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Welcome to Catena Q1 Report 2023. [Operator Instructions] Now I will hand the conference over to CEO, Jörgen Eriksson; CFO, Sofie Bennsten; and Chief Treasury Officer, David Silvesjö. Please go ahead.
Hi, everyone, and welcome to this conference call for Q1 2023. We start off by giving a short summary of the first quarter, followed by a short overview of our business. We will then proceed to the business update, where we will touch upon our current growth initiatives. Sofie and David will then walk through the numbers in the financial update, and we will then open up for the Q&A.
Next slide, please. Starting off with the summary of the first quarter. We continue to report rental income growth driven by acquisitions, projects and a stronger like-for-like numbers, driven by our CPI-linked contracts. We also report a very strong letting ratio of 97.5% and the LTV at 35%, gives us a lot of opportunities going forward. The transaction of 2 ICA assets were closed at the 1st of February. Further, we announced new development in Jönköping of SEK 379 million, and we have started to invest in solar panels and energy storage.
With that said, we stick to our plan and what we told the market, how to use the proceeds from the equity raise in November.
Next slide, please. Business overview. And next slide. On a similar theme, as we saw in Q4 2022, we are going through a trying macro environment with decreasing consumer confidence impacting the majority of the segments. Adding to the market situation in the banking turmoil, which started in the U.S. with Silicon Valley Bank and recently, the takeover of Credit Suisse by UBS. While this event, of course, rises risk levels among the sector, we are not currently seeing an effect on the Swedish banking system who major players are supportive of our strategy.
Looking at some of our key metrics for logistics, we have seen in the latest Postnord report that e-commerce sales are down 7% for 2022. Have in mind here that despite the decrease, we are still above historic levels.
One more granular metric for our business is the volume of small packages that goes through the logistics system. While data is scarce, the Swedish post and telecom authority, which tracks small packages volume in Sweden registered an increase in the number of small packages by 7% in 2022.
This is telling for why we are seeing continued interest from new development. While a number of small packages are increasing, the sales adjusted for inflation is down. This environment puts stress on a number of companies, of which the market's leading players stand out and can ride out the store.
We are fortunate to be partners with some of the leading names within the managed segments of logistics. As of today, we are not experiencing an increase in vacancy, rather getting asked about more space, a good position to be in right now.
All of this comes back to the shifting view and the increased importance of the logistics facility for the customer. What we are seeing is an increased value proportion for prime assets, driven by changing personnel dynamics and the increased importance of energy efficiency, location and capacity. Here, we believe our portfolio is well positioned for these long-term trends, which together with the overall long-term trends such as lack of prime landlords, reshoring our industrial capacity will maintain a strong demand for our assets.
Next slide, please. During the quarter, we added 1 property in Gothenburg, 1 in Stockholm and a third property in Denmark, which bring the portfolio a total of 128 properties with a contracted annual rent of SEK 1.8 billion.
Next slide, please. Looking at our customer base, the ICA acquisition, which took effect in Q1 makes ICA our second biggest customer with regards to the contract value. And furthermore, the top 10 customers now stands for 46% of the contractual value.
Next slide. Let's take a look at our initiatives for future growth. Next slide, please. Starting up with energy, which we want to highlight as a major opportunity for us going forward. As we announced in Q4 2022, we have identified investments of total of SEK 500 million with an estimated low double-digit return. These investments are mainly solar panel installations and battery facilities, which can assist the current energy infrastructure, both for the tenant and the grid as a whole.
Due to the increased demand for frequency balancing driven by the current energy crisis in Europe, the need for battery facilities is growing and has led to a high ROI. While the future is uncertain with regards to how long the compensation for frequency balancing will remain, the levels are sufficient for quickly paying up the initial investment and having the facility in place in the future for example, peak shaving and recharge stations for electric trucks. All of these factors will make our facility even more attractive for customers in the future.
Next slide. Regarding our current projects, nothing material to report besides that we are progressing well across all numerous sites. As mentioned in last quarter, we are hovering around 6% in yield on cost in the current projects. With newer projects, we will be aiming for 6.5%.
Next slide. As we mentioned during our equity raise in Q4, we see potential for new attractive projects going forward and that there is a demand for modern facilities in great locations. In line with that statement, I'm very happy to announce our latest project made official after the quarter ending. In Jönköping close to our ongoing project with Elgiganten, we will build 33,000 square meter facility. Nowaste Logistics has signed a 9-year lease agreement of 13,000 square meters, and they also have an option regarding the other 20,000 square meters.
Our partnership with the fast-growing 3PL players dates back many years, and it's a clear illustration how we grow together with our customers and the system in their growth journey. Construction will start in Q3 2023 with completion set for Q3 2024.
Next slide, please. With regards to our land bank, we have had some progresses in a couple of our processes, although we had to wait for some decisions to gain legal force. So nothing more to report there.
Next slide. Looking at our leasing operation, our letting ratio continues to be high, standing at record high 97.5%, reflecting the strong demand for our segment.
And with that said, I would like to hand over to Sofie for the sustainability and the financial update.
Yes, I turn to the next slide, and thank you, Jörgen, and hi, everyone. Taking a look at our sustainability. We continue to work with our certifications of our property portfolio. Ending the first quarter on a high note, we have now 31% of our lettable area certified, which is a 10 percentage point increase since last year, and we will continue this work during 2023.
During this quarter, we were ranked as one of the best workplaces in Sweden by the organization Great Place to Work that tracks our employee metrics. Maintaining a high motivation among our coworkers is a top priority and a necessity in order to reach our ambitious target.
And we're going further to Slide 16 for some financial updates and further on Slide 17. Our income for the period was driven primarily by our main acquisitions and indexation. An indexation, which is parrying the negative side effect of the high inflation.
Rental income for the period amounted to SEK 446 million compared to SEK 377 million during Q1 2022. The higher rental income increased our net operating surplus with 22% to SEK 359 million. The higher surplus ratio is explained by us divesting 2 older facilities during 2022, while we acquired and completed more efficient facilities with lower property costs.
Profit from property management rose 22% to SEK 278 million compared to SEK 227 million in Q1 last year. Higher financial income, acquisitions and new developments have had a positive effect.
The next slide, please. The rental development compared to Q1 2022 has been positively impacted by our CPI-linked contract that came to effect at the start of the year. Within projects, the main contributors were the completion of the [indiscernible] facility in [indiscernible] and the Nowaste facility at [indiscernible] both in Helsingborg.
With acquisitions, the majority of the increase came from the Halmslätten acquisition and the acquisition of the 2 DKI assets in Denmark. Divestments made a negative contribution of SEK 20 million, where the largest divestment was Vanda and Fröträdet, which together totaled SEK 14 million of lost rental income during the quarter. I am now handing over to David for some comments on financing.
Thank you, Sofie, and good morning, everyone. On balance day, we have reported an equity ratio of 52.7%, which is well above our minimum target of 40%. The macroeconomic picture continues to be a concern, whereas parts of the real estate market witnessed difficulties obtaining debt and with market values and the falling trend, this should also inspire to interesting pockets of opportunities.
It's true that secular trends is speaking in favor of our business and forms a big part of our success. It's also important to point out, though, that our employees take steps each day to try to stay ahead of what's next. We have shown strategically from last year with 2 capital injections, we took measures early on to stay ahead of market conditions.
As a long-term committed real estate company with a proven track record on developments, strong operating cash flow, longer leases, we are in an ideal position to further capitalize.
Next slide. With interest rates higher, average cost of debt increased 3.4% on balance day compared to 3% from last quarter. Net debt to EBITDA was reported at 8.1x, whereas run rate was reported much lower at 7.1x.
Our interest coverage ratio of 4.6x also illustrates our strong cash flow and resilient operations, combined with the low leverage of 35% and the secured loan to value of 30%, we have ample headroom to our targets and covenants and should comfortably be able to capitalize on our pipeline and further opportunities.
Next slide, please. From the first quarter, we have successfully refinanced over SEK 1 billion of debt, almost half of that was related to secured bonds swapped to secured bank lending from satisfying terms. Our debt maturity structure implies we have about SEK 3 billion of refinancing in the upcoming 12 months, whereof we have ongoing discussions with several funding partners regarding the entire volume.
Most of that debt is related to secured bank loans and a smaller part is related to secured bonds through SFF. Not until May 2025, we have unsecured loans that matures. We have more than enough liquidity to cover for 12 months of loan maturities should that deem necessary. We still expect the bond market for real estate to stay volatile throughout 2023, with elevated credit spreads.
Next slide, please. Our interest maturity structure implies we have currently 67% of total debt hedged with an average term of 3 years, which delays and reassures impact from higher interest rates going forward. Our derivatives portfolio and fixed interest loans combined have an average term of almost 5 years.
If the market rents were to increase from here with another percentage points, profits would be impacted by about SEK 36 million, all else being equal -- that should be interest rates, not market rents, sorry.
Our strategy to work with a certain level of interest rate hedge has been consistent over time and complies with our overall strategy committed to long-term engagement whether it's about customers, properties or overall sustainability targets. Handing back to you, Sofie.
Thank you, David. And looking at our capital deployment during the period, the acquisitions are related to the 2 ICA assets and the Danish property with DKI, a tenant, and also the land at Stigamo in Jönköping, where we now announced the new development to Nowaste. It was a total investment of SEK 1 billion. Divestments of one small property in [indiscernible] came to SEK 9 million. And development CapEx ended at SEK 393 million, and these investments are mainly related to our large projects with Elgiganten in Jönköping, Menigo in Landvetter and Lekia in Malmö.
I'm going to Slide 24. As regard to property valuation, we registered write-downs of SEK 710 million in the first quarter, and it was driven by higher yield requirement. The average weighted valuation yield for the portfolio is 5.6% by the end of the period compared to 5.4% by the end of last year. The EPRA net initial yield came to 5.2%.
Now it's time for Jörgen and some closing remarks. Please proceed to Slide 25.
Thank you, Sofie, and please -- now we are at the takeaways from today, and it can be summed up into following. Catena is entering 2023 with strong fundamentals. Our organic growth opportunities are attractive, and we can be offensive during the year.
Catena has a resilient financial position driven by our strong cash flows and low loan-to-value, which gives us significant headroom to act upon our growth ahead. And lastly, we are opportunistic with regards to the transaction market and new development and looking forward to present more great news throughout the year.
And with that said, I would like to open up for questions. Thank you.
[Operator Instructions] The next question comes from Markus Henriksson from ABG Sundal Collier.
First, a question on the transaction market. Could you elaborate a bit on what type of players there are active, I guess, including you? And have you seen any transaction that is representative of your portfolio recently?
Yes. Good morning, Markus. We have seen that there are some ongoing transactions and discussions. And I would say that there are a lot of capital on the sideline waiting for investments and it's the giant funds from abroad like BlackRock, Verdion and those kind of players that we are competing with.
And it's tough for us to compete in terms of the muscles, but we can act fast sometimes like in the ICA case. And I would say regarding the market yield, it's hovering around 5% a bit under in some cases, I have heard, but give or take 5%.
And then you've been very clear on that future yield on cost will be 6.5%. That's what we see now in the announced Nowaste project. Could you help us a bit on possible future projects, if construction costs will move down? Will the discussion take that into account already? Or could we see rents being stronger than expected? What would be the kind of moving target here? And are you closer to 7 than a 6 based on construction costs and rental growth?
Yes. I would say when we are aiming for 6.5% with that said, that we are closer to 7% than to 6% in coming cases we are looking into. The construction cost we assume that they will be trending down from now on. We have seen some signals, but are waiting for more signals. But we also see that there is a lot of contractors that they are very keen to get new jobs, so to speak. So I think that we are in a good position in the negotiations with the contractors.
Then last question, I think, for -- if we go back a few years in time, Catena used to mention a long-term NOI margin target of around 80% used to be then around 74%, so that was a quite tough target back then.
Now in the coldest quarter you delivered 80.5%. You mentioned several things here, we have new construction, you have sold a few assets with lower efficiency, and you have a 97.5% occupancy rate. But as the reference consensus is at 79.5% for 2024 and you have now reached the target, could you help us out a little bit here on the back of potential new construction, vacancy risks since you're running on all cylinders and the potential assets that are still in the portfolio that have lower efficiency?
Yes. Where should I start? I could start with the portfolio and then efficiency. And as you said, we have disposed somewhere where there was a low margin, Fröträdet and Vanda are 2 great examples of that. We are looking into if there are some more to dispose and to acquire and to construct assets with very high margin. But with that said, we can also see that we are now looking into some energy investments and where we can maybe go big in terms of solar panels.
Maybe we need to have the setup like we have to get the energy invoice first and then reinvoice. So that could impact the margin going forward. But it's too early to give some full analysis of that.
Regarding the occupancy rate, 97.5%, yes, it's very strong. Of course, it's too early to see the impact in the whole society of the demand. I mean it's -- people are suffering now because of high interest rates and the Riksbank did another hike.
So of course, there will be an impact. It's very good for us to have the giant players. They will sort out the turmoil going forward. But of course, there could be some vacancies. Some of our players, our customers maybe will suffer during the year, but we are confident with the situation, and we also see a demand for the big players to take more space. So there will -- I cannot assume that there will be any dramatic changes in the metrics going forward this year.
And a quick follow-up there. The 80.5% you delivered here in Q1, do you feel that, that is a good reference point, a good proxy of where you are currently?
Yes. I think so. But also bear in mind, if there should be some major changes in the energy setup, that could impact. But it's not to next quarter or to Q3 or so, but in the long run, but then we have to come back with more intel about that. So yes, 80% and above is a good measure.
The next question comes from Rodd Meshe from Erik Penser Bank.
I think -- yes, the previous -- Markus touched a few of the questions I had. But just -- could you just clarify when -- regarding the transaction market, and the 5% yield indication, is that for like the prime assets or -- and prime locations or just in general?
Yes. Sort of. I mean you can always discuss what is prime or not. But yes, new construction.
Newly built, over 10,000 square meters.
Yes. Newly built, sort of the assets that we also produce and want to own so to speak, with the signed lease agreement, with a good tenant, with a low credit risk, I should say that around 5% today.
5%, okay. Yes, because -- yes, sorry, I'm just an old value [indiscernible] now, but this is quite, I would say, indicates a little bit more like 200 bps increase from like a year ago where we saw like a 3.25% or something.
And another question that I had is regarding the new -- the leases. Yes, as we -- the previous mentioned was regarding the increase in construction costs and how does that impact the high inflation as well? How does that impact the newly signed leases, is it reflected in the leases, for example, this with Nowaste lease?
Yes. I mean we have done our calculation. And of course, investigate with the contractors, what will the cost be in a new project if we kick off in the next quarter. And so of course, we have taken in mind in the calculation, the actual construction costs.
We say in terms of market trends as well have been impacted over?
Yes. They are higher today, of course, compared for a couple of years ago or just 1 year ago. I mean the cost of debt is so much higher and the construction costs are higher. So that leads to higher rents. It's the same.
Have you seen that even in renegotiations of leases or...
Sorry, I didn't...
Is that seen -- have you seen that in terms of renegotiations of leases or...
Yes. I mean we are helped by the CPI-linked contract by the 1st of January, the leases were up 11%. And it's too early to say what will happen in the renegotiations during the year. But all of the tenants, they get higher rents from the 1st of January. So that -- we are helped by that in the discussions with new projects when they compare the rents.
Okay. And just last question regarding the interest rates on the cost of financing for new projects. Could you just elaborate just to give a little bit picture of where the interest rates level are in nearly if you're going to finance in new projects?
Yes. Rodd, thank you for your question. That's a good question. I won't be able to give you details about a typical margin, but any debt from here on, I would say, the best way for you to get a grip on where we are is just basically to look at market rates and then add a margin, which is typically somewhere between 1.3% and 2%, I would say, depending on the duration for a project, we are usually talking 1 to 2 years.
[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.
Okay. Thank you all listeners. And by that, I want to wish you all a great weekend when it comes. So thanks for this Friday.
Thank you. Bye.
Thank you. Bye.
Thank you. Bye.