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

Welcome to Catena Q3 Report 2024. [Operator Instructions] This call will be conducted by CEO, Jörgen Eriksson; CFO, Sofie Bennsten; and Chief Treasury Officer, David Silvesjo. Now I will hand the conference over to CEO, Jörgen Eriksson. Please go ahead.

Hi, and welcome, everyone. We stick to the same agenda today as we used to have: a short summary, business overview and an update followed by sustainability, finance and a short takeaway before ending up with then Q&A. So next slide, please. Let's go into the summary of Q3 2024, where we reported 17% increase in rental income, ended up at SEK 1.566 billion, driven by acquisitions, projects and by our CPI-linked contracts. Profit from property management increased by 7% in total, and per share, it was down to SEK 16.78 per share. We do see this as temporary since we now have acquired a lot and have a much stronger cash flow in the coming quarters. We also show this in our earnings capacity in our report. Compared with earnings capacity report 1 year ago, we now have an increase by over 21% per share going forward. In our result, we have an item related to a write-down in our joint venture companies with SEK 28 million. Last year, at the same time, we had a value uplift from this JV with SEK 37 million. So if we adjust the income from property management from those items that is not cash flow driven in the both reports, we have an increase in income from property management by 15% and income from property management by share -- per share by 6%. And the balance sheet is very solid with the LTV at 37.6%. And furthermore, we report an increase in NRV per share up to SEK 416. Catena ended up the quarter by acquired DSV Horsens in Denmark. This transaction improved our key metrics, which is also confirmed with the rating upgrade from Fitch. Both our letting ratio and WALE are higher, thanks to the huge acquisition we made and we will, for sure, come back to that later on. With all this in mind, we are comfortable to generate strong cash flow going forward. And next slide, please, and looking into the business overview and the market update. The transaction market has picked up after the summer, and we see more players submitting sharp bids and yields starting to creep downwards. And the numbers for e-commerce for September 2024 in Sweden has a growth by 28% measured year-to-year compared to the same period for 2023 according to Svensk Handel. And the strongest growth is witnessed within the online pharmacy that is up 20%. Regarding new developments, it is pretty much the same story as last quarter, but maybe with some more activities in the market and we have, for sure, ongoing discussions, but it takes time today. We have signed LOI with one customer that hopefully will lead to a sharp agreement before the end of this year. Furthermore, we are in the starting blocks for another project where we first have to solve some challenges with natural values before the County Administrative Board give us the okay to start the project. Lastly, the same as the last quarter and as far as we know, there is the same situation regarding vacancies around the Stockholm- Mälardalen, our region, as we have told you the other quarters. Next slide, please. Looking into our customer base, there has been a major change regarding the top 10 customers. After the transaction in Denmark with DSV, DSV now our biggest customer standing for 20% of our contractual value. Logistics and transport has at the same time increased as a segment and is now standing for 51% of the contractual value. Next slide. And a look at our portfolio shows that the value for the first time exceeds SEK 40 billion, explained by, of course, all the acquisitions we have made during the last quarters and especially the Danish acquisition at the end of September, which amounted to about SEK 5 billion. The share in Denmark has now increased to 18% and the lettable area in the total portfolio is now really close to 3 million square meters. Next slide, please, business update. So next slide again. And at the end of August, we carried out our second directed share issue during this year, which David will talk more about later on. Most of the proceeds were used to acquire the DSV asset in Denmark, and this transaction, together with the other acquisitions made during this year will lead to significant increase in earnings going forward. Next slide, please. And one of the highlights of the quarter was that we received an upgraded rating to BBB from Fitch with a stable outlook. The upgrade reflects our strategy and strong performance and will contribute to our ability to generate further profitable growth. Next slide, please. So looking into this fantastic acquisition in Denmark. And it's the largest logistics center in Denmark with over 300,000 square meters of logistics space. And we are not only adding substantial state-of-the-art well-conceived logistics space to our property portfolio, we are also forging a deeper relationship with DSV, which is now Catena's biggest tenant. The center is located in Horsens, close to the highway. At the site, DSV now has warehouses, cross-dock terminals and also office spaces. The roof features large solar cell plants installed by the tenant with a total capacity of 35 megawatts annual. This, combined with other energy solutions, makes the entire facility self-sufficient. Next slide, please. A picture of our project in Ramlösa, Helsingborg that we do together with Nowaste. We won the land allocation competition from the municipality in Helsingborg. It's ongoing, and the first building will be completed in Q4 and Nowaste will be the tenant at this location, which was named as the logistics establishment in Sweden of year 2023. Next slide. Now going to Sundsvall and our most recently completed project where we welcome Kyl- och Frysexpressen as a tenant. We already have them in Luleå, but now they move in also in Sundsvall in a state-of-the-art temperature-controlled cross-dock terminal. Next slide. Here is our pipeline in terms of development, which totals to around SEK 2.6 billion, where SEK 800 million is remaining investments. When all is completed, we will add another 200,000 square meters to the portfolio and yield on cost on those projects is an average of 6.7%. And as we have said before, we are aiming around 7% in new development. Next slide, please. And for future development on our land bank, we are working with the zoning plan processes. So no updates today about the land bank. Next slide, please. Looking into our leasing operations, our net leasing was plus SEK 21 million in the quarter and summarized to plus SEK 66 million for 2024 so far. Our WALE is now increased to 6.7 years. And the letting ratio is almost at 97%. Next slide, and please handing over to Sofie.

Going to sustainability, and hello, everyone. Thank you, Jörgen. If we -- the environmentally certified area made a small increase to 42% and it will increase further as projects and new acquisitions that are in the process of being certified is finalized. We maintained our EPRA sBPR Gold certification regarding our sustainability reporting for 2024. And the Scope 3 is at a high level compared to last year due to us finalizing projects. We report the Scope 3 when the buildings are completed, which means that the Scope 3 will increase once projects are finalized. We work with carbon dioxide budgets in all our projects to limit our CO2 emissions. And for some financial updates, next slide, please, and next slide to income. Rental income came to SEK 1.6 billion, growth of 17% since last Q3. The increase was driven by indexation, larger acquisitions and projects being finalized. Net operating surplus follows this development and also rose 17% to SEK 1.3 billion. Profit from property management rose 7% to SEK 911 million compared to Q3 last year. And next slide, please, for rental development. We had a like-for-like growth of 6.1%, driven by the CPI. Acquisitions contributed with SEK 99 million with the newly acquired properties in Landskrona, Helsingborg with DSV as tenant and also Jernholmen that we bought in Denmark. There were 2 divestments during the quarter, a small one in Sweden and the sale in Denmark of the property in Brøndby outside of Copenhagen. And in the project development, the finalized projects Elgiganten in Jönköping, Lekia in Malmö, MM-Sport in Landvetter, Gothenburg were the main contributors. And so far, this amounts to SEK 47 million. I'm now handing over to David for some comments on financing and next slide.

Thank you, Sofie, and good morning to everyone. During the quarter and what Jörgen mentioned earlier, we have raised SEK 3.1 billion in equity followed by the acquisition in Denmark, of course, amounting to just over SEK 5 billion of equity raised this year. We are pleased with the successful equity placement and the confidence shown by the investor community. Additionally, we are satisfied that the acquisitions we made are immediately adding value for our shareholders. In total and year-to-date now, as I mentioned, we have raised SEK 5 billion of equity and invested almost SEK 10 billion this year so far. And on balance date, that means our EPRA NRV is at SEK 416 per share, almost 5% higher than in previous quarter. Our strategy on the capital structure and given that we have been able to increase our profit from property management over these 2 years of turbulence that we have experienced, we are still focused on maintaining financial discipline going forward while continuing to seize investment opportunities. And going over to next slide. We are very happy to announce that the combination of actions taken this year, capital raised and the investment opportunities sourced and executed, have led to several metrics improved operationally, as Jörgen mentioned, but also financially. And this was confirmed earlier this year by the rating agency, Nordic Credit Rating, and also just recently in October by Fitch Ratings, adjusting our long-term credit rating to BBB. And this will, of course, support our financial capabilities going forward. On balance date, loan-to-value at 37.6% and net debt-to-EBITDA of 8.2x with a run rate of 7.6x, position us well to remain agile and ready for further investments along the way. We are also satisfied with the ongoing theme to transform our portfolio to higher efficiency standards, thereby enabling a gradual shift also to a more sustainable financing position. And right now, we are sitting at 70% of our outstanding loan portfolio being sustainable. And next slide, debt and money management. We have taken actions in the third quarter to extend the overall debt maturity, along with lower financing costs. In total, we have raised SEK 2.5 billion in debt during the third quarter and almost SEK 5 billion year-to-date. Among some of the highlights taken -- actions taken in the quarter, we have issued SEK 1 billion in unsecured debt, paying 100 basis points over STIBOR 3 months for 3 years and 135 basis points over STIBOR 3 months for 5 years. The second main event I would like to mention is also the sourcing of DKK 1.7 billion of Danish mortgage bonds at attractive terms with debt maturity of well over 10 years isolated. Our liquidity, including debt commitments totaled SEK 4.2 billion as of the balance sheet date, aligning with our target, positioning us for further investments. And going to next slide. Right now, the macroeconomic environment is marked by uncertainties around productivity and growth trajectories. While both the U.S. and Europe face political challenges, the U.S. has a clearer stance on pursuing that to fuel growth, whereas Europe remains uncertain in this regard. But in Europe as well as in the Nordics, we anticipate further central bank rate cuts as recent CPI figures have fallen below the long-term target of 2% that central banks usually look at. During the quarter, we entered Danish interest rate swaps of DKK 1.1 billion, carrying an average fixed rate of approximately 2.4% with an average term of 6 years. Approximately 62% of the loan portfolio has a fixed rate and the average interest rate maturity was 2.7 years on balance sheet date. Now passing over to you, Sofie, for next slide and guide us through capital deployment and valuations.

Thank you very much, David. Our capital deployment divided into acquisitions of SEK 8.6 billion with a large property in Horsens, a sale and leaseback with DSV that came in the last day in the quarter and also some acquisitions from previous quarters, among others, Jernholmen, south of Copenhagen and the 2 other sale-and-leaseback transactions with DSV in Helsingborg and Landskrona, totaling to 8 new properties during the year. We divested a property in Brøndby, Denmark and a smaller property in Kristianstad in Sweden, totaling to almost SEK 600 million. Development CapEx ended at SEK 1.9 billion. These investments related, among others, to our large ongoing projects with Elgiganten in Jönköping and this was finalized during Q2, that project. And also the project at Stigamo also in Jönköping to Nowaste and at the large project that we started here in Helsingborg at Ramlösa. Total CapEx for the year rounded off to SEK 10.5 billion so far. And next slide, please. Our property value stayed the same as the yield requirements haven't changed much since last quarter. There were some smaller changes due to higher yield requirements in some smaller cities, but those are mitigated by higher rent levels and some projects being finalized. And also, we had a one-off effect due to deferred tax of the acquisition in Horsens. The average weighted yield valuation, the exit yield for the portfolio, is now 5.9%, and the EPRA net initial yield came to 5.5%. And so far, 61% of our portfolio has been externally valuated. And now, handing over to Jörgen for today's takeaway.

Thank you, Sofie and David. So 3 points takeaway from this meeting. First of all, Catena delivers a solid Q3 report on all numbers. And with a strong balance sheet, we have a lot of headroom for doing more investments going forward. Secondly, we have deployed the proceeds from the equity raises in Q1, Q3 and hereby delivered what we told the market when we were out with those equity transactions. And the third point is with this existing portfolio, we show a significant uplift in our earnings capacity for the coming 12 months. And with that said, we would like to open up for Q&A. So please go ahead.

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

You mentioned that there are more bidders and more aggressive bids in the transaction market. Does this imply that we're past an inflection point on yields? And how does this more competitive market impact your decisions on capital allocation?

Good question. Yes, we've seen in lately transactions that there are more players bidding with sharper bids, so to speak. I think we will see going forward that there could be some uplift in the valuation -- in the portfolio, but I think it will lag about 6 months before the external valuators have enough evidence to confirm on lower yields. Of course, that will be tougher for us to be competitive in some of the transactions. On the other hand, I think we have shown historically that we can find some projects, some acquisitions that we have been successful in. There could be other upsides for us and the sellers. We have quite smooth processes and we can be fast-footed. So I'm not worried that we couldn't come through and couldn't be successful in acquisitions going forward.

Okay. That's clear. And on the development side, I think you mentioned that you are seeing a bit more activity. With your own discussions, I think the narrative hasn't really changed that it takes longer there. But taking the 2 things together, are you more comfortable than last quarter on starting new projects?

Definitely. Based on the intelligence and when we have the ear to the rail, so to speak, and the people in our organization discussing new projects with customers, there is much more discussions this quarter than the last 2 quarters. I think it's related to that we now see that many players are comfortable that there will be some stronger demand going forward, whether it's in -- within 6 or 9 or 12 months. But it's more positive and it's, of course, connected to what's happening with the interest cuts that Riksbanken have made and will, for sure, do more cuts going forward. So all in all, the atmosphere, the feeling is a bit more positive, I would say.

Okay. That's clear. And does this apply to all the regions, even including Mälardalen region, given that you still see the oversupply situation there?

A really good question. I would say that it's not fair to assume that there are that many discussions close to where Panattoni has their pre-let -- or non-pre-let development. So it could be more in the south of Sweden, in Gothenburg, around Jönköping, but also in Stockholm South. But yes, there are challenges around Stockholm-Mälardalen going forward as well.

The next question comes from Erik Granström from Carnegie.

I was just going to start off with perhaps asking you what you see going forward in terms of your cooperation with DSV. How do you view the opportunities together with them going forward? But also how do you see the fact that you are now -- DSV now accounts for 20% of your portfolio? So could you perhaps give us a little bit in terms of your thinking here?

Yes. Good question. The first one about how do we see the relationship with DSV and the fact that they are 20% of our contractual value, yes, we all know that they are or will be world's largest logistic player when they close the Schenker deal. So we think it's fantastic. It's a secured cash flow for many, many years. And we also have a very good dialogue with them and also a speed dial, so to speak. So if there could appear opportunities going forward, I think that we have good opportunities to be a part of those discussions. But with that said, it's too early to speculate what will happen. I just assume that you wonder about what will happen with the Schenker property portfolio. But yes, the boring answer is that we actually have to wait and see.

Okay. And moving on, perhaps, if you could say something about sort of the project pipeline you were in. What kind of yield on cost do you think that you can achieve now that you're seeing activity picking up again? Are you becoming more confident in yield on cost? Or is it something else moving in the market as well aside from perhaps a little bit better interest from potential tenants?

Yes. Good question. I mean, we have, for quite many quarters, told the market that we are aiming for around 7% depending on what areas and at what price level we acquire the land, so to speak. But when we do our math and our analysis and see what is the market rent on certain land areas and what is the construction costs and so on, we are pretty confident that we can be hovering around 7%. If that is 10 bps below or over 7%, we have to see, wait and see.

All right. Very clear. And then perhaps asking again about the latest acquisition from DSV. You mentioned that you expect an NOI of around SEK 300 million. Does that mean that, that starts immediately now as you've taken possession of the asset? Or does the contract stipulate that there is some sort of discount in terms of rental income being paid by DSV?

The contract kicked in at the 1st of October. So when you are looking at our report on the slide for the earnings capacity, DSV in Denmark is there by 100%.

And that then includes the around SEK 300 million in terms of NOI?

Correct.

Okay. Because it seems like the earnings capacity increases by something like SEK 280 million quarter-on-quarter.