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

Welcome to the Cibus Q2 2024 Report Presentation. [Operator Instructions] Now I will hand the conference over to CEO, Christian Fredrixon; and CFO, Pia-Lena Olofsson. Please go ahead.

Good morning, everyone. Welcome and greetings from a very summer empty Stockholm today. And we're talking to you live, and my name is Christian Fredrixon, and I am joined here as always by the company's long-term CFO, Pia-Lena Olofsson. So let's move into summary of the period. Rental income, up 3%, and net operating income up about 9%, but that includes a one-off insurance payout for a burnt down property in Finland of about EUR 1.8 million. And without this one-off income point, then we have a stable increase in net operating income of about 2%. The profit for the period is about EUR 2.2 million, and the property in values increased by about EUR 4.4 million in the quarter through acquisitions and through FX rate movements. But in that figure, we have an unrealized change in value of about minus EUR 8.3 million, which is [ EUR 0.5 million ] minus. And then moving on to this -- the favorite slide, Cibus with our slogan, and we love our slogan because it says exactly what we do. And we create value for our stakeholders by investing in daily goods properties. So creating food into yield, that's what we like to do and are continuing in doing. This is a slide many of you will remember and recognize. I think our mantra of course, converting food into yield, and I thought I'd like to share a story with you from earlier this year when we had a company kickoff, when I, ahead of the kickoff, asked one of those AI song bots or song apps to write a song about Cibus Nordic Real Estate. And the lyrics were actually great. So hats off to the bot. But -- and the song was titled Supermarket [ Love ]. That's not going to be our new slogan. I think converting food for yield does the job fine. But it's amazing to see how AI can help in the creativity and moving along. So the lyrics are great. The beat was terrible. So I won't play the song for you, and we're sticking to our slogan converting food into yield. On the map to the right, I'm happy to show you the 5 red dots, which are our new acquisitions in Sweden. Coming back to those a bit later. But otherwise, things are pretty much the same. We aim to create stable cash flows. We are focused purely on daily goods properties, listed since June 2021 on the Stockholm Mid-Cap. We're the sole listed pure daily goods real estate vehicle in the Nordics. We have a semi-peer now through listed Prisma Properties, which has about 20% grocery assets, but they're more of a development company than we are. But it's great to have a peer also in the market. We've grown from our Finnish supermarket portfolios into Pan-Nordic pure grocery player, and we pay a monthly dividend to our shareholders. So this is our expansion time line, established 2018 in Finland, moving on to 2020 when we entered into Sweden, then entered into Norway 2021, and then entered into Denmark in 2022. So looking at our properties at the end of the last quarter. We now have 455 assets, which is up from 451 as we did the acquisitions. We'll be adding one more asset soon as we take possession of the last asset shortly. Our property values are up EUR 4.4 million, as mentioned. And for the fourth consecutive quarter, our earnings capacity has increased, and that's about 3% up quarter-on-quarter. And then our lettable area has also increased by 9,000 square meters, which is from the acquisitions. On the tenant side of things, no change. We still have, of course, the largest daily goods players in the Nordics as our tenants. Then moving on to a bit more about the assets we carried out in this quarter. We acquired 6 grocery stores in Western Sweden in an area called Varmland. The assets are 88% daily goods in rental income. The rest, which is not daily goods is in the property in Bengtsfors, which is the ICA property there up to the top left of the 6 photos, where the other, which is not daily goods, is the Swedish state monopoly for alcoholics beverages, which is Systembolaget. There's a restaurant [ and an IT ] store. The agreed property value was SEK 87.5 million, approximately EUR 7.6 million. And the price per square meter paid was about SEK 9,800 per square meter, which is about EUR 855 per square meter. And worth pointing out that, that's about half or less or less than half of what it costs to reinstate a supermarket property in Sweden right now. So we think we've done a very nice deal in acquiring these properties, which fit well in our portfolio and give us increased cash earnings per share. Looking at the assets, there's one ICA store that has a low OCR, OCR, of course, being occupancy cost rate. And that's one of the key metrics when looking at supermarket stores, what's the share of rent towards turnover in the store. And this store has a very low OCR. So very happy about that. The rest of the other 5 assets are leased to a company called Pekas. Pekas is a discount grocery brand, present only in Varmland. They have 15 stores. After this transaction, we own 7 of these. They were acquired by Coop Varmland in 1999, and Pekas is doing very, very well. They've been growing steadily throughout the last years to 8% in last year 2023 and 12% up in 2022 and that they have very healthy margins. So we're very happy about this tenant. There's an ongoing project in Hagfors, which is the asset up to the top right, and that's the property which we haven't taken possession on yet. We're waiting for the project to finalize. But I was reading in the media that Pekas, they're investing about EUR 1 million in that asset. And you can do the math by yourself there, kind of figure out what we've paid for these various assets in -- on average. So I think that shows how important these stores are and stores in general are for the grocery players. They invest heavily in the stores. And therefore, are long-term in many stores, even though the world may say something else. So happy to have got that acquisition under our belt during Q2. And then moving on back up to the slide, Cibus top level. What do we mean by creating stable cash flows? Well, if you look at the left part of this slide as an income statement or a profit and loss, we try and create stable cash flows on every single line of the income statement. So starting with the top line, we focus only on daily goods properties, create stable income. It's strong tenants, as you know, a story well told. It's also very noncyclical daily goods business, of course, proven to be resilient in all times of economic volatility. People might need to buy food in all terms of the market, up and down term. 84% of our rental income is from daily goods tenants, and 97% of our 455 properties are anchored by daily goods tenants. And when we say anchored, we -- often that means the only tenant. As you see, our average property size is 2,200 square meters and what we have there is in effect, a single stand-alone supermarket. And stand-alone could be in a building with residential on top, et cetera, but the tenant is 100% in most properties, a daily goods tenant. Looking further down the P&L then, we protect our growth through having 99% of our linked -- of our rents linked to CPI. And that's worked very well throughout this high inflation season. We have a steady WAULT. It's now come up from 4.8 years in the last quarter, up to 5 years again. And Pia-Lena will tell you a bit more about that later. And one of the most important things also is, of course, store location stability, which is prevalent in supermarkets. The store locations are very important for the grocery chains. They need to make sure that people can find to the store, get into the store, purchase things and [ leaving easy ] accessible places. Very important for the chains, often many decades in one place. And a unique characteristic of supermarkets and daily goods assets is that if a chain or grocer decides to move out, often one sees that there's someone else banging on the door, ready to take over, maybe one of the other chains or maybe a more local or independent player working on a small one to 2 shop basis. And -- but what is important is that sometimes there are vacancies in supermarkets. Some locations do become obsolete. It cut through competition among the grocers, perhaps that infrastructure changes or demographic changes in the region, which means that a store is obsolete. That's part -- natural part of our business. And what's important to remember is to have a very big portfolio. Otherwise, risks can be big if you only own a [ few ] supermarkets, but owning 455 assets in 4 countries where they're all very small, means that we have a great diversification of our income stream. Now, again, we have 90% of [Technical Difficulty] triple-net result from property increases. So on the cost side, we try through these lease [Technical Difficulty] that we get the increase in [Technical Difficulty], but we have a stable cost basis. [Technical Difficulty] We also want to make sure we have stable income when it comes to the bottom line. So we are 97% interest rates hedged, and we use diverse funding sources. Next slide, please. Thank you. Earnings capacity, as mentioned many times before is one of our key metrics and drivers. And I'm very happy to share with you that for the fourth consecutive quarter, we've now managed to increase our earnings capacity per share. So in total, since the dip in Q2 -- or the 1st of July 2023, we've now increased the earnings capacity per share by 7%. And this quarter, what has happened, what are the main changes? Well, we have the top line indexation growth coming through in certain of our regions. In Sweden, for example, indexation only comes through once a year, but in other countries, it comes through on a rolling basis. So we can see that we've top line indexation growth. We've done a couple of rent renegotiations. What's also coming through is the outcome of the bond refinancings that we've carried out and told you about earlier. And then the acquisition in Sweden also helping earnings capacity per share, of course. Looking at our share price performance and the traded volumes. It's a very liquid share. About SEK 60 million of turnover per day. About 2,400 transactions per day, which is a very high number liquidity for a company of our size. And so happy that we have the liquidity in the market. Looking at our shareholder list, you will recognize many of these names. A very stable shareholder list. And we're proud of our shareholders with many are well known and professional investors. But we also have a very large number of smaller investors. And looking at the number of shareholders we have now, at the end of the quarter, it's about 51,000 shareholders, which is up 3,000 shareholders since the end of last quarter. And handing over to Pia-Lena for the financial overview.

Thank you. Okay. Let's start with some significant events during the quarter. We have the AGM, the 15th of April, where the Board was reelected. The 1st of May, it was announced that the Board had repurchased warrants of the 2020 program. It was conditional of -- that the holders reinvested their repurchase consideration in Cibus shares using the retaining warrants and 1,396 new shares were subscribed. On the 28th of May, Cibus acquired 6 grocery-anchored assets in Sweden for SEK 87.5 million that Christian talked about just a minute ago. And then on the 29th of May, Cibus announced that Cibus wanted to exercise the right to prematurely redeem its senior unsecured green bond loan 102, and it was made early July. On the 31st of May, Cibus announced that we had increased the total number of shares and votes due to the aforementioned exercise of the 2020 warrant. Here are some key figures for the quarter. Rental income was EUR 30.4 million and net operating income also EUR 30.4 million. Net financial items was minus EUR 16.7 million and profit from property management, EUR 10.3 million. We do have items affecting comparability on several lines in the P&L. So let's look at the next page. In the second quarter, service income included an insurance compensation of plus EUR 1.8 million for a fire damaged property in Finland. The property was subsequently sold in the second quarter. Cibus reported a nonrecurring expense of minus EUR 1.1 million, of which minus EUR 0.4 million was based on the resolution by the AGM to subsidize the option premium for the 2024 warrant program and minus EUR 0.6 million was based on the Board's decision to repurchase the previous paid premiums for the 2022 warrant program. All warrants for the 2022 program were subsequently canceled. Net financial items include a nonrecurring expense of minus EUR 3.6 million for tender offer when buying back bonds that mature 2024, 2025. Net financial items also include a positive exchange rate change of plus EUR 1.3 million. Profit from property management, excluding nonrecurring items and exchange rate effects amounts to EUR 11.9 million. Unrealized changes on property value was minus EUR 8.3 million. The negative change in value was mainly attributed to Finland and Denmark. Unrealized change in value of derivatives was minus EUR 0.3 million. Our current earnings capacity shows a net operating income of EUR 114.7 million. Property expenses is the same since the last quarter due to gains through energy efficiency in our ESG investments. Indexation and acquisitions have increased the rents. Profit from property management plus expenses from the hybrid bond was EUR 52.7 million. Adding back noncash items, profit from property management was EUR 0.97 per share, which is an increase of EUR 0.01 per share since the last quarter. Looking at the net operating income in a comparable portfolio, we see that the effects of indexation and other rent increases amount to plus 4.4%. Indexation going forward will increase the NOI and cash flow while financial expenses are 97% capped. Cibus segments or countries. Finland is the largest market with 70% in the second quarter. NOI this quarter is however somewhat inflated for Finland due to the insurance compensation. So without it Finland would be contributing with 68% of the NOI, Sweden and Denmark 14%, and Norway 4%. Cibus strategy is to give its shareholders strong dividend on a monthly basis. The AGM in April decided an unchanged dividend of EUR 0.90 per share divided into 12 payment occasions. The dividend yield on the closing share price of SEK 157.8 at the end of the quarter was 6.5%. Looking at the balance sheet, property value was EUR 1.768 billion. Secured debt was EUR 889 million, giving a loan-to-value on secured debt of 50.3%. Unsecured bonds amounted to EUR 241 million, and this includes the loan 102 that we called and repaid early July. Also, the other bonds that can be callable during 2024 are included. So if they were to be called paying the cash that we have on hand, the bonds would amount to EUR 192 million. Our net asset value EPRA NRV was EUR 676 million or EUR 11.8 per share. Our remaining lease time was back at 5 years at the end of the second quarter. We have extended nearly [ 50 ] grocery and daily goods leases during the quarter. Regarding funding, 77% is bank financing with a weighted average floating credit margin of 1.6% and an average weighted capital maturity of 1.5 years. All bank loans with remaining terms of less than 12 months are currently being refinanced, and we estimate that they will be all refinanced during the second half of 2024. Close to 21% of external funding was at the end of the second quarter unsecured bonds. Taking the call bond in July plus the callable bonds during 2024 out with the cash that we have on hand, unsecured bonds would be 17% of the funding sources. Our hybrid bonds amount to 2.6% of funding sources and have first call in September 2026. Based on the earnings capacity and taking all interest rate hedges into consideration, an increase of the market interest rate with 1 percentage points would affect profit with about minus EUR 0.5 million annually. An increase with [ 2 percentage ] points would affect profit with about minus EUR 1.1 million annually. Looking at some key metrics. LTV was 58.9% at the end of the second quarter. We continue to operate in the lower part of our internal policy range between 55% and 65%. The covenant in the MTN program is LTV of 70%. Interest coverage ratio was at 2.2x and will continue to be stable even if we would get higher interest rates due to the high degree of hedging. The covenant in the MTN program is 1.5x. As an alternative to the LTV, we look also at the net debt-to-EBITDA. We have high-yielding properties, and net debt-to-EBITDA was 9.8x during the second quarter. Over to you, Christian.

Thank you, Pia-Lena. So looking a bit into the future now. In the outlook, it's been a busy time in grocery and daily goods, there's lots of things happening in the market. Takeovers, fight for market share, food prices moving. I've written a bit about that in the CEO comments in the report, so I won't dig into too much about that now. But the outlook going forward for us earnings capacity started to grow in the second half as mentioned and our strategy is to continue this development. There's still inflation in our markets. So the figures look to support continued growth in rental income through indexation, which proves our business model that we have inherent growth built into our business model. And the stable development in the daily goods business. And what can be seen on the market is there's several new retail growth initiatives that could lead, among other things, to more sale and leasebacks. What we see in there examples of that is, for example, in Sweden, Lidl have said that they want to increase their number of stores by 50%. They've been around for a long time in Sweden, they managed to build 200 stores. They've now said they want to increase by a further 100. So that's a significant investment for them. Listed tenant, Axfood with Willys, their discount brand is doing very well in the Swedish market, and they want to grow that substantially. And they also want to grow by them buying City Gross, which is a small privately held hypermarket player in Sweden with about 3% market share. So Axfood had made -- had bought that structure looking for more stores apparently, and they're waiting for the competition authorities to give them the green light later this year. In Finland, we've also seen that the very cutthroat and strong competition between S Group and Kesko, together have more than 80% market share in Finland. And Kesko has stated that they want to grow and they have stated that they are doing a -- they want to do a store investment program of approx EUR 250 million per year. So I mean, that's a significant number. And so my take on all this activity, and there's also other activity in Norway and Denmark, is that if the grocers are building balance sheet now, then sooner or later, there may be more opportunities for sale and leasebacks, as the grocers are building up their balance sheet and want to offload assets going forward. There's also transaction volumes that are starting to pick up in the market in general, which also helps us. And one thing also, I just want to mention on P&L. I mentioned we moved out our WAULT back from 4.8 years to 5 years. It's been around the 5-year mark since inception of Cibus, as you've seen. I think a great strength for us being such a large company and specialized on one asset class is that we can renegotiate leases in packages. Our tenants are big corporates, used to procurement, they're used to negotiations. That's what they do, right, buy groceries and daily goods and sell them on. By being a large player like ourselves, we can manage to negotiate packages, which is a win-win for both our tenants and us. So for example, in Finland, we had negotiations, one of those [ 50 ] leases, which we mentioned were with our 3 main tenants in Finland. So it's good to negotiate in packages, we feel, and it's good to be big. Looking at the market in general, falling interest rates should mean stabilized valuations and increased transaction volumes across our markets, all other things being equal. I think there's evidence of falling interest rates right now as well as seen. This should also create business opportunities for us. We've seen in general an increased investor appetite for stable cash flow operational sectors. I think there's evidence of that through the IPO of the Prisma Properties, I mentioned earlier, and then multiple transactions in several markets, especially Sweden has seen a much more liquid transaction market for -- in our segment, both from institutional players but also from private capital. In general, of course, a strong support from equity and bond markets as well as support from senior banks, which in general, in the market, I think will facilitate transactions and movement going forward. And we feel strong support from our bankers as well, which is great. We have a motivated, competent and agile organization ready to react. We've done one transaction as seen, and we are looking to do many more in all of our Nordic markets and also following other key European markets closely.

Yes. Cibus is working with different ESG activities, all to reach the goal to be climate neutral in 2030. In the second quarter, we have completed our double materiality analysis and is preparing for including ESRS reporting in the Sustainability Report for 2024. During 2024, we have issued 3 bonds under the new, more ambitious green framework that was launched during 2023.

Thank you. And when it comes to environmental impact, the best thing we can do is work and have energy in focus. We have net leases, as you know, so we're working side by side with our tenants to create energy-efficient buildings. During the quarter, we've added additional 2 solar cell panels in -- on 2 of our roofs. And we've also installed about electric -- we have installed about at 50 of our locations, loading bays for -- or charging bays for electric vehicles. So 50 store locations in Finland and Sweden we've signed during the quarter. For the S in ESG, of course, daily goods, real estate, important part to play in everyday life. It's part of a sustainable and resilient society. The people can get edibles and can go to the store and both meet people and buy food, of course. It's also an important physical meeting place in the modern world and by some, it's considered social infrastructure, and a very important part of society. And what are we working on there? Well, again, together with our tenants, focusing on important social aspects of daily goods portfolios, creating accessible and safe marketplaces. So what are our focus areas going forward? Growth and grow -- to continue to grow our earnings capacity per share, our main focus, to continue to provide stable cash flows and dividend paying capacity, looking at and carrying out cash earnings per share accretive potential transactions and continue to optimize our balance sheet. And the -- on the ESG side of things, continue to work with social infrastructure. We remain -- we want to retain and create accessible daily goods locations as a meeting place, work with energy efficiency, become climate neutral in 2030, and then as Pia-Lena mentioned, preparation for the European Sustainability Reporting Standard. Primary reasons to invest in the Cibus share, high and stable yield, potential for favorable value growth and monthly dividends, segments with long-term resilience and stability. And just to summarize then what are the -- what should be the main takeaways from the Q2 report? Stable underlying cash flows, as mentioned, daily sector still doing very well, of course. We're receiving index growth, renegotiating packages, our WAULT has moved out. The earnings capacity continues to grow. Very happy with that, of course. We feel the strength of tailwinds from the financial markets, which should allow us to carry out more transactions going forward. And we're back in growth mode. We've done [ 1 ] acquisition and looking for more. Thank you from us.

And we open up for questions.

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

I have to first -- I have to ask first if we can find the Cibus bot song anywhere or do we have to find ourselves?

I'm not quite sure of the copyright rights for this AI song bot, but we had a lot of fun, so try it during the summer. Just put in a link of what you think the song should be about, and in about 1 minute, you get a song. Amazing.

Great. Then on a more serious note, you have some loan -- bank loan renegotiations coming up, and I guess you had a 1.5% margin on those on average. What should we expect about -- or what do you expect about the discussions now for H2?

Yes. The margin is 1.6%, current margin on the bank loans. Yes, I mean, we have very good discussions with the banks, and there's large interest with the banks that they have a cooperation with today and also new interests also. So we have -- we are looking really good in -- we're looking at a good negotiation with the banks and then we'll see. And we have the aim to finalize the refinancing in the second quarter, now second half year of 2024. But really good discussion with the bank. They're happy to support us going forward. And also since the bond market has opened up and shows so strong, that also gives us negotiation power with the banks.

I mean, in general, one can say that supermarkets and groceries are a very likable asset class from banks, stable tenants, semi-long WAULTs, geographically and by number, diversified portfolios which create stability in cash flow. So no, it's a very preferred asset class in my feeling when it comes to this asset class.

And then your refinancing has been quite extensive. Do you want to comment anything about hedging activities after Q2?

I mean, we will continue to have a high degree of hedging that's important for us to continue to deliver stable cash flow, and hedging is a part of that. So that's something that we will continue to do. And the refinance activities that we did with the bonds, of course, is giving us a good platform to start from and to grow from going forward. And we will have benefits going forward also in the earnings capacity, when we're able to call the bonds when they become callable. So we have 1 loan, 103, that will be callable in early September, the 2nd of September, and then the other loan, 104 loan will be callable in December. So replacing them with [Technical Difficulty] and having longer maturity.

And you had quite a lot of renegotiated lease agreements. Can you describe with the tone in those discussions? Has it been tough as usual or even tougher?

I'd say on the contrary, it's business as usual. In most cases, one simply extends the list. We get the index growth, the tenant gets a stable store location, so they can carry out their core operations, which is selling daily goods. My feeling is that it was -- and what I hear from our team is that, of course, it should be a tough negotiation, right? That means everyone should be happy when they leave the table. But I understand we have a good cooperation with our tenants and reach some good negotiation points for everybody.

And then a question regarding valuations. Do you want to give some comments on the property valuation cycle and differences between countries?

Yes. Sure. Sure. No, as seen, we had a value decrease this quarter, also 0.5%. In general, I think there's a lag in the market. The value was inherently, and the way that the value should work is they need transaction data. So therefore, in both upturns and downturns, valuations are lagging in my view. We've seen it turn in Sweden, just as in many other sectors, as seen among our listed peers who have reported over the last weeks, we see that values in Sweden have stabilized and are starting to grow. Transaction volumes in our sector are picking up, the several buyers on the buyer side, as mentioned, and we see that valuations have bottomed out and are just slightly starting to pick up. In the other countries we have, that's Norway, Finland and Denmark, then we see that we're still lagging this development in Sweden. The largest movement we saw was in Denmark. And why are yields still moving up when interest rates are falling and there should be more confidence in the market and financing costs are going down in general? I think it has to do with the lag, as mentioned, the need of transaction data. But in general, as interest rates continue to fall, there should be more and more buyers willing to put and assume lower financing costs going forward in their calculation and their investment ideas. No one wants to catch the falling knife, but if the knife has hit the floor, then there should be more people wanting to come and pick it up. So I think we're at a turn of the market. I think that's the sentiment in the market. And when it comes to valuation decreases, I mean, even if it were to continue with the lag, then we still counteract this with extending leases, as mentioned, which extends the WAULTs, which moves things a bit in our direction. Indexation is coming through, of course, in our sector. And then we carry out some new lettings and trying to create new income streams, for example from EV charging facilities, et cetera.

And last question, you mentioned the OCR, occupancy cost ratio. Have you disclosed what it is? Or I have -- can't remember I have seen that number. Could you elaborate a bit on that, perhaps what kind of ranges you have there?

Yes, no, that hasn't been disclosed, not for us and not for that transaction. It's -- in general in the market, if the retailers and the chains don't want to tell us, the market or other competitors, what turnover is in an individual store, because the turnover is what really drives the long-term attractiveness of the store location, right? So -- but if -- in example, ICA, they are -- it's owned -- every store is owned by an independent retailer. So you can find out in looking backwards at these annual reports what the turnover was in an individual store. And that's what we've done in this case before the acquisition found out what the turnover is in the store and found out that the OCR looks very low, which should, in the future, both mean stability in store locations, because the store is doing very well. The retailer is doing very well, but in time should also mean a potential for rent increases.

The next question comes from Viktor Rud Stenlof from ABGSC.

Christian, Pia-Lena, can you hear me?

Yes.

Yes, we can.

Yes. Very good. So you stay positive on your outlook for acquisitions here going forward. Any color on what markets are looking more attractive at the moment?