Earnings Call: Q3 2020

Oct 28, 2020

Thank you, and welcome to today's Q3 presentation. The content is as usual, start with highlights and results, balance overview, operational review, capitalization, capital deployment and market analysis, can we finalize this with a question and answer session? Please move forward to Slide 4. Highlights. Catena has performed well in the Q3 and despite the uncertainties caused by COVID-nineteen, the structural trends fueling high demand in the sector is yet outweighing negative economic impact from the pandemic. NAV per share is 8% higher in the 3rd quarter, alone indicated further demand for our asset cost both from customers and investors. We acquired a new property in Borrell, East of Gothenburg and signed an agreement with the e commerce fashion company, neti.com, for 15 years with expected NOI of SEK 16,500,000 a year. We have experienced another period of strong wetting activity, helping us to grow stable cash flow and we keep working hard to obtain future interesting developments. Slide 5, please. COVID-nineteen, we have been fortunate enough to experience only a limited negative impact on revenue caused by COVID-nineteen so far. In total, dollars 6 1,000,000 year to date has been expensed as total rent plus corresponding to well below 1% of total headline rents. Though the market sentiment in the quarter has recovered, uncertainties about the long term impact of pandemic remains clouded. In many countries around the world, the virus spread has yet again, unfortunately, started to increase. Our net debt to value position of 54 0.3% in combination with our durable cash flow operations makes me feel comfortable going forward. We keep monitoring the situation and continue to explore ways to address the challenges faced by our communities, our customers and employees. Slide 6 results and balance overview, and I hand over to Sophie for taking action on Slide 7. Thank you very much. From the income statement, you can tell that the net operating income was 10% higher year to date compared with the same period last year and income from property management was 13% higher. That's $14.39 per share compared to $12.68 a year ago. NOI ratio was reported at over 80% in comparison to last year's 77%, in part due to lower maintenance costs caused by limited access to some of our properties during the pandemic. During the period, rental income was affected by a positive one off related to an early redemption of rental contracts in the amount of $40,000,000 and a negative $6,000,000 was related for reserves for expected credit losses. Unrealized changes in property value amounted to $480,000,000 corresponding to almost 3% of fair value. And we go over to Slide 8. About our financial position, the balance has grown by almost SEK 2,000,000,000 since last year, where unrealized value changes from properties contributed EUR 679,000,000 and investments in standing assets by EUR 969,000,000 Net asset value per share was reported at EUR 223,000,000 which is an upturn by 13% year over year. And then we're going to Slide number 9, an operational review and handing over to Pemi on our rental growth. Slide 10. Rental income amounted to SEK 937,000,000 in the period. The total growth in rental income was 5.9% year over year. Project development contributed 2.4% and net transactions 1.1%. Like for like, the growth contributed 1.5% and there was also one of effects related to prepayment of an early lease expiry as well as reserved losses, net amounting to 0.9% in the period. Slide 11. As indicated by the diagram, our cash flow has been growing consistently since 2015. From the last 9 months, we performed another strong cash flow where we retained 58% from revenues in property management income. Cash flow is key for stability and to enable continued focus on a stable and profitable development pipeline. Our target is to maintain a level above 50%. Next slide, please. Slide number 12. Going to talk a bit our portfolio characteristics. We hold a diversified portfolio, both in terms of geography, asset size and tenant concentration, whereas approximately 44% of our contractual income is derived from our 10 biggest tenants. Many of them such as Deo Elopo Smur, we hold several contracts attached to a variety of properties. And above all, 3rd party logistics suppliers like these provide critical services to society. Handing over to Bennie, Slide 13. A little bit more about our diversified customer base. Simply put, our success is mirrored by the success of our customers, and we are proud to acknowledge the long term relationships we tend to keep with all of our customers. This slide is displaying an essential part of a customer portfolio with the majority has experienced growth and or are part of an industry experienced growth. With over 40% of rental value being represented by well recognized firms within 3rd party logistics, transport and recycling provide the stability. Another 23% is related to food and beverage, where for some customer growth due to online grocery expansions currently is very high. Almost 15% is related to home, construction, packaging and healthcare, all of whom at various degrees are witnessing a state of growth. Slide 14, Sophie? Yes. Our on balance day, our property value was appraised at approximately SEK 17,800,000,000 with a reported EPRA NIIY of 5.7%. During the Q3, unrealized value adjustments amounted to approximately $400,000,000 reflecting a market yield compression, but we also but it's also due to projects being finalized and a favorable leasing activity. Going to Slide 15 and Penny? Rental market. We continue to perform well on leasing, reflected in the high utilization of our facilities, leading to continued high occupancy of 96.1%. The rental market can be characterized as strong, particularly in prime locations with good means of transportation, mainly driven by high demand coming from a structural shift in supply of goods and scarcity of land and standing assets. In other parts, where land is not an issue, the market is more stable. It remains too early to draw any long term conclusion with regards to the pandemic. In Sweden, restrictions have been discussed and partially implemented. The critical function of supply chains in combination with steps away from traditional brick and mortar, however, makes logistics real estate very resilient. Leasing activity and contract maturity. With continued strong leasing performance, we welcomed $33,000,000 worth of new leases in the quarter and net of $28,000,000 In the Q3, we have completed over 36,000 square meter of new development capable of generating $25,000,000 of NOI. The maturity of our contracts remains well disputed over time, averaging approximately 5 years. Then we move forward to capitalization and Slide 18. Sophie? Yes. We maintain our cost of debt at 2.4% on average and LTV was reported at 56%, down 50 basis points a year back from now. Equity ratio was reported at 34.9 percent with sufficient headroom from our minimum target of 30%. Going to slide 19 and our funding structure. There are some details about our loan portfolio. Access to financing has gradually improved from late second quarter reflected in credit spreads being tightened. During the Q3, we have successfully printed EUR 414,000,000 in 2 separate bond issues, 1 4 year floating rate and 1 2.5 year fixed rate, both with just a slight increase in pricing compared with the beginning of the year. The commercial paper market has also picked up pace in the quarter and therefore we also have been using that window of opportunity to ship some source of funds. Ongoing discussion with our bank creditors are going well. On balance day, we reported a debt maturity of 2.2 years and an average interest maturity of 3.1 years. And we're going to Slide 20, which is about our capital deployment and handing over to Bernie on Slide 21. Capital deployment year to date. We continue to focus the majority of our investment into development. During the 1st 9 months, we invested a total of just over SEK 1,000,000,000 with 3 additional acquisitions outstanding POPTUS earlier this year totaling EUR 307,000,000 the rest of $722,000,000 has been directed towards our development pipeline, including investments in our standing properties. Slide 22, development projects in progress. At September 30, 77,000 square meter space was under construction of which all is pre let, equating to remaining $430,000,000 to invest. The value of projects in progress was 1,125,000,000 dollars During the quarter, we have finalized 2 major development projects in Hasilvoort adding almost $25,000,000 of net operating income to our earnings. Market and outlook, again, please move forward to Slide 24. A little bit about the market and a short notice about some interesting news. Postnoord, who is the leading parcel service provider in Sweden, announced in August that e commerce was growing at the pace of 25% compared to last year. That indicates a declining growth in contrast to the number reported this springsummer, which is quite expected given the extraordinary circumstances that prevailed at that time, notably caused by oil restrictions. The big difference from last year is that this is slice in whom is utilizing online shopping. Now Jan as well as OLD has found its way to digital platforms and that progress is here to stay. No one has probably missed out the news flash about Amazon's earlier this quarter. And actually today, they launched their new Swedish homepage. From a logistics point of view and a Catena viewpoint in particular, I think this will only add and accelerate what has already been in place for quite some time. Goods derived typically from certain mid price segments have been struggling for a while and with a giant like Amazon established puts further pressure on the speed of the digital transformation. Slide 25. In late September, we announced the agreement to acquire 38,000 square meter of lettable area located in Voorhees, strategically set next to Gatlinburg. The newly constructed facility offers a state of the art efficiency. Catena has signed a 15 year lease agreement with Nelly, a well known e commerce fashion company, including an option for expansion of another 13,000 square meters. The contract generates an NOI of approximately 16,500,000 dollars Of course, the REIT will be prepared for solar cells. Slide 26. When we first started to develop the NanoLogistics position in the French of Malmo in 2015, Our goal was to create a modern, expedient and sustainable cluster of logistics operations serving the Greater Copenhagen area. Now 5 years later, we have successfully done just that. It's been a fantastic collaboration and I'm proud to announce that in the Q3, we signed leases for the remaining space in our multi tenant warehouse. From February 2021, the entire position will become fully let. Slide 27. Next to this position, just described, we held a piece of land where they expect to have a final decision on Sonntown within the next 6 to 12 months. It comprises 110 1,000 square meters of land and enables another 50,000 to 55,000 square meter of available area, which could potentially generate another $15,000,000 in head rent. From the experience with first part of Sonano, we know this is an attractive location for logistics purpose. Slide 28, potential future development projects. The search of new promising land continues along with ongoing detailed development plans in progress. On balance days, we have a potential of about 5,000,000 square meters of land, where almost 1,000,000 square meter are consolidated and with development plans in place. Rest of the land bank is conditional on various contractual agreements such as detailed development plans having to gain legal force. Slide 39 29, sorry, moving forward. And welcome some questions and we will try to answer those. Thank Our first question is from Peter Randblum from Kempen. Please go ahead. Hi, good morning all. Thanks for the presentation. So it's clear the current market is driven by high demand from e commerce. Could you also shed a light on which type of tenants for which you see a lower demand and for which you expect a lower demand going forward? Looking at the demand all in all, we must understand that we are very heavily within the Swedish retail ecosystem. And within that segment, we see actually that it's a brick and mortar part of sales that are suffering in those days. So from the ecom perspective, we don't see that. But as said, looking into the fashion segment and sports segments, they have had yes, they have been suffering a little bit, but that is especially related to brick and mortar sales. And if you're looking at the container, where we have some losses or risks related to COVID-nineteen, I would say we have some square meters of what you call climbing center where you have what do you call it, where you go to event handling and so forth, but that is really on the margin. Thank you. And do you also expect maybe a rise in bankruptcies from next year onwards with the economic recession maybe hitting some tenants? That's very hard to foresee. I think that is very much related to much more global situation and linked to second, third wave of COVID-nineteen. But and I don't want to sit here guessing about that. Okay, clear. Thanks. Our next question is from Jan Isel from Kepler Cheuvreux. Please go ahead. Okay. Thanks for that. I have a couple of questions. So I'll just start with my first one, and that is regarding your property uplifts. And you mentioned in the report that there are built in some kind of uncertainty in these valuations. Could you quantify a little bit about the actual amount or estimated amount that is put into some kind of uncertainty in your valuation at the end of September? Well, we're not going to quantify. It's hard to put a number on it, but we see a compression of the yields, both in our own external values and our internal and also from the big acquisitions that have been or the big transactions that have been made in the market around us during this last half year. To put a number on it would be to forego coming valuations and I don't want to do that. But if it is a small Valuation, it's well within we follow the market on our fair value. So it's a small impact or rather large one or how should No, I would say it's a small impact. It's not that big. But we also we can't foresee where the market is going. Here in Skane, it's now closing down. We've got restrictions for 3 weeks going forward, and we can't foresee where the pandemic takes us. So right now, we don't have any big issues. Okay. And just a question on yield then, yields. You probably are involved in some kind of building process for logistics properties and so on. Are you expecting yields to come down further from this level? Well, in some areas, we might still see a yield compression where you don't have where there is a scarcity of land, the yields are going to might going to go down to follow as they are in Europe. But we also have in Sweden, we have a lot of land and there are areas that you got land easily accessible and then we see the yields going the other way. So but in the major areas of the big cities, I would expect some yield compression still going forward. Okay. And your just now the topic, your tax has been rather low during the last years. And are you expecting it to be in such a low amount going forward also? Or how do you look upon your pay tax in 2021 2022? I would expect us to these rental doors began to say that, you're beyond what I mean. These new regulations have made it a lot more difficult for us to we want to pay taxes, but we don't want to pay it all at once. But yes, we are going to pay taxes, and I think we're going to hold the same amount as we have been the last year. I don't expect to see a big increase on paid taxes during the coming years. Okay. And just digging into your projects, there were 2 projects that were finalized in the 3rd quarter. The cost no waste. And was it early in the quarter, late in the quarter, just to get a feeling for how much it was impacted the rental income for the quarter? Of course, we will see some coming rental growth due to those projects and also that will be finished, but I won't give you the exact figure. Okay. But when was the If you're looking at the ongoing project, then you could elaborate and make a backboard calculation on that one. Okay. So maybe a fair assumption that they moved in, in the middle of the quarter and then there will be some extra factors in the Q4. Okay. Yes. Okay. And the Marlon has the same question for DHL and BOST in the Q4. Is it the same there that we could maybe calculate the same math that maybe moving in, in the middle of the quarter and then you're getting an impact on the Q1 on these 2 projects? Okay. Is that a fair assumption to make? Yes, absolutely. That's it. Okay. Yes, okay. And you also have an impressive utilization ratio. Is it is this the absolute ceiling? Or could you just could you raise it even further? Or how do you look upon vacancy? What I can say is that the market is still strong and just not going into details, but we expect the market to be strong going forward. And my final question really regards your financial costs. And we could see from the slide here that 45% of the loan portfolio have expiring interest rates agreements in 1 year time? And with your discussion with the banks and so on, do you think that you could come down a little bit on your average interest rate in 2021? I don't know if it's going to come down. I think it's going to be continued where we are at now. We don't see any big increase or decrease in the margin. The premium margin. Keep it flat. Okay. Okay. Okay. Thanks for taking my questions. Thank you. And our next question is from Markus Henriksen from Pareto Securities. Please go ahead. Hi, Benoit and Sophie. I have three questions. First one is the NOI margin. In the Q3, you mentioned last quarter that you have trouble to do some maintenance. So I'm just looking for near term for Q4. Do you still have trouble to do maintenance? Because I guess for next year that we should expect more of a normalized NOI margin more in line with 2019 plus some efficiency? In the short run, we know we are about in the same situation due to the COVID-nineteen pandemic. And at the other hand, late on the last quarter is normally one with a little slightly higher level. So I think you could about the same levels, maybe a little bit up on that side. But I do not see that normalized going forward. I think you could calculate with the levels that we have been at in the quarters. Q4 is still on the low side and a normal more normal year. We hope we will hope for that during 2021. And what we need to take into consideration, of course, is that we have had a lot of new projects, new development, which means for the added square meters, it will be for sure lower costs. So exactly. Yes. Do you still feel that there is some maintenance that you were not able to do this year and that will come next year? You say more of a normal I don't expect you to add it on top, so to say, just to see if it's more normalized. All right. That's clear. Then I'm looking at the investment levels. You are at an all time high here at 12 months, almost SEK 1,000,000,000. But many projects are finalized. Now short term, what do you think we should view? You have earlier years stated at a level around SEK 700,000,000, but now we're way above that. So what's your view on future project pipeline and the investment level? Total investment level, absolutely, we will aim for the same levels that we have been at. And you know our priority, first hand developing projects on our own land and then we will top it with acquisitions. That is the plan going forward. And when it comes to project related, we will still aim for this plus SEK 700,000,000 a year. All right. That's clear as well. Last question is regarding the follow-up on the revelations here during the quarter. You mentioned Tostart and Sundanor. Is that related to Blackstone, Wilburys sale? It's not so close, but do you see more evaluations in the Oresund region than you see in your other parts of the portfolio during the quarter? Yes, we do. We see a higher up on those locations. And it's also regarding that we have that the projects now are finished and the tenants have moved in. So it's a mix of those 2. But absolutely, the South of Sweden is So there are no material positive revaluations in other parts of your portfolio if you exclude projects and the other region? Yes, there are, but those are the 2 biggest ones. We have especially in Stockholm City area, we can see higher values as well. Same logic applies, the dense areas, the density of land and projects. All right. Thank you. And it seems that we have no further audio questions. So I will hand the word back to the speakers. Do we have any e mail questions? No. When we have no further questions, then thank you all for this presentation. Stay safe in COVID times. Bye. Bye bye, everyone.