Earnings Call: Q1 2021

May 7, 2021

Thank you. Thank you everyone for joining. Christophe Abrahamson, CEO and Matthias Babin, CFO will present today. If we begin on Page 2, this is the Casella Q1 report for 2021. Most of you, of course, know Casella quite well and you will have seen the slide before. We hope that our recent strategic refocus on the property market will make it easier for investors to understand who we are as a company. We strive to be the preferred European partner for real estate investors. And following our announcement to wind down IPM, Katella will now have 3 property focused business areas going forward. Katella is the leading advisor in Corporate Finance then a Property Investment Manager with European Reach. We have now added principal investments as a separate business segment where we invest our equity directly. But it's important to point out that we are not a traditional property company with large and long term balance sheet exposures. We are 1st and foremost an investment partner, where we now at times partner also with Equity. Let's move on to Page number 3. Having exited the bank and our mutual funds business and now FEM means that our AUM and income and profits are lower than in recent periods, but we still feel that it will be positive for the long term value of the company. Property Investment Management, Tim, is now over 50% of scale of income and it keeps growing, which adds stability to our future profits and cash generation through rather predictable fees. We have a solid balance sheet now with a total cash of $2,200,000,000 including Cattellabank. But of course not all cash is immediately available for new investments. This is the main reason why we raised more capital during the Q1 We now have around $1,000,000,000 of available liquidity, which is how we intend to fund principal investments going forward. The rest of the cash fit in our daughter companies and is needed to fund operations to pay profit sharing and taxes and then the rest coming as dividends throughout the year. Obviously the cash in the Capella Bank is not yet available either, but we hope that should be available towards the end of the year. We move on to Page number 4. We're trying to illustrate how we intend to use these additional funds in our core property segments around Europe. It is Cattellas' strategy now to use equity more actively to unlock value creation opportunities. And this is of course more important now giving our higher cost of debt. We try to the goal is always to generate over 20% IRR on our equity. It's the first and foremost I think the most important thing is to support our customer needs, which in turn then generate AUM growth in asset management by unlocking and attracting more deals. Of course we continue to invest and this is where some of the principal investment funds will go in and development projects where we can also generate project management fees. Without creating conflicts in our various markets, We may also selectively engage corporate finance as advisor and at times sell into our own or new property funds. That's a challenging equation in each market, but we feel that we have the right teams in place to work with our partners and customers competitors in a good way. Let's move to Page 5, where we then summarize be consolidated results of the group. Q1 2021 was unfortunately disappointing from a financial standpoint with a significant drop in income end with losses at the operating profit level. The Q1 is always our weakest and we have exited loss making operations, but we're still not satisfied. AUM, if we start at the top, is at about $117,000,000,000 which is drop of $13,000,000,000 during Q1. Of course the outflows in IPM continued with further almost $6,000,000,000 which is one of the main reasons we have now decided to wind down that business. And the divestment of Quayon France, our Asset Management platform in France also reduced AUM by 14,000,000,000. So on a like for like basis, AUMs were up. TIM, Property Investment Management had a net inflow of about $4,700,000,000 primarily from new investments in our core property fund. The group delivered income of $314,000,000 which is $189,000,000 or 38% lower than the same quarter last year. That sounds pretty dramatic and unfortunately it is, but IPMs drop of $131,000,000 naturally had a significant impact on the group's results. But the core property segments were also down compare the last year. There are good reasons for this, but it's still not good enough. Corporate finance down $21,000,000 or 19% versus last year. A lot of this was attributable to Sweden not repeating a record quarter last year where they had one very large transaction sort of distorting the numbers a little bit. And BIM, their income was down about 30,000,000 13% year over year. It is worth noting however that the underlying fixed fees in property investment management was up about 13% as the portfolio continues to grow. All in all, we showed an operating loss of $22,000,000 in Q1, which of course is $20,000,000 We will focus on growing our underlying strong performance in PIM. That's where most of the continued profit growth will come from and actively address the areas where we've had some recent weakness. There's a few platforms where we have some significant actions to take. Principal Investments will be a positive addition go forward. But this will take some time as I'm sure everyone understands. New investment projects take can take years harvest and we have patience and we ask for our investors' patience. As we have announced, the Q2 results will have a further negative impact from the wind down of IPM. A one time estimated loss of $103,000,000 affecting the 2021 results. We still feel obviously that this is the right decision going forward and we can now focus our capital end our time on the property segment. Let's go to Page 6, where we cover the balance sheet as of March 31. Excluding Cattellabank, which is reported as the Solsys Group held for sale, the group's total assets amount to $4,100,000,000 The increase from Q4 explained by the new $1,250,000,000 4 year bond that has added almost $500,000,000 to the balance sheet, which is partly offset by the sale of Campground, of course. The continued focus on principal investments can be seen in the now $934,000,000 of assets in property development projects, which has increased primarily from additional investments in about $136,000,000 in the Danish Residential Development Cactus and NOK76 1,000,000 in the logistics project in Norstedt, Sweden. Let's go to Page number 8, where we go into Corporate Finance and the results for Q1. As mentioned, Corporate Finance income was down $21,000,000 or 19%, which in the context of a 36% market drop in transaction volumes be terrible, but we of course aimed a little higher. We had some areas of strength however, where Sweden contributed and continued to deliver strong underlying performance, albeit not at the extreme 2020 level, but we have good pipeline. We see strong activity and Sweden continues to deliver very well. Denmark came back at last couple of quarters relatively weak, but Q1 was strong with especially with having advised the Danish Rail Authority DSP in a large development JV. And the French Residential Advisory continue to grow income 35% year over year, which has been an ongoing very positive story for our French Corporate Finance business. The rest of Continental Europe had another challenging quarter with further lockdowns and deal delays impacting our performance and we are still not delivering in Germany where we need to figure out what our market offering and decision needs to be. Some of these issues won't be easy to solve in the current environment, but it must be and will be a focused area in the rest of 2021 given the losses. Let's turn to Page 10, which is Property Investment Management. PIM grew its AUM by about $7,000,000,000 adjusted for the sale of Cam France. So we're up about 6%, 7% on a like for like basis, thanks mainly to continued capital inflow into our property funds. With particular continued strength in residential across Europe and an increased focus on sustainable assets. I think we have a very nice good track record in AUM growth intend, although we have a slightly lower starting point now and need to be more aggressive here. But in the current environment being up 6%, 7% we feel is pretty good. Even though Tim's Operating profit of $28,000,000 in the quarter was down materially year over year. It is important to know that fixed fees as I mentioned continue to grow quite well and there were no performance fees end this quarter. We had a significant performance exit fee in 2020 and no performance fee in this quarter. So it's not exactly like for like, but we're looking at a pretty standard underlying quarter if you look at the PIM results. Go to Page number 12, where we're covering principal investments. While we're not yet able to fully report this as a business segment, we have added further details and we will discuss this a lot more in Q2 when we will also report it fully in all our financial statements as a separate segment. As previously communicated, this is an area of increased focus for Capella. We have continued to invest in our ongoing projects. As I mentioned earlier, dollars 136,000,000 into Cactus and dollars 76,000,000 into Mocha, I think, total $212,000,000 If you look at the table looking at our project, you'll see at the far right column of $298,000,000 is today what Cattello has invested as equity or shareholder loans and it's on this balance that we are targeting a 20 send IRR. The German development projects are promising on a long term basis, even though our equity commitment so far is limited given where we are in the project phasing. These are multi year projects. Our French logistics projects are progressing well from a development standpoint. And to realize the returns that we seek on these particular projects, we're now working actively to accelerate the leasing activities, which is where most of the upside in the project lies at this point. Very excited to talk about this. We'll talk about it a lot more in Q2. We see a solid pipeline of potential projects, which we believe will generate attractive new deals for the remainder of this year. Let's go to Page 14, where we'll wrap it up and just talk a little bit about how we see the market around Europe in the Property segment. As you will have seen from our Q1 results, the market remains challenging in many ways, but also with some opportunities. Investment and transaction volumes remain somewhat depressed in several countries, which is challenging for our Corporate Finance business. But there should also be a bit of a backlog of deals that should open up. We're not sure if this is in the second or third or fourth quarter, but there's a backlog of delayed deals that we hope will start really coming through. There is however a lot of capital and debt is still cheap, which means that find attractive investment opportunities you need to be creative in investment management, which we believe is playing to our strengths as a company across Europe. We're keeping a close eye on the interest rate expectations going forward as a material increase represents a risk to the company, even though we don't see it as a short term risk, it's clearly something that we need to consider with ongoing investment projects. Our focus then is to continue in our segments of strength and to look for new opportunities where there are still good risk adjusted yields available, it could be in select residential, modern logistics and if we're talking the case of office, prime is really king at the moment, which is where our focus would be. We That concludes our presentation. We thank you for your time today and we'll now open it up for questions. Thank you. And our first question comes from the line of Patrick Bratundejus from ABG. Please go ahead. Your line is open. Hi, good morning. Yes, A few questions from my side. If we could start about start on PIM and You're right here in the CEO wording in the start of the report that you are looking for a new French partner. Can you elaborate a little bit on that, what you are looking for and what the alternatives that you are currently seeing in the market? Yes, I can't obviously comment on specifics, but we are using different contact networks to identify which we have done in the past partners that we start up businesses with. There could be an acquisition route which I find less likely, but we're considering it. Our Main objective as usually is more successful for us is to find a partner that we fund to start a business with and we develop a strategy and a platform together. Those partners will be minority owners in the company and so that our interests are aligned. But we have a couple of good discussions ongoing and I think but you never know how that pans out. But we feel confident that we'll have a French platform up and running hopefully in 2021. Thank you. The next question comes from the line of Jesper Ermigsen. Yes, sorry. Go ahead. Yes, thank you. I had some a follow-up question. Sorry about the delay there. If we move over to the transaction volume development in Corporate Finance, it's, I guess, muted a little bit stick with 'nineteen. But can you talk a little bit about how the start of this quarter has been given that Q2 is seasonally one of your strongest quarter. Is it mute it as well? Or do you see the restriction in Europe has helped you and you're almost back to normal? Or how should we think about that? Well, as you know, we don't talk about results that are not published yet, but what we can say and like I said in the market comment. Harry, it varies a little bit by market. As you know, the Nordic region has been less affect it and has been sort of running not as normal, but at least a lot closer than Continental Europe. I think Continental Europe is still somewhat muted. And like I said, there's a backlog of activity. There are pockets where it's opening up, but I think it's we don't look at Q2 as being the revelation and suddenly everything is back to normal. As you know from any non business commentary the world is not back to normal. But in certain markets the activity is good and in others, it's still somewhat muted. Okay, fair. Thank you. And my last one is regarding What can be expected on the performance fee for the European Residential Fund in Cattella here in Q2? If we look at the data from that fund, it seems to be down compared to last year. And is this something that we can expect for the second quarter? Well, as you know, I can't make statements about what we expect in our financial results for the 2nd quarter. All I can say is that we had no performance fees in the Q1. Okay, fine. Thank you. Thank you. Thank you. The next question comes from the line of Jesper Enrichsen from Redeye. Please go ahead. Your line is open. Great. Thanks very much for a good presentation. And my first question is that you say that you want to become a more partner within logistics, property development and other value add segments, preferably with co investments. Could you give us a little bit more flavor on this? Well, we have, as you know, partnerships if we start with logistics. We work with Ketela Logistics Europe which is based in France and have started looking outside of France and we have a partnership with Improv in Sweden. And what we're looking to do is build upon those partnerships. They have started well as you know, these types of development investments take time to materialize the profits, but we feel we have good products with good cost control and nice locations and an attractive sustainable product offering. So we want to expand, we want to continue to co invest in these assets. Those models are not exactly the same, but the general just is in each of these investments we'll take an equity stake and help fund the platform and work together with our partners for the long haul. So that's some logistics. In the other platforms it varies a little bit country by country. But if you think about our asset management businesses, especially when it comes to restructuring transactions, which are more challenging assets to work out. It is often a sign of a stronger partnership and the ability for partner to trust us as a partner to if we put some of the equity in alongside of them, so that our goals are fully align and not just the fee based business. I think that's a sign of strength from our side and that's where we hope we can unlock more deals. We have seen some of those come through, not yet with massive equity co investments, but that's fine. The equity investment is small as long as we get the deal and we have a great partner then we feel good. And that's how we intend to operate. All right. Thanks. And as I understand it, you want to focus more on property funds with performance fees going forward. What focus will those have if that is true? Well, I think what I've said in the past and what we continue to work on is when we launch new funds, We should be creative in the ways that the funds are structured and how the fees are structured. If you think about a very well performing fund at the moment, if you don't have performance fees, if you're an investor, you're kind of wondering just chugging along, will they sell or are they just generating fees over long terms. I think if you have some of the performance fee embedded in more funds, I think your interests are better aligned with your investors. Now of course with yields where they are today in the market, seeing large, large performance fees in the near future is hard. When yields are between 3% 5% in most European markets have a very, very high excess performance over hurdle rate is hard. But that's our job to find the right yields to find the right assets that we can add a lot of value to. But I think it's being a little bit more creative in the fee structure to make sure that our investors feel that our interests are aligned. It's not easy. It's not an exact science. We have launched a business as an example. Relaunch the new logistics fund called Deutsche Lambtus, which is as you might imagine, Germany and surrounding areas, where there is a little bit of creative structuring in how the fees work and I think that's a good sign out of Krieg. All right, great. And then my last question is, you could tell us about Your plans to strengthen the profitability within Corporate Finance and also the efforts towards debt capital markets. Yes, I think that's a little premature the question. It's quite complicated. We are we have, as you might have seen, hired a few people around Europe in debt capital markets. That's always the first step, get talent in and they will tell you what to do. It's not my job to tell them what to do. So we're hiring people with the same with top capabilities and it will be our job to help them work together to get a good product offering that's consistent, if that helps be consistent across Europe, otherwise it could be market by market. From an overall corporate finance perspective, that is a that's a hard not to crack. I don't think many even of the biggest best performing global competitors have really anyone I don't think anyone has really, really cracked the code on this, but there are some that have done it better than others. It's about having the right product and having have consistent strategy and for us maybe more importantly in the short term is to address local lock because that is a very, very large drag on our overall numbers. And if we can't be competitive, we have to look at what the options are. But I think a better product offering, hiring the right people and focusing on core and value add sort of advisory service. The Traditional broker segment is challenging, it's very competitive and the fees are not as high as we want our advisory fees to be. So it's about moving upstream in the value chain and focusing our business in the right direction. But this is not an easy task. It's something that's going to take at least the rest of this year to get some traction. But it's a fun and interesting challenge. It's an organizational challenge, it's a product challenge and it's a market challenge, which makes it fun. All right. Great. And then just one last question about when you return your bank license in Q3, you say that you will immediately get SEK 350,000,000 that will be like available cash. And then like after a year or so, your divested Visa shares, like those money will be available. Is that the same amount that you went out with, which is about like SEK 80,000,000 or something? Well that's part of the cash. The Visa shares, I just want to make it clear there we don't have be the shares. We have Visa C convertibles. And those are part of the settlement from 2016. So there's no available shares to just liquidate at the moment. We did that and that has been added in the as you would have seen in the correction of our 2020 financial statements, that's part of the balance sheet now. But the V2C convertibles have another 7 to 8 years to actually convert we don't know what the conversion rates are going to be. They have come down over recent years as part of that settlement. So we have them on the balance sheet at market value with a slight risk adjustment based on the fact that the conversion rate trend has been negative. So there's no immediate additional liquidity coming from Visa shares on top of the cash that we're reporting here. There should be, I believe it's SEK 57,000,000 or SEK 58,000,000 Swedish Krona that we have on the balance sheet today in Visa Convertibles. So that should be that level or give or take that level of liquidity to be released over the next 7 years. So it's not a hugely material number. All right. Great. Thanks, Stefan. Yes, sorry. And also to add on that, about the SEK 352,000,000, it's It's not going to be immediately available. It will take some time due to local processes. So But we foresee that this will we will retrieve this cash in hopefully during 2021. But it's depending on local processes and also ECB, what they decide when we can actually define the judgment of the bank license. Okay. Thanks. Great. Yes. It's important. We do report the cash in the in Cattello Bank sort of separate box and outside the normal reporting because the timing is not entirely certain. It's something that we've work on for a long time and it's a painfully slow process. It's yes, if you have the choice maybe don't start a bank with these licensing requirements. It's that if compliance is not your hobby, it's a challenge and we're working on it. And once this year ends, we should be in a good position. Great. Thanks. Thank you. Thank you. We have no further questions at this time. Please go ahead, speakers. Okay. Well, if there are no further questions we have an e mailed question from Protector looking at the I guess it's taken from the CEO commentary given the low returns in our market, finding attractive investment opportunities is challenging and we need to think creatively and expensively. Diederik, I think I touched upon this earlier. When I said with the market returns where they are, you have to be very creative in how you deal with investment management. You can't everyone is chasing the same deals and we have to be better. The good thing is our strength is not just investment, it's asset management, created workout deals, restructuring deals and our asset management companies work directly with our funds fund vehicles as well to enhance value on each asset, which means that we're not purely a passive investor and we have the ability in several of our asset management platforms to do structuring and restructuring that is I wouldn't say it's market neutral, but at least you have the ability to generate see his business by helping others increase their returns. It's not our own money necessarily and that's and I think so we're we think we're in a good position. But direct investment opportunities, like I said, we're launching new funds, we're going into new segment a little bit and trying to find yield where we think the risk and return balance this is right. Of course, it's a competitive market out there, but I think our track record is very strong. Okay. I think that is all the questions that we have received. So we appreciate everyone's interest in Capella and thank you for your time this morning. And we will this will be available on the website of the recording and you guys have a great Friday. Thank you.