Catella AB

STO:CAT B

Earnings Call Transcript 2021-Q1

[Christoffer Abramson, CEO & President]

Thank you, everyone, for joining. Christoffer Abramson, CEO, and Mattias Brodin, CFO will present today. We begin on Page 2 with the Catella Q1 Report for 2021. Now most of you of course, know Catella quite well and you will see in the slide before. We hope that our recent strategic refocus on the property market will make it easier for investors to understand who we are as a Company. We strive to be the preferred European partner for real estate investors and following our announcement to wind down IPM, Catella will now have 3 property focused business areas going forward.Catella is the leading advisor in Corporate Finance and a property investment manager with European reach. We have now added principal investments as a separate business segments where we invest our equity directly. But it's important to point out that we are not a traditional property company with large and long-term balance sheet exposures. We are first and foremost an investment partner where we now, at times, partner also with equity.Let's move on to Page #3. Having exited the bank and our mutual funds business and now IPM means that our AUM and income and profits are lower than in recent periods. But we still feel that it will be positive for the long-term value of the company. Property Investment Management sales is now over 50% Catella's income and it keeps growing, which adds stability to our future profits and cash generation through rather predictable fees. We have a solid balance sheet now with a total cash of SEK 2.2 billion including Catella Bank.But of course, not all cash is immediately available for new investments. This is the main reason why we raised more capital during the first quarter and we now have around SEK 1 billion of available liquidity, which is how we intend on principal investments going forward. The rest of the cash in our daughter companies and is needed to fund operations to pay profit sharing and taxes and then the rest coming as dividends throughout the year. Obviously, the cash in Catella bank is not yet available either but we hope that should be available towards the end of the year.We move on to Page #4. We're trying to illustrate how we intend to use these additional funds in our core Property segments around Europe. It is Catella's strategy now to use equity more actively to unlock value creation opportunities, and this is of course, more important now given our higher cost of debt.We tried to -- the goal is always to generate over 20% IRR on our equity. The first and foremost, I think the most important thing is to support our customer needs, which in turn then generated AUM growth in asset management by unlocking and attracting more deals. Of course, we continue to invest and this is where some of the principal investment funds will go in development projects where we can also generate project management fees. Without creating conflict in our various markets, we may also selectively engage corporate finance as advisor and at times to sell into our own or new property funds. That's a challenging equation in these markets, but we feel that we have the right teams in place to work with our partners and customers and competitors, in a good way.Let's move to Page #5 where we then summarize the consolidated results of the Group. Q1 2021 was unfortunately disappointing from a financial standpoint with a significant drop in income, and with losses at the operating profit level. The first quarter is always our weakest, and we have exited loss-making operations but we're still not satisfied. AUM, as we start at the top, is at about SEK 117 billion, which is a drop of SEK 13 billion during Q1. Of course, the outflows in IPM continued with further almost SEK 6 billion, which is one of the main reasons we have now decided to wind down that business. And the divestment of CAM France, our asset management platform in France also reduced AUM by SEK 14 billion. So on a like-for-like basis, we -- AUMs were up. PIM, Property Investment Management, had a net inflow of SEK 4.7 billion, primarily from new investments in our core Property fund.The group delivered an income of SEK 314 million, which is SEK 189 million or 38% lower than the same quarter last year. That sounds pretty dramatic and unfortunately it is, but IPM's drop of SEK 131 million naturally had a significant impact on the Group's results and -- but the core property segments were also down compared to last year. There are good reasons for this, but it's still not good enough. Corporate finance is down SEK 21 million or 19% versus last year. A lot of this was attributable to Sweden not repeating a record quarter last year where they had one very large transaction sort of distorting the numbers a little bit. In PIM, their income was down about SEK 30 million, 13% year-over-year. It is worth noting, however, that the underlying fixed fees in Property Investment Management was up about 13% as the portfolio continued to grow. All in all, we showed an operating loss of SEK 22 million in Q1, which of course is '20.We will focus on growing our underlying strong performance in PIM. That's where most of the continued profit growth will come from and actively address the areas where we've had some recent weakness and there is a few platforms where we have some significant actions to take. Principal investments will be a positive addition going forward, but this will take some time, and as I'm sure everyone understands new investment projects take -- they can take years to harvest and we have patience and we ask for our investors patience. As we have announced the Q2 results will have a further negative impact from the wind-down of IPM. A onetime estimated loss of SEK 103 million affecting the 2021 results. We still feel, obviously, that this is the right decision going forward. And we can now focus our capital and our time on the property sector.Let's go to Page 6 where we cover the balance sheet as of March 31. Excluding Catella Bank, which is reported as a disposal group held for sale, the Group's total assets amount to SEK 4.1 billion. The increase from Q4 explained by the new SEK 1.25 billion 4-year bonds that has added almost SEK 500 million to the balance sheet, which is partly offset by the sale of Kaktus, of course. The continued focus on principal investments can be seen in the now SEK 934 million of assets in property development projects, which has increased primarily from additional investments in -- of about SEK 136 million in the Danish residential development Kaktus and SEK 76 million in the logistics project in how should I say, Sweden.Let's go to Page #8 where we go into corporate finance, and the results for Q1. As mentioned, corporate finance income was down SEK 21 million or 19%, which in a context of 36% market drop in transaction volumes isn't terrible but we're reporting a little higher. We have some areas of strength however, where Sweden contributed and continued to deliver strong underlying performance albeit not at the extreme 2020 level, but we have good -- we have a good pipeline, we see strong activity and Sweden continues to deliver very well.Denmark came back last couple of quarters relatively weak, but Q1 was strong with -- especially, with having advice the Danish Rail Authority, which has been in a large development JV. And the French residential advisory segment continue to grow income 35% year-over-year, which has been an ongoing very positive story for our French corporate finance business.The rest of Continental Europe had another challenging quarter with further lockdowns and deal delays, impacting our performance and we are still not delivering in Germany, where we are need to figure out what our market offering and decision and needs to be. Some of these issues won't be easy to solve in the current environment, but it must be and will be a focus area in the rest of 2021 given the losses.Let's turn to Page #10, which is Property Investment Management. PIM grew its AUM by about SEK 7 billion, adjusted for the sale of CAM France. So we are up about 6%, 7% on a like-for-like basis. That is mainly through continued capital inflow into our property funds. With particular continued strength in residential across Europe and an increased focus on sustainable assets, I think we have a very nice good track record in AUM growth in PIM although we have a slightly lower starting point now and need to be more aggressive here. But in the current environment being up 6%, 7% we feel is pretty good. Even though PIM's operating profit of SEK 28 million in the quarter was down materially year-over-year, it is important to know that fixed fees as I mentioned, continue to grow quite well and there were no performance fees in this quarter. We had a significant performance exiting 2020 and no performance fee in this quarter. So it's not exactly like-for-like but we're looking at a pretty standard underlying quarter if you look at the PIM results.Go to Page #12 where we're covering principal investments. While we're not yet able to fully report as a business segment, we have added further details and we will discuss this a lot more in Q2 when we will also report it a fully in our -- all our financial statements as a separate segment. As previously communicated, this is an area of increased focus for Catella and we have continued to invest in our ongoing projects. As I mentioned earlier, SEK 136 million into Kaktus and SEK 76 million into Norrkoping. Total is SEK 212 million. If you look at the table, looking at our projects you'll see at the far right column of SEK 298 million is today what Catella has invested as equity or shareholder loans and it's on this balance that we are targeting a 20% IRR.The German development project are promising on a long-term basis even though our equity commitment so far is limited. Given where we are in the project phasing these are our multi-year projects. Our French logistics projects are progressing well from a development standpoint, and to realize the returns that we seek on these particular projects, we are now working actively to accelerate the leasing activities, which is where more of the -- most of the upside in the project life at this point. We're excited to talk about this. We'll talk about it a lot more in Q2. We see a solid pipeline of potential projects, which we believe will generate attractive new deals for the remainder of this year.Let's go to Page #14 where we'll wrap it up and just talk a little bit about how we see the market around Europe in the Property segments. As you will have seen from our Q1 results, the market remains challenging in many ways but also with some opportunities. Investment and transaction volumes remain somewhat depressed in several countries, which is challenging for our corporate finance business, but there should also be a bit of a backlog of deals that should open up. Not sure if this is in the second or third or fourth quarter, but there is a backlog of delayed deals that we hope will start really coming through.There is however a lot of capital and debt is still cheap, which means that to find attractive investment opportunities you need to be creative in investment management, which we believe is playing to our strength as a company across Europe. We're keeping a close eye on the interest rate expectations going forward as a material increase represents a risk to the company, even though we don't see it as a short-term risk. It's clearly something that we need to consider with ongoing investment projects. Our focus then is to continue in our segments of strength, and to look for new opportunities where there are still good risk-adjusted yields available, be it in select residential, modern logistics and if we talk in the case of office, prime is really king at the moment, which is where our focus will be.We -- that concludes our presentation. We thank you for your time today, and we'll now open it up for questions.

[Operator]

[Operator Instructions] And our first question comes from the line of Patrik Brattelius from ABG.

[Patrik Brattelius, Analyst]

Yes. A few questions from my side, if we could start on PIM and you're right here in the CEO wording, in the start of the report that you are looking for a new French partner, can you elaborate a little bit on that what you are looking for, and what the alternatives that you are currently seeing in the market?

[Christoffer Abramson, CEO & President]

Yes. I can't obviously comment on specifics, but we are using different contact networks to identify, which we have done in the past, partners that we startup businesses with. There could be an acquisition route, which I find less likely but where we're considering it. Our main objective is usually is more successful for us is to find a partner that we fund to start a business with, and we develop a strategy and a platform together. Those partners will be minority owners in the company, and then -- so that our interests are aligned, but we have a couple of good discussions ongoing. And I think -- but you never know how than pans out. But we feel confident that we'll have a French platform up and running hopefully in 2021.

[Patrik Brattelius, Analyst]

I had some -- a follow-up question. If we move over to the transaction volume development in corporate finance it's I guess, muted a little bit with '19. But can you talk a little bit about how the start of this quarter has been given that Q2 is seasonally one of your strongest quarter? Is it muted as well or do you see the restriction in Europe has helped you and you're almost back to normal or how should we think about that?

[Christoffer Abramson, CEO & President]

Well, as you know, we don't talk about results that are not published yet, but what we can say, and like I said in the market commentary, it's -- it varies a little bit by market. As you know the Nordic region has been less affected and has been sort of running, not as normal but at least lot closer than Continental Europe. I think Continental Europe is still somewhat muted and like I said, there is a backlog of activity. There are pockets where it's opening up but I think it's -- we don't look at Q2 as being a revelation and suddenly everything is back to normal. As you know from any non-business commentary that the world is not back to normal, but in certain markets the activity is good and in others it's still somewhat muted.

[Patrik Brattelius, Analyst]

Okay. Fair. Thank you. And my last one is regarding what can be expected on the performance fee for the European residential fund in Catella here in Q2. If we look at the data from that fund it seems to be down compared to last year, and is this something that we can expect for the second quarter?

[Christoffer Abramson, CEO & President]

Well, as you know, I can't make statements about what we expect in our financial results for the second quarter. All I can say is that we had no performance fees in the first quarter.

[Operator]

The next question comes from the line of Jesper Henrikson from Redeye.

[Jesper Henrikson]

Great. My first question is that you said that you want to become a more active partner within logistics, property development and other value-added segments preferably with co-investments, could you give us a little bit more flavor on this?

[Christoffer Abramson, CEO & President]

Well, we have, as you know partnerships. We start with logistics. We work with Catella Logistic Europe, which is based in France and have started looking outside of France, and we have a partnership with Infrahubs in Sweden, and what we're looking to do is build upon those partnerships. They have started well. As you know, these types of development investments take time to materialize the profits, but we feel that we have good products with good cost control and nice locations and an attractive sustainable product offering. So we want to expand, we want to continue to co-invest in these assets. Those models are not exactly the same, but the general gist is in each of these investments we'll take an equity stake and help fund the platform and work together with our partners for the long haul. So that's in logistics. In the other platforms, it varies a little bit country by country. But if you think about our asset management businesses especially, when it comes to restructuring transactions, which are more challenging assets to work out it is often a sign of a stronger partnership and the ability for a partner to trust us as a partner too if we put some of the equity in alongside of them. So that our goals are fully aligned and not just the fee-based business. I think that's a sign of strength from our side and that's where we hope we can unlock more deals. We have seen some of those come through, not yet with massive equity co-investments, but that's fine. The equity investment is small as long as we get the deal and we have a great partner then we feel good. And that's how we intend to operate.

[Jesper Henrikson]

And as I understand it, you want to focus more on the property funds with performance fees going forward, what focus will those have, if that is true?

[Christoffer Abramson, CEO & President]

Well, what I think what I've said in the past and we continue to work on is when we launch new funds, we should be creative in the way that the funds are structured and how the fees are structured. If you think about a very well performing fund at the moment if you don't have performance fees, if you're an investor you're kind of wondering is this just chugging along, will they sell or are they just generating fees over long terms? I think if you have some of the performance fee embedded in more funds, I think you're interests are better aligned with your investors. Now of course, with yields where they are today in the market being large, large performance fees in the near future is hard. When yields are between 3% and 5% in most European markets they have a very, very high excess performance over hurdle rate is hard. But that's our job is to find the right yields to find the right assets that we can add a lot of value to, but I think it's being a little bit more creative in the fee structure to make sure that our investors feel that our interests are aligned. It's not easy, it's not an exact science. We have launched a -- For example, we recently launched a new logistics firm called Deutschland Plus, which is as you might imagine Germany and surrounding areas where there is a little bit of creative structuring in how the fees work and I think that that's a good sign at CREAG.

[Jesper Henrikson]

All right. Great, and then my last question, if you can tell us about your plan to strengthen the profitability within corporate finance and also the efforts towards debt capital markets?

[Christoffer Abramson, CEO & President]

Yes. I think that's a little premature, the question. It's quite complicated. We are -- we have, as you might have seen, hired a few people around Europe in debt capital markets, that's always the first step. Get talent in and they will tell you what to do. It's not my job to tell them what to do, so we're hiring people with the same -- the top capabilities and it will be our job to help them work together to get a good product offering that's consistent, if that helps. To be consistent across Europe. Otherwise, it could be market by market. From an overall corporate finance perspective, that is -- that's hard, not to crack. I don't think many, even of the biggest best performing global competitors have and really anyone -- I don't think anyone has really, really cracked the code on this. But there are some that have done it better than others. It's about having the right product, and having a consistent strategy. And for us, maybe more importantly in the short term is to address local lot because that is a very, very large drag on our overall numbers. And if we can't be competitive, we have to look at what the options are. But I think a better product offering, hiring the right people, and focusing on core and value-add sort of advisory service the traditional broker segment is very challenging. It's very competitive and the fees or not as high as we want our advisory fees to be. So it's about moving upstream in the value chain and focusing our business in the right direction. But it -- this is not an easy task. It's something that's going to take at least the rest of this year to get some traction. But it's a fun and interesting challenge. It's an organizational challenge, it's a product challenge and it's a market challenge, which makes it fun.

[Jesper Henrikson]

All right. Great. And then just one last quick question about when you return your bank license in Q3 saying that you will immediately get SEK 350 million that will be like available cash, and then like after a year or so your divested Visa shares like those money will be available. Is that the same amount that you went out with, which is around like SEK 80 million or something?

[Christoffer Abramson, CEO & President]

Well, that's part of the cash. The Visa shares, I just want to make it clear there, we don't have Visa shares. We have Visa fee convertibles, and those are part of a settlement from 2016. So there is no available shares to just liquidate at the moment. We did that and that has been added in the -- as you would have seen in the correction of our 2020 financial statements. That's part of the balance sheet now but the Visa fee convertibles have another 7 to 8 years to actually convert, and we don't know what the conversion rates are going to be. They have come down over recent years as part of that settlement, so we have them on the balance sheet at market value with slight risk adjustments based on the fact that the conversion rate trend has been negative. So there is no immediate additional liquidity coming from Visa shares on top of the cash that we're reporting here. There should be, I believe it's SEK 57 million or SEK 58 million that we have on the balance sheet today in Visa convertibles. So that should be that level or -- give or take at that level of liquidity to be released over the next 7 years. So it's not hugely material number.

[Mattias Brodin, Acting Chief Financial Officer]

And also to add on that about the SEK 352 million. It's not going to be immediately available, it will take some time due to local processes. So -- but we foresee that this will -- we will retrieve this cash in -- hopefully during -- in 2021 but it's is depending on local processes and also in ECB and what they decide when we can actually -- the final judgment of the bank license.

[Christoffer Abramson, CEO & President]

It's important we do report the cash in Catella Bank, sort of a separate box and outside the normal reporting because the timing is not entirely certain. It's something that we have worked on for a long time and it's a painfully slow process. It's -- yes, if you have the choice maybe don't start up a bank with these licensing requirements. It's that it's compliance is not your hobby. It's a challenge and we're working on it. Once this year ends we should be in a good position.

[Operator]

We have no further questions at this time. Please go ahead, speakers.

[Christoffer Abramson, CEO & President]

Okay. Well if there are no further questions. We have an emailed question from [indiscernible] Looking at the -- I guess, it's taken from the CEO commentary. Given the low returns in our market finding attractive investment opportunities is challenging and we need to think creatively and expansively. [indiscernible], I think I touched upon this earlier when I said with the market returns where they are, you have to be very creative in how you deal with investment management. You can't -- everyone is chasing the same deals and we have to be better. The good thing is our strength is not just investment, it's asset management, creative workout deals, restructuring deals, and our asset management companies work directly with our funds -- fund vehicles as well to enhance value on each asset, which means that we are not purely a passive investor. And we have the ability in several of our asset management platforms to do structuring and restructuring that is, I wouldn't say it's market neutral, but at least you have the ability to generate fees and business by helping others increase their returns. It's not their own money necessarily and that -- and I think so -- we think we're in a good position. But direct investment opportunities like I said, we're launching new funds we're going into new segments a little bit and trying to find yield where we think the risk and returns balance is right. Of course, it's a competitive market out there but I think our track record is very strong. Okay. I think that is all the questions that we have received. So we appreciate everyone's interest in Catella, and thank you for your time this morning, and we will -- this will be available on the website as a recording, and you guys have great Friday. Thank you.