Castellum AB (publ) (CAST) Earnings Call Transcript

Welcome to Castellum's webcast and presentation of the half year report. Joacim Sjöberg, CEO; and Jens Andersson, CFO, will present the results. There will be a Q&A session in the end of this webcast. [Operator Instructions] So let's start. Please go ahead, Joacim.

Good morning, and thanks, everyone, for being here on this beautiful summer morning. We are here to share our half year report. And I'm joined today by, as always, Jens Andersson, our CFO. But if we start with the first slide, we see overall stable results. I'm very proud of the organization. Our strengthening of the balance sheet during last year with the rights issue and divestments of properties and amortization of debt is, of course, the main driver behind the income being up only 1.3%, where the income from property management is up 16.3%. But we will look into these figures in more detail later in the presentation. Our net leasing for the period is positive, not much [indiscernible], and we see that as a huge strength. We have continued to sell nonstrategic properties. The proceeds from these will be used for new investments. We will come back also to this, but I want to highlight that this should be seen as streamlining of the portfolio rather than continued strengthening of the balance sheet. Castellum is a -- one of the largest listed real estate companies in the Nordics. We are fully integrated with local hands-on presence where our assets are located. The portfolio is located in attractive regions across the Nordics, and we're exposed to the robust market in Norway via our associated company, Entra. You can see the location of our properties on this map. As of the 30th of June, it sums to SEK 156 billion, including our share in Entra. And of this SEK 156 billion, over 75% is located in the Nordic metropolitan areas, meaning, urban areas with at least 1 million people, and the remaining is in growing regional cities in Sweden. We have a contract value currently of approximately SEK 9.6 billion. The operational focus is to retain existing tenants and lease vacant spaces. That's the most important thing, and that's our top, top, top priority. We have more active dialogues on new business than in a long time, but these things take time and they always remain uncertain until the ink is on the paper. We continue to have focus on reducing costs where possible. That means that we have implemented a procurement organization, we have business processes under review and we are streamlining our central administration. We also have eyes open for new investments. So far, we've been investing in existing portfolio because that's been outperforming new acquisitions. We will keep divesting from our portfolio, but that's for the purpose of trimming it, and we have a very attractive project portfolio of more than SEK 40 billion. That's in new logistics and in refurbishments of existing buildings. Turning to the most important thing, our tenants, they represent the cross-section of Nordic business and authorities, and the exposure to individual tenants is very low. Our 10 largest tenants represent some 14% of our total contract value with no tenant generating more than 2.4%. The strong tenant base with many of our larger tenants being publicly funded is also a strength. 25% of our total contract value stems from public sector tenants and the largest one being The Swedish Police Authority. As at last of June, the remaining average length of our contract was 3.7 years. Jens will cover these figures in more detail, but from a helicopter point of view, total income increases, divestments affect income negatively. We have reduced property costs. We have admin costs also being reduced. And we have a lower debt volume, thus lower interest costs. Summing this up, we report income from property management up 16.3% from last year, and Jens will walk you through this on the following slide. So over to you, Jens.

Thank you, Joacim, and good morning, everyone. Total income increased by SEK 64 million. One isolated explanation of the increase is the expected insurance compensation in Finland relating to a significant water leak. Excluding this one-off, the income is in line with previous year. Divestments has reduced income by SEK 188 million, while completed projects contributed positively with SEK 44 million. Direct property costs decreased SEK 105 million, equivalent to 8%, mainly driven by lower electricity costs compared to the same period last year. Lease and property administration, together with central administration, decreased by SEK 73 million, of which SEK 63 million is explained by one-off effect recorded in the second quarter last year. Remaining part of the cost saving of SEK 10 million is explained by a reduction of full-time employees and a strategic decision to discontinue Castellum's innovation company. The loan volume is significantly lower due to divestments and the concluded rights issue last year. As a result, our interest expense are also lower compared with last year. Looking at development of operating income and excluding the insurance compensation in Finland, the like-for-like portfolio income increased by SEK 112 million, equivalent to 2.6%. The change in the like-for-like portfolio is mainly driven by indexation amounting to SEK 202 million or 5.3%, though partially offset by higher vacancies of SEK 184 million. For the like-for-like portfolio, the direct property cost decreased by SEK 54 million, equivalent to minus 4.7%, of which electricity costs decreased by SEK 113 million due to unusually high electricity costs in the first quarter of last year. In extent, no further positive effect to be expected. Excluding one-off effect of electricity costs, like-for-like increased by 7%, equivalent to SEK 59 million. This is primarily explained by more frequent snow removal and extra heating due to a colder and snowier winter compared to previous year. Looking at renegotiations. Renegotiations corresponding to annual rent of SEK 229 million were concluded during the period with an average positive change in rent of 1% compared with minus 1% in the first quarter. Additionally, contracts with an annual rent of SEK 702 million were extended with no changes in terms, equivalent to 60% of all contracts coming up for negotiation during the period, which we see as a positive sign, indicating that most of our tenants are comfortable continuing paying the rent also after 2 years of strong CPI indexation. Net leasing, positive, plus SEK 6 million, as Joacim mentioned earlier. Bankruptcies significantly lower compared to the same period last year. Tenant quality has also been very stable, and outstanding receivables are low and decreasing compared to the same period last year. Looking at rental income and net leasing. When we look at net leasing over a longer period, it continues to be volatile on a quarterly basis. Income, on the other hand, is much more stable and increasing over time, however, affected negatively over the last few years by divestments. What is also clear is that we have been holding back on new projects since 2022, hence, net leasing mainly derives from existing properties rather than new projects, which has been a strong driver of net leasing in the past. Joacim will tell you more about our expectations to start more projects going forward later in the presentation. Looking at property values. During the period, Castellum has written down property values with approximately SEK 1.6 billion, equivalent to minus 1.1%. Since the peak 2022, bandwidth closed to SEK 23 billion. The value change during the period is mainly driven by negative cash flow as a result of more cautious view on vacancies and future rent levels, perhaps too cautious but remains to be seen. Valuation yield is in line with year-end, however, almost 46 bps upward shift since the same period last year, currently at 5.62%, and seems to have stabilized. Approximately 14% of the property value has been externally valued during the second quarter by Cushman & Wakefield, confirming internal values and our valuation process. Property sales communicated during the period of approximately SEK 1.5 billion further confirm our book values. Jumping to financial highlights. Loan to value is still on a historically low level of 37.5%, in line with year-end '23, despite the continued slight downward pressure on property values during the year. ICR currently at 3.3. Expiring interest rate derivative [ in the quarter ] will increase financial costs, resulting in a downward pressure on ICR. Rate cuts, however, is expected to have a mitigating effect, keeping ICR on a comfortable level around 3. Average interest currently at 3%, unchanged during the year. Please note that average interest refers to a point in time at the end of the quarter, not an average interest cost for the second quarter. The increase in financial net quarter-on-quarter is partially explained by one-off effects relating to financing of loans, SEK 40 million, and expiring interest rate swaps at the end of the first quarter, plus SEK 15 million per quarter. Rating is stable, and we feel that we have reasonable headroom to move this requirement. Looking at debt maturity structure. We have issued SEK 0.5 billion bonds during the quarter, SEK 3.5 billion during the period. Our domestic bond curve has tightened by 80 bps since the beginning of the year. Indication for [ CFCS ] benchmark is around 155 bps on 5 years and 175 bps on a similar Eurobond. Euro market is still wider, as you understand, however, now open for good Nordic real estate names. Correct timing for reentering Eurobond market is continuously being evaluated. We also see continued good interest from Nordic banks and have refinanced term loans and revolving credit facilities with a total loan volume close to SEK 14 billion during the quarter, terms in line with previous agreements and with spread significantly lower than the peak in '23. Almost SEK 28 billion also in cash and unutilized credit facilities available at the end of the quarter. We will gradually reduce the revolving credit facility volume if access to the Eurobond market remains open. The market for commercial papers is also back on favorable terms for us, which is good. All in all, a very good financial position for Castellum. Over to you, Joacim.

Thank you, Jens. I'd like to draw your attention to our largest ongoing projects. And that list, of course, is significantly shorter now than it was a couple of years ago. But we still have 7 larger ongoing projects, that is projects that individually has a larger volume than SEK 50 million, 5-0. These are a mix of 3 -- our 3 main categories: that's office, public sector and logistics. It's also a mix of metropolitan areas and regional cities. Average occupancy rate in these projects is 91% and a rental value of SEK 156 million with an average lease duration of approximately 6 years. All of these will be completed in 2025. Just a few words on the 2 projects on the picture. Tullen 8 in Örebro is a public sector property, a building now being completely refurbished and renovated. It's fully rented. Gladan 6 in Stockholm is the only of our ongoing projects of some size that is not 100% rented. The reason for that is that it's a multi-tenant project with rather small floor space where client demand always comes closer to completion. We feel that we have a very strong local market for such a product. The overall product pipeline, as mentioned, is an investment volume of some SEK 40 billion. This is a new slide that we have introduced in order for us to be able to explain how investments and transactions affect our balance sheet going forward. We've invested some SEK 1.5 billion, of which SEK 1 billion is in projects, including new constructions as well as extensions and reconstructions. The SEK 1 billion in project investments are split in approximately half on larger projects and half on CapEx and TIs. We will continue to sell nonstrategic properties. But as mentioned, that is not for the purpose of strengthening the balance sheet, which we think is in good shape, but rather to optimize our portfolio and to streamline our property management and resources for further investments. The assets sold over the period of SEK 1.6 billion include the portfolio of 10 properties sold for SEK 934 million, including some solitary properties and/or retail that are not a priority for us. There was also a car dealership that we sold to the tenant for SEK 347 million, which we are very happy for. These proceeds, as mentioned, will be used for new investments. We frequently get the question, when we are done selling? The answer is that we will most likely never be done selling or trimming in our portfolio. Assets, markets and allocation will vary over time, and we will constantly monitor where we will create long-term shareholder value. However, we do aim to increase the portfolio value, and we project that we will be net investors going forward. Some figures on our sustainability. We work towards clear sustainability targets in the short and the long term to contribute to a sustainable development. We are actively engaged in reducing our climate impact through enhanced energy efficiency. And that was -- has materialized in a reduced energy consumption of some 2.9% over the period -- over the rolling 12 months. We continue to have a focus on sustainability-certified buildings, and now 64% of the property value has been sustainability certified. And the investment in solar power currently generates 19% of our total energy consumption. And finally, on a more anecdotal basis, we have been identified as one of the World's Most Sustainable Companies in 2024 by TIME Magazine and Statista. The list includes some 21 companies, and we were ranked 2nd of all Swedish companies and 6th place in the world of all property companies included on the list. So that's something that we're quite proud of, to be honest. Some final key takeaways. We focus on our core business, letting properties, reducing costs and being more efficient, thus improving our net operating income. The most important thing is to retain tenants and to fill vacancies. Local management teams have a very good local market knowledge, and we have a close dialogue with most of our tenants. We see, as mentioned, more active dialogues on new business than in a long time, but still, these processes take time. The rental market is pretty stable in our regional cities, but we are still more cautious in the capitals, Stockholm, Helsinki and Copenhagen, albeit more optimistic than we were in the last quarter. We have increased our focus on new investments, both on projects and on acquisitions. So that concludes our presentation for today. So if there's any questions, please go ahead.

[Operator Instructions] And the first question today comes from Lars Norrby, SEB.

Joacim, in your CEO statement, you're talking about growing optimism. Does that only refer to financing transactions? Or does it include property management and demand -- rental demand?

Yes, in fact, Lars, I think it relates to, I wouldn't say, all aspects of more business, but quite a few, certainly, on the financing side where markets and banks are treating us way more favorable than we did 1 year or 1.5 years ago, but also in terms of our dialogues with tenants. We have, as mentioned, more and larger dialogues ongoing now than we have had in quite a few quarters. We're still cautious, but we have a higher level of activity than in a long time.

The second question is regarding value changes. You still had some negative value changes in the quarter, even though quite small. But what's your picture here? Are we now at the bottom? Or is there still a bit more maybe to go?

Lars, Jens here. I mean a bit tricky to answer, but the gut feeling absolutely tells me that we have bottomed out. And I think we've seen that over a couple of quarters that the value decrease has slowed down. And it feels very reasonable when we see underlying interest rates are starting to come down and is expected to come down further. So yes, it should be rather stable, but of course, we cannot give you any guarantees here.

Next one is Albin Sandberg, Kepler.

Two questions for me. Second quarter of positive net letting, still occupancy trending down a bit. Where is that weakness coming from?

I think that we don't see that as a definite sign of weakness. This is something that we have predicted. We've been quite vocal about this in earlier reports, so we have seen this coming. We have a very active dialogue with tenants, but there is a higher turnover in the contract stock. So we have -- we lease more, but we also get more notices on cancellation. And I think that it's fair to say that most companies at post-COVID are reviewing their future demand in terms of what they actually need. With a lower interest rate and some macro figures pointing in a better direction, we do believe that a lot of companies will start to think about expansion rather than reducing. But this remains to be seen, of course. But we do not see the current market development necessarily as a sign of weakness. We have actively decided not to invest as much as we have done historically. And that, of course, affects the quality of our products and our ability to meet client demand.

Yes. And your comment about being a net investor going forward, do you foresee that most coming from start-up of new projects, investments in the existing portfolio rather than M&A?

We have started to scout for new investments. But so far, the figures have been quite clear that investing in our existing portfolio, reducing vacancies and starting new projects as the fully let logistics project that we are building in Västerås at the moment has, by far, outperformed buying existing properties from someone else. But we have been more active in reviewing opportunities, and our transaction team is constantly monitoring opportunities. But so far, the balance has been towards developing our existing portfolio.

Okay. And my final question, I think, Jens, did you mention some negative one-offs in the net finance cost? And if so, could you just repeat that so I get the amounts right? Or did you not say anything?

Yes. Yes, I actually did. The increase in financial net quarter-on-quarter is partially explained by one-off effects relating to refinancing of loans, and that was SEK 14 million; and expiring interest rate swaps at the end of the first quarter, plus SEK 15 million per quarter.

Okay. So is that a total of SEK 29 million? And is that in Q2?

That's SEK 29 million, and there are some other explanations, smaller items that I cannot give you right now.

Okay. But SEK 29 million as a negative in the net finance cost for Q2?

Among others of the financial costs relating to repurchase of bonds, et cetera, et cetera.

Next one is Paul May, Barclays.

Are you there, Paul?

Can you hear me?

Yes, no, we can. Now we can.

Good stuff. Just following on from Albin's on the like-for-like rent growth. I think you mentioned in Q1, if I recall correctly, that there were some leases being renegotiated at lower than the previous passing rent, so negative re-leasing. Is that still the case in Q2? Does that explain some of the slowing quarter-on-quarter? And then the second question is, I think you mentioned around attractive acquisition opportunities. I appreciate still more attractive in your existing portfolio for investment. I just wondered, are those acquisition opportunities that are attractive coming in at a higher yield than your valuation yield and, hence, the reason that's why they're attractive? I'm just interested on that.

The first question, I mean, just very briefly, we -- the renegotiated leases were combined up 1%, and the remaining leases have been prolonged at existing, i.e., indexed terms. So yes, we have seen a reverse development compared to last quarter when we actually saw a negative trend. Now that's been reversed into a positive trend. Second question on the opportunities that we are reviewing, I mean we do not solely rely on [ Excel ] to -- when we look at investment opportunities. But of course, when the yield on cost is so much higher than the prices that we are being offered for existing -- that yield on cost in our own project is so much better than the yields on existing assets that we are reviewing, then the balance, as mentioned, has been completely in the favor of our investment opportunities internally. But there are also other issues. We'd like to grow in some areas. We've been quite vocal about the fact that we'd like to grow in Helsinki and Copenhagen. We are actively reviewing that, albeit it is a lower yield than we can get from our existing projects. But we cannot put all eggs in one basket, so we need to grow on a selective basis throughout our markets. Is that an answer, Paul? Or is it just gibberish?