projects. But it's fair to assume that the new projects we hopefully present, they are prelet more or less to 100%. And with that question answered, I think that was the last one. So from the Catena team, I say thank you very much, and have a nice day.

Thank you. Goodbye.

Thank you. Bye.