Welcome to Catena Q1 Report 2023. For the first part of the conference call, the participants will be in listen-only mode. During the questions and answer session, participants are able to ask questions by dialing star 5 on their telephone keypad. I will hand the conference over to CEO Jörgen Eriksson, CFO Sofie Bennsten, and Chief Treasury Officer, David Silvesjö . Please go ahead.
Hi, everyone, and welcome to this conference call for Q1 2023. We start off by giving a short summary of the Q1 , followed by a short overview of our business. We will then proceed to the business update, where we will touch upon our current growth initiatives. Sofie and David will then walk through the numbers in the financial update, and we will then open up for the Q&A. Next slide, please. Starting off with the summary of the Q1 , we continue to report rental income growth driven by acquisitions, projects, and the stronger like for like numbers driven by our CPI-linked contracts. We also report a very strong letting ratio of 97.5% and the LTV at 35% gives us a lot of opportunities going forward. The transaction of two ICA assets were closed at the 1st of February.
Further, we announced new development in Jönköping of SEK 379 million, and we have started to invest in solar panels and energy storage. With that said, we stick to our plan and what we told the market how to use the proceeds from the equity raise in November. Next slide, please. The business overview in next slide. On a similar theme as we saw in Q4 2022, we are going through a trying macro environment with decreasing consumer confidence impacting the majority of the segments. Adding to the market situation in the banking turmoil, which started in the U.S. with Silicon Valley Bank and recently the takeover of Credit Suisse by UBS. While this event of course rises risk levels among the sector, we are not currently seeing an effect on the Swedish banking system with major players are supportive of our strategy.
Looking at some of our key metrics for logistics, we have seen in the latest PostNord report that e-commerce sales are down 7% for 2022. Have in mind here that despite the decrease, we are still above historic levels. One more granular metric for our business is the volume of small packages that goes through the logistics system. While data is scarce, the Swedish Post and Telecom Authority, which tracks small packages volume in Sweden, registered an increase in the number of small packages by 7% in 2022. This is telling for why we are seeing continued interest from new development. While a number of small packages are increasing, the sales adjusted for inflation is down. This environment puts stress on number of companies of which the market-leading players stand out and can ride out the storm.
We are fortunate to be partners with some of the leading names within the many segments of logistics. As of today, we are not experiencing an increase in vacancy, rather getting asked about more space, a good position to be in right now. All of this comes back to the shifting view and the increased importance of the logistics facility for the customer. What we are seeing is an increased value proportion for prime assets driven by changing personal dynamics and the increased importance of energy efficiency, location, and capacity. Here, we believe our portfolio is well-positioned for these long-term trends, which together with the overall long-term trends such as lack of prime land lots, reshoring of industrial capacity will maintain a strong demand for our assets. Next slide, please.
During the quarter, we added one property in Gothenburg, one in Stockholm, and a third, a property in Denmark, which bring the portfolio a total of 128 properties with a contracted annual rent of SEK 1.8 billion. Next slide, please. Looking at our customer base, the ICA acquisition which took effect in Q1 makes ICA our second biggest customer with regards to the contract value. Furthermore, the top 10 customers now stand for 46% of the contractual value. Next slide. Let's take a look at our initiatives for future growth. Next slide, please. Starting off with energy, which we want to highlight as a major opportunity for us going forward. As we announced in Q4 2022, we have identified investments of total of SEK 500 million with an estimated low double-digit return.
These investments are mainly solar panel installations and battery facilities, which can assist the current energy infrastructure, both for the tenant and the grid as a whole. Due to the increased demand for frequency balancing driven by the current energy crisis in Europe, the need for battery facilities is growing and has led to a high ROI. While the future is uncertain with regards to how long the compensation for frequency balancing will remain, the levels are sufficient for quickly paying off the initial investment and having it in the facility in place in the future, for example, peak shaving and recharge stations for electric trucks. All of these factors will make our facility even more attractive for customers in future. Next slide. Regarding our current projects, nothing material to report besides that we are progressing well across all numerous sites.
As mentioned in last quarter, we are hovering around 6% in yield on cost in the current projects. With newer projects, we will be aiming for 6.5%. Next slide. As we mentioned during our equity raise in Q4, we see potential for new attractive projects going forward, and that there is a demand for modern facilities in great locations. In line with that statement, I'm very happy to announce our latest project made official after the quarter ending. In Jönköping close to our ongoing project with Elgiganten, we will build 33,000 square meter facility. Nowaste Logistics has signed a 9-year lease agreement of 13,000 square meters, and they also have an option regarding the other 20,000 square meters.
It's a clear illustration how we grow together with our customers and the system in their growth journey. Construction will start in Q3 2023, with completion set for Q3 2024. Next slide, please. With regards to our land bank, we have had some progresses in a couple of our processes, although we have to wait for some decisions to gain legal force, nothing more to report there. Next slide. Looking at our leasing operation, our letting ratio continues to be high, standing at record high 97.5%, reflecting the strong demand for our segment. With that said, I want to like to hand over to Sofie for the sustainability and the financial update.
Yes, we go on to the next slide. Thank you, Jörgen, and hi, everyone. Taking a look at our sustainability, we continue to work with our certifications of our property portfolio. Ending with the Q1 on a high note, we have now 31% of our lettable area certified, which is a 10 percentage point increase since last year, and we will continue this work during 2023. During this quarter, we were ranked as one of the best workplaces in Sweden by the organization Great Place to Work, who tracks our employee metrics. Maintaining a high motivation among our coworkers is a top priority and a necessity in order to reach our ambitious targets. We're going further to slide 16 for some financial update and further on to slide 17.
Our income for the period was driven primarily by our made acquisitions and indexation, an indexation which is pairing the negative side effects of the high inflation. Rental income for the period amounted to SEK 446 million compared to SEK 377 million during Q1 2022. The higher rental income increased our net operating surplus with 22% to SEK 359 million. The higher surplus ratio is explained by us divesting two older facilities during 2022, while we acquired and completed more efficient facilities with lower property costs. Profit from property management rose 22% to SEK 278 million compared to SEK 227 million Q1 last year. Higher financial income, acquisitions, and new developments have had a positive effect here. The next slide, please.
The rental development compared to Q1 2022 has been positively impacted by our CPI link contract that came to effect by the start of the year. Within projects, the main contributors were the completion of the PostNord facility at Bunkagården and the Nowaste facility at Plantehuset, both in Helsingborg. With acquisitions, the majority of the increase came from the Hans-Litte n acquisition and the acquisition of the two DKI assets in Denmark. Divestments made a negative contribution of SEK 20 million, where the largest divestment was Vanda and Forsätet which together totaled SEK 14 million of lost rental income during the quarter. Now handing over to David for some comments on financing.
Thank you, Sofie, and good morning, everyone. On balance day, we have reported an equity ratio of 52.7%, which is well above our minimum target of 40%. The macroeconomic picture continues to be a concern, whereas parts of the real estate market witness difficulties obtaining debt and with market values in a falling trend, this should also inspire to interesting pockets of opportunities. It's true that secular trends is speaking in favor of our business and form a big part of our success. It's also important to point out, though, that our employees take steps each day to try to stay ahead of what's next. We have shown strategically from last year with two capital injections, we took measures early on to stay ahead of market conditions.
As a long-term committed real estate company with proven track record on developments, strong operating cash flow, and longer leases, we are in an ideal position to further capitalize. Next slide. Sorry. With interest rates higher, average cost of debt increased 3.4% on balance day compared to 3% from last quarter. Net debt to EBITDA was reported at 8.1 times, whereas run rate was reported much lower at 7.1 times. Our interest coverage ratio of 4.6 times also illustrates our strong cash flow and resilient operations. Combined with a low leverage of 35% and a secured loan to value of 30%, we have ample headroom to our targets and covenants, and should comfortably be able to capitalize on our pipeline and further opportunities. Next slide, please.
From the Q1 , we have successfully refinanced over SEK 1 billion of debt. Almost half of that was related to secured bonds, swapped to secured bank lending on satisfying terms. Our debt maturity structure implies we have about SEK 3 billion of refinancing in the upcoming 12 months, where of we have ongoing discussions with several funding partners regarding the entire volume. Most of that debt is related to secured bank loans, and a smaller part is related to secured bonds through SFF. Not until May 2025, we have unsecured loans that mature. We have more than enough liquidity to cover for 12 months of loan maturities should that deem necessary. We still expect the bond market for real estate to stay volatile throughout 2023 with elevated credit spreads. Next slide, please.
Our interest maturity structure implies we have currently 67% of total debt hedged with an average term of three years, which delays and reassures impact from higher interest rates going forward. Our derivatives portfolio and fixed interest loans combined have an average term of almost five years. If the market rent were to increase from here with another percentage points, profits would be impacted by about SEK 36 million all else being equal. That should be interest rates, not market rent. Sorry. Our strategy to work with a certain level of interest rate hedge has been consistent over time and complies with our overall strategy committed to long-term engagement, whether it's about customers, properties, or overall sustainability targets. Handing back to you, Sofie.
Thank you, David. I'm looking at our capital deployment during the period. The acquisitions are related to the two IKEA assets and the Danish property with DKI as tenant and also the land at Stigamo in Jönköping, where we now announced the new development to Norway. It was a total investment of SEK 1 billion. Divestment of one small property in Borås came to SEK 9 million, and development CapEx ended at SEK 393 million. These investments are mainly related to our large project with Elgiganten in Jönköping, Menigo in Landvetter, and IKEA in Malmö. I'm going to slide 24. As regard to property valuation, we registered write-downs of SEK 710 million in the Q1 , and it was driven by higher yield requirements.
The average weighted valuation yield for the portfolio is 5.6 by the end of the period, compared to 5.4 by the end of last year. The EPRA initial yield came to 5.2. Now it's time for Jörgen and some closing remarks. Please proceed to slide 25.
Thank you, Sofie. Please now we are at the takeaways from today, and we can be summed up into following. Catena is entering 2023 with strong fundamentals. Our organic growth opportunities are attractive, and we can be offensive during the year. Catena has a resilient financial position driven by our strong cash flows and low loan to value, which give us significant headroom to act upon our growth ahead. Lastly, we are opportunistic with regards to the transaction market and new development and looking forward to present more great news throughout the year. With that said, I would like to open up for questions. Thank you.
If you wish to ask a question, please dial star five on your telephone keypad to enter the queue. If you wish to withdraw your question, please dial star five again on your telephone keypad. The next question comes from Markus Henriksson from ABG Sundal Collier. Please go ahead.
Thank you very much. Good morning, everyone. First, a question on the transaction market. Could you elaborate a bit on what type of players that are active? I guess including you and, have you seen any transaction that is representative of your portfolio recently?
Yeah. Yes. Good morning, Marcus. We have seen that there are some ongoing transactions and discussions, and I would say that there are a lot of capital on the sideline waiting for investments. It's the giant funds from abroad, like BlackRock, Verdion, and those kind of players that we are competing with. It's tough for us to compete in terms of the muscles, but we can act fast sometimes, like in the ICA case. I would say regarding the market yield, it's hovering around 5%, a bit under, in some cases I have heard, but give or take 5%.
Thank you. Thank you for that. You've been very clear on that the future yield on cost will be 6.5%. That's what we see now in the announced Nowaste project. Could you help us a bit on possible future projects if construction costs will move down? Will the discussion take that into account already, or could we see rents being stronger than expected? What would be the kind of moving target here, and are you closer to a 7 than a 6 based on construction cost and rental growth? Thank you.
I would say, when we are aiming for 6.5, with that said that we are closer to seven than to six in coming cases we are looking into. The construction cost, we assume that they will be trending down from now on. We have seen some signals, but are waiting for more signals. We also see that there is a lot of contractors that they are very keen to get new jobs, so to speak. I think that we are in a good position in the negotiations with the contractors.
Thank you. Last question, I think for, if we go back a few years in time, Catena used to mention a long-term NOI margin target of around 80%. Used to be then, around 74. That was a quite tough target back then. Now, in the coldest quarter, you deliver 80.5%. You mentioned several things here. We have new construction. You have sold a few assets with lower efficiency, and you have a 97.5% occupancy rate. As a reference, consensus is at 79.5% for 2024, and you have now reached the target. Could you help us out a little bit here on the back of potential new construction, vacancy risks, since you're running on all cylinders and potential assets that are still in the portfolio that have lower efficiency?
Thank you.
Yeah. That, where should I start? I can start with the portfolio and then efficiency. As you said, we have disposed somewhere where there was a low margin. Forsätet and Vanda was two great examples of that. We are looking into if there are some more to dispose and to acquire and to construct assets with very high margin. With that said, we can also see that we now are looking into some energy investments and where we can maybe go big in terms of solar panels. Maybe we need to have the set up, like we have to get the energy invoice first and then re-invoice. That could impact the margin going forward. It's too early to give some full analysis of that. Regarding the occupancy rate, 97.5%.
Yes, it's very strong. Of course, it's too early to see the impact in the whole society of the demand. I mean, it's people are suffering now because of high interest rates, and the Riksbank did another hike. Of course, there will be an impact. It's very good for us to have the giant players. They will sort out the turmoil going forward. Of course, there could be some vacancies. Some of our players, our customers, maybe will suffer during the year. We are confident with the situation, and we also see a demand for the big players to take more space. I cannot assume that there will be any dramatic changes in the metrics going forward this year.
Thank you. A quick follow-up there. The 80.5% you deliver here in Q1, do you feel that that is a good reference point, a good proxy of where you are currently?
Yeah, I think so. Also bear in mind, if there should be some major changes in the energy setup, that could impact. It's not to next quarter or to Q3 or so, but in the long run. We have to come back with more intel about that. Yes, 80 and above is a good measure.
Perfect. Thank you. Those were my questions.
Thank you, Marcus.
The next question comes from Örjan Rudén from Erik Penser Bank. Please go ahead.
Oh, hi. Hi. Good morning, everyone. Thank you for a great presentation. I think, yeah, the previous, Marcus touched a few of the questions I had, but could you just clarify when regarding the transactions market?
Yeah.
The 5% yield indication, is that for, like, the prime assets or, and prime locations, or it's just in general?
Yeah. Sort of. I mean, well, there you could always discuss what is prime or not, but, yeah, some new construction.
Newly built, over 10,000 square meters.
Yeah. Newly built, sort of the assets that we also produce and want to own, so to speak, with a signed lease agreement, with a good tenant.
Yeah
a low credit risk.
Mm.
I should say that around 5% today.
5%. Okay. Yeah, because yeah, Sorry, I'm just an old valuer that moved into the stock market now. This is quite, I would say, indicates a little bit more like 200 dips, increase from, like, a year ago, somehow. We saw like a 3.25% or something. Another question that I had is regarding the leases. Yeah, as we in the previous mentioned was regarding, yeah, the increase in construction costs. How does that impact the high inflation as well? How does that impact the newly signed leases? They reflect it in the leases, for example, this with Nowaste lease.
Yeah, I mean, we have done our calculation and of course, investigate with the contractors what would the cost be in a new project if we kick off in the next quarter. Of course, we have taken in mind in the calculation the actual construction costs.
We'll say in terms of market rents as well, have been impacted over?
They are higher today, of course, compared for a couple of years ago or just one year ago. I mean, the cost of debt is so much higher and the construction costs are higher, so that leads to higher rents. It's the same.
Yeah.
Yeah.
Have you seen that even, like, in renegotiations, of leases or?
Sorry, I didn't...
Have you seen that in terms of renegotiations of leases or?
Yeah, I mean, we are helped by the CPI-linked contract . By the first of January, the leases were up 11%. It's too early to say what would happen in the renegotiations during the year. All of the tenants, they get higher rents from the first of January. That we are helped by that in the discussions with new projects when they compare the rents.
Okay. Just a last question regarding the interest rates on the cost of financing for new projects. Could you just elaborate or just give a little bit a picture of where the interest rates level are in newly, if you're going to finance some new projects?
Yeah. Hi, Röd . Thank you for your question. That's a good question. I won't be able to give you details about a typical margin, but any depth from here on, I would say the best way for you to get a grip on where we are is just basically to look at market rates, and then add a margin, which is, you know, typically somewhere between 1.3 and 2%, I would say, depending on the duration. For a project, we are usually talking 1-2 years.
Yeah, exactly. That's what I was looking for. I have no further question. Thank you for taking my call.
Thank you.
Thank you.