Castellum AB (publ) (CAST) Earnings Call Transcript

Hello and welcome to the Castellum AB Q2 Reports 2020. [Operator Instructions] Today, I'm pleased to present CEO, Henrik Saxborn; and CFO, Ulrika Danielsson. Please begin your meeting.

Good morning, everyone, and this is Henrik. This has just been a quarter that no one of us has experienced before. It has meant a lot of work for us in the group, but I can proudly, today, say that we have shown that Castellum stands strong under these tough circumstances and have delivered. So I'm, today, sure that we will also deliver growth in 2020. But we will start this presentation with giving you overview on the report as well as the market. So next slide, please. The situation right now is that you know that we are active in 3 countries, 3 countries that have different regulations, laws and support from governments. Denmark and Finland that are, more or less, domestic opened now but hasn't opened the borders to 100% yet. Sweden that have taken another path and have all the time been more opened than the most of the countries. We can see that our customers are paying, and so far, not in the need, so much of need, that we was expecting from the beginning. So this, together with a fantastic job done by the team in Castellum and the shape of the portfolio, meant that we could perform well even under these special circumstances. And the short version of this report is simply this, that all rents are, more or less, collected. We have achieved 9% growth in cash flow, and the cash flow has been built up with a lot of work from income side but also through decreases in the cost side. And we, today, reached the goal of our cost savings programs to simply decrease cost by SEK 100 million during 3 years, and the last year has stand for 40% of that. We have also achieved 8% on NRV growth. And the net lettings have been strong with the effect from the last big contract with the government, but even cancel of that -- without that, the net leasing is better than last year in all lines. And even if there -- if the investment volume is not that impressive for the quarter, we have started new developments for approximately SEK 3 billion, and that's extremely important for the -- in the future. And all this together resulted in a decrease of the LTV down to 43%. And on top of this, we have been active; started new construction, as is mentioned, for [ SEK 3 billion ]. We are starting the buyback program and a climate neutral program to reach neutrality in 2030 as well as then started the construction of one of the largest solar cell projects in Europe. But with that said, I think we will go back to the report, please. So next slide, please.

And then the P&L, I will not go through every detail in this slide. But to summarize, the first 6 months can be summarized in an increase in income from property management with 9%, 10% is later quarter. And that is mainly due to renegotiations made earlier and CPI uplift, which has increased rental values, continued cost-efficient control and lower funding cost; the small unrealized change in property values on a portfolio level, mainly driven by project gains and better cash flow, and on top of that, a realized change in revenue due to transactions made earlier; and negative change in derivatives mainly due to lower market interest rates; and finally, a tax of roughly SEK 364 million, of which SEK 80 million is paid. And to finish finally, low impact so far due to COVID-19. But we're siding to the rental income and cost on the next slide, please. The like-for-like portfolio stands roughly 8% of the growth of the 9%, and the big contributor is, as I just mentioned, rental growth, cost control and lower funding cost. But looking into the rental growth, the average increase in like-for-like is 3.8% and consists of CPI of roughly 1.7%. And we made renegotiations with an average increase of 15%. However, high vacancies and incentives mitigate that growth with 0.8%, meaning a rental income growth of 3% net. And worth mentioning, looking into this number is that Castellum has given roughly SEK 14 million in incentives under the governmental rental support aid program. And of that, the government will compensate the landlords and Castellum with 50%, meaning that we have accounted SEK 7 million in incentive costs this second quarter. So if we adjust for that, the like-for-like growth is 3.2%. The expenses have also moved in the right direction. In like-for-like, it's down 2.8%. But we have to have in mind that the first half year, we have really high property taxes due to taxation last year. So if we adjust for that real cost development, in like-for-like, is lower cost with 7.5%. And finally, the funding cost, it is 10 basis points or lower in average, and that has contributed to SEK 70 million. A part of that is, however, mitigated by increased debt volume. So let us go to the next slide, please, and mention something about COVID-19 on Castellum. When we released the Q1 report, we had a knowledge of the payment pattern and its pattern for Q2 rents. At that point in time, 96% of the rents was paid as normal; 4% were outstanding that we had a -- discussions with regarding need of liquidity help. And the 4% had one thing in common. If I should simplify the picture, apart from any help of course, it is that they almost all can be found in the service sector, such as hotel, restaurants, traveling, pleasure, retail, et cetera. And the reason the numbers was not bigger is that our exposure is so little. So looking into the 4%, it is now down to 1%, meaning that we have got roughly 99% of the Q2 rents paid. And as we see now, the rent for Q3 will follow the same pattern and share of payments. But with that said, we are humble and would not be surprised if it gets worse in Sweden and the world for some time of businesses before it gets better. The liquidity help regular so far is mainly going from quarter to monthly payment. And today, we have helped roughly 230 tenants with quarterly rental value of SEK 110 million. And to give you a reflection, Castellum have a tenant base of 6,000 clients. Of that help, 1/3, you could say, is already back on a normal invoicing mode. And 2/3, we have said that we will help them going into Q3 and, in some cases, Q4. And on top of that, we had given the governmental rental aid program SEK 14 million, SEK 7 million net cost for Castellum. As you all know, COVID-19 hits everyone. It's more a question of how and the magnitude. The logistic warehouse is doing really, really well in the tenant base, among other things, due to increased e-commerce shopping. And public tenants have increased demand for new premises before COVID-19, and we experienced that, that is the same. Regarding offices, there are, at the moment, no big discussions. But we experienced that company's CEOs on board, to what you would say, are trying to understand what will be the new normal regarding offices. Less offices due to working from home, or more offices but small ones and on different locations. More office space needs -- own desk and spaces between desk is needed. Therefore, we can say that offices at the moment are on, you could say, hold. Retail and hotels have had tougher times, as everyone knows and fully understands. So our view is that the COVID-19 hits very differently. And depending on how long this will go on, of course, the impact can be broadened. And we will get back to that when we talk of property valuation. Back now to the market. Next slide, please.

Thank you. Then going into the rental market. And first of all, from a Castellum perspective, this net leasing we have on the half year and the quarter was very strong -- set very, very strong with SEK 200 million. But that was, of course, a result of leasing out to E.ON's headquarter in the first quarter and the government in the second quarter. It stands for approximately SEK 150 million. But even excluding that, we can conclude that this quarter has been better than the last years. So we have had a good activity and good result of that activity. So the net leasing from the existing portfolio, excluding all projects, was surplus. And we signed more contracts than the last Q2. We have no bankruptcies at all the last quarter, so simply strong. We expect to include even more government contracts in the short term basis, but we'll come back to that in the next reports. The next slide, please. And then if we look at the rental market, we can now see in the market that we expect to have activity increases in the office market. The market levels are still in the same levels that before the pandemic. And you -- as you've seen, the gross volume in the leasing are intact for us. In the office market, we're also benefiting now from the increasing of investments volume from the government side. The logistic market, as Ulrika mentioned, they are typically strong and stronger than historical, driven now by expansion into the market towards e-commerce. So the shopping is now moving into our logistic sector for real. So the rents are stable to growing and on the most attractive locations for the locations. But then you can ask yourselves, are the markets the same? Of course, not. In the short term, looking back for the last crisis, Stockholm CBD and Kista has been the only real volatile market. And towns like Orebro, it's the opposite, where it's actually hard in the aftermath to see the difference of the pricing in -- at the crisis. So my point is that our portfolio is a very good -- have a very good resistance in a market like this. And the next slide, please. And then going into something else. The first [indiscernible] in a crisis like this is a short-term contracts. And therefore, it's extremely important for us to see the development in our co-working company, United Spaces. This is also our test arena for new technical solutions. So far, we can conclude that approximately 12% of all members are using the spaces on a daily basis, and that we have approximately 85% of the total income still contracted. On top of that, of course, all meetings have been canceled, and then 15% is -- appears in the income overnight. Since we are certain that these types of business will be the first to benefit from the recovery in the market, we continue to invest. We invest right now in 4 new sites: in Uppsala, Helsingborg and expand in Stockholm and Gothenburg. And then back to the balance sheet, please, Ulrika.

On the next slide. The balance sheet of Castellum is strong. The LTV is 42.9%, while the net debt-to-EBITDA is down on 9.9. So this, together with a strong cash flow, makes the company a very good position. The valuation yield on portfolio level was unchanged on 5.1%. And the NAV depends on how do you calculation. When we came to look at the EPRA NRV, the long-term net asset value, and that was in the -- SEK 199 per share. But the balance sheet leads us into thoughts about the valuation, the property valuation that we can see in the next slide, please. The valuation of portfolio level means that we move the value in a positive way with SEK 299 million. The main part is project gains and better cash flow. But in our valuation, you do have a reflection of what was mentioned earlier, talking about our tenant base and how the COVID-19 had hit in a different way, meaning a very good situation for the logistic warehouse side and for office, if the tenant is a public tenant. And more traditional office is on hold in order to try to understand changed demand for premises and office location going forward. And finally, retail and hotel have been taken down in order to reflect its much tougher market. So that means that the asset class has been more polarized. And to give you a reflection on the retail part, on portfolio level, we have written that down 4%. But we have part of the retail that is doing very well also, of course, grocery, et cetera. So our single assets, you can see write-downs at between 10% to 20%. But on the other hand, warehouse logistics is really -- doing really, really well. But let us go into the property market, Henrik, on the next slide.

Thank you. And the volume of transactions in Sweden totaled to approximately SEK 78 billion last -- the half year. That means a decline of 9%. We feel like the market is waking up and could bring good investment opportunities for us. The yields have been stable in our markets, office and logistics. Example is that logistics deal is down on 4.5% and some transaction not closed but seems to end up in deals in line with -- before the crisis on the office side. And the interest from the foreign investors increased, and they stood for all the 35% of the deals in the Swedish market the last half year. If you look at our developments, we can take the next slide, please. As you see in this picture, we have a lot of midsized and/or large developments. These 15 developments represent SEK 5.8 billion in investment volume. The average then mean is almost SEK 400 million per project. And you can say in average yield on all this portfolio is normalized to 6.2%. And the pre-let volume of this is approximately, at this moment, 79%. So it's a low-risk and good return on equity. I'll make sure that we will find more interesting developments, but we will only invest if it's in a low-risk at this moment. And then looking at some pictures and some developments. We can take the next slide, please. These 3 are the 3 latest ones. Malmo, the court that we have described before that are under construction -- been under construction, and it's more or less fully let with the government on a 20-year lease. And that will start -- will be ended in the 2022. And the next one is Jonkoping. In Jonkoping, that's the new court that we will build and lease out to the government for 15 years. This is -- a lease agreement is now signed, and the construction will be signed in the latest in the August, and we'll start up with that. This construction will also be finished 2022. Then on the last one is in Orebro. This is the police department. We'll rent this for 12 years, and this building that will be the first carbon-neutral police house that we ever heard of, 100% leased out and will be finished in 2022. All the 3 projects stand for investment volume of SEK 2.9 billion and a rent volume of SEK 182 million. So then financing, please, Ulrika.

Yes. And of course, on the next slide, all those developments needed to be funded. And yes, Castellum stands strong, as Henrik said earlier, from many aspects, so also the funding situation. With many tools in the toolbox, many to talk to, a good liquidity buffered and confirmed credit opinion from Moody's this June on Baa2 with stable outlook, Castellum has a good situation in this more turbulent times. We experienced relative good access to funding within the Nordic banks and at the moment, relative stable margins. The bond market experienced falling margins or spreads during the most part of last year and in the beginning of this year. This trend was broken at the same time that the market realized the progress of COVID-19. During the second half of the first quarter, the credit spreads increased dramatically steep. And for Castellum, it indicated an increase of 2 to 4x pre-corona crisis for duration 2 to 7 years. But during the second quarter, the spread has, however, fallen down, even if they are far from pre-corona crisis. And worth mentioning is that the real estate sector is lagging a little bit compared to other industries regarding spreads falling down. And to give you a price reflection, Castellum would have paid roughly 100 basis points for 5-year money at the year-end. And today, maybe price on screen is around 200 basis points or just below. The safety market has also been hit by COVID-19 with increased spreads [ all in use ]. During a period of calmness, in March we have issued some volumes during the second quarter and has now SEK 2.7 million outstanding in volume compared to Q1, SEK 4.4 million. Also here, the spreads have increased. And at the moment, to give you a reflection, maybe we would pay 65 basis points, which can be compared to year-end prices at 35 basis points, but -- however, lower price than what the Riksbank is buying off. And let us go to the next slide, please. What have we done? We have done a lot. A lot of it was pre-corona, meaning early this year, we renegotiated some bank debt, terminated some, and at the same time, issued new Swedish bond for roughly SEK 1.5 billion in the domestic market. And during this first half year, SEK 2 billion in bonds has matured of, as I said, SEK 1.5 billion was refinanced and SEK 0.5 billion is refinanced with existing bank facilities. To summarize it all, Castellum has, at the moment roughly SEK 12 billion in unused credit facilities. And that will cover existing debt that mature this year and a good way into 2021, while we, at the same time, can meet the need from the business. And our duration the rest of the year consists of SEK 2.7 billion -- or what was matured, SEK 2.7 billion in CP and [ SEK 1.2 million ] in bonds in the autumn. And our ambitions, as we see it now, is to refinance that in the capital market if it so allows us to do. But of course, we can always use our credit facilities within the bank system, if needed. So on the next page, please.

And then to something totally different and extremely important, sustainability. Our objective is that we shall be one of the most sustainable property companies in Europe and a major player in the construction of sustainable societies. Castellum is targeted to achieve now 100% climate neutrality in our operations to 2030. Therefore, the Board has approved to implement 2 road maps, one for property management and one for the development to achieve this. And since the big polluter is the new developments, we decided to try to build the first carbon-free police house, as I told you earlier. And the objective is that this building shall have net zero carbon emission during its lifetime. And there will be more projects like this to come. Another example is our program to build 100 new solar cells panels on our roofs. We have started approximately -- we have started 14 new ones, and the largest one is 30,000 square meters with 8,500 panels that will produce approximately 3.3 gigawatt hour per year. So this is one of the biggest in Europe. So we will come back to this, and you will follow us on this objective we have during the years simply going forward. And the next slide, please. As we have stated, the pandemic is not gone. And the economic effect of the pandemic is not gone. It will continue and will affect us. But in our market, we have a strong position. The markets are in -- also in a good and stable at the moment, but it's divided. It's a divided market. You need, for example, to have capacity to invest. Our belief is that we will create opportunities for us. So we will -- I think we will see very interesting next coming months. We have already active office market that will develop, and we are rightly positioned for that. We will see a logistic market develop strongly, and we are also there. We have created a strong cash flow inside Castellum and a strong balance sheet that will give us opportunities. So simply, to summarize this, this is a strong first half year, will give us the opportunity to report in the Q4 for 2020 despite the pandemic that we will have an increase in income from property management. And with this, we will leave over for some questions. Thank you very much.

[Operator Instructions] Our first question comes from the line of Tobias Kaj of ABG.

Yes. I would like to start to ask some questions regarding your rental income, and you wrote that you gave SEK 14 million in discounts and expect to get SEK 7 million back from government support package. Have you included those SEK 7 million in your income for Q2?

Yes, they are taken as an incentive cost in Q2, totally.

Okay. And have you received all other income for Q2? Or do you have other outstanding receivables?

No. We have -- of what was invoiced for Q2, when we finally closed that one, 99% of all that was invoiced for us being cash on the banks.

Okay. And regarding your occupancy rate, it improved by 1.7% in the quarter, and it seems to be improving in most segment. However, the like-for-like growth for rental value is stronger than the like-for-like growth for rental income. Why is that?

We have changed -- I think we write that in the report. We had changed definition of the occupancy -- how we calculate the occupancy rate. So in Q1, we -- and the earlier report, we have had incentives treated as vacancy. So what you're seeing is just the vacancy part that deduct rental value. So the number for Q1 with the new definition would have been [ 93.8% ] on portfolio level.

Okay. And your reported rental income increased by 3.2% quarter-over-quarter. And that despite -- I mean, you don't have any really significant acquisitions in the first half of the year. So can you give some more information of the sequential increase in rental income? How much is related to developments, and what the rest related to?

Yes. As you see, the like-for-like growth is in this market good, and this is also adjusted for, you could say, the incentives, the government aid incentive that we have given. We have also this second quarter, and I think that is mentioned in the report on the total portfolio, extra, you could say, one single income that we will -- don't have going forward. And that is all summarized to SEK 20 million, this second quarter is [ slated ]. And it's a lot of small, you could say, insurance case that, to be honest, in Q2 suddenly were closed from the insurance company, every one, and money was received. So that one is extraordinary, you could say, second quarter.

Okay. And regarding -- you talked about your startup development in Q2. And I just want to ask if the rent contracts and the developments in Jonkoping and Orebro, are they included in the net letting for Q2?

Yes.