Cibus Nordic Real Estate AB (publ) (CIBUS) Earnings Call Transcript & Summary

Welcome to the Cibus Q2 2023 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Sverker Källgården; and CFO, Pia-Lena Olofsson. Please go ahead.

Thank you very much, and once again, welcome to the Q2 interim report by Cibus Nordic Real Estate. My name is Sverker Källgården. I'm the CEO of the company. And with me today, as usual, is Pia-Lena Olofsson, the group CFO. Let's move directly to the next slide, as Pia-Lena will take you through the numbers later on in the presentation. Significant events during the period. At the Annual General Meeting on the 20th of April, Patrick Gylling was reelected Chairman of the Board; and Elisabeth Norman, Victoria Skoglund, Nils Styf and Stefan Gattberg were reelected as board members. And on the same day, on the extraordinary general meeting, the meeting approved the directed share issue decided on the 23rd of March. And therefore, we announced on the 28th of March, the new numbers of shares and share capital in Cibus. On the 23rd of May, we announced that we, as of June 19 would repurchase the bond maturing in September. And on the 13th of June, Cibus launched a repurchase offer for all unsecured bonds outstanding, although not included the hybrid bonds, the repurchase offer was maximized at EUR 25 million. And on the 21st of June, we announced the result of the repurchase offer the company had received and accepted repurchase instructions for a total aggregate amount corresponding to EUR 16.8 million plus SEK 8.8 million. On the 21st of June, we announced that the unsecured bonds outstanding, excluding the hybrid bond amounted to EUR 91.5 million plus SEK 679 million. And also after the end of the period on the 11th of July, we announced that Cibus have launched an updated green financing framework and a new sustainability-linked financing framework. Okay. So a couple of slides about Cibus if we have any new listeners. Cibus is a real estate company focused on daily goods properties. 99% of our rents are linked to CPI development. And over 90% of the leases are either net or triple net leases, which means that a lot of the costs in the properties are there by the tenants. The insensitivity to the broader economic trends makes our operations more akin to infrastructure than retail. We have been listed since March 2018 and moved on to Nasdaq Stockholm's main list in June 2021. We have a clear Nordic focus with properties in Finland, Sweden, Denmark and Norway, and we pay out monthly dividends to our shareholders, currently EUR 0.9 for the 12-month period. The story about Cibus is the story about portfolio diversification. Traditionally, these kind of assets were owned aside of single assets or in small portfolios, which meant you had a very high risk concentration. You also came into a weak negotiation position with the tenants. The banks realized this, so the bankability was low, which meant you had a higher risk but also a high-return business. What Cibus realized is that if you own more than 450 of these assets, you diversify the risk and lower the concentration. Only 1 of our assets is worth more than 1.5% of the combined NOI. When you own a lot of properties with a handful of tenants, you become an active operator and not just a landlord, negotiating rents. The banks realize this, so the bankability is much higher which means that you have lower the risk, but have the same return as for a single asset. Also with some Cibus support makes us more akin to infrastructure than retail is that we see a resilience to e-commerce. We have a negligible negative effect in the portfolio as the share of online trade is approximately 4% when it comes to groceries and a large share of that volume is click and collect from the stores. If you look worldwide, you have seen very few operators to make a profit on online food sales due to the lower margins but also the high cost of delivering the goods out to the end consumer. On the other hand, we see a notable positive effect as our existing stores can work as an actual distribution network for other goods purchased online. Sustainability. Cibus, we have set the goal and have an action plan how to become climate neutral by 2030. We have to work together with our tenants to achieve this. But as our tenants are the leading grocery companies in the Nordics with own ambitious targets, we are confident that we can reach our goals. And to the right, you can see the scopes and the pathway, how to become climate neutral. Looking at the shareholders list on the last day of June, the largest shareholder was the Fjärde national AP-fonden with 8.2%, followed by Länsförsäkringar Fonder, 5.8%, Avanza Pension, 4.0, Nordnet Pension, 3.7% and Vanguard owning 3.4%. In total, the 15 largest shareholders own 43.1% of the company, and Cibus had 48,000 shareholders on the last day of June. The share price performance. We have an average daily volume of SEK 85 million, of which SEK 39 million is traded over NASDAQ with about 3,200 transactions a day. And the stock market needs and the turbulence experienced since the outbreak or the war in Ukraine as well as rising inflation and interest rate expectations have affected Cibus share price. And at the end of June, we were trading at SEK 104.85. Then over to Pia-Lena for the financial overview.

Thank you. Here are some key figures for the second quarter. Rental income was EUR 29.6 million. Net operating income grew with 11%, to EUR 28.1 million. Profit from property management was EUR 11.5 million and earnings after tax, EUR 4 million or EUR 0.06 per share. The low earnings was due to unrealized changes in property values of minus EUR 8.3 million in the quarter. If we go into details, there are some items affecting comparability in the second quarter. Administration expenses include a positive nonrecurring item of EUR 0.4 million due to reversal of our provision in connection with an earlier acquisition. Net financial items included a redemption premium of minus EUR 0.7 million, and an exchange rate loss of minus EUR 0.5 million. Profit from property management, excluding the items affecting comparability and exchange rate effects amounts to EUR 12.3 million. Unrealized changes in property value was minus EUR 8.3 million and is due to increased yield requirements of about 5 basis points. We have a positive effect of unrealized changes in value of interest rate derivatives of EUR 2.5 million. Our earnings capacity shows a net operating income of EUR 111.3 million, which is an increase of 8%. The lower exchange rate on the SEK and the NOK compared to the euro has affected the earnings capacity negatively, mainly indexations have increased the rents. The underlying business is doing well. Net financial expenses have, however, significantly increased due to the increased reference rates. The profit from property management cash items shows EUR 0.91 per share. The dividend is EUR 0.90 per share. The dividend was proposed by the Board with consideration that the directed share issue should be used to buy back bonds as we make additional interest rate caps to secure the long-term cash flow. By looking at the net operating income in a comparable portfolio, you can see that the effect of indexation, other rent increases amounted to 8.6%. Index increases going forward will increase the net operating income and cash flow, while the financial expenses are more than 95% capped. Cibus also has a strong cash position at the end of the second quarter that can be used to further strengthen the balance sheet and cash flow. We had 455 properties at the end of the second quarter with a property value of EUR 1.815 billion. properties with grocery and daily good tenants contribute with 97% of our net operating income. Cibus segment is countries. Finland is the largest market with 69% of the net operating income in the second quarter. Finland -- Denmark, 14%; Sweden, 13%; and Norway, 4%. The countries contributed with fairly the same percentage as the NOI in property value. Cibus strategy is to give our shareholders a strong dividend on a monthly basis. We currently pay out EUR 0.90 per share divided into 12 installments. The dividend yield on the closing share price of SEK 14.85 at the end of the quarter was 10.1%. Looking at the balance sheet. Property value was EUR 1.815 billion Secured debt was EUR 917 million, giving our loan-to-value unsecured debt of 50.5%. Unsecured bonds amounted to EUR 149 million, giving a net loan-to-value of 56.5%. Our net asset value, NAV, was EUR 744 million or EUR 13 per share. Our average lease time was 5.1 years at the end of the second quarter. We have during the quarter prolonged leases on 31 assets then leased out to top money with 5 years that would otherwise have matured during 2024 and 2025. Regarding funding, now 84% of our external funding is bank loans. We have during the quarter raised new bank loans and reduced the volume outstanding bonds. 100% of the bank loans are interest rates hedged and can maximum amount to 3.95% between September 2023, up to and including December 2024. Interest can maximum amount to 4.05% during the first half of 2025, after which the interest hedges gradually matures. 75% of our outstanding bonds are also hedged. So in total, more than 95% of all debt is interest rate hedged. The first loan to mature is in December 2024, which is a bond of EUR 32 million that matures. Based on the earnings capacity, taking all interest rate hedges into consideration, an increase of the market interest rate with 1% would affect profit with 0.9 million annually, an increase with 2% would affect profit with minus EUR 1.4 million. Cibus' target is to maintain the interest coverage ratio above 2%, with the company has low exposure to floating interest rates. We expect that this target can be maintained for the next 12 months as long as the underlying reference rates are below 9%. Over to you, Sverker.

Yes. In the future, the focus areas going forward. Our main priority is to continue to optimize our balance sheet to increase cash flow and to secure future dividends. but also ESG projects to increase energy efficiency and hope to become climate neutral by 2030. The primary reason to invest in the Cibus share. We produce a high and stable yield. There is a potential for favorable value growth as 99% of our rents are CPI-linked, which will give noticeable growth in our NOI even without acquisitions. We pay out gradually rising monthly dividends. And last but not least, we are active in a segment with a long-term resilience and stability. The grocery in the daily goods sector have experienced stable noncyclical growth over time. Historically, the grocery sector has grown by approximately 3% annually, even during periods of recession. That's all for us. So please feel free, and we are open for questions.

[Operator Instructions] The next question comes from Svante Krokfors from Nordea.

Sverker, Pia-Lena. Svante from Nordea here. A couple of questions. If we first start with the earnings capacity. You have added a new line there, adjustment of noncash items, which is a positive 1, and has an impact of EUR 0.05, EUR 0.06 on EPS. Could you elaborate on that?

Yes, absolutely. We thought it was important to show the cash items. And these -- that we eliminate is the arrangement fees that have been priority paid and also cap premiums have also been paid before. So those are the effects that we are eliminating on that growth.

Okay. That's very clear. Then I know this is the wrong audience for the dividend discussion, but your earnings capacity now indicate EUR 0.91 in EPS, and you want to pay a EUR 0.90 dividend. So could you give some flavor on this?

Yes. As I said, I mean, the reason that -- or what the Board had in consideration when they suggested that dividend was that we should secure the cash flow going forward, which we have done. So more than 95% of our debt is secured and hedged, which means that we have much more stable cash flows going ahead. The index increases that we will receive, as you know, 99% of our rents are linked to CPI and will increase with CPI while more than 95% of our interests are capped.

We also had a very strong cash position at the end of the quarter, so we can strengthen the balance sheet even further. So this is on a sustainable level.

And do you have -- you mentioned that you want to lower the LTV further and probably also the range for LTV, what's the status of that?

Yes. We are looking at all the alternatives on the LTV. We have an ambition to lower the LTV, that's for sure. And one thing that we have communicated earlier that we are open for selling nonstrategic assets. We are not in any strong discussions regarding that at the moment, probably be a bit calmer over the summer, but we can't exclude going forward that we might be able to interested in selling some assets to further strengthen the balance sheet.

And then I might have asked this before, I've forgotten, but the secured LTV of 50.5%, When was it so that you can take it up to 55%?