Catena AB (publ)

Hi everyone and welcome to this conference call for Q1 2023.

We start off by giving a short summary of the first quarter followed by a short overview of our business. We will then proceed to the business. where we will touch upon our current growth initiative. Sophia and David will then walk through the numbers in the financial update, and we will then open up for the Q&A. Starting off with the summary of the first quarter, we continue to report rental income growth driven by acquisitions, projects, and stronger likes. numbers driven by our CPI-linked contracts. We also report a very strong rating 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 yen shopping of 379 million SEK 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 to proceed rates in November. On a similar theme as we saw in Q4,

2022, we're going through a trying macro environment with decreasing consumer confidence impacting the majority of the segments. Adding to the market situation in the banking terminal, which started in the US with Silicon Valley Bank and recently the takeover of Credit CIS by UBS. While this event, of course, raises risk levels among the sector, we are not currently seeing an effect on the Swedish banking system, who 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 Telekom which tracks small packages volume in sweden registered an increase in the number of small packages by seven percent in 2020 this is selling for While the number of small packages are increasing, the sales adjusted for inflation is down. This environment puts stress on 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. Broader 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 of proportion for private assets driven by changing personal dynamics and the increased the 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, reassuring our industrial capacity, we will maintain a strong demand for our capacity. Next slide, please. During the quarter, we added one property in Gothenburg, one in Stockholm, and a third property in Denmark, which brings the portfolio a total of 128 properties.

contracted annual rent of 1.8 billion SEK.

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. And furthermore, the top 10 customers now stands 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 a total of 500 million SEK 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 group. rate 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 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 the future. Next slide. Regarding our current project, nothing material to report besides that we are progressing well across all As mentioned in the 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 raising Q4, we see potential for new attractive projects going forward. facilities in great locations. In line with that statement, I'm very happy to announce our latest project made official after the quarter ending.

No Waste Logistics has signed a nine-year lease agreement of 13,000 square meters and they also have an option regarding the other 20,000 square meters. Our partnership with the fast-growing 3PL player streaks back many years and is a clear illustration of 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 progress in a couple of our processes. although we have to wait for some decisions to gain legal force. So 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%. That said, I would like to hand over to Sophie for the sustainability and financial updates. And thank you, Jørgen, and hi, everyone. Taking a look at our sustainability. We continue to work with our certifications of our property portfolio. Ending this of our last area certified, which is the percentage from the increase since last year. And we will continue during 2023. During this course, we were ranked as one of the best workplaces in Sweden. By the organization Great Place to Work, we were proud of our employement, maintaining a high motivation among our colleagues, co-workers is the top priority and necessity in order to reach our ambitious target. And we'll go on further to slide 16 for some financial updates and further on. Our income for the period was driven primarily by our main acquisitions and indexation. An indexation which is preparing the negative side effects the high inflation. Rental income for the period amounted to $446 million compared to $377 million during Q1 2022.

Higher rental income increases our net operating surplus with 22% to 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 properties. Profit from property management rose 22% to 278 million compared to 227 million Q1 last year. Higher financial income, acquisitions, and new development have had a positive effect here. Next slide, please. The rental development compared to Q1 2022 has been positively impacted by our CFI-linked contracts that came to effect

The main contributors were the completion of the first small facility at Boone, and the Norway facility at Plantehuset, both in Helsingborg. of the increase came from the acquisition of the acquisition of the two DKISS in Denmark. made a negative contribution where the largest of estimates was Rwanda, which together totaled 40 million of lost rental income during the quarter. Thank you, Sophie, and good morning, everyone. On the 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 would market values in a trend, this should also inspire two interesting pockets of opportunity. It is true that secular trends is speaking in favor of our business and forms a big part of our success. It's also important to point We have shown strategically from last year with capital injections we took measures early on to stay ahead of market conditions. As a long-term committed real estate company with a proven track record on developments, strong operations, trading cash flow, and longer leases, we are in an ideal position

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 first quarter, we have successfully refinanced over $1 billion of debt. Almost half of that was related to secured bonds, to secure bank lending from satisfying terms. Our debt maturity structure implies we have about 3 billion of refinancing in the upcoming 12 months. where we have ongoing discussions with several funding partners regarding the entire volume. Most of that data is related to secured bank loans, and a smaller part is related to secured bonds. Not until May 2025, we have unsecured loans that mature. We have more than enough liquidity to cover for 12 months of loan maturities. 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 from high interest rates going forward. Our derivatives portfolio and fixed interest loans combined have an average term of almost five years. If the market trend were to increase from here with another percentage points, profits would be impacted by 36 million dollars being equal. That should be interest-based. 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, Sophie.

Thank you, David. I'm looking at our capital deployment during the period. The acquisitions are related to the two ICA assets and the Danish property with DKI as tenants and also the land at Stiga Borg in Jönköping, where we now announced the new development to Norway. It was a total investment of one billion. Divestment of one small property in Boreås came to nine million. And developers Capex ended at 393 million. And these investments are mainly related to our large project with .

And . We registered a write-down of $710 million in the first quarter, and it was scripted by a high rate required. The average weighted valuation yield for the portfolio is 5%. compared to 5.4% at the end of last year. The premise initially came to 5.2%. Thank you, Sophie. Now we are at the takeaways from today and we can be summed up into the 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 by our strong cash flows and low loan-to-value which gives us significant headroom to act upon our growth ahead. And 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. If you wish to ask a question, please dial star 5 on your telephone keypad. To enter the queue, if you wish to withdraw your question, please dial star 5 again on your telephone keypad. telephone keypad.

The next question comes from Marcus Henriksen 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 there are active?

guess including you and have you seen any transaction that is representative of your portfolio recently 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

and it's the giant fonts from abroad like BlackRock, Verdeon and those kind of players that we are competing with and it's tough for us to compete in terms of the muscles, but we can act fast sometimes, like in the ICA case. And I would say the market yield it's it's hovering around five percent a bit under in some cases i have heard but give or take five percent Thank you. Thank you for that. And then you've been very clear on that the future loan cost will be 6.5%. That's what we see now in the announced waste project. 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 ramps being stronger than expected or what would be the kind of moving target here and are you closer to a seven than a based on construction costs 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 costs, we assume that they will be trending down from now on. We have seen some signals, but are waiting for more signals. But we also see that there is a lot of contractors that they are very keen to get new jobs, so to speak. So I think that we are in a good position in the negotiations with the contractors.

Thank you. Then last question, I think, for if we go back a few years in time, Katina used to mention a long-term NOI margin target of around 80%. It used to be then around 74%. So 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 but as the reference consensus is that 79.5% for 2024 and you You have now reached the target. Could you help us out a little bit here on the back of potential new construction vacancy risks as you're running on all cylinders and potential assets that are still in the portfolio that have lower efficiency. Thank you. I can start with the portfolio and then efficiency and as you said we have this we are looking into if there are some more tools to dispose and to acquire and to construct assets with very high margin but with that said we can also see that we are now looking into some energy maybe we need to have the the setup like we have to get the energy invoice first and then re-invoice that could impact the margin going forward but it's too early to give some full analysis of that and 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, people are suffering now because of high interest rates and the Riksbank did another hike. So 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. But of course, there could be some vacancies. Some of our players, our customers, Maybe we will suffer during the year, but we are confident with the situation and we also see a demand for the big players to take more space. So I cannot assume that there will be any dramatic changes in the metrics going forward this year.

Thank you. And a quick follow-up there. The 8.5% deliver here in Q1. Do you feel that that is a good reference point, a good proxy of where you are currently? Yeah. So, but also bear in mind, if there should be some major changes in the energy setup, that could impact, but it's not to the next quarter. or it took you three or so but in the long run but then we have to come back with more about that so yes 80 and above is a good measure Perfect. Thank you. The next question comes from Rod Meche from Eric Penza Bank. Please go ahead. Hi. Good morning, everyone. Thank you for a great presentation. I think Marcus touched a few of the questions I had. Just to clarify, regarding the transactions in the market, the 5% yield indication Is that for like the prime assets and prime locations or just in general? I mean, you could always discuss what is prime or not.

but yeah new construction newly built over 10,000 square meters sort of the assets that we also produce and want to own so to speak with a signed lease agreement with a good tenant with a low credit risk I should say that around 5% today.

5%. Okay. Yeah. Because, yeah, I, sorry, I'm just in all the value that moved into the stock market now, but this is a quite, I would say indicates a little bit more like 200 dips increase from like a year, a year ago.

So now I would be sort of like a 3.25 or something. Um, Another question that I had is regarding the leases. Yeah, as you previously mentioned, was regarding the increase in construction costs and how does that impact the high inflation as well? How does that impact the newly signed leases with flex? Yeah, I mean we have done our calculation and of course investigate with the contractors what will cost be in a new project if we kick off in the next quarter and so of course we have taken in mind in in the calculation, the actual cost. We'll say in terms of market as well. been impacted yeah they are they are higher today of course compared for a couple of years ago or just one year ago i mean the cost of of their is so much higher and the construction costs are higher. That leads to higher rents. It's the same. Yeah. Sorry, I didn't... Yeah, I mean... We are helped by the CPI-linked contracts.

By the 1st of January, the leases were up 11%. It's too early to say what will happen in the renegotiations during the year. All of the tenants get higher rents from the 1st of January. We are helped by that in the discussions with new projects when they compared the rents.

Just the last question regarding the interest rates on the cost of financing. a new project, 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 new projects?

Yeah. Hi, Rob. Thank you for your question. That's a good question. I won't be able to give you the details about the typical margin, but any depth from here on, I would say the best way for you to get of where we are is just basically to look at market rates and then add a margin which is typically somewhere between one point three and two percent, I would say, depending on the duration for the project. We are usually talking one to two years. Yeah. I have no further questions. Thank you. Thank you. As a reminder, if you wish to ask a question, please dial star 5 on your telephone keyboard. So I hand the conference back to the speakers for any closing comments. Okay. Thank you all listeners. And by that, I want to wish you all