Cibus Nordic Real Estate AB (publ)

STO:CIBUS

Earnings Call Transcript

[Operator]

Welcome to Cibus Nordic Real Estate Q4 Report for 2022. [Operator Instructions] Now I will hand the conference over to CEO, Sverker Källgården; and CFO, Pia-Lena Olofsson. Please go ahead.

[Sverker Kallgarden, executive]

Thank you very much, and once again, welcome to the Cibus Nordic Q4 Interim Report. My name is Sverker Källgården, I'm the CEO of the company. And with me today with a bit of sore throat, Ms. Pia-Lena Olofsson, Chief Financial Officer. Pia-Lena will take us through the numbers later on in the presentation. So let's jump straight into the next slide about the significant events of the fourth quarter.

On October 7, we announced that we had acquired and then taken possession of a grocery and daily-goods property in Denmark. Then on the 10th of October, we announced that the Nomination Committee, in preparation for the next Annual General Meeting, have been appointed. On October 13, we announced that we had acquired another property in -- this time in Finland. And on November 21, we announced that we were considering issuing a senior unsecured bond and launching an offer to repurchase our outstanding euro bonds. On the 22nd of November, we announced that we had issued a senior unsecured bond of EUR 70 million under our MTN program. And on the 23rd of November, the results were announced of the offer to repurchase the Company's bonds. The Company had received priority repurchase order for a total of EUR 46.9 million.

And today, the Board of Directors' dividend proposal was announced, and the Board of Directors intend to propose to the 2023 Annual General Meeting a dividend of EUR 0.9 per share distributed over 12 payment occasions. I will try to give you some color on the Board's proposal regarding dividend to the Annual General Meeting. And as I said, the Board's proposal is to pay a dividend of EUR 0.9 per share divided into 12 payments.

The last 6 months, the 300 basis point rise in interest rates in the last 6 months, that has been extraordinary. We have interest caps that mitigate partly impacting the short to midterm. But the long effect -- the long-term effect on our debt of EUR 1.1 billion is about EUR 30 million per year. Therefore, to raise dividend by 5% from last AGM is unsustainable in this interest rate environment. We could have stretched just another year, but going forward, it's not sustainable over time. And by making this adjustment now and not when the interest rate hedges expire, we clarify the long-term dividend capacity. This is a level of dividend that is sustainable at current interest levels.

And it also affords Cibus to take advantage of value and cash flow contributing investments in our portfolio. And if the proposal is decided at the AGM, Cibus will also be better prepared when interesting business opportunities comes to market.

Cibus Nordic, we are a real estate company focused on daily-goods properties. 99% of our rents are linked to CPI development and over 90% of our leases are either net or triple net, which means that the tenants bear most of the costs for running the property.

Our insensitivity to the broader economic trends make operations more akin to infrastructure than retail. Our properties allow our tenants to provide groceries to the populations of the Nordic countries regardless economical situation. Therefore, Cibus' underlying business is noncyclical and almost countercyclical as it tends to -- the volumes of groceries tends to at the worst economical situation.

We are listed since March 2018, and on NASDAQ Stockholm MidCap since June 2021. We currently have a clear Nordic focus. We are present in the 4 Nordic countries of Finland, Sweden, Denmark and Norway. We pay out monthly dividends to our shareholders. Current 12-month period, we pay out EUR 0.99. And the Board's proposal for the coming 12 months is EUR 0.9.

The story about Cibus is the story about portfolio diversification. Traditionally, these kind of assets were owned as either the single assets or it's more portfolios of 2 to 5 assets, which meant you had a very high risk concentration. If the tenant left, you lost your cash flow. You came into a weak negotiation position with the tenants, the banks realized this, so the bankability was low, which meant you had a high risk, but also high return business.

What Cibus realized is that if you own more than 450 of these assets, you diversify the risk and lower the concentration. Only 1 of our assets stands for more than 1.5% of our NOI. You become an active cooperator with a tenant and not just the landlord. The banks realized this so the bankability is much higher, and it means you lower the risk, but you have the same return for single assets. And due to the risk factor, we can buy assets 50 to 100 basis points higher than the existing portfolio is trading at and produce value-creating growth for our shareholders.

Cibus also sets part because we see a resilience towards e-commerce. We see a negligeable negative effect. The share of online grocery sales are back to around 4% as they were before the pandemic. And a large share of that volume is click and collect from our stores. Looking worldwide, you can see and find very few operators making profit on online food sales. On the other hand, we see a notable positive effect as our existing stores work with a natural distribution network for other goods purchase online.

Sustainability at Cibus. We are driven by the conviction that we and our decisions about our real estate portfolio can contribute to responsible social development. We have the ambition to promote sustainable development for both tenants as a living community, and that this contributes to a good term -- long-term profit development for our shareholders.

Today, we have 43 of our properties with solar panels. We have also started installation of solar panels under our own management. The first facility under our own operation was completed in the fourth quarter of 2022. And we have set the goal to have 0 emissions by 2030.

Looking at growth 2022, we have acquired properties of EUR 342 million. That's a growth of 23% compared to Q4 '21. Finland, Sweden, Denmark and Norway are our main markets, but the other European markets are monitored. We have a mandate to issue up to 10% new shares. But due to the new market situation and the timing for the growth target that we have to reach a portfolio between EUR 2.5 billion to EUR 3 billion, that has been postponed until the markets are more stable.

Looking at the shareholders' list on the last day of December 2022, [ the fourth national AP Fund ] was the largest shareholder, owning 6.5% of the company; followed by AB Sagax, Länsförsäkringar Fonder, Vanguard, Marjan Dragicevic and BlackRock. In total, the 50 largest shareholders own 43% of the company, and Cibus had 43,000 shareholders.

Looking at the Cibus share price performance. The average daily volume in total is SEK 45 million and that -- of which SEK 23 million is purchased via NASDAQ. And we have around 2,300 transactions a day. We are affected by the stock market turbulence since the outbreak of the war in Ukraine as well as rising inflation in interest rates. And the share price on the last day of December was SEK 143.4.

Then over to Pia-Lena for the financial overview.

[Pia-Lena Olofsson, executive]

Thank you. Here are some key figures for the fourth quarter. Rental income was EUR 28.3 million. Net operating income grew 30% to EUR 26.5 million. Profit from property management was EUR 12.4 million. And earnings after tax, minus EUR 10.6 million or minus EUR 0.23 per share. The negative earnings was due to unrealized changes in property value of minus EUR 24.5 million during the quarter.

If we go into details, there are some items that are affecting comparability in the quarter. In the administration costs, we have a nonrecurring cost of EUR 414,000 regarding the final settlement, mainly in connection with the restructuring of the Finnish operations from 2020 and 2021. Net financial items, including a nonrecurring cost of EUR 840,000 for order redemption being in a part of the Eurobond that matures in September 2023. We also have an unrealized exchange rate loss of EUR 309,000 due to the weaker NOK and SEK compared to the euro.

Profit from property management, excluding the nonrecurring costs and exchange rate effects amounted to EUR 14 million. Unrealized changes in property value was EUR 24.5 million, negative. And this is the increased yield requirements of about 20 basis points in the property portfolio. The effect was dampened somewhat by increased rent levels due to indexation.

Our current earnings capacity on a 12-month basis, now shows earnings capacity from the 1st of January this year. So indexation is included. Net operating income is EUR 110.7 million. Indexation and acquisitions have increased the rents. The net financial expenses have increased mainly due to the increased reference rates, but also due to higher margins on the new EUR 70 million bond. The higher Euribor has also increased the cost for the hybrid bond. Profits from property management plus expenses for the hybrid bond was EUR 56.1 million or EUR 1.16 per share, which is a decrease of 7% compared to 12 months ago.

From the graph below, you see the net operating income in a comparable portfolio. If you compare the portfolio, 31st of December 2021, you will include indexation of both the 1st of January 2022 and 1st of January 2023. We, therefore, compared to the 1st of January 2022. You can then see that the effect of indexation and other increases amounted to 8.5% on an annual basis.

We had 454 properties at the end of the fourth quarter with a property value of EUR 1.851 billion. Properties with grocery and daily-goods tenants contribute with 97% of our net operating income.

In those segments is countries. Finland is our largest market with 68% of the net operating income in the fourth quarter; Denmark, 15%; Sweden, 13%; and Norway, 4%. Total property value in the countries contributed with the same percentage as NOI.

Cibus strategy is to give its shareholders strong dividend on a monthly basis. The Board intends to propose to the Annual General Meeting a dividend to a total of EUR 0.90 per share divided into 12 payments. The dividend yield on the -- post dividend compared to yesterday's closing share price of SEK 136.95, it's 7.25%.

Looking at the balance sheet. Property value was EUR 1.851 billion. Secured debt, EUR 880 million, giving a loan-to-value of secured debt of 47.6%. Unsecured bonds amounted to EUR 259 million, giving a net loan-to-value of 59.1%, which is within our finance policy target of 55% to 65% LTV. Our net asset value EPRA NRV was EUR 710 million or EUR 14.7 per share. Our average remaining lease time was 5 years at the end of the fourth quarter. It continues to be very stable around 5 years, as you can see from the graph below.

Regarding funding, 75% of our external funding is bank loans. We have a floating interest margin of 1.6% and an average loan maturity of 3 years. The last bank loan is a loan that what we financed during the quarter. So now only a bank overdraft and amortization matures until 2025 regarding bank financing. 22% of external funding is unsecured bonds. Of the bond that matures in September 2023, EUR 76.3 million remained at the end of the fourth quarter. After the period, additional bonds of EUR 14.5 million have been repurchased, so EUR 61.8 million remain to be refinanced. We also have a hybrid bond of EUR 30 million with the first call date in September 2026.

[ Fund dividend ] of our bank loans are hedged with interest rate caps or have fixed interest rates at the end of the fourth quarter. After the end of the period, additional interest rate hedges of EUR 245 million have been made by using interest rate swaps at a level of Euribor 3 months at 2.94% to 2.97%, which starts from the third quarter 2023. Based on the earnings capacity, taking the caps in the fixed rates that were in place at the end of the fourth quarter into account, an increase of the interest rate of 1% would affect profit to minus EUR 6.9 million on an annual basis; an increase of 2% would affect profit with minus EUR 13.4 million. Over to you, Sverker.

[Sverker Kallgarden, executive]

Yes. Thank you, Pia-Lena. The future, what are our focus is at the moment? Well, of course, refinancing of the outstanding Eurobond that matures in September '23 is our primary target. But when the bond is refinanced, we can look more closely on acquisitions again. And we look forward to have continued growth in the Nordics, but are also monitoring new geographies.

We have also identified several ESG projects in our portfolio that are profitable and will take us towards our goal of being carbon dioxide neutral by 2030. And the primary reasons to invest in the Cibus share, we produce a high and stable yield for our shareholders. There is a potential for favorable value growth at 99% of our rents are CPI-linked, which give noticeable growth in our NOI even without acquisitions. We have gradually rising monthly dividends. And we are in a segment with a long-term resilience and stability. The grocery and daily-goods sector has experienced stable noncyclical growth over time. Historically, the grocery segment has grown by approximately 3% annually. It also shows strong resilient to the growing e-commerce trend.

Okay. So thank you very much, and we are now open for questions.

[Operator]

[Operator Instructions] The next question comes from Svante Krokfors from Nordea.

[Svante Krokfors, analyst]

Svante From Nordea. I hope you can hear me.

[Sverker Kallgarden, executive]

Svante, we can hear you perfectly.

[Svante Krokfors, analyst]

A couple of questions, if I may. First, regarding the dividend cut. I think good to be proactive here unlike some other companies who have reported today. How should we look now at the EUR 0.90 and relate that to your earnings capacity going forward? So I guess, given the current interest rate environment, if interest rates stay at these levels, it implies that your EPS should, in that circumstance, clearly exceed the EUR 0.90 dividend?

[Sverker Kallgarden, executive]

Yes. This is -- we have been calculating on this, and this is a sustainable level going forward on the current interest rate levels.

[Svante Krokfors, analyst]

And then perhaps on your valuation changes in Q4, [ minus EUR 24.5 million ]. It's a bit more than 1% of your asset base. You said it was around 20 basis point increase. Can you elaborate a bit on what external evaluators have used there because some companies, especially in Finland, have, in the lack of reference deals, they have -- the external evaluators have made kind of a gut feeling valuation also, how can you elaborate a bit on that?

[Sverker Kallgarden, executive]

Yes. As we've said, we externally evaluate all of our properties each quarter. And we are conservative. So we do not speculate in valuations. We tend to follow the valuators' values on our properties if we haven't got a totally different if you want it for sure. But if that is the case, we always do that in -- together with the Board of Directors, and it's always a lower valuation from the company than the valuators.

So we are conservative when it comes to valuation. And we like to be on the sales side as well. So we do not want to sit here in the first and second and third quarter when the valuators finally see that there are deals in the market, and I wouldn't say panic, but really, the valuations. So we have had discussions with the valuators.

And yes, there are gut feelings. There have been some acquisitions in the market, in the 4 Nordic countries. But when there is lack of -- when there are lack of deals in the market, it goes to the gut feeling and hopefully, they're safer thus far. So -- and we try to stay on the positive or on the stable side as well, as we said. So we are conservative, and we follow the external valuators' values.

[Svante Krokfors, analyst]

And there seems to be objects available in the market. I think you took a slight one-off cost from terminating possible acquisition. So what kind of activity do you see in the market now?

[Sverker Kallgarden, executive]

We are looking. Now there are signs that there will be properties and portfolios in the market. It's not a huge activity at the moment as many of the companies are looking at refinancing the debt. But there will probably -- and there will probably be deals in the market going forward over the year, and we want to be prepared for that as well. So if this proposal goes into the decision at the AGM, we will be better prepared when interesting business opportunities comes to the market.

[Svante Krokfors, analyst]

But did I understand correctly that before the refinancing of the EUR 61.8 million bond that you have left, you will probably not do anything?

[Sverker Kallgarden, executive]

Probably, yes.

[Svante Krokfors, analyst]

Then on earnings capacity, could you go a bit through now, just to make it clear, how much CPI indexation is in the earnings capacity? It's everything that has been materialized by year-end, but there are different ways between countries, how the CPI indexation hit. So could you elaborate a bit on that?

[Pia-Lena Olofsson, executive]

Yes, I can do that. Finland and Denmark, the indexation is when the contract was signed. So usually about 50% of the agreements do have increased the 1st of January. But the other part is quite evenly distributed between the rest of the 3 quarters.

Sweden and Norway, on the other hand, have to increase the 1st of January, all the contracts. And as you can see on a yearly basis, the increased use indexation is 8.5%.

[Svante Krokfors, analyst]

The EUR 65 million maturing in the coming 22 months. Obviously, the '23 bond is a big one, but what can -- what are your thoughts about that bank financing availability and also the share of secured loans, how much can you increase that?

[Pia-Lena Olofsson, executive]

I mean, we are having discussions regarding to refine our staff, and we hope to be able to resolve that in due course.

[Operator]

[Operator Instructions] There are no more questions at this time. So I hand the conference back to the speakers for any closing comments.

[Sverker Kallgarden, executive]

There are 2 questions online. "Why a proposal to reduce dividend more than forecast about earning capacity in 2023?"

Well, I hope I have answered that question as the Board -- we saw that -- this isn't a sustainable level over time. So -- and being on the conservative side, the Board of Directors saw that, to raise the dividend by 5% for the last AGM, that was unsustainable in this interest rate environment. And by making this adjustment now and not when the interest rate hedges expire, we can -- we clarify the long-term dividend capacity. And as [indiscernible] said, this is a sustainable level and at the current interest levels over time. So that was why we -- the Board of Directors have made this proposal to the AGM.

Next question is, "Do you plan to continue to be a net acquirer during 2023 and 2024? Any plans of selling some properties in order to strengthen your balance sheet?"

Well, we do not rule anything out. We like our properties. But if we have interesting enough proposals for our properties, or we see properties that are not 100% with our strategy, we might consider to sell these kind of properties. But otherwise, we will be a net buyer in 2023 and 2024 if the markets stabilize.

The problem now in all markets is that it's very hard to calculate what the interest rates are going to be in 3 or 6 or 12 months. But when that stabilizes, the markets will come back to normal again. Probably on a different level than before, but they will come back.

"You say the newly cut dividend is sustainable according to current rents. Is this taken any height for increased rents in the year of future or just today's rents?"

Well, we have made our calculations and we have made a sensitivity analysis as well, and we should be able to -- if the current -- if the interest rates are on the current levels, we will be able to keep this dividend going forward, yes.

And that was all the questions we had online as well. So we thank you for listening and look forward to talk to you again when we disclose the results from the first quarter later on this year. Thank you.

[Pia-Lena Olofsson, executive]

Thank you.