Cibus Nordic Real Estate AB (publ)

STO:CIBUS

Earnings Call Transcript 2022-Q3

[Operator]

Welcome to Cibus Nordic Real Estate conference call. [Operator Instructions] Now I will hand the conference over to the speakers CEO, Sverker Kallgarden; and CFO, Pia-Lena Olofsson. Please go ahead.

[Sverker Kallgarden, executive]

Thank you very much, and once again, welcome to the Q3 2022 interim report presentation of Cibus Nordic Real Estate. Speakers today, as usual, is myself, Sverker Kallgarden, the CEO; and with me is Pia-Lena Olofsson, the Group CFO. Pia-Lena will take us through all the numbers later on in the presentation. So let's head on to the significant events during the period. On the 13th of July, we announced that we had updated our MTM program and published an updated prospectus. And then in late August, we opened up the high-yield bond market by replacing our green SEK bond with a new green bond of SEK 700 million.

Then in September, we acquired 4 assets in 3 separate deals in Denmark, Norway and Sweden. Then after the period, we have bought another single asset in Denmark. And on the 10th of October, we announced that the Nomination Committee in preparation for the next Annual General Meeting have been appointed. And on the 13th of October, we acquired another single asset in Finland.

Cibus Nordic. We are a real estate company focused on daily goods properties. The properties are filled with strong tenants that provide dependable income to our shareholders. Daily goods are a noncyclical item, and grocery, the grocery market have grown an average by 3% annually in the last 20 years. 99% of our rents are linked to the CPI development, and over 90% of our leases is either net or triple net, which means that most of the costs are carried by the tenants.

We have been listed since March 2018 and moved to the NASDAQ Stockholm main list in June 2021. Currently, we have a clear Nordic focus as all our properties are in Finland, Sweden, Denmark and Norway. And we are paying monthly dividends to our shareholders, currently EUR 0.99 for the current 12-month period.

Cibus. The story about Cibus is the story about portfolio diversification. Traditionally, daily goods and grocery properties were owned as either single assets or in small portfolios of maybe 2 to 5 assets, which meant you have a very high risk concentration. If the tenant left, you lost all your cash flow. That meant you came into a weak negotiation position with the tenant. The banks realized this, so the bankability was low, which meant you had a high risk but also high return business.

What Cibus realized is that if you own 450 assets, you lower the risk and the concentration. Only one of our assets stands for more than 1.5% of our combined NOI. When you own a lot of assets with a handful of tenants, you become an active cooperator with the tenants and not just the landlord to negotiate rents. The banks realize this, so the bankability is much higher, which means that you have lower the risk, but you have the same return as for a single asset. And due to the risk factor I talked about earlier, we can buy assets to 50 to 100 basis points higher than the existing portfolio is trading at and, therefore, produce value-creative growth for our shareholders.

Cibus is sometimes put on the retail shelf, and what sets Cibus apart from other retail? Well, apart from having noncyclical tenants, we see resilience towards e-commerce in our portfolio. We have a negligible negative effect from e-commerce. Even during the pandemic, the share of online trade grew to approximately 5% but is now down to around 4% again. And a large share of that volume is click-and-collect from our stores.

And if you look worldwide, you see very few operators who make a profit on online food sales due to the low margins and the high cost of distributing the goods to the end consumer. On the other hand, we see a notable positive effect as our existing stores can work as a natural distribution network for other goods purchased online.

Sustainability. Cibus have a goal to have 0 emissions by 2030. We are committed to that goal, and we will reach this goal by working together with our tenants but also to have our own projects. We have started our own solar panel project in Charlottenberg, Sweden, which will be ready and start producing electricity in the fourth quarter this year.

Growth. We have a growth target on a portfolio worth EUR 2.5 billion to EUR 3 billion.

Our main markets are Finland, Sweden, Denmark and Norway, but we are also looking at monitoring other European markets to learn more about them. We have a mandate to issue up to 10% new shares. But due to the new market situation, the timing for the achievement of the target is postponed until the market stabilizes. So far this year, we have grown by EUR 323 million. Most of that was in Q1 when we entered the Danish market.

Looking at the shareholders' list on the last day of September. The largest shareholder was the Fourth National AP Fund, who owns close to 8%, followed by AB Sagax, Columbia Threadneedle, Vanguard and Lansforsakringar Fondforvaltning AB. In total, the 15 largest shareholders owns close to 46% of the company, and Cibus has 43,000 shareholders. Looking at the share price performance, Cibus have an average daily volume of SEK 48 million, of which SEK 23 million is traded at NASDAQ with more than 2,200 transactions per day. The stock market and ease and the turbulence experienced since the outbreak of the war of Ukraine as well as rising inflation and interest rate expectations have affected the Cibus share price. And on the last day of September, the share price was SEK 145. And today, just before the call, we were trading at around EUR 152. Then over to Pia-Lena for the financial overview.

[Pia-Lena Olofsson, executive]

Thank you, Sverker. Here are some key figures for the third quarter. Rental income was EUR 27.8 million. Net operating income grew 36% to EUR 26.2 million. Profit from property management was EUR 14.7 million and earnings after tax, EUR 24.2 million or EUR 0.49 per share.

If we go into details, we have some items affecting comparability during the quarter. Net financial items include a cost for early redemption of our green SEK 600 million bond as well as previous capitalized arrangement fees at a total of minus EUR 1.4 million. We also have a negative exchange rate change of EUR 0.4 million.

Profit from property management, excluding nonrecurring costs and exchange rates effects, amount to EUR 16.5 million. We have unrealized changes in property value this quarter of EUR 8.9 million and is largely attributed to increase of income -- rental income due to indexation, and this is primarily in Finland. Our current earnings capacity on a 12-month basis shows a net operating income of EUR 104.3 million. Indexation acquisitions has increased the rent. The higher reference rates, the IBOR as well as the new SEK 700 million green bond has increased the financial expenses. The higher EURIBOR has also increased the cost for the hybrid bonds. Profit from property management plus expenses for the hybrid bond was EUR 61.7 million or EUR 1.27 per share, which is an increase of 8% compared to 12 months ago.

On the graph below, you see the development of the net operating income, profit from property management and the profit from property management per share after the deduction of the cost of hybrid bond. On the graph on the right is the net operating income for the comparable portfolio that we owned 12 months ago. And the comparable net operating income is EUR 78 million compared to EUR 76 million 12 months ago.

Looking at our portfolio, we have 450 properties at the end of the third quarter with a property value of EUR 1.858 billion. Properties with grocery and daily goods tenants contribute with 97% of our net operating income.

Cibus segment is our countries. Finland is our largest market and contributed with 69% of our net operating income; Denmark, 14%; Sweden, 13%; and Norway, 4%. Our property value, Finland has 67%, Denmark, 15%; Sweden, 14%; and Norway, 4%. Then the strategy is to give our shareholders stable and reliable dividend that increase over time. Dividend yield was with the share price of SEK 145 at 7.5%, and we continue to pay our dividend monthly.

Looking at the balance sheet. Property value was EUR 1.858 billion. Secured debt was EUR 855 million, giving a loan-to-value on secured debt of 46%.

Our unsecured bonds amounted to EUR 249 million, giving a net loan-to-value of 58%, which is within our finance policy target of 55% to 65% loan-to-value. Our net asset value, EPRA NRV was EUR 738 million or EUR 15.2 per share. Our average remaining lease term was 5.2 years at the end of the third quarter, and it continues to be very stable around 5 years, as you can see on the graph below.

Of Cibus' external funding sources, 75% is bank financing. During the quarter, we have refinanced a EUR 200 million bank loan in Finland at the same margin. The average floating interest margin is the 3-month reference run rate, plus 1.6%. Bonds stand for 22% of external funding and our hybrid bond 3%. 71% of our bank loans are hedged with interest rate caps or have fixed interest rates at the end of the third quarter. Based on the earnings capacity, taking the caps on the fixed rates into account, an increase of the interest rate was 1% would affect profit with close to EUR 7 million on a yearly basis. An increase of 2% would effect with minus EUR 13 million on a yearly basis. We have then not taken any tax consideration in accounts. Over to you, Sverker.

[Sverker Kallgarden, executive]

Yes. Thank you, Pia-Lena. What about the future? What are we focusing on at the moment? Well, of course, we look at refinancing the existing bank loan and the Eurobond that has not yet been refinanced. We are looking at continued growth. Even though it's -- the market is calm at the moment, and we are not doing any larger acquisitions. We are monitoring both the Nordics and the new geographies in Europe. And also working with ESG matters to fulfill our commitment to have 0 emissions by 2030. We are looking at our current portfolio and how to make it more energy efficient and also how to become carbon dioxide neutral by 2030.

Last but not least, what are the primary reasons to invest in Cibus share? Well, we produce a high and stable yield. -- we have never lowered our dividend in euros per share for one quarter to the next. There is a potential for favorable value growth. 99% of our rents are CPI-linked, which will give noticeable growth in our NOI even without acquisitions. But we also have our investment strategy to acquire individual properties or portfolios with higher yield requirement than the existing portfolio is valued at.

We pay out gradually rising monthly dividends and have a dividend policy that says that we should increase them by 5% annually. And we are in a segment with a long-term resilience and stability. The grocery and daily goods sector, it has experienced stable noncyclical growth over time. As I said, approximately 3% annually, even during periods of recession. That's -- it also shows strong resilience. We're growing e-commerce trend that has made us sourcing to distribution network for goods purchased online. Thank you very much. And now over to the questions...

[Operator]

[Operator Instructions] The next question comes from Svante Krokfors from Nordea.

[Svante Krokfors, analyst]

A couple of questions. I mean you have postponed your growth and investment-grade time frame targets, which is quite understandable. How do you look at -- I mean, for your growth to continue, I guess, credit market has to work, but also the share price is a factor as you will need to raise equity when you grow to EUR 2.5 billion to EUR 3 billion. And how do you look at these 2 metrics, and the importance of those for the growth targets to kind of be chased again?

[Sverker Kallgarden, executive]

Yes. Of course, the most important thing is that the financial market stabilizes. Depending on what -- it's not important what the interest rates are just as it stabilizes because if the interest stabilizes, the yields for the property stabilizes as well. So the [indiscernible] at the market at the moment is really the biggest problem because no one knows where it's going or in what -- which direction it's heading. So that's the most important factor that we have stability in the financial market. Then of course, our share price. That, we can -- as we have done for years, issue new shares to premium. And now that is very, very good situation for any company. So that is important as well but not as important that the market stabilizes.

[Svante Krokfors, analyst]

Okay. And also thank you for the good disclosure on interest rate caps and so on. Regarding that, perhaps the question about the bond refinancing, especially the EUR 135 million next year, how do you look at the bank's willingness to continue to lend and how -- I mean 46% of your LTVs, bank loans, how high can you take that?

[Pia-Lena Olofsson, executive]

I mean we are still having very good discussions with the banks, and we are still very happy to be part of Cibus and to finance us going forward. As you can see also since we refinanced the EUR 200 million bank loan this quarter and at the same margin as we had before. So yes, we have different discussions with the banks and with -- and looking at different alternatives when it comes to the EUR 135 million bond, of course. And we'll see what is best for Cibus, how we will refinance that. It matures in September next year. So we do have some time on our hands. But of course, it's something that we have on top of our mind and that we're working on.

[Svante Krokfors, analyst]

And regarding the 46% bank loan LTV, what kind of levels do you think are a reasonable to -- maximum reasonable to work with?

[Pia-Lena Olofsson, executive]

I mean we do have -- it depends if we would have amortization or not. But without amortization, around 50%, and then it might be that we would need to have amortization if we have a higher than 50% be secured, in that sense.

[Svante Krokfors, analyst]

Okay. And then obviously, you would prefer the bond market to start working. Even if you increase the bank loans, it probably will postpone perhaps your investment-grade readiness.

[Pia-Lena Olofsson, executive]

Absolutely, absolutely. So we'll see, but we're looking at different alternatives, of course.

[Svante Krokfors, analyst]

Then a question about rent increases, which are indexed. I have talked to some retailers in Finland, and it appears that they are perhaps not swallowing the entire increases as such. Do you have any comments on increased negotiations with tenants? Or do they just accept the CPI indexation, which is obviously high now?

[Sverker Kallgarden, executive]

Yes. We have no signals that I won't accept the index upgrade.

[Svante Krokfors, analyst]

Okay. That's clear. Perhaps there's a question about the competitive landscape, any changes there? Has it eased now? Or how should we look at it?

[Sverker Kallgarden, executive]

The market is extremely calm. So yes, it has eased, but we're not doing any large transactions either. So it's probably more or less the same.

[Svante Krokfors, analyst]

And then finally, a question about dividends. I mean you have probably followed the discussion in Sweden regarding some investors perhaps suggesting that dividend should be postponed until the credit market situation clears up. Is there any kind of indications from banks regarding that? Or do you have any comments on that in general?

[Sverker Kallgarden, executive]

No, we have heard nothing about it from the banks, and there are no discussions in the Board either of changing our dividend policy.

[Operator]

There are no more questions at this time from the teleconference call. So I hand the conference back to the speakers for any questions from the web.

[Sverker Kallgarden, executive]

Yes. We have a couple of questions on the web, I think we have answered the one that says if there are any risk of not being able to pay out dividends next year, we answered that on Svante's call. Interest rates are going up. What about retail real estate yields in your market? Requested from [indiscernible] from Eurinvest partners.

Well, this segment in the Nordics has not seen the yield compressions that we have seen in residential or other commercial buildings. The yields in our portfolio are a bit north of 5.5%, which is a sustainable -- long sustainable level. So we haven't seen the yield compressions.

And as you've seen in the report, the valuations are still going up due to the index in this segment. So we haven't seen any fluctuations in any direction or major fluctuations in the direction of the last years.

And then we have a question for Paul Gary. Having confirmed that levels of CPI indexes currently assumed in your property valuations. It's a bit different situation in the countries as in Finland, you have the -- or the index upgrade is on the anniversary of the day when the contract was signed.

So that's a bit hard to tell. But we know in Sweden that the valuators have an index of 7% calculated and we'll see what the actual number will be. But in some way, -- the -- there is -- I've read in the papers that they talk about 9% for next year. So not full indexation in the valuations.

[Pia-Lena Olofsson, executive]

Yes. We have a question regarding bonds. And for now, the bond market on the high-yield market is close to closed, so to say. So right now, it's very difficult to do a new bond. But Cibus has proven over and over again that we can open the high-yield market when it comes to bonds when they are a market there. So of course, we are monitoring the market at this point. And if we feel that, that would be an utility, then we would pursue it, but we're also looking at different alternatives for refinancing the EUR 135 million bond...

[Sverker Kallgarden, executive]

We have a last question from [ Nicolas ]. Where do you see the share price in 4 years?

Well, [ Nicolas ], if I knew that, I will probably get the Nobel Prize for economy. We cannot comment on the share price in 4 years. That's totally up to the market to set. Okay. That's all the questions we have online -- so I guess...

[Operator]

No more questions at this time. I hand over back to the speakers for any closing comments.

[Sverker Kallgarden, executive]

Yes. Thank you all again for listening in at Cibus quarterly call. And I hope you will call in again at the Q4 report. Thank you, and bye-bye.

[Pia-Lena Olofsson, executive]

Thank you.