Earnings Call: Q2 2021

Aug 20, 2021

Thank you. Good morning, everyone, and thank you for joining. We'd like to turn to Page 3 to begin our presentation. Most of you, of course, know Casella quite well. And following our announcements recently to wind down ITM. Casella now has 3 property focused business areas, property investment management, Principal Investments and Corporate Finance. Cattella manages around SEK 112,000,000,000 in its Pan European Property Investment Management Business and as a leading advisor in Corporate Finance in several large European markets. Principal Investments, our newest business segments is where we invest our equity directly and we now have close to SEK 700,000,000 Swedish kronor of capital invested as of the Q2 of this year. We want to reiterate, as we have done in previous quarters, that we are not a traditional property company with material long term balance sheet exposures. We are still and will be 1st and foremost an investment partner, an investment manager where we now at times partner with Equity. We then move to Page number 4. I have the key operational highlights during the Q2. I will come back obviously to the details on the following pages, But we are start with very, very proud of an exceptionally strong Q2 for all of Cattellus core business segments. From a group perspective, We announced the formation of a new leadership team during the quarter and we have also added an ESP manager to further strengthen our focus in this critical area of long term sustainability. I'm personally very excited to get to build Cattell's future with such a talent group of people and to add a lot of fun to the mix too. We are focused on the future and that's what we'll talk about in this presentation today. But I'd like to briefly highlight also that the transformation of Capella is progressing well with the bank wind down on track for the end of this year and the liquidation of IPM should be finalized also on time, on track with no more and the already communicated one time charge to the P and L. Having exited the bank now and of course, having only a minority interest in mutual funds and having exited ITM. It means our business is somewhat smaller than it has been in recent periods. But we are confident that it will be positive for the long term value creation of the company. And as you can see with our growth in the presentation, I think we've replaced a lot of operations with higher quality of earnings going forward. Property Investment Management continues its strong track record of organic growth and profitability with assets under management now at $112,000,000,000 Several new sustainability focused funds under development and significant amounts of additional committed capital already available for investment and continued growth. In principal investments, we've made our biggest step to date during the Q2, both with a significant investment in a JV development project in Central Dusseldorf and also delivering on our strong pipeline in logistics developments in Sweden. Catalysis invested capital is now up to close to $700,000,000 in 11 ongoing projects. Corporate Finance delivered an excellent quarter, in fact, our 2nd best ever with particular strength in large M and A transactions, which we believe is very important and a continued focus area for Capella as a whole. We move on to Page number 5. We give a summary of the group's consolidated core results. That means adjusted or discontinued and divested operations. I want to start with explaining that the cost attributable to our shareholders for the liquidation of IPM is just over 100,000,000 including a write off of $39,000,000 of goodwill. This is what we have already communicated to the market and in press release. And we stick by that number and the progress is good in the liquidation. However, as we follow IFRS accounting rules, we show the full impact of roughly a little bit over 140,000,000 But as we own just under 61 percent of ITM, we want to reiterate and clarify again for the actual impact to our shareholders is around 100,000,000 IFRS does not make this easy for our investors or ourselves, but we hope that this clarifies the $100,000,000 and we can now focus on the core ongoing businesses going forward. So if you look at the core numbers, McKellar Group delivered strong financial performance in all aspects during a very solid second quarter, with income up 17% to 4 $78,000,000 and operating profit up 55 percent to $113,000,000 with profit margin up a solid 6 points as well. Property Investment Management, PIM, I will sometimes refer to this PIM, continued to grow strongly with the assets under management at $112,000,000,000 and the rolling profit margin still in the 20. The AUM growth primarily comes from various residential funds, but also new sustainability focused and commercial funds. Principal Investments added nearly $400,000,000 of invested capital during Q2, mainly from the landmark mixed use project in Konigzallet in Dussauds and by continuing to develop our logistics project in Norrkoping, which is about 70% to 75% completed and adding 2 more logistics projects in Orot Pru and Jungvik in Sweden. Catalysis invested capital is now close to $700,000,000 with 11 ongoing projects. But of course, Realized profits, as you will see from the chart as well, will take some time, even though we see attractive markets already at this moment for several of our assets. Corporate Finance, the Corporate Finance market rebounded broadly in Europe in the Q2. And Cattell, I would say, delivered beyond our expectations, $43,000,000 of operating margin from $188,000,000 of income is really good in and of itself. But adding that most platforms actually across Europe performed really well, a very broad sign of strength and that we successfully delivered as an advisor in several large M and A transactions, make it an even better quarter and show solid strategic progress for Capella across Europe. We jump ahead to Page 7 where we start discussing Property Investment Management in a bit more detail. This is a chart that we are very proud of and it's a big fundamental aspect of Patella's ongoing growth. Over the past 5 plus years, PEM has grown its assets under management by an average of 23% annually. And during 2021, we have continued to deliver on significant growth with strong underlying profitability. PIM remains the main growth engine of Capella And we have a clear strategic focus on raising new capital and launching new sustainability focused funds, While organically growing our asset management platforms and also launching select new platforms that fit strategically with our core competencies, which we'll keep talking about in the coming quarters. The growth of the business, the underlying Assets under management has also resulted naturally in increased fee income with fixed fees around 630 $1,000,000 in the last 12 months, which is up 10% compared to a year prior. And variable fees, which are based on good fund performance as well as transaction fees were about $430,000,000 during the same period, an increase of nearly 30% compared to the same period the year before. Let's move on to Page number 8. Look a bit closer at the AUM Growth of Property Investment Management this year. As you are aware, we divested our asset management operations in France during the Q1 and adjusted for the sale of Gauquent France. PIM has grown its AUM by over 11,000,000,000 or roughly 11% in the 1st 6 months of 2021. The AUM growth continues to be mainly driven by our modern residential funds, But it's also supported by solid growth in our commercial funds and new asset management mandates in the U. K. APAN platform. Looking ahead and very importantly and positive as well, we feel very, very good about our growth abilities to continue this path for PIM, where we have nearly $10,000,000,000 of unlevered already committed capital in our funds ready for deployment and 3 new funds recently launched being launched with showing strong investor demand. So, we feel strong about the coming quarters and our continued growth. On Page 9, a little bit about the financials for Finn. So again, despite having divested Cam France, We have increased income after assignment expenses and commissions by $15,000,000 or 6% year over year. And in Q2, PIM delivered an operating profit of $84,000,000 so the year over year increase of 10% driven by both an increase in fixed fees and in performance fees. As just mentioned, we feel very positive about our ability to grow From a Position of Strength. And that we have a well diversified existing portfolio with a relatively modest risk profile in the current environment. Let's move on to Page number 11, where we have a sort of an overview of Principal Investments. As you know, this is a new segment for Capella and sort of the first time we give a more detailed overview of this business segment. Scenario of increased focus for us And over the last year, we have continued to invest. We now have a diversified portfolio of projects in different asset classes across Europe. Most of our projects come through our development partners, Catella Project Management, CPM, Cattellar Logistics Europe or CLE and InfraHUBs, with both CPM and CLE also generating material management fees for the group, where sometimes our equity component in that investment is limited, which is again one of the strategic aspects of what we're how we're trying to grow and how we use synergies across our platforms. The numbers on this particular slide, Slide 11, represent the estimated total project development cost to give everyone some investment perspective of the overall size. While Cattell's shares of these Investments are detailed on the next slide. But principal investments have also recently launched 3 more in private projects and 2 attractive investments through CLE, putting our total portfolio now, as I mentioned, 11 active and also 2 additional just to be initiated projects. We also have some minor co investments through our asset management platforms, which we do not detail here in this So let's move on to Page number 12. I'll take a little bit of a look at what the portfolio that we have ongoing as of the end of the second quarter. In total, Capella has invested $688,000,000 of capital in these 11 active projects at the end of Q2, with close to $400,000,000 added in the 2nd quarter, primarily in Koenigseggs in Dusseldorf and with InfraHUB continuing to invest in Norrkoping and also ramping up the investment in Yungby. As you will see from the estimated completion column, a decent number of the current projects are estimated to be realized and generate profits in coming in 18 months, very exciting period for us. And we also see a solid pipeline of potential investments replacing those, which we believe will generate attractive new deals in 2021 and beyond. Still of course focused on meeting our IRR return requirements of about 20% on average. If we then move on to Page number 14, we take a look at the Corporate Finance business. As I mentioned earlier, the European Corporate Finance market had a relatively strong quarter in comparison to, I'd say a quiet Q1 and all of course compared to a COVID effective Q2 last year. And Capella also managed to increase our overall market Chair. European transaction volumes grew about 20% compared to last year, whereas Catela's transaction volumes more than doubled or actually tripled compared to the same period last year. Casella advised on transactions valued at about $17,000,000,000 in the quarter, with Sweden having a particularly strong few months and France also continuing to transacting well. As mentioned, we see a very positive development that we grew volumes broadly, geographically and between asset classes and also that large M and A advisory was a significant share of our business in Q2 with slightly higher margins. Let's move to Page 15, continue to talk about Corporate Finance, the financial overview. Corporate Finance generated $43,000,000 of operating profit from $188,000,000 of income in Q2, representing a margin of 23%. Again, very, very solid broad growth And some key areas of strength were, as I mentioned, M and A Advisory, particularly in Sweden with M and A Advisory for Jan Toriet, Sienes Fastiet, they're in a very large sell side advisory So really large transaction and a very strong position in the Swedish market, not just in traditional sell side where we already were ranked number 1 last year. French Residential sales continued to be very, very strong with several large block transaction advisory. And in Denmark, we completed the sale on Teleflex Parken. And we had continued broad strength, particularly in Finland and Spain, but also in other markets. And in Spain, Really strong performance in residential sales as well. So very happy about Corporate Finance. It's Of course, some seasonality in this business, but if we look at how we've been performing in the Q2 in the past, this was exceptional. I will now hand over to our CFO, Matthias Prudin, to cover the financial summary, which begins on Page 17. Thanks, Christopher. Financial summary for ongoing operations. The 2nd quarter had a stable income growth and underlying profit. Looking at the overall adjusted Q2 EBIT result, we made a significant improvement By 55% compared to Q2 2020. Main driver behind the positive outcome is corporate Finance, the higher transaction volumes that led to an increase of variable income by 80%. Further, Fixed income increased with 80% due to higher AUM for property funds in ATAM. Compared to Q2 2020, the profit sharing agreement of performance fees Tier 1 fund has come to an end in 2021, Which has led to less cost for assignments, expenses and commission. The personal cost increase relates to the positive EBITDA outcome and are especially linked Corporate finance performance with higher performance based salaries. Key ratios for Capella Core showed strong margin of 24% And an EPS of 0.61 dollars Both ratios improved during the quarter, which shows us But our core business is performing rather well. Just to remember, reported figures are heavily impacted By the provision of approximately €100,000,000 regarding IBM wind down and a Google write off of the same. Continuing to Page 18, financial and liquidity position. Capella has a continued strong balance sheet and equity ratio. Total assets increased by $311,000,000 to over 4,500,000,000 The positive development is related to additional investments of $500,000 in our property development projects, Mainly taxes and the impact of North Shipping and issuing of our senior bond, which increased group cash with $408,000,000 net. Cattell has significant available liquidity of $980,000,000 to invest in further business development and projects. Still, EUR 429,000,000 is told by Catalabank and will be available when the application to return the bike license is approved, which is expected during the second half of twenty twenty one. Net cash has decreased due to our own reinvestments, primarily in Impras, Cactus and SVB in France. That was all regarding Qatar's financials and over to you Christopher. Thank you, Matthias. Before opening up for Q and A, I would like to briefly summarize the quarter from our perspective again on page 20. We're excited about this quarter and we feel that the transformation is continuing well. The core operations, And our core businesses are performing well across the board. In our largest business area, Property Investment Management, we show the ability to continue to grow profitably and organically basically. Very strong track record over a long period of time and looking good for the coming quarters. Principal Investment continues to invest in regions and segments supporting our IRR target. And we have, as I said, a select number of investments being completed in the next year, year and a half. In Corporate Finance, the market rebounded and Capella gained market share through our broadened and attractive service offering. We have a new leadership team in place devoted to executing on the strategy and creating long term value for Capella. The strategic transformation is progressing well and all non core Teleta business areas will be exited by year end, which frees up capital and time and resources to focus on our core business growth. To accelerate the work with our sustainability agenda, we have appointed ahead of ESG. Besides better illustrating the part Catalla Place and Society will also better enable eHistory profile growth going forward and also by attracting the right capital partners that we want to work with. As a final point, we currently see a good pipeline across our businesses, areas, markets and indicating a good remainder of 2021. And with that, I would like to thank you all for your time today and we will now open it up for questions. Thank And currently, we have two questions in the queue. The first is from the line of Patrick Bretilis of ABG. Please go ahead. Your line is open. Good morning. Thank you. Well, I would like to start with a question regarding The Investment Management. And you're right in your report that the lower assignment cost helped This quarter to give a higher performance based fees to the operating profit line. So what exactly is impacting that from Think that from year to year. Yes. So, that's an important question, In 2020, in SARE I, Casella European Residential Fund, We had an agreement with a prior partner to share part of the performance fee. So while the total performance fee, Matthias, correct me if I'm wrong here, was close to $90,000,000 or $88,000,000 Last year, in this quarter, our net fee after sharing was $73 if I remember correctly. This year, we received $64,000,000 but retained all of it. So if you think about $15,000,000 of assignment expenses going the other way, and this year we have 0. The net impact, however, is $9,000,000 lower performance fee, but still a very, very strong performance in the fund. But that's how the gross and net really works out. Okay. Thank you. And was that just a onetime split? So going forward, we don't We should not expect that to be the performance fee to be shared with any third party? Yes, that's correct. Well, it's not a one time. It had occurred in the past, but it is That agreement has ended and we now retain 100% of that. Okay, perfect. Thanks. My next question is regarding the corporate finance, which was one of your strongest quarters Historically as well. But how do you view the pipeline going forward here into the second half of twenty 2021. And what is your view on how COVID is currently Acting the market, is it still some COVID left over? Or has that Disappeared and it's more back to a normal transaction market similar to what we saw in previous years Before COVID hit the society? Yes, Patrick, it's a complicated question with no straight answer. But I think it's fair to say that, A, we're very proud of the performance in this quarter And that we have a broad strength that to me is the number one the indicator of what's going to happen in the future. Look, the pipeline in Corporate Finance, as you know, is You can look at the pipeline and our pipeline is strong. We have a number of large transactions, but those are They happen, they happen and it's a big number. They don't happen, they don't happen. But the underlying core performance remains strong. And if you look at our markets Over the last year, the biggest challenge for us has been some of our markets have just really been heavily impacted and not produce a lot of volume at all. Now that has started to pick up and it's picked up broadly. I'm not a COVID expert, but what we can see is that it is somewhat easier to transact. I'm not saying that the market sentiment is totally back and there is a little bit market to market. As you know, The Swedish market maybe has remained more open than others, and it goes in waves a little bit. But we have seen a broad recovery and we have seen a stronger performance from Cattella in larger transactions. And that's a move in the market that we have made On purpose is the strategic shift. We want to be part in broader and bigger transactions with higher fees. And what the future holds with COVID, your guess is as good as mine. All I can say is we're proud of the broad performance And the pipeline in large transactions looks good. However, many will actually happen. We don't know, but we're happy with the pipeline. Do you believe it's a catch up effect that we see here that transaction that were supposed to occur in 2020 has been Postponed and that is what we are going to see now or is it this is the underlying pace? Looking at our own transactions, I can't speak for our competitors in the market as a whole, but looking at our own, we don't really see it as a catch up. I think the market activity picks up. We haven't had a lot of transactions completed this year that were sort of sitting, waiting in 2020. It's more that, as you know, over the last year, a lot of Buyers and sellers and lessees and lessors have chosen to restructure and rework and extend rather than transact. And now we're back in somewhat more of a transaction environment. So we haven't really seen a That's materially impacted transactions that just were on hold and then executed. We'd rather see that a bit more transaction activity. And With M and A transactions and advisory that we've had, none of those were Delayed transactions from last year. Those transactions take a lot of time. So when they came from and when they originated originally, I don't think it really has to do with COVID delay, but rather executing power. Okay. Thank you. My last couple of questions is regarding the principal investments. You've shown a very Tail the table in the quarterly report on Page 12. It was also in the presentation. Just to my understanding here, when you write estimated completion, Can we also expect to see an impact on the P and L on these quarters? And then should we look at what Cattella has totally Invested in equity and assume an IRR to see to calculate or make an assumption What the P and L effect of this property development project Or how should we think about this when we are going to see a P and L effect from this and how that will Yes, I think it's a fair question. And again, the project Each investment might be slightly different. But number 1, yes, you should look at our share and that's what you can sort of project your own IRR calculations based on to look at profit. That's the best estimate that we have and that's how we will measure it. Number 2, we don't have a perfect correlation between Estimated completion and when profits are accounted for, more like the cash profit, as As you may or may not know, we follow IFRS as far as revenue recognition principles for development projects, which means that It's effectively a percentage of completion approach, not exact. But we will have Some forward funding transactions that might generate help us with cash flow in the short term, but generate profits over a longer period of time before the Finished project is delivered. There's also revenue recognition impacts whether the property is not only completed, but leased. So there are several components in how you recognize profits. But on a simplistic model, if you want to do that, You can look at our invested capital and apply our targets and look at estimated completion as a portfolio of roughly maybe the quarter after or something like that as the profits take. Perfect. Very helpful. Then just as a last question, what can you say about the IRR projection? I know you have a target of 20 Percent, but can you say anything regarding these if some projects are significantly above Or perhaps even a little bit below expectations at this point? As you know, Patrick, We don't provide profit projections in the market or to anyone. Look, every investment will unless we get 20% exactly, every some investments will be below, some will be above. All we can say is that our current projects look good as a whole. Some are better than others, but we look we're still projecting 20% on average. Okay, fair. Thank you so much for your answers. Thank you, Patrick. Thank you. And we currently have one further question in the queue. And that next question comes from the line of Jesper Henriksen of Redeye. Please go ahead. Your line is open. Hi, Andy. Congrats to the good results. Also appreciate the improved communication in the report. If we start with Tim, you delivered solid numbers and continue to grow the AUM. And given that your plan is To grow AUM further, how much can you grow with the existing organization and how much new employees do you think you'll need? It's again a very hard question to give an exact answer to. I think Where we are today in our existing funds and our existing platforms, There's naturally somewhat of economies of scale. But as you know, Launching new funds, raising new capital, that front end work and acquisition work requires people And you can only manage so many funds. But back office and our headquarters, obviously, We don't think we need to increase at all to manage that growth. So there will be some economies of scale clearly. Launching new platforms, which is a clear objective of ours as well, Less so, I mean that requires the full platform establishment. However, we feel that we now have A headquarters organization that can manage significant growth in platforms. So that will be that sort of companies of scale. Great. And going forward, where do you Expect to see the most AUM growth geographically? I think, Look, in our underlying portfolio, it's I'm not going to say it's more of the same, but the regions Where we are large, it's naturally most of the growth will come from there. But we are looking at at new markets and new types of investments. But I can't guess on that yet. But we'll be very happy to report on it when we initiate something for real. Obviously, A clear objective of ours is sustainability focus and ESG funds. We have a long track record in several of our platforms of sustainability focused funds, But we want to get better, just like everyone else. It's a clear focus and it's the right capital partners that we want to work with And it's the right thing to do. That's we look at that from existing funds, new funds and how we can generate new platforms benefiting from that and helping societies as well. Good. And if we move over to Principal Investments, this is clearly receiving more focus. And you have very large projects in terms of development cost in principal investments. And you mentioned that you aim for an IRR of 20%, but could you put some more color on how we should think about profitability of these, if that's possible? Yes, I think similar to Patrick's question, I think the easiest estimate is to take our invested capital and project an average 20% IRR on that. I know that that's not easy and these are long term projects. And I think we will become more and more transparent as we start divesting some of these projects. And you'll see running run rate performance, Accumulated average returns, but we're at the infancy. We've just started. We could take Grand Central from last year, which is the only material divestment that would really skew our IRRs because it was an exceptional investment and we hope to have more of those. So right now, we're a bit early in the game, but I think if we sit here a year from now, we should have a different track record and more detailed profitability metrics to talk about. But as of now, what we focus on It is a total IRR of 20% on average on the invested capital. But also as we highlighted before, Now this equity is invested to generate more deals for Cattellas as a whole, to generate more AUM, to generate more advisory fees. And hopefully and we feel very strongly about this. We will talk more about this in the coming quarters, which we see in our pipeline. Great. And regarding the Swedish logistics Project. Can there be a plan to include like all of those into a new fund? Or Are there any thoughts about something like that? We've discussed this before and We've made no secret that we are looking to launching Swedish property funds. The intention is to create several funds. But of course, logistics is a market that we feel very strongly about and how the great macro performance and outlook. So I think that's clearly something that we're looking at. I wouldn't say all of that. That's a very strong statement, but we're clearly looking at it. All right. Nice. And regarding the German projects, you put the shovel in the ground in Seestat. What are discussions about the sale of, for example, the first stage of that thing? I think it's we've just put the shovels in the ground literally. So I think the sale discussions are a bit premature. I think we're very happy about The recent developments in the political and permit developments there that has enabled us to get going on this project physically. As you know, it's a large multi year, multi stage development. But I think it's too early for me to discuss the sale prospects. All right. And then Last regarding corporate finance. You delivered a good numbers and you say that German operations are improving with improving results. Would you say that you're satisfied with the current status of the operations in covered finance also in the German market? We're never satisfied, but it has been really good progress. We've had both a couple of large transactions, both executed in the pipeline. We have After the Q2, also we did a transaction where we supported our residential funds in a large transaction. Obviously, it's a completely independent advisor, which shows again the strength of synergies and continuing to believe it in the development of this platform. Look, Germany is a huge market and we are not that big yet. But it's something that we're working on and all we can say is that it's been good progress this year, which is the right direction. And we have continued to manage our cost base, while delivering some transactions, which we were not successful in last week. So that's all good for us. Again, not satisfied, but it's a few steps in the right direction. Great. Thanks. That's all for me. Thank you, Hector. Thank you. And as there are no further questions on the line, I'll hand Yes. We have no more comments. Thank you for Very good, insightful and challenging questions. And thank you everyone for listening, and we look forward to Seeing you again in a few months with another good quarterly report. Thank you, everyone.