Catena AB

STO:CATE

Earnings Call Transcript 2020-Q2

[Operator]

Hello, and welcome to the Catena Fastigheter Q2 Report 2020. [Operator Instructions] And just to remind you, this conference call is being recorded. Today, I'm pleased to present CEO, Benny Thögersen. Please go ahead with your meeting.

[Benny Thögersen, Chief Executive Officer]

Okay. Thank you. And please move ahead to Slide 2. I would like to welcome you all to today's presentation of Catena and the interim report January-June 2020. Today will be a little bit larger team than normally, and I would like to introduce Sofie Bennsten, our CFO. We have Anna Wallander, our Sustainability Manager; and Peter Andersson. Please move on to Slide 3. Here, you see the content, and I will -- we will walk your way through the topics. And we could then move on to Slide 4. Some highlights. Against the backdrop of the ongoing coronavirus outbreak, Catena delivered a strong and resilient second quarter with the numbers overall satisfying. They were so critically important supply chain industry, the swift moving change in consumption behavior in combination with a strong and healthy mix of customer has yet proved to be a favorable source of factors in this otherwise challenging environment. In the second quarter, several projects became finalized, and I'm glad to find the pace of ongoing investments steady. Sentiment within markets have fluctuated during the quarter. And even though concerns about the economic recoveries have amplified during the last part of the quarter, investor sentiment has proved to be strong enough to keep this down.Next slide, please. So far, the backdrop of the COVID-19 has limited impact on Catena regarding revenue. In total, SEK 7 million was the expense of rentals during the first half year. We entered the COVID-19 crisis in a position of financial strength, and we feel comfortable about the overall financial situation.As investors and economists are trying to assess mixed data on the global economy amid concerns over the coronavirus spread, we continue to explore ways to address the challenges faced by our communities, customers and employees. Next slide, please. Here, we will move over to the results and finance overview, and I will hand over to Sofie.

[Sofie Bennsten]

Thank you very much, Benny. So we're going to Slide 7 and talk a bit about our income statement. Our net operating income was 10% higher year-to-date compared with the same period last year, and income from property management was 13% higher. During the period, our rental income was affected by a positive one-off. It was related to an early redemption of rental contracts in the amount of SEK 40 million, and a negative SEK 7 million was related to credit losses and receivables.Property expenses was approximately SEK 10 million to SEK 14 million lower during the period, influenced by a mild winter in combination with lower maintenance measures due to the coronavirus and the fact that we have had limited access to some properties.Changes in property value was reported slightly positive, above all, as a net effect of rental negotiations and finalized projects. Going to Slide 8, statement of financial position. You can comment that the balance has expanded by approximately SEK 1.7 billion. Since last year, where unrealized value changes on properties was SEK 485 million and investments amounted to SEK 952 million.Net asset value was reported at SEK 208 per share, an upturn by 14% year-over-year. Now going to the operational review and handing over to Benny.

[Benny Thögersen, Chief Executive Officer]

Please move on to Slide 10, rental growth. The rental income amounted to SEK 622 million in the period. The total growth in rental income was 6.4% year-on-year. Project developments contributed 2.2% (sic) [ 2.4% ], and net transactions with 1.5%.Like-for-like, the growth contributed 1.9%. There was also one-off effects related to prepayment of an early lease expiry as well as reserved losses net amounting to 1.2% in the period.Slide 11, share of income retained. Our strong first quarter operating performance was accomplished by an equally sound second one. Before value changes, we retained 58% of all income during the period. Historically, this is a high reported number, in part, influenced by the pandemic and the limitation it has posed visiting some of our properties. Our target is to maintain a level above 50%.Overall, I feel we are very well positioned given the current situation, and I have great confidence in our team and our strategy going forward. Slide 12. Our strong performance is reflected in our customer and specifically our long-term focus on top consumption markets. This slide is displaying some industry segments where our portfolio has experienced growth and for some of these customers, even in the midst of this ongoing pandemic outbreak. With over 40% of rental value being represented by well-recognized firms within logistics, transport and recycling provide for stability.Another 23% is related to food and beverage where, for some customers growth due to our online grocery expansions, currently is very high. Almost 15% is related to home construction, packaging and health care, all of whom at various degrees are witnessing a state of growth.Slide 13. And there, I hand over to Sofie.

[Sofie Bennsten]

Yes. And on our -- on balance day, our property value was appraised at approximately SEK 7.2 billion with an EPRA NIY of 5.9%. During the period, several transactions have been spotted in the market, indicating an unmodified yield since end of 2019. Go to Slide 14, and Benny?

[Benny Thögersen, Chief Executive Officer]

With rental market, with several ongoing projects related to efficiency improvements, we continue our focus on raising the quality in our portfolio translating in the growth of rental value per square meter. So far and generally, occupier demand have been characterized as fairly robust even in the midst of the pandemic. Rents have been held broadly steady during the period with geographical discrepancies. With the overall letting ratio of 96%, we currently feel we are in a comfortable position.Slide 15. The quarter provides a SEK 22 million worth of new leases and net of SEK 19 million. By example, DHL has obtained access to an extended space of 2,000 square meters in Sunnanå, Malmö. And PostNord has obtained access to a newly constructed terminal in Katrineholm, also 2,000 square meters.The maturity of our contracts remain well distributed over time, averaging approximately 5 years. And I would also like to add that we now have a full house at the multi-tenant warehouse down in Sunnanå. That happened after the quarter. Capitalization. Please, Sofie?

[Sofie Bennsten]

Okay. Thank you very much. Going to Slide 17. We maintain our cost of debt at 2.4% on average. And LTV was reported at 55.7%, down 30 basis points from a year ago. Equity ratio was reported at 34%, with sufficient headroom from our minimum target of 30%. Going to Slide 18. For funding structure during the first half year, we have, among other things, utilizing our backup facility to cover capital market funding at maturity. The share of financing coming from traditional bank loans amounted to 85% on balance day, specifically capital credit markets have witnessed a higher degree of threat the first half year with wider spreads than what we typically have been the case with channels through the banking system. Ongoing discussions with our creditors are going well.On balance day, we reported a debt maturity of 2.4 years and an average interest maturity of 3.4 years. As stated in our first quarter report, we have entered new interest rate swaps and prolonged old one at a total nominal volume of SEK 2.3 billion. The result being a longer interest maturity kept at a lower interest rate. We entered the transaction when interest rates were hitting record low levels.Turning to Slide 19 for capital deployment and moving on to Slide 20, and Benny.

[Benny Thögersen, Chief Executive Officer]

Thank you, Sofie. Capital deployment year-to-date. During the first half year, we have invested a total of SEK 878 million. Three properties were acquired totaling over SEK 307 million and adding almost 30,000 square meters and SEK 20 million in rental value. Development capital expenditures amounted to SEK 571 million.Slide 21, please. Projects in progress. On balance day, we have 6 larger projects under construction, pre-let to customers such as PostNord, DHL, Boozt Fashion, Nowaste Logistics and Seafrigo Nordic. With only minor adjustments, all of our projects are on schedule. Overall, there is over SEK 530 million left to invest during the existing development pipeline, which when finalized will add another 110,000 square meters to our portfolio. And then I'm very happy to introduce Anna, who will talk a little bit on our focus on sustainability. Please, Anna?

[Anna Wallander;Sustainability Manager]

Yes, thank you. I would like to start on Slide 23 and present our key sustainability figures for the first half of 2020. As you can see, we are continuing to reduce our energy consumption per square meter. From last year, it's down by 6%. Most of our energy is fossil-free, and we are actively working with installation of solar power as well and planning many more installation on our roofs.We have reduced our greenhouse gas emissions compared to same period. Last year was 15%. And we are working with our environmental building certification and currently working on 10 more to be certified with Miljöbyggnad. And I would like to take this opportunity to talk a bit more about Miljöbyggnad, as some of you might not be so familiar with the certification standard.If we move on to Slide 24, you can see on the left-hand side, there's some key factors of Miljöbyggnad 3.0, which is the one we have been talking about a lot, the one we're working with now. And it's a tool to create sustainable buildings, primarily directed at new buildings. And on the right-hand side, you can see a new certification standard that I would like to present. It's called the Miljöbyggnad iDrift, meaning Miljöbyggnad in operation. So it's for buildings that are already exists. It was released a couple of weeks ago, and it's a tool to improve the existing portfolio. And the Sweden Green Building Council released this certification standard because they saw that most companies were working -- were focusing on certifying new buildings, but didn't do anything about the existing portfolio. And well, obviously, the majority of buildings already exist, and will do so for many decades to come. So the standard is very much needed.As you can see, it's also possible to certify existing buildings with Miljöbyggnad 3.0, and we're currently doing so with 7 existing buildings. But it's quite complicated, it's of a time consuming. And it's not always possible if you didn't build according to the manual from the start. And -- but most importantly, it doesn't always add that extra value that we're looking from a sustainability perspective.If you apply this manual on a building that's been in operation for a couple of years, it doesn't get the same value as if you would have done it from the start. And we're currently working with 1 project, where we're applying iDrift. From our experience, we can see that it's much more appropriate for existing buildings and get the extra value that we're looking for. So just to summarize, we will continue with the projects that are in progress. But then the best way forward is to certify all new production, with Miljöbyggnad 3.0 or 3.1 and the existing portfolio with Miljöbyggnad iDrift in order to get the most out of both standards, both from a sustainability and also from an economic perspective. Thank you. That's all from me, and we'll go back to Benny.

[Benny Thögersen, Chief Executive Officer]

Thank you, Anna. Please go on to Slide 26. We would like to address a few voices from the market during the second quarter. PostNord announces that the e-commerce is growing at a record pace with 44% during April in comparison to last year. This is, of course, due to corona. Element Logic, which is one of the automation provider of auto store, is announcing about Boozt, their efforts to expand the world's largest auto store equipment and thereby cementing their position. In June, Boozt also made an advisement on its earnings to significantly increase in the light of accelerated online shopping.Cainiao, an affiliate to the Alibaba group, announces their efforts on doubling the floor space of its overseas warehouses to 2 million square meters. Point is that the size of transformation supply chain is found everywhere, and it's important for us to stay ahead of this changing environment to be able to deliver best possible service to our customers. Some cases. Slide 27, please. During the period, several smaller volume projects have been completed. By example, we completed the construction of a terminal adopted for PostNord located in Katrineholm in proximity to the Stockholm area. The investment amount to SEK 36 million and provides a yield of approximately 6.5%. The lease agreement is for 10 years.28, next case is -- in early April, we signed an agreement to acquire a plot of land in the municipality of Jönköping. The plot covers approximately 190,000 square meters and is well located in one of our Sweden largest logistics sites adjacent to standing properties we already own. The position is excellent, and it allows transport to several metropolitan regions within 1 day. The transaction is conditional on a detailed plan gaining [ lead ] force. We expect the site to be ready for construction within 2 to 4 years. Next slide, please. The investment case in Åstorp. In May, we announced acquisition of a land plot from the municipality of Åstorp with a signed agreement to construct and lease 10,800 square meter distribution center to Seafrigo Nordic, an international third-party logistics company that focuses on the handling and storage of food. The rental agreement signed has a duration of 12 years, with an estimated net operating income of slightly more than SEK 9 billion a year. The facility will have an excellent location next to the E4 highway, not far from Helsingborg in the South of Sweden. Construction is scheduled to become finalized during the summer of 2021, and the facility is expected to be certified in accordance with Miljöbyggnad Silver, and a photovoltaic cell facility is also being installed on the roof. Slide 30, please. Potential future development projects. The search of the promising land continues along with ongoing detailed development plans in progress. On balance day, we hold a potential of about 5 million square meters for land where almost 1 million square meters are consolidated and with development plans in place. The rest of the land bank is conditional on various contractual agreements [indiscernible] detailed development plans having to gain legal force.And that was all for today's presentation and I will now invite you to the question and answer session. Please go ahead.

[Operator]

[Operator Instructions] Our first question comes from the line of Staffan Bulow from ABG.

[Staffan Bulow, Research Analyst]

Yes. Staffan Bulow from ABG here. I have a couple of questions to start off. You mention SEK 7 million of rental income reduction from reserved credit losses as a consequence of COVID-19. Are there any other COVID-19 rental income effects, such as discounts or granted deferrals for the first half of 2020 worth highlighting?

[Sofie Bennsten]

No, we really don't have that much other things that affect us. Of course, we've been helping out our customers with the cash flow [indiscernible] our peers. But otherwise, we've seen -- in our customers, we don't see that they are that much affected. So it's pretty much the losses that we have reserved for, and that we help them with cash flow or we have been helping them with cash flow over the first and second quarter.

[Staffan Bulow, Research Analyst]

Okay. And have you seen an increased demand of new warehouses and logistics facilities from your existing tenants since e-commerce still has grown quickly the last months?

[Benny Thögersen, Chief Executive Officer]

Simple answer, yes. That is due to the logic. We know that there is much more e-commerce and that we have moved ahead maybe 1, 2 years compared with what the expected growth of the e-com in Sweden. And for every e-com and krona, we need more square meters. So we are changing actually store as the square meters to warehouse and logistics, terminals, square meters. So the answer is yes.

[Staffan Bulow, Research Analyst]

And given that answer, are you planning a lot of starts of projects for the second half of 2020?

[Benny Thögersen, Chief Executive Officer]

We have good-looking sales funnels. And we know, due to the corona, they have not been [ progressing ] at the same pace that maybe expected, but there will be more to come.

[Staffan Bulow, Research Analyst]

Okay. And regarding property valuation, if I understand you correctly, all value revision, we will need to improve cash flows or projects and no yield compressions.

[Sofie Bennsten]

Yes, that's correct.

[Operator]

And the next question comes from the line of Markus Henriksson from Pareto.

[Markus Henriksson, Research Analyst]

I'm looking into the maintenance costs. What you expect for the second half? We had 2 quarters in a row now with less since you are trying to not spread the virus.

[Benny Thögersen, Chief Executive Officer]

It's a little bit hard to have an outlook on that one. We expected that we will in a little bit higher, what you say, pace to get into our warehouses and terminals. But I do not foresee any major changes.

[Markus Henriksson, Research Analyst]

All right. So not a normalization, more -- a little bit higher than in the first half, but not normal compared to last year, for example?

[Benny Thögersen, Chief Executive Officer]

Yes. Pretty much like that. It is your words.

[Markus Henriksson, Research Analyst]

Looking at like-for-like growth, what could we expect there going forward, looking at and comparing it to the past quarters?

[Benny Thögersen, Chief Executive Officer]

Without -- we cannot predict that. But on a very generic level, you see the same pattern going into the very dense areas, we do see higher levels looking at the more rural areas. It's more like flat, that is. Same as usual.

[Markus Henriksson, Research Analyst]

All right. All right. Lastly, looking at zoning plans. Could you elaborate a bit more on the larger ones, what we can expect for the different schedules here with Stockholm Syd, for example, and some of the other larger ones when they could be approved?

[Benny Thögersen, Chief Executive Officer]

We have good connection with the municipalities. No, a little bit joking. Things are going pretty well in Nykvarn and with the municipality of Nykvarn/Södertälje. So there, we are moving forward. But as you know, the logic behind this could always be, what you call it, not overruled, but I gave it up to other parties in the systems. But there, we are quite grateful, but we will have a zoning plan within next year or 2. Absolutely.

[Markus Henriksson, Research Analyst]

Okay. And for the other large ones, can you fill in a bit more there as well?

[Benny Thögersen, Chief Executive Officer]

I think you have a table within the annual report, where you could see the status of the different plots that we have. But for example, we could expect things to go a little bit faster in Gothenburg and Landvetter. I think luck is on our side. And also, I think down in Malmö and Sunnanå, it shouldn't take that long either, we are talking about single years.

[Markus Henriksson, Research Analyst]

All right. All right. Lastly, if we look at acquisitions ahead, are you mainly focusing on Denmark? Or what kind of objects are you looking at? And what regions are more interesting for you to expanding?

[Benny Thögersen, Chief Executive Officer]

Denmark is absolutely interesting for us. We have communicated that for a time now. And looking at yields and what type of capital that is entering Sweden, we need to choose, and we would like to go for those that are a little bit -- for this acquisition where Catena could -- one or another way, adding value. For example, if there are any cases may be included with automation or things like that, going head-to-head with pension funds capital and going for acquisition on 4.5%. That is not -- this is for Catena.

[Operator]

[Operator Instructions] And as there are no further questions, I will hand it back to the speakers.

[Benny Thögersen, Chief Executive Officer]

Okay. And I would say thank you for participating in this presentation and looking forward for a good Q3. Thank you.

[Sofie Bennsten]

Thank you very much.

[Anna Wallander;Sustainability Manager]

Thank you.

[Operator]

This now concludes our conference call. Thank you all for attending. You may now disconnect your lines.