Cibus Nordic Real Estate AB (publ)

STO:CIBUS

Earnings Call Transcript 2021-Q3

[Operator]

Welcome to the Cibus Nordic Real Estate Audiocast with Teleconference Q3 2021. Today I'm pleased to present CEO, Sverker Kallgarden, and CFO, Pia-Lena Olofsson. [Operator Instructions] Speakers, over to you. You may go ahead and begin.

[Sverker Källgården, Chief Executive Officer]

Thank you very much. And once again, welcome to the Interim Report Presentation of Q3 Results for Cibus Nordic Real Estate. As previously said, the speakers today are, apart from myself, Sverker Kallgarden, Pia-Lena Olofsson, our Chief Financial Officer. Next slide please.Summary of the periods. Pia-Lena will take us through all the numbers later on in the presentation. However we have had some significant events during the period. On July 1 we acquired 3 properties in Sweden. And on the September the 6 we announced that as of the 20th September, 2021, the Cibus share would be included in the EPRA Index, which is a leading global index for listed property investments. And on the September the 24, we signed an acquisitions of 5 properties in Finland. And then on the last day of September, we took a first step into Norway when we announced that we have purchased a portfolio of 8 properties in South Eastern Norway. Next step, please. Next slide, please.Well, Norway, we are happy to open up a third market for Cibus, and now we truly call ourselves a pan-Nordic company. We on the 30th of September we acquired our first 8 properties in Norway. They are 100% grocery with a long WAULT of over 9 years with -- filled with strong tenants and on very good location. The Norwegian market characterizes on smaller. And the density of the grocery stores are higher than in Sweden and Finland. And contracts are fairly similar to Finland as the tenants bear most of the common costs in a property as there are no general possession rights. Next slide, please.We have also had a significant event after the end of the period, and that's on October the 6. We announced that the Nomination Committee in preparation for the next Annual General Meeting had been appointed. Next slide, please.What about Cibus? What kind of company are we? Well, we are a real estate company focused on daily goods properties. We fill them with strong tenants to provide dependable income to our shareholders. We are listed since March 2018. And on the Nasdaq Stockholm MidCap since June 2021. We have a clear Nordic focus. And we pay out monthly dividends to our shareholders as the first company on the Nordic Stock Exchange. And we are currently paying out EUR 0.94 for the current 12-month period. Next slide, please.The story of Cibus is more or less the story of portfolio diversification. Traditionally these kind of assets are -- were owned as either single assets or in small portfolios, which meant the owner had a very high risk concentration. If the tenant left, you lost all your cash flow. [indiscernible] came into a weak negotiation position with the tenant and the banks realize this, so it was hard to get proper funding, which meant it was a high-risk, but also a high-return business.What Cibus realized is that if you own 310 of these properties, you diversify the risk and lower the concentration. None of our assets stand for more than 2.5% of our NOI. And when you own such a large amount of properties with a handful of tenants, you become an active cooperator with the tenants and not just the landlord. The banks realize this, so the bankability is higher, which means that you lower the risk, but you have the same return as for a single asset.And due to the factor that we -- due to the risk factor, we can buy assets 50 to 100 basis points higher than the existing portfolio is trading at and therefore value-creating growth for our shareholders. Next slide, please.Cibus also sets apart that we -- we have a resilience towards e-commerce. Even during the pandemic, when the share of the online trade rise to around 4%, we've seen a negligible negative effect because the large share of the volume is click-and-collect from our stores. And there are very few operators worldwide who make a profit on online food sales due to the low margins and the high cost of packaging and delivering the food out to the end-consumer. On the other hand, we see a notable positive effect at our existing stores. They can work as a natural distribution network for other goods consumed online. This is a strong trend. I mean, you see it all over the Nordics, these kinds of boxes in the entrance of the food stores were the pickup points for e-commerce goods. Next slide, please.We are also set apart from the rest of the companies in our segment, that we are an active property manager. We have our own organization that actively works with our portfolio and with new acquisitions. Next slide, please.When it comes to sustainability, we continue to work together with our tenants. And in Q3, 38 of our properties in Finland had solar power plants installed on the roofs. And these were installed and paid by Tokmanni. We have also in the second quarter signed a collaboration agreement with Jarntorget to jointly develop a part of the Cibus Swedish portfolio that's not used for daily goods retail. And these homes will all be carrying the Nordic Swan ecolabel. Next slide, please.Growth. As you can see on this slide, we have managed growth way above our growth target. In 2018 and 2019 we met the growth target of EUR 50 million, but from 2020 and onwards we have grown north of the growth target. So far this year we have grown by around EUR 160 million and the pipeline is still strong. Acquisitions, normal growth will be financed through cash and bank or bond financing. But if you see opportunity for more rapid growth, that may lead to an equity raise or a hybrid bond to secure the LTV for the company's financial targets. Next slide, please.Looking at the shareholders' list as of the last of September, the largest shareholder is Fjarde AP-Fonden, followed by BMO Global Asset Management, Marjan Dragicevic and Dragfast. In total, the 15 largest shareholder owns 42%, approximately 42% of the company. And we had 40,000 shareholders on September the 30. Next slide, please.If you look at the share price performance, we have an average daily volume of around SEK 47 million with more than 2,700 transactions per day. On the last day of September, the share price was SEK 207. And total share return since the 1st of January, 2020, was over 50%. And today the share is trading at around SEK 230. Then over to you, Pia-Lena, for the financial overview.

[Pia-Lena Olofsson]

Thank you so much. I'll just go through some of the key figures for the third quarter. Rental income was EUR 20.2 million. Net operating income grew with 16% to EUR 19.3 million. Profit from property management was EUR 12.5 million. And earnings after tax EUR 12.1 million or EUR 0.29 a share. Next slide, please.Looking at the P&L in more detail. As I said before, net operating income was EUR 19.3 million. And there are no nonrecurring expenses in administration costs this quarter since we have not had an extraordinary project, just normal course of business. Net financial items is affected by a positive exchange rate change of EUR 188,000. Unrealized change in value of investment properties was EUR 1.8 million compared to EUR 0.5 million in Q3 last year. And we have low current tax due to the use of loss carry forwards and taxable depreciation on building inventory. Next slide, please.Our current earnings capacity on a 12-month basis shows a net operating income of EUR 76.3 million with the properties we have taken possession of at the end of September. Profit from property management plus expenses for hybrid bond was EUR 47.3 million or EUR 1.18 per share. We have however made additional acquisitions that we have or will take possession of in the fourth quarter this year, and which we have communicated earlier. And this is the portfolio of 72 properties in Finland acquired from Sagax. The portfolio in Norway of 8 properties. And a portfolio of 5 S Group properties in Finland.Our earnings capacity end of December with these acquisitions shows a net operating income of EUR 82.5 million and profit from property management plus expenses for hybrid bond of EUR 52.1 million or EUR 1.24 the share. And this is counted with 42 million shares since the acquisition from Sagax will partially be paid with 2 million new shares. Next slide, please.We have 310 properties at the end of the third quarter. Property value was EUR 1.336 billion, and we had 789,000 square meters. Our anchor tenants, Kesko, Tokmanni, Coop, S-Group and Lidl stands for over 90% of our [indiscernible]. Next slide.Looking at our 2 segments. We had 2 countries, Finland and Sweden at the end of the third quarter. In next quarter we will add also Norway as one of the segments. In the third quarter, 84% of our net operating income comes from Finland and 16% from Sweden. And our property value is the same correlation, we have 84% in Finland and 16% in Sweden. Next slide.Cibus' strategy is to give our shareholders stable and reliable dividend that increase over time. Our dividend policy is such that we should increase our dividend with 5% per year. And Cibus is still the only company in the Nordics that pay out dividends monthly. Dividend yield was 4.6% of the share price at the end of the quarter. Next slide.Looking at the balance sheet. We had property value of EUR 1.336 billion. Senior debt was EUR 648 million, giving a loan-to-value on senior debt of 48.5%. And then we have our unsecured bonds of EUR 194 million, giving a net loan-to-value of 60.1%, which is within our finance policy target of 55% to 65% loan-to-value. We have a hybrid bond that is part of equity. And our net asset value, NAV, was EUR 497 million or EUR 12.4 per share. Next slide.Our average remaining lease time was 5 years at the end of the third quarter. The WAULT has been very stable around 5 years as you can see from the graph below. Next slide.Regarding funding. We had bank financing of EUR 648 million at the end of the quarter. The average floating interest margin is 3 months EURIBOR or STIBOR, depending on currency, plus 1.7%. Our weight average tenor for bank loans was 2.8 years. 66% of the bank loans are hedged with interest-rate derivatives. And the first bank loan matures in 1.7 years.We also have few unsecured loans on the market. 1 Green SEK bond of SEK 600 million and 1 euro bond of EUR 135 million. And then also we have 1 hybrid bond of EUR 30 million. Next slide.Our funding strategy in the midterm is to still have 50% or more our external funding as bank financing. We do however intend to be active on the bond market as well. We have an MTN program in place that covers both senior unsecured bonds as well as hybrid bond. And as -- like I said, normal growth will be financed with generated cash and bank loans, while long -- larger portfolios or faster growth will be financed by bonds in combination with either a hybrid bond or a new share issue to keep loan-to-value within our finance policy threshold between 55% and 65% loan-to-value. Next slide.Our long-term funding strategy is to reach investment-grade in credit rating. And to reach this, we need to first of all grow our portfolio and then change the debt and capital structure. Over to you, Sverker.

[Sverker Källgården, Chief Executive Officer]

All right. Thank you, Pia-Lena. What about the future? Please turn to the focus area going forward. Focus now is growth. We have -- we are looking at new geographies in the Nordics. But our main focus, of course, is continued growth in Finland, Sweden and Norway as we are present on these markets. Next slide, please.And the primary reasons to invest in the Cibus share. Well, we produce a high and stable yield. Cibus has never lowered our dividend in euros per share from one quarter to the next. There is potential for favorable value growth as we are buying and acquiring assets and portfolios to a higher yield and the implicit yield we're trading at. That is a possibility for favorable long-term growth in share value.And we have gradually rising monthly dividends. And aim to gradually increase them by 5% annually. And last but not least, we are active in a segment with long-term resilience and stability. And the grocery and daily goods sector has experienced stable noncyclical growth over time.Thank you. Then on to questions.

[Operator]

[Operator Instructions] First question of the day we have from Svante Krokfors from Nordea.

[Svante Krokfors, Analyst]

I have a couple of questions. The first one is a nice one, I think. Are you, after the Sagax transaction, now the largest player in the Nordics?

[Sverker Källgården, Chief Executive Officer]

I can't give you an answer on that because some of the companies haven't released their Q3 figures yet, but we are among the largest, absolutely. What we can say is that we are the leading player in the Nordic market as we are present in 3 of the Nordic countries, which is unique in this segment. So yes, we see that we are the leading company in this segment.

[Svante Krokfors, Analyst]

Yes. And you said that you are also looking at other markets than the ones you are present in which basically it's more likely Denmark than Iceland. So have you already looked at more in detail at the Danish market? And what's the characteristics there?

[Sverker Källgården, Chief Executive Officer]

Yes. We've said -- we used the corona pandemic to study these markets, both Norway and we have also looked at Denmark, which is very clear is that the Nordics is a very [ homagen ] market. And the characteristics are more or less the same all over the Nordics. We have almost identical legislations with some variations. But we feel very safe to do business in all 4 or 5 Nordic countries, depending on how you look at it. But of course, Iceland is a very, very small market. So it wouldn't -- probably it wouldn't be the first market to enter from here. But we have looked at it, and we are prepared to more -- make investments in Denmark, if you find good enough deals as we did in Norway.

[Svante Krokfors, Analyst]

Okay. And on that theme, based on your current earnings capacity, your valuation yield is something like 5.7%. We have seen quite a significant yield compression in all segments. Is there any reason why there's not any big movement in your space?

[Sverker Källgården, Chief Executive Officer]

There's probably not enough deals which are presented to the market for the valuators to have good reference deals. But we are also a bit confused of this because we think that the stability of this segment is -- it earns a lower yield than we're trading at the moment.

[Svante Krokfors, Analyst]

And it's -- obviously it's good for you if you want to continue to buy?

[Sverker Källgården, Chief Executive Officer]

Absolutely.

[Svante Krokfors, Analyst]

And still on that note, I mean you can buy single properties or smaller portfolios, 50 to 100 basis points, higher yields. I guess the flip, the other side of that question is that as there are no deals, I mean you could imagine that certain critical size would kind of take the portfolio premium even higher. Do you have any thoughts around this? I mean, you have shown EUR 1.5 billion property asset company. So do you have any thoughts on that?

[Sverker Källgården, Chief Executive Officer]

Yes. We are actively working with growth as we always mentioned in our presentation, and that's a clear focus for us on many reasons. One is the reason you're mentioning, but another, maybe even more important for Cibus is to be able to reach investment-grade and credit rating and dramatically lower our cost of financing. So it is important for us to grow, and we have the ambition to become significantly larger in the coming years.

[Svante Krokfors, Analyst]

And then regarding the deals that haven't closed yet or were announced during Q4, can you give a recap on the closing of those?

[Sverker Källgården, Chief Executive Officer]

The deals that we have, the Sagax deal will close in the month -- in the month -- in November, late November or early December. Then we have the...

[Pia-Lena Olofsson]

The Norwegian deal have already closed.

[Sverker Källgården, Chief Executive Officer]

Yes.

[Pia-Lena Olofsson]

So the 15th of October we closed that deal. So that we're already taken possession of. And also the Finnish deal also has closed already. It closed the 1st of October 1. So now it's only the Sagax that we haven't taken possession of in this quarter of these 3 that we have in the earnings capacity for December that we have added.

[Svante Krokfors, Analyst]

That's clear. And Pia-Lena a question to you, the hybrid adjustment you make. You make in the earnings capacity calculation EUR 1.275 million. I come to a bit different result. But what -- do you make some assumptions regarding tax? Or how do you arrive at that?

[Pia-Lena Olofsson]

I conclude that the EURIBOR is negative, and that's why I'm taking that into account when I look at the interest that we're paying.

[Svante Krokfors, Analyst]

Okay. So there's no tax element in that.

[Pia-Lena Olofsson]

No, no.

[Svante Krokfors, Analyst]

Okay. And then perhaps the final or next to final question regarding Norway. And Sverker could you a bit -- I mean, the price per square meter was quite much higher than in your earlier deals, but I guess the rents are also higher. Could you elaborate a bit on the dynamic there?

[Sverker Källgården, Chief Executive Officer]

Yes. The price per square meter was a bit higher, yes. As you say, the rents are higher and it's very modern buildings. And also, if you look at the key metrics all over for the Norwegian market, it's very similar on the bottom line to the rest of the Nordic countries. So that's why we are very confident in continuing to grow in Norway. And Denmark is more or less the same situation.

[Svante Krokfors, Analyst]

Okay. And then the last question regarding, I mean Finland is your biggest market. And you have probably been following what's going on in the online side there, the new Norwegian company, Oda, coming to the market any day now and Kesko starting to implement their Micro Fulfillment Centers in their stores. Do you have any thoughts around this?

[Sverker Källgården, Chief Executive Officer]

Yes. We discussed it with the seller of the portfolio in Norway. And if you look at Oda, which are present on the Norwegian market, the volumes are very low. It's a handful of supermarkets that their total market share is. So at the moment, it isn't a threat for physical food stores. And I'm confident that it won't be a threat for many years.

[Svante Krokfors, Analyst]

Okay. And I guess the fact that Kesko has chosen this strategy to base their kind of online distribution to the separate stores and not have a centralized distribution is positive. But what's the thing about S Group on that front?

[Sverker Källgården, Chief Executive Officer]

A trend that we see on the Finnish market is that a lot of food stores, especially in the larger cities have 24-hour opening hours, which means that they can pack the grocery, the online grocery bags on off-peak hours, which is a good thing for them. So that's one of the reasons I think that why they've chosen the tactics. And the S Group is certainly close -- looking closely at what Kesko does. So if it is a positive outcome, they will most definitely do the same.

[Svante Krokfors, Analyst]

Yes. So you could, from your perspective, the structure in Finland is taking the direction that favors you?

[Sverker Källgården, Chief Executive Officer]

Absolutely.

[Operator]

Next we have Joonas Ilvonen from Evli.

[Joonas Ilvonen, Analyst]

It's Joonas from Evli. It's fair to say you will continue to expand quite a lot more in Norway. But what can you say about establishing a local office in Oslo? I mean, you indicate that your annual central administration expenses will increase by some EUR 400,000 by the end of this year. I think that, that doesn't yet include any an office in Oslo? Or can you talk about what's driving that increase?

[Sverker Källgården, Chief Executive Officer]

It's not an office, but we have an organization. We have one CIO already working with the Norwegian portfolio, but he works from Sweden. So part of the costs for the Norwegian organization is in administration. Otherwise, we'll look closely, and there will be a breaking point when we establish our own office. But so far, and looking at what we are doing at the moment, it's -- we have enough organization to continue to grow in Norway. As a lot of our management, the property management and economic management are outsourced. We only need a limited organization when we enter a new country.

[Operator]

Next we have Matias Arola from Inderes.

[Matias Arola, Analyst]

First, your value against were EUR 1.8 million in the third quarter. There were no major transactions. So are the value against related to yield compression or how should I think that?

[Pia-Lena Olofsson]

Well, we've only 1 transaction, a portfolio in Sweden that we acquired in the third quarter.

[Matias Arola, Analyst]

Yes, but that was about EUR 4 million only. Am I right?

[Pia-Lena Olofsson]

Yes...

[Matias Arola, Analyst]

But that's related to solely on that transaction.

[Pia-Lena Olofsson]

You mean the value of the portfolio? Yes, we have...

[Matias Arola, Analyst]

No. I mean, the fair value against in the third quarter EUR 1.8 billion. Yes, yes.

[Pia-Lena Olofsson]

Yes. And now of course we also have a slight yield compression in Sweden also. Yes.

[Matias Arola, Analyst]

Yes. Yes. Right. About your occupancy rate, your economic occupancy rate, if I looked right, has decreased 1.5 percentage points during the last 12 months. I guess that your vacancy rate has increased, especially here in Finland. But what is behind this?

[Pia-Lena Olofsson]

It's mostly because we have acquired new properties that do have vacant space in them. It's not that much that we have received a lot more vacancy in the portfolio, in the properties that we have. So when we acquire, we have some occupancy already, and that's something that we take into account when we buy the properties...

[Sverker Källgården, Chief Executive Officer]

But these are not any significant areas in the building. Those are the kind of areas that we talk about regularly that it's -- it might be a pharmacy or a hair dresser in connection with the food stores, and these might be vacant at the moment when we buy them.

[Pia-Lena Olofsson]

Yes, it's very seldom that we have one property that is empty. It's usually that we have a part of a property that is empty. And it can be office space on the second floor. It can be expansion areas for the grocery stores that are empty for now. Yes.

[Matias Arola, Analyst]

Okay. About your lease agreements, there are ending lease agreements both in '22 and '23 with a rental value of EUR 8 million. How confident you are that you can renew these agreements?

[Sverker Källgården, Chief Executive Officer]

We are very confident that as most of these contracts are probably in Finland or they are in Finland, as we have a very long WAULT in Sweden and Norway. And as Sweden -- Finland has no possession rights, we are confident that they will be renewed.

[Operator]

So at this time there are no further questions. So I would like to now hand over the floor back to speakers for their final remarks. Over to you.

[Sverker Källgården, Chief Executive Officer]

And no questions from...

[Pia-Lena Olofsson]

And we have no questions from the web either.

[Sverker Källgården, Chief Executive Officer]

Okay. Then thank you very much for listening, and welcome back to the next presentation when we will present the full-year results. Thank you.

[Pia-Lena Olofsson]

Thank you. Bye.

[Operator]

Thank you so much, speakers. Thanks, everyone. You may all disconnect now.