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Castellum AB
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Good morning, everyone, and welcome to the presentation of Castellum's report for the first quarter of 2018. This report will be presented to you by Castellum's CEO, Henrik Saxborn; and CFO, Ulrika Danielsson. And the presentation will be followed by a Q&A session.
Hi, everyone. It's Henrik here. Yes, let's start with the first slide then. We can now conclude that this year started up very well. The result of property management increased by 12% compared with last year, ended up in SEK 2.43 per share, despite that we had a very cold and snowy winter. And the net leasing delivered also very good. We had a volume of SEK 48 million in net leasing, even though the rent to E.ON, their headquarters is not calculated into that figure. And the vacancies, because of that, of course, then increased as a product of the last year's very strong net leasing and ended up in 93%. And I'm especially pleased that, that -- that the ongoing portfolio had a good net leasing as well of SEK 27 million on the existing stock.And you can -- we have also noted that the Swedish real estate sector are very attractive still, both on the core assets as well as if you look into cash flow portfolios. This is -- had led to a positive value correction, I can say, along with that we also see in the market that we still have expectation on increasing cash flows. This together contributed also to the net -- the share pair -- pair of share wounded up to SEK 151 despite that we give out a dividend of SEK 2.65 in the quarter.And if you look into the activity level in the company last -- the first 3 months, we have been able to announce new projects for approximately SEK 1.5 billion. And we also closed the sale in Stockholm for a building right for residentials, and that actually had been auctioned for the last 5 years. And yesterday, we also announced something that we've never done in Castellum's history before. We launched a totally new storage solution that we call Beambox. That actually is a on-demand service for private persons and families. They take care of their households and belongings. And we think that, that will, of course, give us a positive inflow on a little bit more not-so-attractive part of the logistic assets.And with that, I leave the word to Ulrika.
Okay. On the next slide, you have the P&L. And you can summarize, so far, a good ramp in markets, a really good net leasing last year, completed projects, and cost control together with a stable funding cost, lead to an increase in income from property management of 12%. And then we also had to remember that in 2017's numbers, we still had earnings from the disposal of the big portfolio in the North since the buyer got the key to the buildings during Q1 last year.Value changes was up SEK 284 million. Half of that came from, you could say, increased cash flow on project gains, and the rest from yield changes here in Stockholm. And as Henrik said, we sold one asset this first quarter with a negative value changes so far of roughly SEK 50 million. However, just so Castellum sold that asset roughly book value, but the reason that it's negative now is that the payment is being made in 2 steps. So in this P&L, you only have the first payment of roughly SEK 240 million and the rest of SEK 50 million, roughly, we will get when the [indiscernible] is finally made up, and we think that will happen later this year.And regarding taxes, Castellum still have taxes -- tax losses carryforwards, which means that almost all taxes so far this year is deferred taxes. And after some changes in interest derivatives, the result bottom line right along SEK 765 million.So what had driven this development? If we look into the next slide, we have the NOI. And the NOI increased with SEK 76 million, of which SEK 48 million came from the income side and SEK 28 million from, you could say, the cost side. And the like-for-like portfolio, that is a portfolio that we had owned and managed in management for 2 years, had a contribution of roughly SEK 40 million net or a growth of 6%. And then you have projects that contributed SEK 30 billion -- SEK 30 million, and the rest is transactions.So if you then look into, you could say, the 3 distant markets that are important for Castellum: it's the rental market, the property market and the credit market. And in the futures market, we also will have a deeper insight in the P&L versus the balance sheet. So if we start with the rental market on our next slide. We see that the rental market is still strong. And in the Q1 numbers, we see -- we now see the impact of the negotiation made last year and the exchange with [ Next20 ] that took place 2017. And as you can see, Castellum's rental income grow with roughly 3.6%. However, like-for-like, it was much better growing, so -- of which, of course, some part of that growth is made from tenants paying after leaving. And then, of course, as I said, the net effect also of that we sold assets 2016 that we had in 2017's first quarter, which means that the transactions contributed negative in that aspect.And if we look in -- which, you could say, signals where is Castellum's tenant basis, you can see that the public sector is still the main biggest contributor from the income stream, and that is a rather stable cash flow to Castellum, along with duration, on the other hand, but a good stable base for Castellum. And then the next in line, you can see, you have the consultancy on the commercial services that mainly you see in office spaces. And a much lesser space is the retail part or, what you could say, the exposure to people buying stuff.And then if you go to the next slide, I think we will have the market.
If you look at the market, as Ulrika said, noted is that it's still strong. Our main markets is the office markets and the logistic market, and I’ll come back to that. But if we will start with office market, I can say it's almost the same as it was 3 months ago. The change maybe is that we have even less vacancies into the central part of Gothenburg and Stockholm. That will be the driver of the increase in the rents, from my view. So looking at our top levels here, we can see SEK 9,000 in the best locations, so somewhere between SEK 9,000 and SEK 8,000 is the best locations for best deal locations. And for Castellum's part, we are the closest part to central station, we are now aiming for around SEK 4,000 to SEK 6,000 a square meter. We haven't signed that, but we have that offer out for several contracts on the Street right now.If you go into Gothenburg, we hold still the rent level of SEK 3,400. And we see that as the market is so strong, it's more a lack of opportunities for a tenant to find a good space, that is the problem right now, and the lack of new productive mall regions this year. If you go to the rest of the market, it's more or less the same as we reported in Q4. It's strong. It's less of production in the office space. And the unique market for us is the Malmö area, to be honest, and what's maybe going to come up in Gothenburg.If I move to the logistic part of the market, we see a continuing growth on demand side, and it's all driven by the e-commerce. And we see -- we have placed ourselves in the Gothenburg and Stockholm market, and that's where we know them the best. But this means that we predict that we'll see positive trend on small logistic warehouses that are correctly located. But if you look at the international or national logistics center, that will still be under competition on the rent levels because of the -- it's possible to build them on bigger areas or rebuild them. So simply, we see 2 strong markets, both office and logistic going forward.If you take the next slide, please. And then going to Castellum, yes, you can see that we didn't have the same net leasing that we have 1 year ago. But if we should have put on into this figure, the E.ON signing of that contract, which is not in here, it would more or less be on the exact same figure that it was 1 year ago. So from my point of view, this is a strong figure, and it's extremely positive that we have a strong net leasing on the existing portfolios as well and not on the projects.If we go to the next slide, you'll see the differences between the different markets. And here, we have the best performer this quarter is the Western region, and that's driven by logistic assets. And actually then, you have also very strong performance of, what we call, the central part, that's consisting of the 6 midsized towns. So still the same picture that we saw in the Q4, strong positive net leasing. And it's actually the central part of Sweden is performing that, I think, that most market understands.So yes, let's go to the next slide, please.
So if we leave the income side and go to the cost side, the property cost increased with SEK 28 million. And maybe that is a question mark at first glance since now that this quarter was cooler compared to last year and compared to normal year. But the reason to this is mainly driven by lower maintenance and administration. Both those can be connected to the transaction part. The lower maintenance is due to assets sold, and the lower administration is due to the consolidation and cost efficiency regarding the transaction [ portion ] and the promise made to save costs.And if you go to the next slide, you do have another cost slide, so to say, and that is the interest rate cost. And this year, we're working with an average funding of 2.4%. And at the end of this quarter, we are going out with 2.2%, and that is a reduction of roughly 20 basis points. This is mainly driven by, you could say, 4 actions. Castellum has ending credit sale volumes of roughly SEK 3.5 billion in the end of the quarter that we did not used but paid commitment fee for. We have used the loans from European Investment Banking on attractive terms and a duration of 5 years. We have increased the CP program with SEK 32 billion this quarter. And at the end of March, it was fully used. And a high STIBOR or a less negative STIBOR contributed also positive to this development.And if you then look on the last slide, so to say, we do have, on the next page, the taxes. And as I see, Castellum has tax losses carryforwards, so that is the reason for Castellum paying little taxes. But when we do speak about taxes, I do want to make a comment about the suggestion regarding the interest rate deductibility that was released during this quarter. And as what it says now, it is more in line with the EU directive, and that means that interest rate cost will be deductible of 30% of taxable EBITDA. And furthermore, they will lower the tax rate, and this will be made in 2 steps. And you can say that, as it's there's now the suggestion, it will not have any bigger impact on Castellum's paid taxes. And for giving you one example, if this new suggestion would have the upside this quarter Castellum would have paid no more taxes than the -- while we are already accounted for. On the other hand, it would have a positive impact on the deferred taxes due to lower income tax rate.So I'll...
Yes. If we go in then back and going to the real estate market and take the next slide, please. We will take the next slide, then we have the balance sheet.
Yes.
Sorry.
The balance sheet of Castellum is strong with an LTV of 48%, and that is a little bit higher compared to the year-end. But then we have to have in mind that at the end of this quarter, we paid out half of the dividend to our shareholders.And as you have seen from our report, we have with us the portfolio in the Malmö property segment in order to try to be more transparent, and this is based on that assets are different. They have different challenges and opportunities. And they are more a reflection of the tenants of businesses that are in those assets than just bricks and walls. And so we're -- for those who wants to make a calibration to the Q4 report, you can say, on our web page, you can find, connected to the report, the property portfolio as at the year-end last year. And it's transformed into new segments and the moving of Uppsala, the central part of the Stockholm also, and hopefully, this will help you calibrate in terms last year to this year.
Then I think we go into the market. Yes. So looking at this, the real estate market, we have -- or the one that was relatively large in Q4, more or less the same figures in this slide, but we have nudged down Stockholm a little bit to 3.4%. Actually, looking through it, I think we can actually say that the core assets, the core deals that's been done has been on the same yields or lower than it was last year, so it's a positive trend. It's also a very large interest, as I mentioned, for cash flow portfolios and portfolios on logistics side. So I can't see anything else than extremely strong interest for attractive and dry assets. And generally, yes, it's still a strong interest for Sweden.So if you look at the next slide, please. We have some of the projects that we haven't bought, but we are investing in because we like projects so much. Here, you have the slide and showing what we intend to build for E.ON. This is the investment of approximately SEK 1.1 billion, 24,500 square meters, 200 meters from the central station of Malmö. And it will be finished the summer of 2021, it was the plan. And when it's 100% leased out, it will give a rental income of SEK 68.5 million.This is the work we was able -- that we made simply because of our sustainability and development on the logistics side and on the, yes, the change on Beambox, and integrating new ideas into this asset. And I'm very proud of this project that we're going to make. If you take something totally different, next slide, then we have the logistic asset, the Torsgatan reconstruction in Brunna in Stockholm. And it's located with the highways of E18 and E4. It's dividing, and it's extremely good location. We have here prepared for expansion of the logistics side and are renting this now out for e-commerce, warehouses and larger logistic as well. So this is just the first phase where we are investing approximately SEK 140 million.And if you look at the next slide, we also showed something totally different. It's what earlier was called the Stockholm water assets. It's then located next door to the central station of Stockholm. Here, we have a total now of 11,500 square meters. And we have started the first phase of investing SEK 300 million into renovating, you can say, in the existing old house. And we have also the plans of building 2 new buildings on this site, and the total investment is approximately SEK 1.5 billion going forward.So this is just some of the pipeline we have. We have still a pipeline approximately of SEK 4.8 billion ongoing, and the coming-up pipeline is more or less the same. So it's still very good. We're in good position here.So let's move to the credit market.
Yes. And if you go to the next slide. As has been the case for a long period of time, Castellum has 3 funding sources: the bank, the bond market and the CP market. And regarding the bank, Castellum feels that we still have good access to funding within the bank, and that they are more, you could say, perceptive, if you say, to different demands, for example, the view on STIBOR floor and price versus the bond market.And regarding the Swedish bond market, there is a lot of property risk in that market, and we are [ many actors ], both listed, non-listed; both rated, non-rated. And if you look into the price, you could see some upward trends in the end of the quarter. But however, it was an initial downturn in the beginning of the quarter. So all in all, if you look, not much has happened. And if you then go to the CP market, it's still very excellent. And the SEK 2 billion in increased frame that we did this first quarter was, you could say, swallowed up very, very quickly. And today, we feel that the demand is more between 3 to 6 months in that segment. It's where we have most attention, you could say.And then if you look to in our activity on the next slide. This first quarter, it has been a hectical first quarter. We have renegotiated roughly SEK 800 million. We have terminated SEK 3.5 billion. We have used EIB facilities. We have also increased the frame in the bond MTN program with SEK 3 billion. We had issued one bond and one has fallen due. And we increased the frame of the CP market that was from 8 to 10 that was fully used, as I said earlier.So all in all, still a very good access to funding and on good prices. Yes.
I start this? And then we will end up within this presentation with the Beambox that I mentioned from the beginning. This is simply a storage solution that you order on-demand services that simply help people to solve their storage on their household belongings responsibly and that without the need to have any car or truck to transport it. We will take care of that. It will mean for Castellum that we use this not-so-attractive part of the logistics and warehouses to store this. And we will simply create our own tenant. It will also be one extremely competitive into the market of storage, and it will be interesting to follow this.And so we will end up in saying that we are convinced what we all we have said that in 2008, in the form that Castellum has now, we have actually the possibility to grow the cash flow, that 10%, and are looking forward for an interesting next coming 9 months of this year. Thank you.
So if we continue to the next slide, which will be the Q&A slide. Thank you for the presentation, Henrik and Ulrika. So this is the final part, the Q&A session. When asking your questions, please state your name and company.
[Operator Instructions] And our first question comes from the line of Fredric Cyon from Carnegie.
A few questions from my side. Starting off with the like-for-like, obviously, very strong at above 5% for the first quarter. If I look at occupancy, it seems like it's improved some 200 basis points approximately year-over-year. It does look like you should be able to maintain this level throughout the year. Anything we should be mindful about before putting in 5% for the full year?
The only thing is that we have, which is in the report, that we had SEK 9 million in income from tenants leaving. Of course, SEK 9 million on 3 months' earning is more valued than SEK 9 million on 12 months' earning. That is the only thing that I think that you should have in your mind.
Perfect. And then on investments. Last year, you invested some SEK 2.9 million in projects and maintenance. Given your positive outlook on the market, should we expect that to increase during 2018?
I think we will have on then MTU market, I think you will see more or less the same figures, roughly.
Okay. And then my final question. There has been a couple of deals in Stockholm here in the last few months at very elevated levels. What's the highest price per square -- highest value per square meter you have in Stockholm at the moment?
That's a good question. I think we will come back -- we can come back to that during the presentation, take notice on question, we will answer that question. It's about SEK 100,000 a square meter. How much higher? We can answer in 5 to 10 minutes, something like that.
And our next question comes from the line of Niclas Hoglund from Nordea.
Niclas Hoglund here. A couple of questions. First, if we start out with the very strong NOI development, the NOI margins then, which is mainly related to the like-for-like properties. Of course, we have this SEK 9 million in tenants leaving, I should say, something else that is worth highlighting? Or especially in a Swedish port, this seems to be a very strong number, with the -- with slightly higher exposure to the North and Sweden. Any more light to the very strong NOI development?
No, no, no. Nothing, of course, but that will not have any big impact. But of course, as I said, in the Q4 report, maintenance is not always equal each quarter. But that is -- it's the only stuff in that case.
Okay, yes. And then moving over to the financing side. Your average funding or financing cost is coming down with 20 basis points. You're still operating without a public rating. Could you elaborate a little bit of the opportunities? What would the financial cost come down in an event with public rating? And do you -- we're also seeing that some of your competitors are really embracing the Danish market and the Eurobond market. What's your perspective of operating in Eurobond then? How would that help -- what kind of impact would it be on the funding cost?
This is a long discussion. But if I should make it a rather short answer, we could first go into the Swedish bond market. So if you look into the charts, you can see here, you read the prices on the screen, of course, that says there is a gap between the one who has like a Baa2 rating and the one who has a Baa3, a further 10 to 15 basis points depending, of course, which day you read on the screen. Then the gap is much wider down to non-investment grade, it's 100, 150 basis points. So depending on which type of rating Castellum gets, the answer is different. But of course, if we compare to Baa2 and Baa3, Castellum, without the rating, pays a little bit more on the margin, of course. And I think now, it's like 20 to 30 basis points, everything else equal, compared to which of the one you are looking into. If you then move to the European bond market, it's the bigger question because if we do -- if our company, with exposure to a country with euro flow, for example, Finland, then it's rather cheap money. But if Castellum would go out there, then we also have to take into account the swapping to seek that cost a little bit. So everything else equal, maybe a little bit cheaper, but it depends on the swap price at every given moment in time. So that is our very short answer.
But could you elaborate on the -- I mean, at 20% to 30%, 20 basis point is quite an interesting opportunity, I would say. How do you view that market? And do you need a sort of investment capacity to sort of stay away from the public rating? Or are you quite fine with the very strong cash earnings that you're generating?
I think that when a company becomes bigger and bigger, it's important to have different tools in the funding sources. And if you became bigger and bigger as doing the bond market, sooner or later, I think that you are needed to have the rating. So with that said, it's more a question of timing and what type of rating you are satisfied with.
Okay. All else equal, is it likely [ NLM ] for Castellum in 2018? Or is it more of a -- or more delayed process as you look at the refinancing opportunities?
Then I don't want to comment that.
[Operator Instructions] And as we have no further questions from the telephone lines, I'll hand back the conference to our speakers.
Okay, that seems to be all for today, so thank you for listening in, and we wish everyone a great Tuesday. Thank you, and bye.