Catena AB

STO:CATE

Earnings Call Analysis

Strong Quarterly Performance and Promising Outlook with New Acquisitions

The company reported an 11% rise in rental income, reaching SEK 493 million, largely driven by acquisitions and CPI-linked contracts. The profit from property management rose 3% to SEK 285 million. The firm conducted a directed share issue raising SEK 2.1 billion, enhancing financial stability with a loan-to-value ratio of 34.1%. With a solid balance sheet, the company is poised to pursue new acquisitions and projects, aiming to boost earnings per share. The ongoing project portfolio stands at SEK 3.4 billion, expected to add 290,000 square meters upon completion, reflecting a positive growth trajectory.

Solid Q1 Performance with Strategic Growth

In the first quarter of 2024, the company reported a robust increase of 11% in rental income, totaling SEK 493 million. This growth was primarily supported by recent acquisitions and favorable CPI-linked contracts, which contributed to stronger like-for-like performance. Additionally, profit from property management rose by 3%, reaching SEK 285 million, demonstrating operational efficiency amidst market challenges. The increase in rental income signals a positive trend and suggests favorable market conditions for the company's growth strategy.

Acquisition and Development Pipeline

During Q1, the company successfully completed acquisitions worth SEK 1.2 billion, including properties in Denmark and Sweden. The ongoing project portfolio is valued at approximately SEK 3.4 billion, with SEK 1.5 billion remaining to be invested. Upon completion, these projects are expected to add around 290,000 square meters to the company's lettable area at a projected yield on cost of about 6.5%. Furthermore, the management has identified attractive opportunities, indicating that the strategic focus will remain on both acquisitions and project developments to enhance revenue streams.

Capital Structure and Financial Ratios

The balance sheet remains solid, with a loan-to-value (LTV) ratio at a comfortable 34.1% following a SEK 2.1 billion equity raise. This strategic move allows the company ample liquidity to pursue its acquisition and development goals. The company's net debt-to-EBITDA ratio stands at 7.3x with an interest coverage ratio of 3.6x, positioning it well within its financial policy limits. On balance day, the average interest rate on total debt was approximately 3.8%, with 69% of the debt covered by fixed interest rates, which helps mitigate risks associated with interest fluctuations.

Market Outlook and Strategic Direction

Looking ahead, the company has expressed optimism regarding the transaction market, which has shown signs of revival. There is a continuing demand for new properties, particularly in logistics and transport sectors, whilst e-commerce activity has risen by 11% year-over-year. The management anticipates a sustained pace of acquisitions and project developments, aiming to increase earnings per share. The company's capacity for growth is evident, framed by a short-term acquisition pipeline valued at SEK 2 billion, suggesting a proactive approach in capturing market opportunities in the near future.

Vacancy Rates and Operational Adjustments

Despite a decline in the letting ratio to 95.6%, the overall vacancy situation remains stable. This change is attributed to operational adjustments within certain properties and the natural fluctuations in the leasing environment. The management has indicated confidence in filling these spaces in the coming quarters and sees potential for an increase in customer base through strategic leasing agreements. Furthermore, the terminations of specific contracts were made with a view to secure better opportunities in the long run, reinforcing the company's commitment to operational efficiency.

Sustainability and Environmental Standards

Sustainability remains at the forefront of the company's strategic agenda, with over 1 million square meters of lettable areas now environmentally certified. The company's capital expenditure aligned with EU Taxonomy is 56%, showcasing dedication to environmentally sustainable practices. Continued efforts are being made to achieve regulatory certifications for recently acquired properties, which can further enhance the company's reputation and marketability in an increasingly eco-conscious market.

Earnings Call Transcript 2024-Q1

[Jörgen Eriksson, executive]

Hi, and welcome, everyone. The agenda today is the same as we used to have, short summary, business overview and update, followed by sustainability, finance and a short takeaway before ending up with Q&A.Next slide, please. So let's dive into a summary of Q1 2024. We report 11% increase in rental income, ended up at SEK 493 million, driven by acquisitions, projects and stronger like-for-like numbers, driven by our CPI-linked contracts. Profit from property management increased by 3% in total and per share, it was unchanged at SEK 5.58 per share. The balance sheet is very solid with an LTV at 34.1% as an effect of the equity raise in March, which we will come back to later on. We report an increase in NRV per share up to SEK 399. With all this in mind, we are comfortable to grow further, and we have already during this quarter added 3 acquisitions summarized to almost SEK 1.2 billion.Next slide, please, and for a business overview, and next slide again, please. So an update from the market. And regarding the transaction market, we can see that it has opened up again, and we expect the optimism this year to stay. The activity is for sure much higher now compared to latest years. The numbers for e-commerce for the Q1 2024 shows a positive trend and is up 11% compared to the first quarter 2023, although compared to very low digits, [ '23 ]. We are not back at the levels from the pandemic, but it's a good signal and it gives some optimism in the -- within the segment.Generally speaking, one can say that there are quite many players asking for new premises, but the processes do take longer time than it used to be. We have patience and are confident that we can be successful and present new projects going forward. And lastly, as far as we know, there is the same situation regarding vacancies around the Stockholm-Malardalen region as in previous quarter, actually.Next slide, please. Looking into our customer base, there has been a minor change regarding the top 10 customers that now stands for 43% of the contractual value and as before, logistics and transport, together with food and beverage are the 2 big segments in our portfolio.Next slide, please. Talking about our portfolio and the regions. Since the beginning of this year, we report in 4 different regions called Sweden South, West and East and then Denmark. South is former Malmo and Helsingborg, excluded Denmark, West is former Gothenburg and Jonkoping, and East is former Stockholm. The fair value on lettable area has increased due to acquisitions, projects and amounts now to SEK 32.5 billion and almost 2.4 million square meters.Next slide, business update further on. In March, we carried out a directed share issue, which David will talk more about. The proceeds will be used to shift up a gear and we have identified attractive opportunities in the acquisition market as well as we see good chances to start new projects on our land bank. And the goal is, of course, to increase the earnings per share as soon as we can.Next slide, please. Our ongoing project portfolio totals to around SEK 3.4 billion, where SEK 1.5 billion is remaining investments. And when all this is completed, we will add another 290,000 square meters to the portfolio. And the yield on cost on total is around 6.5%. And for new projects, we are aiming for around 7%.Next slide, please. In this quarter, as I said before, we have acquired some properties, and one is a Danish property in the Copenhagen area. The land area is 80,000 -- 81,000 square meters, where one part is a building right, enabling 17,000 of new lettable area, and the existing buildings have a GLA of 32,000 square meters and Scan Global is the tenant and has an 11-year lease.Next slide, please. Just before closing the quarter, we acquired a new produced property in Helsingborg via a sale-and-leaseback transaction, and DSV is a tenant for a 10-year lease. Both Scan Global and DSV are new into our customer portfolio.Next slide, please. With regards to the land bank and future development, there are no updates and processes for getting zoning plans are ongoing.Next slide, please. Some words about the leasing update. And looking into that operation, our net letting was plus SEK 8 million in the quarter. Our WALE is now at comfortable 5.4 years. The letting ratio is actually down to 95.6%, and it's no dramatic and it's due to one. It's a step in area in the Scan Global property, [ two ], a completed project in Malmo, where one part was a speculative -- on speculative basis, and third, we also terminated one contract from our side to get a better solution in place after the summer, and that was in the region East.With that said, next slide, and please, I hand over to Sofie.

[Sofie Bennsten, executive]

Thank you, and good morning, everyone. I'm going to next slide. We have now reached 44% and have over 1 million square meter of our lettable areas environmentally certified. We continue to maintain a high level of EU Taxonomy alignment. For example, our CapEx of 56%, although this is lower than last year due to that [ property ] we acquired in Denmark wasn't certified. Work is in progress to align this property as well through a common certification.And going over some financial figures. The next slide, please, and next slide for some income. Rental income for the first quarter came to SEK 493 million, a growth of 11% since last year. The increase was driven primarily by indexation, some larger acquisitions and projects being finalized. Net operating surplus follows this development and rose 10% to SEK 394 million. Profit from property management rose 3% to SEK 285 million.And next slide, please, and rental development. Our CPI-linked contracts that came to effect in January gave a like-for-like growth of 6%. Acquisitions contributed with SEK 11 million with through the newly acquired Jernholmen in Denmark and the smaller Askatorp in Kungsbacka. There were no divestments during the quarter. And in project development, the finalized projects to Lekia in Malmo and to SGD in Norrkoping were the main contributors during this quarter.I'm now handing over to David for some comments on financing, and next slide, please.

[David Silvesjo, executive]

Thank you, Sofie, and good morning to everyone. Our capital raising efforts during the quarter across both debt and equity highlights our strength in the market. Assessing the capital structure, I would like to start by addressing the current environment briefly, specifically marked by volatile interest rates during the quarter. For markets anticipating 6 or even 7 rate cuts from the Fed in the beginning of the year, U.S. market sentiment has shifted, indicating only 1 or 2 cuts this year, if any.In the Nordics, the landscape differs with less sticky inflation, less aggressive fiscal policies and more moderate growth and resource usage, the likelihood of rate cuts in the near future is higher. Regardless of this, we remain confident in the robustness of our business fundamentals. This conviction drove our decision to amplify equity during the quarter through a targeted share issue raising a total of SEK 2.1 billion. As Jorgen pointed out earlier, we were very pleased to observe the interest coming from both new and existing shareholders, highlighting our reputation in the market. On balance day, the equity ratio adds up to 53%, leaving room for capitalizing on investment opportunities. As always, we continue to prioritize the safety of margin for any environment.Passing on to next slide. On balance day, our financial KPIs comfortably align with our policy and covenant parameters. Following the directed share issue, along with new debt, the loan-to-value remained comfortable at 34.1%. Our net debt-to-EBITDA amounted to 7.3x, and our interest coverage ratio to 3.6x. The secured debt-to-value ratio reached 26%, while our unencumbered assets offer flexibility for tapping into capital market if deemed sufficiently attractive.Next slide, please. On March 31, the company's weighted average interest rate on total debt was 3.8% with a weighted average term of 3.6 years. During the quarter, we successfully secured new debt totaling SEK 1.2 billion, which was utilized to finance 2 strategic acquisitions. The average cost of this debt was 4.5%, inclusive of interest hedges. Simultaneously, the capital market expanded as optimism grew and uncertainty regarding real estate market diminished. Credit spreads has gradually narrowed over the quarter, mitigating elevated market rates. After the share issuance, our liquid funds, including debt commitments totaled SEK 4.6 billion on the balance day. This means our 12-month liquidity coverage ratio is well covered.Passing on to next slide. Average weighted cost of debt was 7 basis points higher compared to 3 months ago, driven by the leveraged acquisitions taking place in the quarter. The timing of revenues from the acquisitions will, to some degree, catch up additional costs from the new debt. During the quarter, we utilized what we measure to be a window of lower rates during March and obtained interest rate swaps and forward starting swap totaling [ SEK 1.3 billion ], carrying fixed interest of approximately 2.5% fixed with tenors of between 6 years and 8 years. Our consolidated interest maturity structure implies we have currently 69% of our total debt fixed with an average term of 2.9 years. Our derivatives portfolio and fixed interest loans combined have a mix of maturities up to 9 years.Now passing over to Sofie for the next slide, she will lead us through capital deployment and valuations.

[Sofie Bennsten, executive]

Thank you, David. Our capital deployment divided into acquisitions of SEK 1.2 billion with Jernholmen in Hvidovre, South of Copenhagen and a sale-and-leaseback with DSV in Helsingborg, the small Askatorp in Kungsbacka and also a piece of land in connection with our existing Logistics Position, Tostarp, also here in Helsingborg.Now divestments during the quarter and the development CapEx ended at SEK 592 million. These investments related to our large ongoing projects with Elgiganten in Jonkoping, a project that are to be finalized during Q2 with Menigo in Landvetter and the project at Stigamo in Jonkoping. Total CapEx for the year rounded up to [ SEK 1.8 million ] so far.And next slide, please. Our property value was written down with SEK 199 million due to a higher yield requirements. The value changes corresponded to 0.6% of the total value before adjustments. The average weighted valuation yield for the portfolio is 5.8% by the end of the period, and the EPRA net initial yield came to 5.6%. And 22% of our portfolio was been -- has been externally valuated.And moving to next slide and some closing remarks from Jorgen.

[Jörgen Eriksson, executive]

Thank you, Sofie. So the takeaways from today could be summed up in 3 points. For the first, Catena delivered a solid Q1 report. Secondly, we have very good opportunities to continue growing through acquisitions and new projects. And the third point is with the latest equity raise in place, we have all conditions to shifting up a gear in our business.And with that said, we would like to open up for Q&A.

[Operator]

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

[John Vuong, analyst]

I'm looking at the like-for-like number. And I was wondering whether you could provide a bit more color on it. I mean you have Danish exposure, where indexation is much lower than Sweden. At the same time, vacancy increased over the year. And still, it comes quite close to the Swedish indexation, 6.5%. So what's the bridge here? Are you capturing some positive reversion?

[Jörgen Eriksson, executive]

We have had in some -- we can see in some contracts, we can see a bit higher rent, but that's, as we have said many times on the margin, but we have completed projects, and there's no divestments in the comparison. So we added acquisitions projects, and then we also say that we have a total of 90% impact of the 6.5% indexation. So all that summarized is the numbers actually.

[John Vuong, analyst]

But acquisitions is not in the 6.4% like-for-like. Is it?

[Sofie Bennsten, executive]

No, it's not. That's a different -- those are included in the acquisition part.

[Jörgen Eriksson, executive]

Yes.

[Sofie Bennsten, executive]

No. But the Danish part is still so little compared to the Swedish one. So even if when we rounded up win, that's 6% even so, since we got some renegotiated contracts, even though they are not that big.

[Jörgen Eriksson, executive]

Yes, that's in the 6.4%. Yes. Sorry, John. Sorry, John. Yes.

[Sofie Bennsten, executive]

Yes.

[John Vuong, analyst]

Yes. Okay. So the bridge between the 90% of the 6.5% to 6.4%, so basically from 5.9% to 6.4%, that's from the renegotiated contracts.

[Jörgen Eriksson, executive]

Yes, that's correct. Correct.

[John Vuong, analyst]

And then moving on to the pipeline. Do you have any update on [indiscernible]? Because it's been paused for quite some time now, and I still see it in the report as one that could be completed. And maybe on a different development, on the Nowaste development in Jonkoping, which is going to be delivered this year. It still says 38% occupied. So from my understanding, there's an option to take the entire space for them. Just wondering on how discussions are progressing here.

[Jörgen Eriksson, executive]

Yes. Good question, John. First, [indiscernible], there is the issue with the traffic department of -- from the government, I don't know, it's Swedish word, [ Catena ] traffic government said that we have to wait to start that construction. Unfortunately, we have an ongoing discussions. But as we speak, we are not agreed on if we can start earlier than they say. So we don't have any update about that. As soon as we have, we will present it.About the Stigamo and Nowaste, yes, they have an option. We feel very confident that we have -- when the project is finalized at Q3, Q4, I'm very optimistic to have more or less all the lettable area signed with the lease agreements. But we have to come back with that as well.

[Operator]

The next question comes from Erik Granstrom from Carnegie.

[Erik Granström, analyst]

I have a few questions as well. Perhaps starting off with the acquisition pipeline you mentioned in the presentation, you see a short-term pipeline of around SEK 2 billion. Could you tell us something about where are you -- where is this pipeline? And what kind of yields do you think that you can get in this market?

[Jörgen Eriksson, executive]

Well, we are focusing on the Southern part, on the West part of Sweden and Denmark as well. It's tough to give any specific numbers about the yields and so on. But I can mention that it's fair to assume that it's on -- we can have identified on the same levels as the acquisitions we have made in Q1. That's to give some sort of flavor on it.

[Erik Granström, analyst]

Okay. That's -- that is clear. And then also, you mentioned that your balance sheet now is obviously quite strong following the share issue. The LTV is at 34%. Now what -- over time, what do you think given your portfolio and the company as a whole, what do you think is a reasonable level for your kind of company over time to have in terms of LTV? I understand that market situations can change, of course. But what do you feel in terms of your LTV at this point?

[David Silvesjo, executive]

Yes. Thank you, Erik, for your question. Well, that depends as you point out yourself. We are very clear about the financial policy states. We are -- we will not overshoot 50%, 50% level. With that said, in this interest rate environment, it's quite clear that given that we also have a net debt-to-EBITDA target of 9x, I would say we won't be able to reach over 45% because then we will probably be somewhere between 8x and 9x EBITDA to debt. But it all depends on interest rate environment, I would say, and how we value sort of the environment from time to time. It's very difficult to say, but we have been very clear, very consistent about the loan-to-value target of 50%. We have no thinking of changing that. That's the answer.

[Erik Granström, analyst]

Okay. Good. And then regarding the vacancy, Jorgen, I believe you mentioned that you've terminated a contract in the Eastern region, and you're making some adjustments after the summer. Could you just tell us a little bit of what you're doing here and how you view the -- your ability to fill out the space, first of all, of the projects that you've now included, but also this termination that you mentioned?

[Jörgen Eriksson, executive]

Yes. Well, when we do a termination, we -- of course, we do it because we can see something better is coming around the corner. And for sure, it will be in this case. I can't give you any numbers, but we are doing some adjustments and hopefully, we have a new customer in place in Q3 perhaps, which will lead to better numbers for us. And did I hear you right, you were also wondering about the Stigamo, the speculation or what -- can you take it again, Erik?

[Erik Granström, analyst]

Yes. It was the Scan Global, I mean, the project...

[Jörgen Eriksson, executive]

Scan Global, yes, Scan Global, Scan Global, we acquired that one. There was a smaller ongoing project and they will step into that area also now in Q2 actually. So the one that we don't have the answer for is the part I mentioned in Malmo in the Lekia project that Sofie mentioned was finalized this year-end, where there was around 7,000 square meters on a speculative basis. That's a vacant area at the moment.

[Erik Granström, analyst]

Yes. Okay. I got it. And then finally, perhaps you can say something about -- yesterday, [ Boost ] announced some investments planned for the coming years, including expansion of the facility in Malmo. Could you say how you are -- like how -- what is Catena's role in all of this?

[Jörgen Eriksson, executive]

Yes. It's -- I think it's quite tricky for us to mention about some specific projects that has not been presented yet. But of course, we have ongoing discussions with our existing customer and Boost is one of our big partners, so to speak. So yes, you have to do your speculation by yourself on that one. But it was a positive press release from Boost side that they want to grow and we always want to grow with our customers.

[Erik Granström, analyst]

Okay. That is very clear. Those were my questions.

[Operator]

The next question comes from Markus Henriksson from ABG Sundal Collier.

[Markus Henriksson, analyst]

First question on the ICA property in Gothenburg that we got news about last year. Any update to us regarding a breakup fee in 2024? And how is the interest for that property?

[Jörgen Eriksson, executive]

Good question. We have ongoing discussions with potentially new customers. And besides that, ICA is paying the rent, and we are pretty confident that we will find a win, win, win solution during this year. That's what we hope for and aim for, all parts that are discussing that one. I cannot disclose more than that.

[Markus Henriksson, analyst]

Then, there's been a few questions about occupancy. Just looking at overall since Q1 '23, it peaked at 97.5%. Now it's 95.6%. There was some explanation for the decline here in the quarter, but it's a very high starting point as well. But do you think we should read anything into this change in the past year?

[Jörgen Eriksson, executive]

No, absolutely not. I think we have the free explanations, and I wouldn't say that there is any dramatic things about this. So it's fair to assume that we are hovering around those 96% that we have told the market before. It goes up a bit and it goes down a bit, but we don't see any trends.

[Markus Henriksson, analyst]

Clear. Then last question a bit on property values, very minor negative value change here in Q1. I've seen some consultants that have adjusted yield requirements in logistics in Sweden and Nordics. What are you seeing in the transaction market? Do you see stabilized yield requirements or are they continuing to come up slightly in 2024 so far?

[Jörgen Eriksson, executive]

I think, yes, we have to wait and see. We are, of course, close to the market and had a [ ear ] close to the rail, so to speak. And we have been in some discussions where it actually has been a bidding party, so to speak, where we can see that the yields have been very low. And then there have been other cases where it's not that interest for buyers. So still a bit unsure where it will end up. But for us and the external valuations we received in Q1, it's minor changes, some bps. But with the SEK 32 billion portfolio, some bps ends up at SEK 200 million in change. So as with the letting ratio, no drama at all.

[Markus Henriksson, analyst]

And then just one follow-up. I came in a bit late in the call. So sorry if this has already been asked. The outlook for your granted zoning plans previous quarter, any update on potential signings here before summer or anything to highlight there?

[Jörgen Eriksson, executive]

I think it's the same situation. Not much has happened since the call for the year-end report. But yes, we are working with the zoning plans that we don't have in place, and we are also working a lot to find new projects to sign lease agreements with customers. And it looks positive, but things take longer time today. It's just to accept it.

[Operator]

The next question comes from Emil Ekholm from Pareto Securities.

[Emil Ekholm, analyst]

Only one question from me. You completed acquisitions totaling almost SEK 1.2 billion during this quarter. Should we assume that these acquisitions are part of the identified acquisition pipeline of SEK 2 billion or is the SEK 2 billion excluding these transactions?

[Jörgen Eriksson, executive]

Well, that's a part of the acquisitions that we talked about. But where we will end up during this year, we'll see. I mean, there could be a case where we find and can sign a lot of projects and then maybe there will be less acquisitions or vice versa. So we -- just generally speaking, we have the capacity and we will grow, and we will shift up a gear, and then if it's a combination between acquisitions and project -- or it's more acquisitions or more projects, time will tell.

[Emil Ekholm, analyst]

Perfect. That's very clear. Yes, that was all for me.

[Operator]

[Operator Instructions]

[Jörgen Eriksson, executive]

Okay. We cannot see any more questions. So with that said, we say thank you to all of you, and we wish you a wonderful weekend when it comes. Thank you, and goodbye.

[David Silvesjo, executive]

Thank you. Have a great weekend.

[Sofie Bennsten, executive]

Thank you.