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

Welcome to Catena Q2 Report 2024. [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 a warm welcome to this conference call for the Q2 report 2024. Here is the agenda for today, and it's the same as we used to have: a short summary, business overview and update, followed by sustainability, finance and a short takeaway before ending up with a Q&A. Next slide, please. So let's go into the summary by start saying focus on persistence produce results. We report 14% increase in rental income, ended up in SEK 1.020 billion, driven by acquisitions, projects and a stronger like-for-like numbers, driven mostly by our CPI-linked contracts. Profit from property management increased by 4% in total, and per share, it was down to SEK 11.46 per share, but we do see this is temporarily since we now have acquired a lot and have a much stronger cash flow in the coming quarters and that we also show very clearly in our earnings capacity report within the report. The balance sheet is very solid with an LTV at 38.8%, and we report an increase in NRV per share up to SEK 396. With all this in mind, we are comfortable to generate strong performance going forward. Next slide, please. The next slide again for some business overview. In the market, we see more activity in the transactions, and we have witnessed some transactions with strong demand and aggressive bidding. But still, there are concerns in some markets where the yields will end upward trend. And the latest we heard is that the core money will come back into the market after the summer. It could be a driver for more transactions and stronger demand. It's also due to the first interest cut, which, I think, David will give some more flavor about later on in this presentation. The numbers for e-commerce for May 2024 shows a positive trend and is up 29% compared to May 2023 according to Svensk Handel's e-commerce indicator. This confirms our long-term bet that e-commerce will keep on growing. Regarding new developments, it is pretty much the same story as last quarter. We have ongoing discussions. It takes longer time than we are used to. We can only keep up the work and do our best, and hopefully, we will sign some agreements after the summer in the coming quarters. That's our strongly belief. Lastly, as far as we know, there is the same situation regarding the vacancies around Stockholm-Mälardalen region as in previous quarter, where the aggressive developers have started a lot of projects and also finalized them, but still no lease agreements. Next slide, please. Looking into our customer base, there has been a major change regarding the top 10 customers after the transaction in Landskrona with DSV. It's our second biggest customer standing for 8% of our contractual value. Logistics and transport has, at the same time, increased as a segment by 10%, now standing for 44% of the contractual value. Next slide, please. Some words about the portfolio then. Since the beginning of this year, we report in 4 different regions called Sweden South, West, East and Denmark. And there has been a huge change in the region South, thanks, of course, to the DSV transactions during the spring, not only Landskrona, also Helsingborg. So at the moment, region South is actually as big as region East. The fair value and the lettable area has, of course, also increased due to the acquisitions, and the projects amounts now to SEK 35.9 billion and more than 2.6 million of lettable square meters. Next slide, please. Taking a look at the business update. So next slide. This acquisition, as we mentioned before, DSV, expands the property portfolio by just over 180,000 square meters of logistics space. We are not only adding substantial state-of-the-art, well-conceived logistics space to our property portfolio, we're also forging a deeper relationship with DSV, which is becoming one of the biggest tenants, as I said before. The warehouses are located in Landskrona right beside DSV's head office for Sweden and also close to their transport terminal and the third warehouse. Next slide, please. At our Jönköping project to Nowaste, we had a speculative part of almost 20,000 square meters when we started this year in May. We were successful in signing a 10-year lease agreement with Mestergruppen for that space. Mestergruppen is a leading builders-merchants group in Sweden, comprising the brands XL-BYGG, Bolist, Happy Homes and Colorama, and they are -- Mestergruppen is based from Norway, the group. At the same time, Nowaste has signed an agreement with Mestergruppen to handle their logistics within the warehouse. Next slide, please. At the 1st of May, Elgiganten moved into our biggest project in our history. In total, almost 87,000 square meters where they will handle and store their Epoq kitchens which they moved from Czechia. A unique project in its size and in our initiatives, together with Elgiganten, to drive the sustainability agenda for the facility. We aim for a WELL certification, which is an international standard, which measures factors affecting human health in the property. These factors can include such as thermal comfort, materials and overall well-being. Catena will, with this process, break new ground within social sustainability where the well-being of those working in our facilities will be at the center. Furthermore, we are continuing by building energy-efficient and sustainable facilities by certifying them in the building process through the BREEAM certification process, and we will aim for an Excellent rate for this project. Next slide, please. Our ongoing project portfolio totals to around SEK 2.6 billion, where SEK 1.1 billion is remaining investments. When all is completed, we will add approximately 200,000 square meters to the portfolio. The yield on cost is around 6.7%. And for new projects, we are aiming for around 7%. Next slide, please. We have our land bank of 4.6 million square meters. No other updates around the processing for getting zoning plans. They are ongoing. Next slide, please. Looking at our leasing operations, they are very successful in this report. Our net letting was plus SEK 51 million in the quarter. Our WALE is now at comfortable 5.8 years, and the letting ratio is back at above 96%. Next slide, please, and handing over to Sofie.

Thank you, Jörgen, and hi, everyone, and going to the next slide. The environmentally certified area went down to 41% from 44% last quarter. And this is due to projects and new acquisitions that are in the process of being certified. When these certifications are done, we will see an increase of certified area again. And during this quarter, we certified 53,000 square meters of the existing portfolio. We continue to maintain a high level of EU's taxonomy alignment, for example, our CapEx of 93%. The Scope 3 is at a high level compared to last year due to finalizing projects during the quarter of 93,000 square meters. We report the Scope 3 when the buildings are completed, which means that the Scope 3 will increase when projects are finalized. And moving on for some financial updates. Next slide, please, and next slide over to the income. Rental income for the half year came to SEK 1 billion, a growth of 14% since last Q2. The increase was driven primarily by indexation, the acquisitions we made and projects being finalized. Net operating surplus follows this development and rose 14% to SEK 827 million. Profit from property management grows 4% to SEK 608 million. And over to the next slide, please. Our CPI-linked contract came to effect in the beginning of this year, gave a like-for-like growth of 6%. Acquisitions contributed with SEK 53 million with especially the newly acquired properties in Landskrona and Helsingborg with DSV as tenants and also the Danish property in Jernholmen, Denmark. There were no divestments made, and in project development, the finalized project to Elgiganten in Jönköping, Lekia in Malmö and to SGD in Norrköping were the main contributors during this quarter. Now handing over to David for some comments on finance.

Thank you, Sofie, and good morning, everyone. During the quarter, we followed up on our targeted share ratio from the first quarter with new acquisitions amounting to just over SEK 2.5 billion and project investments of approximately SEK 700 million. Including paid and reserved dividends in Q2, the EPRA NRV stands at SEK 396 per share, as Jörgen mentioned earlier. When evaluating our capital structure, it aligns with our strategy to maintain financial capacity to continue growing through strategically important acquisitions and value-creating projects going forward. On balance day, the equity ratio adds up to 51%, still leaving room for capitalizing on investment opportunities. Passing on to next slide. We have balanced our investment ambitions with equity injections and thereby managed to maintain critical key figures at comfortable levels, leaving ample room relative to both our own policy requirements and financial covenants. The loan-to-value ratio stood at just under 39% and net debt-to-EBITDA at 8.2x. The interest coverage ratio has improved slightly to 3.8x due to a positive trend of lower capital costs. During the quarter, we received news of an upgraded rating, which has contributed to this positive trend as well. In conjunction with refinancing and taking on new loans, we continue to increase the share of sustainable financing, which, on the balance sheet date, now amounts to 61% of outstanding loan volume. Next slide, please. It has been an eventful quarter. Central banks, including the ECB and the Swedish and Danish counterparts, have initiated interest rate cuts due to declining inflation and, to some degree, poorer economic outlooks. By the end of the year, an additional 2 to 3 cuts are expected from the Swedish Riksbank. This has contributed to a gradual decline in capital costs during the quarter. We issued bonds amounting to approximately SEK 1.2 billion during the quarter, and in the most recent transaction of SEK 350 million with a 2-year maturity, we paid 90 basis points over 3-month STIBOR. We have consistently experienced strong support from banks and feel that there is ample room for new business opportunities. Our liquidity, including debt commitments, totaled SEK 3.1 billion on balance day. This amount is more than adequate to cover upcoming refinancing needs for the next 12 months. Passing on to next slide. The average cost of loans has been maintained at 3.8% despite increasing debt by just over SEK 1.2 billion during the quarter. And this is, of course, another indication that conditions are improving. During the first half of the year, we also purchased SEK 1 billion in new swaps at an average fixed rate of 2.5%, with an average maturity of 6 years. Approximately 65% of the loan portfolio has a fixed rate, and the average interest rate maturity was 2.6 years as of the balance sheet date. We will follow the market and central banks' actions this fall and evaluate when and if we should purchase more interest rate hedges going forward. Now passing on over to Sofie for the next slide. She will lead us through capital deployment and valuations.

Thank you, David. And our capital deployment divided into acquisitions of SEK 3.7 billion, Jernholmen in Denmark and the 2 sale-and-leaseback transactions [ today ] were the big ones, and we have some smaller transactions. And it all total to 7 new properties. No divestments during the quarter. Development CapEx ended at SEK 1.3 billion. These investments, like I said earlier, are related to our large ongoing projects with Elgiganten in Jönköping, a project that have been finalized during this quarter, and also with the big project to Menigo in Landvetter and a project at Stigamo in Jönköping. Total CapEx for the year rounded up to SEK 5.1 billion so far this year. Going over to next slide, please. Property value was written down with SEK 161 million. This was due to a higher yield requirement. The value change corresponded to 0.5% of the total value before adjustment. The average weighted valuation yield for the portfolio is 5.9% by the end of the period and the EPRA net initial yield came to 5.6%. And so far, 45% of our portfolio has been externally valuated. And moving to the next slide and some words on credit rating and David.

Yes. Thank you, Sofie. And as we mentioned before, one of the highlights of the quarter was that we received an upgraded rating to BBB flat from Nordic Credit Rating with a stable outlook. We also received a confirmed rating from Fitch Ratings of BBB- with a stable outlook. Both rating agencies confirm our strong market position and our gradual shift towards a more sustainable and a robust financial position. Moving on to Jörgen for some closing remarks.

Thank you, David. So the takeaways from us today will be in 3 points. First of all, we delivered a solid Q2 report on all numbers. Secondly, we have deployed the proceeds from the equity raise in the Q1 as we told and guided the market. And the third point is with this existing portfolio that we have now, we show a clear uplift in our earnings capacity for the coming 12 months. And with that said, we open up for Q&A.

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

Just on occupier demand. Jörgen, you said it's taking longer than expected. Has this changed over the past 3 months? And as a follow-up on that, you also said that you expect to sign some new agreements after the summer. Is there any particular region where you see stronger demand?

I think Gothenburg region and the southern part of Sweden is still the most interesting with the lowest vacancy rates. So it's fair to assume that we will present something in those regions going forward. It could also be something around Stockholm South in terms of new developments. And regarding the occupying demand in the market and, as I said before, about those speculative projects around Stockholm-Mälardalen, there is the same situation. We have not seen or heard anything about new lease agreements in the market. But I would say that based on intelligence and the discussions we have, we are comfortable that there will be some new projects for the rest of the year. But we had hoped to present it in Q1 or Q2. So with that said, yes, it takes longer time.

Okay. That's fair. That's good color. And just on the core money that you mentioned that is -- that you expect to move into the market after the summer, does this pose as a potential opportunity for you to do some asset rotation?

Perhaps could be a case. We -- as you know, we are not an active seller in the market. But from time to time, we can consider to recycle something, and we have, as you know, deployed a lot of capital in Q1, Q2, but we are -- we don't need to sell, but there could be some certain geography we want to dispose and to focus more on other parts. But yes, that's hypothetically speaking.

The next question comes from Niklas Wetterling from DNB Markets.

I got a few questions. And firstly, I noticed that the NOI margin in the earnings capacity guidance has increased quite a lot quarter-over-quarter. Is that fully explained by the acquisitions? Or has it been any improvements like-for-like as well?

I mean that's correct, Niklas. We -- the new acquisitions we have made has, for sure, a higher margin. The new projects that we have finalized has newer margin. And from time to time, we always try to do our existing portfolio more efficient, but the major drivers are, for sure, new acquisitions and new projects, finalized.

Yes. Is it the same thing with the vacancy rate that -- how was the like-for-like vacancy rate development in Q2?

The vacancy rate is due to what we told the market in Q1 that there was a step-in clause framed in Copenhagen for Scan Global. Now they lease that area as well. So -- and we are back at the 96% level.

Okay. Great. And then the Elgiganten project, did you get like full rental income in Q1? Or -- and is it reflected in the earnings capacity guidance, that project?

Yes, everything is reflected in the capacity. Yes.

Great. And then just lastly on the development gains. Have you like come to any conclusion what did, for example, the gains from the Elgiganten project ended up with? And how much has the development gain been this far this year? [indiscernible] separate?

We do adjust the values during the project times at certain stages. So it's fair to assume that in the report, it reflects the market value that we ended up in the Q2. That's the fully effect from finalized project, and we also evaluate the ongoing projects depending on what stage they are and how comfort we are with the market yields and where it will end up in the costs as well.

Yes. But do you want to share any comments on the margins you're getting on the project?

Not more than we have in what we said that the ongoing portfolio now is, we expect to have a yield on cost at 6.7%. And if we are about to start a new one, we hope for around 7%, but that could be some bps above or below, but generally speaking.