Description

Catella is a Swedish real estate advisory, management and investment firm. The stock is down with the Swedish property sector, but Catella is not a Swedish property owner. They have multiple income streams from asset management, corporate advisory etc. and own properties throughout Europe. When you do a SOTP, the share is worth SEK 75 per share, or 100% upside. The market is missing this because Catella is small and illiquid, no research coverage other than ABG (sponsored research) and Catella is being lost in the negative news flow from big Swedish real estate companies like SBB

Description

Catella operates through three divisions: a) Corporate Finance, b) Investment Management (most important segment), and c) Principal Investments.

Corporate Finance

• Corporate Finance is the advisory business. Catella advises small and mid-sized real estate companies on sourcing deals, dd on projects, IPO of property businesses etc. This business has multiple offices throughout Europe
• In the Nordics, competitors in the SMID segment include ABG, SEB, Nordea etc., and regional boutiques  
• Catella’s unique selling point is that they only focus on real estate, as opposed to the other advisory businesses which do all industry verticals
• The segment is relatively stable and does SEK 50-60m p.a. of normalized operating profit
• Although transaction volumes will likely go down, Catella can now advise property companies on balance sheet optimization etc.

Investment Management

• Property investment management with SEK 142bn of AuM. AuM has been growing by a 27% CAGR from 2015 to Q3 2022 (see Q3 presentation)
• Property funds is 76% of AuM. Clients include pension funds in Germany and institutional investors in UK, the Netherlands and Denmark. Investments are c. 70% resi properties and offices, 13% retail, 10% student housing, 5% logistics
• Property asset management is 24% of AuM. In this segment, Catella can invest in projects earlier. They could team up with KKR or other property asset managers who would pay ongoing fees to Catella
• Revenue streams derived through monitoring fees, acquisition fees, divestment fees, and performance fees above a hurdle
• Fixed fees on AuM are stable around 60bps; variable fees fluctuate between 25-45bps of AuM
• The segment does c. 400m of EBIT, which should be growing over time with AuM.

Principal Investments

• Partnering with other real estate firms to invest in real estate projects. Catella is not the builder but will manage the real estate development process
• Currently, they own 11 different projects, after selling 5 properties at 50%+ IRRs – obviously we shouldn’t assume 50% IRR going forward
• Catella’s largest project is the “Kaktus”, a residential building in Denmark. The Kaktus is nearing completion, and Catella has invested SEK 423m so far. When comparing the property to comps, the Kaktus could generate a profit for Catella of SEK 400m+
• Total equity investments for this segment is SEK 1.3bn. When going through each project, the value of the real estate could be anywhere from SEK 1.3bn to 3bn

Valuation

I think valuation is best looked at through a SOTP:

• Corporate finance does 50-60m of EBIT. If we use a multiple of 6x to take into account potential volatile earnings from a recession, we get SEK 330m
• Investment management generates c. SEK 400m of EBIT, and if using a multiple of 11x (significant discount to comp multiples given smaller, less well-known business), you get to SEK 4.4bn value. There could be significant upside to this number since AuM has been growing by 27% since 2015
• Principal investments is worth c. 2bn. Investments are 1.3bn, and we can relatively quickly get to 2bn when going through project by project
• Total EV of SEK 6.7bn. Catella has net cash, so equity value is close to 6.7bn. That equates to a value per share of SEK 75.

Risks 

• Corporate Finance could have a couple of bad years given the current environment. Also, the business does depend on key individuals/rain makers to deliver deals
• For Investment Management, Catella does need to continue to do well in terms of returns. However, even if they do not, they do have a lock up, so investors can’t just pull their money from one day to the next
• Value for properties owned in Principal Investments could be lower, although unlikely to be lower than the 1.3bn that has been invested

Catalyst

Completion and sale of principal investment properties 

Continued momentum on AuM and earnings